Mortgage Rates Are Falling But Loans Require More “Points”

Another week, another headline screams how mortgage rates have falled to an all-time low.

Freddie Mac published its weekly mortgage rate survey Thursday and found that the “average” mortgage rate is now 4.96 percent, the lowest since the survey started in 1971.

But, if we look beyond the headline, we find that there’s another part of the story worth watching.  Mortgage rates are falling but the number of points required to lock those rates is not.

Lenders now require an average payment of 0.7 points to get the 4.96 percent rate from the headlines.  That’s up from 0.6 percent last week and 0.4 percent a year ago.

A “point” is a fee equal to 1 percent of the loan size. 

Therefore, to get access to a 4.96 percent interest rate on a $200,000 home loan, today’s lender would require an extra $200 versus last week and $600 versus last year.  Today’s mortgage borrower would be subject to a $1,400 closing cost in addition to the “typical” closing costs accompanying a purchase or refinance.

This is a period of historically low rates — there’s no doubt about that.  However, the cost of getting access to low rates is increasing.  The press doesn’t always tell that part of the story and it’s one more reason to look deeper than the headlines.

(Image courtesy: The Wall Street Journal)

When Is A 5.000 Percent Mortgage Rate Really 3.600 Percent?

An oft-touted benefit of homeownership is its tax benefits.  However, like most IRS-related items, understanding how the benefits work is not always clear.

In general, homeowners are entitled to two home-related tax deductions — one for annual mortgage interest paid, and one for real estate tax bills paid.

Not everyone is eligible, though.  Some of the exclusionary traits include total amount borrowed, and whether or not the home is a primary or secondary residence.

The official IRS publication is filled with notes and explanations but, in general, you can calculate your approximate mortgage interest tax deduction using the following math:

1. Sum your annual mortgage interest and real estate taxes paid
   
2. Find your tax rate on the IRS tax bracket schedule
   
3. Multiple your tax rate by the sum from Step 1

This is grossly simplified, but fairly accurate.

As an example, a homeowner paying a combined $20,000 in 2008 mortgage interest and real estate taxes, and who is in the 28% tax bracket, may be due $5,600 in tax credits.

The availability of mortgage interest tax deductions is one reason why loan officers make reference to “after-tax mortgage rates”.  An after-tax mortgage rate is effective interest rate, post-tax code, and can be calculated using the formula below:

(After-Tax Mortgage Rate) = (Mortgage Rate) * (1 – Marginal Tax Rate)

The same homeowner with a 5.000% mortgage rate, therefore, has an after-tax mortgage rate of 3.600%.

Because not every homeowner is eligible for home-related deductions, and because not every homeowner should claim them, talk with your personal accountant before making any tax-related decisions.

The Touch-Up Topper Replaces Expensive, Bulky Ironing Boards

Ironing boards can be bulky and awkward — especially in a cramped laundry room. 

Instead of fumbling with a folding board for a quick press, look to the Touch-Up Topper instead.

The Touch-Up Topper is a heat-resistant, portable ironing surface that rolls or folds for storage.  Using sewn-in magnets, the quilted pad fastens to the top of most washers and dryers, turning any metallic surface into an instant ironing surface. 

At 32″ x 18 1/2″, the Touch-Up Topper has a larger ironing surface than traditional ironing boards and it costs less, too.  The Touch-Up Topper costs $14.95 and is available for sale at SkyMall.

New Fannie Mae Loan Fees Target Condo Buyers, Among Others

When conforming mortgages started defaulting en masse in late-2007, mortgage guarantor Fannie Mae created a loss-offsetting, fee-generating scheme dubbed “loan-level pricing adjustments”.

The concept was basic: For mortgage applicants with high-risk profiles, collect up-front payments to offset potential long-term losses. 

Similar to the auto insurance model in which younger drivers pay higher premiums, riskier applicants pay higher fees.

At the inception of the program, Fannie Mae defined ”risk” as a combination of borrower credit score and home equity percentage.  In general, lower FICOs and higher LTVs paid more costs.

Effective April 1, however, Fannie Mae’s definition of risk is expanded.  By a lot.  Fannie Mae’s new loan-level fees now impact any conforming mortgage that meets any of the following criteria, with the exception of fixed rate loans of 15 years or less.

• Up to 0.75% fee: Secured by a condo/co-op with less than 25% equity
  
• Up to 0.50% fee: Features a junior mortgage (i.e. HELOC, HELOAN)
  
• Up to 1.00% fee: Features interest only payment options
  
• Up to 1.00% fee: Secured to a 2-unit property
  
• Up to 3.00% fee: Is designated as “cash out”

Each 1 percent in fees equals 1 percent of the borrowed amount. Therefore, a condo buyer with a $200,000 first mortgage and a $25,000 line of credit is subject to a mandatory 1.25% charge of $2,500, due at closing.

However, it doesn’t stop there.  Fannie Mae has also adjusted its original FICO-LTV matrix so that nearly every applicant — irrespective of credit score — will face higher closing costs on their home loan.

Mortgage rates may be falling, but the cost of financing a home is rising.

Fannie Mae’s latest announcement is its fifth risk-based pricing update in the last 15 months.  It’s likely it won’t be the last, either.  Therefore, if you’re torn between to buy a home now or later, consider that the cost of waiting may outweigh the benefits of falling prices or falling rates.