Mortgages: January 2009 Archives

One of the salient facts of the current loan market is the fact that pretty much nobody is offering "jumbo" loans at anything like a "par" rate

One of the saving graces is that this is a lot less meaningful than just a couple of years ago. In 2005, the conforming loan limit was $359,650, and the median sale in San Diego County was almost $600,000. This meant that for the typical purchase, unless you had a 40% down payment you were looking at a "jumbo" loan even if you were both "A paper" and full documentation. Once you paid a "jumbo" amount, you had to wait years for the conforming limit to catch up to your mortgage. VA and FHA limits were even lower. Well, now both the FHA Limit and the OFHEO conforming loan limit have gone up (to $546,250 for single family residences in San Diego), while the median price of housing has gone down by roughly 30%. This means that if it were possible to get a median priced property without a down payment, it would still be a conforming loan. Yes, the decline in values has meant a lot of pain for overextended borrowers and especially the lenders who loaned them the money, but right now we're looking at the situation for buyers, and providing you've got a 3.5% down payment (or VA eligibility) and a credit score that's not putrid, the situation is pretty darned rosy for buyers. People can qualify for properties they wouldn't have had a prayer of getting, even before the run up in prices we've had the last few years - with a full documentation, thirty year fixed rate mortgage, to boot. The vast majority of the properties out there can be had with conforming loans.

Those relatively few properties that are the exceptions, however, are in a world of hurt. While conforming rates have nose-dived (below 5% if you're willing to pay at least part of a point, mostly just above if you're not), "jumbo" rates for loans above the conforming limit are still high. Not only that, but the lenders offering them don't want to offer anything like a so-called "par" rate. This means that "no points" loans basically don't exist for Jumbo loans. You can get something in the mid to high 6s on a thirty year fixed rate loan if you're willing to pay two to three points, but the only "no points" loan offered from any of my eighty-plus lenders today carried a rate of ten percent. Yep, double digits. I haven't seen rates like that since about 1994.

There's a reason for all this. Right now the markets are very nervous about jumbo loans. Why? Because on the secondary mortgage bond market, they are traditionally part of the same nonconforming market as stated income loans - which were one of the root causes of the meltdown. Nobody wants to buy those bonds, because of the default rate they have been subject to for the last couple of years due to stated income shenanigans. Yet with stated income all but dead (a few portfolio lenders are willing to do them. Ask me if you have a need), the lenders are well aware that the secondary mortgage markets are going to figure it all out soon, after which jumbo rates are likely to fall. Upshot: They will have funded all of these loans, paid the salaries of the people necessary to fund them, etcetera, and then not made a profit on the loans. So they want a stroke of profit they can show their stockholders and investors right up front. This profit is taking the form of discount points. For brokers and correspondent lenders, I can't find a single jumbo loan in the sixes or sevens that the lenders are willing to pay as much as ninety-nine cents on the dollar for - which means they (we) have to charge discount amounting to more than one full point just to break even - and in the real world, nobody does loans just to break even. They can call it discount, they can call it origination, they can call it a the hokey pokey, but it all amounts to the same thing in this case. The lenders want what amounts to an immediate profit on the loan in the form of cash paid, to make up for interest they don't think they'll be getting later.

There is always a tradeoff between rate and cost on real estate loans, but the lenders can change that tradeoff in light of current market conditions. A traditional tradeoff between rate and cost is about two points of cost for one percent on the rate of the loan. For conforming rates right now, the tradeoff has gotten much steeper in the "below par" range. When I was looking at rates today, I could do 4.75% for one total point, but buying the rate down to 4.25% would cost almost the California statutory limit of six points. The lenders set that kind of tradeoff to discourage people from getting rates below par because they don't want to be stuck carrying a 4.5% loan for thirty years. But for "jumbo" rates, the tradeoff is as shallow as as the tradeoff for conforming is deep. 6.375 could be had for three points, 6.875 for two - standard enough between those two points - but to buy the total points down to zero, you had to go all the way up to ten percent - a difference of over three percent to buy off two points - less than one sixth of the traditional margin. FYI, it takes about eight months to break even on that kind of slope between the two points. Save two percent on initial costs, spend three percent per year on the rate. There are exceptions, but if you think you'll be able to refinance at a lower rate in eight months, it's generally going to be a better idea to wait. However, if you are one of those exceptions, for instance, someone whose short term hybrid has adjusted to nine and a half percent, you are being very strongly encouraged to pay two to three points to refinance. The zero points loan doesn't do you any good, and so if you can't afford your current rate, you're going to have to come up with 2-3 percent of the loan amount from somewhere - cash or your equity.

