Whether you are a first time home buyer or looking to move up, buying a home is a big decision, and not one to take lightly. One of my missions with this blog is to help people make the best decisions possible when buying a home or taking on a mortgage. I do this regularly through the information on this blog, and through my free Chicago home buyer’s guide – the Real World Home Buyers Guide (just click to download – it’s 55 pages of information and you don’t need to give up your email to get it). I get a lot of great comments about how helpful this is, and how knowing how the process works, and what to expect when buying a home or getting a mortgage, takes the stress out of buying a home and getting a mortgage at the best terms possible. We are now putting together a Chicago Area Video Home Buyer’s Guide which will break down this guide into short video segments.

The Chicago Video Home Buyers Guide will be released one segment at a time over the next few months. With this first installment we start at the beginning – Why would you want to own your own home? This is the first of three segment discussing the financial benefits of owning, and in this segment we cover equity build up, or how you can increase your equity or ownership interest just by paying down your mortgage. Let me know your thoughts. Thanks for watching, and I hope this is helpful.

Free- Home Buyer’s Guide

You can trust in us to get the job done right.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

There are few things that are certain in life, but some things you can count on. Death, taxes and the fact that rents will go up, all make the list. Cook county just sent out their tax bills, and, as expected, even though home values were down, real estate taxes increased. Landlords don’t have the home owners exemption, so their rents have increased more. This puts pressure on landlords to increase their rents or find a way to cut more expenses. At the same time, home prices are down to the lowest level in years, and mortgage interest rates are near historic lows. This means that home affordability is better than it has been in years, and very competitive with the cost of renting. Not everyone who rents will be able to buy, but there are many renters who are qualified to buy and still sitting on the sidelines. For some, renting fits their life style better and they aren’t in a position where they want to settle down and buy a home. But there are others who continue to rent because they don’t realize they can buy, or, with conditions so uncertain, fear is holding them back. For these people, an increase in rent may be the prod to push them toward buying a home of their own.

There are a lot of reasons why renters think they can’t buy. Here are some of the myths that keep renters on the sidelines:

It cost too much to buy – I am continually amazed at how many people think they need a 20% down payment in order to buy. The truth is, you will need some money for a down payment, but not nearly as much as you think. With FHA you only need a 3.5% down payment, and all of this can be a gift. You will also need money for closing costs, but all of these can be paid for by the seller, if you put this into the contract (FHA allows up to 6% of the costs to be paid for with a seller credit, much more than you will usually need).

This is a bad time to buy – This is all about fear. These are uncertain times, and with the economy still fragile, many renters are worried about losing their jobs, or afraid they will buy too early and home prices will fall even further. No one knows what the future will hold. But in many ways this looks to be a great time to buy. With low home prices and the lowest mortgage rates in decades, this is a one-two punch which makes home buying more comparable to renting and the cost of ownership the lowest in years. We won’t know if this is really the best time to buy until we have a chance to look back, but often, the best time to buy is also the time when it seems the scariest. The combination of low home prices and low interest rates at the same time is not likely to last long term, and as the economy picks up, homes will become less affordable.

It costs a lot more to own a home than to rent – We have already talked about affordability and how owning is closer to renting. But to compare the full picture you need to look deeper than just comparing payments. There are several major advantages to owning real estate compared to renting. These include:

• Tax advantages – you can deduct the mortgage interest, taxes and in many cases the mortgage insurance from your tax bill. This is Uncle Sam’s way of making home ownership attractive.
• Equity build up – With most mortgages, you pay down your mortgage over time. This starts out slow, but evey payment you make means a little less interest paid and a little more equity in your home.
• Appreciation – This hasn’t been the case lately, but over time the odds are great that your home will increase in value as time goes by. For now we have to get out of the recession and the housing slump, so don’t count on this in the next few years. But in the long term it is hard to imagine that home values won’t go up.

The financial benefits of home ownership take time, but if you continue renting you know exactly where you will be down the road.

It doesn’t make sense to buy now since they don’t have the tax credit anymore – The tax credit was a great incentive, but most of the people who took advantage of this were planning on buying a home anyway. The mood of congress has changed, and worries about the deficit and spending are much more of a concern. It is doubtful that they will come back with any type of credit. But the lower prices and rates make up for the loss of the credit. Also, if you qualify, there are other programs that are worth much more. The MCC mortgage credit certificate program is a way for moderate income earners to get up to $2,000 extra as a deduction on their taxes, every year that they own the home (income and property values apply, but they are high enough to help many home buyers). This is a great long term program, and one that most home buyers have never heard of.

It is too hard to qualify for a mortgage – Mortgage guidelines have gotten tighter, but there are still plenty of ways to qualify. One big misconception is that your credit has to be perfect. We do have to show that you have a responsible credit history, but if you’ve had some problems in your past they won’t hurt you forever. If you would like to own your home but aren’t sure if you qualify, do your self a favor and talk with a good loan officer. You might be surprised to find you are in better shape than you thought. If not, a good loan officer can help you to find a plan to fix the problems so you can own a home.

We will see if more renters do take the plunge into home ownership over the coming months, but I expect it will be a lot. There are a lot of renters who are thinking of buying, but just waiting for the right time. The American dream is still to own a home of your own. Let me know what we can do to help get you there.

Free Home Buyers Guide

You can trust in us to get the job done right.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

FHA credit score requirements are moving up again. We, and most other lenders, now have moved to a minimum 640 middle score for FHA approval, and some wholesale lenders now require a minimum of 660. If you read the FHA guidelines, the minimum score is only 580 (though there is no way you will get a loan with that score), and with the economy soft and the housing market down, cutting off otherwise well qualified buyers doesn’t seem like a good way to achieve their goal of offering more families a chance to buy a home of their own. So what gives?

