Links: Going broke on medical bills
Here are some interesting articles from across the web:
- After seeing numerous potential clients who’ve filed bankruptcy to stave off the medical bill collectors, this statement/article is extremely true: “Scholars say medical debt is the No. 1 cause of bankruptcy.”
- Higher rates, less house explores how rate increases reduces the property amounts people qualify.
- Dan Green of the Mortgage Reports has a keen mind when it comes to the market. Here are his thoughts on why rates are rising:
- Mortgage-backed securities lost 84 basis points over 5 days
- Fed Futures currently price a greater chance that the Fed will raise the FFR in May than it will lower it
- Since January 5, the Fannie Mae 30-Year 5.5% bond closed worse on 81% of trading days and has worsened in pricing by 146 basis points
- Since December 5, the same bond has been down on 23 of 36 days, or 63.89% of the time
- Federal Reserve Chairman Ben Bernacke did well in his first year. Meanwhile his predecessor, Alan Greenspan, is writing a book called “The Age of Turbulence”.
Feds don’t raise rates
Today’s headlines:
Fed takes breather from rate increases
After 17 hikes, key benchmark stays at 5.25%
Chart courtesy of bankrate.com
Negative Amortization
Occurs when your monthly mortgage payments submitted are not sufficient to pay all interest and principal due on the loan. The unpaid interest is added to the unpaid balance of the mortgage. It could be considered borrowing equity from yourself. The period of time the Neg-am is applicable is usually limited on each mortgage.
Neg-am or Negative amortization loan usually have a recast period to the loan conditions. Make sure that the recast period is 5 year or more. This will give you enough time to refinance if you are still in the loan. Contact a Mortgage Professional in regards to which lenders have a recast past 5 years.
When doing financing that has a potential for negative amortization make sure you fully understand and feel comfortable with what that means to your individual situation. Your Loan Officer can go over the risk and benefits of the program you choose.
A negative amortization loan is a rising balance loan. It differs from a fully amortized loan in that the payments made on a fully amortized loan are paying down a principal balance. A Neg-am loan does not decrease the principal balance, it adds to it. This loan can be very useful for cash flow oriented projects in that the monthly payment can be fairly low.
When used properly, mortgage loans with potential negative amortization characteristics can be beneficial to homebuyers who want to pay as little in monthly payments as possible in the first few years of the loan term.
What’s good about negative amortization is that your payment doesn’t have to increase just because the interest rate on your ARM went up. The lender can also price the loan more aggressively because a payment cap doesn’t mean that the lender can’t pass along an interest rate increase. What’s bad about negative amortization is that the payment will eventually reset to a level to allow the loan to amortize over its remaining life. The increase in the monthly payment needed to repay the larger loan over a shorter time span can be substantial. If rates have increased substantially, then refinancing may not be a viable option.
Negative amortization can occur with the Option Arms (1% or similar start rates) and reverse mortgages.
When mortgage payments do not cover the full amount of interest due, and the unpaid interest is added to the principal balance of the loan. Under standard amortization, the principal balance decreases with each payment.
A gradual increase in mortgage debt that occurs when the monthly payment is insufficient to cover the interest due, and the balance owed keeps increasing (at least in the first few years).
Some investors use Neg Am loans to increase their cash flow on a property. Usually they plan on selling or refinancing the property is just a few years when using this type of loan.
In most areas where housing prices at a minimum double over the course of 10 years, negative amortization may be less of a concern, and the additional cash in your pocket may be more than worthwhile for individuals who prefer to invest their money in asset classes other than real estate.
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.
Negative amortization When a borrower’s monthly payment is too small to cover both the principal and interest of a loan. In this case, the unpaid interest is added to the outstanding balance of the loan. The danger of negative amortization is that it gradually increases the mortgage debt, and therefore the home buyer can end up owing more than the original amount of the loan.
Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess.
Although no one likes the term “negative” a loan with negative amortization is not always a “negative” for the borrower. The essence of such a loan is that the lender allows the borrower to use a little bit of their equity each month to keep their payment low. The additional cash flow created can often keep the borrower from incurring more expensive debt (such as credit card debt) and in most cases that is a “positive.”
