Dec
3
Rates are really low again
Filed Under mortgage, rates | Leave a Comment
I’ve had severa mortgagel inquiries lately so it probably had something to do with this
National mortgage rates fell sharply last week, with rates on 30-year mortgages dropping to the lowest level in more than two years.
As of today 30 year rates are pretty low:
- One point will get you 5.5%
- Want no points, you’ll get 5.75%
- Want zero points, you’ll get 6.5%
Of course to qualify for these mortgage rates you’ll need superb credit, decent income, an 80% loan balance to property value ratio, and decent assets.
Oct
12
Sep
7
To merge or not to merge
Filed Under credit, mortgage, personal finance | 1 Comment
PRIVATE MORTGAGE INSURANCE: If your down payment is less than 20% of the purchase price of the home, mortgage lenders require that you take out Private Mortgage Insurance (PMI). This insurance protects the lender in the event you default on your mortgage. PMI has fallen out of favor in recent years due to the 80/10/10 (80% first mortgage, 10% second mortgage, 10% down payment), 80/15/5 (80% first mortgage, 15% second mortgage, 5% down payment), and 80/20 (80% first mortgage, 20% second mortgage, 0% down payment).
On the heels of the mortgage credit crisis comes word that the two bigger players in the mortgage industry may merge. However, after further deliberation, they decided against a merger.
MGIC drops bid for rival Radian
The mortgage insurers agree to end the deal and focus on how to survive in the industry.
By Emily Fredrix The Associated PressMilwaukee - Mortgage insurer MGIC Investment Corp. abandoned its $5 billion bid to buy rival Radian Group Inc. on Wednesday, saying it was in each other’s best interest to concentrate on surviving in the faltering mortgage industry.
Radian had vowed to see the deal through when MGIC announced in August it wanted to back out. But chief executive S.A. Ibrahim said Wednesday that Radian didn’t want to fight and instead needed to weather what he called “an industrywide scramble to survive.”
Investors seemed hopeful for both companies after news of the agreement.
Though Radian’s shares tumbled as much as 9 percent after the market opened Wednesday, they closed up 16 cents at $18.27. MGIC shares fell 29 cents to end at $30.05.
MGIC, based in Milwaukee, had agreed in February to pay about $5 billion in stock for Radian, valuing its shares at $60.78. Shares of MGIC closed the day the deal was announced at $70.09.
As problems mounted in the mortgage market, both companies saw their shares tumble and the deal’s value sink.
MGIC said it did not believe it had to complete its purchase of Philadelphia-based Radian because their joint interest in subprime-mortgage investor C-Bass LLC could be worthless.
The decision to end the deal was mutual, both companies said.
Neither party paid the other to get out of the agreement, according to a news release. The original agreement said there would be no breakup fee if a decision was mutual.
Both companies’ shareholders had already approved the deal, which MGIC had said would close in early October.
But woes felt throughout the mortgage industry made the deal difficult to finish, said Michael Zimmerman, MGIC’s vice president of investor relations.
While this is akin to splitting up, it remains to be seen what this means to the borrower. There aren’t too many PMI companies left and when the two biggest PMI companies are more concerned about surviving, especially when in 2007 PMI is tax deductible, this can’t be a good sign.
Jan
30
During my senior year in college, I took a high level English class devoted entirely to Shakespeare’s plays. We studied several including Hamlet. While everyone always remembers the classic line “To be or not to be,” I always liked “Something is rotten in the state of Denmark.”
I didn’t think the line was useful until now…
Recently I came across an article entitled A look at how home mortgages operate around the globe. According to the article the Danish has a similar system as ours. If their mortgage system is anything like ours then something is rotten in the state of Denmark.
Their (the Danish) mortgage system, like ours, relies heavily on the capital markets. Consequently, it is the only country to have home loans with most of the key features of those found in the United States. But there are limitations.
For one thing, lending criteria are extremely rigid, much more so than in the U.S. For another, Danish borrowers must come up with far larger down payments. In the United States, borrowers who make a 20% down payment tend to get the best terms available. But in Denmark, to achieve an 80% loan-to-value ratio, borrowers must take out a variable-rate second mortgage to cover the difference.
Danish mortgages are also “portable,” meaning that when owners sell their homes, they can carry their mortgages over to the new house.
Let’s hope that Danish mortgages aren’t brokered by dirty “rotten” scoundrels.
Countries covered in the article include the aforementioned Denmark, Great Britain, Italy, Japan, Germany, and our neighbor’s to the north, Canada. The general consensus among these countries is to require substantial down payments.
