November
27
2010
Three Steps to Getting in the Right Financial Shape to Buy or Refinance a House
As a loan officer, I talk to people day in and day out and no matter how diverse my clients are I always end up asking the same question: Whats your credit like? The more savvy clients i.e. the ones who have bought or refinanced a home before, know exactly how good their credit is and know that every loan officer they talk to is salivating over the chance to do a loan for someone with a 720+ credit score. For everybody else, that question prompts me to deliver my mini-speech on credit. I dont mindI enjoy educating people and hope that I am the one loan officer they talk to who is willing to take the time to explain the complicated nuances of credit. With that in mind, I set out to create an article setting out those basic lessons for people who are buying their first home or those who are doing a refinance for the first time. In my opinion, there are three important things a consumer can do before applying for a loan, in order to get their finances up to speed. It can take up to six months for your credit report to be updated by the credit reporting companies, so start now and youll be ready for the future.
1.Check your credit report. Under the Fair and Accurate Credit Transactions Act, consumers can request and obtain a free credit report once every 12 months from each of the three nationwide consumer credit reporting companies (Equifax, Experian, and TransUnion). You can go to https:www.annualcreditreport.comcraindex.jsp to request a free copy of your credit report. This is the only site authorized by the three major credit bureaus for the purpose of obtaining a free copy of your credit report. You can request the reports via e-mail, telephone, or mail. While the report you receive from the site will not provide you with a credit score, it will give you a complete copy of your credit historythats all you need for now. Take some time to review each entry. This is also a good time to make sure you are not a victim of identity theft. Do you have any late payments or delinquencies? Are there any errors? Is there any unfavorable public record information? Are there collections disputes? Decide whether to resolve or dispute every negative item on your credit report. Even small items such as a past due account with a utility company can show up and adversely affect your credit so take care of it now.
2.If you carry a balance on your credit cards, start paying them off. We all know that were supposed to do this but many Americans keep putting it off. Heres the deal: when you apply for a home loan, the loan underwriter will look at your ability to repay your total debt and a large annual salary usually does look pretty good. However, the underwriter will also look at the current debt that you carry on revolving accounts and how much you pay for that each month. Oftentimes, they will even calculate it at 3% of the balance rather than your monthly minimum, which really makes a difference when calculating the ratio of your monthly obligations to your salary. For those of you who are paid well, dont fall into the trap of thinking that a hefty salary is enough. I recently had a client who made over 70,000 per year. He resisted paying down the balances on his credit cards because he thought his salary was enough to qualify him for a good rate on his loan. He was wrong and we had to put him into an alternative documentation program with a less than favorable interest rate. In short, start making a serious effort to pay off your credit cards.
3.Start saving to pay for closing costs. Closing costs are the costs associated with the closing of the loan e.g. title costs, loan fees, discount fees, inspection fees, appraisals, etc. If you are refinancing your current home, you can finance the cost of closing into the loan amount. However, when you purchase a home, you will be expected to bring these fees, which can range from 3000 to 7000, into closing with you. There are loan programs that allow you to finance the closing costs of your loan, but be prepared to pay a premium for that convenience. If youre relying on the seller to pay closing costs, keep in mind that what the seller pays in closing costs is considered to be a rebate on the price of the house. If the house doesnt appraise within the range, the seller cant pay your closing costs. For instance, say you find a 200,000 home and the seller is paying 5000 in closing costs. What the seller is actually getting for the house is 195,000 i.e. the 200,000 sales price less the 5000 the seller gave back to you in the way of closing costs. An appraisal is a written estimate of a propertys current market value based on recent sales information for similar properties, the condition of the property, and the neighborhoods impact on future property value. A lender will lend a pound amount based on the appraisal. Therefore, if this hypothetical house appraises at 200,000, all is good. BUT if the house appraises at only 195,000, then you can count on only getting a loan for up to 195,000 so youll have to bring the 5000 difference between the 200,000 asking price and the 195,000 appraisal price in with you anyway. In that case, why have the seller pay closing costs at all? In short, one way or another, you will pay for closing costs, so just start saving for it now.
