mortgage points

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Gone are the days of option arms and stated income.

Going forward, the Federal Reserve wants a minimum set of mortgage underwriting standards implemented on most consumer home loans to avoid another housing crisis.

Today, they unveiled the “ability-to-repay requirement,” tied to the Dodd-Frank bill, which can be met in four different ways.

First, a bank or mortgage lender can meet the requirement by considering and verifying eight underwriting factors, including:

– income and assets
– current employment status
– monthly mortgage payment
– monthly payment on any simultaneous mortgage
– monthly payment for mortgage-related obligations
– current debt obligations
– debt-to-income ratio
– credit history

And if it’s an adjustable-rate mortgage, payment must be based on the fully indexed rate, not a start rate or teaser rate.

The second option allows a creditor to originate a so-called “qualified mortgage,” which provides the lender with special protections from liability.

There are currently two definitions of a qualified mortgage, but both wouldn’t allow amortization beyond 30 years, negative amortization, interest-only options, or balloon mortgages.

Additionally, each would limit mortgage points and fees to three percent of the loan amount, while verifying income and assets.

Option three allows a balloon-payment qualified mortgage if the creditor operates in a predominantly rural or underserved area.

Finally, option four allows for the refinancing of a non-standard mortgage into a “standard mortgage,” which has limits on loan fees and doesn’t contain any risky features such as negative amortization or interest-only features.

The proposal also prohibits prepayment penalties unless the mortgage is a prime, fixed-rate qualified mortgage.

All consumer mortgages are covered by these underwriting rules except home equity lines of credit, timeshare plans, reverse mortgages, and temporary loans.

While the rules aren’t yet finalized, it’s going to get a lot more difficult qualifying for a mortgage…

Source: thetruthaboutmortgage.com

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Buying a home is one of life’s most rewarding milestones. However, as a prospective homebuyer, you may have noticed how much the real estate landscape has changed over the past few years.

Let’s take a look at how a temporary mortgage buydown concession could reduce your interest rate and make your initial monthly payments more affordable.

What Is a Temporary Buydown on a Mortgage?

A temporary buydown is a mortgage financing strategy that allows a homebuyer to lower their interest rate and payment for a predetermined amount of time through the payment of mortgage points at closing (whether by the lender, homebuyer or seller).

What’s a mortgage point? A mortgage point, also known as a mortgage discount point, equals 1% of your total loan amount. For example, a mortgage point on a $200,000 loan would be $2,000. When you purchase points in a mortgage buydown, you’re essentially prepaying interest upfront at closing in exchange for a lower rate, i.e., “buying it down.” Typically, a lender may offer a .25% rate reduction in exchange for one point.

How long could the rate and payment reduction last? Up to three years.

How much could the rate be reduced? A maximum of 3%. The rate is lower in the introductory period and increases over time — a maximum increase of 1% per year — to the original quoted rate.

What happens to those mortgage point payments? The money will typically go into an escrow account. Those funds temporarily subsidize your interest rate for the agreed-upon time period.

According to Scott Bridges, senior managing director of Pennymac’s consumer direct lending division, the benefit of a buydown is simple. “In short, the buydown allows a buyer to combat higher market rates,” he explains. “The first year of the loan, your rate and payment will be based on a rate that is 1% lower than the market rate. So if current rates are 6%, your first year of payments would be based on a 5% rate. That reduced rate for year one can save the average consumer several thousand dollars in payments (depending on loan amount).”

While interest rate discounts, loan terms, and conditions vary by lender, a buydown can be a good option for temporarily lowering your monthly mortgage payments at the start of your loan.

What Are the Benefits of Buying Down an Interest Rate?

There are several reasons you may want to buy down your mortgage rate. Here are a few potential budget-friendly benefits:

  • Lowers initial monthly mortgage payments. If you have a temporary buydown, those points you pay for upfront can make your initial mortgage payments more manageable, which can be especially helpful if you’re at the beginning of your career and expect your income to rise in the future. Those early savings will also add up to less interest paid over the life of your loan.
  • May boost your buying power. A reduced interest rate and the subsequent lower monthly mortgage payment may help you qualify for a higher mortgage, enabling you to purchase a more expensive home.
  • Can be arranged for both purchases and limited cash-out refinances. Whether you’re buying a new home or doing a limited cash-out refinance and replacing your current mortgage with a new, slightly larger mortgage, you may qualify for a temporary interest rate buydown.
  • Potential tax write-off. While a seller, builder, or lender may cover the buydown to facilitate a sale, the points may be deductible as home mortgage interest if you’re the buyer and pay for the buydown.1
  • Reduces rates for fixed-rate and adjustable-rate mortgages (ARM). You can purchase points to lower your interest rate on a fixed-rate mortgage and during an ARM’s introductory fixed-rate period. Depending on the buydown structure, rates may be reduced up to 3% for a maximum of three years.
  • More money in your pocket. A lower mortgage payment at the start of your loan could free up cash to pay bills or make home improvements.
  • Allows you to watch the market. A buydown gives you an opportunity to watch the market while saving on your monthly payments. “As rates move up and down during and after that first year, you can refinance into a lower rate with the knowledge you had a full year of reduced mortgage payments,” Bridges notes.

How Much Does It Cost to Buy Down the Interest Rate?

Generally speaking, the approximate cost for a temporary mortgage buydown equals how much you’ll ultimately save in interest. But several factors will be taken into account:

  • How much money you’re borrowing
  • How many points you’re buying; each point costs 1% of the mortgage amount
  • Type of buydown structure

Who funds a temporary mortgage buydown? In most cases, the buyer will pay the mortgage points, but in some instances, the buydown could be fully or partially funded by the seller, lender, or third party, such as a realtor or builder.

How long will the reduced interest rate be in effect? The lower rate and payment will be in effect for up to three years, depending on the rate buydown structure. Below are a few different types of mortgage buydowns.

Rate Buydown Structures

There are several types of rate buydown structures. If your lender offers you a buydown — most, but not all, lenders do — you will have the opportunity to negotiate pricing and determine which structure suits your financial needs. The following are the most common types of temporary mortgage buydown structures.

