Uncategorized category archives

I recently was asked this question and thought it would be a good blog post.

The technical answer is yes, however you need to be careful if you decide to fire your contractor. 

1st and foremost the contractor you are firing will need to be made whole.  They will need to be paid in full for the work they have completed.  The tricky part is they will have to agree with you that they are being paid in full.

You will have to work with your lender to get the new contractor approved.  You will need to get a homeowner/contractor agreement, W9 and License if required by the state.  If you do not have enough funds remaining in the escrow account to pay the new contractor and keep the original contractor whole, you will need to have additional funds available to complete the project.

It can be done, you just don’t want to do it on a whim!

In Part III of this three part series on Adjustable Rate Mortgages (see Adjustable Rate Mortgages Part I and Adjustable Rate Mortgages, Part II), I will discuss how to calculate the fully indexed rate, which is the new rate of your ARM when it adjusts. Once the initial fixed period of the ARM expires, the mortgage calculates a new interest rate by adding the index of a mortgage to the margin. I will discuss details of both the index and margin in a bit, but let’s remember that this new rate cannot exceed the caps of the ARM, which were discussed in Part II.

To calculate the new interest rate of an ARM, you simply add two variables together and round up to the nearest .125% interest rate.  These two variables are the loan’s index and margin. 

MARGIN

The Margin is a fixed number determined at the beginning of the loan.  This figure never changes.  For example, most conventional Fannie Mae and Freddie Mac ARM’s use a margin of 2.25%.  On FHA and VA ARM’s, the margin usually ranges from 1.75%-2.25%.

INDEX

The index is a market rate that adjusts to market conditions.  The value of an index may not change for months or it can change every day depending on the nature of the index.  Researching the history of each index will help you understand the risk associated with a particular ARM.  Here is a list of the common indexes used for Adjustable Rate Mortgages

6-Month LIBOR (London Inter-Bank Offered Rate)

This index isn’t used as often anymore.  The 6-month LIBOR was a popular index used for many conventional/subprime mortgages.  It may still be used today but isn’t as common as other indexes.

1-year LIBOR

The 1-year LIBOR is the most popular index used today for conventional mortgages.  Most Fannie Mae and Freddie Mac mortgages use the 1-year LIBOR as the index.  The 1-year LIBOR is also used for FHA and VA ARM’s at times.

1-year CMT (Constant Maturity Treasury)

The 1-year CMT is an index primarily used for government backed ARM’s like FHA or VA ARM’s.  Since FHA and VA use both the 1-year CMT and the 1-year LIBOR, it’s important to evaluate which index is associated with every loan FHA or VA loan quote you receive.

Prime Rate

The US Prime Rate is directly affected by the Fed Funds rate you may see mentioned in news articles.  It is the only index that moves exactly to the amount the Fed Funds Rate.  The Prime Rate is always 3% higher than the Fed Funds Rate.   At the time of this posting, the Fed Funds Rate is currently at .25% and the US Prime Rate is at 3.25% respectively.  This index is most commonly used for Home Equity Lines of Credit and some adjustable rate credit cards.

HOW DIFFERENT TWO ADJUSTABLE RATE LOANS CAN BE

Studying the fixed rate period, caps, margin and index of an ARM will help you better understand the total risk associated with a particular adjustable rate loan.  To best illustrate the risk factors of adjustable rate mortgages, I will give an example of two mortgages (Mortgage A and Mortgage B). They appear similar at first glance but are very different after a closer look.

Mortgage A- This is what lenders called a traditional sub-prime adjustable rate loan.  Here are the details:

5.5% initial rate

2 year fixed initial period/ adjusts every 6 months after

6-month LIBOR Index

5/2/5 Caps

5% margin

Mortgage B- This is a traditional FHA 3/1 ARM.  Here are the details:

5.5% initial rate

3- year fixed initial period/ adjusts every 12 months after

1-year CMT Index

1/1/5 cap’s

1.75% margin

At first glance, you will notice the initial interest rates are the same.  Mortgage A is scheduled to be fixed for 2 years vs. 3 years for Mortgage B.  Already B is looking a little safer since the rate will not adjust for a full year after Mortgage A. However, the real difference takes place when we compare the caps, margin and index.

Let’s Compare Them

In Mortgage A, the value of the 6-month LIBOR is 4.5963% in January 2008.  To calculate the new rate, we will add this figure to the margin of 5%. 

4.5963% + 5% = 9.5963%

We then round up to the nearest .125%, which is 9.625%.  If your adjustable rate loan was similar to Mortgage A and was set to first adjust on January 2008, the above figures would apply to you.

