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.

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.

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.

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.

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.

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.