The SKY hasn’t fallen YET
According to BlackRock’s CEO:
Laurence Fink, who helped create the market for mortgage-backed securities, said the credit losses that have already cost banks and securities firms $45 billion are about to get worse.
Read the full article: BlackRock CEO sees no ebb in credit storm
What does this mean? If you have good credit and equity in your home and a fixed rate mortgage, NOTHING. If you have mediocre credit, zero equity, and your mortgage is about to refinance you’ll need to do the following:
- Get your credit in order. By in order I mean it needs to be above 680.
- Start reading your mortgage documents. Your note, your riders, everything that you bypassed at closing.
- Call your existing mortgage company first. See if they’re willing to work with you on your rate when it adjusts.
Apathy and Ignorance
“Is it ignorance or apathy? Hey, I don’t know and I don’t care.” - Jimmy Buffet
Apathy: the trait of lacking enthusiasm for or interest in things generally
Ignorance: the lack of knowledge or education
According to a Bankrate survey 34% of homeowners don’t know the type of mortgage they have.
These were the key findings of the survey:
Homeowners:
- 36% who now have an Adjustable Rate Mortgage (ARM), plan to refinance to a fixed-rate loan when their ARM changes
- 28% of those surveyed worry either regularly or sometimes about how they will afford their payments next year
- 57% of homeowners polled have a fixed-rate mortgage
Your home is your biggest asset/liability depending on how you view your home. Most people either have one of three kinds of mortgages because there are only three kinds:
- fixed rate mortgage which means it’s fixed for 10, 15, 20, 30, 40, 45, or 50 years
- an adjustable rate mortgage which means it’s not fixed, it will adjust at some point
- a negative amortization mortgage which means if you don’t know what kind of mortgage you have then this loan is not for you
If you don’t know the mortgage interest rate and the mortgage loan program you’re in, simply find your mortgage documents and find your NOTE and read it!
Adjustable Rate Mortgage Holders Prepare for Increase in Interest Rates
Interest rates are on the rise and many home owners who have adjustable rate mortgages may see increases in their forthcoming annual adjustments.
Federal Reserve Chairman Alan Greenspan made it clear in 2004 that the Federal Reserve would be increasing short-term interest rates at a measured pace. With the US Dollar at its weakest point in seven years, oil prices unstable and the evaluation of other economic indicators, the Fed Funds Rate was hiked seven times from 1.0% to 2.75% since June 2004 in an effort to curb inflation. Some economists believe it won’t stop until the Fed Fund Rate hits 4.0%.
Consumers with revolving debt accounts tied to the prime rate have seen the effect through rising interest rate charges, as the prime rate always rides 3% above the current Fed Funds Rate.
Mortgage interest rates are affected indirectly by these changes. An increase in the Fed Funds Rate has an impact on financial markets as a whole, but mortgage rates may go up or down based on the perception investors have of current economic statistics and their reaction to the Federal Reserve’s after-meeting statements.
In general, when economic data indicates we have a slow-down occurring in our economy, investors tend to sell off stocks and reallocate that money to the safe haven of bonds and mortgage-backed securities. The purchase of mortgage-backed securities drives interest rates down. When economic data says there is growth in the economy, the stock market typically rallies and mortgage-backed securities sell off to fuel that stock market rally. This drives mortgage interest rates up.
Our current market reflects the reaction of investors reading between the lines on comments made by the Fed, and mortgage interest rates are going up. This will have an affect on home owners with adjustable rate mortgages (ARMs) tied to indexes that are based on short-term interest rates. This includes the 11th District Cost of Funds, 12-Month Treasury Average (MTA), London Inter Bank Offering Rates (LIBOR) and others.
This doesn’t mean that everyone with an adjustable mortgage is in trouble right away. Some indexes are more volatile than others. COFI moves much slower than other adjustable rate indexes, while the LIBOR fluctuates with more volatility. But remember, when an ARM adjusts, the new interest rate is a sum of the borrower’s fixed margin plus the current rate of the index the mortgage is tied to.
Consumers who foresee paying an interest rate that is significantly higher may want to consider refinancing to take advantage of the stability of a fixed rate mortgage.
This is also a good time for borrowers who started out in an adjustable rate loan due to a poor credit score to transition into a fixed rate loan if they can. Once a track record of making mortgage payments on time and in full has been established, this should have a positive effect on the credit score and there is a good chance the borrower may now qualify for a loan with a lower interest rate.