The tradeoff on jumbo hybrid ARMs is similar. For one of my long-time favorites, the hybrid 5/1 ARM, the curve looked very similar, albeit shifted downwards a significant bit: 9.125 for no points, 6.375 for two, 5.75 for three, and you could get as low as 4.875 if you were crazy enough to want to pay nearly six points.

(lest anyone be mistaken, by the time this article is published, these rates will be yesterday's rates, and one thing you can count on in the "A paper" loan world is that tomorrow's rates may be similar, but they will be at least slightly different. I looked at rates what will be day before yesterday to do a Real Loans for Real People but didn't get it posted, so had to do it all over again what will be yesterday. As is the case about 75% of the time, Tuesday's rates were slightly better than Monday's)

I am normally a big fan of low to zero points loans, or even zero cost loans. I normally get a lot more hardcore about that preference for jumbo loans, because on jumbo loans one point is anywhere from a minimum of $5500 on up, and the last set of government statistics I saw show most people refinance at intervals of about 28 months. But at today's jumbo rate/cost tradeoffs, in 28 months you have recovered those two or three points of initial cost about three and a half times over. That is likely to make those two or three points the lenders want for a reasonable rate likely to be an investment that is well worthwhile. Even if you do refinance before then, it only takes about eight months to break even. I am pretty certain jumbo rates are going down within the next year or so, but I can't tell you exactly when, and if anybody thinks they can, ask what kind of insurance they're willing to sell you and at what price. Chances are that if you are one of those people who has a jumbo loan and a good reason to refinance now, the cost of refinancing now will be cheaper and doing so will serve you better than than any such insurance policy.

Caveat Emptor

A while ago, I wrote Sourcing and Seasoning of Funds. You'd think I have a set spiel I give out, and I do. But I just had a case where I didn't think I'd need it, and it burned me. Nice clean loan, plenty of down payment all sourced and seasoned, and then almost $100,000 appears in the account on the last statement as I'm getting ready to close it. Instant can of worms - Oops.

Any time money mysteriously appears, the mortgage loan underwriter is going to take an interest. I don't need all your financial statements, I just need enough to get the loan approved. But don't go dumping large amounts of money into the account, just like you shouldn't go apply for a non-mortgage loan while a mortgage loan is in process.

These two items are related because whenever a large amount of money appears, the underwriter's presumption is that you got another loan. Whereas there is nothing inherently wrong with doing so, when you get a loan, you're going to have to make payments. Those payments affect your debt to income ratio, the most important measure by which you qualify for a loan. The underwriter is going to want to know what the terms of that loan are, how much the payments are going to be, whether those payments are fixed or variable, and all of the other things that help them determine whether you qualify for this new loan even with making the payments for that other loan.

So when a large amount of money appears, the underwriter wants to see sourcing and seasoning of those funds. They want to know where the money came from and how you got it and how long you've had it. If it was a gift, they want to know how the person who gave it to you got it, and they want evidence that no repayment is expected. If you can't provide this information, the presumption is going to be that you got a personal loan of some sort. Obviously, if it's a loan, you're going to have to make payments. The payments are going to add to your monthly debt service, which adds to your monthly cost of housing to determine your debt to income ratio. Every dollar you add to either one of them is a dollar that might mean you don't qualify for the loan on your new property.

It's a horrible lie about people from Missouri, but think of underwriters as Missouri accountants. If you want them to believe anything but the worst possible interpretation of a given fact, they want you to show them on paper. That's their favorite phrase: "Show me on paper." It doesn't matter how much down payment you have, it doesn't matter how much equity in case of default. Lenders are not in the business of repossessing property; they are in the business of making loans that are going to be repaid. Especially in the current environment, they don't want to take any risks that your property is going to be one more property in their already too high inventory of lender owned properties.

