Today s Rates Looking for the best mortgage loan rate

Transcription

1 Today s Rates Looking for the best mortgage loan rate by Natalie Danielson A Washington State Approved Real Estate School under R.C.W Sponsor S 1353

2 Today's Rates Looking for the best mortgage loan rate Curriculum Session Hours Major Topics Method of Presentation 1 1 hour Rates APR Interest rate Lecture Discussion 2 1 hour Finance Charges Good Faith Estimate Lecture Discussion 3 1 hour Comparing Loan Rates and Fees Lecture Discussion 1994 by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 2

3 Today's Rates Looking for the best mortgage loan rate There are literally thousands of mortgage loan programs available for real estate buyers today. Comparing them can be mind boggling. When working with buyers we are often called upon to assess their needs and advise them on financing. Most often they just want the lowest interest rate. Real estate agents are bombarded daily with information on the financial market and rates that sometimes are too good to be true. But, with all the financial news that circulates around a real estate office, there is little that is current or tangib+le. It is nearly impossible to grasp the financial market at the moment. This three hour course was designed to explain that a low interest rate is only one piece of the puzzle when choosing a mortgage loan. The interest rate is only one of the costs associated with the loan and it can be expressed in more than one way. "Today's rates" are not necessarily this afternoons rates. They change without notice several times a day. The lenders when they quote rates have literally hundreds of rates to choose from each day. There is no single interest rate, today! Course Objectives As a result of taking this class the real estate licensee shall be able to: Define the Annual Percentage Rate APR. Identify the different finance charges as a part of a loan including o Loan origination fees o Pre-paids o Discount Points o Rebates Understand the difference between conforming and non conforming loans. Understand the Loan to Value Ratio and how it affects the interest rate by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 3

4 Consumer Financial Protection Bureau Regulations Mortgages are complex transactions that may include risky features, so we ve issued a rule that will simplify and improve disclosure forms for mortgage transactions. Consumers currently receive different, but overlapping federal disclosure forms with the terms and costs of mortgage loans. Because these forms are confusing for many people, Congress directed the Bureau to create new forms. The rule replaces the current forms with two new forms: the Loan Estimate, given three business days after application, and the Closing Disclosure, given three business days before closing. Lenders will be required to give consumers these forms for mortgage applications submitted on or after August 1, Specific benefits of the new forms and rules include: Combining several forms and additional statutory disclosure requirements into two forms. This will reduce paperwork and consumer confusion. Using clear language and design that will help consumers understand complicated mortgage loan and real estate transactions. Highlighting the information that has proven to be most important to consumers. On the new forms, the interest rate, monthly payments, and the total closing costs will be clearly presented on the first page. This will make it easier for consumers to compare mortgage loans and choose the one that is right for them. Providing more information about the costs of taxes and insurance and how the interest rate and payments may change in the future. This information will help consumers decide whether they can afford the mortgage loan and the home, now and in the future. Warning consumers about features they may want to avoid, like penalties for paying off the loan early or increases to the mortgage loan balance even if payments are made on time. Making the cost estimates consumers receive for services required to close a mortgage loan more reliable, for example, appraisal or pest inspection fees. The rule prohibits 2 WHAT THE NEW SIMPLIFIED MORTGAGE DISCLOSURES MEAN FOR CONSUMERS increases in charges from lenders, their affiliates, and for services for which the lender does not permit the consumer to shop unless a specific exception applies. Examples of the specific exceptions include when information provided by a consumer at application was inaccurate or becomes inaccurate, or when the consumer asks for a change in the services. Requiring that consumers receive the Closing Disclosure at least three business days before closing on the mortgage loan. Currently, consumers often receive this information at closing or shortly before closing. This additional time will allow consumers to compare the final terms and costs to the terms and costs they received in the estimate. That will better equip them to raise any questions before they go to the closing table by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 4