As with any decision to refinance, it is important to take the terms of the existing loan, the cost of the new loan, and the borrower’s long-term needs into consideration. A qualified mortgage professional should help weigh out the options by providing a clear assessment of available loan programs for the consumer.
When is the right time to refinance?
Random thoughts on when is the right time to refi:
This is a question that only you can answer. Many lenders will tell you that you ‘need’ to refinance if it is going to save you $50 or more per month. You have to ask yourself if the costs of doing the loan will outweigh the benefits that you will receive from the new loan. A good loan officer can help you determine this by finding out what the cost of the new loan will be, and what your new payment will be. From there, it is up to you to determine if it is really in your best interest.
There are some basic “no brainer” times to refinance. If your credit was less than perfect and your mortgage is an ARM with a short fixed period (2 or 3 years) you should plan to refinance just before you enter the adjustment period. Once you enter the adjustment period your rate could increase by as much as 2%. You should refinance to a fixed rate mortgage, you will most likely lower your payments or keep your payments and go to a shorter term such as 20 or 15 years
The right time to refinance really depends upon your current financial situation and what you need to do to get into a better financial situation. If you are looking to consolidate debt and bills into your mortgage, then you will need to wait until you have enough equity built up into your home to do this. If you simply want a lower rate and or term then you should consult your mortgage professional to see if the benefit of refinancing makes enough financial sense to you. Therefore, each unique situation requires it’s own personal analysis to see when the right time to refinance may be.
Many people refinance and use cash taken out to purchase investment properties. While this certainly isn’t for everyone, real estate investment can be very lucrative and can many times require very little cash out of pocket. If you are considering buying an investment property and would like to take cash out of your equity ask your mortgage professional how this can work for you.
What is an ARM loan?
An ARM loan is where the interest rate is fixed for a specified period of time and then adjusts according to the terms of the loan and the index associated with the loan.
Adjustable Rate Mortgages are excellent choices for our customers with growing families, as the often outgrow their houses much before the fixed period of the mortgage expires.
One of the biggest advantages of an ARM loan is that when interest rates fall, the borrower can take advantage of those lower rates without having to go to the expense of refinancing.
An arm loan typically starts out w/ a lower rate than a fixed rate loan and can give you several years of reduced payments compared to a higher fixed rate mortgage.
The most common ARMs are 6 month, 1 yr, 2 yr, 3 yr, 5 yr, 7 yr and 10 yr.
ARM loans offer way more flexibility than your standard fixed rate mortgage. With ARM loans you can do fixed terms of usually 1, 3, 5,7 or 10 years. Most of these programs also give you an interest only option to lower your payments even more. Even though it has some negative aspects, the Pay Option ARM ( aka Pick a Payment, Cash flow ARM, Neg Am) is my favorite loan. This ARM gives you 3 or 4 monthly payment choices. The interest rate does fluctuate every month, but the minimum payment adjusts once a year and is usually based on paying only 1% of the interest due. This is ideal for investment properties, first time homebuyers, or borrowers savvy enough to divert the savings into other investments. Make sure to discuss all of the options with your mortgage broker.
ARM loans are typically best for people who know that they will either refinance or move within a few years. Because rates tend to be lower on ARM loans, this can be a very good choice. However, if you have no intention of moving within the next few years, you may be better off to go with a fixed rate mortgage. This is something you will want to discuss with your broker.
One of the myths in the mortgage business is that ARM loans are for those who don’t qualify for a fixed rate mortgage. The fact of the matter is that most ARM borrowers could also qualify for a fixed rate loan but choose an ARM because of the lower payments and other advantages that the ARM product offers.
Types of Loan Programs
Editors Note: Due to the mortgage and credit crunch, many loan programs have been eliminated. If you’re in need of a Denver mortgage contact us to discuss your mortgage options.
There are a wide variety of loan programs available.
One of the most popular loan options in the market today is the Pay Option adjustable rate mortgage, which is often called a flex or borrower’s choice loan. Available in 30 and 40 year amortized varieties, many of our customers who value having cash in their pockets each month have taken advantage of this innovative financing program.
For example, you have fixed rate mortgages, adjustable rate mortgages, VA mortgages, FHA loans, Reverse Mortgages, Interest-Only loans, Option Arm loans, Stated-income loans, No Ratio loans, HELOC’s, 30 year loans due in 15 years, etc. The list goes on and on. You should ask your mortgage professional which loans apply to your situation, whether you qualify, and what will save you the most money.
