Mortgage by Randy
monthly update to our clients, colleagues, family & friends
By: Randy Mitchelson, September 2010
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In Issue 30 We Touch On:
Refinancing Underwater Mortgages
Recession Over?
Boy Saved By Dog Angel
The newsletter is a little late this month but if you read nothing else, check out the article about the boy who was saved by their dog Angel. Chaos has ensued in the Mitchelson household as we live through a kitchen remodel. The contractors have taken over the garage and all our kitchen stuff is boxed up and taking up space in the living room and dining room. The good news is we haven't had to cook in over a week so we're doing more than our fair shore to stimulate to local restaurant business! Our new accordion style hurricane shutters are installed so there is one less source of stress in our life, worrying about storms and having to hire workers to hang the hurricane panels - an all day project that is nothing but frustrating (oh yeah, and then another day to take them all down and put them back in storage). Despite these economy stimulating projects, there remains a lot of uncertainty and poor consumer confidence due to slow job growth, threat of higher taxes, and nowhere for historically low interest rates to go, but up.
The current newsletter and all prior newsletters are archived at the Mortgage by Randy blog. Bookmark it and share with your friends and family. You can make your own comments and feedback as well. Time for the news...
Mortgage Market: How To Refinance Into A Lower Payment For Underwater Homeowners
Mortgage rates continue to stumble along at historically low levels and depending on the week, are dipping lower into record territory. This is resulting in many homeowners racing to refinance, even if it means bringing money to the closing table due to lower property values. Follow along with this example of calculating how many months it takes to break even on a refinance when you bring money to the closing table to get out from underwater:
Current Mortgage Balance: $200,000 Current Interest Rate: 6.375%
Current Property Value: $190,000 Current Payment: $1,248
Assume that a new mortgage would be at a rate of 4.75%, but to get that lower rate the loan needs to be at 80% Loan-to-Value (LTV), calculated by dividing Mortgage Amount by the Property Value. In this example the current LTV is $200,000 divided by $190,000 or 105%. In other words, the property owner owes more on the loan that the property is worth - a situation many homeowners find themselves in these days.
To achieve an 80% LTV and qualify for the great low rate, the first thing to do is factor in the closing costs that will be rolled in to the new mortgage. Your lender will provide a Good Faith Estimate which itemizes these costs. For this example we will use an estimate of $3,000.
80% of the property value ($190,000) equals $152,000, less closing costs of $3,000, brings the new loan amount to $149,000. Since the balance on the current mortgage is $200,000, the homeowner needs to bring $51,000 to the closing table. In order to know if this scenario makes sense for the homeowner, we do a break-even analysis to determine how many months it will take for the homeowner to earn a positive return on investment of their refinance and compare that length of time with how long they expect to live in the home.
Proposed New Mortgage Balance: $149,000 Proposed New Interest Rate: 4.75%
New Loan Closing Costs: $3,000 Proposed Payment: $777
Comparing the two loans, the monthly savings achieved with the refinance will be $471 ($1,248 minus $777). To determine the break-even, divide the homeowners investment plus cost ($51,000 + $3,000 = $54,000) by the monthly savings of $471 and the result is 114 months or about 9.5 years. In other words, if the homeowner expects that they will be living in this property for at least 9.5 years longer, it may make sense to invest their savings into bringing their mortgage down to 80% LTV at a lower rate. Looking at the interest rates that banks are offering for savings and CDs, combined with the uncertainty we've witnessed with stocks, it is hard to find a better way to get a stronger return on investment.
The break-even process can be applied to any scenario, just insert your own numbers. As always, send a note if you need any help.
Personal Credit: Are Credit Inquiries A New Trend In Decisioning Mortgage Applications?
A recent update from Flagstar Bank, indicates that "...purchase transactions with subject properties located in Florida with four or more mortgage inquiries on the credit report in the last 90 days are not eligible." The rule goes on to say that inquiries showing any Fannie Mae or Freddie Mac credit reseller as the credit inquiry will be deemed to be a mortgage inquiry and other inquiries that cannot be identified as being for purposes other than mortgage (auto, department store, etc) will also count toward the limit.
Wow. If this becomes a trend with lenders, it is a big penalty to consumers. We know that the credit bureaus have adjusted the credit score formula to allow mortgage inquires made within a 30 day period to count only as one inquiry. This protects consumers from being penalized on their credit score for shopping around for the mortgage program provider that is the best fit.
A representative from Flagstar's Boca Raton office informed us that Florida may be singled out due to a higher incidence of investors trying to purchase and finance multiple properties simultaneously. This is a classic example of gaming the system. Unfortunately, shoppers for just one property can't be effectively differentiated from the investors so the bank is protecting itself the only way it can - with limits on mortgage credit inquiries.
