11.4.08 Interest Rate Alert

Big news in the mortgage world… here’s the scoop:

The Good

  • Conforming rates drop to low 5%’s… could head lower!
  • San Diego conforming loan limit increased to $546,250 (from $417k)!

    [click here to see limits in other high-cost counties]

“Conforming” (backed by Fannie/Freddie) qualification means:

  • Loan amount: at or below the limit.
  • Credit: 680+ fico.
  • Income: debt/income ratio below ~45%.
  • Collateral: 20%+ equity (some wiggle room here).

Bottom Line: this is great for home buyers. In fact there has never been a better time than right now to buy homes under $750k. Rates are as low as ever. Prices are close to rock bottom. If your income is stable, and you can afford to make the long-term payments, and you plan to live there (or can afford to rent out) for the next ten years… then now is the time to buy.

This is also a great time for qualifying homeowners to refinance.

The Bad

  • The temporary “Agency Jumbo” program that extended loan limits closer to $700k for a nominal increase in cost has been eliminated.
  • If you have an adjustable loan, and your equity is not sufficient to qualify, consider bringing in cash to make the deal happen. The rates are that good, the risks of keeping the adjustable loan are getting worse, and it might be better to park your money in a hard asset than roll the dice with other investments.

The Ugly

  • Loan re-sets on high-end homes pose a potential Triple Whammy Threat:
    • Some re-sets force principal-and-interest payments.
    • Some re-sets force re-amortized payments over 25 years, not 30.
    • Some fully-indexed rates may increase immediately.
  • Check the terms of your “Adjustable Rate Note” to see where you stand.
  • Today’s ugly jumbo refinance interest rates (~8%) would mean principal and interest payments ~50% higher than existing interest-only payments.
  • It is very hard to qualify for a “Jumbo” loan today anyway.
  • This is a huge reason why sales volume is down.
  • A huge percentage of high-end homeowners currently have “5yr I/O” loans.
  • None of these loans have re-set… yet.
  • The immediate problem is not so much the interest rate adjustment, because the indexes tied to them are currently so low, it may actually lower payments in the short-term… keeping in mind that long-term payments can potentially double.
  • Here is the immediate problem: an $800k loan re-set that forces the re-amortization from interest-only to principal-and-interest payments over 25 years… with the same interest rate… goes to $4,912 (from $3,667)… that’s $1,245/mo higher… and that’s with rates being low.
  • Some loans allow five more years of I/O payments after switching to adjustable… but keep in mind they will later be re-amortized over 20 years (…not 25, not 30).

Bottom Line: Up until now, the $750k to $2m range has hung in there… fending off major price drops. The items listed above suggest that marginal folks will face increasing pressure to get out, which at best, will put downward pressure on prices, and at worst, spiral into another “sup-prime” type debacle.

If you have a jumbo loan that is re-setting soon, you should check the “Adjustable Rate Note” (received during loan signing) to see when it calls for re-amortization. Regardless, now may be a good time to consider bringing cash in to make a conforming refi happen.

If you cannot refinance, then make sure you have the resources to withstand payment shock from re-amortization and potentially much higher interest rates. If the outlook is sketchy, consider selling now, rather than catching a falling knife later as other people find themselves in the same situation.

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