mortgage

Anonymous Lender Review of the “All-in-One” Mortgage

reallivingathomeblog Arlington , , , 0 Comment
Anonymous Lender Review of the “All-in-One” Mortgage

Question:   On social media, I have seen a new loan program advertised called the All in One mortgage.   Whom might this program benefit and are there any pitfalls to look out for?

Answer: With mortgage rates so high, we’re seeing new products or new angles on old products (like the 2-1 Buydown) and lots mixed information about why rates are high or where rates are likely heading in 2023 and beyond. So in keeping up with my promise to provide relevant, transparent information on the mortgage market, let’s talk about another buzzy product being discussed lately, the All-in-One Mortgage.

It’s a fairly simple product, but cutting through the marketing of it to know if it’s the right product for you isn’t easy.

The rest of this article is a guest column generously written anonymously by a lender at a local bank that offers this product, but wishes to remain anonymous so they could provide an honest review. So enjoy a brutally honest review of a mortgage product that isn’t as great as the marketing makes it seem…

The creators of the AiO claim in their marketing that this loan will pay off a homeowner’s mortgage faster than a traditional mortgage, but we have found this not to be the case and that the AiO may be more expensive than a traditional mortgage, on an apples-to-apples basis. 

The goal of this article is to provide a quick overview of this product, as well as discuss which situations the AiO may or may not be a good financial instrument for the purchase or refinance of a home.

Mortgage, Home Equity Line, and Checking Account “All in One”
The All in One (AiO) mortgage combines a mortgage, a home equity line of credit and a checking account, all in one financial instrument.   The AiO allows you to purchase a home just like any other mortgage, where you would apply for a pre-approval, shop for a home, and once a home is under contract, the AiO would fund the majority of the home’s purchase price.

In addition, you can deposit your pay into this account, and pay all your bills from this account, just like any other checking or savings account.   The account has an ATM card and allows automatic bill pay.    Finally, the AiO acts like a Home Equity Line of Credit (HELOC), allowing you to access your home’s equity should you have such life events as paying for a child’s wedding or building an addition to your home.

Whether this product is a good fit for you depends on your goals and priorities, so the following summarizes how the AiO fits with certain personal and financial goals.

AiO Recalculates Interest Daily, Not Monthly

A traditional mortgage charges interest on the outstanding balance as of the date of the last mortgage payment, and you pay interest on this balance for each day of the month until the next mortgage payment. In contrast, the AiO mortgage calculates interest daily, so if you deposit your paycheck in the account, this immediately reduces the balance on which interest is calculated.

Said differently, if you make an additional payment to principal mid-month, the AiO would calculate interest on the lower balance for the remainder of the month, whereas a traditional mortgage would not. The creators of the AiO mortgage share that this feature saves interest, which it does.

However, the AiO mortgage has a higher starting interest rate than a traditional 30-year fixed mortgage and the AiO does not have a permanently fixed rate of interest, so the interest rate on this product may be higher or lower in the future, as it is market-driven.

Hence, any interest savings due to the AiO paying interest daily can be lost due to the higher initial interest rate and / or increases in the program’s interest rate down the road.   This does not mean that the AiO would not save on interest; however, there are many instances when the amount of interest you pay may be higher despite the advantages of daily interest recalculations, so be sure to discuss interest rate risk with your financial advisor.

Early Mortgage Pay-Off, True or False?

The creators of the AiO mortgage claim that the AiO will pay off your mortgage far faster than a traditional mortgage. To evaluate this claim, we’ve employed the assistance of a technical financial expert, who has both 20 years of experience in the mortgage industry and, before joining the mortgage industry, a finance role for a Fortune 300 company. As this individual’s company also offers the AiO product, the individual wished to remain unnamed.

The findings were that, on an apples-to-apples basis, the AiO mortgage did not result in the mortgage being paid off materially faster than a traditional mortgage. We used the simulator on an AiO mortgage web site, and summarized the results below.