3-2-1 Buydown

A 3-2-1 buydown is a home financing arrangement that will reduce a homebuyer’s interest rate for the initial three years. The lowest interest rate is in the first year, increasing to the permanent quoted rate after the third year.

3-2-1 Buydown Basics

  • Reduces rate by three percentage points in the first year of the mortgage
  • Reduces rate by two percentage points in the second year
  • Reduces rate by one percentage point in the third year
  • Borrower pays full interest rate after the completion of the third year and is fixed for the remainder of the loan

3-2-1 Buydown Example

This chart shows how a 3-2-1 rate buydown could potentially work if you were to qualify for a 30-year, $200,000 mortgage at a rate of 7%:

Mortgage Year Interest Rate Monthly Payment (Principal and Interest) Monthly Savings Annual Savings
1 4% $954.83 $375.77 $4,509.24
2 5% $1,073.64 $256.96 $3,083.52
3 6% $1,199.10 $131.50 $1,578
4 – 30 7% $1,330.60 $0 $0

In this scenario, the total buydown cost would be approximately $9,171, the amount equal to the first three years of interest savings. The chart amounts don’t include insurance or taxes, and you will want to assume no points contribution from the seller, builder, lender, or a third party.

2-1 Buydown

A 2-1 buydown is a type of home financing arrangement that reduces the interest rate on a mortgage for the first two years, after which the rate rises to the permanent quoted rate.

2-1 Buydown Basics

  • Reduces rate by two percentage points in the first year of the mortgage
  • Reduces rate by one percentage point in the second year
  • Borrower pays full interest rate after the completion of the third year for the remainder of the loan

2-1 Buydown Example

This chart shows how a 2-1 rate buydown could potentially work if you were to qualify for a 30-year, $200,000 mortgage at a rate of 7%:

Mortgage Year Interest Rate Monthly Payment (Principal and Interest) Monthly Savings Annual Savings
1 5% $1,073.64 $256.96 $3,083.52
2 6% $1,199.10 $131.50 $1,578
3 – 30 7% $1,330.60 $0 $0

In this scenario, the total cost of the buydown would be approximately $4,661.52, the amount equal to the first two years of interest savings. The chart amounts don’t include insurance or taxes, and assume no points contribution from the seller, builder, lender, or a third party.

1-0 Buydown

A 1-0 buydown is a type of home financing arrangement that reduces the mortgage interest rate by 1% in the first year, increasing to the permanent quoted rate after that initial year.

1-0 Buydown Basics

  • Reduces rate by one percentage point in the first year of the mortgage
  • Borrower pays full interest rate after the completion of the first year for the remainder of the loan

1-0 Buydown Example

This chart shows how a 1-0 rate buydown could potentially work if you were to qualify for a 30-year $200,000 mortgage at a rate of 7%:

Mortgage Year Interest Rate Monthly Payment (Principal and Interest) Monthly Savings Annual Savings
1 6% $1,199.10 $131.50 $1,578.00
2 – 30 7% $1,330.60 $0 $0

In this scenario, the total cost of the buydown would be approximately $1,578, the amount equal to the first year of interest savings. The chart amounts don’t include insurance or taxes and assume no points contribution from the seller, builder, lender, or a third party.

Who Can Buy Down a Mortgage?

In most cases, the buyer will buy down the mortgage, but there are times when the seller, builder, or lender will offer to purchase points and pay for the buyer’s mortgage buydown. Let’s take a look at each scenario.

Buyer-Funded Buydown

When a buyer negotiates a buydown with a lender, they pay a certain amount of points upfront at closing in exchange for a reduced interest rate. Depending on the buydown structure, the rate could be temporarily lowered for up to three years or the entire loan term. Most mortgage buydowns are buyer-lender arrangements.

Seller-Funded Buydown

A seller-funded buydown is when a highly motivated seller purchases points and buys down the homebuyer’s interest rate. This seller concession can help “seal a deal” by incentivizing and speeding up a home sale. Subsidizing a mortgage buydown can:

  • Give a seller a competitive advantage without having to lower the listing price
  • Help increase the borrower’s purchasing power
  • Make it easier for buyers to qualify for financing
  • Expedite the home sale process

A possible win-win for both the seller and the buyer. The seller could make a faster sale while holding on to more profits than they would if they lowered the asking price. The buyer saves money with a lower interest rate.

Builder-Funded Buydown

Homebuilders can offer mortgage buydowns to attract prospective homebuyers. As interest rates climb and the new-home market slows, builder buydowns are becoming an increasingly popular selling strategy. A recent survey found that 75% of nationally surveyed home builders confirmed they are buying down buyers’ mortgage rates to make payments more affordable.2 Builder buydowns can:

  • Lure buyers in a competitive and high mortgage market
  • Make new homes more affordable to a broader range of buyers
  • Be offered as part of a package, such as an upgrade or closing cost contribution

A builder buydown arrangement may require the buyer to go through the builder’s mortgage company for the mortgage.

Lender-Funded Buydown

Lenders may offer to subsidize a buydown by contributing all or some of the funds for the mortgage points. This concession option could help increase your negotiating and purchasing power as a borrower.

