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A QUICK ARM 101

Fri, 28 Aug 2009 04:55:00 GMT

The Consumer Handbook developed by the Federal Reserve Board defines Adjustable-rate mortgages (ARMs) as loans with interest rates that change. According to the Board, an ARM differs from a fixed-rate mortgage in many ways. It points out that with a fixed-rate mortgage, the interest rate stays the same during the life of the loan while with an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.
The Handbook reminds us: "Shopping for a mortgage is not as simple as it used to be. To compare two ARMs with each other or to compare an ARM with a fixed-rate mortgage, you need to know about indexes, margins, discounts, caps on rates and payments, negative amortization, payment options, and recasting (recalculating) your loans. You need to consider the maximum amount your monthly payment could increase. Most important, you need to know what might happen to your monthly mortgage payment in relation to your future ability to afford higher payments.

"Lenders generally charge lower initial interest rates for ARMS than for fixed-rate mortgages. At first, this makes the ARM easier on your pocket than a fixed-rate mortgage for the same loan amount. Moreover, your ARM could be less expensive over the a long period of time than a fixed-rate mortgage---for example, if interest rates remain steady or move lower.

"Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments. in the future. It's a trade-off---you get a lower rate with an ARM in exchange for assuming more risk over the long run."
A HANDY TIP from the Board to anyone looking for the right loan or considering to refinance is to ask this question:

Is my income enough--or likely to rise enough--to cover higher mortgage payments if interest rates go up?
Article by Connie I. Ko

1 reply

A QUICK ARM GLOSSARY

Fri, 28 Aug 2009 04:47:00 GMT

Adjustable-rate mortgage (ARM) - A mortgage the does not have a fixed interest rate. The rate changes during the life of the loan based on movements in an index rate, such as the rate for Treasury securities or the Cost of Funds Index.
Annual percentage rate (APR) - A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as points, broker fees, and certain other credit charges that you are required to pay. Because all lenders follow the same rules when calculating the APR, it provides you with a good basis for comparing the cost of loans, including mortgages, over the term of the loan.
Balloon Payment - A lump-sum payment that may be required when a mortgage loan ends. This can happen when the lender allows you to make smaller payments until the very end of the loan. A balloon payment will be a much larger payment compared with the other monthly payments you made.
Buydown - With a buydown, the seller pays an amount to the lender so that the lender can give you a lower rate and lower payments, usually for an initial period in an ARM. The seller may increase the sales price to cover the cost of the buydown. Buydowns can occur in all types of mortgages, not just ARMs.
Cap, Interest rate - A limit on the amount your interest rate can increase. Interest caps come in two versions: periodic adjustment caps, which limit the interest-rate increase from one adjustment period to another ; and lifetime caps, which limit the interest rate increase over the life of the loan. By law, virtually all ARMs must have an overall cap.
Conversion clause - A provision in some ARMs that allows you to change the ARM to a fixed-rate loan at some point during the term. Conversion is usually allowed at the end of the first adjustment period. At the time of the conversion, the new fixed rate is generally set at one of the rates then prevailing for fixed-rate mortgages. The conversion feature may be available at no extra cost.
Discounted initial rate (also known as a start rate or teaser rate) - In an ARM with a discounted initial rate, the lender offers you a lower rate and lower payments for the part of the mortgage term (usually for 1,3, or 5 years). After the discount period, the ARM rate will probably go up depending on the index rate. Discounts can occur in all types of mortgages, not just ARMs.
Equity - THe difference between fair market value of the home and the outstanding balance on your mortgage plus any outstanding home equity loans.
Hybrid ARM - These ARMS are a mix--or a hybrid--of a fixed-rate period and an adjustable-rate period. The interest rate is fixed for the first several years of the loan; after that, the rate could adjust annually. For example, hybrid ARMs can be advertised as 3/1 or 5/1--the first number tells you how long the fixed-interest rate period will be and the second number tells you how often the rate will adjust after the initial period.
Index - The economic indicator used to calculate interest-rate adjustment for adjustable-rate mortgages. No one can be sure when an index rate will go up or down.
Interest - The price paid for borrowing money, usually given in percentages and an annual rate.
Interest-only payment ARM - An I-O payment ARM plan allows you to pay only the interest for a specified number of years. After that, you must repay both the principal and interest over the remaining term of the loan.
Margin - THe number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Negative amortization - Occurs when the monthly payments do not cover all the interest owed. The interest that is not paid in the monthly payment is added to the loan balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments that are not high enough to cover the interest rate or when the minimum payments are set at an amount lower than the amount you owe in interest.
Payment-option ARM - An ARM that allows you to choose among several paymnet options each month. The options typically include (1) a traditional amortizating payment of principal and interest, (2) an interest only payment, or (3) a minimum (or limited) payment that may be less than the amount of interest due that month. If you choose the minimum-payment option, the amount of any interest you do not pay will be added to the principal of your loan.
Points (may be called discount points) - One point is equal to 1 percent of the principal amount of your mortgage. For example, if the mortgage is for $200,000, one point equals $2000. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages in order to cover loan origination costs or to provide additional compensation to the lender or broker. These points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them. Discount points (sometimes called discount fees) are points that you voluntarily choose to pay in return for a lower interest rate.
Prepayment penalty - Extra fees that may be due if you pay off the loan early by refinancing your loan or selling your home, usually limited to the first 3 to 5 years of the loan's term. If your loan includes a prepayment penalty, be aware of the penalty you would have to pay. Compare the length of the prepayment penalty period with the first adjustment period of the ARM to see if refinancing is cost-effective before the loan first adjusts. Some loans may have prepayment penalties even if you make only a partial prepayment.
Principal - The amount of money borrowed or the amount still owed on a loan.

Article by Connie I. Ko

1 reply

LOANS (A 3-MINUTE ARM GLOSSARY)

Fri, 28 Aug 2009 04:46:00 GMT

Adjustable-rate mortgage (ARM) - A mortgage the does not have a fixed interest rate. The rate changes during the life of the loan based on movements in an index rate, such as the rate for Treasury securities or the Cost of Funds Index.
Annual percentage rate (APR) - A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as points, broker fees, and certain other credit charges that you are required to pay. Because all lenders follow the same rules when calculating the APR, it provides you with a good basis for comparing the cost of loans, including mortgages, over the term of the loan.
Balloon Payment - A lump-sum payment that may be required when a mortgage loan ends. This can happen when the lender allows you to make smaller payments until the very end of the loan. A balloon payment will be a much larger payment compared with the other monthly payments you made.
Buydown - With a buydown, the seller pays an amount to the lender so that the lender can give you a lower rate and lower payments, usually for an initial period in an ARM. The seller may increase the sales price to cover the cost of the buydown. Buydowns can occur in all types of mortgages, not just ARMs.
Cap, Interest rate - A limit on the amount your interest rate can increase. Interest caps come in two versions: periodic adjustment caps, which limit the interest-rate increase from one adjustment period to another ; and lifetime caps, which limit the interest rate increase over the life of the loan. By law, virtually all ARMs must have an overall cap.
Conversion clause - A provision in some ARMs that allows you to change the ARM to a fixed-rate loan at some point during the term. Conversion is usually allowed at the end of the first adjustment period. At the time of the conversion, the new fixed rate is generally set at one of the rates then prevailing for fixed-rate mortgages. The conversion feature may be available at no extra cost.
Discounted initial rate (also known as a start rate or teaser rate) - In an ARM with a discounted initial rate, the lender offers you a lower rate and lower payments for the part of the mortgage term (usually for 1,3, or 5 years). After the discount period, the ARM rate will probably go up depending on the index rate. Discounts can occur in all types of mortgages, not just ARMs.
Equity - THe difference between fair market value of the home and the outstanding balance on your mortgage plus any outstanding home equity loans.
Hybrid ARM - These ARMS are a mix--or a hybrid--of a fixed-rate period and an adjustable-rate period. The interest rate is fixed for the first several years of the loan; after that, the rate could adjust annually. For example, hybrid ARMs can be advertised as 3/1 or 5/1--the first number tells you how long the fixed-interest rate period will be and the second number tells you how often the rate will adjust after the initial period.
Index - The economic indicator used to calculate interest-rate adjustment for adjustable-rate mortgages. No one can be sure when an index rate will go up or down.
Interest - The price paid for borrowing money, usually given in percentages and an annual rate.
Interest-only payment ARM - An I-O payment ARM plan allows you to pay only the interest for a specified number of years. After that, you must repay both the principal and interest over the remaining term of the loan.
Margin - THe number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Negative amortization - Occurs when the monthly payments do not cover all the interest owed. The interest that is not paid in the monthly payment is added to the loan balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments that are not high enough to cover the interest rate or when the minimum payments are set at an amount lower than the amount you owe in interest.
Payment-option ARM - An ARM that allows you to choose among several paymnet options each month. The options typically include (1) a traditional amortizating payment of principal and interest, (2) an interest only payment, or (3) a minimum (or limited) payment that may be less than the amount of interest due that month. If you choose the minimum-payment option, the amount of any interest you do not pay will be added to the principal of your loan.
Points (may be called discount points) - One point is equal to 1 percent of the principal amount of your mortgage. For example, if the mortgage is for $200,000, one point equals $2000. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages in order to cover loan origination costs or to provide additional compensation to the lender or broker. These points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them. Discount points (sometimes called discount fees) are points that you voluntarily choose to pay in return for a lower interest rate.
Prepayment penalty - Extra fees that may be due if you pay off the loan early by refinancing your loan or selling your home, usually limited to the first 3 to 5 years of the loan's term. If your loan includes a prepayment penalty, be aware of the penalty you would have to pay. Compare the length of the prepayment penalty period with the first adjustment period of the ARM to see if refinancing is cost-effective before the loan first adjusts. Some loans may have prepayment penalties even if you make only a partial prepayment.
Principal - The amount of money borrowed or the amount still owed on a loan.