The initial interest rate adjustment is 5%, which means we cannot exceed 5% above the initial rate.  Below is our cap rate

5.5% (initial rate) + 5% (Initial cap)= 10.5%

This means our “Fully Indexed” rate is less than the cap rate.  In this scenario, your new rate would be 9.625%

Let’s do a similar scenario using Mortgage B.  In January of 2008, the 1-year CMT was at 2.71%.  To calculate the new rate, we will add this figure to the margin of 1.75%.

2.71% + 1.75% = 4.46%

Like Mortgage A, we will round up to the nearest .125% which is 4.5%.  If your adjustable rate loan was like Mortgage B, then this new rate would apply to you.

For Mortgage B, the Initial cap is 1%.  This keeps the rate from moving more than 1%.  If the Index were higher, your max rate on the first adjustment would be the following:

5.5% (initial rate) + 1% (Initial cap) = 6.5%

As you can see, Mortgage B is substantially safer than Mortgage A.  The rate is fixed one year longer than Mortgage A. If Mortgage B were to adjust the same time as Mortgage A the rate would’ve gone down 1% versus going up 4.125%.  In the scenario that both indexes were high enough for each loan to reach the cap rate for the initial adjustment, the increase for Mortgage B is only 1% vs 5% for Mortgage A.

Conclusion

Deciding if an Adjustable Rate Loan is right for you should only be done after you’ve evaluated all of the coherent risks associated with each available mortgage.  I hope this three part series was educational.  You can also read more from a book published by the Federal Reserve titled the “Consumer’s Handbook on Adjustable Rate Mortgages” (called the CHARM booklet for short).

Link to Understanding Adjustable Rate Mortgages Part I

Link to Understanding Adjustable Rate Mortgages Part II

It’s easy to get pulled in by skillful pitches from people in the “loan rescue” business. They promise quick and easy solutions to borrowers who are having trouble keeping up with their mortgage payments or whose home value is now below what they owe on their mortgage. The only thing these “rescuers” need from you is some money up front. DO NOT PAY THEM A CENT! Some outfits just take your money and disappear. Even those who may help you with the process are simply providing services you can get for FREE from others, such as FICO and its partner organizations. You can contact us by visiting: http://www.myFICO.com. And I’ll repeat: there is NO CHARGE EVER for the help you’ll get there.

Incidentally, the Federal government is considering making it ILLEGAL to charge upfront for loan rescue services. Nearly two dozen states have already passed laws that prohibit upfront fees.

Now a word about “credit repair” companies. I’ve been asked about these since my last two blog postings on How to Boost Your Credit Score. As those posts stated, there are NO QUICK FIXES to a credit score. So don’t be fooled into using a “credit repair” service. Credit counseling, however, is available at no cost from organizations like our partner, the nonprofit Homeownership Preservation Foundation. You can get in touch with them here: https://www.mortgagereliefonline.com/About_Us.aspx.

By the way, even correcting an error in your credit report can take a month or two to cycle through the system and up your score. But you can get that report for free and easily check it yourself. Find out how to do this (for no charge) at http://www.myfico.com/crediteducation/questions/free-credit-report.aspx.

Please join me in welcoming Colin Robertson as the newest contributor on Mortgages Unzipped.

Colin began his career in the mortgage industry as a loan originator for a wholesale mortgage lender and has since created a number of blogs based on his experience.  His first blog, The Truth About Mortgage, focuses on the consumer home loan process and provides industry-specific news, while The Truth About Credit Cards provides tips and tricks to ensure homeowners have pristine credit when applying for that all-important mortgage.  In his spare time, he enjoys music production, cooking, travel, cycling, and photography.

We look forward to reading your future posts, Colin!

Back in the day, marketing homes for sale involved a listing on the MLS, buying ad space in newspapers, displaying signs on site, and lighting scented candles for the open house. Now, there are countless avenues to gain exposure to buyers and sellers. Through social networks (which connect groups sharing common backgrounds and interests), you can reach a larger sphere of influence and extend your reach.

You’ll save time and trips by utilizing existing technology and groups. Here are a few of the basics — and their relevant ties to the real estate market:

Broadcast your home! When shopping for a home, you can see listing photos or even a virtual tour on an agent’s website. But now, realtors post videos of actual property walk-throughs on YouTube, giving buyers a direct, first-hand look at new construction developments that aren’t yet open to the public.

Twitter enables realtors to stay connected with clients. They “Tweet” (or “post”) short updates with home sale statistics, home improvement tips, and links to local events. And if you’re a buyer, Twitter is often the first place to hear about “Just Listed” properties or developer incentives.

Facebook enables realtors to post links to properties for sale or rent and to share ideas with clients and other industry professionals.

LinkedIn is a networking tool primarily used by professionals in the corporate world. As a buyer or seller, you can read real testimonials and find trusted referrals.