A temporary lower interest rate is certainly enticing, but mortgage buydowns aren’t for everyone. Buying mortgage points in exchange for a rate reduction may not be in your best interest if you are…

  1. Having trouble meeting loan qualification criteria: You must qualify for the standard loan terms without the benefit of the buydown. This also includes:
    • Having a minimum 660 FICO score
    • Meeting the applicable Fannie Mae requirements
    • Submitting mandatory documentation
  2. Purchasing an investment property or manufactured home: A mortgage buydown can be arranged for a principal, owner-occupied home, or a second home. It’s not available for investment properties or manufactured homes.
  3. Planning on selling soon: There are substantial upfront costs involved with buying a new home, including the down payment and closing costs. Add mortgage points to the mix and it will take time to “break even,” meaning the time it will take for your savings to outweigh those costs to lower your interest rate. If you sell in the near future, you may not have been in the home long enough to recoup those point costs.
  4. Doing a regular cash-out refinance: Mortgage buydowns are allowed on purchases and limited cash-out refinances only. Limited cash-out refinances follow Fannie Mae guidelines restricting the cash-back amount to $2,000 or 2% of the new loan principal balance, whichever is less.3
  5. Short on cash: If you have limited cash, the high upfront costs may deplete your savings, leaving you short on funds you may need to cover other future expenses. Instead of buying points, you may want to allocate those funds to paying down high-interest debt or building an emergency fund.
  6. Making a small down payment: If you’re purchasing a home and contributing less than 20% to the down payment, or if you’re refinancing and have less than 20% equity, you’ll likely have to pay for private mortgage insurance (PMI) on your conventional loan.4 The premium will be added to your regular monthly payment. Rather than pay for points, consider using that money to make a larger down payment.

When can a mortgage buydown make sense? This home loan strategy is worth exploring if…

  1. You have enough liquid cash: If your savings is enough to cover the down payment, closing costs, and mortgage points — and you have a cash reserve left over — a temporary mortgage buydown can be a great option for reducing your interest rate for up to three years.
  2. You expect your income to rise: Starting your career? Re-entering the workforce? If you anticipate that your income will rise within the next few years, a temporary mortgage buydown can help you ease into homeownership with a lower initial interest rate and payment.
  3. The seller, builder, or lender is paying for the points: If you’re a homebuyer and the seller, builder, or lender offers to purchase the mortgage points for you, a temporary buydown can be an easy way to save money without any point-related, out-of-pocket expenses.

“Lots of people avoid buying a home when rates are higher,” says Bridges, “but this program allows you to at least achieve some reduced payments and real savings for a year.”

Higher rates can also significantly slow down home buying demand. That means, Bridges adds, “You will likely pay less for the house than you would in a low rate market when multiple buyers tend to bid over asking.” With a buydown, you set yourself up to win on multiple fronts. “You get a deal on the house you want, save money on the purchase price of the home in this higher rate market, save money on the monthly payment in year one, and refinance when rates drop.”

The Permanent Mortgage Rate Buydown Option

Want to lower your interest rate and monthly mortgage payment for your entire loan term? In addition to a temporary buydown, you may be eligible to negotiate a permanent buydown with your lender.

  • Protects against rate hikes. The lower rate will never increase during the loan term as long as you have a fixed-rate mortgage.
  • How much does it cost? The rate typically costs between six and eight points. Costs are added to the closing fees.

Ready to learn more about how Pennymac can help you find the right home loan? Begin your online application now, and if you still have questions, contact a Pennymac Loan Expert. We’ll help you evaluate your mortgage buydown options and decide the best course of action for your unique situation.

1 https://www.irs.gov/taxtopics/tc504

2 https://www.realestateconsulting.com/the-light-rate-buydowns-help-buyers-purchase-new-homes/

3 https://selling-guide.fanniemae.com/Glossary/1044658971/What-is-the-definition-of-a-limited-cash-out-refinance.htm

4 https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/

Source: pennymac.com

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Mortgage rates are still rather elevated relative to recent years, and it has made homeownership far less affordable for many Americans.

One way to potentially save money when buying a home is to use an adjustable-rate mortgage, or ARM. An adjustable-rate mortgage is typically a 30-year loan that has a fixed interest rate for a certain length of time, usually five or seven years. After this time, the mortgage’s interest rate will periodically adjust higher or lower depending on prevailing interest rates at the time.

To be sure, ARMs aren’t right for everyone. But they generally have lower interest rates than comparable 30-year fixed-rate mortgage loans. So, here’s a look at just how much of a difference an ARM can make in your monthly payments and your long-term cost of ownership.

What’s the interest rate difference between fixed- and adjustable-rate loans?

According to the Mortgage Bankers Association (MBA), the average interest rate on a 30-year fixed-rate mortgage in the last week of April 2023 was 6.55% with 0.63 points. (Note: Mortgage points are an upfront cost associated with a mortgage and one point equals 1% of the initial loan amount.)

On the other hand, the average 5/1 adjustable-rate mortgage had a 5.47% rate during the same week, with 1.18 points. When you sign on for a 5/1 ARM, it means your initial rate is fixed for the first five years, and then adjusts according to a certain benchmark index every year thereafter.

How much could you save with an adjustable-rate mortgage?

Let’s say you want to buy a $500,000 home with 20% down, so you’ll need a $400,000 mortgage. You’re trying to decide if a 30-year fixed-rate loan or a 5/1 ARM is the best choice for you.

More: Check out our picks for the best mortgage lenders

As we’ll discuss later, there are other things to consider besides the cost difference, but here’s how the numbers work out over the first five years of ownership.

If you obtain a 30-year fixed-rate mortgage with the average 6.55% interest rate, your monthly principal and interest (P+I) payments will be $2,541. With a 5/1 ARM that comes with a 5.47% interest rate, your monthly P+I would be $2,264.

Now, notice that the typical ARM has higher points, and this would mean an additional upfront cost of $2,200. However, the difference in mortgage payments would mean saving $16,620 over the first five years of ownership, so even with the higher points, your out-of-pocket costs would be more than $14,000 less over five years with an ARM.

An ARM isn’t exactly a free lunch

As you can see, an adjustable-rate mortgage can result in significant cost savings over the first few years you own a home. And if rates fall between now and when your initial rate period expires, it’s even possible your rate could go lower once it adjusts.

However, it’s not a wise financial move to plan on that. The smart move is to assume that your ARM’s interest rate will go up after your first adjustment and plan accordingly. Therefore, an ARM is usually best for homeowners who plan to sell their home before the initial rate period ends or those who are confident they’ll be able to refinance their loan with favorable terms before it does — and there is absolutely no guarantee you’ll be able to.

The bottom line is that while an adjustable-rate mortgage can be a good tool to increase your home’s affordability, it isn’t without its drawbacks. 

