For decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during a financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) propping up the housing market by issuing guarantees for investors on most new mortgages.
Federal subsidies for housing essentially began in the Great Depression with, among other things, the creation of the FHA in 1934 and Fannie Mae in 1938. Fannie is a government-sponsored enterprise (GSE), and in 1968 it became a publicly traded company. It all started for a simple reason: during the depression more than a third of all the unemployed were identified, directly or indirectly, with the building trades. At the time, there seemed to be no way to reduce unemployment without stimulating housing, and much the same is true today.
The Three Government Sponsored Enterprises (GSEs):
Fannie Mae Fannie Mae was established to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing. Fannie Mae created a liquid secondary mortgage market and thereby made it possible for banks and other loan originators to issue more housing loans, primarily by buying Federal Housing Administration (FHA) insured mortgages. For the first thirty years following its inception, Fannie Mae held a monopoly over the secondary mortgage market. In 1954, an amendment known as the Federal National Mortgage Association Charter Act made Fannie Mae into "mixed-ownership corporation" meaning that federal government held the preferred stock while private investors held the common stock; in 1968 it converted to a publicly held corporation, to remove its activity and debt from the federal budget.
Ginnie Mae In the 1968 change, Fannie Mae's predecessor (also called Fannie Mae) was split into the current Fannie Mae and the Government National Mortgage Association ("Ginnie Mae"). Ginnie Mae, which remained a government organization, supports FHA-insured mortgages as well as Veterans Administration (VA) and Farmers Home Administration (FmHA) insured mortgages, with the full faith and credit of the United States government.
Freddie Mae In 1970, the federal government authorized Fannie Mae to purchase private mortgages, i.e. those not insured by the FHA, VA, or FmHA, and created the Federal Home Loan Mortgage Corporation (FHLMC), colloquially known as Freddie Mac, to compete with Fannie Mae and thus facilitate a more robust and efficient secondary mortgage market.
In most cases, lenders sell your mortgage loan to Fannie Mae Mae and Freddie Mac, which repackage them as securities for sale to investors. These two private shareholder-owned corporations (operating under a congressional charter) guarantee trillions in mortgages. The government does not guarantee the debt issued by Fannie and Freddie like it does with Ginnie Mae. It does provide the companies with some special privileges, including exemption from state and local taxes. In 2008, the two institutions held or guarantee about $5.3 trillion in home-mortgage debt.
Mortgage Scandal of 2004-2006
Prior to the mortgage scandal of the 2000s, Fannie and Freddie had relatively strict guidelines for the loans they purchased but along with many lenders, dropped the ball in the mortgage mess (2004-2006) and started buying NINJA (No Income, No Job and Assets) home loans.
Many of the big names in banking schemed to create great masses of junk subprime loans and then disguise them as AAA-rated paper for sale to big private investors and institutions like state pension funds and union funds. To recap the crime: the banks lent money to firms like Countrywide, who in turn created billions in dicey loans, who then sold them back to the banks, who chopped them up and sold them to, among other things, to foreign investors and your state’s worker retirement funds.
Along the road to this shame, a great many other, sometimes smaller offenses were committed. One involved the use of the MERS electronic registration system. By law, banks were supposed to register with county-level offices in each state every time they sold or resold a mortgage, and pay fees each time. But they didn’t, instead registering with the private deed-transfer agency MERS, allowing them to systematically, and illegally, bypass local taxes.
The Federal Housing Finance Agency oversees Fannie and Freddie. Their failure to regulate the two organizations resulted in the the collapse of Fannie and Freddie so the federal government had to take them over in 2008. This means that additional losses are shouldered by taxpayers.
Good Faith Estimates
Starting January 1, 2009, lenders and brokers are required to provide borrowers with new Good Faith Estimate forms to show the final closing costs, and the maximum rate a borrower might pay on variable loans, among other things. Borrowers are asked to sign the document and return it to lenders and brokers before the underwriting process can begin. This is required by the Real Estate Settlement Procedures Act (RESPA).