Article by Connie I. Ko

1 reply

FHA loans may be what you are looking for

Wed, 22 Jul 2009 18:09:00 GMT

The recent credit crunch in the mortgage industry has prompted consumers to examine their options carefully. An outstanding option for home buyers and current homeowners making a comeback is FHA (Federal Housing Administration) loans. The desire for secure options in a volatile market is making FHA loans more attractive.
But many people don't understand FHA and if it's right for them. While there's still a bevy of conventional loan options available, the guidelines have been tightened and for some people with less-than-perfect credit, FHA may be just what they're looking for.
CreditFHA is generally more flexible than conventional loans. Look for guidelines requiring two years from bankruptcy discharge date, paid tax liens and judgments and 3 years from a resolved foreclosure. It is even possible to qualify with no credit score, but you must be able to prove regular payment and financial responsibility in some other forms, such as utility bills or rent.
IncomeContrary to popular belief, there is no minimum or maximum income limits for FHA. The key for qualification for income is not the type of income, but the fact a borrower can prove reliable and steady income. Even part-time income can be considered if earned for a significant period of time.
Down Payment / EquityThe max loan-to-value ratio for FHA loans is 97%, meaning you must have 3.5% down payment or equity in the home. The bright side of buying a home with FHA is you can use gifts, grants and concession for your down payment. For a cash-out refinance with FHA, the max LTV is 95%. One thing to keep in mind is FHA does have loan limits based on geographical location.
Mortgage InsuranceMortgage insurance is a policy that protects lenders from losses on defaulted loans. It is required for borrowers that have less than a 20% down payment. Since FHA insures all FHA loans, the guidelines for FHA loans can be a little more lenient. FHA does require an upfront mortgage insurance premium of 1.5% of the loan amount. After closing, you will be responsible for mortgage insurance premium paid monthly for a minimum of 5 years.
FHA has helped more than 30 million people become homeowners since 1934 and is becoming increasingly involved with options for borrowers who have adjustable rate mortgages that will re-set and may be facing foreclosure.
As always, it is advised that you speak with a mortgage professional about your specific situation and what loan is right for you.
Need a loan? Visit Zillow Mortgage Marketplace where you can get numerous, free loan quotes, anonymously.

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The Difference between Interest Rate and APR

Mon, 04 May 2009 18:04:00 GMT

When you get a mortgage, you are charged two different rates--the annual percentage rate (APR) and the interest rate. Understanding the difference between the two rates is important and will help you make an informed decision when shopping for the appropriate lender and the right loan for you.

Interest Rate
The interest rate is the yearly rate a lender charges for permitting the borrower to use money for a specific length of time. The rate is calculated by dividing the total amount of interest charged by the loan amount. For example, if a lender charges a customer $60 a year on a loan of $1000, then the interest rate would be (60/1000) x 100% = 6%.

Annual Percentage Rate
Annual percentage rate (APR) is the annual interest rate you pay on your loan and is the rate used to calculate your monthly payments. The amount of interest you pay is only one of the costs associated with your loan; there may be others.

Your APR includes both your interest and any additional costs or prepaid finance charges you might pay such as prepaid interest, private mortgage insurance, closing fees, points, etc. It represents the total cost of credit on a yearly basis after all charges are taken into consideration.

It will usually be slightly higher than your interest rate because it includes these additional items and assumes you will keep the loan to maturity.

When shopping for a mortgage--especially if it's your first time--it's important to understand the terminology surrounding the mortgage process. So do your research. Find out as much as you can so that you understand the loan process to make an educated and informed decision when it comes time to choose a loan and lender.

Read more about the difference between the interest rate and APR.

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Mortgage Home Page Headline

Wed, 18 Feb 2009 22:27:00 GMT

Current mortgage rates

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Home Equity Loans and Lines

Fri, 05 Dec 2008 19:08:00 GMT

If you’ve ever asked yourself “What the heck’s a HELOC,” then you’ve come to the right place!

There are two types of home equity borrowing: home equity lines of credit and home equity loans.

A HELOC, or Home Equity Line of Credit, is the right to borrow money from a lender up to a certain amount of money. The “line” is a credit line guaranteed by your house, meaning that if you can’t live up to the terms of the line, then the lender has a right (after a few nasty letters) to foreclose on your house. Typically HELOCs (pronounced HEE-lock) have floating interest rates that can change periodically.

For example, a borrower might obtain a $75,000 HELOC at “prime plus one.” This means that the interest rate is one percentage point higher than the Prime Rate. If Prime is 5.5%, then the HELOC is 6.5%. Remember: The rate is tied to the Prime and could change as much as at every billing date. (The change can be dramatic; e.g., in April of 2007, the Prime Rate was 8.25 percent, whereas in June of 2003, it was 4.25 percent.) Many HELOCs today have a fixed rate feature sometimes called a "Fixed Rate Partition" that allows the borrower to lock a portion of the loan amount at a fixed rate for a period of time. This feature varies greatly between different lenders.

Who should get one: Someone who might need extra cash for home improvements, or is looking at borrowing money to buy a different house (in addition to a mortgage).

Who shouldn’t: Do not use a HELOC to splurge for things like vacations or to finance other consumer debts, like credit card purchases (unless you then plan to tear those cards up!). HELOCs are guaranteed by your house, which means the stakes are very high.

Home Equity Loans are when a lender gives you a set amount of money and you pay it back over a fixed payment schedule. Typically these loans have fixed interest rates. This is a better option for someone who wants to lock in a fixed interest rate, either because they think interest rates are going to increase or because they like the certainty of knowing what their payment schedule will be.

A home equity loan also is a better option than a home equity line if you know exactly how much money you need to borrow and when you want to borrow it.

How to get one: You can get a home equity loan or line either from a mortgage broker or from a bank directly. These loans are also called "second mortgages" because they are typically obtained after the home has been purchased with a first mortgage loan.

Taxes and Interest

Are HELOCs tax deductible? Sort of. Like first mortgage interest payments, home-equity borrowing differs from credit card debt in that you can deduct the interest on your tax return. But this only applies if you itemize your deductions. Also, the tax deduction on interest is limited to loan amounts up to $100,000, with some restrictions.

What determines the interest rate? The Loan to Value Ratio and your credit score determine the interest rate of a home equity loan or line. If your credit score is excellent (760), you may be able to get an interest rate at the prime lending rate, or possibly lower. A good credit score (700-760) will likely get you an interest rate that is about the same as the prime rate. Poor credit will likely result in rates of 1 - 5 points higher than the prime rate. Except in some cases, you should be able to avoid fees such as application or appraisal fees, though you might get hit with an annual fee or a small “recording” fee.

The Good News

Home equity lines can be used by the borrower to pay for anything. You literally get a checkbook for the HELOC and you can write checks to your heart's content until you've maxed out the line's limit. Although HELOCs were originally designed for homeowners to pay for home improvements and other house-related projects, nowadays borrowers use home equity lines for almost anything. Most HELOCs also have online Internet access so you can pay bills online using your HELOC just like you would with a regular online checking account.

HELOCs and home equity loans can also be used as second mortgages at the time of purchase. Frequently they are the second purchase mortgage for 10, 15, or 20 percent of the purchase price when buying a home. Home buyers can avoid buying mortgage insurance (PMI) if they take out two loans instead of one, with no single loan exceeding 80 percent of the purchase price. HELOCs can fill this gap, wherein the first mortgage is frequently 80 percent of the purchase price and the HELOC is the second mortgage.