For our analysis, we assumed a purchase of a $1.0M home, a 25% down payment, making the loan principal $750,000.  We assumed a 6.5% interest rate on the 30-year fixed loan, the homeowner’s household has $15,000/month after tax income and that household had $4,200 remaining of their take home pay after payment of the mortgage and all other monthly expenses.

The AiO website automatically assumes the following:

  • All of the $4,200 remaining after paying expenses is used to reduce the loan’s principal
  • The AiO web site compares the above to a 30-year fixed mortgage with assumptions above, but does not assume any additional payments are made to principal
  • The AiO web site concludes that your mortgage would be paid down in 132 months (11.0 years), but the rapid payoff of the AiO mortgage is primarily a result of the assumption that extra payments are made in the AiO scenario and not the traditional

If the same extra principal payment of $4,200 per month was applied to a traditional mortgage, the 30-year fixed mortgage would be paid off in under ten years and have a lower amount of interest paid, as the AiO would have a longer pay down period and higher interest rate.

Alternatively, if we assume that neither the AiO or the 30-year fixed mortgage pay the extra $4,200 toward principal each month, the AiO would be paid down seven months faster than the 30 year fixed (353 months vs. 360 months); however, due to the higher interest rate for the AiO, the 30 year fixed is forecasted to pay –  by the AiO’s own calculator – over $490,000 less in interest than the AiO mortgage.

Ability to Borrow not Unique to AiOs

If one has an AiO mortgage, the amount of principal paid down is, at any time in the future, available to be taken back out in cash.  For example, ten years after you purchase your home, if you have a medical emergency, you can use the equity in your home to obtain cash almost as fast as one could take cash from a savings account.

The AiO is not the only mortgage product to offer this flexibility. Traditional mortgages (e.g. 30-year fixed loan) offer HELOCS that allow easy access to cash tied to your equity, once the line of credit is approved.

In both cases, you will be charged a market interest rate on funds borrowed against your home’s equity.

We do want to share a word of caution that the largest risk to any form of a HELOC is that one may spend money on goods and services that would not have been purchased if funds from the HELOC were not easily available.

A Worthwhile Option for Investment Properties

The AiO mortgage is the only product I know that will allow one to have a HELOC secured against one’s investment / rental property, as most HELOCs are for primary residences or (sometimes) second homes.   In addition, the AiO allows one to borrow up to 70% of the value of the home, with a limit of $1.0M. Any current mortgages must be closed with the balance rolled into the AiO, and cash back is limited to $250,000.

While an investment property HELOC is not an advertised use for this product, in our opinion, this is one of the best uses of the AiO mortgage.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Ideas for Reducing Your Interest Rate

reallivingathomeblog Arlington, Buyer, Seller , , , , , 0 Comment
Ideas for Reducing Your Interest Rate

Question: Are there any good ways to lower my interest rate?

Answer: I probably don’t need to spend time educating you on how high interest rates have gotten
over the last 6 months (they’ve more than doubled in most cases), but we’re now seeing rates in the
upper 5% to mid-6% range on most loans. Unfortunately, the current economic environment makes it
more likely that rates continue to climb and most lenders I speak to tell me they’re expecting rates in
the 7-8% range later this year.

While there isn’t much you can do to change your rate in a significant way, just like you can’t do much
about the price of gas, there are some strategies you can use to help. I spoke with Jake Ryon
(jryon@firsthome.com) of First Home Mortgage about things he recommends to help bring down your
rate.

Consider ARMs (Adjustable Rate Mortgage)
ARMs got a terrible reputation during the housing crisis because many borrowers didn’t understand
the terms of their loan. Some of these options allowed for negative amortization so borrowers opting
for the lowest rate ended up owing more on their loan than when they started. Many of these options,
and the sometimes predatory approach to lending, have been outlawed so the ARMs you see today
are a distant relative of the ARMs of the housing crisis.