Low Fixed Rate Mortgage
As short term interest rates rises, fixed rate mortgages are become more popular. Fixed rate mortgages are more stable, the payment does not change throughout the life of the loan.
Low fixed rate mortgages in the past have been the highest interest rate of any loan product. However as adjustable rate mortgages (ARM) have been increasing the relative increase in fixed rate mortgages has been small. The past popularity of ARMs was that for a small risk you were taking advantage of a huge difference in interest rate. It is just not the case any more. Fixed rate mortgages are becoming more popular because ARMs still have the same possible risks but little or no difference in rate. While ARMs generally still have lower rates that may not always be true, and has not always been true. It is possible and has happened in the past that fixed rates were lower than some ARMs.
A low fixed rate mortgage is great for borrowers who plan on staying the home for a longer length of time.
Low Fixed Rate Mortgage Loans are loans that are eligible to be delivered to FNMA/FHLMC, which in turn are sold to investors as low risk, income producing investments. Since low fixed rate mortgages can be sold on the secondary market immediately and banks can recoup their capital investments shortly after making the loans, and do not have to take 30 years to collect on their investments, all lender banks, regardless of their market capitalizations, offer this type of mortgages, thereby making the Prime Loan (Low Fixed Rate mortgages) market highly competitive. The underwriting guidelines of Low Fixed Rate mortgages are more stringent than other types of loans. In order for a loan applicant to qualify for the lowest fixed rate mortgage available, he should have a very good credit profile, preferably with credit scores of over 720 and without any adverse credit history. He should also be able to prove that his gross income is at least 2.5 times the total debt, including the proposed mortgage payments. He must also prove that he has enough money to put at least 20% of the house value as down payment, cover all closing costs, and left-over reserves equaling 3 to 6 months housing expenses after settlement. For homebuyers and homeowners who do not meet one or more of these criteria, many banks offer alternative loan programs.
If your current loan program is ARM (Adjustable rate mortgage) it might be a good idea to take advantage of the current low fixed rate mortgage and stop worrying about ever increasing rates.
A low fixed rate mortgage is nearly an oxymoron. Borrowers should realize than a 30 year fixed mortgage offers protection against rate increases, however this protection comes with a price. A 30 year fixed will have the highest interest rate of any loan product on the market.
Low fixed rate mortgages are best suited for the long term borrower. Although it seems most borrowers want a low interest rate for a long term, it is more likely to get a lower rate with an ARM (adjustable rate mortgage) product as the lender will tend to raise the rates for longer term loans.
Low fixed rate mortgages with the lowest rates are usually only offered to borrowers with excellent credit and who have a 20% or more down payment.
ARMs Explained
ARM is an acronym for adjustable rate mortgage. ARMs are mortgage that are tied to a certain index, and will adjust at different periods based on certain economic factors.
Since the American homeowner usually refinances within 7 years, an ARM is sometimes the best mortgage in which to get started.
Some loans have a “cap” on the payment increases, not the interest rate increases. Option ARMs are a good example of this - generally your payment cannot increase more than 7.5% per year. $1000 per month the first year, $1075 the second year and so on.
Most interest only loans are made on an ARM loan. Such as a 3/1 Interest Only ARM. Even though most interest only loans are interest only for the first 5 or 10 years of the loan, this 3/1 I.O. ARM would be fixed for the first 3 years, or for the first 36 months, and then adjust thereafter. Interest only ARM’s are a great way to lower your payment and your interest rate.
Most ARMs have a period where the rate is fixed. The fixed rate period can be anything from a couple months to 10 years. Most common ARMs are fixed for the first 2, 3, or 5 years.
Rate adjustments are always “capped”, or limited by how much they can increase per adjustment period. For example, many ARMs have a ” life cap” of 6%, meaning that a start rate of 5% can never adjust to higher than 11%.
Adjustable rate mortgages are also called variable rate mortgages or hybrid mortgages.
All Adjustable Rate Mortgages (ARM) have interest rates that are based on an index and a margin. The index is always some widely published interest gauge, such as the T-bill, LIBOR, COFI, etc. The margin is added to the index to determine the mortgage note rate.
