I received this email from Daryl Colin thru Facebook yesterday, and think it is valuable information for anyone considering a new mortgage.

Daryl Colin November 25 at 5:35pm

You may be attracted to a mortgage rate that’s 10 bps or more below the market, but that rate may signal a no-frills product that comes with significant limitations on what you can do within the contract terms.

No-frills mortgages are stripped-down to eliminate features that add costs. Typically, no-frills products are designed to appeal to purchasers who are highly cost-sensitive, such as those who might not qualify at higher rates, and first-time buyers with limited opportunities to make prepayments. No frills products are also suited to purchasers who want a re-advanceable mortgage with a low-rate fixed portion that they don’t plan to pre-pay, and for investors, for whom interest costs are deductible.

You generally give up the following:

• No frills is fully closed

This usually means you are committed to the full term of the mortgage. Restrictions to an early payout may be more than a traditional mortgage or have certain requirements that need to be met prior to doing so. Lenders may vary on their definition of fully closed so it’s important that the fine print is explained.

• Prepayment privileges are restricted

Most lenders offer at 10-20% annual prepayment privilege against your mortgage going directly against principle . A no frills product may not have this or offer a significantly reduced amount or in some cases have it eliminated.

• No top-up options

This means there may be restrictions if you decide to refinance or want to borrower more.. Additional penalties or fees may be charged.

• Quick closings/No pre-approvals and longer-than-average approval times

Your mortgage must close in a certain time period in order to qualify for the no frills (low rate) mortgage. In some cases you may not be able to have rate guarantee longer than 30 days.. It’s important to make sure you know the rate hold policy.

• Limited choice of lender from which you can transfer without legal fees

In today’s competitive market most lenders will absorb the legal fees to transfer a mortgage to their institution on the renewal date. Since no frill mortgages are set up with terms and conditions that are unique to the norm it may require additional legal work for the new lender to facilitate the transfer.

The bottom line: Mortgages differ from lender to lender so it’s important that you sit down with an accredited mortgage professional to understand all your options.

I found this excellent article on About.com, in their extensive Real Estate section. Although the information makes reference to American companies Freddie Mac & Fannie Mae, it is none the less relevant to the milton ontario real estate market. The article is aimed at real estate agents, but that’s a good thing as it gives you information that many homeowners won’t have! For more on the local absorption rates, see my most recent posts on this blog.

Whether it’s the listing presentation meeting, or you’re following up with a seller who’s been listed a while, provide the added service of helping the real estate seller to understand absorption rates and how their price falls into the pool of available homes for sale. Absorption rates are now required from appraisers for all government related loans; which is just about every loan.

CMHC, the Federal housing organization, also takes the absorption rate into account; the role the absorption rate plays in a funding decision is dependent on the type of loan, area the property is in, etc.

Fannie Mae’s Form 1004MC, and Freddie Mac’s Form 71 both require that appraisers calculate days on market, inventory levels, and absorption rates for the comparables and immediate area around the subject home. The assumption is that tracking the variability of these three measures across time periods can provide trend information to determine home value direction. So, what’s absorption rate?

Example of Absorption Rate Calculation – Let’s say that we take the number of settled sales for the last six months in a certain area, and it is 120. We then check the current number of active listings, and it is 520 in that area. First, divide the 120 sales by 6 months, to get a rate of 20 closings per month. Then, divide the 520 active listings by 20 to arrive at 26 months to move that inventory; that’s the absorption rate.

Using Freddie Mac’s Form 71, we see that they require this number for three time periods; the immediately preceeding three months, four to six months back, and seven to twelve months in the past. Then, the appraiser must indicate whether the absorption rate is decreasing, stable, or increasing. If it’s decreasing, then the market appears to be slowing, and this could cause the value of the home to be adjusted downward.

As a homeowner considering selling your home, the absorption rate, when viewed in an historical perspective, can be an extremely informative tool in planning when to sell, how long to expect the sale to take, etc.

Also considered are corresponding periods for days on market, inventory, and the sale-to-list price ratio.

If sale prices are getting lower in relation to list prices, this will be evident on these addendum forms, and the appraiser should be adjusting the home value downward. So, it’s clear that a good market is showing higher absorption rates, lower inventories and shorter times on market on average. They prefer to use “median” numbers by the way.

On the bad side, if median absorption rate is declining, and days on market and inventory are rising, this doesn’t look good for the market in the near term. Couple that with wider spreads between list and sale prices, and the picture darkens as well. But, good or bad news, you should be on top of this information and sharing it with sellers and prospects to help them in their decision processes.

One of the truest indicators of the health of a real estate market is the absorption rate. Simply put, the absorption rate is the numerical representation of the percentage of inventory that is being absorbed and the number of time-periods of supply there is presently on the market.

The information used to calculate the absorption rate is the number of available properties at the end of a time-period and the number of properties sold during that time-period.

As I track the market data only on a weekly basis, I am only, at this time, able to present the data in a weekly format. If I am able to gather the data, I will present a historical look at things in the future.

According to typical historical expectations, when calculating absorption rates on a monthly basis, a supply of 5 months or less is a Seller’s Market; a supply of between 5 and 7 months is a Balanced Market, and a supply of 7-plus months is a Buyer’s Market. In the Milton area over the last 10 months, we have, according to these measures, been in and out of a Balanced Market.

Here’s the chart:

Click the thumbnail above

Remember, the data above is presented with numbers pulled on a weekly basis. That means that, if no more homes came on the market, we would have no homes left for sale after 5 weeks. That won’t happen, but it sure is a good time to get your house on the market right now.

Call me @ 905-208-7002 to discuss how we can position your house in the marketplace.

Pre-Approvals: A Dying Breed?

Is the ride coming to an end? I just received a Twitter update from a mortgage broker in Toronto, saying that some lenders have raised their 5 year closed rates by 1/2 % to 4.09%, and that we should expect other lenders to be doing the same thing.

If you haven’t locked your rate in yet, now is the time to do it, just in case!!