A non-warrantable condo, by definition, is a condominium that does not meet the minimum eligibility standards as set by Fannie Mae and/or Freddie Mac.

Condo buildings that fail Fannie and Freddie's minimum standards are often described by one or more of the following traits:

1. The project is more than 10% owned by one entity
2. 50% or more of the project units are rentals
3. More than 20% of the building square footage may be used for commercial purposes
4. The project is filed with the SEC and is sold as an investment opportunity
5. The project is "new" and grants concessions and/or abatements not listed on the settlement statement

There are other non-warrantable traits, too, including failure to meet certain pre-sale requirements and length of time that the condo board has been in control of the building.

The presence of any of these characteristics instantly renders the building "non-warrantable" and precludes building owners from securing conventional mortgage financing. This fact can surprise homeowners who may otherwise be well-qualified.

Good credit, good income, good downpayment -- it doesn't matter one bit.  The government's not going to insure your loan if your unit is non-warrantable, hammering home one of the most important New Lending Truths of the last 2 years.

It's not just about the buyer anymore; it's about the building, too.

The same set of rule applies to another type of condo classification; one that's normally associated with luxury and vacationing.  The condotel.

Condotel is a portmanteau of the words "condominium" and "hotel".  It describes buildings used as both a condo and a hotel, with owners keeping the rights to rent their units while they're not actually using them.  Most often, condotel rentals are managed by an on-site rental company.

A typical condotel arrangement would be in say, Aspen, where a family owns a unit in a condotel building on the mountain but only visits Aspen 6 weeks per year.  During the other 46 weeks, the on-site rental company rents the unit as a "hotel room" to other Aspen vacationers.

The Trump International Hotel & Tower in Chicago has a similar setup.

Like non-warrantable condos, condotels cannot be financed through Fannie Mae or Freddie Mac and, more often than not, condotel buyers have found themselves up a creek; ready to close but unable to find financing.

Thankfully, mortgage money is emerging for condotels and non-warrantables.

Over the last few weeks, a choice group of small banks and investment vehicles have toed the water a bit and re-opened the market for non-warrantable and condotel mortgages. Rates run about a half-percent higher than a comparable conventional mortgages and the minimum downpayment starts at 25 percent.

Beyond that, however, getting an approval is simple.

1. Prove your income
2. Prove your assets
3. Prove your credit score

That's it.  Now, there are some building considerations, too, but they're not nearly as tough as what Fannie or Freddie will throw at you.  And they're more geared toward making sure the building is well-constructed and properly insured.

Any reputable condo or condotel is going to pass those two tests.

And even better -- because approvals are being handled by small lenders and not Big Banks, loan approval times are decidedly quick.  It's common to close on a condotel or non-warrantable condo in less than 30 days.

If you're under contract for a condotel in Chicago, Colorado, or anywhere else, or just found out your condominium is non-warrantable, with notes on how I can help you get a mortgage. The more you tell me -- building name, address, purchase price, closing date, etc -- the more I can do to point you in the right direction.

I answer all my own emails so you'll get the best information you can get. And, hopefully, my rates will be to your liking, too.

How do you avoid paying jumbo mortgage rates on a jumbo-sized mortgage? 

You avoid taking your mortgage to a Wall Street lender, that's how.

It's pretty simple when we break it down.

The word "jumbo" is a Wall Street-specific term for home loans larger than $417,000.  In certain "high-cost" areas, the number is $729,750. 

Lately, rates on jumbo mortgages have been terrible compared to its cousin, the conforming mortgage.  Plus, jumbo mortgages carry higher loan fees. 

The price disparity is even worse for so-called "Super Jumbo" mortgages.  A super jumbo mortgage is similar to a jumbo mortgage, but bigger.   

But the thing is, the terms "jumbo mortgage" and "super jumbo mortgage" -- these are conventions of a Wall Street-bound loan.  Just because your loan size is over $417,000 doesn't mean that you have be subject to the jumbo and super-jumbo rules. 

To avoid them, just make a choice to avoid Wall Street mortgage lenders when your loan size exceeds the local conforming loan limits.  This means bypassing your neighborhood Big Bank retail branches in favor of a niche banks that harbor no allegiance to Fannie Mae or Freddie Mac.

