Mortgage rates are all based on risk. The lower of a risk the loan is the lower the rate will be. Second mortgages are riskier loans. In the unfortunate event of a foreclosure the second mortgage holder gets paid second, not first. If threes not enough money to payoff the second mortgage often they take a loss. Since they are higher risk loans to investors the carry higher rates of return (so investors will purchase them).

A mortgage is considered a lien on your property. A first mortgage is in the first lien position and is the least amount of risk because they are the first to get paid should the borrower default and the home be sold through sheriff’s auction or through some other type of sale. A second mortgage is in the second lien position and is at a considerably higher risk than the first so a 2nd mortgage usually has more strict lending guidelines and credit requirements and will also charge a higher interest rate to make up the difference of this greater risk. If you also had a third lien on your property, they would have the greatest risk and even much worse terms than the first and 2nd liens.

If a homeowner files for BK the second mortgage is not guaranteed to be paid off. So the lender who makes a loan in the form of a second mortgage vs. a first mortgage assumes a higher risk. The lender offsets that risk by charging a higher rate.

Most second mortgages are also held in the lenders own loan portfolio rather than being sold to Fannie Mae, etc. Given that, there is considerable variation in rates, terms, qualification criteria, etc. from lender to lender.

When you take out a 100% one loan you will pay for private mortgage insurance (PMI). When a loan is sold on the secondary market to Fannie Mae or Freddie Mac they will only insure 80% of the value of the home. This insurance covers the other 20% of your loan in the event that you don’t’ pay and the property goes to foreclosure. Second mortgages, when used on an 80/20 combo loan program are self insured and for this reason carry a higher rate. Meaning you don’t have to carry PMI.

Rates on second mortgages will always be higher because the risk to the lender is higher. The rates will vary as with a first mortgage, depending on your credit worthiness, ability to pay and combined loan to value ratio. Combined loan to value ratio is the combination of the first and second mortgage compared to the sale value of your home. The lower the ratio is, the better rate you will get.

Editors Note: Due to the mortgage and credit crunch, interest only mortgages are more difficult to obtain. If you’re in need of a Denver home loan contact us to discuss your mortgage options.

Paying interest only is a great way to minimize housing expenses per month. The concept of this type of payment structure is to allow you a set amount of time in which your payments will be based off of interest only. Every borrower should keep in mind that this loan will not pay down any of the principal balance during the interest only portion of the loan.

Why pay interest only – do you think you will ever really pay off your mortgage? How do you gain equity in your home? Is it from paying down your principal or more so from the market appreciation of your home? When you consider these things paying interest only and having the extra cash flow often makes good sense.

Examine every loan option with your mortgage broker before you decide on a interest only loan program. Your mortgage broker will be able to determine if the interest only option is a good fit for you. This will ensure that you are not frustrated by an uninformed decision years down the road.

Many lenders charge a small premium in order to have interest only premiums, usually 1/8th or 1/4p point. Make sure you discuss this with your mortgage broker as well.

With an interest only loan you will still build equity in your home even if you only make the interest only payments and never apply any extra payment towards the principal. This is achieved because your house is always going to appreciate and gain value (unless you live in a community with declining home values, which is not very common). Therefore, You can still gain equity in your home while freeing up cash to pay down other bills, invest, and/or just to simply put save for a rainy day.

Many people choose interest only loans to increase their cash flow and not be encumbered by such a huge mortgage payment.

With any type of interest only loan you can choose to make additional payments to reduce your principal balance. These type of loans work very well with borrowers whose income may fluctuate on a monthly basis or borrowers who know they will be receiving a pay increase in the future and want to minimize the monthly payment until they have a larger income.

Interest Only loans allow you to purchase a larger house without increasing your monthly mortgage expense and it gives you mortgage payment flexibility to better manage your monthly cash flow without deferring interest.

Paying interest only may free up needed cash flow to help make payments on an investment property you may want to purchase.

Often times a real estate investor will want an interest only loan. The low minimum payments help to increase cash flow for other purchases.

The use of interest-only loans was unheard of just a few years ago, but in the last year these loans have exploded, giving many home buyers leverage against escalating home prices and enabling them to buy homes. A recent Wells Fargo survey of American homeowners showed that the majority of homeowners do pay principal on interest-only loans when they are flush with cash. 73% pay both the principal and interest at least some of the time. Only 25% pay only interest all of the time. Interest-only options on home loans give the home buyer the flexibility to choose how much to pay on their mortgage each month – just the interest-only payment or a little extra to pay down that principal.

