Monday, August 29, 2011

Conventional Mortgages

A conventional mortgage is a type of mortgage in which the terms and conditions of the loan meet the criteria set forth by Fannie Mae and Freddie Mac. A conventional mortgage can be defined as either a fixed rate mortgage (FRM) or an adjustable rate mortgage (ARM). 

A fixed rate mortgage is classified as having the same principal and interest payment for the life of the loan, while an ARM is identified by having a fixed rate for only a specified period of time before the rate becomes variable, depending on market conditions.
Many times, people confuse a conventional mortgage with a conforming mortgage. 

However, a conventional mortgage can be both conforming or non-conforming (jumbo). 

 Because conventional loans are set by Fannie Mae and Freddie Mac, the easiest way to identify if a loan is conventional or not is to know whether or not the loan is government insured. Typical government-insured loans are FHA (Federal Housing Administration), VA (Veterans Affairs) or USDA (United States Department of Agriculture) Rural Development loans. Fannie Mae and Freddie Mac are considered stockholder-owned corporations.

The most common conventional mortgage terms are fixed for 30 and 20 years, however, you can get other fixed-rate loans for 10-, 15-, 25- year terms. There are also 3/1, 5/1, 7/1 and 10/1 ARMs.

You do not need 20% down for a conventional mortgage.  You can get a conventional mortgage with as low as 5% down but you will have to pay mortgage insurance and it will depend on your credit score to determine whether you can get mortgage insurance or not.

Sunday, August 28, 2011

Should I hire a Real Estate Agent or an Attorney to buy a home?

It's no secret that real estate agents earn high commissions.  Although the commission is usually paid by the seller, the cost may be indirectly passed on to you.  And real estate lawyers charge exorbitant hourly rates. This raises the question -- do you need a real estate agent or attorney to help you buy a home?

 

What the Law Says


Every state has its own set of real estate laws. For the most part, a real estate agent's help is not legally required, though agents can help you with tasks that border on legal ones, such as preparing a home purchase contract. In some states, however, only a lawyer is allowed to prepare the home purchase documents, perform a title search, and close the deal.  This does get done anyways when your lender opens escrow and requires a title search.  You do not need an attorney for that.

 

Reasons to Hire an Agent


The process of buying a house is complex, and most people find it's easiest to get through with an agent by their side.  Paperwork will be flying around like a small tornado, and it can be helpful to have someone familiar with the process to deal with it.  Other parts of the transaction will be happening quickly too -- hiring inspectors, negotiating over who pays for needed repairs, keeping up good relations with the sellers (through their agent) and more. All of this is second nature to an experienced agent.  What's more, experienced real estate agents usually have contacts with good inspectors, mortgage loan brokers, and others who can make your buying process easier. And they know what's considered appropriate behavior and practice in your geographical area.

 

Don't Use the Seller's Agent


One of the best reasons to hire a real estate agent is that the sellers are likely to use their own agent -- and you want to keep that agent from taking over the process. In fact, the seller's agent may pressure you to let him or her represent both of you, in a "dual agency" relationship that primarily benefits the seller. (The less scrupulous sellers' agents don't make it clear that they're working for both people, but if only one agent is involved in your transaction, it's fair to assume that the agent's loyalties are with the seller.) It's better to have your own agent -- or, some experts assert, no agent at all -- than settle for dual agency.

 

Keep Control Over the Process


You're the only one who really knows what you want in a house. Even if your agent is scouting out homes for you, there's a lot to be said for scanning the listings and attending open houses yourself. You may find out that your agent doesn't understand your needs as well as you thought, or won't take you to see "FSBO" (for sale by owner) listings.

 

Educate Yourself


Even if you do use an agent (or a lawyer), it's wise to learn as much as you can about the home-buying process. For example, educating yourself about the market value of comparable homes in the area will protect you against over-aggressive agents who might urge you to bid high for a particular house. And you'll prevent misunderstandings and reduce the stress of being told to "sign here" if you study the contents of the various real estate documents in advance.

 

Reasons to Hire an Attorney


Except in states where it's mandated, an ordinary real estate transaction doesn't require an attorney's help. By now, real estate transactions are so standardized that most people in your state will use the exact same purchase contract, just filling in a few blanks.
However, if legal issues arise that your real estate agent can't answer, you'll need an attorney's help. Although good agents know a lot about the negotiating and contracting part of the process, they can't make judgments on legal questions. For example, what if your prospective new home has an illegal in-law unit with an existing tenant whom you want to evict in order to rent the place to a friend? Only a lawyer can tell you with any certainty whether your plans are feasible. Or, if you're drafting any unusual language for the purchase contract, or are concerned about some language in your mortgage, you may want to have an attorney look the documents over.

 

How Real Estate Agents Are Paid

 

Real estate agents normally work on commission, not salary. They receive their slice only after your home search is over, the contract negotiated, and the transaction complete. (In many cases, they end up doing a lot of work for nothing, perhaps because the buyers lost interest or can't close the deal.) The seller typically pays the commission to both the seller's agent and your agent -- usually around 5% of the sales price, to be split between the two agents. This percentage isn't cast in stone, however. For example, the seller might negotiate the percentage down if the house is particularly expensive. (And in probate sales, the court sets the commission.) Some buyers' agents have even been known to offer the buyer a percentage of their commission at closing.
Variations on the typical commission arrangement also exist. For example, some buyers prefer to hire an agent and pay the commission themselves, figuring it will make the agent more loyal to the buyer's interests, and provide grounds for a drop in the sales price.  Less commonly, you may find an agent willing to perform limited tasks for an hourly fee rather than a full commission (in which case you'd also want to ask the seller to bring down the sales price accordingly). Discount and rebate brokers are also available, usually providing you limited services, or interactions via the Internet, at a commission as low as 1%.