Source: fool.com

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Mortgage rates aren’t so low these days. In fact, they’ve basically doubled since early 2022.

While this clearly isn’t great news for aspiring home buyers or those looking to refinance, it has opened the doors to some creative solutions.

Lately, the temporary buydown has taken center stage after being a very niche product.

And many home buyers are opting to pay discount points at closing to lower their rate.

The question is do you want to permanently buy down your rate, or only do so temporarily?

Temporary vs. Permanent Mortgage Buydowns

First, you need to know the difference between a temporary buydown and a permanent buydown.

Permanent Buydown (Paying Points at Closing for a Reduced Rate for the Life of the Loan)

The permanent buydown involves paying discount points at closing to lower your mortgage rate for the life of the loan.

For example, say you’ve got a $500,000 loan amount and are offered a rate of 6.5% on a 30-year fixed mortgage with no points.

That would result in a monthly principal and interest payment of $3,160.34.

You’re not too impressed because you’ve seen advertised rates in the 5% range and so you inquire about that.

The loan officer or broker explains that you can get a rate of 5.75% if you’re willing to pay two discount points at closing.

You’d owe $10,000 at closing to buy down the mortgage rate but you’d have that rate locked in for all 30 years.

The payment would drop to $2,917.86, representing savings of nearly $250 per month. Not bad. But you still need to recoup your $10,000!

Temporary Buydown (Receiving a Reduced Mortgage Rate in Years 1-2 Only)

Then there’s the temporary buydown, which as the name implies, is temporary. That means your mortgage rate will only be lower for a short period of time.

In most cases, we’re talking the first one or two years of your loan, which will likely be a 30-year loan term.

So for years 28 through 30, the temporary buydown will do you no good. And perhaps worse, the mortgage rate will return to what it was supposed to be, sans buydown.

For example, if you elected to use a 2-1 buydown, it would temporarily reduce your interest rate by 2% in year one and 1% in year two.

If the note rate were 6.5%, you’d enjoy a rate of 4.5% the first year and 5.5% the second year. But after that the savings would end.

You’d then be on the hook for the full 6.5% mortgage rate, which could create some payment shock.

By shock, I mean making a higher payment than what you were used to. After all, it’s easy to get used to a lower monthly payment, then feel blindsided when it increases.

As a real-world example, imagine if the loan amount were $500,000. The payment would rise from $2,533.43 to $2,838.95 and finally to $3,160.34.

The saving grace is that it’s somewhat gradual because the rate is reduced 2% in year one, but just 1% in year two.

That way the jump in payment isn’t as drastic. Still, it’s a very temporary solution to lower payments.

The Decision Might Depend on Where Rates Go Next (And Where You Might Go!)

$500,000 Loan Amount Temporary Buydown Permanent Buydown
Mortgage Rate 4.5% in year one, 5.5% in year two, 6.5% thereafter 5.75% for the life of the loan
Cost of Buydown $10,000 $10,000
Monthly P&I in Years 1-2 $2,533.43 in year one, $2,838.95 in year two $2,917.86
Monthly P&I in Years 3-30 $3,160.34 $2,917.86

Now that we know how each type of buydown works, we can discuss which might be better suited for certain situations.

Most proponents of the temporary buydown point to the elevated mortgage rates currently on offer.

To that end, they see it as a bridge to a lower mortgage rate in the near-future once interest rates come back down.

They argue you’ll only need it for a year or two before rates come down and you get the opportunity to apply for a rate and term refinance.

Additionally, you only pay for what you’ll actually use (the temporary buydown funds are put in a buydown account and are typically refunded if you sell/refi before they’re exhausted).

On the other hand, the permanent buydown could result in paying for something you don’t actually use.

For example, imagine if you pay two points at closing ($10,000 in our example), and then rates unexpectedly plummet.

All of a sudden you’re in the money to refinance, but you’re hesitant because you paid those non-refundable points upfront.

If rates fall enough, say to 5%, you’d likely need to eat that cost and go for the refinance to save even more.

If mortgage rates don’t fall dramatically, you could still lose out if you turn around and sell your property before breaking even on the upfront cost.

At that point, the bought-down rate will do you no good either. So you really need to think about your expected tenure in the home (and the loan) before paying points for a permanent buydown.

Can You Finance Mortgage Points?

For the record, there’s also the financed permanent buydown mortgage, which allows you to roll the points into the loan amount.

Instead of a $500,000 loan amount, you’d wind up with a $510,000 loan amount in our example. But the lower interest rate would still equate to a cheaper payment.

It could even increase your purchasing power at the same time, allowing you to buy more home.

While the financing aspect can reduce your cash burden at closing, it still leaves you in a pickle if you refinance or sell shortly after.

You’re stuck with a larger loan amount if you refinance or less proceeds if you sell. So not totally ideal either if you don’t keep the home/loan for a long period of time.

Which Is the Better Option?

To sum things up, be sure you understand the difference between a temporary and permanent buydown to ensure you aren’t paying extra for what you may not use.

Or perhaps buying a home you might not be able to afford at the actual interest rate!

For those who plan to stay in their home awhile, the permanent buydown could make more sense.

But this assumes mortgage rates don’t fall dramatically. Because if they do, a refinance would likely be in the cards.

Conversely, if you expect to sell or refinance sooner rather than later, the temporary buydown could be more favorable.

It reduces the chances of leaving money on the table if you don’t think you’ll hit the break-even period.

Of course, if rates don’t fall, or even rise (and you don’t sell), you might have wished for the permanent buydown.

Source: thetruthaboutmortgage.com

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The Comptroller of the Currency and the FDIC released proposed rules today regarding Qualified Residential Mortgages (QRMs), which will be exempt from the risk retention requirements tied to the Dodd-Frank legislation.

Essentially, QRMs may be securitized without any risk retention, while loans not exempt will require lenders to hold onto five percent of the mortgages they sell on the secondary market (skin in the game).