The problem is that this tightening of credit standards is a direct result of FHA success (I’ll get into this more in a minute). As anyone who reads this blog regularly knows, I am a big fan of FHA mortgages. FHA has always offered common sense, fully documented loans to middle class and low income borrowers. FHA is often thought of as a first time home buyers loan because you only need a small 3.5% down payment and their philosophy on credit was more realistic in that they were willing to work with people who had mistakes in the past.  The key with FHA credit issues is that they needed to understand the situation – what caused the problems, that the borrower is back on track and that the credit problems aren’t likely to continue. FHA was never a score based loan, it was a loan that looked at each situation individually. As someone who reads and analyzes credit reports every day, I can tell you the credit score is just a starting point. For example, 2 of the credit reports I looked at this week from different borrowers had almost identical scores, both in the low 600s. One was a single parent who went through a divorce and had some uninsured medical issues which stained her credit, but is now paying everything on time and trying to rebuild her good credit. The other was from a single guy who makes a great income but travels regularly and doesn’t have a system to pay his bills on time. He can afford to pay when the bills come due, but hasn’t gotten in the habit of doing it. To me these people, even with the same scores, should be looked at differently.

Up until a few years ago FHA never had a minimum score requirement. The score requirements are now coming from the lenders who take on the FHA loans (FHA doesn’t make loans themselves, they insure the loans that meet their requirements) and again, they are raising the scores because of the program’s success. A few years ago, before the financial melt down, FHA accounted for about 2% of the loans originated. 100% financing and sub-prime loans had taken away most of the borrowers who would normally be FHA buyers. Now, most of the companies making these riskier loans have gone out of business or been bailed out by the government, and FHA market share is in the 30 to 40% range. As conventional mortgage guidelines have gotten tougher, more borrowers who would have otherwise been conventional buyers are now better served by FHA. One result of this is that the average credit scores for FHA loans has increased a lot over the last years, from the low 600s to near 700.

But with their market share increasing so dramatically, this has also put pressure on the FHA reserve fund. FHA insures against losses by collecting mortgage insurance premiums on every loan they insure. This has been enough to keep the program solvent since its inception back in the 1930s, but with unemployment high and home values decreasing, this has increased loan defaults and decreased their reserve fund. Although Fannie Mae and Freddie Mac and all the big banks have had to go to Uncle Sam to keep their doors open, FHA is doing this on their own. In order to protect their fund, they have taken several big steps. Earlier this month they changed the way they collect mortgage insurance in a way that will build funds quicker. They also have put more pressure on lenders who make the FHA loans, shifting more risk from FHA to the lenders, and this has spurred the increase in score requirements.

The lenders who approve and fund the loans have always been responsible for making sure that the loans conform to FHA guidelines, they are now being held to a higher standard. Now the lenders are also held accountable for the default rate, or the percentage of loans that go into default (missed payments up to foreclosure). This means that FHA could force a lender to buy back loans that go south, even if the loan met all the guidelines and everything was done according to the rules. The truth is that you never know for sure what loans will go bad, because so many of the problems arise when an unforeseen life event happens to a borrower. It doesn’t matter what your credit score is, if you lose your job, have a death in the family, a medical emergency or another traumatic life event, your finances will be under stress.

From the lenders standpoint, the worst thing that can happen is being forced to buy back a loan. Lenders make money by originating loans and then selling them off and collecting their profit upfront. When they are forced to buy back a loan, this is a big loss. Since lenders aren’t in the habit of doing anything that will cost them money, raising the credit scores is a logical way to cut the risk in their portfolio. This isn’t what FHA was hoping for, though. This move by FHA to hold lenders accountable, is having the unintended consequence of making it harder to qualify for those who FHA is meant to serve, and by taking otherwise well qualified buyers out of the housing market it is making it harder to build a housing rebound. FHA Commissioner David Stevens recently said that he though some lenders had gone overboard on the credit tightening, and "You won’t help communities recover if you limit lending to just the top tier borrowers." But without specific action from FHA the lenders are going to continue with a tighter credit policy, because this is the safest course for them.

What this means to new home buyers or anyone thinking about getting FHA financing.

Credit is now more important than ever. If you are thinking about buying a home, the best thing you can do is to start the process early, have your credit run and get pre-approved for a mortgage. Sometimes there are problems on your credit report which you may not even be aware of. If you start early you have time to make sure you address the issues and get mistakes cleaned up, before it’s too late.

Here are links to past articles which cover how credit scores are determined, what you can do to improve your credit and how to remove mistakes on your credit report.

How to understand and improve your credit score-part1

How to understand and improve your credit score-part2

How to understand and improve your credit score-part3

How to understand and improve your credit score-part4

Free Home Buyer’s Guide

No-Obligation Mortgage Pre-approval

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

One question I hear all the time, is – When will rates drop to 4.00% (or 3.75% or whatever mortgage rate is conceivable but just out of reach)? Mortgage rates are at all time lows, but it is human nature to always want a little better than what is available at the time. No one wants to take on a loan now and then have mortgage rates drop even lower. I usually hear this question after the market has gone in the wrong direction for a few days, but I was hearing variations of this last year (when will rates drop to 4.5%). Sometimes the question comes up after someone is referred to me by a friend or co-worker who just got a great rate, or by someone who heard someone talk about the unbelievably low rate they just locked into. In cases like this we don’t always get the whole story. If their friend locked into a 15 year fixed or an adjustable rate loan, the rate will be lower than the available 30 year fixed rates. Sometimes the friend doesn’t mention that they paid points (higher closing costs) in order to take on a lower rate. The truth is that there is not one mortgage rate available, but many. Your mortgage rate depends on what type of mortgage you are getting, your personal financial situation, the type of property, how much you are willing to pay to close and a number of other factors, as well as what is happening in the mortgage rates market at the time. We can break these down to three categories which determine what rate you can get on any particular day. Some people can get the best rates now, while others may not even be close.

The three factors that determine what rate you are able to get are:

1. Your personal situation and the characteristics of your loan.
2. What is happening in the mortgage backed securities markets and the back offices of the big lenders.
3. How much you are willing to pay to get the loan.

Lets look at each of these in detail.