Adjustable (or Variable) Rate Mortgage (ARM) is a mortgage in which the Note rate can change throughout the life of the loan. The interest rate of an ARM is calculated by adding a predetermined margin to an interest market index. Some of the more common indices chosen as the underlying index are the 1-year Treasury Bill, London Interbank Offered Rate, and the 11th District Cost of Funds. Because the underlying index constantly changes to reflect market conditions, any ARM that base the their interest rates on that index would move in tandem.
Interest only options can be used on many of the other types of programs. It can be used on the fixed rate or adjustable rate programs. With the interest only option the borrower is paying only the interest and not the principle. There is usually a small fee charged to the interest rate for adding this option.
NINA loans are loans that don’t require income and assets to be disclosed or verified.
A HELOC is a home equity line-of-credit.
The traditional fixed rate mortgage is the most common type of loan programs, where monthly principal and interest payments never change during the life of the loan.
With a 15 year fixed loan, you will pay off your principle faster than with a 30 year fixed loan, even if you were only to stay in the loan for a few years.
The option arm loan is a loan that provides four payment options each month:-minimum payment-interest only-30 year amortization-15 year amortization This loan has a variable interest rate. However, the minimum payment is very low - much lower than the interest payment. The unpaid interest for each month is added to the total loan amount. This is referred to as “negative amortization”, because the amount you owe on the house will go up in time, not down. This loan can be good for short terms, such as for investors who will soon sell the property. It is also good for people whose income may change from month-to-month, and they need some flexibility.
Stated Income Loan
Editors Note: Due to the mortgage and credit crunch, stated income loans may be very difficult to obtain. If you’re in need of a first mortgage in Denver contact us to discuss your mortgage options.
Stated income loan programs are offered on fixed rate mortgages, adjustable rate mortgages, or on negative amortization mortgages. They do not require income verification.
Most lenders also charge a higher rate on a stated income loan.
Stated income loans are very popular with business owners. Since they write-off a lot of their expenses at the end of the year on their taxes they sometimes have very little net-income to qualify for a full-doc loan.
Generally a no income, no asset (NINA) loan requires no verification of income or assets. However verification of employment is required and 2 years of same line of work is required. A No Doc loan is a NINA without verification of employment.
Some banks offer borrowers with high credit scores stated income loan programs with no adjustments, meaning the borrowers would not get “surcharged” or penalized for not furnishing proofs of income. These stated income programs offer interest rates that are identical to that of full documentation loans.
Stated Income programs are ideal for those clients with non-documentable income sources. Typically for those who may receive portions of income in cash.
A stated income loan normally requires a slightly higher FICO score to qualify for the same loan to value as compared to a full documentation loan or bank statement program.
There are two common types of Stated Income Programs: Stated Income Verified Assets Loan: (SIVA) - Loan approval is based on your stated income, credit history, and verified liquid assets (bank accounts, 401k, stocks, bonds, etc.). The Verified Assets should be consistent with the income claimed. Stated Income Stated Assets Loan (SISA) - This loan has no assets being verified. You only state your income and state your assets on the application. This program may have a slightly higher interest rate because the assets are not verified.
Some variations of stated income include:1)Reduced Doc - Income and assets are disclosed on the application but income is not verified. Assets are verified.2)No Ratio - Income is not disclosed on the application and assets are stated and verified. 3)No Income No Asset - Income and assets are not disclosed on the application and are not verified. Employment not stated or verified.
Lenders will look at the “stated” income to verify it is not out of whack, you cannot state $80,000 worth of income working part-time as a cashier. This has to be an accurate figure of income actually made.
Stated-income mortgages are for people who make the money they say they make, but that amount doesn’t show up on the bottom line of their income taxes.
Stated Income loans still must be approved by an underwriter. The stated income must make sense for the employment that the borrower has.
They say you can beat the tax man or you can beat the bank, but you can’t beat them both. If your income is difficult to document because of commission based pay or revenue from self employment, stated income loan programs are available which enable borrowers with sufficiently high credit ratings to borrow money at competitive rates. Programs are often available to borrow money equaling up to 100% of the value of your home, without the need to verify your income or your assets, or in some cases without the need to verify either.
Stated Income Loans are for borrowers with income sources that are not easily verified through normal channels. So, lenders allow borrowers to state their true income without verifying it. These loan programs are usually for borrowers with good credit and come with a higher interest rate.
I can understand that a Stated Loan could be confusing? Yet, I want to thank you for reading the information above. If you would like to continue this conversation than please contact me so you and I can discuss your financial situation. Please read more valuable information and when you feel comfortable I would like you to contact me.