“And because risk retention is the rule’s focus, any exemption from risk retention is intended to be narrow, and include only loans of high credit quality,” said John Walsh Acting Comptroller of the Currency, in a press release.

“This should ensure that normal securitizations thrive because risk retention requirements are of a type, and in an amount, consistent with the protection investors will demand.”

Preliminary underwriting requirements for a QRM will look something like this:

– 20% down payment for purchase money mortgages
– If a purchase, no second mortgages
– 75% max loan-to-value ratio for rate and term refinances
– 70% max LTV ratio for cash out refinances
– 30-year max amortization
– Max debt-to-income ratio of 26/38  (no stated income loans)
– No negative amortization (option arms, etc)
– If an adjustable-rate mortgage, rate increase cannot exceed 2% in any 12-month period and 6% over the life of loan
– No prepayment penalties
– Total mortgage points cannot exceed three percent of loan amount
– Borrower cannot be 30 days or more past due on any debt obligation
– Borrower must not have been 60 days or more past due on any debt obligation within 24 months prior to loan closing

The takeaway: These are just some of the rules, so it’s clear the agencies want QRMs to play a very small role in the mortgage market.

Also note that FHA loans, as well as loans backed by Fannie Mae and Freddie Mac, are exempt from the risk retention rules, though that could change once rules are finalized.

Source: thetruthaboutmortgage.com

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It’s that time again, where we take a hard look at a mortgage program floating around the web.

Today, we’ll look at the so-called “Easy Orange” mortgage from ING Direct, a Dutch mortgage lender doing business on our shores (how dare they!).

They call “Easy Orange” the “mortgage for savers,” apparently because the associated mortgage rate is priced below comparable loan products.

Easy Orange mortgages come in the form of either a 5-year or 10-year fixed rate loan.

They’re still based on a 30-year amortization, meaning they’re balloon mortgages, with a final payment due after the five or 10 years are up.

Short Term Mortgages

That’s right, they’re due after just five or 10 years.

The big distinction is that ING offers a “rate renewal feature,” which allows borrowers to relock their rate for another term, for the cost of one mortgage payment (2 biweekly payments).

There’s a catch though – they may not always offer rate renewals, and interest rates and costs can change (go up). They probably won’t get any lower…

In other words, you may have to pony up the money for the “final payment,” which will likely be huge, or refinance elsewhere, assuming you don’t sell before the relatively short term is up.

Oh, and the Easy Orange forces you to make biweekly mortgage payments, though they’re free of charge.

So you’ll be making a mortgage payment every two weeks, which is the standard monthly payment cut in half. This makes for 13 full payments a year instead of 12.

Easy Orange Requirements:

– 20% down payment (or home equity if refinancing)
– Must be owner occupied property (primary residence)
– No vacation homes or investment properties
– No manufactured homes, condotels, properties greater than 10 acres
– Minimum credit score of 700
– Max loan amount of $750,000

Easy Orange Benefits:

– No application fees
– No mortgage points
– Biweekly payments
– Free 60-day rate guarantee on purchases, 45 days for refinances
– Apply online
– Guaranteed closing costs (they won’t change from time of application)
– Close online or over the phone at no extra charge
– Pay electronically

Final Word

While the Easy Orange could save you some money in the short term via the lower mortgage rate associated with the loan program, it carries some serious risk if ING doesn’t offer a rate renewal, or if you’re unable to sell or refinance once the term is up.

Even if they do offer a rate renewal, it may be significantly higher than your previous rate.

They currently offer an interest rate of 2.990% (3.050% APR) on the 5-year product, which may be slightly lower (half point or so) than other adjustable-rate mortgages out there that adjust after five years.

But you’re faced with a decision after five years with Easy Orange, while other ARMs allow you to stay with the loan program, just at the fully indexed rate, which could be higher or lower.

Easy Orange also requires you to make biweekly mortgage payments, which is great if you want to actually pay off your mortgage early, but somewhat counterintuitive if your loan will be reset every five years.

In the end, it may not be worth the risk for the slight reward afforded via the Easy Orange mortgage, but it’s certainly a unique way of going about getting a mortgage.

(photo: audreyjm529)

Source: thetruthaboutmortgage.com

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Mortgage Q&A: “How much do mortgage brokers make?”

If you happen to use a mortgage broker to obtain your mortgage, you may be wondering how they get paid and what they make.

Mortgage brokers essentially work as middlemen between borrowers and banks/lenders, so they can actually be paid by either party.

Just to be clear, this article is about how much mortgage brokers make on the home loans they originate, not how much they make in the way of salary.

Of course, brokers typically aren’t paid a salary, so if we know what they’re making per loan, we’ll have a decent idea as to what they might take home each year as well depending on annual volume.

But you have to consider their costs to operate as well, which will vary based on how large their shop is, if they employ loan officers, how much they spend on advertising (if any), and so on.

How Does a Mortgage Broker Get Paid?

  • They can choose to get paid by either the lender or the borrower
  • They can charge an origination fee directly, which comes out of the borrower’s pocket
  • Or elect to get paid by the lender, which is indirectly paid by the borrower
  • The latter results in a slightly higher interest rate, meaning it’s paid over time via higher monthly mortgage payments

In the recent past (before April 1, 2011), mortgage brokers could make money on both the front and back end of a mortgage loan.

Simply put, they could charge a loan origination fee directly to the borrower and also get paid by the mortgage lender via a yield spread premium (YSP), which was the commission the bank or lender provided in exchange for a mortgage rate above market.

In short, the higher the interest rate, the more YSP the broker would receive from the lender.

YSP was also referred to as “par-plus pricing”, “rate participation fee”, “service release fee”, and many other variations.

Brokers had the ability to make several points on the back end of a loan, potentially earning thousands of dollars, sometimes without the borrower’s knowledge.

They could also collect money on the front end of a loan via out-of-pocket closing costs like loan origination fees and processing costs, which the borrower paid directly.

For example, back in the day it was possible for a broker to charge one (or more) mortgage points upfront for origination, receive another two points on the back from the lender, and also tack on things like loan processing fees.

