Ronald Borch

How to Calculate Mortgage APR - a Real Q&A

Why is the Mortgage APR so much higher than the interest rate?

A very large Interest Rate to APR differential is usually caused by excessive closing costs; however, some people don't know that even a normal mortgage insurance payment can cause a large increase in the Mortgage APR. Of course the APR doesn't determine the payment. The APR simply discloses the true cost of the loan, expressed as an annual percentage rate over the full loan term, taking into consideration certain closing costs, or "pre-paid finance charges", PLUS any monthly mortgage insurance required. To calculate Mortgage APR, let's go back to elementary math, just for a second...

If you have any two parts to a 3-part equation, you can calculate the third. And vise versa all day long. For example, 5 x 2 = 10. You can also say 10 divided by 2 = 5. Okay, stay with me... It's similar when you calculate mortgage APR. With a rate of 5.25%, and a loan amount of $245,471, you can calculate a principal & interest payment of $1355.50. The FHA monthly mortgage insurance would be $112.51. To calculate mortgage APR, just reverse the process and include the closing costs and mortgage insurance. You can calculate a rate (APR) if you have a principal & interest payment plus any mortgage insurance, as well as the "Amount Financed", or the loan amount less the pre-paid finance charges.

Since the APR calculation takes into consideration the closing costs PLUS any mortgage insurance, to calculate the APR, use the payment ($1355.50 plus $112.51 mortgage insurance) and loan amount ($245,471.88 minus an estimated $2500 in pre-paid finance charges). You can then calculate the APR of 6.072%. But again, it’s the rate of 5.25% that determines the principal & interest payment. The APR simply discloses the true cost of the loan.

Closing costs also affect the APR, but not as much as mortgage insurance does. For loans that carry mortgage insurance, a reasonable Mortgage APR might be 0.75% higher than the interest rate. For loans without mortgage insurance, the APR should really come in no more than 0.125% higher than the rate. Otherwise, your closing costs are either too high, or you are paying extra points.

Beware of the companies that tout very low rates - they come with stiff fees. The truth is anyone can get you that low rate, for much less. The question is, do you really want to pay for it? Many of these very low rates online come with multiple points. On a $250,000 loan, for example, you might be able to reduce your 30-year fixed rate down to 4.25% with three or four points at closing. Three points on a $250,000 loan equates to $7,500 extra in closing costs. Would you want to pay an extra $7500 in closing costs to save another $114 per month? That’s a 5.5 year pay back. Do you know where you are going to be in five and a half years? If you sell your home or refinance your loan before this break-even period, you would have wasted some or all of those extra points.

I'm not a big fan spending a lot of money at closings to get a lower rate. It amounts to pre-paid interest. We need to MINIMIZE the interest we pay to the bank, not pre-pay it. I have seen too many people pay points for a lower rate, only to sell their home or refinance again a year or two later. If your future is uncertain, then a no-cost, or low-cost loan is probably a much better way to go. For some it works, but for most, it usually ends up working only for the bank.

Is Barney Frank Scaring Away Private Fannie Mae and Freddie Mac Investors?

Mortgage interest rates improved slightly this week despite a positive spin on the economic news front. But Friday's "only 36,000 lost jobs" employment report was interpreted by investors as mortgage friendly. So do the investors know something the politicians do not? Rates next week, however, could be on the upswing due to some comments made by US Rep. Barney Frank (D-MA), Chairman of the House Financial Services Committee.

Barney Frank essentially gave notice to the debt holders of the GSE's, Fannie Mae and Freddie Mac, that they should not consider their debt investments to be fully backed by the US government, even though these companies have fallen under Federal control. Frank added that when Fannie Mae and Freddie Mac are ultimately restructured, he wants to see investors "take a haircut" on their investments.

So what are Barney Frank's true intentions? Well, if the private debt holders of Fannie Mae and Freddie Mac decide to cease their purchases of new debt issues, and if they sell off their current investment holdings, the cost of funds for these GSE's would increase, resulting in a rise in mortgage rates.

Of course, the Treasury continues to prop up these entities. So perhaps Barney Frank's hope is to scare away private investors in order to make Fannie Mae and Freddie Mac even more dependent on the government than they already are. We can debate his true intentions, but this could certainly be the end result.

Farmers Market in Burlington VT

The next Burlington Winter Farmers Market is coming up - to be held again on Saturday, February 20 at Memorial Auditorium in Burlington. This is the same Farmers Market held at City Hall Park in the summer. A Farmers Market in the winter is a great idea - as many of us could all eat a little healthier than we are right now - especially in the winter. Plus a farmers market is a great opportunity to get out, meet up with family and friends, and support the local community.

Original post by Chris Wagner

Greetings!! I wanted to take this opportunity to tell you about and invite you to the Burlington Winter Farmers Market. This is the second year for the farmers market and we love all the community support. The farmers market is a great opportunity to showcase all that Burlington has to offer, 58 vendors will be setting up every third Saturday of the month from November to April in Memorial Auditorium. We have a wide range of products from farmers selling preserves and frozen vegetables, root vegetables, fresh meats, cheeses, maple syrup, honey and eggs. We have wineries offering a variety of local wines. We have prepared foods including your favorites from the Summer Market and we have crafters selling everything from jewelry, a variety of clothing to pottery and photographic art.