How Attorneys Are Paid

 

Attorneys normally charge by the hour, at rates ranging from $150 to $350. You may also find attorneys who charge flat fees for specific services, such as preparing real estate closing documents. Although attorneys tend to prefer handling the entire case with a "blank check" from you regarding hours to be spent and tasks to be accomplished, you're hiring the attorney, and you can call the shots. If you prefer to hire an attorney for only a limited number of hours, or for specific tasks, such as answering a legal question or reviewing a document, you can negotiate this (and you should record your agreement in writing).


Do I need a Real Estate Agent?

Though the Internet has made it easier to sell your home without an agent, about 93 percent of home sales are still done with some type of real estate agent.  An agent can work independently or for a company that acts as the broker. The broker signs the agreement with the seller. Agents usually get 30 percent to 40 percent of the commission.

There are many reasons why hiring an agent can be helpful:

  • Education and experience - A good realtor understands the complex procedure and paperwork involved in selling a home. He or she has hopefully also gone through a licensing program.
  • Saves time and energy - You won’t have to spend time scheduling and conducting tours of your home, which cut into your work and weekends.
  • Gauging offers - An agent can help discern serious buyers from those who are simply looking.
  • The market - A good realtor knows the market and understand trends, which can help your bottom line.
  • Negotiation - An agent has the negotiating skills to help you get a good price.
  • Professional contacts - Your agent’s contacts with other realtors and with contractors, inspectors, landscapers and the like can help you find a solution for any problem you may encounter.
  • Sale price - In some cases, buyers will offer less money to someone who’s not using an agent, believing the seller is trying to save money by not paying commission.
  • "Caravans" - Agents sometimes conduct open houses just for buyer agents where buyer agents arrive in groups ("caravans") and check out the house. This is usually a quick process, is more convenient than a traditional open house and allows buyer agents in the area to tell their clients about your home. 
A key tool for real estate agents is the Multiple Listing Service (MLS), a massive online database, which 900,000 agents subscribe to, that contains listings of 90 percent of properties for sale across the United States.  Buyers can access the service for free at realtor.com.  Usually, only subscribing agents can list properties, though in some cases home sellers can pay a fee to list their property.

With all of the benefits that come with using an agent, there are some drawbacks.  Most importantly, it’s very expensive.  Commissions can run up to 6 percent of the house’s sale price, though many agents are willing to negotiate commission, especially in a good housing market.  Working with an agent also requires a certain degree of trust, a willingness to place your most valuable possession in a stranger’s hands and say, “Please help me.” But that, along with letting go of any sentimental attachments you may have to your house, is part of the sale process.

If you’re considering hiring a real estate agent to help you sell your house, you have a choice between a full service agent and a discount service.  A full service agent does it all -- prepares your home, conducts open houses, uses the MLS, produces slick marketing materials and a nice sign for your yard and in some cases, hires a professional photographer to take pictures of your house.

A discount service provides less, though what you get depends on the company. Certainly you will pay less: discount brokers usually charge 2 percent to 4.5 percent commission.  Some discount services pre-screen for qualified buyers, and they should list your house on the MLS. You will have to conduct tours, however, and buyers agents may be more reluctant to show your house because of the lower commission involved (buyer and seller agents generally split commission on a sale). But the service may be worth it if you think you can save money and still get a good price on your house.

Saturday, August 27, 2011

Fixed Rate Vs. Adjustable Rates - Which one is the best for me?

Fixed-rate mortgages and adjustable-rate mortgages (ARMs) are the two primary mortgage types. While the marketplace offers numerous varieties within these two categories, the first step when shopping for a mortgage is determining which of the two main loan types - the fixed-rate mortgage or the adjustable-rate mortgage - best suits your needs.

Fixed-Rate Mortgages

A fixed-rate mortgage charges a set rate of interest that does not change throughout the life of the loan. Although the amount of principal and interest paid each month varies from payment to payment, the total payment remains the same, which makes budgeting easy for homeowners.

The partial amortization schedule below demonstrates the way in which the principal and interest payments vary over the life of the mortgage. In this example, the mortgage term is 30 years, the principal is $100,000 and the interest rate is 6%.

Payment Principal Interest Principal Balance
1. $599.55 $99.55 $500.00 $99900.45
2. $599.55 $100.05 $499.50 $99800.40
3. $599.55 $100.55 $499.00 $99699.85

As you can see, the payments made during the initial years of a mortgage consist primarily of interest payments.
 
The main advantage of a fixed-rate loan is that the borrower is protected from sudden and potentially significant increases in monthly mortgage payments if interest rates rise. Fixed-rate mortgages are easy to understand and vary little from lender to lender. The downside to fixed-rate mortgages is that when interest rates are high, qualifying for a loan is more difficult because the payments are less affordable.
 
Although the rate of interest is fixed, the total amount of interest you'll pay depends on the mortgage term. Traditional lending institutions offer fixed-rate mortgages in a variety of terms, the most common of which are 30, 20 and 15 years.