The estimate must include an itemized list of fees and costs associated with your loan and must be provided within three business days of applying for a loan. These mortgage fees, also called settlement costs or closing costs, cover every expense associated with a home loan, including inspections, title insurance, taxes and other charges. A good faith estimate is a standard form which is intended to be used to compare different offers (or quotes) from different lenders or brokers. The good faith estimate is only an estimate. The final closing costs may be different – sometimes very different.
Mortgage Broker or Lender?
Mortgage brokers, middlemen who shop for home buyers among banks and lenders, can choose from programs from many banks. They may be able to offer a variety of deals that are not available at your own bank. Examples of deals include: first-time buyer programs, low- or no-down-payment loans for certain occupations (police and firefighters), and low-cost mortgages for energy-efficient homes.
Most of a broker's compensation comes from fees paid by the lender. The lenders that mortgage brokers deal with quote a "wholesale" price to the broker, leaving it to the broker to derive the "retail" price offered the consumer by adding a markup. For example, the wholesale price on a particular program might be 7% and zero (0) points, to which the broker adds a markup of one (1) point, resulting in an offer to the customer of 7% and one (1) point (Each point is equal to one percent of the loan amount). But if the broker adds a two (2) point markup, the customer would pay 7% and two (2) points.
Due to the mortgage problems, some of the biggest companies in real estate have decided to stop working with brokers. Chase won’t lend to brokers’ clients anymore. The PMI Group, one of the biggest companies in the mortgage insurance business, refuses to underwrite any policies on loans that started with a broker.
All of this is happening just as borrowers need plenty of guidance. Mortgage rates are low, fueling demand for refinancing. But banks’ loan rules seem to change by the day, and many banks don’t have the staff to handle the volume. So if you’re hoping to refinance or looking to snap up a bargain home in the next year or so, you’re faced with a tricky question. Given the number of institutions that want nothing to do with mortgage brokers, shouldn’t you stay far away from them as well?
If you want to be sure you’re getting the best rate and the lowest costs, the only way to come close to succeeding is to hunt extensively on your own. Here are three of the most important steps on your journey to home financing:
The Comparison Shopping will be simpler if you pick a specific kind of loan and look only for that, say a 30-year fixed-rate mortgage with no points. Start with a credit union or two and then a few community banks. Next try a few big national banks nearby. Give your investment firm a notice and the bank that has your checking account, since they may offer you a deal. And if you’re refinancing, don’t forget your current lender. Next, call a few mortgage brokers recommended by people you trust. Talking to more than one isn’t a breach of etiquette.
The Compensation If you find mortgage brokers who can match or beat the best rate and deals you found elsewhere, see if you can get a straight answer to the question of precisely how they are getting paid. The problems in recent years, however, came when banks offered more money to brokers who pushed certain loans or terms, say loans with interest rates that rose quickly and imposed penalties if the borrower refinanced within a few years. Though many of the worst loans don’t exist anymore, it’s still worth asking mortgage brokers point blank whether their yield-spread premium — the industry term for the money they earn from lenders — could be lower if you were in a different type of loan. And if you don’t understand the answer, run it by an accountant or a more sophisticated friend whose compensation does not depend on the answer.
The Guarantees If you’re comfortable with the answers so far, you’ve probably found a good match. There are plenty of mortgage brokers out there who earn their keep, and the best of them know home loans. Still, test them with two more questions. First, ask if they’ll guarantee the rate and costs in the good faith estimate they give you when you apply with a lender. If the broker is wrong on their good faith estimate, then they should pay you. We should all have something binding upfront so people can shop. Second, ask if they’ll sign a piece of paper agreeing to work solely in your best interest. The legal word for this is “fiduciary" and it means a legal relationship of confidence or trust between two or more parties.
Find an Upfront Mortgage Broker
Jack M. Guttentag, emeritus professor of finance at the Wharton School of the University of Pennsylvania coined the term, Upfront Mortgage Broker. Professor Guttentag states that "An Upfront Mortgage Broker" (UMB) is one who has elected to do business in an upfront and fully transparent way." To quote from his Web site, the major differences between a UMB and a conventional mortgage broker (MB) are:
UMBs disclose their fees to customers in advance and in writing, and disclose the wholesale prices (rates and points) passed through from lenders. Customers of UMBs pay the broker's fee plus wholesale loan prices.
