Lending practices have been significantly impacted since the financial debacle in the 4th quarter of 2008. The governments take over of Fannie Mae and Freddie Mac in September has helped to provide the lowest interest rates in decades for conforming loans, but they have not improved the lending practices and rates on loans above the conforming limit. Conforming loans are mortgage loans under $417,000.
Loans above the conforming limit are classified as jumbo loans, and they have always carried a higher interest rate, for the additional risk, and they have not been supported by the United States government. Jumbo rates are for loans over $417,000, but please note that the national conforming limit may differ in some higher priced markets, so be sure to check with your professional mortgage lender for your area. Historically, there have been pools of money raised by investment groups to purchase jumbo loans, and the rates were relatively close to the conforming limits, perhaps 1/2 % higher on average. As we know, many of these jumbo loans have fallen into foreclosure in this down real estate market, and with the loose or predatory lending practices in the news. Today, financial institutions can not easily raise the investment funds for purchasing these types of loans. Consumers have not considered them to be a safe haven, and they have not had a desire to have them in their investment portfolios. Consequently, many of the sources for jumbo loans are no longer offering them, and those that do provide for them have much higher interest rates. For example, the Wells Fargo internet site today listed the 30 year fixed mortgage conforming loan rate at 4.875%, and the 30 year jumbo rate at 7.875%, three full percentage point difference! Lets look at the difference this makes. Let's assume that we have an $800,000 home and a 20% down payment, which would give us a $640,000 mortgage. Based on todays 30 year jumbo loan rate, 7.875%, the monthly payment for only pricipal and interest would be $4,640. If this was a conforming loan rate of 4.875%, the monthly payment would be $3,387. This impacts the cost of living in more expensive homes, but it also restricts the number of buyers who can afford to purchase the more expensive homes, thus lowering the total market of buyers. It also provides a challenge for homeowners who have variable loans that would like to convert to the safer 30 year fixed loans, and can not afford to make the change. This can and will dramatically impair the upper end of the real estate market.
On a positive note, there are some options. A borrower can take out a conforming loan and a second mortgage, and often save money with a blended rate between the two mortgages. Other options include variable rate mortgages, or shorter fixed rate mortgages, such as 5 year fixed, then a variable rate. These have lower beginning rates, but place the risk of future higher interest rates on the borrower. Also, the higher end buyers often purchase homes with cash, or they don't need more than the conforming limits for loans, and so they are not subject to the lending issues.
Investment real estate lending has also been through some major changes. The most noticable is a limit on the number of mortgages to receive conforming lending. An investor can now have only a maximum of four mortgages. As before, it is possible to have more than one unit to a mortgage. For conforming loans, up to four units can be in one mortgage. This change will limit investors who invest heavily in real estate.
The second change is pricing. Historically, there has been over par pricing on non-primary residential mortgages. A borrower could pay approimately 3/8 of a percentage higher rate with no points, or they could pay approximately 1 1/2 points to get the conforming rate. A point is 1% of the mortgage amount. For example, if a loan was $300,000, a point is 1% or $3,000. (ie. If the conforming rate was 6%, they could either get this rate on investment properties by paying 1 1/2 points, or they could increase the rate to 6 3/8%, and not pay any points). Today, the choice of paying the difference in the rate does not make sense, and a borrower is faced with paying approximately 3 points with a 20% down payment, or as low as 1 3/4 points with much higher down payments.
These changes make it more difficult for some investors, but again, on a positive note, the interest rates are at their lowest rates in decades, so the monthly mortgage amounts are lower. Most importantly, investors need to be aware of the need to pay points as part of the loan.
This article has been inspired by J.R. Spies of The Mortgage Link. He is a mortgage broker with years of experience, and he is widely regarded as one of the top mortgage lenders in the Durango area. Before you make any decisions on purchasing or choosing a mortgage, please speak to a competent mortgage lender, who will provide you with the education and choices available. Please also note that your individual credit history, and credit ratings will have a big impact on your choices, and the cost of your loans. If you want to reach J.R. Spies, you can contact him at 970-259-8600, or jr@linkdurango.com.
If you would like to have further conversations on Durango Colorado real estate, please contact me, Don Ricedorff at The Wells Group 970-375-7014, don@frontier.net, or at my website at durangorealproperty.com.
Don Ricedorff is a licensed real estate broker in the State of Colorado, with 16 years of experience, and he resides in Durango Colorado. He has numerous real estate designations, which have provided him with an unparalleled education to assist his clients. The designations include:
CRS, Certified Residential Specialist
CRB, Certified Residential Broker
CCIM, Certified Commercial Investment Member
ABR, Accredited Buyer Representative
GRI, Graduate of Realtor Institute
RSPS, Resort and Second Home Property Specialist
CIPS, Certified International Property Specialist
SRES, Senior Real Estate Specialist
He is also an active volunteer in the community and his church. His personal interests include spending time with his family, playing tennis, fly fishing, hiking, boating, and water skiing.
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