Your personal situation and your loan characteristics

When people are shopping for a mortgage, most assume that it is a one size fits all situation. But each loan is priced on its own. There are loan level price adjustments (price hits) for a variety of situations, and other things that influence your loan pricing. Some of the factors that could influence your pricing include:

• Fico scores –Fico scores above 740 get the best conventional pricing. When scores are below 700 the price hits get big (with conventional loans), which means higher interest rates or more money at closing. So the better your credit score, the better your chances of getting the lowest rate.
• Loan to value – Loan to value is a way of looking at how much equity you have in the property. The more equity you have, the less risk, so this can affect your pricing on the loan. This actually works two ways. If you don’t have much equity there can be price hits, but if you have lots of equity in your home the pricing could get better.
• Loan Amount – There are price hits for smaller (under $100,000) mortgages, but the bigger issue here is that bigger loans bring in more revenue for the company. It costs the same to process a $40,000 loan as it does a $400,000 loan. But at the same rate, the larger loan is much more profitable. This means that you will get better pricing for the larger loan amount. Also, if your loan is above the lending limits ($417,000 for a single family home in the Chicago area) this will be a Jumbo mortgage and the rates will be higher.
• Property type – There are price hits for financing condos (unless you have 25% equity) and multi unit buildings.
• Secondary financing – If you have a second mortgage or a home equity loan this could be another price hit, depending on how much equity you have in your home.
• Type of mortgage – If you take on an adjustable rate mortgage, or pay the loan off in a shorter time frame (15 years instead of 30 years) the rate will be lower. FHA loans are priced differently than conventional loans. Adjustable rate loans are always lower than fixed rates because you are taking on more risk. Make sure you are comparing apples to apples when you compare rates. If you have a friend who just refinanced into a loan in the 3s, it probably isn’t a 30 year fixed.
• Property use – If you don’t live in the property (and it isn’t a second or vacation home), it will be considered non-owner occupied, and there will be big price hits meaning higher rates. 

Bottom line, each loan is priced individually. But even when you are comparing your own situation, mortgage rates can change from day to day.   

What is happening in the mortgage backed securities markets and the back offices of the big lenders

This is going to get a little complicated, but here it goes -Mortgage rates go up and down based on what is happening in the economy, and this is reflected every day in the mortgage backed securities (MBS) markets. Lenders use these mortgage bonds to hedge their rates, buying up contracts and locking in their profits. They buy enough bonds  to cover their expected production, and by buying bonds that match up to the rates they are charging, they know what rates they will deliver 30 or 60 days later when the loan actually closes. Locking in your rate means that you are guaranteeing the rate you will close at. This gives you security, and you know there won’t be any last minute surprises where the rate jumps higher at closing. But rates change every day. Good news in the economy (more jobs created, increased production) is looked at as bad news for mortgage rates, and bad news (loss of jobs, any sign that the economy is dipping) is looked at as wildly good news for mortgage rates. The reason for this is that the MBS market is a type of crystal ball. Investors in mortgage bonds include insurance companies and hedge funds, investment companies and other countries (especially China and Japan), buy mortgages bonds because they are considered low risk (even now, because the US government is behind them). The other group of buyers to add in to this mix are the traders who add liquidity to the market by making bets on the direction of interest rates by buying and selling these bonds.

The day to day change in mortgage rates is largely determined by economic news, and again, bad news in the economy usually means good news for mortgage rates. But there are a couple of other factors that shape mortgage rates each day. One major factor is the traders that buy and sell MBS. They react to each day’s news by buying and selling contracts, trying to get in front of whatever the trend appears to be. The market can be volatile and swings in the market on a day to day basis can be significant. But the truth is that rates normally trade in ranges (until something happens to push rates into a new range). So even with market swings, someone closely following the market can do a pretty good job of predicting when the rates are about to hit the best part of the range and it is time to lock in, or are near their worst levels when it is a better bet to float. But there is one other factor that makes this a little more complicated. The MBS market is the basis for mortgage rates, but the actual rates charged are determined by the lenders (usually the wholesale lenders who buy the majority of the loans in the mortgage aftermarket) making the loans. Lenders again hedge their pipelines to be able to guarantee their rate locks, and they are sophisticated enough that they play the ranges along with the traders in the market. But even if they have locked in their own pipelines, they don’t always offer the best pricing in their daily rates. Lenders offer rates based on whether they need more loans, or not. It takes time, effort and manpower to process and close a loan. When a lender has excess capacity, they are likely to offer better rates. When their pipelines are filled and they have more loans than they can handle in a reasonable amount of time, they turn off the spigot by raising rates. Sometimes you will have one wholesale lender who is more aggressive with their pricing than others, because they need more loan volume. Once their pipelines are filled, they come back in line with the other lenders in the market.

Right now the big question is what the Fed will do at their next meeting (November 3rd) and whether they will start a new policy of Quantitative easing, or pumping more money into the economy by buying treasuries and MBS. The goal of this policy will be to lower rates, and the smart money says that this policy is almost a sure bet. But the question then comes down to whether this will mean mortgage rates will actually fall lower, or if the pricing is already built in because everyone expects the Fed to pull the trigger soon. Mortgage rates dropped when the idea was first floated, so I am in the camp that a good portion of the improvement is already baked into the rates now. Rates could drop lower, but barring new evidence the economy is dropping lower, I don’t think we will drop a whole lot lower.

The bottom line here is that mortgage rates change on a daily basis, and sometimes the reasons are clear, other times they aren’t. Many borrowers are best served by just locking in the rate when they apply, and being able to relax knowing that they got a rate that works for their needs and they don’t have to worry that rates will spike higher. But if you want to try and time the rates, you either need to follow the market closely and be able to move fast when the time is right, or you need to work with someone who will do this for you. Find a good, knowledgeable loan officer who watches the market and they can help advise you on what the best strategy is for locking in your mortgage rate.

How much are you willing to pay to get the loan?

The last major factor in what rate you get is how much you are willing to pay to get the best mortgage rate. If you look at the rates in the newspaper or some of the rates quoted in the internet, rates are likely to look very low. But the flip side of the lowest rate quotes is that the cost of getting these rates (points and fees) is going to be higher. Because almost all lenders are getting their money from the same sources, mortgage rates should be very close from lender to lender. When comparing different rate options you need to make sure you are comparing apples to apples. Sometimes it makes sense to pay extra to get a lower rate, other times it is smarter to pay less (or no closing costs at all) and take on a slightly higher rate.

If you are thinking of refinancing your mortgage, you should always do a break even or pay back calculation. For this you need to know 3 things:

1. How much will you save by refinancing?
2. How much will it cost to refinance?
3. How long do you think you will stay in the home, and with this mortgage?