The 30-year mortgage is the most popular choice because it offers the lowest monthly payment; however, the trade-off for that low payment is a significantly higher overall cost because the extra decade, or more, in the term is devoted primarily to paying interest. The monthly payments for shorter-term mortgages are higher so that the principal is repaid in a shorter time frame. Also, shorter-term mortgages offer a lower interest rate, which allows for a larger amount of principal repaid with each mortgage payment, so shorter-term mortgages cost significantly less overall.


Adjustable-Rate Mortgages

The interest rate for an adjustable-rate mortgage varies over time. The initial interest rate on an ARM is set below the market rate on a comparable fixed-rate loan, and then the rate rises as time goes on. If the ARM is held long enough, the interest rate will surpass the going rate for fixed-rate loans.
 
ARMs have a fixed period of time during which the initial interest rate remains constant, after which the interest rate adjusts at a pre-arranged frequency. The fixed-rate period can vary significantly - anywhere from one month to 10 years. Shorter adjustment periods generally carry lower initial interest rates.
 
ARM Terminology

ARMS are significantly more complicated than fixed-rate loans, so exploring the pros and cons requires an understanding of some basic terminology. Here are some concepts  borrowers need to know before selecting an ARM.
  • Adjustment Frequency - This refers to the amount of time between interest-rate adjustments (e.g. monthly, yearly, etc.).
  • Adjustment Indexes - Interest-rate adjustments are tied to a specific index, or benchmark, such as the interest rate on certificates of deposit or Treasury bills, or the LIBOR rate.
  • Margin - When you sign your loan, you agree to pay a rate that is a certain percentage higher than the adjustment index. For example, your adjustable rate may be the rate of the one-year T-bill plus 2%. That extra 2% is called the margin. 
  • Caps - This refers to the limit on the amount the interest rate can increase each adjustment period. Some ARMs also offer caps on the total monthly payment. These loans - known as negative amortization loans - keep payments low, however these payments may cover only a portion of the interest due. Unpaid interest becomes part of the principal. After years of paying the mortgage, your principal owed may be greater than the amount you initially borrowed.
  • Ceiling - This is the highest interest rate that the adjustable rate is permitted to become during the life of the loan.
ARMs are attractive because they offer low initial payments, enable the borrower to qualify for a larger loan and in a falling interest rate environment, allow the borrower to enjoy lower interest rates (and lower mortgage payments) without the need to refinance. The ARM, however, can pose some significant downsides. With an ARM, your monthly payment may change frequently over the life of the loan. And if you take on a large loan, you could be in trouble when interest rates rise - some ARMs are structured so that interest rates can nearly double in just a few years.

Which Loan is Right for You?

When choosing a mortgage, you need to consider a wide range of personal factors and balance them with the economic realities of an ever-changing marketplace.  Individuals' personal finances often experience periods of advance and decline, interest rates rise and fall, and the strength of the economy waxes and wanes. To put your loan selection into the context of these factors, consider the following questions: 
  • How large of a mortgage payment can you afford today?
  • Could you still afford an ARM if interest rates rise?
  • How long do you intend to live on the property?
  • What direction are interest rates heading and do you anticipate that trend to continue?
An ARM may be an excellent choice if low payments in the near term are your primary requirement or if you don’t plan to live in the property long enough for the rates to rise. If interest rates are high and expected to fall, an ARM will ensure that you enjoy lower interest rates without the need to refinance. If interest rates are climbing or a steady, predictable payment is important to you, a fixed-rate mortgage may be the way to go.

Regardless of the loan that you select, choosing carefully will help you avoid costly mistakes.


Friday, August 26, 2011

First Time Homebuyers

You are thinking about buying a home for the first time, you have heard your real estate agent, friends or lender speak about First Time Home Buyers loans... FHA, Rural Housing, VA loans, HUD homes all of these terms really are confusing.  There are several programs available through the government to help you finance your first home.


Now, be aware that the term First time Home buyer is really just that... Agencies now a days don't actually provide money for first time home buyers; instead they facilitate programs that encourage banks and lenders to grant mortgages.


The FHA Loan

The Federal Housing Administration (FHA) provides what is probably the most popular home loan program for first time buyers. Rather than lending the money themselves, the FHA insures a loan made by a private lending institution. This insurance gives the lender a measure of peace in knowing that even if the homeowner defaults on the loan, they will not lose their investment. In such cases, the FHA steps in and pays the balance of the loan, then assumes ownership of the house and resells it.
An FHA loan is designed specifically for first time home buyers in the moderate to low income bracket. Requirements for FHA loans are less strict than those for a traditional fixed rate mortgage. FHA loans are so widely used in the housing industry that they are generally the first ones thought of when first time home buyers apply for a mortgage.


Housing and Urban Development Homes - HUD Homes

HUD Homes are properties offered to low income buyers through a program administered by the U.S. Department of Housing and Urban Development.  As is the case with the FHA loan, HUD does NOT actually loan the home buyer any money.  In fact, HUD doesn't even insure the loan.  A HUD home is acquired through an FHA backed mortgage issued by a private lending institution.  If the home buyer defaults on his mortgage, FHA pays the balance of the loan, then HUD acquires the home and resells it, usually at less than market value.  HUD homes are aimed at home buyers with limited income.

VA Loans

The Veterans Administration (VA) provides a loan program similar to that of the FHA program. Again, rather than loaning money themselves, the VA guarantees a loan made by a private lender. These loans are aimed at U.S. military veterans and their families. A VA loan can be acquired not only by a veteran, but also by a widow or widower as long as that individual does not remarry.
The main advantage of the VA loan is the fact that home buyers are not required to purchase private mortgage insurance or provide a down payment. VA loans are designed to help military personnel purchase homes in areas where financing options are limited.


