This Week's Blog

Local Heroes Get Break on Housing Crunch

With the recent release of NC economic data indicating a drop in the median income level, the rising cost of living, and increasingly rigid lending requirements, one local company, with an eye on important public servants, has set out to educate and prepare people for the new era in home buying.

As the current sub-prime fallout hits Wall Street and national real estate trends continue to stagnate, buyers are faced with risk evading banks and vanishing lenders. In lieu of these conditions, a statewide initiative by DNJ Mortgage dubbed the “North Carolina Hometown Heroes Program,” has been created to help reduce the strain on local teachers, police, fire & rescue, and military personnel. The program provides a package of benefits that includes an educational workshop series as well as an array of free and discounted services that can be used in conjunction with current government offers.

“The economy isn’t awful, but it sure isn’t ideal; times like these make it tough for those on budgets – lots of un-needed stress on people that we really depend on” comments Austin Herbert, senior loan advisor at DNJ Mortgage. With cooperation from regional real estate firms, DNJ’s program helps to reduce the cost and stress for home buyers and sellers by providing them with unique & county-specific, cost saving benefits.

“It’s our way of giving back – we really wanted to show our appreciation for our local firefighters, educators, etc...” comments Austin. “As the market continues to change, people are seeing the importance of being informed and up-to-date, it’s not like a few years ago….things have totally changed.”

“I found that what a lot of people need is just some straight-talk about their financing options” remarks senior advisor Cari DeCandia, “there’s too much confusion and misinformation floating around.” These borrowing options, which continue to dwindle, have started to come with tighter restrictions for borrowers. Banks now require higher down payments, credit scores, and incomes to qualify for loans. “People need to start planning ahead and being proactive with their credit management – and that’s what we teach in our workshops.”

The workshops are informational lectures which are held regularly and require pre-registration, but no admission fees. With local professionals stepping up to help their neighbors, the Hometown Heroes Program hopes to provide relief, education, and hope, for some of our most valuable community members.

ABOUT DNJ MORTGAGE– Providing North Carolinians superior home financing solutions and strategies for over 20 years.

CONTACT:
Cari DeCandia

DNJ Mortgage

919.459.6507

request@nchometownheroes.com

www.NCHometownHeroes.com

www.HomeTownHeroesNC.com

www.lenderforlife.net

Please read the blog titled "What is a temporary buydown and why is it beneficial?" to get a better understanding of the buydown product prior to reading this entry.

With DNJ Mortgage's temporary buydown products, we are prepaying the difference in interest between the note rate and the interest rate the first two years.  That prepaid interest is held in an escrow account by the lender.  Each month that you make a payment, the difference in interest for that month is deducted from the escrow account.  Since the goal with this product is principal reduction, you want to make as few payments as the lender allows and then refinance.  Typically the number of months varies from 4-6.

When we redo the loan, the amount that is left in the escrow account is applied as a credit towards your payoff.  This is a direct principal reduction credit. 

Here is a real analysis that I had put together for a customer of mine.  This should illustrate the power of this program.

Proposed Mortgage Structure (30 yr fixed with two year temporary buydown):

1st mortgage loan amount: $417,000

Interest rate for first year: 5.25%

Monthly payment: $2302.69

Monthly savings from current loan payment: $231.05

How it works:

With this program, we (DNJ Mortgage) are prepaying the difference in interest for the first two years between the note rate of 7.25% and the buydown rates. The first year the buydown rate is 5.25% and the second year, the rate is 6.25%. The total amount of interest we would be prepaying is $9829.44 and this amount is held in escrow by the bank.

Each month a payment is made, the difference between the payment at 5.25% and the 7.25% note rate is deducted from the escrow account. The amount deducted each month is $541.99. Since the ultimate goal with this program is the principal reduction, we would want the least amount deducted from the escrow account as possible. The bank requires that 4 payments be made which would leave you a total of $7661.48 if you were to refinance after the 4th payment. You would receive a credit on your payoff of $7661.48 which is applied directly to principal. That combined with your monthly savings would give you a total savings of $8585.68 for 4 months. We can redo this every 4-6 months to have the greatest principal reduction and lowering your effective interest rate tremendously.

Your total principal reduction in 4 months if you maintain your existing loan is $1633.66. In comparison, with this loan your total principal reduction would be $9587.48.

As you can see with this example, there is a tremendous amount of principal reduction in 4 short months.  It would've taken this customer 27 months to pay down their principal this amount.  This program drops your effective interest rate tremendously due to the interest savings over the course of the loan.

