Archive for the ‘Mortgages’ Category

Guide To Selecting the Right Mortgage Lender

Purchasing a home is something that can provide a number of benefits, both financially and emotionally. However, it is a big responsibility and since most people do not have the funds to buy the home outright, it means taking out a mortgage. Selecting the right mortgage lender is as important, if not more so, than choosing the right home, as for most home buyers, the mortgage represents their biggest investment to date.

Finding the Best Interest Rate

When considering mortgage lenders, one of the most important factors is the interest rate that they offer, as well as the specific terms of the loan. The interest rate determines how much the monthly payment is and represents the profit that the lender will make. Interest rates can change on a hour by hour and even minute by minute basis, so one of the most important things to remember is that you can not rely upon printed mortgage rates, advertisements, or even quoted mortgage rates to be an accurate representation of the current mortgage rate.

However, while interest rates can change at a moments notice, it is possible to get a basic idea of the current mortgage rates by doing some calling around and visiting your bank. The reason it is a good idea to start with your bank, is because banks provide a nice metric for getting an idea of the standard mortgage rates in the area. Your bank will also often be able to provide you with a much quicker answer when it comes to applying for a loan and are more likely to not require any application fee until you actually close on the home.

Once you check the interest rate at your own bank, it is a good idea to spend some time exploring your other options. Mortgage brokers can sometimes provide a more competitive interest rate, as they have relationships with multiple lenders. However, a mortgage broker is not really a lender, but more of a middle man and they only get paid if you go through them to finance your mortgage, so it is important to keep in mind that they are looking to make a commission off of you. Many take points, which represent a percent of the total sale price, as their commission, which is in some regards a junk fee, meaning that it is negotiable and not necessarily a part of the actual mortgage.

Many real estate agents have relationships with mortgage brokers, so they may be able to steer you towards a reliable mortgage broker. However, keep in mind that this could also represent a conflict of interest.

There are also a number of mortgage banks, which are special banks that deal in mortgages, as opposed to the traditional checking and savings accounts found at your local bank.

Locking in an Interest Rate

Since interest rates can change so quickly, many people opt to lock in a mortgage rate with their lender. This simply means that an agreement is signed between the mortgage lender and the borrower stating that the lender will guarantee, or lock in, the interest rate for a specific period of time. This often means paying a fee or a deposit, but ensures that the interest rate will be honored, even if the interest rate goes up.

However, the flip side to this is that if the interest rate goes down, you may not be able to get them to lower it and they would certainly be under no legal obligation to do so. As a result, it is important to be very careful before entering into any type of agreement with a lender.

Watch out For Subprime Loans

While the interest rate is one of the most important parts of a mortgage, it is very important to consider several other factors, such as whether there is a penalty for paying off the loan early. Subprime mortgages are mortgages that have less than optimal terms and interest rates, but they often look very appealing if you don’t look too hard.

For example, negative amortization loans are one type of subprime mortgage, which has a considerably lower initial monthly payment. However, the payment isn’t really low and instead a portion of each monthly payment is applied to the principal of the loan. So, with each payment, the amount owed on the home actually increases, which subsequently increases the monthly payment.

Evaluating the terms of the loan and comparing it to mortgage terms that you know are acceptable, such as those provided by most local banks, is an essential step in avoiding subprime loans.

Junk Fees and Other Costs

As mentioned above, Junk Fees are extra costs on top of the standard fees that can often be negotiated down. When closing on a home, there are a number of extra fees, such as title searches, title insurance, inspections, lawyer fees, courier fees, and even credit checks. Some of these fees, like the title search or the lawyer cost, are strict and can not be negotiated. However, other fees can and should be disputed, as they are often unnecessary padding the pockets of the mortgage broker or lender.

Often the cost of a credit check and courier fee are added on, despite not really being needed or actually used. For example, most lenders check hundreds and hundreds of credit reports each year. As a result, they get a discount on their credit checks, so if they try to charge you anything more than $25, this is an indication that it is a junk fee. Since closing costs can easily cost over $3,000, it is important to carefully consider all of the costs, as well as question anything that does not feel right.

Why Should I Refinance My Home?

refinanceReal estate can be an excellent investment, but since most do not have the money to purchase a home up front, it is usually necessary to use a mortgage. Mortgages are a long term loan and, like any loan, there are sometimes when it may be in your best interest to refinance the mortgage.

Refinancing a mortgage simply means taking the total amount owed and transferring it to a new mortgage and possibly a new lender. While there can be many advantages to this, it is important to determine if refinancing is right for you, as it is necessary to pay closing costs, similar to those paid when the home was purchased.

Refinancing to Change the Term or Rate

There are many different reasons to refinance a home, but the most common reason is to change the term or rate.