While these steps are not exclusive, they will put you on the right track to qualifying for the best mortgage possible. The months before buying your first house are an important time to be frugal and avoid any negative impacts on your credit report.
About the Author: Cassandra Forbess is a loan officer who specializes in mortgage planning at Mt. Financial Services in Portland, Oregon. She can be reached for more questions at cforbess@mtfinancialservices.com .
November
13
2010
What your banker wont tell you
This summer could be a foul season for many consumers followed by tumultuous times for the remaining years. The quadruple jinx of rising interest rates, higher credit card minimum payments, erratic fuel costs, and depressed home values could be the calamity for many families already living on the threshold of bankruptcy.
Americans who recently broke into overvalued home equity, at historically low interest rates, are now seeing a sign of things to come. In some cases, consumers may find themselves upside down, owing more than their home is worth. In other cases, low interest rate credit cards now mandate APRs at least four percentage points higher than two years ago. Plus, issuers have been forced by regulators to double minimum payments on some cardholders who are paying high interest rates. But the real blistering is fuel prices which could now soar any day to any price. Paying 4 per gallon for gas, higher utilities, a 30%+ APR for credit cards, and clinging to a 100%+ home equity line of credit may push more Americans into foreclosure and ultimately bankruptcy.
Dont kid yourself on your current home situation. If you are upside down in your home, there is a clause in your contract with the lending institution that states that they can call the loan in at anytime. That means quite simply that they can force you to pay enough to settle yourself into an equity position or foreclose on the home. Why would the banks do that?
Look at it this way. Banks are in the business to make money, its as simple as that. In addition, while you are mailing off your mortgage payment to Chase Manhattan, it may actually be forwarded to The Bank Of Beijing! Thats correct. China now holds over 40% of American home mortgages.
There is a concrete reason that credit card minimums have doubled. The credit card industry will attempt to fill your head with propaganda such as: they are attempting to help consumers get out of debt quicker. What they are really pulling off is this: when you cant make the minimum payment and contact them, they are now trained to look at your credit file and determine how much (if any) equity you might have in your home. They then offer you a consolidation loan with their bank. Should you decide to take them up on their generous offer of a consolidation loan, they then own you. Should you default on your credit card, they can take the house! Beware of wolfs in sheeps clothing.
Another clandestine offer is consumer credit counseling. Every ad and commercial you will see for this service pitches themselves as a non-profit organization that was established naturally to help you get out of debt quicker, thus avoiding bankruptcy. What you dont know is that the non-profit consumer credit counseling industry if fueled and funded by the credit card industry. They report to the credit card industry! They also will not make your monthly payments on time, thus ruining your credit history anyway. I have seen this time and time again, over and over.
This brings me to ARMs. In short, they are adjustable rate mortgages. Never in American history have we seen so many people with no credit files approved for home loans. Many of these people were innocently following the American dream and quite naturally, the American dream is to purchase as much house as you can afford for the longest amount of time. Based on this fact, many people that could not afford that dream house under conventional financing were able to afford it by incorporating an ARM loan.
In the long run, this will come back to bite them hard. When they signed an ARM, they were betting that the interest rates would not rise during the next 30 years! When the rate does rise and their mortgage rises accordingly, we will start seeing the effects of this in the way of mass foreclosures. As of this writing, we are already at an all-time high for foreclosures starting with Indianapolis in first place, Atlanta in second place and Dallas-Ft. Worth in third place. As rates continue to rise and jobs continue to be outsourced, we will see a plague of foreclosures that I predict will surpass the 1980s.