Finding banks like this isn't always easy, but it's worth the effort.  When a lender makes its own rules instead of following the government's, its mortgage rates tend to be lower, its downpayment requirements tend to be smaller, and its underwriting process tends to be smoother. 

These are all good things when your mortgage is greater than $417,000.

Consider these mortgage scenarios from a sampling of local banks.  Each example carries a corresponding mortgage rate in the low-to-mid 6-percent range:

• $700,000 mortgage with 20 percent down, primary residence
• $1.5 million mortgage with 30 percent down, vacation home
• $2.5 million mortgage with 30 percent down, primary residence

Now, compared to what Wall Street lenders are offering, not only are the small bank rates up to 2 percent lower, but they come without discount points, too. 

And, even still, this is giving Wall Street lenders the benefit of the doubt.  Most Big Bank lenders won't hardly touch a jumbo or super jumbo mortgage with a 10-foot pole anymore, let along underwrite and approve it.

The irony here is that wealthiest Americans often have private banking relationships with firms like Chase, Bank of America, and Citi but the banks' private banking groups are ill-equipped to handle the mortgage needs of a high net worth client anymore. 

In 2005, the banks performed admirably for their wealthy clients. Today, not so much.

Therefore, the best way to avoid paying jumbo mortgage rates on a jumbo-sized loan is to get out from the Big Bank mentality and get your mortgage funded from somewhere other than Wall Street.  Jumbo mortgage rates are expensive.  Rates at niche banks are not.

So, if you're a jumbo mortgage homeowner with a local banking relationship, consider calling your banker to schedule a meeting.  Switching into a "non-jumbo jumbo loan" should be apropos given the huge disparity in mortgage rates right now.

But, if you're a jumbo and without a local banking relationship, that's okay, too -- just call or email me.  I lend in all 50 states and work with niche banks in most all of them.  If I can't help you, I'll be sure to refer you to someone who can.

Okay, so you've seen me use this sort of graphic before. 

Published by the Federal Reserve Bank of Cleveland, this Fed Funds Rate Future chart is an analysis of what action market players think the Fed will take at its next meeting.  The Fed next meeting is a two-day affair beginning October 30.

The Fed Funds Rate matters to regular people like you and me because it is used to calculate Prime Rate, the rate on which credit card interest rates and Home Equity Lines of Credit rates are based. 

Prime Rate had been 8.250% from June 2006 until September 2007's Fed meeting after which the rate dropped to 7.750%.

According to the chart above, prior to the Fed's September meeting, traders placed an 80 percent expectation that the Fed Funds Rate would be lower in October that it is right now.  The odds of the FFR being 4.500% points were roughly 60 percent (as represented by the blue line) and the odds of it being 4.250% were roughly 20 percent (as represented by the white line).

Today, the probabilities look much different. 

• 25 percent chance that the Fed Funds Rate will drop 25 basis points to 4.500%
• 5 percent chance that the Fed Funds Rate will drop by 50 basis points to 4.250%
• 70 percent chance the Fed Funds Rate will remain at 4.750%

We track this chart because can help borrowers make decisions about whether a Home Equity Line of Credit is preferable to a Home Equity Loan.  HELOCs are adjustable rate loans based on Prime Rate; HELOANs are fixed rate loans.  If the probability that Prime Rate will fall is very high, a HELOC becomes more attractive to a borrower.

All things equal, HELOANs tend to be priced 0.250-0.500% lower than HELOCs but carry higher payments.  HELOANs amortize whereas HELOCs only require interest payments each month.

There is currently a 0% chance that the Fed will choose to raise the Fed Funds Rate.  This means that is highly likely that Prime Rate will remain at 7.750% through at least December 11, the date of the Fed's next meeting.

Suddenly, Private Mortgage Insurance is back in vogue.  If only by default. 

Since 2002, many homeowners have financed a portion of their homes using second mortgages.  It wasn't well-publicized, but these "piggyback" loans that helped people finance 85%, 90%, 95% or 100% of their home's value were really sub-prime loans, reflecting the greater risk in lending over 80% on a home's value.

With the demise of sub-prime lending, so went many lending sources for home equity loans.  As mortgage guidelines tighten, home equity loans are becoming either (1) scarce, (2) expensive, or (3) both.