Refinancing to change the rate involves taking out a new mortgage that has a lower interest rate. Refinancing to change the term means taking out a new mortgage, which has a lower length than the previous mortgage. Often, people will do both and refinance to change the term and rate. Knowing when to refinance the term or rate involves identifying your break even point.

Refinancing to Cash Out or Consolidate Debt

Refinancing a mortgage to cash out is the process of taking out a loan and using it to remove the equity from the loan. Equity is the amount of money you have put towards the principal of the loan.

So, for example on a $100,000 mortgage, after 10 years, the total owed to the bank is $85,000. This means there is $15,000 in equity in the home. A Cash out loan will give the borrower $15,000 in cash, but they will start over owing the lender $100,000.

In practice, however, cashing out a loan usually also includes the appreciation of the home. For example, in the above example, say that in those 10 years, the value of the home increased by $20,000. Now, even though the homeowner has only paid $15,000 in equity, technically, they have $35,000. This is the amount of actual equity plus the value of the appreciation.

This means that instead of only receiving $15,000 the homeowner could take out a $120,000 mortgage on their home.

Consolidating Debt works similarly, but involves bringing other debts, such as medical bills, credit card bills, or school costs into the loan. So, for example if the borrower owed $20,000 in student loans, they could add this to their mortgage and spread out the payments over the life of the mortgage.

These types of loans are the most heavily advertised, as they are the most profitable for the lender. However, it is not always in the best interest of the homeowner, because ultimately you are taking a big step backwards. With that said, cash out loans and consolidating debt can be a great way to pay off other lines of credit and bring them together under one large loan.

Refinancing to Remove Someone From the Loan

Another common reason for refinancing a mortgage is to remove someones name from the deed. Often this is after a divorce, but it could be a friend, relative, or business partner who simply wants to move in a different direction.

Whenever there are multiple people on the deed of a home, each person is considered to have an interest in the home. It is not even truly necessary for the person to be on the deed, because, as is the case with certain gifts, warranty deeds are often issued. Warranty Deeds indicate that others have an interest in the property and even though their name may not appear on the deed itself, if anyone buys the home, they will need to have all parties removed.

Since there are a number of instances where there is a need to remove someones name from a deed, often refinancing is the quickest and easiest way to remove the name. This can be especially tricky in cases of divorce, because even though a court may assign ownership of a home to one person or the other, this ruling is not honored by the lender.

Refinancing to Remove Private Mortgage Insurance(PMI)

Private Mortgage Insurance(PMI) is sometimes required on mortgages with less than 20% down. It is a type of insurance that covers the risk to the lender. It does not cover the entire cost of the home, but instead only the 20% down-payment.

In some cases, the PMI may be tax deductible, so there is little incentive to remove it, however if it is not and the homeowner has at least 80% equity in the home, refinancing to remove the PMI may be a good idea. It is important to note that it is the homeowners obligation to remove PMI and typically the bank will make no effort to have it removed.

Refinancing to Avoid Foreclosure

Typically, the foreclosure process begins when the homeowner misses three consecutive payments, however recent legislation has made it a little bit more difficult for lenders to foreclose in some cases. Even once a home has entered into the foreclosure process, it is almost always possible to reverse it, providing the missed payments are made up.

There are several loans, often called Foreclosure Bailouts, which are designed to allow the homeowner to refinance the home, any missed payments, and any fees owed to collections agencies. However, it is very important to be careful when accepting foreclosure bailouts, as they are a type of subprime mortgage.

Initially, they offer relief, but over time it ends up costing the homeowner much more. Of course, when facing foreclosure, often subprime mortgages are the only option.

Other Reasons to Refinance

There are a number of other reasons why refinancing a home may be a good idea. For example, if the home has liens on it, it is sometimes possible to refinance and remove the liens, absorbing them into the total loan amount.

It is also becoming common to refinance a home and take out additional funds for remodeling. For example, if the home needs a new roof, but the homeowner can not afford to pay for it, it is sometimes possible to refinance to include the cost of the renovations.

When Not to Refinance

For each reason to refinance, there is a reason not to. Many of the offers most homeowners receive to refinance are from subprime lenders and while they may seem like a good offer at first, will end up costing the homeowner much more in fees.

It is always important to explore all of your options and make sure you calculate the break even point, which is the number of months it will take for the closing costs associated with refinancing to be offset by the saving of refinancing. There is no set rule, but it is generally not recommended to refinance if the break even point is greater than 48 months.

Knowing When to Refinance Your Mortgage

Refinancing a home loan can offer a number of advantages in certain situations, but it can also be risky and it is possible to loose money if you are not careful. It is also not free, as it is necessary to pay closing costs, similar to those paid when the mortgage was first taken out. Knowing when to refinance and when not to is therefore extremely important.