The USDA Development Housing Loan - Rural Housing


The U.S. Department of Agriculture (USDA) offers yet another guaranteed loan program designed to help lower income first time home buyers purchase homes in rural areas. First time home buyers benefit from this program with no down payment, no mortgage insurance, and lower credit rating requirements to qualify. The USDA understands that first time home buyers in rural environments have additional financial challenges that need to be addressed in order to purchase a home. These USDA-guaranteed loans fit the bill perfectly.
The four types of federal first time home loan programs listed here are but a small sampling of what is available. Various state governments also offer low interest mortgages for first time home buyers, as do some larger cities and counties. Your real estate agent and mortgage broker should be familiar with the government backed loans available in your area. They'll be happy to work with you to acquire the best financing for your needs.

Tuesday, August 23, 2011

What is Mortgage Insurance?

What is it?
Mortgage insurance is a financial guaranty for the lender that will help to reduce or eliminate a loss in the case of a default by the borrower, and it is almost universally required on loans where there is less than twenty percent equity. That means if you are purchasing a home with less than twenty percent down or refinancing to more than eighty percent of your homes value, you are going to be required to pay mortgage insurance. In other words, mortgage insurance spreads the risk between the lender and the insurance company.


“Why do I have to have it?”
The answer to that is simple: without mortgage insurance, many lenders would not be able or willing to accept the risk of lending without having twenty percent equity, making it significantly more difficult for customers to purchase a home, or use their home equity to consolidate debt or make an addition to their home. So while it may seem like you do not gain any advantage by having to pay mortgage insurance, it may be the factor that is allowing you to gain approval for your loan. In addition, a bill was passed in 2007 that allows people to write off their mortgage insurance on your taxes, just like you would for the mortgage interest that you pay. There are income restrictions on this provision, so check with a tax professional to see if this would benefit you.


“When can I stop paying mortgage insurance?”
The answer to that will vary depending upon how your mortgage is worded, but there are a few general guidelines that are pretty universal. If you have a conventional mortgage, you are going to need to pay the mortgage insurance for at least the first year of your loan. If you have paid down the balance below eighty percent of the original purchase price or value, you can send a written request for the lender to remove the insurance (a lot of contracts say you can request the removal at eighty percent, they are required to remove it when the balance gets to seventy-eight percent). Some lenders will also allow you to pay for an appraisal, and if your home has risen in value to give you the twenty percent equity, they will also remove it. If you have an FHA guaranteed loan, you are going to be required to pay the monthly mortgage insurance for at least the first five years of the loan, and in order to have it removed you need to have the loan balance down to eighty percent of the original purchase price or value; they will not allow you to go off of what the appraised value is.

Mortgage insurance may seem to be an unnecessary monthly cost to many first time home buyers, but it is in fact what allows most people to purchase their first home. With the law that allows homeowners to write this cost off their taxes, it has become a little more consumer friendly as well.

Monday, August 22, 2011

Refinancing... Is it a GOOD IDEA??

What is refinancing?

Refinancing replaces your current mortgage with a new loan that has a more favorable interest rate and terms that you can afford to manage. The new loan is secured on the same property as your current loan. The new loan funds are used to pay down the current mortgage while any remaining money can be used to your best advantage.

Example: Mr. & Mrs. Lee both took out a mortgage loan worth $500,000. After 4 years, both of them paid off $250,000. Mr. Lee then took out another home loan worth $250,000 in order to repay the existing loan balance.

On the other hand, Mr. Nava took out another mortgage worth $300,000 in order to repay the unpaid loan balance which is $200,000. Mr. Nava could use the remaining balance in order to fulfill other financial obligations.

The first scenario is a simple refinance while the second is that of a "cash-out refinance".

5 Reasons why you should refinance

If you're thinking of refinancing your house, check out these 6 reasons why a mortgage refinance might be right for you.
  • You want to save more:
    Your monthly payments will be reduced if you get a lower interest rate or when the term of the loan is extended. However, with an extended term, you will be paying more in interest during the life of the loan.
  • You want to pay down your mortgage quickly:
    You can shorten the length of your mortgage by reducing the term of the loan. Your Monthly payments will go up, but you will be able to save more in interest payments. Moreover, you'll be debt free sooner.
  • You need extra cash to pay off credit cards:
    If you have enough equity in your home, you can refinance and borrow more than the current loan balance. With the extra money, you can pay off high interest debts such as credit card balances or installment loans. This refinance loan may be tax deductible under certain conditions.
  • You wish to consolidate 2 loans into one:
    If there's enough equity (due to high appreciation), you can consolidate a 1st and 2nd mortgage into a single mortgage. The monthly payment on the new loan might be lower than the combined payments on the first loan and the second mortgage.
  • You want to convert an Adjustable Rate Mortgage (ARM) into a Fixed Rate Mortgage (FRM):
    A FRM prevents the lender from increasing your monthly interest payments over the life of the loan, unlike with an ARM. This means your monthly payments will remain the same.