I understand that some of you might look at the 7.25% note rate and be fearful of that or consider it a greater risk.  As I explained in my initial blog on the buydown program, we can use this program as a hedge against higher rates because the initial rate on this program is about 1% below market rate.  Also, you are only in the program a short period (4-6 months).  If we see rates starting to trend one way or another, we can get into a lower fixed rate when you refinance.  Also, if you desired, you could use all or a portion of the credit towards a permanent buydown and get a fixed product below market for the entire term.

Please feel free to contact me at 919-459-6507 or cari@dnjmortgage.com for additional questions.

When we hear in the news that the Fed (Federal Reserve) cut interest rates... what does that mean?

The Fed is controlling the Federal Funds Rate which is tied to the Prime rate.  The Prime rate is specific to home equity lines and other short term interest rates.  Before the rate cut, the Prime rate was 8.25%.  Now the Prime rate is 7.75% since the Fed reduced rates by .5%. 

There is a common misconception that the Fed cutting rates will lower long term interest rates (ie. 30 yr fixed mortgages).  Unfortunately, the opposite occurred as fixed rates do not work that way.  Long term mortgage rates are based on Mortgage Backed Securities issued by Fannie Mae and Freddie Mac.  It is the trading performance of these bonds that will ultimately affect the direction of mortgage rates.

The key component is inflation. An increase in inflation is negative for any long term bond because future returns are decreased as the bond becomes less valuable. 

An indicator for consumers to watch to determine the direction of bonds is the Nasdaq/ stock market.  As the Nasdaq declines, mortgage bonds benefit causing mortgage rates to fall.  This is due to money managers and mutual fund companies moving funds into either stocks or bonds.  If stocks/ Nasdaq is trading higher, money is taken out of bonds and moved into stocks causing bond prices to drop and mortgages rates to increase.  The opposite occurs if stocks/ Nasdaq is trading lower.  Money managers then sell off their stocks and move money into bonds causing bond prices to go up and rates to go down.

In summary, it is not what the Fed does that causes rates to increase or decrease, but how the Nasdaq/stock market interprets what the Fed does that will cause rates to increase or decrease.

There are two types of buydown programs: temporary and permanent. 

A permanent buydown is where the borrower or seller pays discount points to the lender to have a lower interest rate for the term of the loan.  Often a permanent buydown does not make financial sense due to the amount of time needed in that loan to recoup the costs of the buydown.

A temporary buydown is where the borrower, seller, or lender pre-pays interest for the first one to three years in order to have a lower interest rate.  The most common types of temporary buydowns are:

• 3-2-1 buydown
• 2-1 buydown
• 1-0 buydown

With a 3-2-1 buydown...if your note rate is 6.5%, for the first year your interest rate would be 3.5%, 4.5% the second year, 5.5% the third year and 6.5% years four through thirty.

With a 2-1 buydown...if your note rate if 6.5%, for the first year your interest rate would be 4.5%, 5.5% the second year and 6.5% for the remaining years in the term.

With a 1-0 buydown...if your note rate is 6.5%, you would have an interest rate of 5.5% for the first year and 6.5% years two through thirty.

Temporary buydowns have been most commonly used by sellers/ builders that are trying to entice buyers with lower than market interest rates for the first few years resulting in a lower monthly mortgage payment.

Why temporary buydowns and the "No Closing Cost Loan" are perfect together?

If your loan amount is greater than $200,000, DNJ Mortgage has the ability to use the commission the bank pays us for originating the loan to pay for the buydown cost as well as closing costs.  This gives our customers a better than market interest rate at no cost to them.  We can continue to refinance at no cost using a buydown program to maintain the lower than market interest rate.

Example:

Customer has a current loan amount of $250,000 with an interest rate of 6.625% on a 30 yr fixed. Current monthly payment is $1600.78.

Based on current market conditions we are able to offer them a no closing cost rate of 6.5% with a one year buydown.  This gives them an interest rate of 5.5% for the first year and then the loan converts to a 30 yr fixed at 6.5% after the first year.  By refinancing at no cost, they received an interest savings of $2500 in just one year.  At the end of the year, they have three options:

1. Keep the loan and maintain the 6.5% interest rate.
2. Refinance again with no closing costs into another one year buydown.
3. Refinance with no closing costs into a different loan product (ARM, 15 yr fixed, etc).

As you can see, using the no closing cost loan along with a temporary buydown provides are customers with several benefits including:

• Lower than market interest rate at no cost them resulting in lower monthly payments.
• Increased interest savings
• A hedge against higher interest rates during periods of economic strength.

Please don't hesitate to contact me at cdecandia@lenderforlife.net for an analysis of whether a temporary buydown would be beneficial for you.