San Diego Housing Bubble News and Analysis

RAY,
I think I know who you are talking about.
It's a portfolio loan that they keep, but isn't it a max of 75% of current value ?

A 5YR ARM today is a very dangerous product.
What if rates are 10% in 6 years ?

For loans under $546K...
I have 30 Year fixed rates at 5.00%. You can buy down to 4.875% for a tiny fee.
Without 20% equity, PMI is added.

With 40%+ equity rates are 4.875%

Almost any rate can be shown, the key is the cost to get that rate.

With historically low rates, I think it is insane to hope for a tiny further decline that may or may not happen.

On a historical scale of 1 to 100 of mortgage rates, with 100 being the highest we are currently at 1. People want more. HLS

Hey HLS,

I have a buddy who is looking at places to buy right now. While I am activly trying to talk him out of it, mostly due to the fact that he cant afford it (not because they are bad prices), I cant go toe to toe with his cheerleaders.

He found a place that needs some work, it doesnt have a real functioning kitchen cause it was a remodel gone bad. Itll cost 20k or so apparently to get the pieces back together (it isnt too bad). Anyways my buddy has 0 savings, as in NONE, but is using a VA loan. He claims he could get a 115% LTV loan at about 6%, which will actually be higher cause he will also have to role the closing costs into the loan as again he has 0 savings. So basically he is saying he can get a 120% loan right now at the 6% mark or so. Is this true? Can lending still be higher than 100% LTV? Even on a partially done foreclosure?
Apparently the other option is to pay a higher purchase price, but then get a sellers rebate to do the work.

It is setting off so many red flags in my head Id think I am at a Chinese Communist party parade or something, but dont have any info to discredit this. Just looking to see if lending has really gotten tighter or if things are just as dumb as ever.

Oh and he has a low 600's credit score.

(please dont flame the poster, I swear it isnt me)

HLS, can I have your email address. I am interested in the 30yr at 5.0. Is that a 0 pt 0 fee loan?

HLS

Do you have any type of newsletter that someone can subscribe too?

Rayb..

You can contact me @ sheldon [at] HomeLoanSheldon [dot] com

No newsletter. I have a radio show instead.

AM 1000 Sundays, Wednesdays and Fridays.
Schedule is on my website:
www.HomeLoanSheldon.com

Donald,
At the moment you don't get 5% without a cost.
It came close yetserday.
No point, no fee loans are a joke,
Unless you think rates are going much lower.

Loan pricing depends on your credit score and the LTV (% of home value)
There is no base rate that applies to everyone.

DWC,,
Anything is possible. I don't do VA loans.
They may have a rehab program. It's sick.

VA and FHA govt backed loans allow ppl with crappy credit scores to buy houses that may not be able to afford them.
THE RATES ARE NOT NECESSARILY BETTER.

I don't do loans for people that cannot afford to repay them based on current documented income.

FNMA will not do loans for major fixers.

HLS wrote:

No point, no fee loans are a joke,
Unless you think rates are going much lower.

Why is that? I'm honestly not familiar enough with the origination process to understand why no fee/point loans are bad.

You NEVER get the best rate when you get a no cost loan.
It is a very misleading concept.

There are no fee loans, there are no cost loans.
They are not the same thing. With either of these you are getting a higher rate, which equates to a higher rate and a higher payment for 30 years.

There are retail rates and there are wholesale
rates. Most people pay retail.

I explain this to anyone who wants to listen and give them the choice of the best rates that they might actually qualify for, rather than general rates in the media.

99% of people looking for a loan have no idea where they fall in the matrix of qualifying by FNMA guidelines.
1 point difference in credit score can cost thousands of dollars over the life of a loan.
There may be ways to raise scores quickly, but they aren't told that because their "friend" doing their loan doesn't know it either.

There is also the option of getting the lowest (wholesale) rate possible, and paying for the costs, which results in the lowest rate and lowest payment possible for the life of the loan.
It generally takes 3-4 years to come out ahead, then you are saving for the balance of 30 years.