Zillow, as you know, offers a comprehensive list of homes for sale, both by agent and by owner, as well as neighborhood statistics and home sale trends. Zillow’s vast directory includes real estate professionals, useful articles, and frequent updates to help you stay tuned into the market.

Blogs give companies an immediate and direct opportunity to provide readers with breaking news, industry insight, and new media. Realtors discuss new developments and market trends. Financial experts blog about legislative changes, rates, new programs and other educational topics.

By combining traditional marketing methods with social networking, you can maximize your exposure for selling your property, connecting with real estate professionals, and finding real answers.

Do you want the best terms on a new mortgage? Do you need to refinance an existing mortgage – or apply for a loan modification? In all these cases, your FICO® credit score plays a key role in helping you qualify and get better terms.

So, can you do anything to raise that FICO® score? Yes! But, remember, it takes time to raise a credit score. In spite of some popular beliefs, nothing instantly boosts your credit score. In fact, some supposedly quick fixes will actually lower it.

Let’s look at some things that could raise your FICO® score:

1. Significantly reduce any high balances on credit card accounts. This is one of the fastest ways to potentially improve your FICO® score.
2. Correct any errors on your score’s underlying credit report. This is also a fast way to help your score. Click here to get your free FICO® score and credit report.
3. Pay your bills on time. This is one of the best ways to boost your credit score. If you’ve missed payments, get current and stay current. Your score goes up the longer you pay your bills on time.
4. Keep balances as low as you can on credit cards and other “revolving debt.” Occasionally use those credit cards you rarely carry, so the creditor doesn’t consider closing them. To get a good score, it isn’t necessary to maintain a balance on credit cards. So pay off your credit card balance in full every month, if you can.
5. Don’t move your debt around — pay it off! You’ll do more for your credit score by paying off the balance you owe rather than moving it to a new card.
6. Don’t close unused credit cards just to raise your score. This doesn’t really work.
7. Don’t open lots of new credit cards just to increase your available credit. This could actually hurt your score. Being conservative with credit is generally good for your score. So a better long-term strategy is to resist opening any new credit card unless you really need it.
8. If you’re starting out, don’t open lots of new card accounts too quickly. This makes you look riskier to lenders and also lowers your average account age – not good. Taking it slow and easy is the best way to build your credit score.
9. If you’re having trouble paying bills, get in touch with your creditors or see a credit counselor. These actions won’t instantly improve your score, but as you start to manage your credit and pay on time, your score will eventually go up. Get help finding a credit counselor. 

In Part 2, I’ll cover how to rate shop for a loan without hurting your score and a few more overall tips. In the meantime, get a complete education on credit scoring.  

Mortgage foreclosure rescue scams are everywhere.  Above is a video from the FTC about these rescue scams.  The video provides real stories like the one where a couple paid a  $500 deposit, $3000 soon after and the result? “They took my money and did nothing”.   About 2/3rds the way through the video, we learn who the FTC recommends.    Go to HopeNow.com or call 888-995-HOPE or 888-995-4673 the Homeowners Hope Hotline.

A couple of interesting tidbits: Look at the Google Results for “Foreclosure Rescue”. The FTC link comes in at #3, while an apparent for profit company comes in at #1.  This FTC page doesn’t even rank for the search term “Foreclosure”.

So how about YouTube?  The FTC did post this there under FTCVideos, but it only has 2,545 views.  A for profit site in this sector has over 13,000 views.

If you want to help this video get watched, feel free to add it, to promote it, link to it, etc.

Here’s the link:

Foreclosure Rescue Video

http://www.ftc.gov/multimedia/video/credit/mortgage/hope-now.shtm

After all, a scammed consumer is not going to be a great real estate consumer in the future. Once bitten, twice shy.

Why you should consider doing everything possible to AVOID foreclosure
There’s lots of talk in the media about homeowners who are “underwater,” owing more on their mortgage than their home is now worth. Some choose to “walk away” from the home and allow the lender to foreclose. This may seem to make sense – until you realize that foreclosure has severe financial and emotional consequences that last for years. The truth is, with all the foreclosure prevention options now available, people should consider foreclosure only as a very last resort. Here’s what happens in a foreclosure:

1. You lose all the money you’ve invested in your home – the down payment, what you’ve paid back on the principal, what you’ve spent on repairs and improvements.

2. You could wind up with a tax bill. When a lender sells your home for less than what you owe on the mortgage, the difference is called “forgiven debt.” To the IRS, that’s taxable income. Congress passed a law to relieve foreclosed owners of this burden, but there are conditions. Check with a tax attorney or accountant.