In contrast, conventional mortgage brokers (MBs) add a markup to the wholesale prices, and quote the resulting retail prices to customers. Most MBs reveal their markup only in required disclosures after an application has been submitted.
Professor Guttentag states that if you don't find a UMB in your state, you can convert a conventional broker into a UMB for your deal. He says just to copy the Commitment of an Upfront Mortgage Broker, and ask the brokers you approach if they are willing to do business with you in this way. Learn more about mortgages by visiting Professor Guttentag's Web site.
Associated Mortgage Group Contact: David Jolivette. Telephone: (503) 221-0064. Fax: (503) 221-0396. Licensed in both Oregon and Washington. Address: 5441 SW MacAdam Avenue, Suite 208, Portland, OR 97239.
Mortgage Trust Contact: Kevin Gienty. Kevin's email: Kevin Gienty. Kevin's telephone: (503) 282-5626. Address: 4386 SW Macadam Avenue, River Forum Two, Suite 401, Portland, OR, 97239.
Northwest Mortgage Group If you want to know the most efficient and professional mortgage brokers ask a title officer − many will tell you it is Northwest Mortgage Group. Contact: Nancy Kinzer, Senior Loan Officer. Email: [email protected]. Telephone: (503) 439-9191 or toll free (877) 439-9191. Fax: (503) 439-9292. Address: 10260 SW Greenburg Road, Suite 900, Portland, Oregon 97223.
Pacific Residential Mortgage Contact: Michael Hall, email [email protected]. Telephone: (866) 624-8533. Mobile: (503) 341-5915. Address: 2 Centerpointe Drive, Suite 500, Lake Owego, OR 97035.
Windermere Mortgage Services Portland Contact: Ms. Bertha Ferran, email: Bertha Ferran, telephone (503) 464-9215 or (800) 867-1337. Address: Windermere Mortgage Services, LLC/AT, Irving Branch, 636 NW 21st Avenue, Portland, OR 97209.
Lake Oswego Contact: Mr. Clayton Scott, email [email protected], telephone (503) 497-5060.
Address: Windermere Mortgage Services Series, LLC/AT, Lake Oswego Branch, 220 "A" Avenue, Suite 200
Lake Oswego, OR 97034.
Portland Area Mortgage Lenders
Chase Home Finance Their office is located in the Pearl District at 422 NW 13th Avenue, Portland, OR, 97209. Telephone: (503) 804-8850.
Flagstar Bank A Michigan-based full service bank. In Oregon they offer home mortgage services. Telephone: (866) 733-3700 or (503) 223-2162.
Wells Fargo Bank Contact: Ms. Cherie Stanley. Email: Cherie Stanley Telephone (503) 226-5805. Mobile: (503) 267-5517. Fax: (503) 653-4440. Address: 5615 SW MacAdam Avenue, Portland, OR 97239.
Other Mortgage Sources
Bankrate Online mortgage services allow you can click through to lenders whose deals you find appealing.
Costco If you are a Costco member, the mega warehouse company offers a full range of financial services to include mortgages. They partner with LendingTree for home loans. Telephone: 800-237-3806.
HSH Associates Online mortgage services so you can click through to lenders whose deals you find appealing.
Veterans Administration Home Loans In 2009, the VA Home Loan Program will receive $6 billion in funding. This funding provides one of the only remaining options for a $0 down payment home loan, and is the reason why each month, thousands of families are able to take advantage of their VA Home Loan Benefits.
Oregon Mortgage Lending Regulations
According to the Oregon Division of Finance and Corporate Services Web site (Oregon Revised Statute 59.840 to 59.996), the below rules govern the licensing of mortgage bankers and brokers in Oregon:
Beginning on Jan. 1, 1994, the State of Oregon required licensing for mortgage bankers and mortgage brokers. The licensing law required that each licensee maintain a surety bond or irrevocable letter of credit of at least $25,000 and use an in-state clients' trust account if the licensee accepts clients' funds prior to the close of escrow. Each licensee is also required to employ an experienced person who has at least three years experience in mortgage lending. The law provides for the licensing of the company, not the individual loan originators.