Like a credit card balance, you can pay down a HELOC at any time, without penalties.

The Not-So-Good-News

Home equity lines are serious stuff, since they’re secured by your house. If you can’t meet the payment obligations such as your minimum monthly balance, your homeownership is in jeopardy. Make sure you do your homework and fully understand all the consequences as well as the benfits. What may be a quick fix for debt relief or vacation plans could end up costing you your best investment.

Real Life Example

Bonnie is buying a $300,000 home and has $30,000 saved for her down payment. She needs to borrow the remaining $270,000. She works with a mortgage broker to take out a first mortgage for 80 percent of the purchase price ($240,000) and a Home Equity Loan for 10 percent ($30,000). The terms of the home equity loan are fixed at 6 percent. On closing, she ends up with a $30,000 home equity loan, in addition to her $240,000 mortgage. She may pay a slightly higher interest rate on the Home Equity Loan than on her first mortgage, but that interest is tax deductible, whereas the Private Mortgage Insurance premiums she would have had to pay with a mortgage greater than 80 percent would not have been.

Real Life Example

Harriet wants to remodel her kitchen because she loves to cook. Also, she has heard that a modern kitchen will help her resale value when she sells the house. (She has used the My Estimator tool on Zillow, and knows that in her area kitchen remodels are good investments.)

Harriet goes to her local bank where she has a checking and savings account and gets a HELOC. The bank orders an appraisal to see if the house value justifies the HELOC. It will also check to see how much equity Harriet has in the house. Her house appraises for $400,000 and she has a mortgage with $50,000 remaining on it, so the bank knows there is $350,000 of equity there ? plenty to support a $25,000 home equity line of credit.
Borrow
Harriet uses the $25,000 line to buy a new refrigerator and oven, and to pay the contractor who does her remodel.

Next article: Refinancing Your Home

Previous article: Types of Lenders

Types of Lenders

Fri, 05 Dec 2008 19:07:00 GMT

Lending companies come in all shapes and sizes. Perhaps the first lender any of us ever used was the "Bank of Mom and Dad." Whether we were trying to buy a video game player, a stereo, or even a car, the parental vault was cracked open to help make it happen. Rates were great. We could borrow money with little or no interest. Perfect!

For some people, a mortgage loan from parents or other relatives is still a viable, even attractive, option. For others, read on.

Your needs could be to:

Purchase a home
Refinance an existing mortgage
Open a home equity line of credit (HELOC)

For any of those choices, there are many companies out there -- banks, mortgage brokers, and e-lenders -- willing to help you find a loan. It's not because they think you'll be happy in that Craftsman or that two-bedroom condo in the coolest part of town. It's because they make money lending you money. It's called interest (and fees). That's why it's in your best interest to get the lowest rate possible, and the best terms, which are usually not one and the same. (See mortgage rates in your state).

Know Your Lenders

Before you get the low-down on amortization schedules or learn about newfangled 50-year notes, it helps to understand your choices when it comes to types of lenders. Most fall into one of four categories:

Internet lending resources
Mortgage brokers
Mortgage bankers
Banks and savings and loans

Internet Lending Resources

Internet lending resources have a wide presence on the Web and not all actually lend money, although it might appear that way. They consist of direct lenders, lending marketplaces, and content sites.

Direct Lenders: Direct lenders lend their own money and include both traditional and online lenders. Many traditional banks provide helpful online information, including rates, calculators, and educational content. Online lenders, on the other hand, offer loans directly through the Web. They can offer very competitive rates and give you personalized help via phone, e-mail, and even online chat -- but you probably won't meet anyone face-to-face during this process. So, if you are comfortable transacting online and want a low rate, this option is worth investigating. Keep in mind that some mortgage bankers offer loans both online and in local sales offices.

Lending Brokers: Lending brokers let you fill in one form and then quickly compare quotes from several banks (usually around four). These services make money by charging the banks a fee for the chance to compete for your business. Because banks know you are comparing them side-to-side with others, they offer competitive rates. Once you have filled in your information, they will contact you -- usually by phone -- to begin the process of finding a loan that fits your needs.

Person-to-Person Lending Marketplaces: Lending marketplaces let you ask for money directly from other individuals, and facilitate and service your loan for a small fee. Loan amounts available are still somewhat low, but rates can be lower than other sources of unsecured debt (like a credit card).

Content Sites: Content sites focus on offering educational information, content, calculators, and tools. These sites usually make money from advertising and partnerships. Their partners frequently include direct lenders and lending marketplaces. Here on Zillow, we have a very popular mortgage site called Zillow Mortgage Marketplace. It's where borrowers can can get unlimited loan quotes -- anonymously.
Directory Sites: Your online search can be simplified by using a lending directory. You will find that many lending sources are just one click away.

Mortgage Brokers

Mortgage brokers are like a matchmaking service since they match you, the borrower, with a lender. They review your personal financial information and look over an array of lenders to try to fit you with one who will give you the best rate and terms. Mortgage brokers usually make their money from the lender since they are bringing a client (you) to them, but fees may also be charged to the client. The advantage is choice since the broker will have lots of suitors to match you with; the disadvantage is that once the match is made, they're out of the picture and you continue the dance with the lender you were matched with.

Mortgage Bankers

Mortgage bankers (also called mortgage companies) may or may not be affiliated with a bank and their specialty is in providing mortgages. Period. They originate mortgage loans, which means they prepare loan documents, perform credit checks, inspect and appraise the property. Once they issue you a loan, it is then sold to a secondary lender, such as Fannie Mae and Freddie Mac. This is very common. A secondary lender is in the business of buying existing mortgages from the primary lender to keep the pool of mortgage money moving. This creates fierce competition on the primary level, which in turn keeps rates down for consumers.

Banks and Savings & Loans

Banks and savings & loans are usually "part of the neighborhood" and make their money from the funds generated from their customers who have checking and savings accounts at their bank or from other services they offer. They issue mortgage loans and usually keep control of the loan, but sometimes sell it off to secondary lenders.

Other types of lenders include finance companies and credit unions. Whichever lender you use, the bottom line is to do your homework and don't be afraid to ask questions.

Want More Information?

Both the Federal Housing Administration and the Veterans Administration have several loan programs designed to encourage homeownership.
FHA: http://www.hud.gov/fha .. ... oans.cfm
VA: http://www.homeloans.v .. ... eran.htm

The two big purchasers on the secondary lending market in the U.S. with the homespun names, Fannie Mae and Freddie Mac, also have free content and tools about lending and homeownership. Visit www.fanniemae.com and www.freddiemac.com.

Next article: Home Equity Loans and Lines

Previous article: Choosing a Lender

Choosing a Lender

Fri, 05 Dec 2008 19:06:00 GMT

A lender is critical to the cost and success of your home purchase. For one thing, he holds the purse strings. For another, this level of service can make the difference between a happy new homeowner and a disappointed would-be buyer who missed out on a home.

Beyond finding a good interest rate, you are relying on a lender to lock in your rate fast: if you want that 6 percent rate, he needs to jump on it because rates can change like the wind. You are also relying on him to close on the loan on time; you could lose a house if there is a hang-up for some reason beyond your control. And many fees are determined by the lender, fees that can be negotiable if you know what to ask.

It is helpful if you gather all of the required documentation in a neat package before you start talking to lenders.

Shopping for a lender requires a homework assignment:

Know thyself. Before you even pick up the phone or turn on the computer, figure out what mortgage type you are looking for. Not all lenders handle all loans. You can be more selective if you know what you're looking for.

Know thy prevailing mortgage rates. It's easy to compare rates online, and many sites allow you to see the rates from local lenders for various types of loans. Use the sites that show points as well. One caution: many of the lenders listed are paid advertisers, so you aren't getting the total picture. However, lenders have to be competitive to stay in business, so what you see will most likely be a good benchmark for comparison.

Understand the players. Study the types of lenders and their advantages and disadvantages for your situation. Some lend their own money, and others find the money for you.

Understand the fees. Beyond the interest rates, there are closing fees and points, and occasionally commissions that you don't see. You will want to compare these for all the lenders on your list.

But Where Are They?

As you can tell from the homework assignment, you are going to make this decision based on your individual needs and the costs. You are also going to base it on professionalism, and one time-tested way to do that is through referrals. Most people find their lender or broker through friends or real estate agents. After all, you only have so much time. As one buyer put it, "If you figure someone you trust has done some shopping, it's easy to just get lazy and leverage their work." But in some cases, the seller of the property might provide your mortgage, too.

Often the choice starts with pre-approval. Remember, you should get a pre-approved loan before you shop for a house. You are free to shop around for a different lender after you get it, but buyers usually end up with the first lender.