Economy & Financial Insights: The Recession Is Over, Huh?
One of the trusted advisor economists I follow is John Mauldin who encapsulated the state of our economy succinctly earlier this summer. "Unemployment is high and is in reality going higher if you count those who would take a job if they could get one. Incomes are weak. Plans to purchase discretionary items are falling. Housing is likely in for a further drop in prices. The stock market is not exactly booming. Treasury yields are falling, not from a credit crisis or a flight to quality, but because of economic conditions (deflation). Money supply is flat or falling. Prices are under pressure. The list goes on, and all factors are indicative of deflation."
To underscore the dismal job growth, Mauldin teaches that we need to create 125,000 jobs per month just to keep up with population growth! In addition, the formula used by the government to calculate unemployment assumes that if you haven't looked for work for four weeks, you are not counted as unemployed. If you add back those who were taken off that list, the unemployment number would be higher. In May and June nearly one million people dropped out of the labor market based on that formula. This is just a little peek at the hocus pocus that goes on with calculating the jobs report, which admittedly is a very challenging process given 50 states and three hundred million citizens.
Question of the Month: What Is A Net Tangible Benefit?
Net tangible benefit is a fancy term to describe a simple concept. In order for a lender to proceed with a refinance of a mortgage, they must be able to demonstrate that the new mortgage will benefit the customer. Although there are some flaws to this concept, as long as a new mortgage is designed to accomplish one of these four things, an argument can be made that a benefit can be extracted:
Reduce Costs: refinance from a higher rate to a lower rate. This involves borrower costs so the cost savings should be compared to the expenses associated with the new mortgage.
Access Cash: among other things, a cash-out refinance might be for a home improvement project, to pay off higher costs debts (like credit cards) or to pay the costs of higher education
Reduce Payments: switching from a fixed rate loan to a lower cost adjustable rate loan is risky but for consumers dealing with a monthly cash flow crunch, this could be a quick fix.
Reduce Interest Rate: Consumers with adjustable rate mortgages that expect interest rates to rise are motivated to refinance into a fixed rate loan to reduce their risk exposure to rates adjusting higher.
Giving Back: Boy Saved By Dog Angel - A Michelle's Angels True Story
Read the remarkable story of "Angel" , an 18 month old adopted Golden Retriever who saved the life of her owner, Austin Forman (age 11). While reading, listen to the various artists who have provided free music in the MAF jukebox.
Need volunteers? Do you have a fundraising event upcoming? Do you have a personal web site where you are raising donations for your cause? Submit the information to randy@mortgagebyrandy.com by the 5th day of each month and we will do our best to include your information in the next issue.
Autumn has arrived and with it a new slate of tour stops for National Web Leads. Next week is Orlando for a one day industry summit and in two weeks Fort Lauderdale for another industry get together. Plane tickets are booked for NYC the first week in November. Last, if you missed it on Facebook, here's an article about National Web Leads that was in a recent Gulf Coast Business Review.
Randy
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Mortgage by Randy newsletter, Copyright 2010 Randy Mitchelson. All Rights Reserved.
Randy Mitchelson is a licensed mortgage professional. All material presented herein is believed to be reliable but we cannot attest to its accuracy. All material represents the opinions of Randy Mitchelson. Recommendations may change and readers are urged to check with their financial advisors before making any decisions. Opinions expressed in these reports may change without prior notice. Mitchelson can be reached at 239-851-6738.
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You have permission to publish this article electronically or in print as long as the following is included:
Randy Mitchelson, of Estero, Florida, is a business professional, entrepreneur and author with over 15 years experience in financial services. Mitchelson has served in leadership roles for Global & Fortune 500 firms like Bank of America, KeyBank and CIBC.
As a member of National Association of Mortgage Brokers, Randy has earned the Lending Integrity Seal of Approval. He educates both individuals and groups about credit scoring by conducting personalized credit report reviews, action plans and one on one consultations. He is author of the free monthly newsletter, Mortgage by Randy as well as the Daily Dollar newsletter. A licensed mortgage professional, Mitchelson also founded Trinity Home Financing, LLC.
He is owner of Estero, Florida based National Web Leads, LLC, an internet lead generation service matching consumers with lenders for auto, cash advance and other financial products. Through its network of partners, National Web Leads delivers innovative Web 2.0 performance marketing solutions to advertisers and affiliate marketers.
Mitchelson earned his BS and MBA at Rensselaer Polytechnic Institute in Troy, NY. He is a founding member and Finance Chairman of the Southwest Florida Regional Technology Partnership Inc. and Vice President for the Michelle's Angels Foundation Inc. He is married to Susan, a Pharmacy Supervisor in the Lee Memorial Health System in Fort Myers, Florida.
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