November
6
2010
A mortgage broker is a well-trained professional representing those who seek home mortgages and provides them an ideal solution. He is thorough with the entire mortgage processes. Hence, he will give the clients the best mortgage solution. A mortgage broker is considered as financial matchmaker between the borrower and the lender. Mortgage brokers are very knowledgeable professionals, as they have contacts with many lenders. They find the best interest rate for the borrowers to suit their needs by taking quotes from various lenders and picking the right one for their clients. Federal laws, state laws and licensing boards, regulate all most all the mortgage brokers. The mortgage brokers charge a nominal fee for the services he renders to the customers. Even though the borrower spends money on a mortgage broker, he still saves a lot of money due to the advice got from the mortgage broker. Mortgage brokers have access to lot of mortgage services and products at wholesale prices and they in turn market these services and products to their customers.
Need for using a commercial mortgage broker:
By engaging a mortgage broker, the customer gets his value for money spent on him. They provide the customers with excellent financing options according to their needs and objectives.
Locating a mortgage lender is not an easy task. By engaging a mortgage broker, this process is simplified as he has contacts with many lenders offering various financial options to the home loan seekers. With the help of a mortgage broker, the customer has all chances of getting loan options for an unbelievable amount.
When working along with a mortgage broker, the borrowers loan application has the possibility of being submitted to various lenders, this in turn increases the chances of the loan getting funded and also gives the mortgage broker the power to bargain in getting the best deal.
Since each and every kind of property has its own advantages and disadvantages, hiring a mortgage broker who is specialized in that particular loan type, will definitely be an advantage to the borrower. Also it saves a lot of time to the borrower in locating the right kind of the lender offering the best deal.
Advantages of hiring a mortgage broker:
The mortgage brokers have extensive knowledge about the mortgage market. They can find the borrower the best financial solution from the available options. They have access to more number of lenders and sometimes might even help the borrower to get mortgage from a mainstream bank itself. Since, mortgage involves lot of paperwork; it is taken care by the mortgage brokers. They reduce the time spent on searching for options by the borrower. They also can negotiate well with the lender and get the best possible interest rate to the borrower.
Disadvantages of hiring mortgage brokers:
Some kind of unscrupulous brokers might be there who show bias towards the lenders and make the borrower pay higher fees and commissions instead of providing an appropriate product or service to him. Some brokers may be void of training and knowledge about the mortgage industry but may make the customers believe that they are good knowledgeable people. Not all the brokers may have good contacts with the lenders. Some mortgage brokers might also charge heavy fees to their customers.
October
30
2010
An adjustable rate mortgage, commonly referred to as an ARM, is a mortgage where the interest rate on the mortgage changes periodically, on a schedule, according to an index. The most common indexes used to determine the interest rates are:
One-year constant maturity treasury securities (CMT)
Cost of Funds Index (COFI)
London Interbank Offered Rate (LIBOR)
A lending institution’s own costs of funds.
The mortgage payment that you pay will thusly change, either up or down, to ensure a steady margin for the lending institution.
For many people who are looking at mortgages, the adjustable rate mortgage can seem like a great idea, however there are many pros and cons to an adjustable rate mortgage – items that need to be weighed over the short and long term to decide whether an adjustable rate mortgage is right for you or not.
The Pros of an Adjustable Rate Mortgage
The initial interest rate on an adjustable rate mortgage looks great on paper. Most often, the adjustable rate mortgage inserts rate is much lower than a fixed rate mortgage, which also means that the payment is lower. As a borrower, this lower interest rate can also mean that they can qualify for a higher loan amount if the lender is willing to base their ability to pay on the initial monthly payment amount. It’s important to do some research on the interest rates and see where they are sitting at in comparison to the six months to a year prior.
An adjustable rate mortgage is a good idea for people who only plan on staying in a house for a few years – from three to five years. Taking advantage of the lower interest rate that accompanies an adjustable rate mortgage is a good idea in this case. It means that you will ‘pay less’ for the home that you will be living in over the period of the three to five years, and gain more in equity in your home.
The Cons of an Adjustable Rate Mortgage
The biggest issue with an adjustable rate mortgage is that the interest rate will rise and thusly, so will your monthly mortgage payments. You have to decide whether the gamble is worth it or not. If you are looking at getting a raise in the next year from your job, then you may be able to handle an increase in your mortgage payments.