Here are some sources for lenders:

Agent referrals. Agents want to have the pre-approval in hand before they spend time finding a house. It ensures that you are a qualified buyer, which will help them when they present your offer to a seller. Often they can refer you to some lenders they've worked with before. This is fine if you have an experienced agent who can vouch for the lenders. Good agents have several lenders they can refer you to, and you should ask the same questions you'd ask if you were finding the lender on your own. In case the relationship sounds too close for comfort, the Real Estate Settlement Procedures Act (RESPA) prevents agents from taking kickbacks or referral fees from service providers. But remember the agent's incentive in finding you a good lender is to ensure the transaction closes on time without any hiccups. That's in their best interest as well as yours.

Friend referrals. Friends who have bought or refinanced a house recently make great referrers. Ask them if the lender described the different types of loans available in easily understood language; if he locked in the rate he promised; and how similar closing costs were to the lender's Good Faith Estimate. If your friends were happy with the process, you probably will be too.

Online sources. You can find plenty of sites, such as LendingTree.com, where you can get estimates from lending companies without ever talking to them. And others where you can have someone call you. There's no risk, until you sign a contract. Decide up front if you need to have in-person service; that will narrow your choices.

Mortgage brokerage. If you don't have time to find a lender yourself, a broker can do it for you. Sometimes you pay him upfront, but usually the bank pays him. Of course, you pay in the end: it's just wrapped up in the interest rate. However, when you go through a mortgage broker to shop for your rates, he/she can most likely get a lower rate than you could: it's called shopping wholesale. Unfortunately, only the licensed mortgage professionals have access to the wholesale rates.

Your bank or credit union. You have your money there, so you probably trust it. The loan officer usually controls the loan (even if they resell it eventually) and has authority to make decisions on his own. That can be nice when time is short.

One more thing. Don't discount your parents or other family members as a source of mortgage financing. A properly structured and documented intra-family mortgage loan is as official as any loan from a bank. The interest you pay is still tax-deductible but you can keep that money in the family.

Ask Away

Compare three or more lenders before making a decision. You'll want to compare rates, fees, and points, but you will also want to know a slew of other things. Don't be afraid to ask: Lenders know you have options, so being forthright should not be a problem.

When you ask the questions below, listen carefully to see if the lender is answering in a straightforward way, without using jargon you don't understand. When you ask about fees, do they include them all voluntarily? If you think they are trying too hard to push you in a certain direction, go elsewhere. And be sure to get a Good Faith Estimate that defines settlement costs. That, together with the Truth in Lending document will give you a picture of the total amount you are borrowing and the annual percentage rate.

Questions to ask potential lenders

What are your loan programs? Do you offer VA loans (for example)?
What is the par rate for a 30-yr. fixed loan? (He should have the answer at the tip of his tongue.)
Could you estimate closing costs for my loan?
Can you estimate and explain your fees?
Explain an APR and what is it for this loan?
What is your income from this loan?
Would you get approval for my loan locally?
Here's my timeline. Are you certain you can get this done in time for closing?
Can I see a Good Faith Estimate?

Additional questions for online lenders

Is there someone I can talk to whenever I need to?
How are you keeping my info secure?

Additional questions for mortgage brokers

How do you get paid, in points or commission?
How much will you make on this loan from the lender?
Name some of your top lenders.

Next article: Types of Lenders

Previous article: Understanding Mortgage Types

Understanding Mortgage Types

Fri, 05 Dec 2008 19:04:00 GMT

To quote a mortgage broker: "There is a different loan for a different need." In other words, the type of mortgage you get depends on your individual situation. A good lender will get a sense of your needs from your credit report, your assets, and your employment history. He can then recommend some options for you. Here's a rundown on the most common loan types.

Fixed-Rate Mortgage

Interest is fixed for an amount of time; e.g., 10, 15, 20, 30, or even 40 or 50 years, at which point the amortized principal is paid in full.
Pros: Security. You know what your payments will be. You can refinance if rates drop significantly.
Cons: If rates go down, you'll still be paying the initial rate unless you refinance. This is a long-term prospect; if you are keeping your home for 15 or even 30 years, it's a conservative way to go. But you can end up paying more short-term than if you had an ARM.
Watch out: This is a long-term prospect; if you are keeping your home for 15 or even 30 years, it's a conservative way to go. But you can end up paying more short-term than if you had an ARM.

Adjustable-Rate Mortgages (ARMs)

The interest rate fluctuates with an indexed rate plus a set margin; adjustment intervals are predetermined. Minimum and maximum rate caps limit the size of the adjustment.

Pros: Initial rates are lower than fixed. Popular with those who aren't expecting to stay in a home for long, or in a hot market where houses appreciate quickly, or for those expecting to refinance. You can qualify for a higher loan amount with an ARM (due to the lower initial interest rate). Annual ARMs have historically outperformed fixed rate loans.

Cons: Always assume that the rates will increase after the adjustment period on an ARM. You are betting that you'll save enough initially to offset the future rate increase.

Watch out: Check out the frequency of the adjustments. The more often, the lower the starting rate, but the more uncertainty. The less often, the higher the rate, but a little more security. Check the payments at the upper limit of your cap (your rate can increase by as much as 6 percent!); you can get burned if you can't afford the highest possible rate. And planning that a refinance will bail you out is risky; what if you can't afford (or can't qualify) when the time comes?

1-yr. Treasury ARM

The rate is fixed for one year, then becomes adjustable every year. The new rate is determined by the treasury average index plus the loan margin (usually 2.25-2.5%). 30-yr. term.
Pros: Lower rates than a fixed mortgage. When rates go down, you benefit.
Cons: Watch the margin; the margin is added to the index to come up with the new rate after the adjustment period. When rates are going up, you could end up paying more interest than with a fixed.
Watch out: If you are a gambler and think the rates won't increase, this might work for you. But if you are into it for the long or even intermediate run, fluctuating interest rates can mean higher payments over time.

Intermediate ARM

With an intermediate or hybrid ARM, the rate is fixed for a period of time, then adjusts on a predetermined schedule. This is shown by the number of years the loan is fixed, and the adjustment interval (.e.g., 3/1 ARM is 3 year fixed, and 1 adjustable annually). The new rate is determined by an economic index (usually treasury or treasury average index) plus the loan margin (usually 2.25-2.5%). 30-yr. term.
Pros: Lower rates than a fixed mortgage. When interest rates rise, you see more ARMs because they are easier to qualify for.
Cons: When rates are going up, you could end up paying more interest than a fixed-rate mortgage after the initial period.
Watch out: If you aren't planning to keep your house for long this might work for you because you will receive lower rates initially. Be sure to check the rate caps so you know exactly how high your payments can go. Fluctuating interest rates can mean higher payments over time.

Flexible Payment Option ARM

The borrower chooses from an assortment of payment methods every month. There is a "change cap" limiting how much payments can vary in a year.
Pros: Frees up cash when you need it. Good for buyers with variable incomes (e.g., salespeople who work on commission).
Cons: Some options won't cover your interest. With lower payments, your balance increases each month, and eventually your payments will increase substantially. This could lead to negative amortization.
Watch out: Eventually you will be required to pay down the principal and your payments will increase drastically. If you can't make them, you lose the house. Most experts say, "Don't do it."

Interest-only ARM

For a period of time, you pay only interest, and do not pay down the principal.
Pros: If you don't plan to stay in a home long, you can buy something you ordinarily couldn't afford. If you are in a hot market, or a hot neighborhood, you'll have low payments while your house appreciates in value. You can always pay more on the principal while enjoying the low payments. One other great thing about an interest only mortgage is that payments made to the principal reduce your monthly payment. So, if you have a job that has a heavy non-scheduled bonus or commission based compensation plan, you can pay the interest every month and when you get your bonuses pay down the principle to reduce your monthly payment.
Cons: The day will come when you need to pay down the principal. If your home value has fallen, or your income decreased, you could have trouble making the new payments. One strategy is to invest the difference between an interest-only loan and a fixed-rate loan to build up cash reserves.
Watch out: If you can't pay interest and principal at the same time, chances are you can't afford the house. You can only put off the inevitable for so long: the principal has to be paid down. If you can't make payments, you could lose the house. If you plan to sell your house and can't sell it for what you owe, you are in trouble.

Convertible ARM

An ARM that can be converted to fixed rate after a period of time.
Pros: Saves on refinance costs, assuming you would have been switching anyway.
Cons: You will have a higher rate for the fixed with a convertible loan. You can't look around for a better deal, which you can with a refi.
Watch out: Saving the cost of the loan and the hassle of shopping loans are a plus, but you might be crying if the refinance rates are lower than your new fixed. Experts say, "Just refinance."

