30-year mortgage rates drop below 4% for first time in 18 months

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

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Rate news summary

From Freddie Mac’s weekly survey: For the first time since January 2018, the 30-year fixed is under 4%, averaging this week averaging 3.99%. That’s seven basis points lower than last week. The 15-year fixed-rate averaged 3.46%, down 5 basis points from last week.

The Mortgage Bankers Association reported a 3.3% percent decrease in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $484,350 loan, last year’s payment was $161 higher than this week’s payment of $2,310.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages at zero points: A 15-year FHA (up to $431,250 in the Inland Empire, up to $484,350 in Los Angeles and Orange Counties) at 3.125%, a 30-year FHA at 3.25%, a 15-year conventional at 3.25%, a 30-year conventionalat 3.875%, a 30-year FHA high-balance (from $484,351 to $726,525 in L.A. and Orange counties) at 3.50%, a 15-year conventional high-balance (also $484,351 to $726,525) at 3.625%, a 30-year conventional high-balance at 4.0%, a 15-year jumbo (over $726,525) at 3.875% and a 30-year jumbo at 4.50%.

What I think: Purchase money second mortgages, be it home equity lines-of-credit or fixed rates, were monster popular back in the go-go days of exotic lending.

In 2004, more than 48% of California purchase loan transactions, or 530,000, were facilitated with piggy-back seconds. Nationally, such mortgages made up 30% or almost 2 million of all purchase loans, according to Black Knight Inc.

Fast forward to 2018, just 5.8 percent, or 29,000, of California purchase transactions and 3.9%, or 163,000, of U.S. purchase transactions were funded with piggy-back second liens, Black Knight figures show.

But now innovative mortgage industry thinkers are creating mind-boggling second lien purchase money and cash-out financing instruments that will save mortgage shoppers armored cars of cash.

The prize of the many new programs goes to a new purchase money home equity line-of-credit or HELOC that gives you a better mortgage rate and gives you back a good chunk of your down payment right after your transaction closes.

Here is an illustration: Let’s say you are putting 10 percent down, or $45,000, on a $450,000 condo, and you have a 720 middle FICO score. In the Fannie Mae world, a zero-point loan will give you a 30-year fixed at about 4.125%. The principal and interest payment on the $405,000 loan amount would be $1,963. The private mortgage insurance (because you are putting less than 20 percent down) is an additional $132 for a payment total (excluding taxes, insurance and HOA) of $2,095.

Now, let’s take the clever HELOC.

With either savings, borrowed retirement funds or perhaps a little help from mom or dad, you put 25% down, for example. You will need to come up with an additional $67,500 for a total down payment of $112,500. This zero-point loan would offer a one-quarter percent lower interest rate at 3.875% on a 30-year fixed. The principal and interest payment will be $1,587. You must add this new HELOC within four months of your purchase closing. This instrument allows you to cash-out up to 89.99 percent of your down payment, or $67,455. Your rate is 6.24%. Your interest-only payment would be $351. Your first and second payment totals would be $1,938.

By maneuvering some money around, your 30-year fixed first mortgage is one-quarter percent lower. You avoid private mortgage insurance. Most importantly, you save a serious $157 per month using the delayed financing piggy-back.

Plenty of piggy-back purchase money seconds already existed before these new seconds became available. But Fannie Mae charges additional points of 1.125 or $3,797 (in this example) for the privilege of having subordinate financing simultaneously with your purchase transaction. And often the mortgage insurance is less expensive than a piggy-back purchase loan.

The other inventive idea about this loan is non-occupant co-borrowers are allowed. And, say mom and dad are the co-borrowers and their middle FICO scores are higher than yours. For pricing purposes, we get to use the highest middle credit score.

Mortgage broker Jeff Lazerson can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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