Many self employed borrowers take advantage of stated income loans so they do not have to provide tax returns to qualify.
As you move down the line on the different programs, from SIVA to SISA to NINA the interest rate will move a bit higher each time. Depending on your credit scores and LTV (loan to value) you might be able to qualify for one but not another.
Stated income is a very popular form of loan qualifying. As you’re probably aware, most successful business owners write off a lot of their expenses at the end of the year on their taxes, causing very little net income to be used for qualifying for a loan. You also see this with borrowers that make tips, bonuses and commission as their sole form of income.
Should You Pay Points?
Should you pay “points” to get a better rate? Do you plan on keeping your loan for a while? Then it may make sense to “buy” a lower interest rate by paying one or more “points.” Even if you’re unsure of how long you plan to keep your mortgage before you move or refinance, paying points now for a lower rate may make sense. For example, do you have a high-paying job now but you think you might change careers in the next few years? Talk it over with a qualified Mortgage Planner. Its part of a Mortgage Planners job to help you find the right loan for your means and goals.
If you look at a comparison of 2 different loan programs, one with points and one without points, laid out by a mortgage professional, you will be able to see your total cost of the loan for each program. The most important factor here is the amount of time you plan to hold this property before refinancing or selling. This will help you make the decision rather quickly.
For borrowers with ample cash and low return on investment for their cash, paying additional points to buy down an interest rate may be a good idea. One should always consult with a loan officer to analyze the cost of the buy-down and the amount saved with the lower buy-down rate over the life of the loan. A knowledgeable loan officer can show a homeowner the number of years the homeowner needs to keep the loan in order to recoup the cost of the buy-down, and thereby allowing the homeowner to make an informed decision.
Paying points may decrease your debt to income ratio
Paying points to get a lower rate when refinancing into a long term fixed mortgage often makes good sense. The points can normally be financed into the loan instead of paid out of pocket. Over the long haul, money saved from the lower interest rate will more than make up for the principal added by the points.
When you pay “points,” you pay interest in a lump sum upfront to get a lower rate on your fixed rate mortgage. Each point costs 1% of the mortgage amount. The more points you pay, the lower your mortgage rate. So, which is the best for you? More points and a lower rate? Or fewer points and higher rate? To decide, you need to consider: (1) Whether you can afford to make the upfront payment now for points. (2) The length of time expect to have the mortgage. The longer you plan to have your mortgage, the more it makes sense to pay for points now because you’ll have a long time to benefit from the lower rate.
There are basically two types of buy-downs, a permanent buy-down and a temporary buy-down. A permanent buy-down entitles the homeowner to a lower interest rate for the life of the loan. A temporary buy-down gives the borrower a lower interest rate for the first two or three years of the loan term. A common temporary buy-down is the “2-1 Buy-Down”, which gives the homeowner a discounted rate of 2% below his mortgage note rate in the first year of the loan, 1% below the qualified note rate in the second year, and the note rate for years 3 to 30. For example, consider a borrower qualifying for a 30-year fixed rate mortgage of $200,000 at 7% interest rate, with the option of a 2-1 Buy-Down that costs 2.25 points, without the buy-down, the borrower’s monthly payment would be $1,330 for the life of the loan. With the 2-1 buy-down, at the cost of $4,500 (2.25 points = 2.25% of the loan amount), the borrower interest rate for the first year is 5% (2% below qualified note rate of 7%) and the monthly payment for the first year is $1,074, 6% (1% below note rate) and a monthly payment of $1,199 for the second year, and 7% (qualified rate) and monthly payments of $1,330 for the remainder of the loan term. Another common Temporary Buy-Down is the 3-2-1 Buy-Down, which works very much like the 2-1 Buy-Down, except in that it gives the borrower 3% below qualified rate in the first year, 2% below in the second year, 3% below in the third, and the normal note rate for the rest of the loan term.
When deciding weather or not to pay points to get a lower rate you should also look at your “break even point”. One point is equal to 1% of your loan amount. If paying that extra point lowers your rate then your savings are in a lower monthly payment. The break-even point is the amount of time it takes for that monthly savings to exceed the total initial investment of the point. When comparing different loan scenarios and options with your mortgage broker, have them calculate your break-even time for each scenario. You want the break-even point to be shorter than the amount of time you plan to spend in that mortgage (if you plan to sell or refinance in the future)
Points are normally tax deductible whether you or the seller actually pay for them. Points on a refinance are not deductible in the same way. On a refinance you normally have to spread your deduction out over the amortization of your loan (check with your tax advisor).