Jumbo Loans

Above Freddie Mac and Fannie Mae conforming guidelines, therefore the big secondary lenders will not secure jumbo loans. 2006 maximum amount for a conforming loan: $417,000.
Pros: When the market is out of sight, the jumbo loans make a purchase possible.
Cons: Higher down payments, and higher interest rates.
Watch out: If you can afford the higher payments, then go for it. But make sure you can afford them.

Assumable Mortgage

An adjustable-rate loan, the balance of which can be assumed by a home buyer.
Pros: Sellers can offer a low interest rate to entice buyers.
Cons: This is almost never a fixed rate mortgage, so the savings might not be all that great.
Watch out: These are rare today. If the buyer who assumes the loan defaults, the bank will go after the original borrower.

FYI - FHA loans are assumable, but are fully-assumable and are not always ARMS.

Balloon Conforming Mortgage

Interest rate is fixed for a period of time, but the principal is not completely amortized. For the remainder of the term, it adjusts to a new fixed rate determined by the Fannie Mae net yield index plus the margin. 30-yr. term
Pros: Lower monthly payments initially. If your career (and salary) has a good future, or you are in a hot market and plan to sell before the balloon comes due, you can save moolah.
Cons: Who knows what that new rate will be? There's a looming debt in your future.
Watch out: You can refinance when the balloon comes due, but you are gambling that you can afford the refi loan.

Balloon Mortgage

The rate is fixed for a period of time, but the principal is not completely amortized during the period. The entire balance of the principal is due as a balloon payment at the end of that period.
Pros: Lower monthly payments, with the idea you can always refi or sell before the balloon.
Cons: A big elephant waiting in the wings
Watch out: It's easy to procrastinate, or your life changes, and then your balloon pops. Refinancing costs might offset any savings you made.

Veteran Administration Loans

A zero-down loan offered to veterans only; the VA guarantees the loan for lenders.
Pros: Nothing down, and no mortgage insurance. The loan is assumable.
Cons: The rate might be higher than conventional loans or FHA loans.
Watch out: Shop around first. Lenders are paid a 2 percent service fee by the government, so your points should reflect a discount when compared to similar rate loans.

Federal Housing Administration Loans (FHA)

Government-subsidized loan with low down payment (i.e., as little as 1-3%) and closing fees included; the government guarantees the loan.
Pros: Low rates for those who can't come up with the down payment or have less-than-perfect credit; great for first-time home-buyers. The loan is assumable.
Cons: If you can afford 5 percent down, you might find better rates with conventional loans

Watch out: Shop around first. Lenders are paid a 2 percent service fee by the government, so your points should reflect a discount when compared to similar rate loans.

Next article: Choosing a Lender

Previous article: Qualifying for a Mortgage

Qualifying for a Mortgage

Fri, 05 Dec 2008 19:02:00 GMT

Basic truth: A loan holds your house and land as collateral; it's not a pound of flesh, but the loss can seem just as life-threatening.

But a lender does not really want to end up with your house. They want you to succeed and make those monthly payments that make the world (or at least the U.S.) go 'round. So when you apply for a loan, the lender will scrutinize your financial situation to make sure you are worth the risk.

You need to get your paperwork in order before you find a lender, but first you should understand the basic facts.

Down payment. Traditionally, lenders have liked a down payment that is 20 percent of the value of the home. However, there are many types of mortgages that require less. Beware, though: If you are putting less down, your lender will scrutinize you even more. Why? Because the less equity you have in the home, the less you have to lose by just walking away from the loan. If you cannot put 20 percent down, your lender will require property mortgage insurance. (If you can only afford, for example, 5% down, but have good credit, you can still get a loan, and even avoid paying PMI. Ask your lender about an 80/15/5 loan -- an 80 percent first mortgage, followed by a 15 percent second mortgage and 5 percent down. This gives the lender more security, while saving you the cost of insurance.)

LTV. Lenders look at the Loan to Value (LTV) when underwriting the loan. Divide your loan amount by the home's appraised value to come up with the LTV. For example, if your loan is $70,000, and the home you are buying is appraised at $100,000, your LTV is 70%. The 30 percent down payment makes that a fairly low LTV. But even if your LTV is 95 percent most people can still get a loan, most likely for a higher interest rate.

Debt ratios. There are two debt-to-income ratios that you need to consider. First, look at your housing ratio (sometimes called the "front-end ratio"); this is your anticipated monthly house payment plus other costs of homeownership (e.g., condo fees, etc.). Divide that amount by your gross monthly income. That gives you one part of what you need. The other is the debt ratio (or "back-end ratio"). Take all your monthly installment or revolving debt (e.g., credit cards, student loans, alimony, child support) in addition to your housing expenses. Divide that by your gross income as well. Now you have your debt ratios: Generally, it should be no more than 28 percent of your gross monthly income for the front ratio, and 36 percent for the back, but the guidelines vary widely. A high income borrower might be able to have ratios closer to 40 percent and 50 percent.

Credit report. A lender will run a credit report on you; this record of your credit history will result in a score. Your lender will probably look at three credit scoring models (one for home equity loans or lines of credit) and then average them to arrive at your score. The higher the score, the better the chance the borrower will pay off the loan. What's a good score? Well, FICO (acronym for the company that invented the model) is usually the standard; scores range from 350-850. FICO’s median score is 723, and 680 and over is generally the minimum score for getting "A" credit loans. Lenders treat the scores in different ways, but in general the higher the score, the better interest rate you'll be offered.

Automated Underwriting System. The days when Jimmy Stewart would sit down with you to go over your loan are over. Today you can find out if you qualify for a loan quickly via an automated underwriting system (AUS), a software program that looks at things like your credit score and debt ratios. Most lenders use an AUS to pre-approve a borrower. You still need to provide some information, but the system takes your word for most of it, without Jimmy having to vouch that the farm really is yours. Later on, you'll have to provide more proof that what you gave the AUS is correct.

Required Information

Your lender will require some or all of the following when you apply for pre-approval for a loan:

-- Paycheck stubs for the last 30 days
-- Last two years of W2's or tax returns if you are self-employed.
-- Recent credit card statements
-- Two bank statements over last 90 days
-- Loan information on current home (if you own one)
-- 401K statements
-- Divorce decree (if applicable)

Next article: Understanding Mortgage Types

Previous article: Basic Mortgage Questions

Basic Mortgage Questions

Fri, 05 Dec 2008 18:59:00 GMT

Mortgages are probably the most crucial piece to buying, selling, or just plain owning a home. And, honestly, they are not as hard to understand as you might think. You can benefit from the experience of others who have mortgages (which is just about everybody you know), and with a little homework, you can make the best financial decisions.

1.) What is a mortgage?

It’s pretty simple: A mortgage loan is a loan, with your house and land used as security; if you don’t pay back the loan, the lender forecloses on your home. The loan is secured by a lien (the "mortgage") against the property (your house and land). The lender doesn't own the house, you do. They just have the lien with your house as their collateral (i.e. the security).

When you are looking for a first mortgage, there are two things to think about: what you can actually afford, and what you can borrow. Why are they different? Because the lender is not going to look at how much you spend in a month on gourmet wine or movies, or how comfortable you'll be with a big payment. They may be willing to loan you much more than you think you can spend on your mortgage. Only you know how much flexibility or not that your lifestyle has, which determines how much you can afford in a home.

A lender looks at your income (and income potential) vs. your debt, as well as your savings and credit history. Then they determine how big a risk you'd be for the lender to take on. They're also going to look at the value of the house you want to buy, and the interest rate of the loan you'll be getting. And then they arrive at a loan amount their firm can live with. In a perfect world it will match (or exceed) what you need to bridge the gap between your down payment and the price of the house you want.

2.) Why are there so many kinds of mortgages! How will I ever figure it out?

When it comes to looking at mortgage types, ask yourself one giant question: What is your goal? Will you be in this new home when the grandkids come to play, or is this a starter home that you'll trade up in the next five years? The answer to that question will help narrow your mortgage choices.

3.) Why does my length of time in the house matter?

It matters for two reasons: It will determine which type of loan is better for you, and it will dictate whether you look hardest at interest rates or at points.

If you are going to stay in your house and plan to pay off your mortgage over its lifetime, you can get a fixed rate loan where the payments will not change. (Of course, taxes and insurance are usually included in this type of loan and they might change.) The interest is a little higher than with an Adjustable Rate Mortgage but you have the security of knowing what your loan payments will be.

But if you know you won't be in the house long, you can get a lower interest rate on an ARM. If rates take a big jump in a few years, it won't matter because you're planning on selling then anyway. You'll also have the option of a hybrid ARM that is fixed for, say, five years, and then adjusts annually.

