If your mortgage is set to adjust this year, the smart move may be to let it. Today’s conforming mortgages are adjusting lower than ever before — as low as 3 percent.  It may not be what you expected when you signed for your ARM several years ago.

The reason why ARMs are adjusting lower is because of how they’re made.

When conforming adjustable-rate mortgages adjust, they adjust according to a pre-determined formula. The formula is the sum of a constant and a variable.  The constant is usually 2.25 percent and the variable is a daily-changing interest rate called LIBOR.

The formula looks like this:

New Mortgage Rate = LIBOR + 2.250 percent

LIBOR is an acronym for London Interbank Offered Rate.  LIBOR is very similar to the Federal Reserve’s Federal Funds Rate.  Banks borrow and lend money from each other at the LIBOR or the Fed Funds Rate.

Normalcy is returning to banking and the timing couldn’t be better for Charlotte homeowners with ARMs. 15 months ago, a homeowner’s ARM may have adjusted to 6 1/2 percent.  Today, that same ARM falls to just above 3.

As a strategy play, it might make sense to let your ARM adjust. Or, because fixed rates are still near 5 percent, converting that ARM to a long-term fixed-rate product might make sense, too.  The decision is a balance between how low do you want your payment, and how long might you live in your home.

The longer you stay, the more it might make sense to switch to fixed-rate, even though ARM rates are so low.

If, however, you are in an Option Arm, and Interest Only ARM, or a Sub-Prime ARM, it won’t be so simple.  You want to carefully review the original mortgage paperwork to see what will happen with that loan when it adjusts. I can help with that.

If you’ve got a conforming, adjusting ARM, it makes sense to review why you chose that program 3,5, or 7 years ago – if htose reasons still amke sense, maybe you should keep it.  Of, it may be time to lock in a new rate for 5,7 or even 30 years.

A frequent question I get – what is the Jumbo Mortgage market like?

Over the past year, those who qualified for loans that conformed to Fannie Mae guidelines (Conforming loans), saw very low interest rates and pretty streamlined approvals – you just needed to have documented income, a down payment of 3.5% to 20%, and a credit score over 620. 

Jumbo loans in Charlotte and the Carolinas are very different however.  Banks are actually lending for Non-Conforming loan amounts, but they are actually acting like it is their money they are lending!  If you were going to lend someone $500,000 to $2,000,000 to buy a house, what would you want from them?

Banks are pretty unanimous in their answer right now. They want:

• Large down payments – share the risk of ownership with the home owner
• Great credit scores and credit history – only lend to someone with a history of paying back their obligations as agreed – on time.
• Documented Income showing the ability to repay the loan – if the IRS doesn’t think you made the money, the lenders won’t either.
• What is the house really worth?  Expect  a strict review of the appraisal, and the lender may even require two separate appraisals.
• Lastly, the banks prefer that you also share the risk of future interest rates – this means they will offer much better rates on Adjustable Rate Mortgages than on Fixed Rate Mortgages.

As an example, right now we have a lender that is offering a 5 year fixed rate mortgage with an interest rate of only 3.75%.  The not so fine print is that you need 25% down payment (share the risk of ownership), a 680 or better credit score, a two year income history that shows your new mortgage payment and all other debt payments will be less than 45% of your pre-tax income.

Change this loan to a 30 year fixed rate loan, and the interest rate jumps to 5.875% – and you need at least a 700 credit score.

Reduce the down payment to only 20%, and the rate jumps from 3.75% to 4.75%!

Jumbo mortgages are still available, and pretty easy to get.  Just remember that the lender wants you to share the risk by making a larger down payment and everything else needs to be ‘clean’ – credit history, income, property value.  For the right person, a 3.75% 5 year fixed rate makes the right house very affordable.

For many people the first question they ask a mortgage loan officer is, “What are your Mortgage Rates?” When I get this question, I could flippantly choose between any of these answers:

A. That Depends
A. Anywhere from 1% to 10%, what would you like them to be?
A. 5% plus or minus
A. Rates on what?

As you can see, none of these answers really answer the question that the caller really wants to know. I recently did a quick count, and I added up 30 questions that need to be answered before an accurate rate quote can be given.  Here is a list:

• Is this a purchase or refinance?
• If a refinance, are you looking to take cash out at closing, or just lower the interest rate?
• How will this property be occupied? (Owner occupied, second home or investment property)
• Where is the property located? (City, State, Etc.)
• What is the condition of the property?
• What type of property is it? (Single family home, condo, town home, high rise, duplex, triplex, etc)
• How much land is the property being sold with? (if it’s a huge acreage, it won’t be a conventional loan)
• If it’s a condo – is this condo project approved? (I don’t expect clients to know, but we have to find out!)
• Will you have an escrow account for property taxes and homeowner’s insurance?
• Is this property located in a flood zone?
• How much is the property worth? (Sales price AND appraised value)
• How much money will you be putting down?
• How many properties do you already own? How many of those are financed? By whom?
• What would you like the loan amount to be?
• Will the loan be more than $417,000?  (Above that, ‘Jumbo’ loans usually have higher rates).
• How long of an amortization would you like on the loan? (10 years, 15 years, 20 years, 30 years, 40 years, 45 years?)
• How long of a note would you like? (for balloons… 7 year, 10 year, etc)
• Do you need a fixed rate, or could it adjust in the future?
• If you’re considering adjustable, what length would you like to have it fixed? (6 months – 10 years)
• If you’re considering adjustable, which index would you like to have your ARM tied to?
• How will you repay the loan:  Principal and Interest each month, or Interest Only for a period of time?
• How quickly are you looking to close on this loan?
• Would a pre-payment penalty be ok if you got a lower rate?
• Do you have a preference on which bank services your loan? (some clients like some banks and hate others)
• What is your credit score? (To truly be accurate, we have to run your credit, as the score we get when we run your credit is the score we use for pricing the interest rate).
• What’s your debt to income ratio? (We will calculate this for you when we have your income and expenses fully documented).
• After closing, how much money will you have left over, in reserve?
• Will you be getting private mortgage insurance (PMI)?
• If you’ll need PMI – which type will you get?
• Will you be getting a second mortgage or Home Equity Line of Credit (HELOC) with this new first mortgage?

So, what can you learn from this list?  First, if someone answers with a number when you ask them, “What are your rates?”, recognize right away that the answer you just heard is completely arbitrary and may have no resemblance to the actual interest rate you will end up with.

Second, there may be something more than just an interest rate that matters.  A mortgage professional should be able to walk you through these 30 questions, not just to waste your time, but rather to help you understand the impact of the different answers and how they will not only affect your interest rate, but your financial future as well.  For example, a 15 year mortgage usually has a lower rate than a 30 year mortgage, but the larger payment of the 15 year term could create great hardship for you if you suffered a job loss and didn’t have adequate savings to carry you through that period.

Next time you are looking for a mortgage, make sure you have thought trhough some of these questions and find a loan representative that asks you all the questions up front to eliminate any surprises for you.

APR is an acronym for Annual Percentage Rate.  It’s a government-mandated calculation meant to simplify the comparison of mortgage options.  It is probably the most misunderstood number at any closing or with any application.

A loan’s APR can always be found in the top-left corner of the Federal Truth-In-Lending Disclosure.

Because APR is expressed as a percentage, many people confuse it for the loan’s interest rate.  It’s not.  APR represents an estimate of the total cost of borrowing over the life of a loan.  “Interest rate” is the basis for monthly mortgage repayments.  APR has nothing to do with your payment.

The concept of the APR is to allows consumers to make an “apples-to-apples” comparison between loan products.

As an example, a 5.000 percent mortgage with origination points and fees will almost certainly have a higher APR than a 5.500 percent mortgage with zero fees.  In this sense, APR can help a borrower determine which loan is least costly long-term.

However, APR is not without its shortcomings.

First, different banks includes different fees into their APR calculations.  By definition, this spoils APR as a choose-between-lenders, apples-to-apples comparison method.

And, second, when calculating APR, “life of the loan” is assumed to be full-term.  When a 30-year mortgage pays off in 7 years or fewer — as most of them do — APR comparisons are rendered moot.  For Adjustable Rate Mortgages, or ARM’s, the APR has to make an assumption as to what rates will do after they adjust – an impossible task that makes APR virtually useless to compare ARM loans.

In other words, APR is just one metric to compare mortgages — it’s not the only metric.  The best way to compare your mortgage options is to review all the loan terms together and determine which is most suitable.  We do this with the Total Cost Analysis report.  The Total cost is simply the sum of the interest you will pay plus the closing costs you pay for a particular loan program.  We give all of our clients a Total Cost Report when they are looking at loan options. In fact, we can even plug in ompeting offers into our software and show the Total Cost of a competitors program.

If your Lender can’t help you calculate the Total Cost of a loan choice, ask some tough question – they are telling you that they can’t tell you the cost of the product they are selling.  Yikes! Do you really want to buy that?