Since Jan. 1, 2002, licensees have been required to notify DFCS of the names of loan originators working for the licensee that originate Oregon residential mortgage loans. All loan originators also must complete 20 hours continuing education every 2 years.
Oregon Regulations on Fraudulent Mortgage Marketing
On March 11, 2008, Governor Ted Kulongoski signed into law Senate Bill 1064, which expands enforcement over loan originators by allowing the Department of Consumer and Business Services (DCBS) to ban or suspend loan originators from engaging in dishonest or fraudulent practices. DCBS will maintain a registry of loan originators and list complaints made against them as well as actions taken. The bill also requires lenders to file an annual report with DCBS detailing their lending activity.
Stricter and clearer rules to enforce the 1993 Oregon Mortgage Lenders Law took effect on May 7, 2008 according to the state Division of Finance and Corporate Securities. The new rules will, among other benefits, make it easier for the state to penalize “bait-and-switch” tactics, in which companies lure customers with fictitious loan terms and coax them into accepting inferior loans. Other rules:
The new rules require mortgage lenders to prominently display the complete terms of loan fees and interest rates.
Mortgage companies no longer may advertise a teaser rate in large print and bury the true loan terms in tiny print at the bottom, or in a rapid-fire voice on a radio ad.
If it’s a subprime loan that resets after two years to a higher interest rate, that must be explained and advertised in the same style and size of lettering.
If the loan allows “negative amortization,” in which the borrower may – and often does – add to the loan principal each month, that must be clearly stated.
Advertisers no longer may pretend to be the customer’s existing lender, or make false statements that a customer has pre-qualified for a loan.
Penalties remain unchanged at $5,000 per violation. As before, regulators also may strip the licenses of the 1,500 mortgage lenders licensed by the state to operate in Oregon. The new rules, as with other state banking regulations, do not apply to national banks that are federally licensed. Those banks include Washington Mutual, Wells Fargo and other major home lenders.
Your Credit Score
The all-powerful FICO score — the measure used most frequently by traditional lenders to determine creditworthiness. The best way to get credit from the mainstream lenders is to have a good FICO score. Its scale runs from 300 points to 850 points; the higher the score, the better your credit standing. Credit scores and reports are now used to determine the rates you pay on loans and credit cards, your insurance premiums, whether you get a job or an apartment. Lenders have long used credit scores and reports to determine whether to lend you money and how much interest to charge you. Some utility companies are linking credit scores to the size of the deposit you must pay to have your power turned on.
Consumer Reports, in their July 2005 issue, noted that, "Scores from the three credit bureaus can vary by 50 points or more because of errors or out-of-date information. That gap could result in a $100-per-month swing on a $150,000, 30-year fixed-rate mortgage."
Free Credit Reports Credit scores are based on credit reports which are free to all consumers as of September 1, 2005. The official government sponsored Web site address for the free credit reports is annualcreditreport.com (this is the only Web site you should use). You can request a report by mail, download a form, or call 1-877-322-8228. Scammers and marketers are exploiting the federal law (2003 Fair and Accurate Credit Transaction Act) by creating Web sites with similar names (over 200 Web site have domain names similar to that of the government sponsored site) so be careful. You can visit the Federal Trade Commission Web site at www.ftc.gov − it has a link to the free-report site.
The credit reporting industry has gotten good at convincing people they need to know their credit histories to include scores on an annual basis. Unfortunately, they've also used some deceptive tactics to market these scores, leading consumers to pay for reports they thought were free. That practice could be curtailed in coming months, thanks to new rules taking effect in April and September of 2010. In late February, 2010, the Federal Trade Commission amended its rules so that Web sites advertising "free" credit scores must link to free credit reports mandated by the government. Starting April 1, online advertisers of "free" credit reports must post a notice directing consumers to the FTC's site, ftc.gov, and AnnualCreditReport.com. The confusion started seven years ago when Congress passed the Fair and Accurate Credit Transactions Act. It required the three major credit-reporting bureaus to provide consumers a free report each year. The law did not, however, provide scores for free − you must pay extra for those.