Determining if the Time is Right to Refinance

Typically, the golden rule in the real estate industry is that you should wait until the interest rate is at least 2% lower than your current rate before refinancing. It was often referred to as the 2% rule and was touted by most financial professionals, with the belief that this was the point where the savings outweigh the costs of refinancing.

However, today, most financial advisors will not recommend that you follow the 2% rule, primarily because the math simply does not add up. It certainly works well for the lenders, but it does not help the consumer.

Instead of only focusing on interest rates, it is instead essential to take into account the closing costs associated with the loan. This includes not only whatever points you are paying the lender and their application fee, but also an appraisal, credit report, title insurance, and attorney fees.

Practical Example: When to Refinance

As an example of how to evaluate whether refinancing lets say that under the new loan, your interest rate would be $50 less a month and the closing costs would be $9,000.

To determine if you should refinance, divide the closing costs by the amount saved in monthly payments. This will tell you the break even point, or when you will recoup your closing costs.

$9,000 / $50 = 180

So, in 180 months or 15 years, you would break even. This makes it easy to see that refinancing is not such a good idea.

Now, lets say that your closing costs are only $4000 and you save $100 a month.

$4,000 / 100 = 40.

So, in 40 months or 3.3 years, you would break even. This is much more acceptable, because this means that after three years, you will have saved more than your closing costs and will end up dramatically reducing the amount of interest you pay.

How Long is Too Long When Breaking Even

There is no set limit of when the break even point is right and when it is wrong. A great deal of this depends on the income, assets, and personal situation of the lender. However, usually if the break even point is less than 4 years(48 months) it is generally a good investment.

When to Refinance the Term

The above examples described when to refinance the interest rate, but sometimes it is a good idea to refinance the term. The term refers to the total length of the loan and is usually 30 or 15 years, although lenders offer mortgages of almost any term.

Generally, shorter terms mean a lower monthly mortgage payment and longer terms means a lower monthly payment. However, even though you are paying more each month with a shorter term, the amount of interest paid is almost always lower.

For example, consider a home that is $100,000. If you were to take out a 30 year fixed rate mortgage at 4.5%, your monthly payments would be $506 and you would pay $82,406 in interest over the course of the 30 years.

If, on the other hand, you took out a 15 year loan with that same interest rate, the monthly payment would be $764, but the interest would be only $37,698.

As a result of the dramatic effect lowering the length of your term can have on the total amount of interest paid over the course of the loan, it is sometimes a very prudent investment.

Often, many people will refinance their loan after about 5 or 10 years, to a shorter term, thereby saving a great deal of money.

Refinancing a Mortgage: The Application Process

In the past, when it came time to evaluate a prospective loan applicant, a very personal approach was taken, with a human manually reviewing the loan application. Today, almost all lenders now use an automated underwriting system(AUS.)

A Look at Automated Underwriting Systems

The AUS automatically reviews and evaluates the loan application and credit history of the applicant, as well as the total amount of the requested loan, using a mathematical formula to determine eligibility. The entire process only takes a few seconds and it either does not approves the loan or marks it as a Strong File or Weak File. A Strong File indicates that the application meets the loan requirements and does not require any additional documentation. A weak file, on the other hand, indicates that there were some discrepancies or problems with the application, so more documentation is required.

For example, someone with a strong file, might not need to provide any employment documentation or tax forms, while someone with a weak file would.

While the loss of a personal touch in the underwriting process definitely has negative connotations, one of the nice things about using an AUS is that initially, there is often no need to provide any documentation.

What Type of Documentation is Required for a Refinance Loan?

Depending on how the Automated Underwriting System evaluates the application, there are three basic levels of documentation: Full Documentation, Stated Documentation, and No Documentation.

Full Documentation loans will require that all aspects of the application are verified by a third party. Generally, this means providing tax forms, such as the past few years W2s and paycheck stubs. The lender may also require that the applicants bank verifies the loan using a Verification of Deposit(VOD) form. Typically, the full documentation loan is the most common type of refinance loan.

Stated Documentation loans are when the lender simply uses the information that is provided on the loan application, without actually verifying it with a third party.

No Documentation loans, as the name implies, are loans that require no documentation. The lender does not request any banking or employment information, as well as not running a credit report.

Can the Consumer Decide the Documentation Level to Provide?

In some cases, the consumer does has some control over how much documentation they provide. Of course, from a literal standpoint, they are free to provide no documentation at all, but the lender is under no obligation to offer a loan in this case. Instead, it is almost always up to the lender to determine how they will document the mortgage application.