ARM Adjustable Rate Mortgage
Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap.
If you are currently in the tail end of the fixed period in your Adjustable rate loan, often 2 years, 3 years or 5 years after you took it out, this may be the best time to get a fixed rate mortgage refinance and lock in your rate while it is low. While mortgage rates rise and fall, the current market outlook is that they will continue to increase over the next couple of years, and you don’t want to be stuck paying a lot more money for a couple of years when you have the opportunity to refinance ARM into fixed rate mortgage today.
There are many Adjustable Rate Mortgage products available today. Some ARM products have rates that adjust immediately the following month after settlement, others have an initial fixed rate period of 1, 3, 5, 7, or 10 year. ARM that has an initial fixed interest rate period is also known as Hybrid Loans.
When choosing an ARM product, it is as important to consider the underlying indices and margins as picking the lowest teaser rates. Different indices have different sensitivity to the interest market. In other words, some indices such as Treasury bills and LIBOR are highly sensitive to market conditions and adjust rapidly. The 11th District Cost of Funds Index, also known as COFI, tends to move slower in comparison and therefore less volatile.
ARM products almost always have an initial interest rate that is lower than that of fixed rate products of the same loan term. These lower starting rates, also refereed to as Teaser Rates, are meant to induce/reward borrowers who are willing to bear some of the risks of future interest rate movements.
ARM’s are great for keeping your payment down for a fixed period of time while you work on your FICO score and aim for a better fixed rate down the road.
Some ARM loans have an interest only option. These loans are very popular with people who do not plan on staying in the home for a long period, want to qualify for a larger home and investment properties to increase cash flow due to the lower payments.
Other ARM product features that need to be considered include the Period Adjustment Caps which limits the maximum rate change allowed at an given adjustment, the Floor, which is the lowest possible rate of the loan, regardless of the value of the underlying index, and the Life Time Cap, which sets a ceiling for the maximum rate of interest throughout the life of the loan.
An ARM, short for “adjustable rate mortgage”, is a mortgage on which the interest rate is not fixed for the entire life of the loan. The rate is fixed for a period at the beginning, called the “initial rate period”, but after that it may change based on movements in an interest rate index. The ARM rate quoted by a lender or broker is the initial rate. It holds until the end of the fixed-rate period, which can last from a month to 10 years. This rate is critically important if the initial rate period lasts for 10 years, but it is very unimportant if the period is only one month. On the most popular ARM program, the initial rate period is 12 months, and on more than half the period is 36 months or less. While you can always opt for an ARM with a longer initial rate period, the rate goes up as the period lengthens. If you need the rate on a one-year ARM to qualify, you must consider very carefully what happens after the fixed-rate period ends.
An adjustable-rate mortgage (ARM) with an initial fixed-rate period of pre-determined years, during which the borrower is may have an option to pay only the interest accrued on the loan. The interest rate then adjusts annually or bi-annually, based on the indexes such London Inter-Bank Offered Rate (LIBOR) index, and can move up or down as market conditions change.
ARMS have caps so the borrower is protected by a maximum adjustment the lender can make over the term of the loan. This information should be clearly identified in the Truth in Lending statement (TIL) which should be given with the Good Faith Estimate (GFE).
ARM loans come with different initial fixed rate periods such as 1 2 3 or 5 year fixed. After the initial period they will start to adjust according to the index they are tied to. What’s nice about ARM loans is it allows the borrower to have a lower payment initially. These type programs can be used for many reasons, one of them being for someone who won’t be living in a property for an extended period of time.
Is the ARM right for you? I can understand how the ARM can be confusing and 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.
The initial interest rate for an ARM is lower than that of a fixed rate mortgage, where the interest rate remains the same during the life of the loan. A lower rate means lower payments, which might help you qualify for a larger loan. There’s couple of questions that is very important when considering the ARM like; How long do you plan to own the house? The possibility of rate increases isn’t as much of a factor if you plan to sell the home within a few years. Do you expect your income to increase? If so, the extra funds might cover the higher payments that result from rate increases. Some ARMs can be converted to a fixed-rate mortgage. However, conversion fees could be high enough to take away all of the savings you saw with the initial lower rate.