The higher costs are one reason why PMI is once again a viable option for homeowners with less than 20% equity in their homes.

We've talked about the "quick snap back to 2002".  Well, that we're even talking about PMI at all is one more supporting argument.  Check out this Bankrate.com article from that year.  Despite its age, some salient points are raised.

Even as second mortgages increase in rate, PMI payments still tend to be slightly higher than its piggyback counterparts.  The Tax Relief and Health Care Act of 2006 narrows that gap, however, using tax deductibility.  The act grants itemized deductions for some private mortgage insurance (PMI) and government mortgage insurance (MIP) expense premiums paid in 2007.

For all loans originated in the 2007 calendar year, mortgage insurance is tax-deductible provided that two tests are met:

1. The homeowner's household income is $100,000 or less in 2007
2. The home loan is for a primary or secondary residence

For households earning more than $100,000, the deduction is phased out to the tune of 10% per $1,000 of additional income until it reaches 0% at $110,000.  So, if a single person earns $90,000 in 2007 and buys a home using MI, the MI expenses are tax-deductible in 2007. 

However, there's a catch!  Because the tax code is due to expire December 31, 2007, there is no guarantee that the MI will be tax-deductible in 2008.  As always, talk with your tax professional about how tax deductions work and whether you qualify for a PMI deduction. 

Because mortgage guidelines continue to shrink and second mortgages grow more scarce, PMI is expected to grow in popularity.  When it does, the graphic/poll above will shift, too.

LIBOR (Lie'-boor): 1. The variable in most people's "What's my mortgage adjusting to" mortgage rate formula; 2. Media darling now that writers are wondering from where the next big mortgage problem will originate.

Despite what you may hear in the news, LIBOR's rapid ascent will not have a major bearing on your adjustable-rate mortgage and your ability to repay your lender-- at least not this year.  That's because all adjustable-rate mortgages have very clear rules by which they can adjust.  Those rules can provide you with protection against market conditions just like the ones we're facing now.

For an ARM, the formula to determine the new, adjusted mortgage rate is (LIBOR) + (some constant) = (New Mortgage Rate) where some constant is equal to any one of the following:

• Conforming loan: 2.250-2.750%
• Alt-A or Portfolio loan: 1.500-3.500%
• Sub-prime loan: 4.999-8.999%

But, not that it matters.

The press is talking a lot about LIBOR right now and you may be getting nervous.  There's no need to because most articles are leaving out the most important condition of an ARM's adjustment calculation -- the Adjustment Cap. 

The Adjustment Cap defines the rate by which your mortgage can move up or down when annual (or semi-annual) adjustment is calculated.

Stated differently:  Your mortgage rate doesn't just change willy-nilly -- it follows very clearly defined rules.  Your rate cannot adjust too high too fast, or move too low too fast.  We can presume that this was put in place to protect the bank in the event of falling rates, but when rates rise, homeowners like you get the benefit.

So, what it is your adjustment?  If you have your old loan papers, dig them up and you'll find out.  If you can't understand your closing papers (or don't want to), scan and email them to me and I'll take a look at it for you.

If you don't have your papers (or don't feel like looking it up), you can assume that your Adjustment Cap is 2.000%.  That's because for many conforming and Alt-A 5-year ARMs originated in 2002, the rate adjustment cap was set to be 2.000% at the point of first adjustment; for 3-year ARMs originated in 2004, the adjustment cap was set to be 2.000%. 

During the fixed rate portion of those 5- and 3-year ARMs, LIBOR is up roughly 4.000%.  But, like I said -- it doesn't really matter.

The most that the ARM can adjust is 2.000%, regardless of LIBOR. 

In a real life example:

• Current ARM: 4.250% 3-year LIBOR ARM, adjusts 09/2007
• Adjustment Formula: LIBOR (5.750%) + CONSTANT (2.250%) = 8.000%
• Actual Adjustment: 6.250% because 8.000% exceeds the 2.000% cap

So, no need to panic about LIBOR.  Despite what the newspapers say.  As always, the news talks in broad terms and isn't specifically addressing you.

Source
1 Year LIBOR -- Rate, Definitions, & Historical Graph
MoneyCafe.com

If governments see fit to curb the use of interest only mortgages, I propose a solution for mortgage borrowers everywhere.

The 100-year mortgage.