When to refinance mortgage

"Should I refinance my house now?" – This is what most people ask when they're looking to reduce their mortgage payments by taking advantage of low rates. To find the answer, check out the mortgage refinance tips below:
  • Build up equity:
    You can refinance when you have built up at least 10% equity in your home (Fannie Mae owned mortgages, require 5% equity). It is possible for you to refinance if you have less than 5% equity, but you may have to pay a certain amount of money in order to make up the difference in equity.
  • Check if mortgage refinance interest rates are low:
    It's better to follow the 2% Rule. The 2% Rule allows you to enjoy the benefits of home refinance if the refinance interest rate is 2% lower than your current loan's interest rate. The savings in interest will help you recoup the costs of the new loan, provided you aren't planning to move soon (the break-even period). However, there are no-cost as well as low-cost refinance loans where the costs of getting the loan are included. However, these loans have comparatively higher rates than loans that do not include the refinance costs and your options are limited when the credit market is experiencing a slump. Learn more about the when to refinance rule of thumb.  

    As per this rule, if your rate on the mortgage is reduced by at least 2% then only you should refinance to get a benefit.

    As always, compare mortgage refinance interest rates offered by different lenders in order to get the best interest rate. This will help you save more over the life of the loan.
  • Pay off any late payments:
    There is no such limit on the number of times you can go for home refinance loans. Most lenders prefer that you have no late payments in the last 12 months before you refinance.
  • Remove negatives and improve your credit score:
    Get your credit report from the bureaus and review it for any negative items (late payments, collections, etc) and inaccurate items. Dispute any inaccurate items and remove them from the report. Pay off as much of your debt as you can. Otherwise, you won't get a low interest rate and may not even qualify for a refinance loan. Of course, there are lenders in the subprime lending market who may offer you a mortgage refinance loan, but it's better to avoid them as they'll charge higher interest rates and fees and could be fraudulent.

When NOT to refinance


Refinancing is not a good idea if:
  • Your property value has gone down:
    If your property value goes down and you refinance up to 80% of the appraised value, your original mortgage amount may be higher than the amount you borrow. Therefore, the new loan will not be enough to pay down the existing one.
  • You have been paying off the first loan for a long time:
    If you are almost finished paying off a 30 year fixed mortgage, then refinancing is not a good idea. You will lose equity in proportion to the amount you borrow over and above the remaining loan amount.
  • You have used up enough equity:
    Refinancing is not a good idea if you have already reduced the amount of your equity by taking out a 2nd mortgage or a home equity loan. Refinance loans for 100% of the loan are rare, and with the mortgage market currently in a crisis, are hard to find.
  • You have a few years left on the current loan:
    If there are only a few years left on your current loan, then refinancing is not a good idea. Taking out a new loan will only put you deeper into debt just when you were about to become debt free.
Refinancing makes sense for the right reasons and at the right time. You need to decide whether to opt for a simple interest rate adjustment refinance or a refinance that will provide you with extra money. If you'd like to check out what mortgage refinance rates and terms are currently available, request a no-obligation free mortgage refinance quotes from our community lenders and brokers.

Friday, August 19, 2011

Do you really want to pay your mortgage Bi-Weekly?

If you have a mortgage, you may have received and invitation from a bank or mortgage servicing company to make your payments bi-weekly.

The Good thing about this:  Paying half of your mortgage every two weeks could coincide evenly with your paycheck schedule.  Plus you can pay off your mortgage six to eight years early.

Why is it not a good idea?:  Many of the programs come with a hefty price tag.  if you are interested in paying half of your mortgage every two weeks instead of making one full payment every month, get all the details from the institution offering the program, including all of the fees and charges.

If you are serious about this, you could get the same results for free.

Myths and advantages
You need to understand what bi-weekly mortgage programs will and will not do for you.  Here are two common misunderstandings:

Paying your mortgage twice a month gives you better credit.    
NO.  Banks often use an automatic bank draft for their bi-weekly plans, which means all your mortgage payments will be made on time, and that will help your credit.  But you can get the same effect on a monthly plan using electronic bill payment or an automatic bank draft.

Paying twice a month reduces the compound interest on your mortgage.
WRONG.  In fact, even though you are paying biweekly, chance   are, your loan servicing institution is paying your loan monthly.  Which means that if you buy into bi-weekly plan, you are actually loaning the servicing company half of your mortgage payment (interest free) for at least two weeks every month.  What will reduce your interest are the two additional half payments going toward the principal each year.  In other words, by making 26 payments of half your mortgage, you are in effect making 13 monthly payments instead of 12.

Depending on the terms of your loan, and who you ask, one extra payment a year will enable you to pay for your house and average of six to eight years ahead of schedule.

The price tag
Biweekly payment programs are easy, but the convenience comes at a cost. Many lenders offer two ways to pay: upfront or as you go.
Of the top five mortgage-servicing institutions, four charge enrollment fees that range from $295 to $379. Three also levy additional charges on every transaction. If you want to pay as you go -- without the hefty upfront charge -- fees from the same top five servicers average from $4 to $9 a month.

Is it for you?
If you are wowed by the convenience of having the bank automatically draft a payment that coincides with your biweekly paycheck, don't have much discipline when it comes to money and don't mind the extra fees, then you might want to consider a biweekly payment schedule. 

Some questions to ponder:
1. How long are you planning to stay in your house? Granted, any extra money you pay to your mortgage will likely come back as equity when you sell. But if you're looking for a good deal from a biweekly payment plan, you want to be in the house a substantial number of years.
2. How close is retirement? If you'll soon be receiving your retirement money monthly, do you want to spend money setting up a biweekly payment plan?
3. Would an early payoff on your mortgage facilitate other planned financial goals, like sending kids to college, changing careers or early retirement? Or would it make those plans more difficult?
4. Is there a better way to spend this money? "Do you have a Roth IRA?" "Are you making the maximum contribution to your retirement? Something about owning your own home is satisfying. But when you're talking about looking at your home as an investment, look at all the investments you could be making with that money."

