When we go through a period of lower interest rates
as we are now doing, borrowers are always looking
for the benefits that may come with refinancing.
There are several ways that you can compare
the numbers to see if the savings that you may
experience meet your goals.
Let's take a look at a couple of examples from
recent discussions with clients:
Borrower currently has a loan that started at
$535,000 at an interest rate of 5.0%. Payments
are $2,872, balance is $525,000 and the borrower
has made 16 payments.
The quotes at the time were for a new 30-year
fixed rate loan at 4.5%. The loan fee was zero
points, (one point equals 1% of the loan amount)
and transactional costs would be about $3500.
If we compare costs to interest rate savings the
recovery period is fairly short. $3500 is .667%
of the loan amount ($3500/$525,000). The
interest savings per year is .50% (5.0% - 4.5%).
So it would only take about 16 months to
break even and start saving money (.667 divided
by .50 is 1 1/3 years, i.e. 16 months).
If we make comparisons of the monthly payments
it works out like this: $2872 current payment to
$2660 new payment is $212 per month savings.
$3500 in costs divided by $212 is about 16.5
months. Once again, a fairly quick recovery of
costs.
And if you are committed to staying in the home,
comparing the costs over the remaining life of
the loans provides another measure of the
benefits of considering the refinance.
There are 344 payments remaining on the existing
loan (360 scheduled payments minus the 16 already
made). 344 payments at $2872 per month means
that you would pay $987,968 over the remainder
of the loan term.
On the new loan, you would have 360 payments
at $2660 per month for a total outgo of $957,600
over the 30 years.
So, would it be worth it to spend $3500 to save
$30,368 with a new refinance? Many borrowers
who are committed to a long-term strategy
choose to go this direction.
I had a discussion with a different borrower. He
was definitely committed to a long-term strategy
and wanted to see how much he could save by
obtaining a lower interest rate and shortening
the term of his loan from 30 years to 15 years.
His existing loan had a balance of $408,000,
interest rate of 5.0%, payments of $2238 and
had 341 installments left.
The new proposal was for $408,000 with an
interest rate of 4.25%, with a one-point loan
fee and $3500 in costs. The new 15-year
payment would be $3069 per month.
The interest rate comparison works out like
this: $7580 in fees ($4080 + $3500) is about
1.86% of the loan amount ($7580 divided by
$408,000). The interest rate difference is
.75% (5.0% minus 4.25%). It would take about
2.5 years to recover the costs with interest
savings (1.86 divided by .75). Not a particulary
great recovery period.
It would not make sense to compare monthly
payments, because we are not comparing
"apples to apples". The monthly payment
on the 15-year loan is much higher to retire
the principal balance over the shorter period
of time.
There are 341 payments remaining on the
existing loan. At $2238 per month the total
outgo will be $763,158.
On the new loan there will be 180 payments
at $3069 for a total of $552,420.
This borrower was definite in his decision.
It was very much worth $7580 to save
$210,738!
It is important to understand whether your
goals are short-term or long-term, and then
to analyze your choices from several different
approaches. More often than not, the answer
becomes fairly obvious what will work best
for you.
As always, let me know how I can help you
with exploring your options.
Wednesday, September 22, 2010
Wednesday, September 8, 2010
The Challenge of Condos
In the mortgage lending world, condominiums
are considered differently by the lenders than
are single-family detached homes (SFDs).
Because single-family detached homes have
an element of autonomy for the owner, and
because condominiums require collective
accounting and decision making, SFDs are
considered less risky than condominiums.
Through statistical experience, the lenders know
that the introduction of common ownership that
is essential to the condominium project, creates
additional risks.
There are at least 4 major concerns of lenders
that can create insurmountable obstacles to
helping a borrower obtain a loan in a particular
condominium project.
1. Percentage of owner-occupants in the project.
A typical guideline from FNMA and FHLMC is that
the project must have at least 51% of the units
occupied by owners. This 51% can include second
homes, but cannot include tenant-occupied or rental
units. Lenders know that if a project is predominately
renters that the pride of ownership in the project is
diminished.
