Archive for Regulations
Rates and APR: What Do They Tell You
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What is the difference between the interest rate and the A.P.R.?
You’ll see an interest rate and an Annual Percentage Rate (APR) for each mortgage loan you see advertised. The easy answer to “why” is that federal law requires the lender to tell you both. By showing both this can lead to confusion, especially to those First Time Homebuyers.
The Federal Reserve wants the APR to be a tool for comparing different loans, which will include different interest rates but also different points, fees, and other terms. The APR is designed to represent the “true cost of a loan” to the borrower, expressed in the form of a yearly rate. The problem is that there are many costs associated with a loan, that are not considered in APR.
What Fees Are Included In The APR?
- Loan Origination Fee
- Loan Discount Fee
- Other Lender/Broker Fees (Application, Underwriting, Processing, Tax Service Fee, etc.) – Anything paid to the broker or lender or affiliate of the broker or lender
- Odd Days Interest
- Mortgage Insurance Premium
- Title Closing Fee
While APR was designed as an attempt to make it easier to compare loans, it’s sometimes confusing because the APR includes some, but not all, of the costs associated with a mortgage. And since the federal law that requires lenders to disclose the APR does not specifically declare what goes into the calculation, APR’s can vary from lender to lender and loan to loan.
What Fees Are Not Included In The APR Calculation
- Escrow Setup
- Appraisal Fee
- Title Insurance
Let’s Throw Adjustable Rate Mortgages In The Mix
The APR on an Adjustable Rate Mortgage (ARM), a loan tied to a financial index, like a 5/1 ARM, assumes the index will never change. The interest rate on an ARM is composed of the index and margin. Because of the underlying assumption that the index will not move over the life of the loan, the APR can be grossly under or over stated on an ARM depending upon if the index moves up or down over the life of the mortgage. ARM’s loans were created because the Bank does not have to assume the interest rate risk of a Fixed 30 Year Mortgage, allowing the consumer to get a slightly lower rate, and assume the risk that rates will rise. These financial indexes have always moved over the course of a 30 year mortgage thus making the APR a difficult tool to compare a fixed rate mortgage to an ARM.
So, APR’s are at best inexact. The lesson is that APR can be a guide, but you need a mortgage professional to help you find the truly best loan for you.
Show What Should You Do?
You as a consumer need to look at two things when considering a mortgage loan
- The front end costs associated with obtaining the loan, not just those deemed pre-paid finance charges, and thus included in the APR calculation
- The interest rate, and the total cost of the loan over time.
Here is a Comparison of two different mortgages, both 30 year fixed rate mortgage.
The first mortgage has an APR of 5.03%, and the 2nd has an APR of 5.25%. So, if you were to choose a loan simply based on the APR the typical choice would be the 1st mortgage; however, if you will be staying in the home less than 90 months (most loans are only held for 60 months) then the best choice is Loan 2, because the total cost is cheaper.
Make sure you are dealing with a mortgage professional that doesn’t just throw rates and fees at you over the phone. I’ll take the time to prepare a total cost illustration and determine that the loan you select meets your long term objective.
I really appreciate you coming back to look around. If you know of anyone else you think might enjoy my blog, please don't keep me a secret.
New Hope for Housing: HAMP 2.0
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Obama announces changes to to HAMP
While this modification sounds great each of these programs to help, has garnered little support, and been able to help very few people. The reason that each program has failed is because the guidelines for the customer to qualify are still too stringent.
The program has been modified to attempt to help those that have been effected by the economy through no fault of there own. There is increased incentives for mortgage services to help unemployed homeowners, and for those that owe more than their home is worth. This is still in an effort to help stabilize the housing market.
Eligible homeowners must live in an owner-occupied home, have a mortgage balance less than $729,750, owe monthly mortgage payments that are not affordable (greater than 31% of gross income), and demonstrate some sort of financial hardship.
Today is an important step forward for homeowners, who will now have more options to retain homeownership. The use of principal write down as an additional tool in the Home Affordable Modification Program (HAMP) will offer expanded opportunities in the case of negative equity.
Faith Schwartz
Executive Director
Hope NOW
For more information on HAMP 2.0:
FHA Refinance Fact Sheet for Underwater Homeowners
Here is a video from CNBC that goes over the new developments for HAMP:
If you cannot view the above video on HAMP Updates Click Here.
USDA still needs additional funding for the Guaranteed Rural Housing Program
One item that was completely ignored was increased funding for a program that is already working, USDA Home Loans. A USDA Home Loan is one of the best loans available, it also has the lowest foreclosure rate of any other product available, 1.72%. The Wall Street Journal had an excellent piece talking about USDA Home Loan and the need for Congress to authorize additional funding.
I urge everyone to contact your elected officials immediately and voice your concerns; Authorize additional funds for USDA Home Loans.
What Went Wrong in the Mortgage Market
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Michael Lewis, the man the world really came to know from the Book “Blind Side”, has another book soon to be released. Michael Lewis newest book is titled,
“The Big Short: Inside the Doomsday Machine”. This book takes him back to his roots, he started as a Bond trader at Solomn Smith Barney, and wrote a book about his time there, “Liar’s Poker.”