Free alternatives to bi-weekly programs
While hundreds of thousands of mortgage holders have signed up for bi-weekly payment programs, they represent only a tiny fraction of the overall number of mortgage holders, according to estimates from the top five loan service providers.
A true biweekly mortgage -- one that you set up when you buy your house or when you refinance -- is rare. Not every lender offers them. In any case, remember that it's possible to get many of the same benefits of a biweekly payment schedule for free.

Here's how:
1. Pay an additional one-twelfth of your mortgage each month. Designate on your coupon that the amount should go against the principal.
2. Contact your loan service agent and find out if you may start sending a half-payment every two weeks without enrolling in their biweekly program. Some banks flat out won't allow it. In some cases, the loan agreement prohibits partial payments. Some mortgage servicing companies will permit it -- but you must write out very specific instructions with each check so that they know where and how to apply the money. If your mortgage institution doesn't seem willing to oblige, don't try this option.
3. If you get a bonus or tax refund each year, add the equivalent of one extra payment to your mortgage. Again, tell the bank that the additional money goes toward the principal.
4. If you get paid biweekly, take half of your mortgage payment from each check and put it in a savings account. At the beginning of the month, write your mortgage check from that account. At least twice a year you'll be including the equivalent of an extra half-payment. Specify on the mortgage coupon that the additional money goes against principal.

Thursday, August 18, 2011

Conditions of a Mortgage

After you apply for a mortgage and your mortgage professional submits your application for approval, the underwriter may ask you to clear certain conditions before making a decision. To fulfill these conditions, you usually need to supply additional documents to clarify financial facts within a specified period of time.

Features

  • An approved mortgage usually comes with a few conditions set by the underwriter. At this stage, the underwriter usually provides you with a checklist of borrower conditions that you need to satisfy before getting a full approval. These conditions often require you to provide additional documents containing explanation, correction and verifications. Satisfying these conditions may take time because you often need to obtain documents from third parties.
Examples
  • If you don't have credit histories or scores, the underwriter may ask you for payment history of utilities, such as gas and electricity. If you have unconventional income sources, you may have to get an accountant to prepare a profit and loss statement. The underwriter may also ask you to explain or correct inconsistencies in credit reports, tax statements and pay stubs. Other possible conditions include verifications of employment and income, housing history and letters from donors who provide you with funds.
Timing

  • Satisfying the mortgage conditions is the stage that delays the approval of most loans. Many times, this is because various third parties take longer than expected to produce the documents you need. For example, your place of work may be going through a busy period and take more than one week to provide a verification of employment. If you have bad debt, it also takes time for you to clear the collection account and obtain relevant documents.
Clear to Close

  • Once you satisfy all the conditions, the lender issues a clear to close, which means the lender will soon be ready to provide the mortgage funds. It usually takes two to three days from a clear to close for the lender to process your funds. Aiming to get a clear to close at least one full week before closing provides you with enough time in case it takes longer for the lender to process your funds.

Wednesday, August 17, 2011

Annual Percentage Rate (APR)


What Is the APR?


APR is a measure of the cost of credit that includes loan fees paid to the lender upfront, as well as the interest rate. The higher are the loan fees, the larger will be the APR relative to the rate. If there are no loan fees and the rate is fixed through the life of the loan, the APR will equal the rate.

What Is the Purpose of the APR?


To provide a single comprehensive measure of the cost of credit to the borrower, which they can use to compare loans of different types and features, and loans offered by different loan providers.

The APR is a mandated disclosure under Truth in Lending. Mortgage shoppers confront it as soon as they search for interest rate quotes, because the law requires that any rate quote must also show the APR.

Can All Borrowers Rely Safely on the APR?


No, some should ignore the APR, including:

* Borrowers who expect that they will sell their house or refinance the mortgage     within 7 years.
* Borrowers looking to raise cash, who are comparing the cost of a cash-out refinancing with the cost of a second mortgage.
* Borrowers with little cash who need a high-rate loan with negative points (rebates) to cover their costs.
* Borrowers shopping for a home equity line of credit (HELOC).

The APR is most useful for borrowers shopping for an adjustable rate mortgage (ARM), who expect to hold the mortgage a long time, and who are not doing a cash-out refinance, a low or no-cost mortgage, or a HELOC.



Tuesday, August 16, 2011

What is a Reverse Mortgage?

Reverse mortgages are relatively new products in the world of retirement income, and there's much confusion over how they work. In essence, here's what the national trade group, the National Reverse Mortgage Lenders Association, says about them: "Reverse mortgages are available to seniors 62 years old and older with significant home equity. They are designed to enable elderly homeowners to borrow against the equity in their homes without having to make monthly payments as is required with a traditional 'forward' mortgage or home equity loan. Under a reverse mortgage, funds are advanced to the borrower and interest accrues, but the outstanding balance is not due until the last borrower leaves the home, sells or passes away. Borrowers may draw down funds as a lump sum at loan origination, establish a line of credit or request fixed monthly payments for as long as they continue to live in the home."  


May be a bad deal


Even if the reverse mortgage is not a scam, it may come with so many charges and hidden fees to make it a bad deal. And of course, the person trying to sell it to you probably won't mention that.
If you think you might be interested in a reverse mortgage, your best course would be to speak with a HUD counselor, or a financial planner who does not sell mortgage-related products.