All told, they could make three to five points on a mortgage, aka 3-5% of the loan amount. If we’re talking a $500,000 loan amount, that’s anywhere from $15,000 to $25,000 per loan!

And it could be even higher for jumbo loans. Prior to the housing crisis, it wasn’t unheard of for brokers to make massive commissions like this.

You’d hear about them asking for “max rebate” on the back end, which was the limit wholesale lenders would pay out, while still convincing the borrower to pony up an origination fee on the front end.

As a result, brokers could essentially be paid twice for the same transaction.

The beauty of it was the yield spread premium came in the form of a higher mortgage rate, so it didn’t even look like a fee or a cost to anyone – it just meant the borrower had a slightly higher mortgage payment for the entire loan term.

In other words, the borrower was saddled with a higher rate for the life of their loan and may have also paid a commission upfront, without realizing it.

Had the broker just charged the upfront fee and nothing else, the borrower may have received a mortgage rate of say 4% instead of 4.5%.

In hindsight, it probably didn’t matter because most of those loans didn’t last more than a few years (or months) before they were refinanced or foreclosed on. Eek.

How Mortgage Broker Compensation Works Today

  • Brokers can no longer get paid twice on a single loan
  • Instead they have to choose how they want to be compensated, by the borrower or lender
  • They may have a different compensation package with each lender
  • So depending on where the loan is placed their commission could vary from loan to loan

As noted, the controversial practice outlined above was outlawed in 2011.

The Fed came in and changed all that by effectively banning yield spread premiums, and now mortgage brokers can only get paid by the borrower OR the lender, not both.

That doesn’t mean they can’t still make a lot of money per loan, it just means the way they can get paid via the wholesale mortgage channel has been limited.

In other words, they either charge you directly to close the loan or they get paid by the lender and you pay for that commission indirectly (not out-of-pocket at closing) via a higher interest rate.

If charging directly, the borrower pays for the broker fee or origination fee, loan processing, and so on. Compensation can also vary from loan to loan.

If being paid by the lender, it’s similar to YSP, but brokers must now choose a compensation plan upfront with each lender they work with, as opposed to charging different amounts on each loan as they see fit.

And they usually must stick with that compensation plan for three months before they can change it again.

For example, they may choose to earn 1% commission on every loan they close with Bank A. So if the loan amount is $500,000, they’d earn $5,000. If it’s $300,000, they’d only get $3,000. And so on.

But they may select a higher compensation structure with Bank B that gives them 1.5% on each closed loan.

Assuming the loan terms and cost are the same, they can send your loan to Bank B for a higher commission, as it won’t affect what you ultimately receive.

However, a different broker may decide to set all their compensation levels at 2%, and if you happen to work with them your interest rates may be higher across the board to account for their higher commission.

So you kind of have to shop mortgage brokers too in order to find the one offering the lowest rate/costs.

In other words, you can still get a raw deal, or at least a not-as-good deal. The good news is they can no longer get paid on both the front and back end of the loan.

But you should continue to be vigilant and look over your loan documents to ensure you aren’t being overcharged.

In short, you’ll want your broker to send your loan to the bank that offers you the lowest interest rate, not the one that gives them the highest commission.

What Is the Mortgage Broker’s Commission? And How Do I Find It?


So you’re applying for a home loan and want to know the mortgage broker’s fee. I don’t blame you, it’s important stuff.

But if the interest rate and combination of closing costs are favorable relative to other banks/lenders/brokers, it doesn’t really matter what they make.

Still, you should know and you have a right to know. Here’s how to find out.

When signing loan disclosures early on in the process, look out for a “Loan Brokerage Agreement” form that spells out their commission, and whether it’s borrower- or lender-paid.

The screenshot above is an example where a broker earned $8,775 via the lender for facilitating the loan. Not bad for one loan, eh?

To figure out how much they’re making on a percentage basis, simply take the compensation amount and divide it by the loan amount.

The loan amount in this example is $780,000, making their compensation 1.125%. It’s reasonable as they could charge 2% or more depending on the wholesale lender they partner with.

You can also find the broker fee on the Closing Disclosure (CD) and the ALTA Settlement Statement when it’s time to sign docs and close your loan.

Okay great, so what do brokers make?

  •  A survey said they were paid 2.25 points per loan on average
  • On a $300,000 loan amount that would be $6,750 in compensation
  • While it sounds like a tidy sum, you have to consider their volume and operating costs as well
  • It’s pretty close to what real estate agents make, usually 2.5% of the sales price

A press release from 360 Mortgage Group detailing the compensation changes said mortgage brokers generate an average revenue of 2.25 mortgage points on a home loan.

For example, on a $500,000 mortgage, they’d make roughly $11,250 in revenue. That sounds pretty good, doesn’t it?

But as mentioned, we have to subtract the costs of doing business, which are variable. From there, you’d have your profit per loan.

Not a bad take for helping people get mortgage financing, depending on how many loans are closed each month, and what expenses are involved.

As you can see, mortgage broker salary will definitely vary based on the size of the loans they typically close. In more expensive areas of town (or the country), brokers might make six-figures or much, much more.

While those in lower-priced metros could make significantly less if costs are still relatively similar.

Additionally, brokers who focus on mortgage refinances might have higher loan volume than those who help home buyers purchase real estate, as the latter can be harder to come by and slower to close.

Of course, if they partner with a local real estate office or two, they have the ability to generate a ton of purchase loan business too, so it’s hard to say either specialty would be more successful universally.

Their average income will also depend on the financial institutions they choose to partner with, as compensation structures and points per loan will vary across different mortgage lenders.

One aspect of a mortgage broker’s job is linking up with lending partners that are good at quickly closing loans, while also offering competitive pricing. As such, these partners can greatly affect a mortgage brokers salary.

[How to get a wholesale mortgage rate?]

Will mortgage brokers still make the same money?