5 The Loan Estimate (August 2015) Lenders by law must provide the borrowers with a Truth in Lending Statement (TIL) which details the finance charge, costs and APR along with the payment schedule within 3 business days of application. This Truth in Lending Disclosure will change to the Loan Estimate in August A borrower is usually encouraged to ask at least three different lenders to give a Loan Estimate, which is a standard form showing important facts about the loan. It should be sent within three days, and it shouldn t be expensive. Lenders can charge you only a small fee for getting your credit report and some lenders provide the Loan Estimate without that fee. When a borrower receive a Loan Estimate, the lender has not yet approved or denied the loan. Up to this point, they are showing what they expect to offer if the borrower decides to move forward with your application. The borrower has not committed to this lender. In fact, the borrower is not committed to any lender before signing final closing documents. Once the borrower has found the best mortgage, the next step is to tell the loan officer to proceed with that mortgage application. This is called expressing your intent to proceed. Lenders have to wait until the borrower expresses intent to proceed before they require payment of an application fee, appraisal fee, or most other fees. The Loan Estimate may show a rate that has been locked or a rate that is floating, which means it can go up or down. Mortgage interest rates change daily, sometimes hourly. A rate lock sets the interest rate for a period of time. Rate locks are typically available for 30, 45, or 60 days, and sometimes longer. The interest rate on the Loan Estimate is not a guarantee. If the rate is floating and it is later locked, the interest rate will be set at that later time. Also, if there are changes in the application including your loan amount, credit score, or verified income the rate and terms will probably change too. In those situations, the lender gives the borrower a revised Loan Estimate. When does a lender have to provide a Good Faith Estimate? It must be sent within three days to the borrower. Can a lender charge a fee for the GFE? Loan originators will be allowed to charge a fee for providing the Loan Estimate, but the charge must be limited to the cost of the credit report. Loan originators are prohibited from charging, as a condition for providing the GFE, any fee for an appraisal, inspection, or similar settlement service by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 5

6 Annual Percentage Rate In 1969 the federal government passed the Truth in Lending Act, Regulation Z, requiring lenders to make certain disclosures to consumer loan applicants so they will know exactly what they are paying for credit. Regulation Z was designed to regulate the disclosure of the charges. The most important disclosure required is the annual percentage rate (APR). With this knowledge borrowers should be able to compare credit costs and shop around for the best credit terms. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) direct the Consumer Financial Protection Bureau to publish rules and forms that combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan. Under the new CFPB regulations Regulation Z has been amended and the documents and disclosures will change. The borrower can review the Loan Estimates and compare Total Loan Costs, which it is shown under Section D at the bottom left of the second page of the Loan Estimate. Total Loan Costs include what the lender charges to make the loan, as well as costs for services such as appraisal and title. The third page of the Loan Estimate shows the Annual Percentage Rate (APR), which is a measure of the costs over the loan term expressed as a rate. Also shown on the third page is the Total Interest Percentage (TIP), which is the total amount of interest that the borrower will pay over the loan term as a percentage of the loan amount. A borrower can use APR and TIP to compare loan offers. The Real Estate Settlement and Procedures Act RESPA, Regulation X, has been amended. What is the APR? The APR includes some of the costs for a loan expressed as an annual percentage of the loan amount. What costs can be included in the APR? The costs include the interest rate, the loan origination fees, discount points, prepaid or interim interest, document preparation fees, processing fees, underwriting fees, tax registration, and the mortgage insurance costs. When does the APR have to be disclosed? The lender must disclose the APR in a good faith estimate of the finance charges within 3 business days of receiving the written application. If the figures change over the course of the transaction, the lender must provide a new disclosure no later than settlement. Why not just compare the APR on the different rate sheets provided by the lenders? The rate sheets, since they are not designed to advertise or extend consumer credit they are exempt from Regulation Z. They are for agents to use to be made aware of the different programs available. So, only some rate sheets will have the APR listed some 1994 by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 6

7 will not. When you do try to compare the APR from one loan program to another, you may not be comparing apples to apples. What is the difference between the way the lenders figure the APR? The APR includes the costs for each loan. But, the same loan with the same basic costs can have a different APR.. Lenders are not consistent with the way it is calculated. An example is the prepaid or interim interest. This is the interest charged for the loan that is prorated based on the closing date. If the lender assumes a closing date that is the end of the month, there is no prepaid interest. But, another lender may assume a closing date towards the middle of the month. Another example is the mortgage insurance premium, if charged, is sometimes included in the lenders estimate of APR by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 7