An adjustable rate mortgage, called an ARM for short, is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes.
If you are considering an adjustable rate mortgage, make sure you do the research. Find out how often the rates can increase and by how much. Try to determine whether you can afford payments if the rates go up significantly over the next few years.
“American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed-rate mortgage,…To the degree that households are driven by fears of payment shocks, but are willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.”- Alan Greenspan, the Chairman of the Federal Reserve Board at the Credit Union National Association 2004 Governmental Affairs Conference
Most lenders tie ARM interest rate changes to changes in an “index rate.” These indexes usually go up and down with the general movement of interest rates. If the index rate moves up, so does your mortgage rate in most circumstances, and you will probably have to make higher monthly payments. On the other hand, if the index rate goes down your monthly payment may go down. Lenders base ARM rates on a variety of indexes. Among the most common are the rates on one-, three-, or five-year Treasury securities. Another common index is the national or regional average cost of funds to savings and loan associations. A few lenders use their own cost of funds, over which–unlike other indexes–they have some control. You should ask what index will be used and how often it changes. Also ask how it has behaved in the past and where it is published.
Adjustable rate mortgages or ARMs have Interest Rate Caps. Rate caps limit how much interest you can be charged over a period or over the life of a loan. - A Periodic rate cap limits the amount by which your interest rate may increase at the adjustment period(s). Only some ARMs have these period caps.- Overall or lifetime rate caps limit how much rate can change over the life of the loan. Lifetime or overall caps are required by law and have been required by law since 1987 on all Adjustable rate mortgages.
ADJUSTABLE-RATE MORTGAGE (ARM)A mortgage loan where the interest rate is not fixed for the entire term of the loan, and can change during the life of the loan in line with movements of an index rate.
If your ARM has started to adjust, it might be a good idea to refinance into a fixed rate loan.
2/28 ARM is a great product. Especially for 1st time home buyer or subprime borrower. Allows them to strengthen credit over the two year period.
An Adjustable Rate Mortgage (ARM), will carry a lower initial interest rate than a typical 30 year fixed rate mortgage. The lender is hoping that you will forget about the adjustment, and just continue to hold on to the loan. Be aware of when your loan is due to adjust, as well as by how much it will adjust.
If one or more of these situations describes you, an ARM might be a good fit: -You plan to stay in your home for a relatively short period of time -You want lower initial monthly payments and can handle potential payment increases in the future -You want to qualify for a larger mortgage amount, and you expect your income to go up over time
It has been shown, that home owners would have saved thousands of dollars if they had a ARM of a conventional 30 year fixed.
When should you take an ARM mortgage vs. a traditional 30 year fixed? Consider how long you plan on occupying the property. If it is for 10 years or more then a 30 year fixed may be the best bet when interest rates are low. However, if you plan on moving sooner then consider the extra savings you will achieve by choosing an ARM. For example, you plan moving when your child is old enough to go to school in three years. The best financial choice would to get a 3 year or possibly a 5 year ARM. When a 30 year fixed mortgage is around 5.875% a 5 year ARM is around 5.25% and a 3 year ARM would be about 5.00%. On a $200,000 loan the monthly payments would be $1183 for a 30 year, $1104 for a 5 year ARM, and $1073 for a 3 year ARM. Times that by 3 years, 36 months, and your savings for an ARM vs. a 30 year fixed would be between $2800 - $3900. Money better spent elsewhere.
If you only plan on living in your home for a few more years, it might not be worth it to move from a program like a low rate ARM or an Interest Only Program to a traditional Fixed Rate loan. There may be better things to put your money towards each month that putting a few extra dollars towards the principal of your home.
Prime Rate increases to 6.5%
Chairman Alan Greenspan of the Federal Reserve raised the federal funds rate by .25% to 3.5% yesterday. As a direct effect, commercial banks boosted their PRIME RATES (used for Home Equity Lines of Credit) by a .25% to 6.50%.