What is an ARM?
Simply put, an ARM is a loan with an interest rate that is locked for a set period of time (usually 5, 7,
or 10 years) that can adjust (up or down) after that set period, based on market rates. The rate will
continue to adjust up or down based on market rates with limits on how much a rate can change each
year and throughout the life of the loan.

Why should you consider it?
In the current interest rate environment, you’ll usually see lower interest rates on an ARM than on a
standard 30-year fixed mortgage. The difference can be roughly .5-1%, which is a significant savings
on interest payments.

What about the risk?
The risk of an ARM is that if rates remain high or end up higher at the end of your lock period, your
rate will adjust upwards. The gamble you’re taking (based on historical rate trends, it’s a good bet) is
that rates will drop enough to justify refinancing into a lower 30yr fixed rate before your ARM lock
period expires.

Over the last few years when rates were so low, ARMs didn’t make sense because they were so
close to a 30yr fixed rate (sometimes higher), so you haven’t heard people talk much about their
benefit until more recently when the spread between the two has increased.

Buy Origination Points
In most cases, you can buy “points” on your loan to decrease the interest rate. One point equals 1%
of your loan amount and for a while, you were seeing a reduction of around .25% in rate for a point. In
the current interest rate environment, buying a point may lower your rate by as much as .5-.75%.
Discuss this with your lender up-front so you’ll know if you should budget additional cash to lower
your interest rate. Your lender can also calculate the break-even point on this investment, which is essentially calculating how long you need to be in the loan (own the property) for the money saved in
interest payments to exceed the amount you paid for the point.


Increase Down Payment
Sorry if this seems obvious, but for years when rates were so low, many buyers were choosing to put
less money down, even if they had more funds available, because the cost of borrowing was so low,
they felt they could use the extra cash more effectively in other savings/investment vehicles.

That financial strategy is no longer as attractive and using as much down payment as you can muster
is gaining favor in financial advisory circles. In general, you achieve the best interest rates with a 20-
25% down payment, with little improvement beyond that. However, putting more money down can still
make a lot of financial sense even if it doesn’t lower your rate because the interest payments on
borrowed money are so high now.

There are still plenty of loan options for buyers with less (3-5%) to put down, but those rates have
shot up and carry higher mortgage insurance premiums.

It’s now even more important to get pre-approved and open discussions with a trusted lender at the
beginning of your home search (here’s a link to an article I wrote about picking a good lender). If you
have any questions about finding a lender or want recommendations, don’t hesitate to email me.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me
at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing,
please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N
Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

20% Down Payment Myth

elieliresidentialcom Arlington, Buyer, Loan , , , , , 0 Comment
20% Down Payment Myth

Question: Are there ways to buy a home without putting 20% down?

Answer: I hope everybody is enjoying the holidays and some time off!

Next month we will take some time to look at market performance in 2021, but this week I’ll address one of the most common questions I get – is it necessary to save 20% for a down payment in order to buy a home? Studies show that the most common reason people give for not buying a home is not having enough savings for a down payment.

About 1/3 of Arlington buyers purchase a home with less than 20% down and for many buyers, especially first-time home buyers, they’re putting as little as 3-5% down.

Programs For Everybody

For those with good credit, there are popular Conventional Loan programs allowing for as little as 3% down and for those with lower credit scores, FHA Loan programs range from 3.5%-10% down. There are also some exceptional 10-15% down programs available to those with great credit and good incomes that do not include mortgage insurance premiums.

Specialty Programs For Military and Doctors

If you are an active-duty or former servicemember you likely know about VA Loans that allow purchases with zero down. Doctors also have access to special loan programs offering great rates with low down payments for large loan amounts.

Mortgage Insurance

Many loans with less than 20% down will include mortgage insurance, which I wrote about here. It will increase your monthly payment and is usually a higher the less you put down. However, there are options to get rid of the mortgage insurance fees by buying it out or applying for early removal after a couple of years.

There are also loan options that do not include mortgage insurance at all.