Here is Lewis’ “60 Minutes” interview from Sunday’s episode, in two parts:
Part II:
The Good Faith Guarantee – What You Need to Know as a Borrower and a Realtor
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- Flickr photo by David Reece
The Department of Housing and Urban Development (HUD) under RESPA revised the Good Faith Estimate, HUD-1, and HUD-1A through regulation adopted in 2008 which became effective January 01, 2010. The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, passed in 1974. The purpose of the act is to help consumers become better shoppers for settlement services and to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. RESPA covers loans secured with a mortgage placed on a one-to-four family residential property.These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. RESPA requires borrowers to receive disclosures at various times. A Good Faith Estimate is required to be delivered within three (3) days of giving six required items:
- Name
- Social Security Number
- Monthly Income
- Property Address
- Property Value (Estimate)
- Loan Amount
Fees disclosed on the new Good Faith Estimate are grouped into three categories:
- Fees that cannot increase from the initial estimate to closing
- Fees that may vary as much as 10 percent from the initial estimate to closing
- Fees that may increase without limit, because the lender has no control over them or may be difficult to predict in advance.
Fees in the no tolerance group: lender fees, mortgage broker fees, processing, underwriting, and discount points.
Fees in the 10% variance group: appraisal, recording fees, credit report, flood certification, tax service, mortgage insurance, and guarantee fee. Title closing and title insurance are included in this group when selected from a provided list by the borrower. Any single fee could vary by more than 10%, the combined total of the fees in this group may not increase by more than 10%.
Fees in the unlimited increase group: homeowner’s insurance, per diem interest, and setting up the initial escrow account. Title closing, and title insurance are included in this group when they are not selected from a list provided by the lender.
The New Good Faith Estimate – The Positive:
As a customer you have a minimum of 10 days to shop for various settlement services. The Good Faith Estimate is now lo longer an “Estimate” but an Etched in Granite Guarantee of Fees charged by the Mortgage Broker and Lender. This very fact will eliminate any companies still that would attempt to bait and switch consumers by offering low fees, and then increasing at closing. The format of the new Good Faith Estimate may not be modified from the version prescribed by HUD, this will make it easier for consumers to compare GFE’s from one lender to another.
The New Good Faith Estimate – The Neutral Items:
The overall costs for closing a loan have not decreased, and none of the items have went away, and no new items have been added because of the new Good Faith Estimate. The borrower will be asked to provide a commitment to the loan and to moving forward prior to locking in the rate and terms. If the borrower does not provide their commitment to moving forward with the loan by the end of the shopping term, minimum 10 days, then the lender no longer has to honor the terms. If the terms do happen to change during the process then this will trigger another 10 day grace period.A very important part for the customer to pay attention to is how long the interest rate being offered is good through. Because of MDIA (Mortgage Disclosure Improvement Act of 2009) the APR at closing cannot be off by more than 1/8%, if it is it must be re-disclosed and have a 3 day waiting period. So, the interest rate will need to be locked in at least 5 days prior to closing with most investors requiring 10 days. Interest rates are very fluid so guaranteeing an interest rate for any lenght of time is very difficult, since the interest rate could change.
The New Good Faith Estimate – The Stuff that was forgotten:
The Lender and Broker are responsible for the accuracy of fees that are typically paid for by the seller, ie. Owners Title Policy. A seller’s closing cost concession is not shown on the new Good Faith Estimate. The proration of taxes is not shown. Proration of taxes is a credit given to the buyer, when taxes are paid one year after assessment, since the new buyer’s first bill would be for a time period when they were not living in the property.
The two most important pieces information everyone wants to know when purchasing a home:
- What is my total monthly payment. The Principal, Interest and Mortgage Insurance is included, but not the Taxes and Insurance. Sure everyone can just add the cost, but wouldn’t it make more sense to just include the total payment, it was on the old Good Faith Estimate. With a USDA Home Loan you don’t have to worry about the added expense of mortgage insurance.
- How much money will I need to close. If your using a USDA Home Loan this doesn’t become as much of an issue, but still something you want to know.
Because of timelines with RESPA and MDIA it is important to work with a knowledgeable mortgage broker to ensure that closing deadlines are met.
HUD Settlement Costs Booklet – Revised for 2010
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The Department of Housing and Urban Development (HUD) has revised the “Settlement Costs Booklet“; now entitled “Shopping for Your Home Loan.” The revised booklet is required to be given to every consumer applying for a purchase loan on or after January 01, 2010.
Layout of the Settlement Booklet:
There is a detailed explanation of the new Good Faith Estimate (also required on or after January 01, 2010) and the revised HUD-1 form. The booklet is divided into 13 parts, obviously HUD isn’t superstitious.
Some of the important topics covered:
- A list of milestones on the path to closing your purchase loan.
- A description of the purpose of the booklet.
- Contact Information for HUD as well as other important contacts, a glossary, a consumer bill of rights via a “Do” and “Don’t List”
- The Roles of various entities involved in the mortgage process: Loan Originator, Real Estate Agent, Attorney, Builders.
- A short section, with a worksheet to help determine what you can afford.
- Shopping for the best loan and shopping for other services outside of origination “Other Settlement Services”
- Types of Loans and Programs
- Explanation of the new Good Faith Estimate, and the new HUD-1.
Shopping For Your Home Loan booklet provides consumers with tools they need to make an informed decision about the costs incurred during a mortgage transaction.
*Post updated 02-03-2010 to embed the updated Settlement Cost Booklet that was updated by HUD on 01-06-2010 with corrections for minor detail.