8 Interest Rate There is no single interest rate for mortgage financing. The interest rate is only one measurement of the cost of the money borrowed. The annual percentage rate was designed to help consumers compare loan programs because the interest rate is not the only measurement. Well, isn't it most important to get the lowest interest rate? In very general terms there is only one primary source for all the money in the U.S... the federal government. All of the lenders get it at different times under different circumstances and then package it differently as a product to the consumers. If a lender offers an unbelievably low interest rate, then the borrower will often pay for the lenders costs of that money. Those costs can be blatantly obvious or hidden. The interest rate changes every day. There are no guarantees except "locks" which the lender might require a fee. The borrower actually has very little control of the interest rate. They only have control on the amount of risk they are willing to assume to get a lower rate and the costs they are willing to pay for that rate. What is the interest rate today? The rate sheets that agents get daily often have no date or they are out of date. With a financial market that is constantly in flux, never assume that rate will be available tomorrow, next week, or next month when the transaction closes. How can I make sure that my buyer gets the lowest rate? The borrower must make the final decision on the lender for the transaction. The loan program chosen may not have the lowest rate, but may have the lowest costs associated with it so the borrower can afford to close. The mortgage loan chosen will have many variables besides interest rate and costs. The loan program could be fixed (15 or 30 year), have a balloon, be an ARM or a 3/1 buydown. It will depend not only on the rate and costs but the program that the buyer qualifies for by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 8

9 Discount Points You cannot talk about mortgage financing without including the discount points. They are as critical to the costs of the loan as the interest rate. What are discount points? Discount points are a form of prepaid interest. They are a lump sum of interest paid at closing to increase the lenders yield or profit on the loan. How much does a point cost? One point costs 1% of the loan amount. It does not equal one percentage point off the loan amount. What loans are they associated with? Discount points are charged on conventional as well as government loans. Who pays the points? The buyer or the seller may pay the discount points depending on the way the purchase and sale agreement is written. In the past, the seller had to pay the points on VA loans, but for now that has changed so that the borrower can pay them. What is "par?" When a loan is at the "par rate" there are no discount points attached. Seldom do you see a loan at "par" on a rate sheet. How many points are charged? The number of points generally range from one to six points and can be higher. The number of points are directly related to how the lender's quoted interest rate compares to the market rates. Why pay points? Since points are prepaid interest, they lower or buy down the interest rate for the life of the loan. The buyer may have an easier time qualifying for the loan because the lower the income required if the interest is low with several points. But, the buyer must have the cash to pay the points at closing. The points, though, can be paid by the seller to open the door to more buyers by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 9

10 Loan Origination Fees There are administrative costs associated with mortgage loans. These costs can include costs of processing, overhead, facilities, salaries and commissions. Why are they charged? These costs are the costs that the lender occurs to get that loan for the borrower. Who pays the loan fees? The loan fees are generally paid by the borrower but the purchase and sale agreement could state the seller is to pay costs including the loan fee. In the past, the sellers were required to pay the discount points on a VA loan, but now the veteran borrower can pay the points. How much are loan origination fees? They vary with the lender on conventional loans, but usually they range from 1% to 3% of the total loan amount. On government loans the loan fee is 1%. Why are they sometimes included as a cost along with the discount fees? Lenders often quote the loan fees and discount points as one figure on loans. conventional On government loans the fees are listed separately. Lender Rebates Many wholesale lenders pay the mortgage brokers rebates when they place the borrower with certain loan programs. These rebates are now required to be listed on the HUD settelement statement which will be called the Closing Document by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 10

11 Finance Costs and Pre-Paid Costs There are other costs associated with mortgage loans. Lenders call them by a variety of names. What are the other costs that the borrower must pay to get a mortgage loan? These costs can include the following: Loan fee, discount points, appraisal, credit Report, processing fee, underwriting fee, title insurance, settlement or escrow fee, recording fee, tax registration, flood hazard, funding fee and several other miscellaneous fees depending on the transaction. What are pre-paids? Pre-paids are costs that are prorated depending on the time of closing. These include: Interim interest: The loan is paid in arrears (backwards). At the time of closing the borrower must have the loan paid through the month that the transaction closes. If it closes at the end of the month, there is no pre-paid interest. Hazard or Fire Insurance: This is a yearly cost and the first year is paid at closing. Taxes: The real estate taxes are pro-rated between the seller and buyer for the year by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 11

