Sunday, March 19, 2006

Exploring Loan Platform Options

Hello again folks,

Not too long ago, a client asked us some interesting questions about Loans and Loan Platform Options. We thought we would share that post with you...

Our clients wrote:
"...We have been contacted by our Builder's lender about approval for a loan. They recommend doing an 80/20 with no down payment at 6% and 8.125% respectively (Loan will be ~$185.000). We have yet to get their papers in the mail, and also were planning on asking USAA if they could match or beat this. My question to you, is should we be looking at an 80/20 as our only option for mortgage? Or would a traditional 30 yr convertable and 3% down payment with mortgage insurance be a cheaper option for us?..."

While the Builder's lender has set you on a relatively accurate course, those directions could use a little tweaking... LOL

It is true that money is very inexpensive at this moment in time, it has been our experience that 80/20 loans are not necessarily the best product for all buyers. You should indeed check with USAA about what loan programs they offer, but you should also check with Preferred Mortgage, a Coldwell Banker Residential Brokerage affiliate lender at 888-315-6194. Keep in mind that, perhaps one of the most important and impacting portion of your loan platform, is the type of loan you secure. Oh yeah... wanna really help your sleepless nights... ponder this... there are hundreds of types of loan programs that you could research... perhaps even thousands... how's that for a head scratcher??

Consider this scenario; You do not intend to make this home purchase the last time you ever purchase a home. This will be a 'stepping stone' home... something to build some equity with so you can move up to a larger home in the future. You will most likely live in this home for three to five years and then make a move up. If that in fact takes place, then there are numerous types of loan platforms you should be looking at but... least of all a fully amortized, fixed rate 30 year mortgage. Like Danny Davito said in his hit move, Other People's Money... "Why should I use my money when there is plenty of Other People's Money to use!!!"

Let's explore some options:

The 80/20 loan- Arguably one of the most used loan platforms in today's lending arena. One of the beauties of this type of Hybrid Loan is that the federally required "Mortgage Insurance Premium" referred to as MIP is waived because the Buyer's first loan is for only 80% of the appraised value. (all this of course if the loan is a federally insured loan, I.E. a Fannie Mae or Freddie Mac loan) However, of late, 80/20s have come under extreme scrutiny by many loan underwriters. Appraisals are often challenged by the underwriter, forcing a 'review appraisal' to take place, sometimes at the expense of the Buyer. Some lenders require dual instances of Title Insurance to be purchased by the Buyer, dual instances of Loan Origination Fees, dual instances of Underwriting costs, dual instances of Mortgage Broker Fees and a whole host of other additional dual instances of fees. There are of course, those lenders who do not charge these additional fees into the transaction; but consumers have to hunt for them, or be allied with a Realtor (hummmm - that must be us!) who can put them in touch with such a lender.

Two other popular Hybrid Loans are the 80/10/10 and the 80/15/5- Both of these loans, like the 80/20 eliminate the need to carry the federally required MIP. However, they typically require the buyer to come up with some down payment money of their own. The 80/10/10 is two loans, a 1st for 80% of the appraised value of the home and a 2nd for 10% of the appraised value of the home, supplemented by 10% down payment of the Buyer's own funds. The 80/15/5 is similar. There are again two loans, the first of 80% of the appraised value and the second for 15% of the appraised value, supplemented by 5% down payment of the buyer's own money. Both Hybrid Loans eliminate the need for MIP. However, these loans too, can be laden with additional costs.

Perhaps one of the most important features to be aware of during your search for a loan is the PPP (Pre Payment Penalty). Usually, as long as the consumer's credit score has a minimum of a 625 FICO Credit Score, there is little reason to subscribe to loans with PPPs. If you do choose to engage a loan with a PPP, be sure you fully understand EXACTLY what the pre payment penalty is and how it functions within the construct of the loan. (usually the sum of 6 months of the loan payment).

LIBORs and other Interest Only Loan Platforms: Interest ONLY loans such as the LIBOR, COFI and CODI are very popular for short term investments, say... 3 to 7 years.

About Interest Only Loans

An interest only loan is a great tool to consider when searching out your financing options. This type of loan allows you to pay the interest portion of your payment for the first 10 years of the loan, and greatly reduces your required mortgage payments. Because the value of your home is going to increase (in most cases) regardless of how much money you pay towards the principle of the loan, an interest only payment frees up cash that can be used to maximize 401K contributions, to put money into an IRA or other investment, to save for college or to pay down debts.

In most situations, interest only loans are some type of adjustable rate mortgage.

This option should be cautiously considered and is not for everyone. An interest only loan makes the most sense for someone who is . . .

  • borrowing more that $200,000 (although not required)
  • putting down at least 10% (although not required)
  • planning on being in the house for 3-7 years
  • financially disciplined to take advantage of monthly savings

LIBOR (London Inter Bank Offered Rate)

A Libor Mortgage Loan is also commonly referred to as an "Interest Only" Loan or "Interest Only" Mortgage. Most libor loans have "Interest Only" payment features to them and are tied to the current rate of the popular Libor Index. In order to understand all your libor mortgage options (including those with "interest only" payments) you should consult a Libor Mortgage professional, like USAA, Preferred Lending and/or Pacific Funding Group.

CODI (Certificate of Deposit Index)

Some financial analysts feel a CODI loan is better than Other Adjustable Interest Only type loans

A CODI loan is based upon the most stable index currently available. Simply put, it is the aggregate sum of what banks are paying to their depositors on their 3-month CD accounts. As we know, these short-term CD's generally offer a very low rate of return. Currently, the average rate paid by a bank on a 3-month CD is approximately 1.40%. Here's how it works: we take the daily average of these 3-month CD's and add those daily values together for one month. We then divide that sum by the number of days in the month to reach a monthly value. Next we add that current monthly value to the previous 11 months and divide by 12 to give us the current CODI Index. Right now that aggregate index is 1.820% and dropping. Over the past 9+ years, CODI has been as low as 1.820% and as high as 6.53%. The average of the past 9+ years is 2.90% and STILL DROPPING! By comparison, the 30 year fixed rates have swung between 5.875% and 9.25%!

The CODI index is however the most stable in the industry and has demonstrated a linear downward trend. The loan although variable can be structured to emulate the properties of a fixed for a moderate period of time

COFI (Cost of Funds Index)

This stands for “Cost of Funds Index”, and is determined and calculated every month by the Federal Home Loan Bank of San Francisco. According to the web site of that Bank:

The 11th District Monthly Weighted Average Cost of Funds Index (COFI) is one of many indices used by mortgage lenders to adjust the interest rate on adjustable rate mortgages. The monthly COFI reflects the actual interest expenses recognized during a given month by all savings institution members of the Federal Home Loan Bank of San Francisco (Bank).

It should be noted that the cost of funds index (COFI) is not an interest rate; it is an index. Well... that is just a little bit about some of the loan options that many Arizonians are taking advantage of. Only you can make the absolute decision as to which loan product is best for you, but be sure to engage the counsel of a competent lender. Let me know when you will be speaking with each lender and I will set up a conference call with you and me and the lender on the phone together.

Hope this information is helpful to you.

Be sure to check in with us any time you have a question or just want to chat about what is next in the process: and... for goodness sake... please don't make any decisions without checking with us first. We have been doing this for nearly 20 years... but this may be your first outing... LOL

Bye for now... till our next posting...

Lori & "G-II"

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