Review your FICO scores and credit reports several months before applying for a loan. Consumer Reports recommends that you buy your reports and scores at www.myfico.com and order the $44.85 FICO Deluxe package. If you have a spouse, you should order separate credit reports. Even if you've been married for a long time and share a credit history. Here are the three major credit reporting companies:
Factors That Lenders Weigh when Examining a Buyer's Credit Report Lending institutions − in conjunction with Fannie Mae and the Federal Home Loan Mortgage Corporation − have based loan decisions on credit scores that are provided by the credit bureaus. Factors:
Level of delinquency (30, 60, 90 day late).
Derogatory public record (lawsuits or legal judgment) or collections files.
Proportion of balances to credit limits.
Length of time accounts have been established.
Too many inquiries from creditors in the last 12 months.
This can mean that even if you have perfect credit, are never late with payments, but have all your credit cards at their maximum and you keep moving them to get lower rates and not closing them, your scores could be the same as the person with minimal credit and a few small collections in the past.
Acceptable Debt Load Every loan program has different acceptable debt ratios. Your top ratio will be your new house payment against your annual gross household income; your bottom ratio would be your house payment and all other debts (consumer debt, child support, and union dues but not utilities and insurance payments) against your annual gross household income.
Active Credit Accounts Too many credit cards may cause your credit score to be lower than expected. If you have several credit cards open with little or no balance, this would give you an opportunity to go out and incur further consumer debt.
Secure Cards Can Improve Credit Record If you have having a hard time establishing credit, you can put your own money on deposit − say, $350 − and obtain a secured card. You need to use this card and pay it off monthly to have some activity on it. Don't take it to the limit quickly, it might negatively impact your credit score by being a new account already at the maximum credit limit.
New FICO Credit Score System
In late January, 2009, Fair Isaac and one of the three major credit bureaus, TransUnion LLC, started offering the revamped score, dubbed "FICO 08," to lenders.
The new score is supposed to do a better job of predicting borrower defaults, be more forgiving of one-time slipups and take a harder line on repeat offenders. The score, which will still range from 300 to 850 will provide a deeper analysis of subprime borrowers or those with "thin" or young credit histories, according to Fair Isaac. More consumers with accounts in good standing should also see their scores increase slightly. Overall, Fair Isaac predicts fico 08 will improve the accuracy of lending decisions by as much as 15%.
FICO 08 will still factor in credit-card accounts for authorized users, such as children or spouses. Fair Isaac had originally planned to exclude authorized users in order to curtail abuse by "credit repair" Web sites. Such sites arrange for people with poor credit to boost their scores by becoming authorized users on accounts held by strangers with better credit. But Fair Isaac tweaked its model in a way that will still help legitimate authorized users improve their credit scores − although perhaps to a lesser extent than prior FICO versions would − but would also protect lenders from people who were trying to game the scoring mechanism. It could be months or even years before the score is widely available to consumers.
The credit reporting industry has gotten good at convincing people they need to know their credit histories − even scores − on an annual basis. Unfortunately, they've also used some deceptive tactics to market these scores, leading consumers to pay for reports they thought were free. That practice could be curtailed in coming months, thanks to new rules taking effect in April and September. Last week, the Federal Trade Commission amended its rules so that Web sites advertising "free" credit scores must link to free credit reports mandated by the government. The confusion started seven years ago when Congress passed the Fair and Accurate Credit Transactions Act. It required the three major credit-reporting bureaus to provide consumers a free report each year. The law did not, however, provide scores for free − you must pay extra for those.
The site where you can get reports entirely free is AnnualCreditReport.com − you can also call 877-322-8228. But the most logical address − FreeCreditReport.com − belongs to Experian Information Solutions Inc., one of the credit bureaus. You can indeed go to that site, get a credit report and, for an extra $1, your credit score. But unless you read the fine print, you might not know that when you enter your credit card information, you also sign up for Experian's credit-monitoring program. That will cost you $14.95 a month. It will be deducted right from your card account, unless you cancel within a seven-day trial period.