Many people want to assume that they will just get a free loan and refi if rates drop.
They are now stuck in a higher rate loan or an ARM that is going to explode, AND UNABLE TO REFI.

Never before in history have such a large % of "homeowners" been unable to refinance.
They no longer qualify for a loan, at ANY rate.

With rates now just above historical lows, I think it is extremely foolish to want a no cost or no fee loan, gambling that rates will go lower.
They don't know if they will qualify.

Banks will tell you that they have no fees. It's a lie. The fact is that the rate that they quote you (retail)is higher to compensate for fees. It's simply a retail rate.

In general, you have clueless consumers (who think they understand loans) going to clueless salespeople (who think they understand finances & loans) for the largest financial transaction of their lives. Neither one seem to want to learn what they don't know.

This is a recipe for disaster resulting in the simple fact that 99% of borrowers did not get the best loan that they could have on the day that they chose to lock.

Higher retail rates may not change as often as wholesale rates which can change at any time.

This morning's opening rates for 30 YR fixed are well off the lows of several days ago. What was 5.00% is now 5.25 They could end the day higher or lower. Right now, by paying an additional .75%, the rate is 4.875% saving .50% HLS

I know it is impossible to get 5% at no point no fee. But anything comes close to that is still good.

Have no idea what you actually qualify for, but with a credit score above 740 and a loan amount below 60% LTV,

30 YR rates are 4.99% with .75% cost right now. Between 60%-80% LTV cost is 1pt.

Maybe they will go lower. HLS

HLS, I agree with most of your points especially neither clueless consumers nor clueless sales people seem to want to learn what they don't know.

However, I don't think "it is extremely foolish to want a no cost or no fee loan, gambling that rates will go lower." It really depends on individual situation (e.g. how much cash you have on hand, what job security youhave, what is your overall financial plan, etc).

In the perfect world, a loan officer should just list all the options that the client could have. And the client makes all the tradeoff for himself.

But then again, neither clueless consumers nor clueless sales people seem to want to learn what they don't know.

I think I'll side w/ HLS on this one. If you don't have a few grand to buy down rates, then you're probably extending a little too much to buy the house. If you are not sure of your job security, then you shouldn't be buying a house. Point is, If you can't afford to pay a few grand up front to get you a better rate, you should rethink the house you're buying. It might be too much for you. Pay a few thousands up front will save you tens of thousands over the life of the loan.

Just because someone has a few thousand or a few tens of thousands does not mean they should spend it to lower the rate. It depends on how long they plan to stay in the property and the amount of time it takes to recoup those costs.

One might be willing to pay a higher rate and save their cash if it takes more than 3 or 4 years to break even on the costs one is paying.

The informed consumer should be offered a range of rates and costs and find the best rate/cost balance for their particular situation. This rarely happens.

Obviously if you plan to flip the house, it's not worth to buy points. But if you plan to stay there at least 7-10+ years, then buying points would make a big difference. If you noticed, I was refuting the points of not everyone can afford the points or job security.

If you ask for options, they'll give it to you. If you didn't make the effort to ask for options, then you shouldn't blame the loan person for not telling you. They probably make the best guess they can base on the information you give them.

Asianautica,as a customer, one always wants to get the best deal. Lots of homeonwners that are qualified and having capitals are still searching for a good deal and that do not mean that they cannot afford something. I think asianautica needs to differentiate the difference. I am having a 6% right now, and I want to search for something that is signifcantly lower, and I am not in a hurry, something wrong there? Besides, even if you have several grands in your hands, does it mean that you have to spend it anyway if there are choices? That seems the american way of spending coming back already. Furthermore, spending a few thousand bucks may not necessarily save you a lot in the future. You have to be wise to choose. If you pay thousands of dollars just to enough to save you $20 a month. It is not a good investment and why not wait a little longer. Have you done a refi before?