Sep
26
A letter from a reader
Filed Under mortgage | Leave a Comment
I get a lot of email. Some are linking requests. Some are spam that somehow get through GMAIL’s spam filter. Some are mortgage requests. Some are mortgage questions. Some are mortgage vendors trying to sell me something.
On Sunday, I received a well written argument from a reader who asked me to post his response to the Denver Post article NO MONEY DOWN: A HIGH RISK GAMBLE.
Phil,
I enjoy frequenting your blog, and wanted to be sure to share this with you. I am an independent Mortgage Broker with my own company Source Financial LLC, and I wrote an extended response to The Sunday Denver Post’s lead article from September 17, 2006 entitled “No Money Down: A High-Risk Gamble” [www.denverpost.com/ci_4347686].
I found the Denver Post article to be riddled with misrepresentations, one-sided accountings, and dangerous misinformation, all supporting a traditionalist approach to mortgages that has put two-thirds of all families into home ownership, but yet has led to a situation where the average fifty year-old American is worth negative $7000, only 5% of Americans retire at age 65 in financial dignity, and 9 out of 10 Americans die in debt.
In reference to my 2000 word response, Denver Post Business Editor Stephen Keating indicated that “I will take the time to read it and digest your observations, and discuss it with the rest of the reporting/editing team here.” Article author and Denver Post Business Writer Greg Grifffin wrote “This is a well-reasoned and well-supported argument. I don’t agree with everything you’ve said, but you’ve managed to get me thinking.” Unfortunately, checking today’s (September 24) Sunday Denver Post and www.denverpost.com, my response remained unpublished…
A Response to “No Money Down: A High-Risk Gamble” – The Sunday Denver Post, September 17, 2006 lead article [www.denverpost.com/ci_4347686]
As an independent Mortgage Broker that owns my own company, Source Financial LLC, in addition to being affiliated with a larger mortgage company that handles the processing and servicing of my loans, Lion Financial Corporation, I read the lead article “No Money Down: A High-Risk Gamble” with great interest. Knowing that a lot of folks along the Front Range turn to the Denver Post as an objective source for information, I was shocked and dismayed by much of the information and conclusions that were put forth on a topic that already invokes a fight or flight response among many home owners.
100% financing loans have been an amazing tool that has greatly contributed to the 5% increase over the last twenty years in percentage of homes occupied by the owner. But it is not the lack of equity that is putting these borrowers into jeopardy, it is a lack of a flexible asset base to deal with changes that has been increasing the risk of these folks defaulting. In general, people that utilize 100% financing for home purchases usually are lacking the liquid assets, emergency funds, and overall wiggle room to deal with financial hardship.
Of course lenders usually have guidelines concerning liquid asset reserves that must be held by the borrower in order to qualify for a loan, but often they only require enough to cover two to four months of mortgage payments. When people do face catastrophic events rightfully referenced by the Denver Post, “job loss, medical problems and divorce,” those reserves can often quickly disappear.
But having equity in one’s home when faced with these situations does not “give homeowners options when they face financial problems,” because it is precisely when folks are facing such dilemmas that they are quite often unable to qualify for refinancing, as at that point in time they are too high risk of a borrower for lenders to work with. As a Mortgage Broker I am deeply disturbed by this fact, but unfortunately it is a reality that we all must face when dealing with banks and lenders.
And probably the most misunderstood aspect of homeownership is the fact that equity is a ZERO PERCENT RETURN INVESTMENT. Yet two-thirds of Americans hold the majority of their wealth in home equity, which is a non-liquid asset that gives them absolutely zero return. Many people confuse appreciation, which is the increase in home value due to market trends, with getting some kind of return on their equity, but that is a common misconception. That is why it is so important for homeowners to separate their equity from their home via refinancing, and put those “cashed out” funds into investment vehicles that offer an actual rate of return. In doing so, homeowners increase their overall liquidity, improve their capacity to face emergencies, reduce their financial risk, increase their rate of return, improve their tax deductions, and diversify their investment portfolio.
Instead of spending their liquid asset base (savings) to finish their basement and send money to their parents, such as in the case of Jose Garcia and Maria Vanderhorst, borrowers with 100% financing have to exercise greater financial discipline. And putting money down and getting into a 30-year fixed would not have improved their situation, as then their down payment would be tied up as equity, which is a non-liquid asset, money that can only be accessed through refinancing or by selling their home.