The first step is to determine how much you will save. For an example, if you now have a mortgage with a $200,000 balance and a 5.00% interest rate., your mortgage payment is about $1,073 per month. Now, if current rates are at 4.00% (this is an example.  Call me if you want a personal quote) the new mortgage payment would be $955per month. The lower rate means a savings of almost $118 each month. This is a great savings, especially when you look at it over the life of the loan, But does it make sense to refinance? Maybe. We still need to know more, though.

The next step is to find out how much it will cost to refinance. This is where it can get confusing. If you have spent any time on the Internet, you’ve seen lots of ads for mortgage companies claiming they offer the lowest rates. But low rates don’t mean a thing if you don’t look at the closing costs too. I’ve seen closing costs differ by as much as $6,000, so this is something that can make a huge difference. Closing costs include title fees, the cost of the appraisal and bank charges as well as points – which are upfront financing charges.

The difference in closing costs can make a big difference in whether the loan makes sense, or not. If you are paying $1,800 in total closing costs, it will take you a little over a year to payback the closing costs with the $92 savings from your new rate.  After that, every payment you make will be a true savings. But if that same loan cost $6,000 to close, then it would take close to 5 years before you would get any benefit at all from refinancing. So the lowest rate isn’t always the best deal.

The last question, is how long you do you expect to be in your home and in the mortgage. If you plan to stay in the home for at least 10 years, then paying more to get a better rate might be the best strategy, especially if you think (like I do) that rates are about as low as they will ever go. But most people don’t stay in their home forever. If you aren’t sure how long you will stay in your home, you might be better served by getting a loan with lower closing costs. Even though the rate and payment may be a little higher, your savings will come much quicker.

We can take this idea one step further. When rates are down, the biggest obstacle to homeowners lowering their payments and taking advantage of the low rates is the cost of refinancing. The more that the loan costs, the longer you will need to be in the new loan before refinancing makes sense. So if a loan costs a lot up-front, it takes a big improvement in the rates before it is worth doing. On the other hand, if there are no costs at all, a small reduction in the rates can save you a lot of money over time.

With a no-cost refinance we use the yield spread premium (the money that the wholesale or end lenders pay us to bring them the loan) to pay for the closing costs. When I price loans I have several different options. Every day the lenders we deal with send us new price sheets. These sheets have matrices which allow us (the mortgage banker or broker) to price the loan in different ways. It is common in the Chicago area to price a loan to show no points or origination fees, but with the customer paying the normal costs at closing. If someone wants a lower rate, I can price it so that they pay more money up-front (points) and get a lower interest rate. We can also do it the other way, offering you a slightly higher interest rate (where the lender pays us a higher premium) and we can use part of this premium to cover all your closing costs.

Here is how it works. If you have a mortgage with a balance of $250,000 and an interest rate of 5.00%, your loan would have a monthly payment of $1,342 for principal and interest. If rates drop. and you are able to refinance at 4.00%, your new payment will be $1,193, for a savings of $148 per month.

In order to do the loan with no closing costs, we raise the rate a little to cover the costs. How much the rate increases depends on the size of the loan, but in most cases the loan will be just an 1/8 or 1/4 point higher. So with our example, if you could refinance at 4.00% with closing costs, let’s say the rate would be 4.125% with no closing costs. So the payment now goes up to  $1,211 per month, or $18 per month higher. The monthly savings are lower, but with no closing costs , you have no investment in the mortgage at all. This works especially well for people who don’t plan on being in their home or their mortgage forever.

No-cost refinances work best when the loan amount is higher. In many cases we can do a no-cost refinance for the same rate as other companies are doing full cost loans. Smaller loans, those under $150,000 are harder to do without any cost. The smaller the loan the higher the interest rate would need to be in order to cover all the closing costs. This won’t be the best route for everyone, but, depending on your situation, it could be a great option.

So, when will rates drop to 4.00%, or 3.75% or …?

This post has gone the long way around, but the best rate available to you depends on your own unique situation, what is happening in the overall economy and how that is reflected in the mortgage backed securities markets and how much you are willing and able to pay in order to get a low mortgage rate. If you want to see where you stand, and what we can do to give you the rate and program that best fits your needs. If I can help in any way, give me a call.

Peter Thompson                              630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Refinance

If you are buying a home or refinancing your mortgage in Cook County, expect to pay some extra cash at closing to set up your tax escrows. Real estate tax bills come out twice a year. The first installment (which pays for the first 6 months of the previous year) was due in March and the second installment (for the second half of last year) was supposed to come out in September. But in Cook County these dates are suggestions, not real deadlines. I can’t remember the Cook County tax bills ever coming out when they were supposed to, and this year it looks like they will be out later than usual. Cook County Treasurer Maria Pappas says that she expects tax bills will be mailed out the week of November 22nd – almost Thanksgiving. The reason the bills are extra late this year may be political. Even though home prices are down, tax increases are expected (the increase is shown on the 2nd installment). If the tax bills came out before the election on November 2nd, this would be a big issue. Holding it back may make political sense, but it means that anyone transacting a mortgage and escrowing their taxes will have to cough up extra money at closing. Lenders all count on the tax bills coming out at the proper time, so when they aren’t the title companies build in a big reserve to insure they have collected enough, even if the tax bills are much higher than before. This is called TI, or Title Indemnity.

With TI, the title company holds back an amount over and above the previous tax bill to allow for tax increases, and guarantees the lender that they have collected enough to fully fund the new escrow account. Most title companies will collect one and a half times the current tax bill and they will charge a fee ($150-$200, usually) to hold onto the taxes and pay them once the bill comes out. Once the bills are out, any money left over will be returned to the borrower. So this isn’t an increased cost (except for the fee) but it is a real hit to cash flow, and for borrowers who are short on cash anyway, it is a real hardship.

