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New home mortgages


Lawman

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My daughter and her husband want to build a new home in Aledo which is near Ft. Worth, Tx. They have been approved for a loan but the details do not make sense to me. The loan rate for construction is 5.9% but the written agreement states that the interest rate for the permanent mortgage will be determined at closing and may change depending on interest rates at the time of closing..In addition they will have to pay one half of one percent of the amount of the loan. The final rate is not pegged to the prime rate or anything at all..Based on the agreement it seems to me the lender is free to set the permanent rate at anything they please. What is the standard agreement for 30 year fixed mortgages now and what rates should they expect to pay?

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the written agreement states that the interest rate for the permanent mortgage will be determined at closing

Paying points on the loan (the half percent in your case) isn't unusual, but there's no firm language about how the final rate will be determined..?

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Well that would sure make me nervous... if the final is rate is to be 'based on the interest rate at the time' I would expect at the very least that the formula be spelled out. If not I don't think I'd be willing to enter into an agreement like that, especially if there were any prepayment penalties. I've never used a building loan before so maybe someone with some specific experience with these could comment on whether such a thing is normal.

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I think the construction rate part is reasonable, they are risky for the lenders, but not knowing what or how they will determine the rest is scary. Then again, given the time frame (I assume a few months to finish the construction and get a final inspection/sign off) it would be hard for the lender to commit to much. Why not get the construction loan now and when finished shop around for the 30 year mortgage....

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Lets_Play_Two

Sounds to me like a very normal construction to mortgage loan process. When people apply for a mortgage, the indicated rate is usually only locked in for a certain time period and if closing is delayed the rate may change. I had a house built in 1983 (vowed to never do it again!!!) and this was the structure of the construction/mortgage loan. I would also guess they would be free to get a mortgage any where they want to when closing time comes. The advantage with this arrangement is that they have already been qualified by the lender. Mortgage rates are never directly tied to the prime rate. Also there is no "going" rate for a mortgage, it will vary by lender and by geographic location. What is the lenders current 30 year rate? That will be a better indication of what they can expect when closing time comes.

 

To check out rates and trends go to www.bankrate.com

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The lender's current rate is very reasonable but I'm not accustomed to doing business in a way that suggests the customer should just trust the lender that the permanent rate will be reasonable..There must be some formula they use to determine the rates they charge..Seems to me like they should be willing to put that formula in writing.

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If they want to lock in a rate up front they may want to consider a "construction perm" loan. This type of loan automatically converts to the permanent mortgage upon completion of construction and may allow you to "lock in" your interest rate. There may be extra fees involved though as the lender is assuming the risk if interest rates were to go up during construction.

 

However, in today's market I would think rates are not likely to go up so this should be low risk, (for the buyer and mortgage company). Also, depending on credit score and possibly regional variations, a rate as low as 5% with no points should be available. One point reduces interest rate by 1/8th or .125 percent. Sounds like they are paying half a point to get 5.9% rate.

 

Hope this helps.

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Lets_Play_Two
The lender's current rate is very reasonable but I'm not accustomed to doing business in a way that suggests the customer should just trust the lender that the permanent rate will be reasonable..There must be some formula they use to determine the rates they charge..Seems to me like they should be willing to put that formula in writing.

 

IMHO you are reading something into this that is not there. I do not believe they have committed to a binding agreement with an unknown rate. A simple formula such as 4% over prime just is not the case. Look at bankrate, they show rates and trends. BTW points on mortgages are %. 1/2 point is 1/2% of mortgage. The points are reflected in the difference between quoted mortgage rate and APR which includes origination and discount points and other closing costs that are added to mortgage amount and collected up front.

 

Current comparison of rates in Ft. Worth area for $250,000 mortgage with 20% down. http://www.bankrate.com/gookeyword/rate/mtg_ratehome.asp?params=250000,TX,287&product=1&points=6&pType=f&refi=0&pct=0

 

Here is some information on mortgage pricing!

 

"the chatter about the Treasury seeking to bring mortgage rates down to 4.5 percent as a way to jump-start the housing market is true.

 

Thirty-year fixed-rate mortgages are priced off the 10-year U.S. Treasury note. The 10-year note is trading at the lowest levels since the Federal Reserve Board started recording the levels back in the 1950s.

 

At this writing (Dec. 17), Bankrate's national average for a 30-year fixed-rate mortgage is 5.42 percent (now about 5.33%) and the 10-year note is at 2.2 percent. That's a spread of 3.22 percent. Historically, spreads are typically between 1 percent and 2 percent.

 

The current widening of the spread can be explained in part by the "flight to quality" in Treasury securities. In uncertain economic times, investors flock to the safety of owning U.S. Treasury securities.

 

The yields on other investments, like mortgages, don't follow the Treasuries lower, thereby widening the spread to Treasuries. A little year-end pressure for portfolio managers to own Treasuries also keeps the Treasury rates low."

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Thanks guys..I guess if for some reason the permanent rate offered months from now, near completion, was not competitive they could apply to another lender for the permanent mortgage..

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Thanks guys..I guess if for some reason the permanent rate offered months from now, near completion, was not competitive they could apply to another lender for the permanent mortgage..

 

make sure of that...construction/perms usually stay with the construction lender unless the institution has an arrangement to pass the "perm" to a true mortgage underwriter/provider. one can always refi, but if rates drop, which they very well may, there'd be no reason. also, research contract for prepayment penalties.

 

another thing..find out what the rate is without the points. if rates do go down for the "perm" financing the points may be wasted $$$$'s.

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Thanks guys..I guess if for some reason the permanent rate offered months from now, near completion, was not competitive they could apply to another lender for the permanent mortgage..

 

 

 

Right..

 

I've built two homes both deals were exactly like your daughters.

 

It is very important that they maintain their credit rating till the house is completed.

 

 

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Just 2 add my 2 cents. This is very common. Local banks lend their own deposit money typically to fund construction. Upon completion the loan is locked and closed for permanent financing. Most loans are then "sold". This requires a bit more detail. The asset of the loan, the debt obligation is ultimately sold to Fannie Mae/Freddie Mac for pooling and sale on the securitization market. The sold that most people think of is the servicing. Make sure to have them ask their lender if the retain or sell the servicing. Most local banks sell the loan asset to Fannie/Freddie and retain the servicing. Lots of advantages here both in cost and service.

 

There is no set formula for what rates will do, plain and simple. The Mortgage Backed Securities (MBS) market is what ultimately defines rates based on what investors are willing to invest in based on returns. If the Dow is tanking many investors will run to Treasuries or MBS for security because these are markets that traditionally perform well over time with a predictable return. There is lots of discussion to be had about "predictable returns" but that for another post. As investors flood into the MBS market that creates demand for those securities. Price rises on demand and rates fall. If the DOW is doing well, those monies pour back into equities, demand falls, rates rise. Very volatile. Avoid watching the 10 year. It is at best a barometer of the market but huge disconnects have existed recently and if you watched the 10 year over the past 3 months you would have missed some great opportunities.

 

Have them ask the lender about servicing, what they watch to get a feel for rate movement and whether they have a pre payment penalty if the end loan does not close with them. And do the lender a favor, no one can predict what will happen with rates, so if the end loan makes sense and is comparable to what other banks offer take it.

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That all makes sense. I misunderstood the OP in that I thought Billy was saying that the buyer was being locked into a future loan at an undisclosed interest rate.

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