Monday, August 15, 2011

Mistakes to avoid when you are shopping for a Mortgage

Whether you are looking for a Mortgage for your First Home or refinancing your current loan, it is important to know the most important mistakes people make when they looking to get the best deal.

  • Choose the loan provider that offers the best price and rate over the telephone, TV advertising or newspaper:  If you look at all of them, you will find a lot of lenders that will beat each other at several different prices, but not one of them have the capacity nor the intention to deliver those offers.  Their intention is to get you interested, move along with the process until it is too late for you to back out.  By then, they will raise the price using a lot of tricks available.  You want to make sure you are talking to a reputable lender and one that will deliver what they are promising.  In order to determine this, they will offer you either a Fee sheet or a Good Faith Estimate.  Now a days, lenders will not issue a Good Faith Estimate unless you have decided you are going to do the loan with them.  They are bound to the fees they quote in the Good Faith and if you are not serious about using them, or you do not have a property or do not know what loan program you are going to be using, it is hard to determine what the real fees will be as they depend on third party providers also, and different loans have different fees. Still before you sign a loan commitment or give them any application fees, you want to make sure you are talking to somebody that will deliver.  Usually application fees are non-refundable.
  • Request quotes for rates without giving the lender all the information about your situation:  This might affect the price, the fees and the lender will not be able to give you an accurate quote.  You have to make sure you let them know what you are planning to purchase, type of home, occupancy type, down payment, loan size, equity in the property if you are refinancing, your ability to document your income and assets, etc.  Unless they are not given all the information, they will give you a quote assuming the standard specifications and will give you a low price, this might not be realistic for your situation.
  •  Shop for your mortgage on different days:  Because of the market volatility this is a huge NO NO!!  This will not be comparable...Unless you are shopping all of them on the same day, this really is useless and you are wasting your time and energy.  Shop all of them on the same day.
  • Confuse a No-Cost Mortgage with as a No-Cash Mortgage:  This is one of the worst mistakes a borrower can make. "No-cash" means the borrower does not have to pay the settlement costs at closing, but the lender doesn’t pay them either. The costs are added to the loan balance, so the borrower pays them over time, with interest.  Buyer usually pays a higher interest rate on a No-Cost mortgage as the costs are calculated and are put into the loan in the interest rate.  Depending on the closing costs, if the lender needs for example $3,000 for closing costs they will charge the borrower the rate that will give them $3,000 in rebate to cover those costs.  Really they is no such thing as free in the mortgage business... you will get charged somehow.
  • Select a Lender without knowing any of the other charges except points, then try to negociate them afterwards:  Before you make a decision on whom you are going to use, find out all of their fees, I will write a post in regards to this but please, do make sure you know what you are getting yourself into.  Everything costs money, Title Insurance, Escrow, Credit Reports, Appraisals, Inspections, Flood Certifications, Recording Fees... just to name a few, so make sure you do know about these fees before signing any initial documentation.

Friday, August 12, 2011

Home Inspections and Appraisals


Appraisals and home inspections are both carried out during the sale of a house. Though they both involve a trained professional taking stock of a house, they are performed for distinctly different reasons.


        APPRAISAL
    • The appraisal is concerned with determining the market value of a house. Mortgage loans are often conditioned on an appraisal; lenders won't put up more than a house is worth. The appraisal can also prevent the buyer from overpaying for a house.

    Inspection

    • The home inspection is aimed at revealing the physical condition of a house. Buyers get a home inspection to reduce the chance of "surprises" after they take possession of the property.

    Appraisal Factors

    • Key factors in an appraisal are the square footage of a house, its general condition, its permanent fixtures, the number of bedrooms and bathrooms, and the value of comparable properties in the area.

     

     

     

     

     

     

     

     

    Inspection Goals

    • The home inspector isn't as interested in the value of a home, as whether it has hidden problems. An appraiser may note the presence of a gourmet kitchen; the inspector will actually test all the appliances.

    Contingencies

    • Home buyers frequently make their offers contingent on the house being appraised for the sale price, or close to it, as well as on the seller fixing any problems found in an inspection. Such contingencies allow them to back out of the deal without penalty if problems arise.

Thursday, August 11, 2011

Who is an Underwriter?


A Mortgage Underwriter is an insurance professional responsible for evaluating the risk of a mortgage application, from the financial institution perspective. In this job, the mortgage underwriter is responsible for determining the maximum amount of mortgage granted.
There are three tasks that a mortgage underwriter completes each day: evaluate mortgage applications, determine total mortgage amount, and create risk analysis reports.
When the underwriter receives the loan file, she looks at the total reported household income, down payment amount, and purchase price of the property. A series of calculations are performed to determine if this request falls within the acceptable range of risk, based on the standard criteria of the lender.  A computer software program now performs these calculations.
The total amount of mortgage granted is based on the information provided by the applicant and the guidelines used in the computer program. The mortgage underwriter can adjust this value based on the forecasted value of the property, economic climate and other factors. Banks and financial institutions adjust their levels of acceptable risk all the time, balancing profit opportunities and risk to the institution.

Wednesday, August 10, 2011

Funds to Close - What to do and to avoid.

If your Cash for your downpayment for your loan is in the bank and it has been there for more than two months you are fine... Free!! No more paperwork to provide other than your Bank Statements.

Now, the problem arises when you have cash in hand and have deposited the money just before you need it, this is a big NO NO!  Most loans do not accept cash in hand at all and you will have a big problem if you can not proof the source of the funds.