Very early in the application process it is important
that we contact the Homeowners Association (HOA)
management company to find out what the owner-
occupancy percentage is.
We often find that the HOA canagement company
only derives their statistics by matching the mailing
addresses to the property addresses. If someone
has their mail sent to their office, or to a post office
mailbox, the HOA management company will not
make the leap of judgment that the unit is occupied
by an owner.
Similarly, when the mailing address is a distinctly
different street address than the subject unit, they
will not survey the owners to find out if they owner
rents the property, or if it is held as a second home.
So, the information that we receive from the HOA
management company is likely inaccurate, but does
not present a problem unless the percentage of
units with matching mailing and property addresses
is very close to the 51% level. In that case, the
lack of interest in the managment company to
be more accurate could be costly to the buyer or
homeowner interested in refinancing.
In fairness to the HOA management company, they
do not feel that this is part of the service that they
are obligated to provide to their unit owners. The
unit owners would be well-served to insist that this
attention to detail be included in their contract with
the HOA management company.
2. Percentage of unit owners who are delinquent in
their HOA fees.
Lenders have also proven statistically that if there
is a significant number of unit owners who are delin-
quent in paying their HOA fees that there will not
be enough money for the payment of ongoing bills
and to replenish reserves for capital replacement
and improvements.
The guideline figure has been that no more than
15% of the unit owners can be more than 30 days
behind in the HOA fees.
Not surprisingly, the HOA management company
does a much better job of tracking the receipt of
the HOA fees and can give us this figure with
more accuracy.
A large number of delinquent homeowners means
that there is an increased likelihood of special
assessments being necessary.
And the lenders know that if everyone in the project
is asked to come up with several thousand dollars
each, that it creates financial strain on all the home-
owners. This jeopardizes the financial strength of
the entire project.
3. Lawsuits involving the condominium project.
The biggest concern of the lender is that there are
lawsuits involving construction defects in the condo-
minium project. They defeat the loan request,
almost without exception.
It is almost a certainty that within the statute of
limitations, currently 4 years I believe, that the
HOA will file suit against the developer. Although
there may not be large construction issues that
require litigation, if the HOA fails to take that
step, they could be accused of not fulfilling their
fiduciary responsibilities to the homeowners.
Consequently, a construction defect lawsuit is
almost a given within that timeframe.
Other lawsuits, which may include "slip and fall"
or nuisance suits, may be able to be overlooked
by the lender if they are limited in scope and don't
involve the unit that they are being asked to lend
on.
4. Saturation or concentration by the lender or
investor.
Many lenders, and FHLMC and FNMA, may have
a limit to the number of units that they are willing
to lend on in a condominium project. They call
this 'saturation' or 'concentration'.
They do not want to have a lot of eggs in one
basket. If there are big problems in a particular
condominium project, they want to make sure
that they are sharing the risk with other lenders
and that they don't take all the losses themselves.
Sometimes this can be a very difficult statistic
to ascertain at the beginning of the process. There
are times that despite our best efforts to find out
early on if there is the potential for exceeding the
lender or investor limit, the answer comes to us
after the loan has been submitted to the lender for
approval. And then we have to find another lender
late in the process.
All condos are not created equal. The lenders want
to make a good decision on the loan request, and
even though it seems like they may be overly
conservative at times, their interests are compatible
with the buyer's interests.
Given all the facts, most buyers would probably
prefer to live in a condominium project that enjoys
the pride of ownership of a majority of owner-
occupants, and that these owners pay their bills
responsibly to keep the financial condiiton of the
association strong, and where there are not issues
regarding the quality of construction of the units
and common areas.
If you are buying, or own a condominium, these
factors are important in obtaining new financing
and need to be thoroughly researched early in
the process.
are considered differently by the lenders than
are single-family detached homes (SFDs).
Because single-family detached homes have
an element of autonomy for the owner, and
because condominiums require collective
accounting and decision making, SFDs are
considered less risky than condominiums.
Through statistical experience, the lenders know
that the introduction of common ownership that
is essential to the condominium project, creates
additional risks.
There are at least 4 major concerns of lenders
that can create insurmountable obstacles to
helping a borrower obtain a loan in a particular
condominium project.