Hints on Getting The Right Home and Mortgage
Estimate How Much You Can Afford Start by estimating how much you can afford to borrow − especially first time buyers. Most mortgage lenders say that, to be manageable, your total monthly payment for principal, interest, mortgage insurance and property taxes should not exceed between 28 and 36 percent of your family's gross income. You can calculate this online at Quicken or Microsoft's Home Advisor.
Consider what it would cost if you were to take out a conventional 30-year fixed-rate loan and what you could expect to pay on an adjustable-rate mortgage (ARM). Rates on ARMs are initially lower than those on fixed-rate mortgages.
Preapproval You can make yourself more attractive to sellers by getting a lender or broker to issue you a preapproval letter for a mortgage. Preapproval includes a check of your credit history, your earnings, and your family's financial assets. You do NOT have to ultimately choose to finance a purchase with the lender who preapproves you, but to a seller, a preapproval letter puts you on nearly the same ground as a buyer offering to purchase for cash.
Borrowing A 30-year fixed-rate loan may offer a lot of peace of mind, but you pay more for that security. One of the newer multiple-year ARMs that remain fixed for 7, 10, or even 15 years before they are readjusted may be more affordable without significantly adding to your risk that interest rates will continue upward. On average, owners tend to relocate with 6 years of purchasing a house, so one of these longer ARMs may serve for as long as you remain in your home. Look for an ARM offering an interest rate at least one-half percentage point below what lenders ask for a conventional 30-year fixed-rate mortgage.
Risky Mortgages In the July 2005 issue of Consumer Reports, the publication warned that many loans mortgage brokers and lenders are pushing increase the odds of foreclosure by allowing borrowers to accept more risk than they can manage, especially if home prices level off or if interest rates increase. That’s because some loans, such as interest-only mortgages, keep monthly payments artificially low at first but can skyrocket to unaffordable levels later on. They concluded, "With today’s low interest rates, the best option for most buyers is still a 30-year fixed loan."
Hints
Dial mortgage lenders until your fingers hurt when checking out rates. You will be surprised at the range of quotes (and costing costs) you'll receive. Just a quarter point can save you $25 a month on a $150,000 30-year mortgage. Points and fees can also vary widely between lenders.
Make certain you obtain a written disclosure of all loan costs in advance from any mortgage broker or direct lender with whom you do business. Be prepared to challenge any large discrepancies between the quote and the actual fee(s) at closing. In Oregon, you have three business days after signing the final papers to revoked the transaction − this applies only on refinancing. Examples of honest third-party charges to expect include appraisal fee (about $300), credit report fee (about $15), recording fee (varies by county), mortgage or transfer tax (in some counties), courier fee, wire fee, title insurance fee, and escrow or attorney fee. Names of unnecessary, undisclosed loan fees include an administration fee, documentation fee, processing fee, preparation fee, overhead fee, management fee, and even "miscellaneous charges" when the lender runs out of creative names.
After you get all the quotes and start comparing, you may find a lender or broker who you would like to do business with but their rate was higher than your lowest quote. Call them back and tell them that you would like to do business with them but they need to match your low rate. They may surprise you and readily agree. Last, when you lock a rate, agree (get it in writing) what happens if the rate drops before you close.
Should You Pay Points
Points are mortgage loan costs typically in association with an interest rate. One point is equal to one (1) percent of the loan amount, so one point on a $200,000 loan is $2,000.
Points are often looked upon as prepaid interest, hence the potential tax deductibility. If you paid points last year for your new home then you may be entitled to deduct those points from your taxable income. Note, the tax deductibility can vary for points between purchase and refinance transactions. Points paid during a refinance are usually only deducted over the term of the mortgage. With a purchase, points may be tax deductible for the year paid.
If you pay points, you're paying your lender some of the interest up-front, in a single fee, in exchange for a lower rate. There is no correspondent trade off between points and rates, but usually one point will get you 1/4%.
Deciding Whether or Not to Pay Points − Here are the steps:
First calculate your monthly payments by paying a point then do run the same routine with paying no points. Subtract the two amounts to find the monthly savings.
Now divide the monthly savings into the point you paid. The result is the number of months it will take to recover the cost of the additional funds to drop your rate.