Last year the Cook County tax bill came out in October. Delaying it for an extra month means a lot more cash needed at closing. If you are refinancing your mortgage and have an escrow set up now, this means you will have to fund the new account, and will then get paid back from your current lender after closing (this is usually done within 30 days). If you are buying a new home it isn’t quite as bad because you will get a credit for the unpaid taxes from the seller, and you will normally get more back in the credit than you need to set up the new escrows. Either way, it means more cash at closing than any other time of the year. I’ve worked with homeowners who needed to get gifts to come up with the extra cash. Again, this is a cash flow problem, not an extra cost, and you will get money back from the current lender (if it is a refinance) and the title company once the bill is out. Closings will be a little easier and more affordable once the bills do come out.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company

With mortgage rates at all time lows, it makes a lot of sense to fix in your rate and refinance at what may turn out to be the lowest real rates ever. Getting a fixed rate mortgage makes a whole lot of sense for any one who is pretty sure that they will be in their home for a long time. But even now, even with fixed rates as low as they are, fixed rate mortgages aren’t the right choice for everyone. Adjustable Rate Mortgages (ARMs) are priced even lower, and though you are taking on some extra risk, they are the best choice for many. The question is, when does it make sense to go with an adjustable rate mortgage. ARMs are structured in different ways, but the most popular, and safest ARMs are the longer term adjustables which are fixed for a period of time before adjusting. Most ARMs amortize, or pay down, over 30 years, just like the most popular fixed rates. The difference is that the rate is only fixed in for a specific period of time, and then it floats, up or down based on what is happening in the market. The time that the rate is fixed in can be as short as one year, or as long as 10 years. The rates are usually lowest for the shortest periods because you are taking on more risk that the loan will be higher if mortgage rates increase. When you are looking at ARMs, you want to get the lowest total cost for the time you plan on being in the home (or the mortgage). Taking a 1 year or even a 3 year ARM rarely makes sense in a market like this. But a longer term may be a great deal. The 7-1 ARM (fixed for the first 7 years then adjusts once a year after that) is over 1/2 a point less than a comparable 30 year fixed rate mortgage. If you don’t plan to stay with your mortgage forever, this could save you thousands of dollars over the life of the loan.

Questions to ask to see if an Adjustable Rate Mortgage is the right choice for you:

How long do you think you will be in the home?  A lot of this has to do with where you are in life, and what you expect to happen in the future. Are you a single income now, but expect to have a spouse working down the road? Do you expect to out grow this home as your family grows? Do you expect to be transferred or are going to need to move out of the area at some point? Or maybe you are at the other end of the spectrum and have kids who are finishing up with school and are thinking about downsizing in the future. The key is that if you have a good understanding of your future needs, and you really don’t expect to be in the home past a certain point, an ARM may be the right choice.

Is your income steady, declining, or likely to go higher? Are you a single income now, but expect to have a spouse working down the road? Are you in a job where you know that your income will be higher as time goes by? If you feel confident that your income will rise, an adjustable could be a good way to go. On the other hand, if your income is likely to be topped out and you don’t expect raises of more than the cost of living in the future, you are better served by going with a fixed rate where you will know the payment is going to stay affordable, even if you are there longer than expected and interest rates jump.

Do you have extra money coming in that you can use to pay down the mortgage? I’ve worked with borrowers who get get bonus as a substantial amount of their compensation. If you are getting a smaller monthly payment, but a big check once or twice a year, it may be easier to keep the monthly payment small and then pay extra toward the mortgage when you get these big checks. ARMs fit in well here (Interest only mortgages are sometimes appropriate, too). Everyone’s circumstances are different. The best approach is to match your needs to the loan that is most appropriate for you.

What is your risk tolerance? Will you be able to sleep at night if rates do move higher? With mortgage rates at all time lows, we know that rates have to go up, the only question is when, and how much. If your circumstances change, and it looks like you will need to stay in the mortgage longer than you planned, is this going to add to your stress? There are safety features built in, but if you are still in the loan when the payment adjusts, it could be a big jump. You will have saved a lot of money up to that point, but unless you used the savings as part of an investment plan, you need to be ready for the higher payment. Consider your risk level and temperament before choosing an ARM. There are a lot of people who would benefit financially from and adjustable rate loan, who still are better off taking on a fixed rate loan.

The other thing to keep in mind when deciding which loan is right for you, is that the future doesn’t always turn out like we expect. There are a lot of homeowners now who are stuck in homes too small for their needs because they can’t afford to sell and buy a new home with the market conditions now. For most home buyers who took on ARMS years ago, their adjusted rates have fallen as the ARMs came due. That probably won’t happen in the future, but if you match up your real needs and an accurate estimate of what your situation will be over the years you plan to be in the home, an Adjustable Rate Mortgage can save you a lot.

Peter Thompson 630-479-6424       

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company

We live in interesting times. Over the last several years we have seen a series of refinance booms as rates dropped to what had previously been unthinkable rates. Each time rates dropped we were sure they couldn’t go any lower. But here we are again, and mortgage rates are the lowest they have been since they’ve been keeping track of mortgage rates. The reason for the drop in rates is due to fear of softness in the economy, and this isn’t good news. But when you , if you can save money by refinancing your mortgage this could help by lowering your monthly payment or cutting years off your loan and paying your house off early.

Why should you consider refinancing?

• You can lower your interest rate and payments.
• You can shorten your loan term and pay your mortgage off early.
• You can take cash out for home improvements, college expenses, investments, or whatever your needs may be.
• You can restructure your debts with a refinance to get rid of your high interest credit card balances and save hundreds of dollars per month.
• If you bought with a low down payment, you can often refinance to get rid of mortgage insurance or your higher rate second mortgage.

• You can get rid of an adjustable mortgage and lock in to a fixed rate.

These are just a few reasons you may want to take on a new mortgage. It is important, though, to make sure you know why you are refinancing and that it is really in your best interest. Refinancing isn’t the slam dunk easy transaction it was a few years ago. With home prices down this makes it harder for some homes to appraise out where they need to be, and mortgage guidelines are tighter than they were before, too.  But there are programs which make it easier to refinance even if you don’t have a lot of equity (or even no equity) in your home.

The FHA Streamline Refinance -This is available only if you already have an FHA mortgage. This is still the easiest and most inexpensive mortgage around. If you can lower your rate an payment you can refinance without a new appraisal and roll some of your costs into the new loan.

Fannie Mae and Freddie Mac Home Affordable (Obama Refinance) – With these programs you can lower your mortgage rate even if your home value has gone down, and mortgage insurance will be based on what it was when you originally took on the loan (so if you didn’t have it then, you won’t have it now).

And of course, if you have been in your home for a while and have equity built up, you will have a lot of options to refinance in a way that best meets your long term needs. The big question then, is when does it make sense to refinance your mortgage? Refinancing can make a lot of sense if you are lowering your rate and payment without having to pay a lot up front. The more you have to pay to close the loan, the longer it will take for the lower mortgage payments to pay off the higher cost of getting the loan. This can still make sense if you are sure that you will be in the home for a long time, and you want to lock in the lowest rates. But too often the lowest rate isn’t the best value.