Some of the adjustable rate mortgages that are offered by lending institutions have a prepayment penalty, which you incur if you pay the mortgage off early. By having this prepayment penalty, you could be opening yourself up to a lot of strife – having a prepayment penalty on your mortgage contract is never a good idea because you simply just do not know what the future will bring.
You must also consider the payment cap. A payment cap sounds great – your mortgage payment can not go above “x” amount of pounds, however, that doesn’t mean that the interest charge is capped. If the interest rate raises high enough that you go over your payment cap, the lender adds the interest to your mortgage debt, which then finds you in the position of paying interest on the interest. This can translate to you paying much more for your home than you did when you bought it – this is called negative amortization. Many lenders have a cap on negative amortization that you can have, and if you reach that point, your payment cap goes out the window and your mortgage’s monthly payments are adjusted to begin repaying the negative amortization debt.
Factors that can go either way
There are a few factors of adjustable rate mortgages that can fall on either side of the procon debate. Due to the fact that there are many different types of adjustable rate mortgages available from different lenders, it’s important that you research the adjustable rate mortgage and find out whether it is right for you. Some of the ‘ambiguous’ factors that you have to consider can make or break the decision to go with an adjustable rate mortgage.
One of the first things you need to consider is the lifetime interest rate cap on the mortgage. This is the maximum amount that the interest rate can raise through the period of the mortgage. There are also the periodic adjustment caps that limit the amount that your mortgage interest rate can raise from one adjustment period to the next. The law states that adjustable rate mortgages have some type of lifetime cap.
Most lenders use one of the index rates to base their interest rates on. The index rates change and fluctuate with the movement of the economy. To determine the interest rate that you will be charged, the lender adds a margin (profit percentage) to the index rate. The margin that the lender will add is also important – it determines your future interest rates with an adjustable rate mortgage. The margin is different from lender to lender, so it’s important to find out what the margin is.
October
23
2010
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October
16
2010
The Offset Mortgage Why Is It Growing In Popularity?
The biggest innovation in the mortgage market in recent years, the offset mortgage, is now starting to take a significant share of the market. Now, only six years after they were introduced, the offset and the current account mortgage account for 10% of all borrowed mortgage capital.
According to one of the UK’s largest mortgage lenders, as many as 25% of existing mortgage holders could save money in the long run by choosing an offset mortgage. If you’re one of those possible 25%, then it’s important that you are aware of the facts.
What exactly is an offset mortgage?
Here’s the concept: you borrow capital from the mortgage lender and you also have savings sat in another account. Instead of paying interest on your full loan and earning interest on your savings, you pay interest on the amount you borrowed minus the amount you have saved. For example, if you had 25,000 savings and a mortgage of 110,000, you would only pay interest on the sum total of debt, which would be 85,000. Your savings would not earn any interest on a separate level, they would only be linked to the mortgage.
So what’s the big selling point?
The major advantage to this kind of mortgage, particularly where higher tax payers are concerned, is that you end up paying less interest. This transpires because you are not earning interest on the savings, and as you know, the taxman always takes a fair amount of that interest away from you. If you have significant savings, then you lose a lot to the taxman but not with the offset mortgage. That’s why this type of mortgage is so well suited to people that have to pay over 40% tax.
These calculations illustrate the potential savings:
100,000 mortgage – 25 years
Interest rate – 4.69%
20,000 deposit
Traditional mortgage interest payments – 85,351
Offset mortgage interest payments – 41,998
Saving – 43,353
With the offset mortgage you would also complete the mortgage after just 19 years and 4 months. This is because the monthly repayments are calculated without your savings being included in the equation therefore you would overpay, and finish paying it off early.
On average, a standard rate tax payer could feasibly save 9,538 in tax and a higher rate taxpayer a considerable 17,341.
There’s also the benefit of flexibility the offset is a lot more forgiving than the traditional mortgage and you can overpay, underpay and take payment holidays without penalties.
If it’s that great, why isn’t everyone doing it?