The lender may charge points, and required third parties charge for their services, which increases the cost of the loan. If you sell your home in a few years and have paid points to get a better interest rate, you may not recoup the cost of those fees. And your equity in the house will be minimal, but you are betting the home will appreciate enough to cover the fees, or that the money you save in interest will balance out the additional cost of the loan. (If you stay in the house longer than you expect, you take the risk that you can't afford the higher payments as the interest rates adjust, or you risk not being able to refinance.)

There's no free lunch (or free loan): You can choose between higher rates with lower points, or lower rates with higher points. The key is to compare different types of loans to see what works for your needs.

Tip: In general, you should never pay more than 1 to 1-1/2 points to a lender, depending on the loan. (In certain circumstances, you might pay 2 percent, but only if there is a good reason; e.g., bad credit, complex loan, or you are buying a great interest rate.) You should discuss with an independent mortgage professional the effect discount point have on your rate. If your holding time is less than five years, you might consider "negative points" or receiving a credit from yield spread premium for your closing costs.

4.) Where can I find today’s rates?

Lenders and your local bank will have the latest rates for each type of loan. Shop around for rates in your city to see who is offering the best deal locally. Looking at the advertised rates will not tell you which loan you qualify for and often times the lowest rates ("teaser rates") can be misleading, so you should investigate several lenders.

5.) Why are some rates shown as a percentage and as an APR too?

The Annual Percentage Rate is what you will actually end up paying in addition to the principal. It wraps up the interest, points and fees in an effective annual rate. (When a lender quotes you a rate, it will be for interest only, so ask to see the APR.) As above, when you are using the APR to compare loans, make sure you are comparing apples to apples. You need the same loan from different lenders to make the comparison work.

Tip: Compare the APR on two identical loans and choose the one with the lesser rate. Does this seem confusing? Take a look at the resources at the bottom of this article or seek independent mortgage advice.

6.) What is amortization?

It is a true measure of what you are paying per year against your loan. A loan has a life -- whether it's 15, 30, or even 50 years. You pay in installments, and the principal decreases (except in the case of interest-only loans or negative amortization) until the loan is paid off by the end of the term. The payments are evenly spread over the life of the loan, with the interest payments the majority of the payment at the beginning, and then principal paid off toward the end of the term. Pay attention to the amortization schedule, which shows the payments for the life of the loan including interest.

Tip: Pay half your house payment every two weeks instead of one monthly payment. This results in 26 payments per year, one more payment annually than if you just paid monthly. The re-amortized loan will eventually result in more of the payment paid on principal and less on interest. The extra payments go to pay down the principal on the loan.

7.) I keep hearing that ARM rates are tied to an index. What's that?

Fasten your seatbelt. This can get complicated.

An ARM loan's interest rate is determined by an index, which adjusts periodically, plus a pre-set margin (e.g., Prime plus 2). In general, you want to understand this because some indexes change faster than others. The more change, the more fluctuation in the ARM. Most buyers want to choose an ARM based on a stable index (especially if you suspect the economy is less than booming), or at least consider it along with all the other aspects of the loan. Ask your lender to fill you in on how the index works for your loan.

Some popular indexes include:

T-Bills, the federal government's treasury bill index; the most commonly used

LIBOR (London Interbank Offered Rate Index), based on international rates

COFI (11th District Cost of Funds Index), based on a moving average of rates

Prime Lending Rate

8.) What else should I watch out for?

Prepayment penalties. Think it's a good thing to pay off a loan? Well, it might be, but certain lenders charge a penalty if you do. Penalties apply for a specific period of time, usually 1, 2, or 3 years after the loan is originated. How much is the penalty? Could be six months of interest or 2 percent of the principal remaining on the loan, but it varies.

You might think that it’s stupid to get a loan with a prepayment penalty, but some lenders offer very low (and therefore tempting) interest rates in exchange. Also, some borrowers agree to loans with penalties if they have bad credit and it's the only way they can get the loan. Mostly, a prepayment penalty is a financial decision. There are situations where accepting a prepayment penalty on a loan can save you thousands of dollars in interest.

9.) What's a traditional vs. non-traditional loan?

Lenders are creative when it comes to loans to enable people to own a home. That sounds very American, but sometimes the loans are issued regardless of a buyer's ability to pay. Recently, when the housing market was hot, non-traditional loans sprouted up like dandelions in your front lawn.

Non-traditional loans include:

Interest only loans mean the buyer pays no principal and only interest for a period of time. Payments are low because the buyer is not paying anything down on the principal, though he can if he wants (though few do). If this is a short-term loan, buyers can benefit from the reduced payments -- it enables them to borrow more in the loan amount. But it all depends on the length of the interest-only period; the shorter the better.

Payment-option ARMs let the buyer choose from a selection of payments: negative amortization, interest only, or fully amortized. The buyer has to be careful not to pile up an even higher debt by always choosing the lowest payment.

Zero-down loans do not require a down payment, so the loan amount, as a percentage of the purchase price, is usually higher than the Fannie Mae guidelines; if the borrower gets a second mortgage to cover the amount above the guidelines, it's called a "piggyback loan" or a "purchase money second mortgage." Ditto if the borrower does not have enough for a down payment, and gets two mortgages instead. (See Understanding Mortgage Types.)

Home Ownership Accelerator Loan Products are mortgage products (or software) that promise to accelerate your mortgage payoff; many times promising that you do not have to change your spending habits! Buyer beware; these products require a high degree of financial dicipline and adequate discretionary cash flow. Please seek independent mortgage advice before applying for any type of home ownership accelerator loan.

Traditional loans are those where the principal and interest are paid in an agreed-upon payment schedule, with a down payment that fits within the usual parameters. Fixed and conventional ARM loans fall into that description.

10.) What's mortgage insurance? Do I need it?

If you are making a down payment of less than 20 percent, you will most likely have to get Private Mortgage Insurance (or PMI). It ensures that the lender is guaranteed, by the mortgage insurer, 80 percent of the loan if you default. The insurance premium amount varies by the loan to value of the house and type of loan. Another option is to get a second mortgage to use for part of the down payment. For example, you can get an 80/10/10 loan (80 percent loan, 10 percent second mortgage, and 10 percent down) or a variation thereof and avoid paying PMI.

Government loan programs, such as FHA or VA loans, are backed by the government rather than PMI. There is no monthly mortgage insurance on VA loans, however you will have monthly mortgage insurance on a new FHA loan.

Next article: Qualifying for a Mortgage

Previous article: Home Buyers' Regrets

You Don't Always Get Credit For Trying

Wed, 03 Dec 2008 01:35:00 GMT

Eager and committed first-time home buyers who say they are ready to buy, but want to work on their credit first, should understand that there are some misconceptions they need to understand before making a payment or closing an account. In some instances it may actually be best to wait and pay those debts off at the closing table. Here are five misconceptions about paying credit card debt:

1. Your score will drop if you check your credit – Definitely not true. Checking your credit report and score is counted as a "soft inquiry" and doesn't harm your credit at all. Only "hard inquiries" from a lender or creditor, made when you apply for credit, can bring your credit score down a few points. Worried about damaging your credit while shopping around for a loan? Multiple inquiries for the same purpose within a short amount of time (a few weeks) are grouped together into a less damaging period of inquiry.

2. Closing old accounts will improve your credit score – Many people advocate closing old and inactive accounts as a way for improving your credit. In most cases, closing accounts will actually have the opposite effect. Canceling old credit accounts can lower your credit score by making your credit history appear shorter. Think twice before closing the oldest account on your credit report. If you want to reduce your levels of available credit, ask for your credit limits to be lowered or close newer accounts instead.

3. Once you pay off a negative record, it is removed from your credit report – Negative records such as collection accounts, bankruptcies and late payments will remain on your credit report for 7-10 years. Paying off the account before the end of the set term doesn’t remove it from your credit report, but will cause the account to be marked as “paid.” It is still a good idea to pay your debts, it can improve your credit score, but the major improvement will come when the record expires.

4. Being a co-signer doesn’t make you responsible for the account – When you open a joint account or co-sign on a loan, you are taking on legal responsibility for the account. Any activity on these shared accounts, good or bad, will show up on both people’s credit reports. If you co-sign for a friend’s auto loan and they don’t make the payments, your credit profile will be hurt by their actions and visa versa. The only way to stop this double reporting is to refinance the loan or to have the creditor officially remove you from the account.