3. The lender could sue you. In some states “forgiven debt” is considered a loss the lender can sue you for.

4. You could have trouble finding a new home. It can be hard to find cash for a rental deposit, which could be double the usual amount because landlords are hesitant to take tenants with Credit problems.

5. A foreclosure is reported to credit bureaus and stays in your file up to seven years. A bad credit rating means higher interest rates on loans and credit cards, making future borrowing difficult to impossible.

6. A long wait to buy again. Fannie Mae just increased the time from foreclosure completion to approval for another mortgage from four to five years. Extenuating circumstances, like a job loss, can cut this to three years, the same waiting period as FHA mortgages.

7. Employment problems. A foreclosure can hurt your chance of getting a job if it involves money. Credit checks are typically required for money-related jobs from cashiers to accountants.

8. The emotional impact of leaving a home. You usually wind up in a new neighborhood, with new schools for the children.

I hope this makes clear why the benefits of foreclosure prevention far outweigh the consequences of allowing a foreclosure to happen.

Are you working at a non-depository financial institution?

Starting at :38

We will be providing a mechanism for putting non bank financial institutions out of everybody’s misery.

[Is Secretary Geithner smiling?]

There will be death panels enacted by this congress.
But they will be for non-bank financial institutions that will not be considered too big to die.
And I say that because we have this euphemism that we are going to be resolving these institutions. It has not been my experience that when someone says that they are going to resolve something, they kill it. We are talking about dissolution, not resolution.

We are talking about making it unpleasant for the entities…

Note: The underlining emphasis and [commentary] was mine of course.

I don’t know for sure what the future will hold, but it sure seems like the winds of change are starting to blow when it comes to how mortgages are originated.

Hat Tip Rob Chrisman (by far one of the smartest mortgage people I have ever followed) for sharing the video.

I am working on a deal that was originally with another lender as a purchase 203K, the other lender ended up dropping the ball to the point the borrower switched lenders in the 11th hour to close the loan on time as a regular FHA loan.

The borrower purchased the home and has started the renovation on his own, mainly demolition (I don’t recommend doing this prior to closing on a renovation loan).  So few lenders are actually doing these renovation loans….. he ended up back with the original lender trying to do the 203K loan as a refinance. 

While going through the process he came across some of my posts and blog on Zillow.com (thanks for the referral Zillow) and reached out to me.  Because he was so far along in the process I answered a few questions and coached him a little as to how to deal with the current lender to try and expedite his loan closing.  Three weeks go by and he is no closer to closing than he was when I spoke with him originally.  So he decided to apply with me.

I was walking through the project with him when I noticed the house was going to need to be painted and also knew that the proposed budget only had about $250 in it for minor painting.  I knew by looking at it that it was going to cost more than that!  I have to admit that I don’t go out and see every house I write a renovation loan on, although I do need to have a complete understanding of the project so I can spot potential hiccups and delays and address them up front.

Having done these loans for years I have a ton of experience with them and my customers get the benefit of that experience.  It is really tough to explain all the benefits of experience.  Much of what we have learned through experience is 2nd nature and you just do things differently. 

I have a three year old daughter and I am amazed almost moment to moment as I watch her develop.  It is the things that we take for granted I find the most interesting, the way she eats, gets dressed, walks up and down the stairs, climbs over under and on whatever gets in her way, and a zillion other things.  At some point we learn what works best.  We learn that walking around the table, although it may take a little longer than going over or under (or not), may be the most efficient way to get to the other side.

When working with an experienced lender and or experienced renovation lender their experience will make your experience much less stress full!

Below are some of the things I try and walk around:

1.      Self Help – These are almost always a recipe for disaster and I really discourage anyone from attempting to do these projects as self help

2.      Streamline Renovation – 203K streamline although less expensive by about $800 in costs, I have seen too many issues arise as a result of half the funds being disbursed upfront and contractors disappearing or demanding additional payment upfront to finish. 

3.      Cutting corners – eliminating $5,000-$15,000 from a project because you are spending more than you want.  The difference in your payment is usually minimal, and to go through a renovation project and settle for less than what you want tends to do nothing but generate regrets.  If you are going to do it…do it right!

4.      Hud Consultant - Make sure you are working with a good 203K consultant.  I have been working with AM Consults in Malden MA for well over a decade and am extremely hesitant to work with any other consultant.

5.      The Loan Officer – Choose a loan officer that has the experience actually writing these loans rather than the loan officer that just has access to the program.  The loans are more expensive than a standard loan so expect to pay a slightly higher premium for the loan, but don’t get taken advantage off.  I have seen on more than one occasion an LO charge a ridiculous amount for these loans…The Mind set being if the customer is willing to pay that amount I’ll figure out how to write the loan…They may figure it out but you don’t want to over pay to be a guinea pig (sorry animal lovers).