If you know you are buying a home, and you will put a downpayment, your money needs to be in the account you will use.  Do not make any large deposits that you won't be able to be verified.  The bank will question any unusual large deposits made to your account.  Be prepared for that if you do.

This is a big problem and the one that people understand the least.  They get really upset because they don't understand why the bank needs to know where their money came from.  This is due to money laundry and it is a HUGE thing now a days.

To avoid any problems, keep your money in the bank, I can not stress this enough.  You will save a lot of headaches and more and more paperwork.

What should I bring with me to meet with my Loan Officer?


You want to be prepared when you meet with your Loan Officer, they will need to do a pre-approval and check your credit, income and assets.

If you are buying you will need the following:  (If they apply to you)


  1. Last 30 days pay-stubs
  2. W2's for the last 2 years
  3. If Self-employed Last 2 years of Tax Returns with all Schedules, you will most likely need to provide personal Tax Returns and Corporation or Partnership
  4. If Self-Employed you'll need to will need a Year to date Profit and loss statement
  5. Last 2 Months Statements of your Assets (Bank Statements, IRA, 401K, Life Insurance, Money Market accounts, etc.)
  6. Child Support or Maintenance Court Order
  7. Social Security Award Letter and last 2 years 1099
  8. Social Security Number
  9. Date of Birth
  10. Address history for the last two years

If you are refinancing you will need all of the above plus:

  1. Information for Taxes and Insurance for the homes you own
  2. Mortgage Statement

If you rent you will need to provide your Landlord's information, phone number and Name.

Also, you will need to know your automobiles make, year and value.  Personal Property value and any other assets you may have.

Please take in consideration that every lender will require different things, these are just some or more of the requirements you will be asked for.

Be prepared to pay an application fee.  Most institutions charge an Application that varies between $500 - $700  Sometimes that covers for your appraisal and credit report, but not all the times and at times it is Non-Refundable, so ask your lender about the Application Fee. 

Refinancing your Mortgage Loan

A mortgage refinance refers to applying for another mortgage to replace an existing mortgage on the property. There are many reasons why borrowers decide to refinance their homes:
*  Reduce interest costs with a lower interest rate
*  Reducing the risk from an adjustable-rate by switching to a fixed-rate loan
*  Liquidating equity into cash (Cash-Out Refinance)
*  Increasing the loan term and reducing Monthly payments
*  Decreasing the loan term
*  To get rid of Mortgage Insurance
Among some of them...


A mortgage refinance has the same costs as a mortgage, such as loan application fees, loan origination fees and appraisal fees that must be taken into consideration. Depending on the equity and Loan to value homeowners have the option to pay these costs upfront, or finance them, in the long run a refinance with a lower interest rate is likely to save more money. Overall, when refinancing for a lower interest rate, the main deciding factor is if savings on interest will be greater than the total refinance costs and prepayment penalties if needed.


Some loans, especially fixed-rate mortgages, have a prepayment penalty to discourage borrowers from terminating their mortgage early by paying off the remainder of the loan early.  Homeowners will need to calculate the total cost of refinancing their home to decide if it is the best option. Many financial advisors suggest that homeowners look for at least a two-percentage point reduction in their mortgage prior to refinancing. Homeowners can also use online mortgage calculators to get a better estimate of how much they can save by refinancing. However, online mortgage calculators usually do not take into account all the costs incurred with a mortgage refinance. 


http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx

Homeowners who plan on a cash-out mortgage refinance to liquidate equity for home remodeling, large expenses, credit-card debt elimination, debt consolidation, or any major expense might benefit from consulting a financial advisor.  With a cash-out mortgage refinance, homeowners are refinancing their existing mortgage with a higher borrowed amount. This results in a single loan and loan payments that can be stretched over a long term. Homeowners are also advised to see if there are any stipulations or requirements set by their lender prior to refinancing their home. 



For example, the Federal Housing Administration has several requirements for cash-out mortgage refinances on their loans, including loan limits, the amount of equity that can be cashed-out, and qualification and eligibility requirements. Besides a cash-out mortgage refinance, there are also other options available to homeowners looking to free up equity. Homeowners can also take advantage of other mortgage products such as a Home Equity Loan or home equity line of credit (HELOC), which generally have more flexible spending and repayment options.

Why is your Credit so Important?

Why is your Credit Score so Important? 
Everybody has a credit score calculated at the time your credit report is requested.  That is if you have ever requested credit, meaning a Credit Card, an installment loan or any type of loan that gets reported to a Credit Bureau.

It's based on over 100 different proprietary variables and algorithms developed by Fair Isaac (FICO). The range is 300 to 850. You can get your credit score from Experian or Equifax. Most lenders consider people above 650 to be prime borrowers, meaning they will most likely be approved at favorable rates. According to my credit report from Equifax, 71% of the people with a credit score from 500-550 will default on their credit. Another 51% of buyers with a credit score from 550-600 will default on their credit. That's pretty scary. This is why lenders run your credit report and head straight for your FICO Beacon score.


Do you know your Credit Score?
You should start planning 6 months before you plan to purchase a home.  At this time you want to find out what is in your credit report and if you need to clean something there or pay off some debt so you can be ready to get a mortgage.
Te best way to get a free credit report without getting hit for checking it too often is to go to:

https://www.annualcreditreport.com/cra/index.jsp

 You can request a FREE credit report from this site every 12 months.  This will not give you a score, you will have a choice to purchase one if you decide, but I do believe that the most important thing is to see what is in your report and not worry too much about what your credit score is, unless you really want to know.