Interest Only mortgages require monthly payment of “interest only” for a specified period, usually the initial 10 years of a 30 year loan term. At the end of the interest only period, the loan is re-amortized to pay off the mortgage in the remaining 20 years. The monthly payments will naturally be much higher compared to that of the interest only period. In practice, most homeowner refinance before the end of the interest only period. The disadvantage of Interest Only loans is in that the homeowner will not build equity during the interest only period. There is also the risk that the home has since lost value when it comes time to refinance.

Paying interest only may allow you to contribute to your 401k, or IRA retirement account, because of your new lower monthly payment.

Interest only loans can also be of value for borrower’s seeking to consolidate other debt carrying high interest rates like credit cards. By minimizing your mortgage payment, you can afford to pay down these other debts more quickly.

Here are reasons why you shouldn’t pay retail mortgage rates from your banks, credit unions, and mortgage companies: 

Many home owners looking to improve their situation by calling their local bank. They are quoted rates that are specifically targeted to the homeowners themselves. This is very similar to prices listed at a department store. What they may not know is that most banks have two lines they offer. Retail and Wholesale. Wholesale rates are offered to mortgage professionals only and are typically 1/4 to 1/2 a percentage point lower. This is because the lending institution does not have to pay for advertising and staff to complete the loan transaction . The mortgage professional works for the borrower. Utilizing a mortgage professional to get the lower rate (and in many cases) favorable terms can save the homeowner tens of thousands of dollars over the life of the loan.

It is not unusual for a top notch mortgage broker to be able to offer an identical loan program from a major mortgage lender (Wells Fargo, Washington Mutual, Countrywide, etc.) with lower fees or rates than if a consumer were to go directly to that same lender

The fees that brokers charge will vary from one to the next, as well as the loan program that they think is best for your situation. Know that different brokers work with different lenders, and have different experiences with those lenders. If you are wondering about the loan program and fees that your broker is offering, call me today at to see how I compare.

Most brokers work with a large number of lenders, often in the hundreds. They use their expertise and past experience to ‘shop’ all of those lenders for a loan that is right for you. If you wanted to do the same thing, it would take an enormous amount of time and research. By working with a broker, you can save yourself a lot of trouble. And since the broker gets your mortgage at a discount rate, you won’t pay any more than you would at the bank. It’s very similar to how retail stores buy their products in large quantities at a low price, and then charge you a higher price. It’s how they make their profit. But that doesn’t mean that you’re paying more than you would somewhere else.

The local bank also does not normally offer the flexibility of a mortgage broker. Mortgage brokers can move your loan over to a different lender if there is a problem or if interest rates drop. A local bank cannot do this with there in house programs.

I’ll be the first to admit that I’m a sucker for the Apprentice. I watch this show every Thursday night. I really do. If I miss the original airing (I don’t have TIVO) I catch it the next evening on CNBC.

Season Four just concluded last night with Randal winning the job. Usually by week four you know who’s a stud. Randal was that guy by week one. From day one they touted his pedigree – Oxford, MIT, and Rhodes Scholar. As for Rebecca, the runner up, all they did was question her loyalty each and every week for saving her friend Toral.

Nothing will touch Season One. It truly was the best group. However, this season was better compared to the previous two seasons which were fairly lame. Donald Trump has something about him that makes people want to watch the show. In comparison, Martha Stewart’s version of the Apprentice was a flop.

Here’s an article from the Rocky Mountain News regarding the onslaught of bankruptcy filings.

As new rules loom, debtors in single day file 433 fresh cases

By John Accola, Rocky Mountain News
October 4, 2005

Record day, record month, record year.

A stampede of debt-laden consumers on the last day of the month broke the charts Friday in Denver’s U.S. Bankruptcy Court.

Bankruptcy Clerk Brad Bolton said Sept. 30 marked the court’s largest number of filers in a single day – 433 fresh cases – and also exceeded previous record highs for the month and year.

“It’s the No. 1 day of all time here, and I bet it won’t last a week,” Bolton said.

Bolton said he expects the figures to keep climbing as debtors rush to file before a new and stricter bankruptcy law takes effect Oct. 17.

This year, with three months remaining, Colorado filings totaled 28,093 on Friday. That compares with 27,993 filings for all of 2004.

For the month, September showed 5,432 filings, a 131 percent jump over September 2004.

Overall, bankruptcies are up 31.2 percent from a year earlier.

To declare bankruptcy, consumers whose debts total more than their net worth must also show that living expenses and monthly bills exceed their income.