donaldduckmoore, I think you misunderstood my point. IF you're a person who are buying a house right now and you want to get the best rates. What I'm trying to say is, the "best" rate will always come with points. Whether it's worth to get those points or not depends on how long you want to stay in the house. Here's an example, right now if you buy a $500k house w/ 20% down, using aimloan.com, you can get 5.25% w/ 0 points, but with all the fees, you're looking at $3910 at closing. If you want 0 points 0 fees, i.e. no cost to you at closing, you'd have to pay around 6.25%. It would take out about 1 year to break even with the fees of $3910. So, if you're not flipping, it wouldn't make any sense to get the 6.25+% just so you pay 0 point & 0 fees.

Your comment about *never* getting the best rate needs to be qualified. The *best* loan will be the one that costs the least over the time held. Thus, a no cost loan will be better for those with a shorter time horizon, even if the rate is higher. The key variable is how long one expects to be hold the loan.

For example, here are two hypothetical 30 year loans:

Loan A (points & fees): 5% rate, with 6k in pts/fees/closing. APR = ~5.2%
Loan B (true no cost): 5.5% rate, $0 pts/fees/closing. APR = 5.5%

Scenarios:
> Owner holds for one year, then sells or refis at a lower rate. Loan A's true APR jumps to 8.8% (due to amortizing fees over 1 year vs. 30). Loan B's APR remains unchanged at 5.5%.

> 3 year holding period, Loan A = 6.4%, B = 5.5%

> 5 years is ~ breakeven, Loan A = 5.4%, B = 5.5%

> Over the next 25 years the APR on loan A will be reduced slowly to 5.2% resulting in greater & greater savings over loan B.

Generally, the more spread between the rate and APR, the larger the fees and the longer the breakeven point (vs. lower fee, higher rate/APR loans). If you think you'll be there over a decade, then shop by the lowest APR, if your time frame is < 5 years, shop for the best rate with the lowest fees.

Either time frame carries risk, as planning to stay for the long haul may be interrupted by job loss, relocation, family crisis, etc., while expecting to move/refi within 5 years may not be possible due to credit issues, equity reduction, etc. As a general rule, I tend to want to pay as little upfront as possible.

As for the foolishness of waiting for rates to drop further, if deflation worsens you could see rates substantially lower, thus making a no/low cost, fixed 30 year loan a good hedge, since you have the ability to refi down at anytime w/o losing the chunk of cash used for pts/fees but you're still locked into a good 30 yr. rate in case inflation spikes due to all the gov't intervention.

Also, for refi's, a true no cost loan at a rate less then your current loan is "risk free", with the option to refinance at a lower rates in the future (should that occur) without any break-even analysis.

One should crunch the numbers to verify what is best for their particular situation and determine how much risk (if any) they're willing to take on various scenarios.

Just because you have money to spend it on paying a few grand up front doesn't mean you should spend on it. I could probably pay 40% down or more to get the best rate HLS refers to, but it may not be the best option for me. With extra cash, there are unlimited options. I could buy another investment property when the time is right. I could invest in my favorite company (or even start up my own company) when the time is right. It really depends on how much difference the mortgage rates are (typically they are small differences) and what your alternative options are. You might think that you saved tens of thousands over the life of the loan but your opportunity costs might be even higher.

Paying points is really about how you identify and measure risk. By paying points now I guaranty myself a lower cost relative to todays circumstances.

By not paying points I have the added liquidity of cash in hand and the potential opportunity of making a far greater return than the tax deductible interest I am paying for the loan.

To say no one is going to get the lowest possible rate is wrong. There are very few people but there are always a handful of people who know how to wiggle the system.

True, but the opportunity cost of the few thousand also must be taken into account.

If your rate of return is higher from investing the buydown money, then you will "save" less over the life of the loan vs. investing it.

With rates at 5%, do you expect your investments to return more or less then that over the next 30 years? Another way to look at it is; would you be willing to invest in a 30 year bond at 5%, or would you be worried about future inflation or better returns from different asset classes?