If you are tight on funds for closing opting for a loan with the lowest upfront cost and no discount points may cost may be right for you. Over the life of the loan you may be paying out more money however enabling you to provide for your families immediate needs.
Should I refinance my ARM to a fixed rate
There are benefits and negatives to both a fixed rate and an ARM mortgage, but the for the borrower who is thinking about refinancing there ARM into a fixed rate there are many things to consider. By Refinancing your ARM to a fixed-rate mortgage you will avoid the payment increase when your ARM interest rate begins to adjust. You will also lock into a more stable payment for the term of your mortgage.
If you are in a situation in which you MUST refinance, pay close attention to what is going on in the market. Make sure you are dealing with a savvy and honest loan officer or Mortgage Broker. Sometimes the yield curve becomes inverted, and you can actually refinance into a 30 year fixed mortgage, at a lower or equal rate than a 3 or 5 year ARM!
You need to find what your break even point is for your current loan. Have you already broken even? If not how much more will it cost you to continue in your current loan? Have an honest discussion with a broker to decide what is the best course of action.
In an economic climate where short term rates and long term rates are about the same, it may be better to refinance adjustable rate mortgages into fixed rate loans. Home buyers are willing to share the risks of an adjustable rate mortgage when the adjustable rate is significantly lower than fixed rate mortgages. If such advantage no longer exists, fixed rate mortgage is often a preferred choice.
When deciding to refinance your adjustable rate mortgage (ARM) into a fixed rate mortgage, you first need to decide how long you think you will be in your home. If you are in the second year of a 5 year ARM, and only see yourself in the house for another 2-3 years, then you may want to wait until it is absolutely necessary to make the change. Your mortgage broker can advise you as to what the market may do, but they will not know what is in store for years to come. Concurrently they will also not know the number of years you will be in the home, along with any changes in your life that may require you to move.
Refinance Out of An Adjustable With A Fixed
Everywhere you look, economists believe rising interest rates are imminent. According to popular believes, when Adjustable Rate Mortgages (ARM) start to adjust, the new interest rates will be significantly higher, thereby putting unprepared homeowners, who have been accustomed to the low payments of ARMs, at risk of default and eventually foreclosure. If a homeowner with an Adjustable subscribes to this outlook, it is time to refinance out of the ARM and get into a Fixed Rate Mortgage (FRM), while long term rates are still historically low.
Typically, adjustable rate mortgage can adjust from 2-5% on their first adjustment. Check with your mortgage servicer to see how your mortgage will adjust, and when it will adjust.
Here in early 2006 financial markets are experiencing a phenomenon known as the inverted yield curve. In a nutshell, that means that interest yields on long term investments like bonds are actually lower than those paid for shorter term ones. What this means for the mortgage market is that long term fixed rate loans are actually priced lower than the ones that have only a short fixed rate period and then convert to an ARM. During periods of inverted yield curves it is a great time for many borrowers to refinance out of their ARM mortgages into long term fixed rate ones.
If you have an adjustable rate mortgage and you are considering refinancing into a fixed rate to get out of the adjustable you need to consider your short term and long term goals. If you plan on moving from the home within the next few years refinancing into another Adjustable Rate Mortgage (ARM), might be the best option. However, if you have no intention of ever moving then a fixed rate mortgage may be the best option for you. Therefore consider all options before jumping into a new mortgage.
If you want to know the details of how and when your ARM will adjust read through your mortgage Note. The Note is one of the many documents you signed at closing and you should have a copy of. The Note will describe when your rate can adjust, and how the adjustment is calculated, and what the adjustment caps are.
Along with the security of a fixed interest rate you may also be able to take cash out of your home’s equity in the same transaction. Its best to do this at the same time you refinance your adjustable rate mortgage to keep from having to pay closing costs again later. Ask your preferred mortgage professional if your home has grown in value and if a cash-out refinance is right for you.
When you have an adjustable rate mortgage at some point it will adjust. When your loan is a few months away from adjusting it a good idea to look into refinancing your loan to a fixed rate. When refinancing to a new loan look into all the options. Going with a 25, 20, or 15 year term might be better option rather than a 30 year if you are able to afford the monthly payment.
To really understand you adjustable rate mortgage, you need to know two things, the index and the margin. The index is the adjustable component can be one of several indices. The most common index used is the 6 month LIBOR. Indices move up or down based on numerous economic factors. The margin is the fixed component of the adjustable and does not move. When you adjustable rate mortgage adjusts it’s when the index and the libor added together are greater than your current rate.