The new bankruptcy law, however, will make it more difficult – and expensive – to go through the bankruptcy process, with higher bankruptcy filing fees and added requirements, such as mandatory credit counseling and debt education.

The extra legal hoops are designed in part to steer people away from Chapter 7 bankruptcy, where most debts can be wiped out entirely, to a less forgiving Chapter 13. In a Chapter 13, the bankruptcy court requires debtors to set up a plan to repay a percentage of their debts over five years.

An income “means test” presumably will prevent debtors with above-average incomes from filing a Chapter 7. In Colorado, a couple whose income exceeds $54,187 would likely have to file Chapter 13, according to the new rules.

Josh Stritecky, an attorney at Methner & Associates in Denver, was in bankruptcy court recently lugging a bag overloaded with bankruptcy files. Stritecky said he and his colleagues have been working seven days a week to keep up with the flurry of cases.

“It’s been crazy,” he said.

He said credit-card debt is just part of the picture. A lot of the cases involve job loss, huge unforeseen medical bills and divorce.

One woman, a legal assistant in Denver who makes about $50,000 a year, said she wouldn’t qualify for Chapter 7 after mid-October. She declined to provide her name for this story because she feared her career would be affected by the stigma associated with bankruptcy. She was faced with repaying about $15,000 in credit-card debt, $10,000 for a student loan and two mortgages totaling roughly $125,000, according to her filing. She only had $50 in her checking account and $50 cash, according to the filing, made in August. She said she believed she would never fully pay off her debts.

“I just couldn’t cut it,” she said. “I’ll never take out a loan for anything again in my life.”

The law also takes aim at business bankruptcies. Denver attorney Brent Cohen, a commercial bankruptcy specialist, said retailers filing for bankruptcy – either to reorganize or to liquidate – could have a harder time keeping store leases.

Cohen said the new law favors commercial landlords, in some cases allowing them to break their rental agreements with a bankrupt tenant. Current law allows bankrupt businesses to sell those leases as an asset and even remain on the premises for years until a reorganization plan is approved.

Tighter deadlines will give business tenants fewer breaks.

“If you have a landlord resisting the debtor’s efforts . . . and the debtor needs additional time to organize, that can be a very difficult deadline to live with,” Cohen said.

accolaj@RockyMountainNews.com or 303-892-2666.

Copyright 2005, Rocky Mountain News. All Rights Reserved.

Until recently, seniors 62 years of age and older have not had the best choices when it came to getting cash from their homes. Traditional home loans only offered the option of either selling one’s house or borrowing against its equity.

With reverse mortgages coming on the scene, seniors now have some additional cash-flow alternatives. This type of loan allows mature borrowers to convert their home equity into tax-free income without leaving their current home or making mortgage payments – and they do not need an existing income to qualify.

How a Reverse Mortgage Works
Reverse mortgages are probably best understood when compared side-by-side with traditional home mortgages, otherwise known as “forward” mortgages. The following table shows the differences between the two:

Both loans incur debt against your home, and both affect equity, but they do so in different ways. Traditional home mortgages require making monthly payments to a lender. With a Reverse Mortgage, payments are made to you.

What a Reverse Mortgage Involves

Here are some important points to know when considering a reverse mortgage:

Eligibility: To qualify for a reverse mortgage, you must be at least 62 years of age. All owners who are on the title deed must meet this age requirement. You must also have paid off all, or most, of your home mortgage. Lastly, the home you reside in must remain your principal place of residence.

Mandatory Counsel: To receive a reverse mortgage, federal law requires that you first undergo counseling to understand how these mortgages work. This ensures you will make the right decision when it comes to choosing a plan. Also, the counseling service must be provided free of charge.

Tax-Free Income: One of the advantages of a reverse mortgage is that the money you receive will not be taxed. The amount you’ll obtain depends on several factors including the plan you select, the type of cash advances you choose, your age, and the value of your home. Typically, the older you are the larger the loan, as you will have more equity in the house.

Cost: The cost of a reverse mortgage varies considerably from one type to the next. However, you can typically use the money you receive to offset the loan fees. The costs will be added to the loan balance and must be repaid with interest once the loan terminates.

Repayment: Reverse mortgages do not require any payment as long as the borrower(s) remain in the home. Should the borrower(s) pass away, sell the home, or permanently relocate, then the loan would be due in full, along with interest and additional costs. If two borrowers are on the loan and one dies, the loan would not be due since one of them still occupies the home.

