Hawaii VA Loans

This is an age old question and actually quite complicated one (ok, maybe not quite age old, but common questions nonetheless). However, I will do my best to answer it as simply and accurately as possible. This is a slight oversimplification and this explanation may not apply to all mortgage rates, but it is the driving force behind the majority of rates (there are some lenders who set rates completely at their choosing, i.e credit unions, but they often base their rates off of other lenders’ rates which are described here). So, here it goes…

Mortgage rates, like stock prices are set by the open market. What does that mean? Well, it means that there isn’t someone sitting in a back room in Washington telling people what the rates are going to be. There are thousands of investors (mostly large banks, insurance companies and others) that buy and sell mortgage ‘securities’ every second the market is open. Whenever two agree on a price, that is the new market price. So…what are these securities? Lenders across the country sell individual loans to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac, in turn give them back a security equal to the amount of loans sold to them. They also provide a guaranty that the principal (or the face value) of the security will be repaid. Because of this guaranty from Fannie Mae or Freddie Mac, investors are willing to buy these securities because they are now considered a safe investment. The buyer of the security does not need to worry if Joe in Detroit loses his job at the auto plant. Fannie and Freddie do that worrying for them and absorb any losses (I may describe that process in another blog post, but you’ve got enough to absorb within this one).

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Right about now, you’re probably getting tired of reading headlines about how bad the real estate market is and that the financial world is on its way to a meltdown.  Me too, but there’s another side to all of this, and one that you, on main street, can turn to your advantage.  Guess who else is aware of this phenomenon.  That’s right, every seller of a home currently listed for sale.  Credit is tightening for other loan programs and, in many pockets, prices are lower than they have been in years.

As a VA eligible homebuyer, you can purchase one of these homes at a value not seen in years…and with potentially very little out of pocket expense.  How so? Not only can you negotiate on price when buying a house, there’s another tool that can make getting into a home much easier, seller credit.  A seller credit is an additional sum of money paid by the seller for you to use to pay the closing costs on your loan.  Make sure to discuss this with your real estate agent.

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I remember when having above a 700 Fico (credit) score was superb. If you had a 720, you were in elite status and able to get the best loan rates around. Fast forward to 2008 - and a 720 Fico score no longer guarantees a borrower the lowest mortgage rates.

Here’s how this all started. In December 2007, Fannie Mae (FNMA) & Freddie Mac (FHLMC) (the two government sponsored agencies in charge of buying and selling mortgages on the secondary market which helps replenish the supply of capital in the mortgage market) implemented new Loan Level Price Adjustments based on credit score & loan-to-value.

Translation: FNMA & FHLMC implemented a tiered price adjustment matrix which increased closing costs for borrowers with lower credit scores and lower down payment. Why did they do this? To compensate for the losses FNMA & FHLMC were taking on the secondary market due to the increased amount of defaults and foreclosures occurring in the real estate market.

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If you’ve ever purchased a home before, you’ve probably been asked if you wanted to “points” or not pay “points”. Now, if you are like most people, the common answer would be, “I’m not sure - what would you suggest?”. Well, before we get into the specifics of when it is beneficial to pay points or not, let’s go over what the exact purpose of points when it comes to closing costs.

A point is an upfront fee that is paid at closing to reduce your interest rate. A “point” is always 1% of the loan amount. For instance, using a $300,000 loan amount, one point would cost $3,000 at closing. Now keep in mind - you don’t have to pay points if you don’t want to (except when dealing with adjustable-rate mortgage loans - where sometimes it’s mandatory to pay a point to guarantee the lender a yield) but by doing so, you’ll decrease not only your monthly payments but also the total amount of interest paid over the life of the loan.

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