Mortgage pay Back – When does it make sense to refinance?

If you are thinking of refinancing your mortgage, you should always do a break even or pay back calculation. For this you need to know 3 things:

1. How much will you save by refinancing?
2. How much will it cost to refinance?
3. How long do you think you will stay in the home, and with this mortgage?

The first step is to determine how much you will save. For an example, if you now have a mortgage with a $200,000 balance and a 5.50% interest rate., your mortgage payment is about $1,135 per month. Now, if current rates are at 4.75% (this is only an example.  Call me if you want a personal quote) the new mortgage payment would be $1,043 per month. The lower rate means a savings of almost $92 each month. This is a great savings, especially when you look at it over the life of the loan, But does it make sense to refinance? Maybe. We still need to know more, though.

The next step is to find out how much it will cost to refinance. This is where it can get confusing. If you have spent any time on the Internet, you’ve seen lots of ads for mortgage companies claiming they offer the lowest rates. But low rates don’t mean a thing if you don’t look at the closing costs too. I’ve seen closing costs differ by as much as $6,000, so this is something that can make a huge difference. Closing costs include title fees, the cost of the appraisal and bank charges as well as points – which are upfront financing charges.

The difference in closing costs can make a big difference in whether the loan makes sense, or not. If you are paying $1,500 in total closing costs, it will take you a little over a year to payback the closing costs with the $92 savings from your new rate.  After that, every payment you make will be a true savings. But if that same loan cost $6,000 to close, then it would take over 5 years before you would get any benefit at all from refinancing. So the lowest rate isn’t always the best deal.

The last question, is how long you do you expect to be in your home and in the mortgage. If you plan to stay in the home for at least 10 years, then paying more to get a better rate might be the best strategy, especially if you think (like I do) that rates are about as low as they will ever go. But most people don’t stay in their home forever. If you aren’t sure how long you will stay in your home, you might be better served by getting a loan with lower closing costs. Even though the rate and payment may be a little higher, your savings will come much quicker.

No/Cost Illinois Mortgage Refinance

We can take this idea one step further. When rates are down, the biggest obstacle to homeowners lowering their payments and taking advantage of the low rates is the cost of refinancing. The more that the loan costs, the longer you will need to be in the new loan before refinancing makes sense. So if a loan costs a lot up-front, it takes a big improvement in the rates before it is worth doing. On the other hand, if there are no costs at all, a small reduction in the rates can save you a lot of money over time.

With a no-cost refinance we use the yield spread premium (the money that the wholesale or end lenders pay us to bring them the loan) to pay for the closing costs. When I price loans I have several different options. Every day the lenders we deal with send us new price sheets. These sheets have matrices which allow us (the mortgage banker or broker) to price the loan in different ways. It is common in the Chicago area to price a loan to show no points or origination fees, but with the customer paying the normal costs at closing. If someone wants a lower rate, I can price it so that they pay more money up-front (points) and get a lower interest rate. We can also do it the other way, offering you a slightly higher interest rate (where the lender pays us a higher premium) and we can use part of this premium to cover all your closing costs.

Here is how it works. If you have a mortgage with a balance of $250,000 and an interest rate of 5.75%, your loan would have a monthly payment of $1,458 for principal and interest. If rates drop. and you are able to refinance at 4.50%, your new payment will be $1,267, for a savings of $191 per month.

In order to do the loan with no closing costs, we raise the rate a little to cover the costs. How much the rate increases depends on the size of the loan, but in most cases the loan will be just an 1/8 or 1/4 point higher. So with our example, if you could refinance at 4.50% with closing costs, the rate would be 4.625% with no closing costs. So the payment now goes up to  $1,285 per month, or $17 per month higher. The monthly savings are lower, but with no closing costs , you have no investment in the mortgage at all. This works especially well for people who don’t plan on being in their home or their mortgage forever.

No-cost refinances work best when the loan amount is higher. In many cases we can do a no-cost refinance for the same rate as other companies are doing full cost loans. Smaller loans, those under $150,000 are harder to do without any cost. The smaller the loan the higher the interest rate would need to be in order to cover all the closing costs. This won’t be the best route for everyone, but, depending on your situation, it could be a great option.

Things to watch out for

A true no/cost refinance means that you are not paying any fees or costs to get the loan. This is different than adding the fees and costs back into the loan. This means that your mortgage will be larger, and you will be paying the costs of refinance over the years you have the loan. There is no money coming out of your pocket at closing but you are still investing extra money. If you sold the home or decided to refinance again later, the money you paid will be gone. In some situations this could be the right way to go, but it is not a no-cost refinance. You need to know exactly what it is you are signing up for.

Peter Thompson                              630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Refinance

Another new change in the mortgage industry starts today, June 1^st – the adoption of the Fannie Mae Loan Quality Initiative. This initiative is an order from Fannie Mae, the largest buyer of mortgages in the mortgage aftermarket, that all lenders who want to sell them loans must do extra due diligence, and check to make sure that there are no red flags that the lender would have otherwise missed. Most of these changes are ones that have already been adopted over the last year, like running social security numbers through a data base to make sure they are correct, and pulling IRS tax transcripts on every transaction. But there is one new ingredient to this mix which is likely to throw the industry for a loop, and delay and in some cases blow up the closing on the last day. This new change is that starting with applications taken today, June 1^st, any loans sold to Fannie Mae will have to have a credit report run again on the day of funding to make sure that the borrower has not taken on any additional debt. If they have new accounts, or if they have inquiries on their credit report which means that they could have opened new credit but it hasn’t shown up yet, the loan has to go back to the underwriter and more research has to be done to see if this is a problem, or not.

This new underwriting overlay, like so many of the other changes, is a reaction to the soft real estate market and the high rate of foreclosures. Underwriting was way too lax before, which got us into this mess, but underwriters now are going out of their way to make sure that there is absolutely nothing in the file that could be used as an excuse for the end lender (the wholesale lender or Fannie Mae) to require that they buy back the loan if for some reason it does go bad. Overall, this is a good thing. Making risky loans is bad for everyone. But this new initiative is going to add a whole new level of uncertainty to every real estate transaction. So far all the extra checking and verifications that are part of the loan process have been things that we do at the beginning when we first take on the loan. This, coming at the end, means that you can never have a fully approved loan until the closing.