When you move money from one account to another, you need to show that it has been in the previous account for a while, or where you got it from. You're going to need a paper trail back just as far as all of your other funds on this new money. If you got it from selling your previous property, the underwriters are going to want to see the HUD 1 form from that transaction. If it's a gift, they want a signed letter attesting to this fact from the donor, as well as a source of that money. If you got it from selling something else, the underwriter is quite likely going to ask for copies of the bill of sale. If you're going to be buying property in the near future (or refinancing), keep all the paperwork from anything you sell. And for crying out loud, before you move any large amounts of money around, talk to your loan officer about what you're going to need in order not to kill your loan. Even if you've got all the paperwork, it can make the difference between an easy, straightforward loan, and one where the underwriter takes it into his head that there's something funny going on. You really don't want them to do that, because when it does happen, they can start demanding more and more information, imposing more and more conditions to approving your loan, and in general, delaying your transaction and making the completion of it difficult. Every time one of their loans goes south, an underwriter is potentially in danger of losing their job - so when they think something may be not quite right, they are going to protect their job by requiring all of the information they can think of that might show something isn't quite copacetic. If they should find something specific they can point to, your loan will be declined, and your credit file could very well get an 'attempted fraud' tag. You don't want that, as it can lead to your loan being rejected not just at that lender, but everywhere. So you need to be very careful, and very clean, about moving money around, especially within a couple months of applying for a mortgage.

Caveat Emptor

Article UPDATED here

Because most loan providers will not guarantee their Federal Good Faith Estimates or California MLDS forms, I've been telling folks that the best suggestion (other than doing their loans myself, of course!) that I can give them is apply for a back up loan. But some mortgage loan providers will guarantee their quotes, and this article is about those guarantees, their limitations, and what to watch out for.

Loan officers are not the only ones who play games with the truth in the mortgage world. Borrowers do it. A lot of borrowers do it. Some are actually intending fraud, some just want a better loan and don't see anything wrong with painting their financial picture a little rosier than it is. Furthermore, there are reasons that lenders will decline loans that are not obvious. It has happened to me that I couldn't do a loan at all because of fairly obscure points that the borrowers weren't trying to conceal, they just didn't know they were important, and I didn't think to ask because of their rarity.

Keeping this in mind, loan providers are leery of offering guarantees, and indeed, since only an underwriter you will never meet or talk to can authorize the loan, for a loan provider to make a guarantee that there will be a loan is nonsense. The most they can say is, "Based upon my experience, I see no reason why this would not be approved," or, better, "Subject to underwriter approval, your terms will be this." That's a key phrase. Keep in mind that loan provider guarantees are few and far between, and as a result, there is no standard terminology to use. I, as a loan officer, cannot promise the loan. I can promise, however, that if the loan is approved as submitted, it will be on a given set of terms.

Now it happens that loan officers can manipulate you by submitting a loan that they know will not be approved. This is a lot of work and often "poisons the well" at that particular lender, but then they can tell you sorry, you do not qualify for that loan, but there's another one over here that you do qualify for, and now that you've already selected them to do your loan, they are no longer competing on price, and they build a much higher margin into the newly proposed loan, secure in the knowledge that you're unlikely to be shopping other lenders at this point.

You can counter that by asking what the guidelines are for the loan they are submitting. What is the maximum debt to income ratio? How much income do you need to qualify? Ask them to compute it out for you, and watch what numbers they use. What loan to value ratio is the rate predicated upon? What does the property need to appraise for in order to make that happen? (This can also help you spot hidden fees, albeit rarely. Comparatively few loan officers can tell you how much it's really going to take to get the loan done.) How much time in the same line of work are required? Here's a whole list of questions you should ask prospective loan providers (the most important mortgage article I have written).

Now, as to the form the guarantee should take: It should include the type of loan, to include an industry standard name for that loan type, so other loan officers you shop with know right away what they are talking about. It should also include the cost to get that loan. How many points of origination, if any, and how many discount points, if any? How much in total closing costs? How long of a lock is included?