Impact on Negotiations

Clients often ask me if a lower down payment will impact their ability to negotiate, so in 2018 I did an analysis on the topic. The results showed that only cash buyers (100% down) and buyers not putting any money down were materially impacted by their down payment, the negotiation leverage was similar for everybody in between.

However, it would be misleading to suggest that down payment percentage doesn’t have any effect. Most sellers will respond more enthusiastically to higher down payments, and this comes into play in competitive scenarios (multiple offers), which are common in Arlington and the surrounding DC Metro neighborhoods. When sellers are choosing between multiple, similar offers, buyers with higher down payments have an advantage.

Buyers can combat the potential negative impact of a lower down payment in multiple offer scenarios by getting a strong pre-approval letter from a reputable local lender, offering to get pre-approved by a lender of the seller’s choosing, increasing the Earnest Money Deposit, or several other tweaks to the contract that will be looked at favorably by the seller.

Favorite Mortgage Programs

If you’d like any additional information or recommendations on lenders or loan programs, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

It’s a Great Time to Remove Mortgage Insurance

elieliresidentialcom Arlington, Home Owner, Loan , , , , , 2 Comments
It’s a Great Time to Remove Mortgage Insurance

Question: Can you explain what Mortgage Insurance is and if there’s any way to get rid of it?

Answer:

What is Mortgage Insurance?

Mortgage insurance is an additional monthly or up-front fee added to a mortgage, usually set at .1%-1% of the loan amount, offered by either the government or private insurance companies to enable lenders to offer down payments below 20%. Mortgage insurance covers lenders for losses up to a certain amount if a borrower defaults on their mortgage.

Note: there are some sub-20% down payment products on the market for high-earning, high-credit borrowers that do not require Mortgage Insurance.

There are two types of mortgage insurance available:

  1. FHA mortgage insurance: FHA is a government program, which requires a down payment of as little as 3.5% of the sales price, and mortgage insurance is required on FHA mortgages, regardless of the amount of down payment.
  2. Conventional mortgage insurance: Conventional mortgages are home loans that are not insured or guaranteed by the government, as in the case of the FHA mortgage example. Many conventional loans are sold to Fannie Mae or Freddie Mac and thus follow these entities “conforming” guidelines.

Conventional or private mortgage insurance enables lenders to offer conventional loans with a minimum down payment as low as 3.0%-5.0%. Most 3.0% down conventional mortgages are restricted to low-to-moderate income borrowers.

How is the Fee Determined?

The cost of mortgage insurance will vary greatly, depending upon several factors:

  1. The amount of the down payment
  2. The qualifications of the borrower like credit score and debt-to-income ratio
  3. Whether the mortgage is an FHA or conventional loan
  4. The type of the mortgage such as a 30-year or 15-year loan

Mortgage Insurance Can Be Removed

If you have a Conventional Loan (not FHA), you can request that your Mortgage Insurance premium be removed from your payments once your equity reaches or exceeds 20% (loan-to-value/LTV is 80% or less). This can be a result of a natural equity increase through your monthly payments and/or through appreciating home value.

To qualify, you cannot have a late payment in the last two years and if you are making your case based on a higher market value of your home, the loan servicer will require a new appraisal (cost is usually around $500).

For Conventional Loans, your Mortgage Insurance is automatically removed once your LTV reaches 78% (equity reaches 22%) or you reach the midway point in your loan (15 years into a 30 year loan). Prior to hitting a 78% LTV, it is up to your loan servicer to decide whether to approve the removal of your Mortgage Insurance payment.

Key Takeaway

Given how much townhouse and single-family homes have appreciated recently, if you have Mortgage Insurance and have not made a late payment in the last two years, it’s a good idea to contact your loan servicer about having your home reappraised to see if you now have 22% or more equity and qualify for automatic removal or have 20%-21.99% equity and can apply for early removal.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

2021 Interest Rate Projections

elieliresidentialcom Arlington, Buyer, Home Owner, Loan , , , , , 0 Comment
2021 Interest Rate Projections

Question: Do you expect mortgage rates to increase in 2021?

