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30 FRM cheaper now than 5 yr ARM

On several ratesheets now I am seeing the 30 FRM priced cheaper than the 5 yr ARM (and only about 40-60 bips in fee higher than the 7 yr ARM.)

The 30 FRM mortgage is currently available at par (no discount points) at 3.0% on the nose.

http://content.screencast.com/users/LeveragePlanner/folders/...

This is unlikely to remain in place very long… maybe a few months…..
BUT STILL… important to be aware of.

Dave Donhoff
Leverage Planner
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30 FRM cheaper now than 5 yr ARM

On several ratesheets now I am seeing the 30 FRM priced cheaper than the 5 yr ARM (and only about 40-60 bips in fee higher than the 7 yr ARM.)

The 30 FRM mortgage is currently available at par (no discount points) at 3.0% on the nose.

http://content.screencast.com/users/LeveragePlanner/folders/......

This is unlikely to remain in place very long… maybe a few months…..
BUT STILL… important to be aware of.



Dave ~

Thanks for letting us all know about this incredible rate! Here's the deal:

My dad has two 4-plexes close by and the interest rates are 6% and 6.75%. He has great cash flow and stable long-term tenants. Would the interest rates be higher because they aren't his primary residence but income property?

BTW, we were thinking about refinancing his personal home. It is a VA loan and at 4.375%. Do VA loans always have a bit higher percentage rate than conventional or other types? Does the Government/VA determine the loan rate or is it more "open market"? I was told by the current lien-holder that VA loans are higher. He is paying $1000 extra per month toward the principle and it is scheduled to be paid off January 2020. He isn't against refinancing and paying some reasonable fee to get a much better interest rate. He is thinking that he would plan to pay the same amount but more of it would go to the principle thus paying off the mortgage even earlier.


Robyn
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Hi Robyn,

My dad has two 4-plexes close by and the interest rates are 6% and 6.75%. He has great cash flow and stable long-term tenants. Would the interest rates be higher because they aren't his primary residence but income property?
Rates on his 4-plex invesment properties would probably be in the mid-to-high 3%s currently.

BTW, we were thinking about refinancing his personal home. It is a VA loan and at 4.375%. Do VA loans always have a bit higher percentage rate than conventional or other types?
Very minimally. A VA streamline would probably grab him rates in the low-to-mid 3% currently.

Does the Government/VA determine the loan rate or is it more "open market"?
Open market.

Cheers,
Dave Donhoff
Leverage Planner
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My dad has two 4-plexes close by and the interest rates are 6% and 6.75%. He has great cash flow and stable long-term tenants. Would the interest rates be higher because they aren't his primary residence but income property?

The price adjustment for non-owner occupied AND 2-4 units is 1.75 and 1.00, respectively, to fee, not rate.
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Dave,

I'm struggling to understand the logic behind how a 30 yr FRM can possibly be cheaper than a 5 yr ARM.

From an investor's standpoint, why would you want to encourage the borrower to lock in their extremely low rate for 30 years as opposed to a 5 year lock and then variable by offering the 30 year at a lower rate?

Unless the investor thinks rates will be lower in 5 years?

Please explain.

Thanks,
CP
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From an investor's standpoint, why would you want to encourage the borrower to lock in their extremely low rate for 30 years as opposed to a 5 year lock and then variable by offering the 30 year at a lower rate?

Because the market for mortgages is no longer a free market.

We are down to basically one investor in mortgages: The Federal Reserve Bank. And being a quasi-governmental agency, their decisions are not driven by what is best financially. Their decisions are mainly driven by their dual mandate to maintain both full employment and price stability.

For the time being, they've decided to heavily subsidize mortgage interest rates in an attempt to prop up real estate prices.

Traditional logic no longer applies to the pricing of mortgage loans.

--Peter
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Hi CP,

I'm struggling to understand the logic behind how a 30 yr FRM can possibly be cheaper than a 5 yr ARM.
As per usual, Peter explained it much more elegantly & succinctly than I would have.

You *may* note in my OP that I mentioned this anomaly cannot endure... the free market pressures are as inescapable as gravity. The manipulators can run, but they cannot hide, and natural risk-equalizing forces *always* prevail eventually.

There was a brief period in either 2005 or 2006 (IIRC) when a similar cross-over occured, and hell froze over as I recommended the 30 FRM as the financially superior choice to the 5 yr ARM. It lasted about 3 months.

NOW... at present the ARM pricing is actually very much 'all over the board' among various lenders... it is not at all a liquid or consistent marketplace. Cath showed me an example where the 5 yr was still much cheaper yesterday than the most competitive 30 FRM we both saw... so, it still pays to engage people who keep their finger on the broad lenders/providers.

HOWEVER... the fact that this is all in disarray at all comes back to Peter's explanation. Common risk/reward logic is out the window at present.

Cheers,
Dave Donhoff
Leverage Planner
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BTW, we were thinking about refinancing his personal home. It is a VA loan and at 4.375%. Do VA loans always have a bit higher percentage rate than conventional or other types? Does the Government/VA determine the loan rate or is it more "open market"? I was told by the current lien-holder that VA loans are higher.

My BF (we live together but he owns the house alone) is locked on a VA streamline refi (high-cost area and 88-89% LTV) at 3.75% with a rebate of 1.625 points. The rebate was 1.875 pts but he took a hit of .25 pt to the rebate because he was just under the highest credit score tier.

So he's basically getting his rate dropped from 4.125% to 3.75% and getting 1.625 pts to use toward the costs and prepaids. I'm waiting to hear back from the mortgage guy as to whether rates have dropped any further since he locked on 9/10 (.35 pts relocking or float down fee).

Good luck to your dad on his refinances!
kasha
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A twenty to thirty fixed rate mortgage is almost always better for the buyer than a floating rate loan.

Not true. It is very dependent on the circumstances of the individual taking out the loan, which doesn't translate to "almost always". For those who have the ability to handle the maximum possible payment and have specific plans to have the loan paid off (home sold, loan refinanced, loan paid off some other way) prior to the 8 - 10 year time frame where the total costs (including closing costs) of the floating rate mortgage are less than the total costs of the fixed rate mortgage, variable rate loans are a better deal.

AJ
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You're right, AJ; the decision is strictly situational.

My brother, age 64, is going to buy a house for $89,900. He's putting 30% down.

69930 x 3.00 = $294.83 (per month, amortized over 30 years)

The payment is far cheaper than rent for a comparable house. In his situation, it doesn't matter if he ever pays off the mortgage. However, had he wanted to pay off the mortgage, a 5 year ARM would serve him well, as he can easily afford the payment.

69930 x 2.375 = $1,237.22 (payment required to pay off in five years)
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