So many real estate transactions are links in a chain of sales where the seller of one home is buying another, and each transaction is subject to the closing of the prior transaction. If a first time home buyer on a sale at the beginning of the chain is kicked out for going beyond his ratios, this means that all the other transactions downstream are also on the rocks. In practical terms, what this now means is that there is no such thing as a “clear to close” approval. A clear to close means that all of the prior to close conditions have been signed off on and that the loan is moved into the closing department. Real estate attorneys traditionally demand to see that a loan is clear to close before they will waive on their client’s mortgage contingency (which protects their client’s earnest money), and many attorneys won’t set a closing until they have this in writing. Now, even if you have a written loan approval with all the conditions signed off, it still isn’t a real approval, because something could still come up on the credit report the day of the closing, either with your buyer or one further up the chain.

Another potential issue is that Fannie Mae states in the initiative that they are concerned with the items on the credit report and how they affect the borrower’s purchasing power. The initiative doesn’t mention credit scores, but I’m betting that some lenders will look at this in a more conservative way. If they interpret this as having to pull a full credit report, and if scores are stated, this too could effect the loan approval. Many loan programs are based on credit scores, and if the score drops prior to closing will that mean the loan no longer fits the guidelines? This could be another can of worms.

So long story short, be aware that your credit use can affect your loan approval even after you have an initial approval. Here is what you need to watch out for until the loan has closed:

First of all, don’t take on any debt that you can’t comfortably afford.

Don’t open any new credit accounts, don’t buy a car or even furniture or appliances with no payments for the next six months. All of these will have to be accounted for.

Put your credit cards on hold until closing. You can make your normal monthly purchases, but don’t buy anything out of the ordinary.

If you absolutely have to buy something, check with your loan officer first and make sure you document the new credit.

Think twice before having someone pull your credit. Even if you don’t take on new debt the credit inquiry looks like you are and will need to be explained.

The initiative is strictly with Fannie Mae at this point, but usually whatever Fannie does Freddie Mac quickly follows, and FHA is likely to adopt these regulations, too. Even if they don’t, many lenders will take the initiative and run these on every loan to shield themselves from liability. So this is likely to become an industry standard.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company

If you are a first time home buyer just starting to look around and explore your options, you’ve probably  heard that FHA is the way to go. If you have friends or relatives who bought their first home recently, chances are they bought their new home with an FHA loan. FHA is the best and most popular option for most first time home buyers here in the Chicago area, but in many ways FHA still gets a bad rap. On a regular basis I have clients who start the process excited to know they can buy a home they can afford, only to grow hesitant when older friends or relatives tell them they should get a conventional loan. Over Christmas a client’s Uncle told her she was making a mistake and FHA mortgages were only for poor people. Another couple’s Realtor told them not to use FHA for a home with some property damage, and that they would be better going with a conventional loan. In both cases these people were well intentioned, but wrong. Most FHA home buyers are middle class and just starting out, and if the property needs repairs they will have to be taken care of whether it is FHA or a conventional loan.

FHA has grown in popularity because in many cases it is the only option available for most first time home buyers. Conventional mortgages are loans backed by the big GSEs, Fannie Mae and Freddie Mac. Not long ago, when the housing market was booming and home values were skyrocketing, conventional mortgage guidelines were so easy that almost anyone (literally anyone) could qualify for a mortgage. It turned out that letting unqualified people buy over priced homes wasn’t a good idea in the long run, and ever since then, conventional mortgage guidelines have been in a continual tightening process. There are still conventional mortgages available with a 5% down payment, but most home buyers won’t qualify for these loans, and if they do, loan level price adjustments (pricing add-ons) and high mortgage insurance premiums will make the cost prohibitively high. FHA has taken up the slack by offering loan products that first time home buyers can afford and qualify for.

Here are some of the advantages of financing your Chicago area home with and FHA mortgage:

1. Low down payment – FHA requires only a 3.5% down payment. So if you are buying a $200,000 home, the required down payment is just $7,000. With tax refunds in the mail soon, this is a number that is do-able for many young singles and couples.
2. The down payment and all the cash needed to close can come from a gift – If you haven’t been able to save up a down payment, or you are close but still short, you can get all the cash you need from a gift from a relative. We will need to show the paper trail on where the money came from and how it got into your account. Don’t transfer any money until after you consult with your mortgage loan officer.
3. FHA allows up to 6% of the sale price as a seller concession – In addition to the down payment, you will need to have money available for closing costs and to set up the escrow accounts. This comes out to thousands of dollars, more in areas like Chicago which charge a buyer transfer tax (.75% of the sale price here in Chicago). But you don’t need to save up for this or come up with it from your own funds. It is now common with an FHA loan to negotiate for the seller to pay the closing costs. Find out how much your costs are and what you need to ask for before making an offer on the property. You won’t need anywhere near the 6% (you can also use this credit to structure the purchase or lower your interest rate), but this is a great way to save cash when you need it the most.
4. Credit guidelines are more lenient and common sense – FHA is not a sub-prime mortgage, and if you have bad credit you aren’t going to be able to qualify. But most first time home buyers pay their bills on time, but it’s not uncommon that they have had a few dings in the past. Some times they’ve had serious issues they had to overcome. But FHA looks at the big picture, not just a number. FHA doesn’t have credit score requirements, but all the wholesale lenders now require a minimum 620 score. If you have had problems in the past we will need to understand what happened, why it happened and what you did to fix it. If we can show that the problems are behind you, you can qualify for an FHA mortgage.
5. Competitive interest rates and terms comparable to conventional – FHA mortgage rates are  surprisingly low. In most cases FHA rates will be with in an 1/8 or a ¼ of conventional rates, and if you have less than a 700 credit score, FHA rates are probably better.
6. Most borrowers can qualify for a higher amount with FHA – FHA allows higher housing and debt ratios than with conventional mortgages. You still need to do your own budget and make sure you feel comfortable with your payment, and we have to see that you can afford it, but with FHA you will be able to buy more home for your income.
7. More condos are financeable through FHA – one of the biggest advantages of FHA here in the Chicago area, is that it is much easier and less expensive to buy a condo with an FHA mortgage – especially if you have a low down payment. The FHA condo approval process is being changed now (spot loans are still available up through the end of January), but as the new process takes hold, more properties will eligible for FHA finance.
8. Multi unit homes (2-4 unit buildings) are easier and cheaper to buy with FHA – If you buy a 2 flat or a 3 or 4 unit building to live in one unit and rent out the others, you will pay more and need a higher down payment with a conventional loan. FHA treats small apartment building better. FHA lets you use more of the rental income to offset the mortgage payment (even if you have no experience as a landlord) and lets you buy with the same 3.5% down as you would with a single family home. Also, there are no hits to the pricing with FHA for 3-flats and 4-flats – with conventional you pay a lot more.
9. Allows non-occupant co borrowers (co-signers) so you can blend income – I’ve seen many cases where a couple is buying a home together, but for one reason or another, one partner isn’t able to qualify for the mortgage. FHA allows a relative to come on to the loan and blend their incomes in with the occupying borrowers, letting them buy a home where they otherwise couldn’t. This is also a good program where parents can help their kids who are just starting out.
10. FHA max mortgages have increased almost as high as conventional mortgages – For years, FHA was hardly used in the Chicago area because the loan amounts were too low compared to the values. That has changed. The maximum mortgage here in the greater Chicago area is now $410,000, right in line with the conventional mortgage limits. This means more buyers can take advantage FHA, even for higher priced homes.
11. 203k program is available for homes that need repairs and remodeling – Many of the homes for sale now are short sales or foreclosed properties. Foreclosures often have been neglected, and it is common that they have issues, sometimes minor, but often serious. Minor problems can be fixed before the close, but if it is a big problem like busted water pipes (because the big didn’t winterize the home), a new furnace or putting on a new roof, that isn’t possible. With an FHA 203k loan you can put the cost of the repairs into the loan and do the work after closing. This is a great way to buy a home in a distressed shape and add value with the repairs. You can also use the HA 203k for remodeling or putting in a new kitchen or bath.
12. FHA mortgages are assumable – This means that years from now when you sell your home, the new buyer can take over the loan under the same terms as you have. If interest rates go up in the next few years (and it’s a good bet that they will) you will e able to offer new buyers a mortgage with interest rates much lower than the market is offering. This means it will be easier to sell your home and your home is worth more than a home without low interest financing.

FHA loans aren’t the best option for everyone, if you have a good down payment and great credit a conventional loan is probably going to be right for you. But if you don’t have a lot to put down, have good but not perfect credit, want to buy a condo or for a host of other reasons (most first time home buyers here in Chicago), then FHA is the way to go. Remember, if you buy now along with all the other benefits of buying a home, you qualify for the First Time Home Buyer $8,000 Tax Credit – You need to have your contract together by April 30th. If you want to know if FHA is the best option for you, give me a call and we can see what works best for your personal situation.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company

Mortgage qualification guidelines are getting tighter again as Fannie Mae (along with FHA and Freddie Mac, one of the 3 big buyers of loans in the mortgage  market) is about to roll out the newest version of their Automatic Underwriting System (AUS), DU 8.0. Most loans are now approved through an AUS which is a type of artificial intelligence program. The systems grade each loan for risk and produce a decision which says whether the loan meets their standards, or not. Getting an AUS approval is just the first step. We still have to make sure that all the information entered into the system is correct (garbage in – garbage out) and even if the loan meets Fannie Mae’s guidelines, we need to make sure it fits the extra lender requirements and do all the other things needed to approve a loan. But the odds of getting a conventional loan closed without an AUS approval are beyond slim. It’s not going to happen. So when a new AUS system comes out, this is a big deal. Home buyers who are qualified to buy under the present guidelines, may not be able to qualify under the new rules. And with the release of DU 8.0, a lot of buyers are going to be outside looking in.

A lot of the changes will be tweaking the formula, and some of the changes are taking away programs which all the lenders stopped doing ages ago. The new release does away with expanded approval loans (those with riskier profiles) and raises the minimum credit score from 580to 620. But in the real world, lenders haven’t accepted expanded approval loans in the last 2 years, and with all the price hits included, anyone with a score below 680 is likely to get better pricing with an FHA loan. There are other changes, like a reduction in mortgage insurance requirements, which will lower the cost of financing for some home owners.

The biggest change in the new release is a maximum debt ratio of 45% – or possibly 50% with strong compensating factors. The debt ratio is the total of the new mortgage payment and all your other debt payments divided by your income. The idea behind the debt ratio is to make sure you are able to afford the mortgage and not taking on too much debt. A borrower with a lot of money in the bank and high credit scores is a much safer risk than someone with lower scores and no reserves, so they should be allowed to manage a higher debt load. Back in the old days when I first started doing mortgages (and dinosaurs roamed the earth) the back end ratio was set at 36% for conventional loan, so the 45% (or 50%) isn’t awful. When they adopted the AUS system, much higher ratios were allowed because they were looking at the entire risk profile, not just one number. With strong borrowers it wasn’t unusual to get approvals when the total debt was well over 55% of the income we were showing (many borrowers have income coming in which we can’t use to qualify).  This change will  mean that a lot of well qualified buyers who are able to make their payments, won’t qualify for a Fannie Mae loan. Freddie Mac hasn’t announced that they are following through with similar changes, yet, so for now there are still conventional alternatives for borrowers affected by these changes.

With these changes, FHA is likely to increase their market share, again. FHA is in the same boat as its cousins Fannie and Freddie in that they are under pressure to increase their loan quality and up their reserves. FHA has already announced that they will be tightening their guidelines too, but because FHA financing was just a sliver of the market when the housing bubble was expanding, it doesn’t have the same level of problems that its conventional cousins do. Also, FHA is set up as a way to make financing affordable for more home buyers, so even as they tighten, they will still offer more opportunities to qualify. FHA has a stated back end ratio of 43%, but when run through the AUS much higher ratios are common. You are only hurting yourself if you buy more than you can afford, but there are so many situations where a one size fits all approach doesn’t apply. It’s good that is still an option. At least for now.

Illinois Mortgage Rates                   First time home buyer loans  

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Peter Thompson (630) 479-6424