Are you getting offers to refinance your home again? The floodgates have opened because the standoff between financial institutions and the government agencies (that's you and me) who back mortgages, have reached a compromise. Do you realize the banks take NO risk when they give you a mortgage, i.e. they're just paper pushers.
Mortgage lenders like Fannie Mae and Freddie Mac, who back mortgages have declared war on condominiums. Instead of signing paperwork for our closing this morning, I got a message from GMAC yesterday saying today's closing is delayed because underwriting declared we own a condo and that means we have to pay more fees! Lousy sales pitch too. The message said our rate won't change, we just have to pay another half point origination fee, and that's a really dumb idea so let me explain what's going on and what your options are.
Note: This is my personal story. I'm sharing personal facts and what I've learned researching the problem and I've owned more than 10 homes. My only involvement in real estate is as a homeowner.
I've watched the US financial industry rape America and been frustrated that Active Rain, a wonderful online community of 200,000 plus members involved in real estate, hasn't spoken out more. Our government is slow to respond and seems hopelessly mired in political agendas controlled by corporate America, as they finance campaigns.
The Condo Financing Penalty
According to this Mortgage Rates Report article, Condo Mortgages Seen As “Risky” and Will Cost More April 1, 2009 (recommend you check for specifics for where you live, and the current year as things change constantly):
- If you are financing (buying or refinancing) a condominium with less than 25% equity, you will get hit with an “add-on penalty” simply because it's a condo, and not a traditional, stand-alone home.
- Borrowing from a quote in the article above, “… some of the loan categories and credit risk combinations … default at four to eight times the rate of other mortgages … We have to manage these risks appropriately, and that means pricing them based on the probability of higher losses.”
- This risk-based pricing gets applied to condominiums because of the added layer of the Home Owners Association (HOA). With a condo, you own your unit and have the right to use common areas which are maintained by monthly condo fees paid to the Home Owners Association.
My condex is 2 units, and there are no condo fees … so no risk!
A simple solution would be put HOA fees into escrow with taxes and insurance!
The condo penalty is significant. If you were buying a $400,000 condominium, you'd have to put down 25% or $100,000 to avoid the penalty. Otherwise you could be hit with an extra fee at closing of .75% fee or … $2,250 for a $300,000 condo mortgage.
Avoiding the Condo Financing Penalty
So let's go back to the message the GMAC salesperson left, and yes you need to understand these are sales people who want to process as many loans as possible because their pay is likely tied to performance. Scratching your head?
- My GMAC salesperson said essentially “… we can't close tomorrow because the underwriters came back and said you have a condo so you'll have to pay an extra half point at closing, but don't worry, your mortgage rate isn't changing.”
- A mortgage consultant would have said, the underwriters (Fannie or Freddie) have determined your home is a condo so there's an extra half point required at closing. Let's talk Monday as there are some options you might prefer!
Most homeowners would have gotten angry but realizing you're still going to save a bundle by refinancing, they would go ahead and pay the extra fee, never knowing there are alternatives. Here are the first 2 that came to mind immediately (and hopefully others will add comments below to provide you with more options.
- Mortgage financing is a combination of points paid at closing and the mortgage interest rate. The APR, or really the effective APR (Annual Percentage Rate) combines loan origination fees, service charges and mortgage rate to tell you what you're really paying!
- You can usually lower your monthly mortgage rate (and payment) by paying higher loan origination fees at closing. Alternatively, you can lower your closing costs by rolling loan original fees into your mortgage rate, which results in a higher mortgage rate and higher monthly payments. If you only expect to remain in your home for 5 years, it's cheaper to roll this extra payment into the mortgage.
- If you have substantial equity in your home, and you can stretch to bring your equity to 25%, then the condo penalty should go away but I'll have to wait for my discussion with GMAC on Monday (they were the ones pushing for a Saturday closing).
- Another way to avoid the condo penalty is to get an FHA or VA loan. They aren't available for all condos because the HOA must jump through hoops to qualify, which involves demonstrating that they've maintained the common areas properly and have the funding to continue this to protect property values (actually more complicated but you get the idea).