100% finanacing loans are not dangerous, what is dangerous is borrowers not having a liquid asset base to deal with life’s contingencies. Unfortunately, these are the type of borrowers that tend towards 100% financing, as it really is their only option for home ownership. And tying up their wealth in the straightjacket known as equity is not part of the solution, it is part of the problem. An incredible means to access equity for the purpose of greater fiscal flexbility and all the other goods mentioned above, or “cashing out equity as one goes,” is the Option-ARM loan, which received quite a misguided slamming in the Denver Post article.
The Payment Option Loan gives the borrower four different payment options each and every month: they can make an Interest Only, 30-Year amortized, or 15-Year amortized payment based upon the fully indexed interest rate, or they can make the minimum payment that is based upon a very low “start rate” (usually between 1% and 4%), which involves deferring interest (a.k.a. negative amortization), or adding the difference between the Interest Only payment and the minimum payment onto the principal of the loan. Now while most lenders offer the Payment Option Loan with an adjustable fully indexed rate, one that starts adjusting as early as the first month, some lenders offer the Payment Option Loan with a fixed interest rate for the first five years.
The Payment Option Loan has proven to be a favorite of Real Estate Investors and Real Estate Agents, as it frees up extra cash flow on a monthly basis for much greater investment opportunities. Knowing that equity is a zero percent return investment is some powerful information to have.
The annecdote concerning Louis and India Harts conflated the fixed “start rate” with the adjustable “fully indexed rate”, such that readers were left with the impression that the Harts’ interest rate went from 2.6% to 8.1%. The start rate, which determines how much the minimum payment will be, is not a “teaser rate” that “quickly shoots up”. Some lenders do gradually increase the minimum payment itself (not its determining start rate) on an annual basis, usually somwhere in the range of 7.5% per year, to keep the borrower from deferring too much interest. But the start rates is always otherwise a fixed rate. It is the fully indexed rate, upon which the Interest Only, 30-Year amortized, or 15-Year amortized payments are based, that is adjustable is this case. And this fact is consistent with the numbers quoted in the article: the minimum payment of $919 the Harts are making would be the combination of $721 (2.6% start rate on a $180,000 loan) and $198 of escrowed Property Taxes and Hazard Insurance, which is approximately what they would be for such a home.
In the Harts’ particular case, they are going to have plenty of time to refinance before their loan starts to recast when the principal hits 115% (which would be $207,000 in their situation), as they will be well below that total when their three year prepayment penalty period is up. So the answer to Louis’ “I don’t know how we’re going to do it,” is that when those three years are up, they’ll refinance and get themselves into a loan that they feel more comfortable with and educated about. Though given their situation, if properly understood the Payment Option Loan really is their best option.
My question is how can mortgage products themselves be blamed for foreclosures? At best the article points towards a correlation, but demonstrating causation surely requires more than offhanded references to what some unnamed experts stated the next wave of defaults “may” come from. Beyond unpredictable catastrophic occurences like job loss and overwhelming medical bills, foreclosures occur because borrowers are getting into loans that they do not understand, and often they do not know that they do not understand the mortgage product. It is the responsibility of the Mortgage Broker to completely explain all the details of any mortgage product to the borrower. But it is also the responsibility of the borrower to be certain that they understand the terms of loan before signing off on it at closing. Vehicles and guns both kill in the range of 35,000 Americans each year, but it is the human misuse due to lack of education, ignorance or simple negligance that creates this reality, much like in the mortgage scenario.
Every different mortgage product serves its purpose, and what works for one borrower will not work for another given the specifics of their situation. To label certain categories of loans as “high-risk gambles” or as leaving “no room for slips” ignores the millions of families that are in these loans and find that they very much work for them. It is also a disservice to consumers to mislead them with such one-sided representations.
The true irony of the lead piece in September 17th Sunday Denver Post is that the conclusion that “Option-ARMs… could fuel a surge in foreclosures in the next few years” is the opposite of what we find is actually going on in the mortgage industry, as Payment Option Loans have proven to have the lowest foreclosure rate of any mortgage product currently on the market. World Savings is a bank that specializes in this product, which they refer to as the Pick-A-Pay Loan, as more than 90% of the loans they outfit borrowers with are of the Option-ARM variety. As a lender they have less than a 1% percent foreclosure rate! But World Savings, along with the independent Mortage Brokers like myself that they work with, take on the responsibility of educating the borrowers as to how to properly and smartly manage this incredibly powerful mortgage product.