5. Paying off a debt will add 50 points to your credit score – Your credit score is calculated using a complex algorithm that takes into account hundreds of factors and values. It is very hard to predict how many points you can gain by changing one factor. For a person with a high credit score, just one late payment can cause a significant drop. If a person has a low credit score, it may not cause a large drop at all. There is no magic way to improve your credit score, just keep paying your bills on time, reducing your debts and removing negative inaccuracies from your credit report Good financial behavior and time are the two most important factors for your credit score. To pull your free credit report go to annualcreditreport.com.

1 reply

Your Credit Renaissance

Wed, 03 Dec 2008 01:30:00 GMT

Credit is a recorded history of a person's financial culpability. If it is wrought with late payments and continued debt, major product and service providers are less likely to engage in business with you. It's important to keep your record as immaculate as possible and one must be constantly vigilant to do so. This is a difficult task and the best way to maintain a good credit image is to stay informed and remain alert.

Know your history. Your credit report tells your financial story, from the cars you have to the loans you've owed and owe. If you come across something that seems unfamiliar it's not that uncommon. Identity theft and fraudulent spending is more common than ever and deserves attention, inquiring about it may be your only defense against having unjustly bad credit. You can request a free annual report from the credit bureau or at www.annualcreditreport.com.

Know your card limit. Credit cards with no limit are reported as maxed out, so you should find a credit card with a limit. Be aware of the card's limitations and stay well below them. An intelligent way of doing this is to transfer enough of the payment into another card, making sure the other card has a low rate, to balance them into two payments.

Don't make an exit too soon. As enticing (and advantageous) as it appears to drop a credit card account that is currently not in use, it will actually work against you if you are not timely and have not had the card for at least two years. Unless you have at six accounts open with other companies, hold the unused account with the prudence not to use it. Just think about the small interest loan you can get for a beautiful home, if you ever get tempted to leave.

Minimize the effects of late payments. Even the most passionately punctual payment planners can make a late payment. You must hold yourself to a high standard of on-time payments, this will make it easier for companies to forgive and erase other accidental late payments.

Get rid of collections A.S.A.P. Those agencies that constantly harass you about payments also besmirch your credit score every time you're delinquent on your payments. These companies can do no good for your credit and should be paid and left immediately. Overdue payments will be as obvious as a black eye on your pristine record. Dissolve your relationship with them as quickly as possible through on time or even overpayments.

Charge-offs are damaging. Getting the simple term "charge-off" on your credit report can be the "nail in the coffin" for your credit. Charge-off means that a credit company has had an unsuccessful transaction with you where they didn't receive return on their investment. This is an unfortunate circumstance and damning in the realm of credit. This circumstance can be avoided by practical investments payment management.

1 reply

You Can't Get a Mortgage With Blemished Credit

Wed, 03 Dec 2008 01:29:00 GMT

Mortgages can be a very confusing topic, and myths and misconceptions abound. Subscribing to the myths can keep you from buying your home or paying for a mortgage that costs more than it needs to. Find out the truth behind several popularly held mortgage beliefs. Today's myth: Lenders won’t give you a loan if you have less-than-perfect credit.

You Can’t Get a Mortgage If Your Credit Is Blemished
Even if your credit is less-than-perfect, you may still be able to get a mortgage. There are many loan options available for all sorts of financial circumstances. Some lenders can approve you even if you’ve had previous late payments, delinquencies, or even past bankruptcies. Don’t be afraid to talk to a mortgage banker to find out if you qualify.

"The way people deal with money and risk is often irrational." says Bob Walters, Chief Economist at Quicken Loans. "We're not talking about finances; we're talking about psychology, or at least where the two meet.” Don't let anxiety over past credit issues stop you from exploring your mortgage options, or you may find you've missed an opportunity to improve your financial situation.

1 reply

How Your Credit is Evaluated

Wed, 03 Dec 2008 01:26:00 GMT

How Your Credit Is Evaluated

Here is a quick list of things that lenders look at to determine your credit. It is not comprehensive, but it should give you a good idea of if you are going to get a good rate or not.

Do you pay your bills on time?

Okay - this is important. Actually, this is the MOST important thing that a vendor looks at when determining whether or not you are going to get a loan.

Lending, like any other business, is about making money. If you don't pay your bills, chances are that you will not pay the vendor. Don't be discouraged if you have had problems in the past paying your bills due to an external problem. Even though lending is a business, it is a business run by people. If you can show that you have made an effort to fix your credit, and the lender is convinced that you will pay in the future, you should have no problem.

How much credit history do you have?

Honestly, if you do not have at least two years of established credit, you should not try for a home loan. Lenders want to see a history of payments before handing over a large sum of money.

What is your credit rating?

Lenders like using "credit scores" to determine whether or not you will qualify for a loan. What is a "credit score"? A "credit score" is a number that lenders use to see if you are going to pay your loan off. This number ranges between 200 and 800, with most of the population between 500 and 600. If you have a score of 700 , you have great credit.

You can get your credit score at Fair Isaac's web site

(http://www.fairisaac.com/). You can also ask your lender for your credit score when you apply for your loan.

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How To Shop for a Mortgage

Wed, 03 Dec 2008 01:12:00 GMT

Not only is the process complex and stressful, but it may be the largest financial transaction of your life. It is important that you choose the right loan, the right mortgage banker, and get the best rate. So how do you coordinate all of these things and still manage to close on your home?

Choose the Mortgage Lender and Banker

Decide to shop only a handful of lenders you feel comfortable with; this means less than five. Choose companies that your friends and family have had good experiences. The products offered by these larger and more reputable lenders often differ very little, so shopping less than five is more than enough to make a good comparison. The best lender may not have the absolute lowest rate, but great service and support are worth the extra tenth of a percentage point.

When you choose a lender, you will be matched with a mortgage banker to handle your loan. Ask the banker about their satisfaction rating and if you can read any client testimonials they may have. Also, ask the banker to describe the loan process to you in detail so that you have a better understanding of the company's mortgage operations.

Choose the Right Loan
Once you have chosen a mortgage banker you trust and are comfortable transacting with, they will help guide you to the best loan to fit your needs. Don't be afraid to ask too many questions about different loan options. Your Banker is a great resource. Remember that the more financial information and documentation you provide, the faster and more efficient the process will be.

Once you have decided to start shopping for a mortgage, keep in mind that you only have a 30-day window to do so before shopping for the best rate starts to affect your credit score.

When shopping around for your home loan, keep these three things at the top of your priority list. Most importantly, choose the best lender to cater to your needs as a client. Having a great lender and Banker will make the other steps in the mortgage process less stressful and more efficient.

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How to help boost your Credit Score

Tue, 02 Dec 2008 23:22:00 GMT

A Qualified Mortgage Consultant Can Help Boost Credit Scores

Consumers interested in purchasing or refinancing a home will pay an interest rate based on current market conditions and their ability to pay back the loan. The borrower’s income and debt ratios are taken into consideration by the lender, as well as the predictability factor provided by credit scoring. It’s important to have a mortgage professional in your corner that has a keen eye for solutions to improving credit scores in an effort to get the best interest rate possible.

Interest rates associated with various loan programs are broken down into schedules based on credit score ratings. While each lender has its own guidelines, it’s safe to assume that as the consumer’s credit score goes down, interest rates will go up.

A borrower with an outstanding credit rating will get what is called an A-paper loan. This type of borrower is rewarded with a lower interest rate because they have a proven track record of using credit sensibly and paying their bills on time.

Loans designed for consumers with less-than-perfect credit – sometimes referred to as “sub-prime” – can range anywhere from A-minus, B-paper, C-paper or D-paper loans.

If you have already taken out a mortgage loan with a higher interest rate because your credit score was a little under par, you will really appreciate the value in doing a little work to improve your credit score. Refinancing from a D-paper loan to a B-paper classification can save literally thousands of dollars in financing fees over time, even though the B-paper loan is still considered sub-prime.

A qualified mortgage consultant will guide you through the nuances of the process of improving your credit score to refinance and save money. First and foremost, he or she will want to review the terms of the existing mortgage loan to determine if you have a pre-payment penalty clause written into your contract. In general terms, that means that if you sell the home or try to refinance before the pre-payment penalty expires and you have not already paid off 20 percent of the original loan amount, you will most likely have to pay a 3 percent fee back to the lender to compensate for the high risk and high costs incurred to provide that financing.

Next, you should obtain free copies of your credit reports from www.annualcreditreport.com and start working on improving the credit score six months prior to the expiration date on your existing pre-payment penalty.

There are five factors that make up the credit score and your mortgage consultant can coach you through some basic strategies to improve your credit score. This means very conservative use of credit cards, paying off debt as much as possible and not applying for additional credit cards unless you will benefit from such action. You will want to verify that negative items you have paid off are being removed from your credit report, and that good credit history is being reported to all three bureaus. You’ll also want to dispute any errors that appear on your credit reports and seek to have those removed entirely.