With that said, some lenders do offer a no documentation loan, but they will usually require a 20% down-payment and the mortgage will have a higher interest rate.

In the end, the lender is out to make money, so while they may be willing to forgive a minor digression on ones credit report, they will only do this if they think it is profitable. Anytime they do accept a risk, such as not checking employment, the lender will usually increase fees or rates to counterbalance this risk.

How to Begin the Process of Refinancing Your Home

refinanceBuying a home is not just a big decision from a lifestyle perspective, but it is also a major financial decision. Usually, most people do not have the money to buy a home up front, so they use a mortgage. Sometimes, it is possible to refinance a mortgage and greatly reduce the overall cost of the loan.

In order to refinance a mortgage, you would of course have to already have a mortgage. If done properly, refinancing a home can be an excellent way of reducing monthly costs or dramatically reducing the amount of interest you will pay over the course of the loan. However, if you are not careful, it is possible to loose a great deal of money and end up worse off then you were to begin with.

There are a number of similarities to the process of getting your first mortgage and refinancing your loan. However, rather than simply going with the lowest offer, which is typically the way most people choose a mortgage, there are a number of important subtleties when it comes to refinancing a home.

Don’t Only Focus on the Monthly Payment

If you are a homeowner, it is likely you have come across at least one advertisement proclaiming that you can cut your monthly payment in half by refinancing your home. These companies are not lying and can in-fact dramatically reduce your monthly mortgage payment. However, often this is at the expense of extending the period of your loan, which in turn means you end up paying more in interest.

Also, these companies are often predatory lenders, who are very aggressive and when you are done, you have virtually lost all the equity in your home that you worked so hard to build up.

Refinancing a Mortgage and the Application Process

Refinance Loans are very similar to mortgages and you must follow the same types of regulations as other purchase money loans, which is any loan used to finance a real estate purchase.

Common sense would say that if you have been paying a higher mortgage payment for many years, the lender would automatically approve a refinance loan with a lower monthly rate, but this is not the case. Instead, it is almost always necessary to follow the same sort of application process that a person would when they are applying for the initial mortgage. It is almost always necessary to prove employment history, as well as showing your assets and running your credit when refinancing a loan.

The exception to this rule, however, is FHA Loans that are offered by the Federal Housing Administration and VA Loans, that are offered by Veterans Affairs. Both of these Government Agencies offer what is called a streamline refinance. As part of the streamline refinance, as long as the monthly payments are lower, credit is almost never an issue. Usually, the only requirement is that the homeowner has not been late on a payment over the course of the last 12 months.

Finding the Right Mortgage

When purchasing a home, few homeowners have enough money to buy the home without using a mortgage. Mortgages, which are a special type of home loan, have been used for hundreds of years, but today’s mortgages are much different from those used in the middle ages.

One of the biggest differences between modern mortgages and those of the past is that today, the person who takes out the home is actually considered the homeowner. In times past, the person who held the mortgage, which was often a member of nobility, was considered the homeowner.

Until the person had paid off their home, they not only did not own it, but had very few rights. This began to change in the twentieth century and has gradually moved towards more rights for the homeowner. However, even though today the bank is not considered the homeowner, they do have a lien on the home, so in someways, the change is more of a symbolic one.

Start by Checking Rates at Your Bank

There are many places to get a mortgage, although in today’s housing market, many lenders are being much more conservative in who they offer loans to. One of the best places to start when looking for a mortgage is your own bank.

Your banks don’t always have the lowest rate, but because you already do business with them, they are often going to be able to give you an answer much more quickly and might be willing to overlook less than perfect credit. Also, in many cases, you can find out whether you qualify for a mortgage at your own bank without having to pay an application fee.

When starting to look for a mortgage, starting with your own bank will give you a very general feel of what types of rates to expect, as well as whether you will likely be able to receive a loan from other sources. It is important, however, to not only focus on your bank as the only option, but instead it is essential to use their offer as a basis of comparison against other loan sources.

Mortgage Brokers: A Useful Tool, but Be Careful

Usually, checking out the rates of a mortgage broker is the next step. A mortgage broker is an individual that has relationships with one or more lenders, but is not directly associated with them. Instead, the mortgage broker gets a cut from all mortgages they sell, which is referred to as their points.

Sometimes, mortgage brokers, especially those who are associated with more than one lender, have access to some great deals, but it is important to always remember that they only get paid if you take the loan. Since a mortgage brokers salary is commission based, there is almost always some form of bias associated with their suggestions. For example, it is not uncommon for some lenders to offer special bonuses to brokers if they sell a certain loan, so this will affect what type of loan they push.

Of course, this in no way means that all mortgage brokers are acting solely in their own best interest, but there is the risk of a conflict of interest that all prospective homeowners should be aware of.