You should beware the term, "thirty year loan," unless the words "fixed rate" are in there. A thirty year fixed rate loan is the standard loan that most folks aspire to, but it's usually the highest rate out there. The words "Thirty year loan" can also describe an Adjustable Rate Mortgage (ARM), or a hybrid ARM. A few loan officers will even describe hybrid ARMs as "thirty year fixed rate mortgages," because they are fixed for an initial period. So ask them "how long is that fixed rate fixed for?" here is one example of one way to disclose it right. So you always want to ask, "How long is it fixed for?" if they do not volunteer the explicit information.

If it's a balloon loan, that means you must refinance or pay it off before the end of the loan. Must in this case means it is mandatory, it is required, there is no more loan after that point. If it's an ARM or hybrid ARM, you also want the margin once it does start adjusting and the name of the underlying index to become part of the guarantee. You don't have to refinance hybrid ARMs, and you're welcome to keep them as long as you like what they adjust to, but most people refinance before the end of the fixed period or very shortly thereafter.

Finally, you most especially want whether or not there is a pre-payment penalty to be part of your guarantee, and if yes, the nature of that penalty. A loan with a prepayment penalty should be a much cheaper loan than one without, as you are looking at agreeing to pay about $12,000 around here if you refinance or sell while it's in effect. The phrase, "What would that be without the prepayment penalty?: is one of my favorites. But you have a right to know, and a loan with a prepayment penalty is likely not as good a loan as one a quarter to a half percent higher for the same cost, without a prepayment penalty. If you already know you're going to need to sell before it expires, it needs to be more than that. So make sure you find out, is there a prepayment penalty, yes or no? If Yes, how long is it for? Is it a hard penalty (incurred even if you actually sell the property) or a soft one (waived if you actually sell), and does it strike from the first extra dollar or only after you pay down more than twenty percent in a year? These all make a difference, and you should be aware of their nature, and it should be honestly disclosed to you when you are shopping for a loan.

Caveat Emptor

Original here

My take on the matter is "mostly no", but they do have some uses.

The one advantage that they usually carry a lower interest rate. There have been exceptions to this, just as there have been exceptions to the 5/1 hybrid ARM carrying lower rates than a thirty year fixed rate loan. There was a period about a month ago where for exactly the same cost I could deliver a 30 year fixed rate loan three eighths of a percent lower in the interest rate than the best fifteen year fixed rate loan then being offered. I just checked again, and the world has gone back to normal in this regard - the fifteen year fixed was almost three eighths of a percent lower rate for the same cost. So that is one benefit - lowered interest rate and lowered cost of interest. For a $300,000 loan amount, that would save you $1125 per year in interest charges, or $93.75 per month to start with, and increasing as time goes by. Solid benefit. Mathematical Fact.

Now let's consider the drawbacks. The first is that the payments are much higher. Why? Because you have to pay that principal ($300,000) off in half the time. I'm considering rates to be had at wholesale par as I'm writing this article, but these are equally valid in other contexts. On a $300,000 loan at 4.75% for a fifteen year loan, you're paying $2333.50 per month, versus $1633.47 at 5.125% on a thirty Suppose you have unexpected expenses, lose your job, or take a pay cut. On a fifteen year loan you are still obligated to make that additional $700 payment every month. The payment isn't twice as big, and it does save you a very large chunk of change if you pay your loans off. But there's nothing stopping you from voluntarily paying extra on a thirty year fixed rate mortgage, either. A month ago, I was telling people who wanted fifteen year loans to do exactly that. If the rate on the thirty year fixed rate loan is lower (as it was then), it's a 100% gain to get a thirty year fixed rate loan and simply add extra to the principal payment every month.

Let me make another observation: most folks don't pay loans off - even 15 year loans. Statistically, the number of folks who haven't sold or refinanced before five years is is less than ten percent. Some situation will arise which makes it better to pay off that loan early, via a sale or refinance. When it happens and you have been adhering to a fifteen year payoff schedule (whether you have a fifteen year loan or thirty year fixed rate loan you've been paying extra on), you get a large extra chunk of cash back on a sale, or you owe a lot less on a refinance. Bully for you, good show, and all that. But don't kid yourself that it led to an earlier payoff of your loan.

If you're the sort of person who is just buying their primary residence, going to pay it off without ever refinancing, just going to spend the extra money when the loan is paid off, and would never consider investment property or alternative investments, that's about the limit in complexity we're talking about here. Verdict: yes, get a fifteen year loan. But if any of those assumptions is not valid, then we've got some more work to do.