Home Equity Conversion Mortgage – The Federally Insured Loan

The most common type of reverse mortgage is the Home Equity Conversion Mortgage, otherwise known as a HECM mortgage. This is the only reverse mortgage program that’s federally insured and backed by the U. S. Department of Housing and Urban Development (HUD). This type of reverse mortgage is popular for a few reasons:

• Ability to choose your own interest rate. You can select one that changes annually or one that changes every month.
• You have several payment options. You may receive monthly loan advances for a fixed term or for as long as you live in the home. You may also choose to receive a line of credit or combine monthly loan advances with a line of credit.
• The loan can be used for any purpose. With a HECM, you don’t have to designate the loan to a specific use; you can apply the funds to anything you choose.
• Protection. This is one of the most attractive features of a HECM. This plan protects you by guaranteeing continued loan advances even if your lender defaults.

Sell or Stay?

The main reason people choose a reverse mortgage is to gain financial independence and maintain an adequate standard of living without leaving their current home. The best way to decide if a reverse mortgage is right for you is to compare it to the other option of selling your house. To do this, ask yourself these three questions:

1. How much cash can I get by selling my home?
2. How much will it cost to buy or rent a new place?
3. Is it worth my moving now, or do I prefer to do something else with the money?

Perhaps you’ll confirm what you knew all along, where you now live is the best place to be.

Contact me today if you have any questions.

I wanted to revisit Paying for Points. Recently I encountered savvy borrowers who understood the benefits of paying for points. When we discussed each option I presented, they understood that there was a difference between the rate I offered and the APR.

What is APR?

APR stands for “Annual Percentage Rate” and is the cost of credit expressed as an annual rate. APR is one of the most misunderstood numbers people come across when applying for a loan.

As consumer loans, and mortgage loans in particular have become more complicated, it became necessary to help standardize the ways lenders advertise and quote interest rates. APR was created to help people compare similar loans from different lenders and to explain the ultimate cost of credit. Quoting APR is required by Regulation Z of the Federal Truth-in-Lending Act.

Why is the APR higher than the interest rate?

Because you may be paying loan discount “points” and other “prepaid” finance charges at closing, the APR disclosed is often higher than the interest rate on your loan. This APR figure can be compared to the APR on other loan programs to help you compare the cost of credit for each type of loan.

How do I find the APR on my loan?

Once you have applied for a mortgage loan, the Federal Truth-in-Lending Disclosure Form (TIL) will be sent to you. If you have applied for more than one type of loan, you will receive a TIL for each loan type. At the top of the form, you’ll find your “APR.”

Revisiting our example from Paying for Points Part II, here are the rates and their corresponding APR’s

Points come in two varieties, origination and discount points. Generally a “point” is a fee that the lender charges to buy down the interest rate and is equal to one percent of the loan amount. “Discount points” vary inversely with the rate quoted-that is, the lower the rate quoted, the higher the amount of points charged. Discount points are used to adjust the yield on the loan to the institution providing the money. Origination points, such as is common for FHA and VA loans, are generally charged by the lender to offset the lender costs of administering the transaction.

Does it make sense to pay the points? The answer is…it depends. There are many factors to consider. One of the primary items to review is the overall long term cost of a zero-point loan versus a loan with points. One easy way to determine the value of paying points is to determine how many months (payments) it will take to recoup the original expense. The math is easy. Simply, divide the cost of the points by the monthly savings to arrive at the number of months it will take for yourinvestment in points to pay for itself. Here is an easy example:

The example is a simple approach to compare the difference between a zero-point loan and a loan with points. However, there can be other factors to consider. Some consumers may try to calculate tax implications of the different amount of points and interest paid and the subsequent tax deductions. Other borrowers may consider the present ‘value’ of the dollars spent on points today, versus the future ‘value’ of the dollars if they were invested instead of being paid to the lender. A great majority of consumers will be able to determine the advantages or disadvantages of a zero-point loan by using the above scenario.

NO COST LOANS There is no free lunch, even in mortgage lending. Every real estate financing transaction has costs for processing the application, appraising the subject property, administering the transaction escrow, securing title insurance, etc. In a typical “no-cost loan” the lender agrees to pay all of the costs of the transaction for the borrower in exchange for the borrowerpaying a higher price for the loan. Depending on the individual borrower’s circumstance, this may or may not be a “good deal.”

You will make the right financial decisions today if you have a plan for your future. In other words, your mortgage professional can plan your mortgage around your goals and aspirations. If you plan to move or refinance your mortgage loan within the next five years you most likely should not pay points. If, however, you know you are going to be in this home for a long period of time, you can definitely save money by paying the points. Take a few minutes and think about where you are going to be in the next 3-5 years. The answers you come up with will help you make the right decision about paying points.