Offset mortgages used to have high interest rates, putting many borrowers off at the first hurdle. But as this type of mortgage has started to take off, lenders are offering better and more competitive interest rates.
The interest rate is however, still considerably higher than with the fixed rate mortgage for example, and it’s important that anyone considering an offset mortgage can be sure that the tax savings will cover the higher interest charge. It’s the kind of calculation that can only be accurately provided by a professional mortgage adviser.
As a rule, the standard taxpayer must have savings of 20,000 to put against a 100,000 mortgage to make the offset worthwhile. A higher rate taxpayer would only need 10,000 to justify this type of mortgage. (These calculations were made in reference to an average 4.69% fixed offset rate, and a 4.49% tracker mortgage.) These figures will obviously change with the potential rise and fall of interest rates, and as we project, offset and traditional mortgage rates move closer together.
The many variations on the offset mortgage
Mortgage lenders, in their bid to win your business, offer different incentives that they hope will give them the competitive edge. The most common incentive is a free property valuation or free legal work. The banks have a head start as they can include your current account in the offset calculation as well as your savings, but other lenders will let you offset two different savings accounts. Others will offer a borrowing facility and a chequebook.
The interest rate also varies considerably from a 6-12 month fixed rate, to a tracker guaranteed to stay below the base rate for 6 months, or a tracker which tracks the base rate for a set amount of years, but also charges a minimal premium.
The amount you are borrowing compared to the value of the property will also affect the interest rate. At the moment one lender will give an interest rate of 5.6% for people that are borrowing less than 50% of the property value, whereas anything above that (up to 99%) will have an interest rate of 6.45%.
The concept may be easy for you to get your head around, but the sums won’t be. See an independent mortgage adviser for individual advice tailored to your circumstances, it’s the only way to be sure that the offset is best for you. However, we think that if you have savings and pay interest at a higher rate, you’ll be onto a winner with the offset.
*Indicative figures correct as at 1105
October
9
2010
A mortgage calculator can help you to do many things including understand the terms of your loan. The term of the loan is the length of time that you will hold that loan for. This is often something that you can change to suit your needs. But, in order to know just what the solution is that is right for you, you will want to insure that you actually see what the various options will do. A home loan is a very serious loan and it is one that can make or break you if you do not do your homework.
But, you can use a mortgage calculator to help you to do this. Most home loans will be able to be gotten in a variety of terms. They can range from 5, 7, 10, 15, 30 or even a 40 year loan. Now, there are many things that will help you to decide which the right choice is for your loan. Remember, the longer you hold the loan, the more that you will pay for it. But, also, the longer the loan is the lower your monthly payment is going to be as well. This often helps those that would like to get more of a house to extend it to a longer period of time as well as allows individuals that are looking for the most inexpensive loan option to pay it down faster.
Now, to know how much a longer or a shorter term will cost you, you can use a mortgage calculator. This tool will allow you to put in the values of the loan that you are considering. You will put in the terms of the loan, the interest rate that it is being offered at as well as any down payment that you may be offering. Then, it will produce a good amount of information for you. It will provide you with information on how much the monthly payment will be, so that you can see if it is something you can afford. It will also tell you the total cost of the loan with those terms.
Now, take the mortgage calculator back and refigure your information. You are looking to add in the terms of a different length. For example, if you entered information the first time for a ten year loan, try a 15 instead. Now, compare the monthly payment amounts as well as the total cost of the loan in the long run. You can keep doing this until you determine which the right loan terms for your home purchase are.
When you take the time to compare these various terms, youll see the amount of money that you will be really charged to purchase the home that you want. There are many other things that this tool can tell you as well. It can help you to figure out the total cost of the loan at various interest rate levels and with different types of loans as well. The mortgage calculator is a tool that every home buyer needs to have and use.
October
2
2010
Owning a home is part of the American dream. Its also the biggest purchase that most of us will ever make, and because of that, almost everyone will be borrowing money to do it. Unfortunately, for many people that means a bad credit home loan, and that might be hard to get.