Once your credit score improves, it’s time to refinance at a better interest rate. Your mortgage professional should look for a program that carries no more than a two-year prepayment penalty so you can continue to refinance as your credit score increases. You can repeat this process until you reach A-paper status and secure the best interest rate available.

This is a strategy that also works well for first time home buyers who do not have enough credit history under their belt to get an A-paper loan at the time of purchase. The important thing is to work with a mortgage consultant who can give you a roadmap to follow and a strategy for success in building personal wealth.

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How to Finance a Fixer-Upper Home

Tue, 02 Dec 2008 23:19:00 GMT

How to Finance a Fixer-Upper Home

A home that needs a lot of repair is what's known as a "fixer-upper" because it needs to be "fixed up." There are several reasons you might buy a fixer-upper. Because of their less-than-peak condition, it can be a less expensive alternative to buying a newer home; fixing it up may be the only way to have a home that meets your needs; you might be an investor looking to "flip" the home (fix it and sell it for a profit); perhaps the home has been in your family for generations and you want to keep it that way; or you might be someone who just enjoys the challenge.

Whatever your reason, it's going to take a significant amount of cash to make whatever changes or repairs the home needs. So where are you going to get the money?

Well, you could pay for the materials, home repairs and home improvements on your credit card. But these days, that's not necessarily the best use of your credit. Credit card companies are charging higher minimum monthly payments and credit card interest rates can be very high.

Another way to do it would be to dip into your savings. But then, that's not the best use of your money either. What if you had an emergency that you had to deal with? Perhaps your car's engine gives out and you have to have it repaired. If you had no savings, then you might have to use your credit card. Again, with higher interest rates and minimum monthly payments, that can get expensive.

Probably the best way to get the money for fixing up a home is to tap into your existing home equity. There are a few ways you can do this:

Cash-Out Refinance

You can get cash from your home equity by refinancing your existing mortgage for more than the balance you owe. For example, if your existing mortgage balance is $100,000, you could refinance into a new mortgage for $150,000. You still owe the $100,000, but you'd have another $50,000 to use for the home improvements.

Home Equity Loan

You could get a second mortgage on top of your existing mortgage. A home equity loan gives you a lump sum of money that's good to use for a one-time big expense. This is also a good way to get cash from your home equity, especially if you've hired someone to do the repairs and plan to pay them all at once.

Home Equity Line of Credit (HELOC)

Another good way to finance the home repairs and improvements is to get a home equity line of credit (HELOC). A HELOC is also a second mortgage, but instead of one lump sum of cash, it works more like a credit card using your equity as your line of credit. You can draw from it anytime you need to and pay it off as you use it. This is very handy when you have, say, several contractors doing different work and need to pay them all at different times.

Benefits of Using Your Home Equity

There are great benefits to accessing your home equity to get cash for a fixer-upper. The first is that the interest you pay on a mortgage is usually tax-deductible*, unlike the interest on a credit card. The second is that the interest rate you could get on a home loan is lower than the rate you get on a credit card.

Third, there are many different loan options available these days, some with interest-only payments built into them which means that, in any given month during the interest-only period, you're only required to pay the interest portion of the monthly payment. That kind of flexibility and smaller monthly payment could make it even easier for you to handle paying for those home repairs.

There are several ways to finance a fixer-upper that can give you added benefits without having to make high monthly payments or dip into your savings. So whatever your reason for buying one, you have several options that will make that home worth your while and you'll have a beautiful home to show for it. To explore your options, contact an experienced mortgage banker.

1 reply

How to Avoid Online Mortgage Mistakes

Tue, 02 Dec 2008 23:15:00 GMT

It is obvious that many shoppers come to Zillow Mortgage Marketplace looking for good deals. But beware you will get what you are asking for.

Despite there are a lot of honest and hardworking loan officers here actively seeking to serve your mortgage needs, a few unscrupulous lenders prey on your desire of getting the lowest rate and fees by low-balling your mortgage quote request. In cases like these, Good Faith Estimate is worthless in telling good deal from bad ones.

After you commit to final loan application, those dishonest lenders would make up different stories not to deliver what they promised on written Good Faith Estimate. Here are just a few examples:

1) Mortgage rates change daily, your rate is not guaranteed unless it is locked.
2) You don't qualify for the program quoted previously, here is other loan options with higher rates and fees. Classic "Bait and Switch" tactics.
3) You didn't disclose all your financial facts to me, here are the added price adjustments.
4) Oops, your credit score drops or lending guideline changes, you have to pay higher rate and fees. So on and so forth.

It is usually too late in the process for you to change mortgage lenders after you get screwed by a few hundreds even tens of thousand of dollars in eventual higher fees. A lot of shoppers bite the bullet and reason that it is ok as long as they don't make the same mistakes daily; afterall, you might not even need to deal with another mortgage lender in the next 5 to 10 years.

What causes these morgage rip-offs is a obscure term called "information assymetry", which describes the fact that your mortgage lenders hold more information on your mortgage than you do. This puts you on a disadvantaged position. The study of "Information Assymetry" actually led to three economists' winning the 2001 Nobel Prize in Economic Science.

It is naive to think that Internet already solved assymetric information problems. There is a lot of misinformation out there in the WWW jungle, it is hard to discern who can be trusted. On top of that, we ARE in a turbulent time when mortgage market changes so fast even insiders have hard time keeping up. Simply put, to avoid online mortgage mistakes and save thousands of dollars, you still have to do your own homework investigating which lender actually deliver what he/she promises.

Following two primary solutions suggested by Nobel Prize winners, you CAN find a truted lender to deliver you lowest total-cost loan.

Solution 1: Signaling.
Does the lender indicate to you he/she can be trusted at all? Take the time checking out his/her profile, customer review/ratings and business pratice. Pay special attention to highest educational degree, licensing, credentials and reviews. Beware of the possibility of fake reviews and exaggerated claims. Are these can be easily verified? Does the lender volunteers surpervisory authority's information so he/she can be held accountable if consumer did has valid complaints.

Solution 2: Screening.
But don't take their words for it. You also need to ask questions to induce them to reveal more information. A truthful lender is not afraid of tough questions, he/she rather deal with a serious buyer than some casual shoppers that waste their valuable time. Picky buyers are at least paying customers. Try the following questions:

1) Does your quote consider all my qualification factors and property specifics? What else do you need from me to make it accurate and complete?

2) Can you lock in the quoted rate today if I send in all my application materials? How long is the rate-lock good for?

3) If the rate changes better during loan process, do I benefit in lower rate or fee, or you keep it as additional profit to your company? If the rate changes higher, what would you do now to ensure on-time closing as to avoid lock-extension fee?

4) On your written Good Faith Estimate, why there are blank fields missing number or show zero figure? What fees are fixed, guaranteed, and which fees vary by loan amount and market condition?

5) Do you have other loan options that I can consider? Can you help me calulate my total loan costs (or break-even point) if I'd like to hold the mortgage for 7 or 10 years?

6) I have received lower rate quotes from other lenders, why should I do businss with you?

The last question is a trick. An honest and experienced lender believe in his/her value-added service, and will offer to help you validate whether those quotes actually exist. A dishonest one will offer to beat the price knowing that he/she has to talk you into something else before loan closing. Pay attention to how lenders respond to your inquiries, if you spot something inconsistent or smell something suspicious, walk away. Talk to the next lender.

However, these homeworks might not work for the timid shoppers. If you want quick result and peace of mind, you can try upfront flat-fee mortgage deal, a concept advocated by The Mortgage Professor Jack M. Guttentag.

With an upfront flat-fee mortgage program, you will know upfront exactly how much you will be paying the lender to represent your best interests. Upfront flat-fee lenders makes their fees and loan process transparent to consumers. They don’t take secret profits (yield spread premium) by charging higher mortgage rates. Since mortgage lender’s fee is fixed, they have no incentive steering you to an unsuitable program. Instead, they can focus on servicing customer’s needs and fostering deeper relationship so they can win more referral and repeat business. In return, customers receive better service and lower rate/fee. It is a win-win.

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3.) Why does my length of time in the house matter?

4.) Where can I find today’s rates?

5.) Why are some rates shown as a percentage and as an APR too?

6.) What is amortization?

7.) I keep hearing that ARM rates are tied to an index. What's that?

8.) What else should I watch out for?

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10.) What's mortgage insurance? Do I need it?

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How to help boost your Credit Score

How to Finance a Fixer-Upper Home

How to Finance a Fixer-Upper Home

Cash-Out Refinance

Home Equity Loan

Home Equity Line of Credit (HELOC)

Benefits of Using Your Home Equity

How to Avoid Online Mortgage Mistakes