First off, if you're the sort of person who is looking to get into investment property, especially more than one: Higher minimum payments hit your debt to income ratio (and cash flow) hard. It would be very easy for me to come up with a scenario where you would be accepted on three or four thirty year fixed rate loans, putting the power of leverage to work for you where it does a lot more good, where you would be rejected for a second 15 year loan, simply because the debt to income ratio doesn't work. With the impending final death of stated income, this is going to bite an awful lot of people and keep biting. Where you could have your own property and three investment properties all with positive cash flow on thirty year loans, you could quite likely be stuck with your own property and possibly one investment property on fifteen year loans, and even if the loans were approved, be in serious negative cash flow land. Negative cash flow is a very bad thing for real estate investors - it's the number one reason why real estate investors are forced to do bad things they don't want to do, like sell in a tough market. If you've got positive cash flow and sustainable loans, the question is "How long is it going to be before I sell for a huge profit?" not "can I hold on another month?"

Second, we haven't considered a hypothetical alternative investment yet. Let's look at this very situation, and suppose we can earn an annualized 9% with alternative investments (right now, with the financial markets in the state they are in, I would bet on the historical average of about 10% being too low, for people with the guts to buy into a down market). Let's consider what happens when we take that extra $700 per month the fifteen year loan would require, and invest it. After 15 years, it has become $264,770 - which is actually more than enough to offset the difference in what you owe ($204,868 versus zero), despite the fact that the thirty year loan carries a higher interest rate. Start investing that $2333.50 every month in exactly the same investment at exactly the same yield. Carry it out another fifteen years, and where both loans are paid off, that thirty year and invest the difference strategy has netted you $1,281,520.44, versus $883,009.86 if you waited the fifteen years to start investing while you paid off your property, a difference of almost fifty percent. Mind you, this does presume you actually make that investment every month, but if you're just treating it as an abstract problem to see which use of the same money nets you more money at the end point, the thirty year mortgage and invest the difference strategy really does come out way ahead. In the real world, nothing pays a smooth 9%, and there will be fluctuations - but those fluctuations are more likely to benefit the strategy that starts investing earlier.

If this seems counter-intuitive, consider that by taking the fifteen year loan, you're taking money you could earn 9% on, and using it to pay off a tax-deductible 4.75% debt. Doesn't make a whole lot of sense to me, and the numbers in the previous paragraph don't even take into account tax deductions for home interest, which will cause even more advantage to the thirty year loan. An accountant probably wouldn't bother running the numbers unless you insisted upon knowing exactly how much it would cost you..

One final item before I go: It is much harder to recover the cost of points on a fifteen year loan than on a thirty. Most people never do get the money they spend back on thirty year loans, but on fifteen year loans, it can be truly horrid. For the rates in effect today, it takes over half again as long to recover the cost of two points on a fifteen year fixed rate loan as it does on a thirty year fixed - and since the loans are for a shorter period, you won't get them back as many times over, even if you do keep the loan long enough to pay it off. I have seen rate sheets where the payment actually works out lower for a higher interest rate, due to the costs of buying the rate down. In such circumstances, you literally never recover the additional costs. Watch your actual costs, and things that may not be costs like prepaid interest and money to seed an Impound Account. On fifteen year loans, they become proportionally much more important than on thirty year loans when they find they way into your mortgage balance, especially if the payment was something you only marginally qualified for to begin with.

Caveat Emptor

Article UPDATED here

Rates were higher when I originally wrote this, but the principles remain the same

Right now X is offering me a loan that looks something like this:

80/20 No down payment

On the /80: 6.5% FIXED interest for 30 years, interest-only payment option for 15 years
On the /20: 8.75% FIXED interest for 25 years (amortized to 30) 6-month lock for 1-point ($3800) refundable fee with float-down option

Devil is in the details.

Is there a pre-payment penalty?

They want 1 point to lock for 6 months? Cash, I presume? Quite frankly, the usual cost for locking in six months out is about three points. Nor is X usually that cheap on the lock. They have some excellent rates, but what they're quoting you is a market current quote for a 30 day lock. Long term rates are expected to rise, and long lock periods aren't free. There's something they are not telling you.