Its simple. Imagine going to a bank and asking for 200,000. And then imagine that you have bad credit. Youre always behind on your bills, your credit cards are stretched to the limit or you have no credit cards and you have no collateral. Now try and imagine what the bank will say.
Having a home is a big part of the American dream, but having bad credit is a big part of the American reality. There are a lot of people with bad credit who want to buy homes, but how can they convince a bank or other lender to give them money if its clear theyve never been able to pay their bills on time?
The first thing to do if youre contemplating buying a home and you have bad credit is to try and establish good credit. Make sure you pay your bills promptly. If you dont have a major credit card, get one, use it and pay the bills promptly. Youre trying to convince a lender that you can be trusted to pay back money youve borrowed. Next, you want to carefully check your credit score.
Your credit score is a history of all of your financial activity as it pertains to credit; in other words, how much and how often you have borrowed and how promptly youve paid it back. Credit scores are generated by three companies:Experian; Equifax and TransUnion, and youre allowed one free credit report a year from each of these companies. If youre thinking of borrowing for a house, check your credit report; its entirely possible that there are mistakes that could lower your score.
Now assume that youre on your way to establishing credit (but youre not quite there yet) and your credit report is accurate. The next step is to find someone who is willing to lend you money, and that is probably the easiest step of all. With so many Americans have bad credit, mortgage companies have responded by loosening restrictions on loans and almost all of them have special bad credit programs. Of course, these people arent giving the money away. Youll still have to go through the application process and there are some criteria loan-to-value ratio, debt-to-income ratio, and monthly income that they will use to determine whether or not you are a good risk. However, dont forget that if you have bad credit and a mortgage company is willing to talk to you, they want your business, so dont be afraid to negotiate.
But what if the private mortgage companies and the banks turn you down? Are you out of options? Not at all. There are a lot of different ways you can get money for a house if you have bad credit. A good place to check is the Federal Housing Authority (FHA.) FHA loans have very generous conditions (the down payment can be as low as 3% or less), they are willing to help people with bad credit and they have various programs that offer excellent deals to professional people police officers, teachers to encourage them to become homeowners in the community where they work. Another good choice is Fannie Mae. This private company can make home loans easily available even if you have bad credit through their Expanded Approval Program.
Getting a bad credit home loan can take extra time, but its worth the effort. Interest rates are low and there are a lot of options. Dont delay your dream.
September
25
2010
Most people automatically look for the lowest down payment option on mortgages. This knee jerk reaction is not always the best way to go.
The Down Payment and Mortgage Relationship
A down payment is usually required when obtaining a mortgage. Although there are some down payment free mortgages available, these can generally tend to carry higher interest rates as well. When seeking to obtain the best terms, most options, and lowest interest rates, it is important to have some money set aside to make a down payment with. In general, the average down payment rate on mortgages currently varies from 0 to 20 percent of the mortgage value depending on the type of loan and if it is guaranteed.
Any time you are getting a loan, the more money you can put into it yourself the better off you will be later. The more money you have to borrow means that there will be greater amounts of interest that will have to be paid in the long run. Also, the more money you can put down on any loan, including a mortgage, generally will mean that the lender will be able to make a better offer with a better plan and a lower interest rate, saving you additional money in high interest costs.
When seeking the lowest interest rate possible, have at least twenty percent of the mortgage value on hand. By being able to put a 20 percent down payment on a mortgage, you will be able to save yourself a ton of money on private mortgage insurance and overall interest payments. You will also be able to secure a pretty sizeable portion of the homes equity for your own use. Obviously, equity is extremely important and the less money you put down on the mortgage, meaning more the bank supplies, also means that the bank will own more of the house and therefore more of the equity on the house. You will then have no options in the future when it comes to that equity and also will not be able to benefit from the increase in that equity.
So be prepared to have some money set aside when looking for a mortgage. For those with no other options, no down payment mortgages can easily be found, but just remember what you are sacrificing in the long run. Be smart and be prepared and seek out the best plan for you.