A lot of mortgage brokers I know will not touch Payment Option loans, but I believe that is primarily because they are not all that interested in educating the consumer. Why not just throw them into a 30-year fixed APR mortgage? Everyone pretty much knows how that works. But that is also how banks make of the most money off of borrowers! The “list of higher-risk, alternative mortgages” the article refers to are not only not necessarily higher risk (Payment Option loan has the lowest risk, as discussed above), but they also provide the borrower the opportunity to increase their monthly cash flow by lowering their monthly mortgage payments by as much as 40%. In this way consumers are empowered to “become the bank” and grow their own investment portfolio, rather than falling into the trap of handing over their hard earned capital to the banks in the form of a large down payment or paying down principal so that they can have more of a zero percent return investment, equity.
Affiliates of Lion Financial Corporation, like myself through my company Source Financial LLC, do not shy away from the privilege or responsibility of educating our clients how to properly utilize alternative mortgage packages. And why is this? Because when families are taught smart mortgage product and equity management, they learn to utilize their mortgage as a financial tool for building wealth, which easily makes a $500,000 to $1,000,000 difference for the borrower over the next fifteen to twenty years. The affluent have always understood how to leverage their mortgage, pay as little down as possible, and keep very low monthly payments in order to increase cash flow for investment purposes. The American middle class is being transformed by engaging in these very same concepts and increasing their fiscal discipline, and I absolutely would not have it any other way.
Brent Ritzel
President/CEO, Source Financial LLC
Denver, Colorado, USA
An affiliate of Lion Financial Corporation
303-590-8999
Brent.Ritzel@lionfinance.com
Aug
14
Weekend Highlights
Filed Under denver, mortgage, real estate | Leave a Comment
Al Lewis of the Denver Post discusses the glut of condos in Colorado:
“Colorado’s inventory of unsold condos is at an all-time high,” said Gary Bauer, an independent real-estate analyst in Denver. According to Bauer’s analysis:
* Condo sales have slipped 1 percent year-to-date, compared with a year ago.
* The average price of sold condos year-to-date is down 1.5 percent to $185,000, compared with a year ago.
* Condo owners are increasingly renting their pads instead of selling them in a depreciating market.
Great article in Sunday’s Denver Post entitled Man’s dream house wasn’t dream project. The home was based on Frank Lloyd Wright design principles and carries a $1.4 million price tag. Includes a do’s and don’ts of home building.
DON’T
Be your own contractor. “People often think they can save 15 percent on a house by being their own contractor,” said Formissano. “What they don’t understand is the time and frustration involved. Besides, subcontractors rarely give their best bids to homeowner/contractors.”
Make a decision based on price-per-square-foot costs. “It’s an inaccurate way to decide what you can afford,” said Formissano, “because it doesn’t factor in all the project costs, like landscaping, driveway, septic system, etc.”
Get caught in the trap of multiple “small” upgrades. People tend to drive the budget up with “a little change here, a little change there,” because they rationalize that this is their one shot at building a dream house. “Most budgets are broken by $100 changes,” said Formissano, “not $1,000 changes.”
Pick a floor plan that has lots of angles or a complicated roof design. You can have an interesting house by aligning spaces on an axis, but as LeChevalier learned, the more complex the design, the higher the costs. And ultimately, construction complexity doesn’t add to resale value.
DO
Carefully select a builder. You want someone who listens to you and explains things to your satisfaction. Ask for references and check them out.
Make sure you have 5 percent to 10 percent of the project costs set aside for contingencies or extras. “If you’re building a $500,000 house, make sure you have $25,000-$50,000 set aside for an upgrade you really want or a problem that hikes the cost up,” said Formissano.
Make sure the floor plan works for you. Is the kitchen so far from the garage that carrying groceries will be like a marathon? Is the only way to access your closet through the steamy master bath?
Make decisions in a timely manner. As the house gets closer to completion, homeowners are asked to make more decisions in a shorter amount of time. Since time is money, dragging out a choice - for fear that a better one will appear tomorrow - will drive the budget skyward.
Mar
8
Buying a home vs. renting is a big decision that takes careful consideration, as most mortgage consultants will agree. But the rewards of home ownership are great. For many years, purchasing real estate has been considered an extremely profitable investment. It is an achievement that offers a sense of pride, financial stability and potential tax advantages.
Yes, there are certain responsibilities associated with owning a home. Landlords will often argue the benefits of renting, and for obvious reason. If you are renting, you’re helping them make their mortgage payment.
The numbers are staggering if you look at it this way. If you are paying $1,000 per month for an apartment, and you know your rent will increase 5% every year, then over the next five years you will pay your landlord $66,309. If you are currently renting a house, you may be paying much more than that each month. Either way, you gain no equity by shelling out this monthly housing expense and you certainly won’t benefit when the property value goes up!