12 Conforming vs. Non-Conforming Loans A conforming loan is one that is within the FNMA or FHLMC guidelines for qualifying as well as the total loan amount. What is considered a "conforming loan?' Currently the highest loan amount for a conforming FNMA loan is $203, In addition the borrower must conform to the traditional qualifying standards set by FNMA. Why are loans separated as conforming and non conforming? The lender that you get the loan from most likely will sell the loan on the market to the secondary market; i.e. Federal National Mortgage Association (FNMA or Fannie Mae). This frees up more mortgage money that the bank will have available to lend. A conforming loan can be sold on the secondary market. A non conforming loan is usually considered a "portfolio loan" because a lender will keep the loan and not pass it on to the secondary market. What if my buyer needs a loan that is over the conforming limit? The loan is then considered "non-conforming." The lender takes greater risk with loans that are considered "jumbo loans" and therefore, the borrower pays a slightly higher interest rate and has to have a higher down payment by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 12

13 Loan to Value Ratio The loan to value ratio (LTV) is the amount of the loan compared to the value of the property. This is expressed as a ratio or a percentage. It shows the equity the buyer has in the property. How does the LTV represent risk to a lender? The lower the LTV the lower the equity the borrower has in the property. For a loan with 90% LTV, the borrower has generally put 10% down. If the same borrower put 20% down the LTV would be lower at 80% and the lenders risk reduced because with more equity the borrower will be less likely to default. If the borrower has a lower LTV ratio they will have easier qualifying standard and if it is lower than 80% they often avoid the Private Mortgage Insurance costs. Why is the LTV usually in round figures? To simplify things, lenders choose to group loans according to their LTV which is usually 95%, 90% or 80%. They have eliminated expressing LTV between these categories. If your borrower has 9% for a down payment, it is often beneficial to come up with the extra 1% or the loan is considered a 95% loan. What is the highest LTV available? There are available some 95% conventional loans in the marketplace. Through the Community Home Buyer Program through FNMA a borrower can get a conventional loan with as high LTV as 95%. A borrower if they are a qualified veteran can purchase with a 100% LTV...they can buy with "zero dollars down." A borrower can get an FHA loan with as high as 97% LTV by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 13

14 Comparing Programs It is important rather than just comparing rates or points or fees to look at the entire program offered by a lender. Some lenders offer higher rates and then do not charge for certain fees. Some lenders offer lower rates with all the fees paid by the borrower. The net to the borrower and the lender can be the same or it can be dramatically different. Take three loan programs with what appears to be competitive rates and compare the bottom line. Program #1 This lender is offering a loan for % interest rate. This rate is the 30 day lock rate. If there is a day lock the rate is %. The discount points and fees are %. The APR is %. This is a conforming loan that is a year fixed rate. It is based on a % LTV. Program #2 This lender is offering a loan for % interest rate. The lender is advertising that the borrowers do not have to pay the costs. Program #3 This lender is offering a loan for % interest rate. The rate is based on a day lock. The discount points and fees are %. The APR os %. This is a conforming loan that is a year fixed rate. It is based on a % LTV by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 14

15 Estimated Closing Costs program 1 program 2 program 3 Loan Fee Loan Discount Points Appraisal Credit Report Processing Fee Underwriting Fee Title Insurance Settlement Escrow or Closing Fee Recording Fees/ Wire Fees Tax registration or service fee Flood Hazard Determination VA Funding Fee Other Total Estimated Closing Costs Estimated Pre-Paid Costs Interim prepaid interest Tax Reserves Fire/Hazard Insurance Mortgage Insurance 1994 by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 15

16 Today s Rates Quiz for discussion purposes only 1. The lender must disclose the APR to the borrower: a. Prior to closing b. During the pre-qualification meeting c. Within 3 business days of making application d. On the settlement statement 2. The interest rate for 30 year fixed rate loans today is published by the federal government daily. True False 3. Don is getting a $150,000 loan from ABC Mortgage. He is required to pay 2 points at the time of closing. How much will he pay in points? a. $7,500 b. $3,000 c. $750 c. $ A general definition of discount points is: a. a form of pre-paid interest b. an administrative cost to the lender c. the APR d. an underwriting fee 5. The borrowers must pay discount points on all mortgage loans. True False 6. A conforming loan is one that conforms to the private mortgage insurance company standards. True False 7. The secondary market sets the Loan Origination fees charged to borrowers. True False 8. When a borrower locks in the interest rate, if the rate goes down, they are stuck with the higher rate. True False 9. The truth in lending statement is an estimate of all the settlement charges for the borrower. True False 10. The borrower always has to have a low LTV ratio in order for a loan to be approved by a portfolio lender. True False 1994 by PROFESSIONAL Direction (revised 2002, 2003k, 2008, 2009, 2010,Sept 2012, 2013, May 2015) 16