I'm of the opinion that with fixed rates this low, I want to use as much of other peoples money as possible.

Good point, specially if you suspect in the mid future inflation will be high.

Please run your numbers with your assumption. Use a $500k house w/ 20% down as the example. 5.25% w/ 3900 in fees and 6.25% w/ 0 fees. Let me know what you come up with.

carlsbadworker, what kind of opportunity cost do you think you'll lose with $3900 over 30 years. Please run your # and prove me wrong. I've came up w/ the numbers in my example.

With 5.25% rate, you'd pay $395k in interest over 30 years. with 6.25% rate, you'd pay $484k in interest over 30 years.

Asianautica - there are two separate items:

1) Whether no cost loans are the best choice dependent on time frame.

2) Whether buying down a loan by paying points is a better use of capital then investing it.

As to the first, no cost loans will *always* be more expensive when fully amoritized, since the APR is higher. The lender requires a premium for this "service". The point I was trying to make is that your time horizon determines the true APR (what you actually paid over the life of the loan). Using your scenario, you would be far better paying $3900 to get a full point (~20%) rate reduction over 30 years, and with a spread that wide, your breakeven would be only one year. In your case, the lender is charging a fortune for a no cost loan. A lender *should* adjust the no cost loan's rate to factor in the loan amount (higher balances require less premium) as well as the % diff (a point means alot more at 5% then 7%), of course many lenders will NOT adjust for these factors and happily pocket the extra premium...

As to the second issue of opportunity cost, in your scenario above, your 4k buys you a full 20% rate reduction (full point from 6.25% to 5.25%), which I wouldn't attribute to a bargain point buydown, but rather a very pricey "no-cost" loan (which may be the norm now). Either way, you would save a substantial 90k and you would need to make > 13% ROI if you invested the 4k to just breakeven. If your scenario used a more typical rate buydown (eg 1 point equating to a 5% (1/4pt) rate reduction), the ROI would be far less, especially if holding for fewer years.

Of course many people that intend to save and invest said funds just spend them, while paying down a mortgage is a sure return.

HLS,

Thank you for your response.

Thanks to all the other posters for their input, too.

FNMA has a funky matrix table to determine loan pricing. The best rate possible is for a loan below 60% of the value and a mid credit score above 700.

The rate is the same for a 25% LTV loan with a 800 score.
If you score is 620-699 the same loan will cost .25% more at origination,(not in rate)

At 80% of the value, you need a 740+ score for the best rate. A 739 score will cost .25% more.

There are various combinations in between, based on credit score and LTV.
These are FNMA guidelines that everyone has in pricing a loan.

On a $400K loan @ 80%, a borrower with a 639 score would have to pay $11,000 up front to get the same rate as a borrower with a 740 score gets at no extra cost. Another option is to take a rate about 2 points higher instead.

What nobody understands is how buydowns are priced.
There is no set formula. 5 different lenders can all have different buydown costs at different rates.

Different wholesale lenders have different rates as well, some are consistently higher.

A lender who has the best par rate is not the same lender that offers the best buydown rates.

Not every broker has access to every lender.
The best lenders dont want to deal with shady brokers. These brokers end up only having access to lenders with higher rates. When they tell you it's the best rate that they have, it usually isn't the best rate available.

In the last 2 days, I had 30YR fixed with a small buydown at 4.875% and 5.00% was available with a .50% cost yesterday, but only for about an hour.

In the last 2 days, rates were the lowest that they have ever been in history. Rates moved up to 5.25% by the end of the day. They really do move that fast. HLS

cooperthedog, FYI, this all started with this question:

Then I concur with HLS's answer:

Then there's this comment:

So, now that you have the history of this debate, you might understand where my POV is coming from. Like I've said a couple of time in this thread, if you tend to flip, then it's a no brainer that points are not for you.