Using the 100-year mortgage, your payment on every $100,000 borrowed will be just $1.26 higher than it's corresponding interest only payment.

Yes, this post is somewhat tongue-in-cheek.

UPDATE: Sellsius already posted on this, like, three weeks ago.  But, I will not be stopped from taking my rightful place as a mortgage industry visionary.  Behold: the 101-year mortgage.

A year ago, I called the 15-year fixed mortgage a "sucker's bet" in one of my most popular posts ever.

There was a fair amount of debate around the subject and some of you posted legitimate economic discourse on the subject.  It made me feel good about my audience, actually.  What is a "safe" investment anyway?  In what investment vehicles can returns be maximized?  How do tax deductions apply, or not apply, to certain Americans.

There were a ton of interesting comments.

Only one person, however, went so far as to create a spreadsheet to uncover the heart of debate.  Using pure mathematics, an Air Force veteran in Virginia dissected the argument and drew the most logical conclusion of anyone.

Thank you, Dave Goodridge.

Dave put his dual degree in economics and electrical engineering to work in building an Excel spreadsheet.  You can download the file and test your own scenarios with the usual caveats and qualifiers (i.e. borrower itemizes his interest tax deductions, interest payments are within the bounds of the top marginal tax bracket, invested refunds are paid into a 100% tax-deferred account).

In the end, it appears that the better of the options -- 15-year fixed versus 30-year fixed -- comes down to the likely investment return on the payment delta.

Dave made a terrific case that it's not the 15-year mortgage that's for suckers -- it's the failure to manage your own mortgage and finances that is. 

If we can learn anything from Dave, it's that math never goes out of fashion and to always question what you read.

In reference to 50-year mortgages, here is a quick amortization schedule comparing 30-year, 40-year and 50-year mortgages.

• After 30 years, a 30-year mortgage term is paid in full
• After 30 years, a 40-year mortgage term has 57% of the original borrowed amount remaining
• After 30 years, a 50-year mortgage term has 81% of the original borrowed amount remaining

Of course, it's not all bad news for longer-term mortgages. 

Because a greater percentage of payment is going towards mortgage interest, tax deductibility is highest for holders of 50-year mortgages over the first 30 years, followed by holders of 40-year mortgages, and then 30-year mortgage holders.

The Chicago Tribune's Mary Umberger wrote an interesting piece on the lengthening of mortgage terms, from 30-years to 40-years and now to 50-years.  It ran in Sunday's Business section on the front page.

Mary talked to me as a part of her research on 50-year mortgage story, about which I said:

Dan Green, a mortgage planner with Mobium Mortgage Group in Chicago ... said some of those credit-impaired borrowers might be good candidates for the 50s.

The borrowers would use the ARM to leverage the equity from their homes to pay off debt and improve their credit scores--then refinance out of the 50-year loan to something with better terms.

"It's ironic that the longest available amortized loan is really a short-term solution for some people," Green said.

Her article highlighted some of the lenders that offer the product, while noting in the same breath that Wall Street is not showing much of an appetite to buy them. 

50-year loans carry relatively high interest rates and, therefore, are a short-term solution for people whose credit scores are too low to qualify for interest only loans, but are still in need of a low mortgage payment. 

Typically, that includes the 13 percent of the U.S. population whose credit scores are in the range of 500-579.

By spreading out payments over 50 years, a homeowner can reduce his monthly payments to the lowest level possible while working to improve their credit score. 

Once the credit score improves, the homeowner can remortgage into a more appropriate, lower interest rate home loans that better match their long- and short-term financial goals. In this sense, the 50-year mortgage is the first step of a two-step mortgage plan.

I don't often agree with the Tribune columnists, but kudos to Mary for a deep dig into the story of the 50-year mortgage and recognizing its application as a short-term mortgage solution. 

Too often, columnists deride 40- and 50-year loans without understanding how the mortgage can be properly applied to person's financial goals.

I can't blame the columnists because they are not "in the market" everyday to see what is developing, and how to use it.  Even the venerable Jack Guttentag showed his ignorance about 50-year mortgages, stating, "They're asinine".  His take is that interest only loans are preferred to "going out beyond 30 years". 

He's right, but some people just don't qualify for interest only mortgage products and need the 40- or 50-year term.

