Illinois Mortgage Rates and News

Earlier this week, President Obama announced a new plan to rework the HARP program designed to help more homeowners take advantage of low mortgage rates. The HARP program covers loans that were taken over by Fannie Mae (DU Refi Plus) and Freddie Mac (open Access). When the program was first rolled out, the idea was to allow homebuyers to refinance even if their homes had lost considerable value. The program was originally set to allow home owners to refinance based on their original mortgage terms, so if you had put 20% down when you first bought the home, the new loan would be treated as the same and you wouldn’t need to buy mortgage insurance, even if the value was much less now. Originally the program was set to that help even borrowers who were underwater, that is they owed more on their home than the property was worth, and the guidelines allowed up to 125% loan to value (negative equity of 25%). Unfortunately, this program worked better on paper than in real life. It worked great for the best borrowers, those who had lost value but still had some equity and had put down larger down payments originally. But it didn’t work as well for those who had second mortgages attached (many second mortgage lenders wouldn’t subordinate their loans, a necessity to refinance), and though the program went up to 125%, all the lenders put in their own overlays making it impossible for most borrowers to refinance if they didn’t have some equity in the home. As a result, the original program didn’t work any where near as well as intended, and many other wise well qualified home owners were left out in the cold.

This new version is designed to fix these problems and to help all the home owners who continue to make their mortgage payments even though their value has gone south. One of the main problems with the original plan was that Fannie and Freddie passed much of the risk on to the lenders through the representations and warranties written into their purchase agreements (most of the conventional loans are bought by Fannie or Freddie even if another lender handles the servicing or collecting the payments). The issue here is that if a loan went into default or some problem was discovered in the loan package, Fannie and Freddie could force the lender to “buy back” the loan. If a lender is forced to buy back a loan, this is an immediate loss. The fear of buy backs has been a big part of the tightening of approval guidelines over the last few years. This new version of HARP takes this off the table, and allows refinancing even if their value has declined beyond the 125% set in the first go around. So far we have the broad strokes of the program, but the details won’t be released until November 15th 2011. The first applications can be taken after December 1st. There are sure to be issues that have to be worked out, but this looks like it will help a lot of responsible home owners who owe more than their homes are worth take advantage of today’s record low interest rates.

Here are some of the changes with the new version of HARP:

1. Eliminating certain risk-based fees (price hits or loan level price adjustments) for borrowers who refinance into shorter-term mortgages and lowering fees for other borrowers.
2. Removing the current 125 percent LTV ceiling for fixed-rate mortgages backed by Fannie Mae and Freddie Mac.
3. Waiving certain representations and warranties that lenders commit to in making loans owned or guaranteed by Fannie Mae and Freddie Mac.
4. Eliminating the need for a new property appraisal where there is a reliable AVM (automated valuation model) estimate provided by the Enterprises.
5. Extending the end date for HARP until Dec. 31, 2013 for loans originally sold to the Enterprises on or before May 31, 2009.

To Qualify, Borrowers must meet the following:

1. The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
2. The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
3. The mortgage cannot have been refinanced under HARP previously.
4. The current loan-to-value (LTV) ratio must be greater than 80%.
5. The borrower must be current on the mortgage at the time of the refinance, with no late payment in the past six months and no more than one late payment in the past 12 months.

To see if your loan is held by Fannie Mae or Freddie Mac, here are the links to the look up tools:

FANNIE MAE LOOKUP

FREDDIE MAC LOOKUP

I will post more information on this program as it comes available.

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

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