1. Percentage of owner-occupants in the project.
A typical guideline from FNMA and FHLMC is that
the project must have at least 51% of the units
occupied by owners. This 51% can include second
homes, but cannot include tenant-occupied or rental
units. Lenders know that if a project is predominately
renters that the pride of ownership in the project is
diminished.
Very early in the application process it is important
that we contact the Homeowners Association (HOA)
management company to find out what the owner-
occupancy percentage is.
We often find that the HOA canagement company
only derives their statistics by matching the mailing
addresses to the property addresses. If someone
has their mail sent to their office, or to a post office
mailbox, the HOA management company will not
make the leap of judgment that the unit is occupied
by an owner.
Similarly, when the mailing address is a distinctly
different street address than the subject unit, they
will not survey the owners to find out if they owner
rents the property, or if it is held as a second home.
So, the information that we receive from the HOA
management company is likely inaccurate, but does
not present a problem unless the percentage of
units with matching mailing and property addresses
is very close to the 51% level. In that case, the
lack of interest in the managment company to
be more accurate could be costly to the buyer or
homeowner interested in refinancing.
In fairness to the HOA management company, they
do not feel that this is part of the service that they
are obligated to provide to their unit owners. The
unit owners would be well-served to insist that this
attention to detail be included in their contract with
the HOA management company.
2. Percentage of unit owners who are delinquent in
their HOA fees.
Lenders have also proven statistically that if there
is a significant number of unit owners who are delin-
quent in paying their HOA fees that there will not
be enough money for the payment of ongoing bills
and to replenish reserves for capital replacement
and improvements.
The guideline figure has been that no more than
15% of the unit owners can be more than 30 days
behind in the HOA fees.
Not surprisingly, the HOA management company
does a much better job of tracking the receipt of
the HOA fees and can give us this figure with
more accuracy.
A large number of delinquent homeowners means
that there is an increased likelihood of special
assessments being necessary.
And the lenders know that if everyone in the project
is asked to come up with several thousand dollars
each, that it creates financial strain on all the home-
owners. This jeopardizes the financial strength of
the entire project.
3. Lawsuits involving the condominium project.
The biggest concern of the lender is that there are
lawsuits involving construction defects in the condo-
minium project. They defeat the loan request,
almost without exception.
It is almost a certainty that within the statute of
limitations, currently 4 years I believe, that the
HOA will file suit against the developer. Although
there may not be large construction issues that
require litigation, if the HOA fails to take that
step, they could be accused of not fulfilling their
fiduciary responsibilities to the homeowners.
Consequently, a construction defect lawsuit is
almost a given within that timeframe.
Other lawsuits, which may include "slip and fall"
or nuisance suits, may be able to be overlooked
by the lender if they are limited in scope and don't
involve the unit that they are being asked to lend
on.
4. Saturation or concentration by the lender or
investor.
Many lenders, and FHLMC and FNMA, may have
a limit to the number of units that they are willing
to lend on in a condominium project. They call
this 'saturation' or 'concentration'.
They do not want to have a lot of eggs in one
basket. If there are big problems in a particular
condominium project, they want to make sure
that they are sharing the risk with other lenders
and that they don't take all the losses themselves.
Sometimes this can be a very difficult statistic
to ascertain at the beginning of the process. There
are times that despite our best efforts to find out
early on if there is the potential for exceeding the
lender or investor limit, the answer comes to us
after the loan has been submitted to the lender for
approval. And then we have to find another lender
late in the process.
All condos are not created equal. The lenders want
to make a good decision on the loan request, and
even though it seems like they may be overly
conservative at times, their interests are compatible
with the buyer's interests.
Given all the facts, most buyers would probably
prefer to live in a condominium project that enjoys
the pride of ownership of a majority of owner-
occupants, and that these owners pay their bills
responsibly to keep the financial condiiton of the
association strong, and where there are not issues
regarding the quality of construction of the units
and common areas.
If you are buying, or own a condominium, these
factors are important in obtaining new financing
and need to be thoroughly researched early in
the process.
Subscribe to:
Posts (Atom)