What are the discount/origination on the underlying loan? How much are they going to charge in closing costs to get it done?

Will they guarantee their quoted costs (as in they eat the difference if there is one, not you)? You might want to ask them all of the questions you should ask prospective loan providers

A developer's condo sell out is not the most difficult loan, but it's a long way from the easiest, as well. There are a lot of lenders that will not do them. Furthermore, what's being presented to you looks much cheaper than is likely to be true. If you insist on going with it, call me thirty days before the place will be done, and I'll do a back up loan, because I don't think what they're offering you is real.

he did get back to me as to what lender X's response was:

Is there any pre-payment penalty on this loan? NO.....

What is the total refundable cost for the 6-month lock? YOU PAY 1% UP FRONT AND IT IS REFUNDABLE IF YOU CLOSE WITHIN 6 MONTHS (emphasis mine)

How much will the closing costs be to get this loan done? I DON'T KNOW WHAT YOUR ESCROW AND TITLE COSTS WILL BE. YOUR LENDERS COSTS WILL BE APPROXIMATELY $1,200. (emphasis mine)

Is the rate being quoted based upon full documentation, stated income, NINA or EZ Doc? 100% FINANCING IS FULL DOC

Do I have to pay any discount points, points of origination, or any other points to get the quoted rates? NO POINTS NOR ORIGINATION FEE (ONLY THE 1% LOCK IN FEE OF WHICH WE SPOKE) (I prefer no points)

Regarding third party costs, can you tell me, or will the papers you send me make clear, the following third party costs:
- Appraisal fee: THIS SHOULD BE AROUND $400 BUT IS PART OF THE $1,200 I QUOTED.

- Total title charges: ??????????

- Escrow fee: ???????????

The builder has already assigned an escrow and title company for the property — may I use this company with the (lender X) loan? YES!

How much, total, will I be expected to pay X upfront, out of my pocket, to get this loan? THE $400 FOR THE APPRAISAL AND THE 1% TO LOCK IN....

How much, total, if any, will be added to my mortgage balance on top of what is quoted? ????????????????? NOTHING IS ADDED TO YOUR MORTGAGE.

If I agree to this loan after reviewing the papers, are the rate and closing costs guaranteed, and will X cover the difference (if any) between the quote and the actual final cost? WE'VE BEEN IN BUSINESS SINCE X. WE CONTINUE TO STAND BY OUR COMMITMENTS. (emphasis mine)

Now for the emphasis points, last first

-The question of "Is the rate guaranteed?" requires a simple yes/no response. This evasive reply tells you the answer is no, but that they don't want to admit it. If this answer is not yes, none of the other stuff is written in anything more permanent than beach sand somewhere below the high tide line. It's funny they mention commitments. Neither a Good Faith Estimate nor a Mortgage Loan Disclosure Statement (the California equivalent) is a loan commitment, or any kind of commitment at all. Regulations leave so much room for the unethical to maneuver without running afoul of the law that either one of those forms is nothing more than the loan officer or company wants it to be. A few are right on, and those companies will typically guarantee their quote. More are somewhere in the ballpark, amazingly enough usually noticeably on the low side. And quite a large fraction are nothing more than an exercise in creative writing. He didn't guarantee his quote. Tell me this: Two companies are bidding on doing building work for you. Both are large firms. The first company asks you all sorts of questions about specifications, and guarantees they'll get it done for $5000, and if there's a problem on their end, they will fix it for no additional money. The second says they think they can do it for $4500. Which would you feel more comfortable with? If you know anything about building contractors, the latter is a joke compared to the former. Lenders and estimates on the initial paperwork to get you to sign up are, if anything, worse. They're talking a good game to get you to sign up, knowing that once they've got your cash deposit, you will do what is necessary to protect it, no matter how different their final loan is. That's assuming you're one of the forty percent who even notices the difference.

-I do business with this lender. Their costs are $1295 not including the appraisal to brokers, who perform some of the services they charge their "in branch" clients for performing. By the time you've added escrow and title, you're roughly at the $3400 mark for closing costs.

