RATES AND POINTS IN OUR CURRENT MARKET
Lenders typically adjust their rate sheet offerings every day. In fact, it’s extremely rare to see absolutely no change in any given lender’s rate sheet from one day to the next. Rates are almost universally quoted in .125% increments. Each day the pricing (“discount points”) increases or decreases depending on several economic factors and investor trading (“mortgage backed securities”) around the globe.
Depending on the rate chosen, this can either be a cost out of the borrower’s pocket (“discount points”), or a rebate (premium pricing) from the lender. Rebates to cover closing costs, etc., are a common feature of loan quotes, and lenders are able to offer them because of the interest collected over time. The higher the rate, the higher the potential rebate. The lower the rate, the higher the cost (“discount points”). For example, if a 7.000% rate involved neither an upfront discount nor a rebate from the lender, then a 6.875% might require a 1% discount point and a 7.125% might result in a 1% rebate from the lender.
In that example, both represent the COSTS that the borrower pays. This is the side of the mortgage rate equation that is almost guaranteed to be changing every day—sometimes multiple times per day. A 6.875% rate that cost 1% in discount points today, may cost 1.5% tomorrow OR may cost .5% tomorrow. It just depends on the economic factors and investor trading.
Why are buyers paying points in most cases? Premium pricing has been nonexistent at times in 2022, and the well ran almost completely dry at the end of September. There are a few reasons for the absence of premium. The simplest is that lenders don’t want to rely on earning higher interest over time to make their profits if risks are higher that borrowers will refinance at the first sign of lower rates.
The reason is complex enough to avoid discussing in detail, but it has to do with the speed of the shift in financial markets and the fact that the mortgage-backed securities required to facilitate a borrower not paying discount points simply don’t exist in the quantities required to create a healthy, liquid market. That absence of investor participation means that lenders can actually offer you much better terms if you pay points.
MORTGAGE ASSUMPTIONS
With interest rates currently at 20 year highs, mortgage assumptions may be an attractive option for some home buyers. An assumable mortgage is one that allows a new borrower to take over an existing loan from the current borrower (homeowner). Typically, this entails a home buyer taking over the home seller’s mortgage.
The new borrower (buyer) — the person ‘assuming’ the loan — is in exactly the same position as the person passing it on. They’ll have the same terms and conditions, the same mortgage rate, PMI, remaining repayment period, and the same mortgage balance.
There are three things that buyers should know about how assumable mortgages work:
- Not all types of mortgage loans are assumable. Most conventional loans cannot be assumed, for example, but FHA and VA loans can. Nearly all mortgage agreements for conventional loans (those not backed by the government) contain a “due on sale” provision. As the name implies, the full mortgage balance falls due when the home is sold. So conventional and conforming loans are generally not assumable. Fannie Mae does offer an exception, but only for adjustable-rate mortgages (ARMs).
- Not just anyone can assume an existing mortgage. You still must apply with the lender and qualify for the loan the same way you would purchasing any home.
- You generally need to make a down payment when assuming a mortgage, and it may be larger than expected. It’s often more than with a new mortgage because new borrower will be responsible for the difference between the current owners mortgage balance and the sale price. So, it comes down to your negotiations with the owner.
Contact us if you have questions about the current mortgage market or to see what loan options you may qualify for. Thank you!