The hours for the market are 10am to 2pm, it is held in Memorial Auditorium at the corner of Main Street and South Union in downtown Burlington. Every third Saturday of the month from November to April: (11/21; 12/19; 1/16; 2/20; 3/20; 4/18)

Below is a list of our vendors for the 2009-2010 season:

AH Mushrooms & Plants
Amai Bijoux
The Bakery at Farmhouse Kitchen
Arethusa Collective Farm
Bee Happy VT
The Nomadic Oven
Bread & Butter Farm
Champlain Orchards
Doe's Leap
Dragonfly Sugarworks
Happy Fantastic Design
East Shore Vineyards
Flower Power VT
Claude Lehman Pottery
Fresh Tracks Farm
Full Moon Farm
Painted Tulip Flower Farm
Got Local Kitchens
Green Mountain Granola
Tibetan Cuisine
Honey Gardens Apiaries
Jericho Settler's Farm
Tangletown Farm
Lewis Creek Farm
Maple Wind Farm
Sylviel
McGurran Bee Farm
Naga Bakehouse
Sheppard's Crook Farm
Pine Ledge Fiber Studio
Pleasant Valley Soap Co
Rookie's Rootbeer
Rooftop Pottery
Samosaman Natural Foods
Recycle Moe
Shelburne Farms
Stray Cat Flower Farm
Neshobe River Winery
Sunny Brook Maple
Sweet Flower Designs
Orsini BBQ
Tamale Girl
Tamarack Hollow
Great Photographic Art of VT
The Nutty Vermonter
a la Lindsay
Dinky Donuts
Bella Farm
Benito's Hot Sauce
Digger's Mirth Collective Farm
Botanical Bodycare
Crawford Family Farm
Deeter's Bakery
River Berry Farm
Willow Hill Farm
J Wagner Designs

Hope to see you there!!!!

FHA Announces Policy Changes To Shore Up Finances

The Federal Housing Administration recently announced policy changes to "strengthen capital reserves and address risk, while continuing to to support the country's housing recovery."

The FHA Policy Changes:

• The Up-Front Mortgage Insurance Premium (UFMIP) will increase to build up capital reserves. The premium will increase from 1.75% to 2.25% to go into effect in the spring. FHA will also request legislative authority to increase the mortgage insurance that borrowers pay on a monthly basis.
• The credit score and down payment combination will be updated. A minimum credit score of 580 will be required for the 3.5% down payment program, while new borrowers with a FICO score less than 580 will need to put down at least 10%. Most lenders will continue to supercede this requirement as they already require a minimum FICO of 580 or 620.
• The maximum seller concession will be reduced from 6% to 3%. FHA claims that the current 6% seller concession exposes them to excess risk by creating incentives to inflate the appraised value.

On a typical $250,000 purchase, here is how the changes would affect the loan amount and monthly payment:

With 3.5% down, and the 1.75% Up-Front Mortgage Insurance Premium (UFMIP) rolled in, the loan amount would be $245,471. With a 30-year fixed rate of 5.25%, the monthly principal & interest payment would be $1355.50. When you increase the UFMIP to 2.25%, the loan amount increases by $1207 to $246,678 and the monthly payment increases by $6.67 to $1362.17/mo.

While not a huge difference, there could be more increases coming, if the FHA gets their way with congress. While waiving the 90-day seasoning rule was a positive change to help reduce the foreclosed housing inventory levels, raising prices on consumers, on the other hand, is not always the best way to dig yourself out of financial problems. But since there is no other alternative for more and more buyers, there is really nothing we can do about an increase, but to trust our elected officials that they will keep the people's best interest in mind. Can you sense the sarcasm?

I'm also not a big fan of the seller concession reduction from 6% to 3%, as this will only affect buyers of lower-priced homes. For example, a 3% seller concession on a $300,000 purchase would be $9000, which should be enough to cover the closing costs and pre-paid items on a no-point loan. On a $150,000 purchase, however, the maximum seller contribution would be $4500, resulting in the buyer most likely needing to bring additional funds to closing, especially in states like Vermont that have a relatively high state transfer tax. In February, the new policies will be posted in the Federal Register. After a comment period, I expect the changes to go through in the spring. I hope these changes will not become a regular occurrence.

HUD Waives 3-Month FHA Seasoning Rule, to Speed Up Resale of Foreclosed Properties. What does this mean? Read on...

On Jan 15, HUD took action to reduce the inventory levels of foreclosed properties by waiving the 90-day FHA seasoning requirement. Currently, with certain exceptions, FHA will not issue mortgage insurance to the buyer of a home if the seller has owned the property for less than 90 days.

This is very good news for both real estate investors and buyers, since more and more buyers in today's market are FHA buyers, who will now have access to a wider array of foreclosed properties.

HUD secretary Shaun Donovan says, "This change in policy is temporary and will have very strict conditions and guidelines to assure that predatory practices are not allowed."

And FHA commissioner David H. Stevens added, "FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties. This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity."

So buyers will be able to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, and properties resold through private sales. The waiver will go into effect on Feb 1, 2010, and will be effective for one year... unless extended or withdrawn by the FHA commissioner. I expect this to continue once they realize the positive impact this will have on the housing market, and the economy as a whole. This is certainly a positive step.

Here are a few rules - from the HUD website:

• All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
• In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the waiver will only apply if the lender meets specific conditions.
  
• The waiver is limited to forward mortgages, and does not apply to the (Reverse Mortgage) Home Equity Conversion Mortgage - (HECM).

Read the details - in this pdf released by HUD. Get the FHA Flip pdf Here.