Answer: Happy new year everybody! Historically low mortgage rates in 2020 were one of a few factors that drove real estate prices up across the country (except in the condo market). This time last year, the Mortgage Bankers Association and Freddie Mac each predicted that rates would remain near 2019 levels through 2021, with an average 30yr Fixed Rate hovering around 3.7-3.8% through that period.

As it turns out, rates averaged about a full percent less than those projections. Rates fell consistently throughout the year, except for a brief but sharp increase in mid-March when markets went crazy with the first news of COVID-related shutdowns, until the Fed stepped in with liquidity. Below are some charts from Freddie Mac showing average mortgage rates over the last 50, 10, and 1 year.

Average Mortgage Rates Since 1971

Average Mortgage Rates Since 2010

Average Mortgage Rates in 2020

Rates in 2021+

The Mortgage Bankers Association and Freddie Mac each predict that 30yr Fixed Rates will increase slightly in 2021 and hover around 3%-3.2% in 2021. Beyond 2021, the Mortgage Bankers Association sees rates averaging 3.6% in 2022 and 4.1% in 2023.

An increase to 4% or higher mortgage rates will likely cause the rapid appreciation we’ve seen over the last couple of years to slow down, but I don’t think it will lead to a pull-back in prices unless it is combined with a migration from the DC Metro due to major changes in telework policy.

If you’re considering purchasing in 2021, I wrote a column in 2019 about my favorite mortgage programs that you might find helpful. If there’s anything I can do to help you prepare for a purchase, don’t hesitate to email me at Eli@EliResidential.com.

1/3 of Buyers Put Less Than 20% Down

judson726 Buyer, Loan 0 Comment

Question: Do I have to put 20% down to buy a home?

Answer: This is the most common question I’m asked by buyers and there are a surprising number of people who are well-qualified and want to purchase a home, but sit on the sidelines trying to save for a 20% down payment. Over the last 18 months, nearly one third of buyers in Arlington put less than 20% down and most of those people put 10% or less down.

Popular Low-Down Options

  • Conventional loans are available at 3%, 5%, 10% and 15% down
  • FHA loans are available at 3.5% down
  • If you or your spouse are active or former military, you can qualify for a zero-down loan through the VA. I detailed VA loans in this post from May 2016.
  • Typically, if you have a Jumbo Loan (loan amount exceeds $679,650) you are required to put 20% down unless you qualify for one of many preferred mortgage programs available in the market, which I mention in this post from November 2017.

What’s The Downside?

If you use a non-VA loan with less than 20% down you will have to pay Mortgage Insurance (option to pay it off up-front), which is essentially a monthly penalty/fee assessed on top of your mortgage payment that increases the less you put down and the higher your loan amount.

I explain Mortgage Insurance in this post from July 2016, and explain the process for removing these payments in this post from February 2016.

How Much Are Arlingtonians Putting Down?

Below are statistics pulled from the MLS on the amount Arlingtonians put down to purchase homes over the last 18 months.

These numbers are manually entered by the listing agent at the end of the deal and I think that in some cases agents write 0% financed (cash) instead of entering the correct info so it’s my belief that the number of loans with low down payments is actually a bit higher than the statistics reflect.

  • 32% of all purchases were made with less than 20% down, 26% with 10% or less down, and 18% with 5% or less down
  • 39% of townhomes, 37% of condos and 22% of detached/single family homes are purchased with less than 20% down
  • 14% of purchases were not financed (cash)
  • Only 3% of purchases required FHA financing and less than 2% were FHA-financed condo purchases, so consider this if your Condo Association is setting rental caps simply to qualify for FHA financing

Feel free to reach out with any questions you have about your loan options for purchasing a home anywhere in Virginia, Washington, DC or Maryland. I’m happy to answer any specific questions you have or connect you with a lender who specializes in the type of loan you’re looking for. I’m available any time via email at Eli@EliResidential.com.