Source
Long Way to Go For 50-Year Mortgages
Mary Umberger, Chicago Tribune
July 30, 2006

http://www.chicagotribune.com/business/chi-0607300068jul30,1,7997390.story?coll=chi-business-hed

It happened again. 

This time, the dreaded (and oft-repeated) quote found its way into the front page of the Tribune's New Homes section.

In discussing the benefits of a 50-year mortgage as opposed to an Interest Only mortgage, a home buyer is quoted as saying:

"A big part of selecting a 50-year mortgage is the payment size.  I also know that in a few years, I will have some equity."

This logic is flawed on three levels:

Flaw #1: Interest only mortgages are called "interest only" because the payment due each month that consists of the only the interest due on the loan. Often overlooked, is that additional payments towards principal can be made at any time.  Home owners using interest only home loans can make principal payments at any time, and, in effect, "build equity".

Flaw #2: A 50-year mortgages carries a higher mortgage rate than a comparable Interest Only home loan.  Therefore, the 50-year mortgage carries a higher cost of borrowing.  The better choice is to choose the interest only mortgage, but make the mortgage payments as if it was the 50-year schedule all along.  The mortgage balance will pay down faster.  This method accelerates "equity growth".

Flaw #3: The 50-year mortgage is not a 50-year fixed mortgage -- it's an ARM that only offers lock periods for 2 years, 3 years, or 5 years.  After the initial fixed period, the rate adjusts and the payment will likely increase.  "50 years" only refers to the amortization period of the loan.

Now, this logic is irrelevant for some homeowners because not everyone will qualify for interest only mortgage payments.  For those that don't, there may be no mortgage options other than a 50-year program.  In that sense, 50-year mortgage can be "low-payment loans of last resort".

But for homeowners that can get approved on interest only payment, there are three huge benefits to doing so:

1. Interest only mortgages carry lower rates than 50-year mortgages
2. Interest only mortgages carry lower payments than 50-year mortgages
3. Interest only mortgages allow "extra" principal payments to be made at any time so the homeowner can self-manage it as a 50-year mortgage, if desired

Yes, the 50-year mortgage has its place, but it's mostly as a gimmick for mortgage lender marketing.  The better value for homeowners is to choose interest only mortgage products instead.

Oh boy, oh boy.  The cost of credit is going up (again).

The Fed is widely expected to raise its benchmark Fed Funds Rate to 3.75% today and that's bad news if you have a "first lien HELOC", a popular mortgage product popular from 2003.

First lien HELOCs are lines of credit that serve as a primary mortgage.

When Prime Rate was 4.000%, first lien HELOCs were an attractive mortgage product for a certain class of homeowners.  They provided the flexibility of a traditional home equity line of credit, and the low cost of a Prime Rate-based loan.

At 6.750%, Prime Rate is no longer "low cost".

Holders of first lien HELOCs would be well-served to remortgage into a new loan with lower monthly carrying costs -- maybe a 3-year ARM with interest only options, or something different depending on the overall financial picture.

Regardless, with long-term mortgage rates sitting below Prime Rate, the first lien HELOC is a mortgage product whose time appears to have passed.  And you don't have to be a Harvard student to figure that out.

Another day, another "mortgages are risky" article in the papers.  Today, the headline of an article in USA Today screamed: "Stretching mortgage to 40 years can be risky".

We get it!  Mortgages are risky.  In any form.  Of any product.  With any terms.  They're risky.

McPaper piece cites the same tired arguments against the 40-year loan:

1. Principal is not paid down fast enough
2. The total interest charges over 40 years are larger than with a 30-year mortgage
3. The 40-year loan is a "desperation" loan for people that should not be even considering homeownership
4. When home values flatten, homeowners with 40-year loans will be left stranded and unable to sell

You have seen these arguments before -- they're the same ones people use debunk negatively amortizing loans such as the Option ARM, and Interest Only products.

What makes them wrong is that these arguments are all based on a single tenet -- that paying down a principal balance is a good thing.  That's not always true.

In fact, purposefully maintaining low levels of home equity can be an excellent mortgage planning strategy.

"New" loan products like the 40-year mortgage are not dangerous to everyone; they are only dangerous to homeowners who operate without a financial plan.  It's not the loan that is risky, it's the behavior of the person paying the loan.