Example Let's say you've got a loan amount of $250,000 and you're quoted 7.00% with zero points. That's $1,653 per month in principal and interest for a thirty-year note. Your lender can also offer a rate reduction of 1/4% for one point. The monthly payment on a $250,000 note at 6.75% drops to $1,612, or a difference of $40 per month. In this case, it would take just more than 62 months, or five years, to recover that money. On the other hand, your lender will make an additional $40 per month at the higher rate in lieu of your up-front $2,500.
A lot of the decision rides on how long you anticipate keeping the mortgage in question, either by selling the property or refinancing later if rates drop. If you in fact don't anticipate keeping the house for a long time then paying additional points may not make much sense. But that $40 per month savings adds up to $14,400 more than thirty years. It's really not necessary to rely on outside experts to tell you if paying points is worthwhile or not. Do some of the math yourself, then determine if paying points are really in your best interest.
APR: Not the Best Gauge of Mortgage Costs
Consumers shopping for a mortgage are frequently confronted with having to make a choice between complex alternatives. For example, they can select a fixed-rate mortgage on which the rate is set at 5 percent for 30 years, or an adjustable-rate mortgage on which the introductory rate, say 4.375 percent, holds only for five years after which it changes along with market rates. Furthermore, on both types of loan, a lower interest rate is available if the borrower pays points, an upfront charge expressed as a percentage of the loan amount. In addition, borrowers have to pay a variety of fixed-dollar fees to lenders and other fees to third parties such as title agents and appraisers.
To deal with this problem, the federal government, through the Truth in Lending Act, decreed that lenders had to disclose one number designed to be a comprehensive measure of all costs, which borrowers could use to compare one loan with another. This one number is called the annual percentage rate, or APR. By law, whenever a lender discloses an interest rate, they must disclose the APR alongside it.
The APR is expressed as a percentage, same as the interest rate, except that the APR is somehow a composite of the percentage rate and dollar costs. How they are combined is a mystery to most. The mystery is even deeper on ARMs because the ARM rate is subject to unknown change in the future. Here are the problems with APR:
Few loan officers or mortgage brokers understand it either. Indeed, within most lender firms, the only ones who understand how the APR is calculated are the technologists responsible for having it programmed into computers, and sometimes they get it wrong.
A second problem is that, despite its intent, the APR has never been the comprehensive measure of cost that it was supposed to be. A comprehensive measure would cover all costs that would not arise on an all-cash transaction, but, in practice, third-party charges are not covered. In principle, this is an easy problem to fix, and the Federal Reserve has proposed a fix through recent proposals to amend its Truth in Lending regulations. It has taken them only 30 years.
The third problem is more difficult. Cost depends not only on the characteristics of the mortgage, but also on the characteristics of the borrower. A given set of mortgage features may carry different costs to different borrowers, but this is not reflected in the APR.
The most important difference among borrowers is how long they expect to be in their house. The APR assumes they will live there for the full term of the loan, though very few do so. This assumption can lead to bad decisions.
Consider a borrower choosing between two 30-year fixed-rate mortgages, one at 5.125 percent and zero points, the other at 4.25 percent and 4.4 points. The first has an APR of 5.125 percent while the second has an APR of 4.64 percent, suggesting that the lower-rate mortgage is the better deal. But that is only because the APR is calculated on the assumption that the borrower enjoys the lower rate over the full term of the loan. If the borrower expects to be out in five years, the APR on the low-rate mortgage calculated over five years instead of 30 − which I usually call the "interest cost" to distinguish it from the APR − would be 5.31 percent, and the higher-rate mortgage would be the better deal.
Because of the built-in assumption that the borrower will have the loan for the full term, the APR is also useless to borrowers assessing the cost of adjustable-rate mortgages. If the borrower expects to be out of the house before the initial rate period is over, an APR calculated over the full term may be misleading. If the borrower expects to have the mortgage beyond the initial rate period, or isn't sure, he needs to know how much risk he faces from interest-rate increases after the initial rate period ends. But the APR doesn't tell him that.
A second difference among borrowers that the APR does not account for is their tax bracket. The APR is a before-tax measure. Because mortgage borrowers can deduct interest payments and points from their taxes, any measure of cost should be after taxes.