-It's easy to talk a good game to most folks who aren't experienced with how the game is played. The point of this particular game is trying to lock you in with that 1 percent cash upfront payment, so that when clients discover that he's not going to be able to deliver what he's talking about, they'll be thinking about recovering/losing that money, rather than focusing your attention on getting the best loan. This is called creating a distraction, and is in accordance with the tell you anything to get you to sign up school of thought.

When it comes time to close, he'd be licking his chops due to the fact that the client paid $3500 (or whatever one point comes to) cash upfront, and when he delivered something different, the client believes they have no choice but to agree in order to save their money. I've offered people in that situation a loan that was more than 1 point better, and they still went with the guy who had rooked them out of the 1% upfront, because they're worried about that cash when they should be worried about the rate/cost tradeoff.

He also went to the builder's lender

If I'm interested in getting my monthly payments down lower and I consider getting a 5/1 ARM loan to do so, is that a completely horrible idea, or could I refinance into another 5/1 ARM after the first five years to continue getting a pretty good rate, if for example the 30-year fixed rates have gone up a bunch in 5 years?

That's precisely what I've been doing for the past fifteen years. On the other hand, with the difference in rate/cost tradeoff being so narrow right now between a thirty fixed and a 5/1 (roughly a quarter of a percent interest rate wise), there's a strong argument to be made for the loan you never have to wonder about. Where I thought I would never have a thirty year fixed rate mortgage, I'd consider it if I were going to buy or refi right now. Don't know if I'd do it, but I'd think about it. (And at this update, thirty year fixed rate loans are actually the lowest rate cost tradeoff, at least in for A paper conforming loans)

80/20 No-down 5/1 ARM No pre-payment penalty Total loan amount: $379,900

80%, $303,000: 5.25% fixed & interest-only for 5 years, payment: $1329.65
20%, $78,000: 9.5% fixed for 5 years, interest-only for 15 years, payment: $601.50

Total monthly payment: $1931.15

Aside from the fact that the putative loans total $381,000, which is likely picking nits, I don't believe that loan exists, as 5/1 ARMS are running up around 6.25% at "par" right now. I couldn't find a lender that is even offering 5.25, no matter how many points you paid, and that's wholesale. He attached some GFEs which show $4180 in points charges (plus $875 in pure junk fees and about $150 in well padded costs on the first loan and shorted the likely interest, in addition to all the real stuff), adds $5000 that he's evidently already paid to the closing costs, requires another $3200 plus at closing, and still comes up with final first loan of $303,920.

On the second, the loan required another $1140 in fees but a loan amount of only $75980, thereby balancing the 80/20 requirement correctly, at least, thereby negating the nitpick in the previous paragraph.

(I'd also shoot his agent for not negotiating any givebacks, given the current market, except I'm prepared to bet he didn't have one. I've covered some of these issues, precisely as they relate to this particular situation, at the end of this article), of which which I'll reproduce the relevant section here

Unfortunately, you've already (probably) put a deposit down and you said in subsequent email that the home has appreciated while it was being built, so the developer has incentive to throw roadblocks in your path. Your transaction falls through and not only do they get to keep your deposit but they can turn around and sell the home for more. Preventing this kind of nonsense is what buyer's agents are for (it also gives you someone easy to sue if something goes wrong!). Unfortunately, most developers will not cooperate by paying a commission to buyer's agents for precisely this reason, which means that the average buyer will decline to pay an agent out of their own pocket and try to do the transaction on their own, which leads to situations like this.

Now getting back to the loans, this is how lenders Play The Game of getting you to sign up. They are looking for you to build what sales folk call commitment to a loan before they tell you the whole truth - usually by springing it on you at closing. They make it look better than it is for a while. They can do this because the only form that has to have correct accounting is the HUD 1, which comes at the very end of the process (It's usually prepared by the escrow officer. You should get a provisional when you sign loan documents and a final within 30 days of the end of the transaction). In the case of a purchase, this is usually at the last possible instant, which means that if you haven't prepared a back-up loan there is no time to get one before the deal goes south, which means your choices are limited to sign or lose the property, the deposit, and all that time and aggravation. This is providing that you even notice. Industry statistics say that somewhere around half the folks won't, and even on refinancing, where people can almost always just keep the loan they have without bad consequences, eighty-five percent or so of those who do notice will cave in and sign.

Caveat Emptor

Original here