FYI, your calculation is a little bit off. You do not get the whole 30 years to get $90k out of the initial $3900 in fees. You get a year to get $90k. Since after a year, the person who paid $3900 in fees would save $3900 in monthly payment too. So after 1 year, both people would have $3900 to invest. Then, you would also have to calculate in the tax the person who didn't pay points and fees have to pay from the earning they've made.

Lets take your "typical" scenario with 1 points = to 5% rate vs 0 points = 5.25% rate. With a 5% rate, you pay $373k over the life of the loan. While 5.25% rate, you pay $395k over the life of the loan. So that's a difference of $22k. 1 points is about $4000, correct? The monthly saving from a 5% rate is $61/month. It would take ~6 years to break even. So, the question then become can you make $22k in 6 years from the $4000 capital that you didn't use in points? By my calculation, assuming you hold your investments over a year to get long term cap gain, instead of short term cap gain, you would have to get around 35% a year to break even if you didn't get the points. This also assume that you hold on to your property/loan till you pay it off. It would change drastically if you plan to sell int after 5-7 years. Then obviously, it wouldn't make sense to pay 1 points to only get .25% in rate deduction.

The way I see it is, the only reason why you'd want a no points no fees = no cost loan is if you're betting that rates will go down soon or if you're flipping.

This has been a very interesting thread for me. Although I have always done no cost loans, and it has always been a good thing based on my own buy/sell history, I can see the validity of the arguments here.

I am looking for a new loan broker. Has anyone here used HLS and can share the experience? Any other references?

HLS, thanks for the information. If you don't mind some some potential customer feedback, your web site raised some caution flags. As a web site developer myself, my feelings on your landing page are that it feels like the late 90's style of linkbacks to try and raise search engine rankings. I don't really care about getting good phone rates or disney discounts from my mortgage broker. I would rather he/she focus just on the loan.

You provide some good input here, and my intent is to provide constructive feedback - I'm not bashing in any way. From your comments it seems like you certainly know the industry.

Thanks,

Bob

Hi Bob...

I appreciate your comments.

I am not a web designer. I don't know anything about "raising search engine rankings" and don't expect anyone to find my site by accident.

The links are there to be helpful, and when it comes to loans, I DO focus on them.

I have done loans for a few from this site. I'll let them come forward if they are following the thread.

I say what I do, and do what I say. I'm not aware of any complaints about my service, ever.

I'm not out to fool anyone. People do a fine job of fooling themselves.

I have rates & strategies available that most others either don't have, don't know or are too lazy to deal with. I also have access to credit score help that few have.

The DISNEY link on my site has been popular. For those that don't know, Disneyland is offering FREE admission on your birthday in 2009. No strings attached, you just need to register.

Yes, the link is on my website.
No, I don't make a penny from it.

Bob, If I benefit from that link, I don't know/why that is...

If you want help with a loan, feel free to check with me. I can't do them for free, but I watch rates like a hawk.

I know the games and gimmicks that others play, and I will tell you.
For those that want help or want to truly understand what they are doing for the largest financial transaction of their lives, you get what you pay for.

I'm just trying to be helpful, with more than just loans. HLS

Bob, I'm currently working with HLS right now. He got me the best rate that I can find anywhere by far. I shopped around a lot with many different lenders, from traditional banks, to aimloan.com, to lending tree, etc. After that, I talked to HLS and he's really honest as to what he can get me. He also kept me up to date on everything, which is a very good thing in my book.

Hi HLS,

I haven't posted in a while but I've been following this site for a few years now. We bought a teardown this summer and we're currently building a house. We've got a 6% construction loan (prime + 1% with a 6% floor). The house won't be ready until next summer so it's killing me to watch the rates that are currently available. We'll need a loan of about $1.45M on a bank appraised completed project price of $2.15M. The three most recent sales for near identical homes have been $2.175M, $2.165M and $2.18M. I've been following NFCU's rates closely. Currently their 30-fixed with 0 pts for a jumbo loan over $730K is 5.5%. Of course, who knows where rates will be in 6 months. Do you have any advise for me? Thanks.