A third difference that the APR does not account for is the borrower's opportunity cost − what they might earn by doing something else with their money. Because the upfront and monthly payments required by the mortgage could otherwise be invested to yield a return, that forgone return is a cost to the borrower.
Homeowners Assistance Programs: First-Time Home Buyers
Oregon Home and Community Services (OHCS) is Oregon’s “state housing finance agency.” The Department periodically issues mortgage revenue bonds to fund lower than market interest rate mortgage loans for below-median income homebuyers in Oregon. OHCS helps low and moderate income households in Oregon buy their first home by providing below-market rate financing and cash assistance through our Residential Loan Program, also known as the “Oregon Bond Loan”. The program’s below-market rate helps eligible families increase their home purchasing power and lower their monthly house payments to be affordable.
A qualified homebuyer cannot have an annualized gross household income exceeding the following income limits: $58,600 statewide; $67,400 in Benton; and $67,900 if the property being purchased is located in Clackamas, Columbia, Multnomah, Washington, or Yamhill counties (effective 2/27/04). They must be a first-time homebuyer or not have owned and occupied a primary residence during the three-year period prior to the date the note and mortgage is signed. This requirement is waived if they are purchasing in a targeted area. A qualified homebuyer must be (or intend to be) an Oregon resident, and must agree to occupy the home being purchased as their primary residence. An Applicant may not have been discharged from a bankruptcy within the past two years or had a real estate foreclosure within the last five years prior to closing the program loan.
When you contact a mortgage broker or lender, make certain you inquire about the Oregon Homeowner Assistance Programs and make certain they are willing to participate if you are eligible.
Mortgage Links
Appraisal Services Bruce Pulley, a Portland metro area appraiser, has information about calculating home values as well as other advice about home owning on his well-designed Web site.
Common Mortgage Terms From Interest.com − other useful information about mortgages is also available on this site.
Compare Interest Rates Find the best mortgages at the lowest interest rates. Search for current mortgage interest rates from lenders and brokers nationwide.
Freddie Mac Visit this site for information about home buying. Freddie Mac is private shareholder-owned corporations operating under a congressional charter.
Oregon Association of Mortgage Professionals The Oregon Association of Mortgage Professionals (OAMP) represents the mortgage industry of more than 10,000 individuals in Oregon. They promote the mortgage industry through programs and services such as education, government affairs representation, networking events, and local chapters.
Professor Guttentag Jack M. Guttentag, emeritus professor of finance at the Wharton School of the University of Pennsylvania maintains this site and it's a goldmine of information about mortgages.
For decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during a financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) propping up the housing market by issuing guarantees for investors on most new mortgages.
Mortgage brokers, middlemen who shop for home buyers among banks and lenders, can choose from programs from many banks. They may be able to offer a variety of deals that are not available at your own bank. Examples of deals include: first-time buyer programs, low- or no-down-payment loans for certain occupations (police and firefighters), and low-cost mortgages for energy-efficient homes.
Borrowing A 30-year fixed-rate loan may offer a lot of peace of mind, but you pay more for that security. One of the newer multiple-year ARMs that remain fixed for 7, 10, or even 15 years before they are readjusted may be more affordable without significantly adding to your risk that interest rates will continue upward. On average, owners tend to relocate with 6 years of purchasing a house, so one of these longer ARMs may serve for as long as you remain in your home. Look for an ARM offering an interest rate at least one-half percentage point below what lenders ask for a conventional 30-year fixed-rate mortgage.
Consumers shopping for a mortgage are frequently confronted with having to make a choice between complex alternatives. For example, they can select a fixed-rate mortgage on which the rate is set at 5 percent for 30 years, or an adjustable-rate mortgage on which the introductory rate, say 4.375 percent, holds only for five years after which it changes along with market rates. Furthermore, on both types of loan, a lower interest rate is available if the borrower pays points, an upfront charge expressed as a percentage of the loan amount. In addition, borrowers have to pay a variety of fixed-dollar fees to lenders and other fees to third parties such as title agents and appraisers.