However, if you were to purchase your own home or condominium, you would be well on your way toward building equity within that same five-year period. By choosing a fixed-rate loan program, you can have the comfort of knowing that your monthly mortgage payment will never go up. In fact, you would have the option of refinancing to a lower interest rate at some point in the future should interest rates drop, and this would cause your monthly mortgage commitment to go down.
In addition to building equity, there are tax advantages that come into play with home ownership. Depending on your tax bracket, owning a home is often less expensive than renting after taxes. Interest payments on a mortgage below $1 million are tax-deductible, and your mortgage consultant should help you evaluate the tax advantages of various loan scenarios, and share this information with your tax consultant to glean feedback on your behalf.
To find the loan program that is right for you, your mortgage consultant will need to evaluate your monthly household income, current assets and savings, as well as any monthly obligations you may have for credit card payments, car payments, child support, etc. These prequalification factors, along with the report of your credit score, will determine how much house you can afford and what interest rate you will pay for financing. It is also important to let your mortgage consultant know what your future goals are, because this will help narrow down which loan option is the best fit for your long-term needs.
There are many different types of loan programs available, including “low†and “no†down payment mortgage programs. These types of programs require the borrower to provide less than 3 percent of the loan amount as down payment. FHA lenders rule that the mortgage payment, including principal, interest, taxes and insurance (PITI) should not exceed 31 percent of your gross income, and the PITI plus other long-term debt (car payments, etc.) should not exceed 43 percent of your gross income.
Housing is an expense that takes a big bite out of the monthly budget. If you are a renter and feel that “home†is more than just someplace to hang your hat, think about the advantages of purchasing real estate. It may be time to take the step into building your personal net worth as a home owner.
Mar
8
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 road map to follow and a strategy for success in building personal wealth.
Jan
1
FAQ: Why Isn’t My Loan To Value Based On The Appraisal?
Many homebuyers are surprised to find that they do not automatically have a down payment built into a home they are buying for less than the market value. If you are buying a $130,000 home for $100,000 the lender is typically going to base your mortgages loan to value ratio on the lesser of the appraised value, or acquisition cost.
The appraised value can be used when the borrower wants to take some equity out of the house after the purchase. Since the lender looks for the current market value, which is provided by the appraisal report, the borrower is able to use the equity after the purchase transaction. However, the borrower needs to be careful when he/she wants to take the equity right after the purchase because some lenders would like to see some seasoning on the property before letting you borrow some money against the equity.
Jan
1
Why do I have different credit scores
Filed Under credit | Leave a Comment
Here are reasons why you have different credit scores:
There are 3 different credit reporting agencies. Each one gives you a score. They work independent of each other.
Mortgage lenders typically look at your middle score as your qualifying score. there are some lenders that will take the high score into consideration as well. But as a general rule when applying for a mortgage always give the mortgage broker your middle score if you know it.
Usually a lender will use the middle of the three scores to qualify a borrower and to chose rate.
One creditor may report to only to bureaus A and B, another creditor may report to bureaus B and C, and yet another creditor may only report to bureau B. For this reason, the exact information that each of the credit bureaus has on file about you varies, and therefore so does your score with each bureau.
The primary reason for discrepancies in the three different credit scores is that each credit bureau uses a different scoring module. The scoring system used by Experian is the Fair, Isaac module, the one used by Trans Union is called Empirica and Equifax uses a scoring system called Beacon.
You have three different scores because each bureau has a different system for placing a numerical value on your credit quality. Another reason these scores can vary so much is that some creditors only report to certain bureaus and therefore the other bureaus may not be scoring that particular credit file which can cause a difference in actual scoring.
There are nonconforming lenders that will use average your scores or even use the highest score. Your mortgage professional’s job is to place you with the lender that would be most advantageous to you.
The information that the credit bureaus have on file about you is provided by the creditors who you currently have credit with, as well as the ones you’ve dealt with in the past several years.
When disputing incorrect information on your credit report, be sure to write to all three credit repositories. If only one is notified of the erroneous item, your scores from the other two bureaus would not improve.
Credit score differ because of the credit items that are being reported to each credit bureau, all 3 credit repositories are independent of each other, and because their are different credit scoring modules. Some creditors only report to 1 or 2 credit repositories while others may report to all 3. Trans Union is different from Equifax and they are both different from Experian. By all 3 being independent they all have their own individual credit scoring systems. Lastly, just like there are Windows 98, Windows 2000, Windows XP, etc… as operating systems for a computer, there are different versions of credit generation also. Some lenders may use an older credit operating system simply because it is cheaper to obtain credit reports than the latest credit operating system out available.