  • While it might be more difficult to make a ton of money on a single loan
  • Brokers still have the ability to make a very good living even with limited volume
  • A broker who closes just $2 million a month could earn over $500,000 annually
  • Very few other occupations pay anywhere close to that much

The 360 Mortgage Group believes brokers will be able to adapt to the compensation changes, and if you know anything about the mortgage business, new rules are typically circumvented overnight.

Many mortgage lenders are now publishing multiple mortgage rate sheets, with one version lender-paid compensation and the other borrower-paid compensation.

So brokers can simply pick up a specific compensation-based rate sheet they’d like and be on their way.

For example, if they want to make 2.50 points, there’s a rate sheet for that. If they only want one point, there’s a rate sheet for that too.

But the rule change will probably reduce average incomes for loan brokers, since they won’t be able to take a little from both the front and back of the loan.

Receiving compensation from just one entity, as opposed to two, means it’ll be more difficult to charge an excessive amount per loan, though not impossible.

This is relatively good news for home buyers and existing homeowners looking for refinance who will hopefully enjoy lower mortgage payments, but bad news for mortgage brokers, who continue to lose market share. It could also dent their total pay.

It’s recommended that you shop for a mortgage by gathering rate quotes online, at your local bank/credit union, and also via a mortgage broker or two.

You’ll never know who might have the best rate/terms unless you actually take the time to shop around!

Read more: Why use a mortgage broker?

Source: thetruthaboutmortgage.com

Apache is functioning normally

The mortgage landscape has changed a ton over the past several years.

Mortgage lending guidelines have firmed tremendously since the housing crisis took hold, and mortgage rates have fallen to new all-time lows.

Meanwhile, home prices seem to have bottomed, and decent home price appreciation is in the forecast.

This has created an interesting environment for both prospective and existing homeowners.

Determining Your Homeownership Horizon

  • When to buy real estate and take out a mortgage
  • You need to determine how long you plan to keep the property
  • And in that same sense, the home loan that goes along with it
  • As it will dictate loan choice, paying points, and more

Perhaps one of the biggest changes in thought is that those who take out a mortgage today will keep it for as long as they own their home.

In the past, this wasn’t the case, with mortgage rates very high, and then in a downward trend for many years since.

That allowed existing homeowners to refinance and tap home equity via cash out refinances and HELOCs, while also reducing monthly mortgage payments.

Even recent homeowners were able to refinance just six months or a year after purchasing their homes, thanks to the precipitous drop in interest rates.

[The refinance rule of thumb.]

But that march downward seems to have come to an end, and could in fact reverse course, which will equate to slower prepayment speeds and far fewer refinances.

After all, no one will be keen to lose your super low mortgage rate, even if they do need cash.

It also makes the question of which mortgage to get more difficult. Additionally, one really has to question whether they should buy down their mortgage rate.

Why Homeowners Sell Their Homes

People sell their homes for all types of reasons, and many do so well before their mortgages ever reach maturity.

The most common reason all homeowners move is to obtain a better home, this according to data from the 2017 American Housing Survey (AHS).

It’s also pretty normal to sell a home in order to buy in a better neighborhood, or for a first-time buyer to sell in order to form a household (think more space).

Other reasons include being closer to family, shortening a commute, relocating for a job, reducing housing costs, being forced to move, or simply because of a change in household.

You should consider all these reasons before you decide on a particular type of home loan. It might sway your decision.

Most People Keep Their Homes for Six to 10 Years

  • Prior to the housing crisis the median tenure was around six years
  • Meaning millions of homeowners took out 30-year loans
  • But kept them for a fraction of the time
  • Nowadays tenure is climbing as homeowners hunker down

Take a look at this chart from the National Association of Realtors Profile of Home Buyers and Sellers.

The median tenure for a home seller over the past two decades has been just six years. I guess forever homes are a thing of the past.

As you can see, tenure increased after the mortgage crisis, mainly because underwater mortgagors had no choice but to wait it out.

But many of those who persevered have now listed their homes, just as they are getting their heads above water.

The point I’m trying to make is that very few mortgages are actually held to term, or anywhere close to it.

For one reason or another, mortgages just don’t last that long, despite many being 30-year fixed mortgages.

When looking at this chart, one could reasonably wonder why more homeowners don’t take out short-term adjustable-rate mortgages, such as 5/1 or 7/1 ARMs. The savings would massive.

Both offer lower mortgage rates than their fixed-rate cousins, which would result in a lower monthly payment, less interest paid, and more principal accrued.

Yet most homeowners seem reluctant to go with an ARM, perhaps because it’s difficult to predict the future.

[30-year fixed vs. adjustable-rate mortgage]

Still, the numbers don’t lie – scores of homeowners are on the move in just six short years, whether they hold 30-year fixed mortgages or whatever else.

Will You Keep Your House Longer Now?

  • As you can see from the graph above homeowners are staying put longer
  • Thanks to lower interest rates and high home prices
  • The latest data says homeowners are sticking around for about 10 years on average
  • So that may affect your mortgage decision too

As I noted, the landscape has changed quite a bit. So will the same trend hold true going forward, or will more homeowners choose to stay put for longer?

I’m sure the average homeowner tenure will increase somewhat, but probably not by that many years. There will still be tons of homeowners that sell in a short period of time for a bevy of reasons.

And so homeowners will continue to take out long-term fixed mortgages that don’t do them much good, aside from the peace of mind of knowing their rate won’t change.

More recent data suggests an average holding period of about a decade.

Sure, it’s slightly longer, but since most mortgages come with terms of 30 years, it should still make you question why you’d pay to lock in a rate for triple the time necessary.

Of course, rates on fixed mortgages and ARMs aren’t all that different at the moment, so it’s not a terrible mistake to make, if you can even refer to it a mistake.

Still, you might be able to save some big bucks if you go with a 10/1 ARM as opposed to a 30-year fixed over the course of 120 months, not to mention build equity a bit faster.