Market Reaction To Higher Mortgage Rates

judson726 Buyer, Investor, Loan, Seller , 0 Comment

Question: As interest rates have increased over the last 6-12 months, how will the market react to higher rates and do you expect them to come back down in 2018?

Answer: The rates I’m seeing today are about 1-1.5% higher than what I’ve seen on average over the last few years and about .5% higher than where they’ve been over the last 6-12 months. Generally, most economists are projecting growth in the US and there are similar signs in Europe so if that holds true, expect interest rates to continue their upward trajectory.

Higher Mortgage Rates In 2018

According to Freddie Mac, the average Mortgage rate from the 1970s-2000 was about 7%, the average rate from 2000-2008 was 6% and we’ve been hovering around 3.5-4% since 2008. Freddie Mac currently predicts that rates will reach about 5% by the end of 2018.

  • Mortgage rates are at the mercy of the US and global economies so predicting their direction is no different than predicting how the stock market will do.
  • Contrary to popular belief, mortgage rates are not directly correlated to the Fed rate that you regularly hear about in the news. So when you hear that the Fed is planning to increase rates by .25%, that does not mean your mortgage rate will be .25% higher the following day. See chart below for historical trends of Fed rate vs mortgage rates:

 

  • We are currently experiencing high daily and weekly volatility in mortgage rates, which is frustrating for many. Some weeks see swings of .25% so you can either benefit or lose out from those swings based on when you lock your rate. Discuss this risk with your loan officer.
  • You may have missed the lowest rates over the last few years, but historically mortgage rates are still well below average as you can see from the chart below from Freddie Mac:

 

The Impact Of Higher Rates

For my clients, the ones who feel the rates increases the most are those who have been in the market for 6-12 months but have not purchased yet either due to lack of suitable inventory or urgency.

It’s tough to accept that rates were about 1% lower when they started looking and now they feel like they’ve lost. Those who are just now entering the market tend to be much better at brushing it off. It also impacts my clients who are not also selling a home because those who are selling will realize the benefits of the stronger market vs those who are just buying are at its mercy.

First time buyers are also more sensitive to rate fluctuations because most are already struggling to adjust to the hefty price tag of buying what they want in the DC Metro area.

Redfin recently asked 4,000 buyers who planned to purchase in the next 12 months how increasing rates would impact their purchase and found that only 6% would cancel their plans to buy while nearly 50% wouldn’t change anything or would increase their urgency to buy.

This might seem like a good result for homeowners, but losing 6% of buyers, having 21% reduce their budget, and 27% waiting for rates to drop is a bad sign. Especially if rates continue to go up and the 27% who were waiting for rates to drop decide to either stop their search or reduce their budget.

 

I think the biggest reason increasing rates will slow the market is the psychological effect of higher rates vs the actual impact to buyers’ budgets. For buyers struggling to internalize the “loss” they’ve taken now that rates are higher, consider the following:

  • On a $400,000 loan, a .25% increase in rate represents $60/month. Try to decide if a $50-$150 change in your monthly mortgage cost is worth giving up on a home purchase or compromising on what you want/need. Most buyers decide to spend less than what they’re approved for, so there is usually some cushion.
  • The reason rates are higher is because the economy/stock market have done so well lately so your investments and/or income are hopefully increasing at a rate on pace with or above what you’re giving up in increased mortgage rates.
  • In 2017 the S&P 500 returned about 20% to investors so maybe you earned enough in the market to allow for a higher down payment?

Hopefully the net effect of everything that factors into mortgage rates is still positive for you.

With so much volatility around mortgage rates, it’s even more important that your lender be able to advise instead of just being a pass-through for today’s rates.

My clients have found Jake Ryon of First Home Mortgage (jryon@firsthome.com) and Troy Toureau of McLean Mortgage (ttoureau@mcleanmortgage.com) to be valuable resources during their home purchases and I’d encourage anybody to reach out for advice.