Where Homeowners Stay the Longest

  1. El Paso, TX (99 months)
  2. Albuquerque, NM (98 months)
  3. Oxnard, CA (97 months)
  4. Greensboro, NC (97 months)
  5. Philadelphia, PA (96 months)
  6. Cleveland, OH (95 months)
  7. Seattle, WA (94 months)
  8. Baltimore, MD (93 months)
  9. Rochester, NY (93 months)
  10. Jacksonville, FL (92 months)

In the cities listed above, tenure is the longest, per updated data from NAR for 2018. In El Paso, Texas, a full 99 months go by between sales on the average home there.

While it sounds like a long time, it’s still just over eight years. A 7/1 ARM would cover most folks there, and even if the rate adjusted higher for one year once it became adjustable, the savings realized during the first seven years would likely eclipse any payment increase.

Where Homeowners Stay the Shortest

  1. Providence, RI (33 months)
  2. Cape Coral, FL (35 months)
  3. Greenville, SC (36 months)
  4. New Orleans, LA (44 months)
  5. Madison, WI (47 months)
  6. Grand Rapids (51 months)
  7. Knoxville, TN (54 months)
  8. Boston (57 months)
  9. Omaha, NE (66 months)
  10. Augusta, GA (66 months)

As you can see, lots of homeowners in the cities above could benefit from the short-term financing afforded with an ARM. In most cases, a 5/1 ARM would mean a fixed rate during their entire stay.

What’s even more worrisome is that some homeowners are paying to refinance, or paying mortgage points at closing to obtain a lower rate.

Unfortunately, many of these homeowners won’t hold their mortgages long enough to benefit from the future savings. So use a refinance calculator if you’re thinking about doing this.

After all, the trend to sell in 10 years or less is one that will be hard to shake, even in light of the unprecedented situation we find ourselves in today.

Still, you should definitely ponder the fact that the mortgage rate you receive today will likely be the lowest you’ll ever have – that may sway your decision to part with it so soon.

Read more: Are mortgage points worth it?

(photo: robstephaustralia)

Source: thetruthaboutmortgage.com

Apache is functioning normally

A new analysis from Zillow revealed that nearly half of mortgage applicants opted to pay points when taking out a home loan last year.

These optional costs allow homeowners to buy down their interest rate at closing.

Doing so lowers their monthly mortgage payment for the duration of the loan term.

And it saves them money on interest via a lower mortgage rate, meaning more of each payment goes toward principal.

But are points actually a good deal for homeowners? And do they make sense when interest rates are high?

A Lot More Homeowners Are Paying Mortgage Points These Days

Zillow Home Loan’s analysis, which used data from the Home Mortgage Disclosure Act (HMDA), found that roughly 45% of conventional primary home borrowers paid mortgage discount points in 2022.

As noted, these points allow borrowers to obtain a lower mortgage rate. They are a form of prepaid interest.

The result in a reduced monthly mortgage payment and a lower interest expense during the loan term.

What’s interesting is a lot more homeowners are paying these points than in prior years.

For example, when mortgage rates were at or near record lows, far fewer applicants paid points.

To put it in perspective, just 29.6% of borrowers paid points in 2021, 28.4% in 2020, and 27.3% in 2019.

As for why, it’s probably because the mortgage rate offered was so low that there was little need to pay points. And probably little desire.

Zillow notes that buying points is most often used by low-income borrowers (those who make between 30% and 50% of their area’s median income).

These tend to be the folks who are most fixated on keeping monthly payments down.

At the same time, borrowers were more likely to pay points in top and middle price tiers than for homes in the bottom price tier.

Simply put, a lower mortgage rate makes a bigger impact on a larger loan amount.

However, those who made less than 30% of their area’s median income purchased the most points overall for homes in that bottom price tier.

Another issue lately is because the mortgage market has been so volatile, many lenders made mortgage points compulsory.

[Why Mortgage Lenders Are Requiring Upfront Points]

Paying One Point Might Reduce Your Mortgage Rate by 0.25%

While this can certainly vary, Zillow found that mortgage applicants might need to pay 1% of the loan amount to reduce the interest rate by 0.25%.

For example, on a $300,000 loan amount with a rate of 6.75%, it could cost $3,000 to lower that rate to say 6.5%.

The difference in monthly payment would be about $50 and the interest saved about $18,000 over the full 30-year loan term.

Knowing this, you would need to determine if it’s worth that upfront cost. To do so, you figure out the break-even period, which is how long it takes to recoup those costs and begin saving money.

In our example, it might take around four years of reduced payments and interest to make that upfront point worth it.

And that’s the rub. You have to stay in the home AND keep the mortgage for at least that long to actually benefit.

Note that at the moment, mortgage discount points might be going a little further in terms of rate reduction.

Be sure to shop around with multiple lenders to see how far a point can go, as this can vary by company.

Is a Temporary Buydown a Better Option Than Paying Points?

While paying points wasn’t as popular when mortgage rates were rock-bottom, it may have been underutilized.

After all, someone with a 30-year fixed set at 2-3% will arguably keep that home loan for as long as possible. So paying upfront for even more savings could be a winning move.

Conversely, someone who takes out a mortgage set at 6.5% today may not want to keep it very long. Or pounce at the first opportunity to refinance.

There’s also an expectation that mortgage rates could ease later in the year and in 2024. As such, paying points at closing could be a money-loser.

Remember, if you don’t keep the loan past the break-even period, you won’t actually save money on the upfront costs.

This makes the argument for a temporary buydown, such as 2-1 buydown, perhaps more compelling.

You can save money for the first two years and get the lender, builder, or seller to pay for it.

And once a refinance opportunity comes along, you can swap your mortgage in for a new one at a lower rate.

Instead of banking on keeping the mortgage for a long-haul, you can take advantage of lower payments for the first couple years.

It’s less commitment, and possibly more cost-effective. You’re only using the payment reduction for the year or so until mortgage rates ideally come back down.

The homeowner who pays discount points might feel stuck in their loan knowing they’d “lose money” if they refinanced prior to breaking even.

However, the borrower who opts for the temporary buydown must ensure they can afford the actual mortgage payment if a refinance opportunity doesn’t come along.

Source: thetruthaboutmortgage.com