Simply The Best Loans

Many of us make up a list of the resolutions we intend to make for the New Year. Whether you’ve decided to diet, exercise, work more, work less, travel more, or change jobs, it’s not likely that you’ve made any resolutions regarding your homes. Maybe you should.

For most of us, our home is our biggest investment and also our biggest asset but without regular maintenance and care, it can become a huge liability. Small things can become big issues if neglected.

If you know that you have minor repairs around your home that you haven’t gotten around to fixing, make a list of your home resolutions for the New Year. List all small repairs needed and then give your home an annual “check-up.”

On CNN.com, Money magazine’s Kate Ashford offers an excellent month-by-month guideline for home maintenance. Regular “check ups” can help you make the most of your home investment. To read the article, click here.

The internet is a wonderful tool but it can be a source of problems to mortgage shoppers if they don’t really understand the process and the program(s) being offered. The following is the second example of potential pitfalls of internet mortgage shopping.

Payment Versus Program Focus
Often when I talk to potential borrowers they are more focused on the monthly payment than on the terms of the loan. In some instances, this can create unexpected problems, especially if the borrower(s) doesn’t understand the loan program(s) s/he is reviewing online.

A current refinance client couple have come to me after discovering the refinance they completed last year was at a interest rate of 8.2% during a period when rates were averaging around 5.6%. They were not actually shopping for a refinance but for a line of credit. The company offered unsecured lines of credit, much like a credit card as well as equity lines and home mortgages.

After contacting the company to obtain an unsecured line of credit, the lender agreed to provide my clients a credit line of $20,000 but wanted to “refinance” their house too. My clients told the lender they were not interested in an equity line and they were assured that the line of credit would not be secured by their home but, as part of the deal, the company would refinance their current mortgage. My clients were interested in reducing their mortgage payment but did not understand that just having the payment lowered didn’t necessarily mean they were getting a good deal. Also, their goal was to get a line of credit, not refinance, so they weren’t focused on a mortgage loan. The loan program they were given was at a much higher rate of interest and didn’t include their monthly escrows which they then had to begin paying out of pocket. The effect appeared to be reducing their monthly payment, but in reality, it increased.

Another issue was the new mortgage cost them 5 points in origination in addition to the other closing fees which totaled over $11,000 for a loan amount below $180,000. The new mortgage included a 3-year pre-payment penalty of 2 points. The unsecured line of credit was at a 22% rate of interest.

In my opinion, this situation would fall under the definition of “predatory” lending practices. However, my clients readily admit, since they were in a hurry to close, get the line of credit and they were focused only on what the monthly payment looked like, they failed to fully read the terms of the loan and the line of credit or the settlement statement of closing costs.

When focusing on other issues instead of the terms of your mortgage, it is easy to overlook important details. Don’t do your mortgage in a rush. Make sure you understand exactly what the terms of the loan will be and what that will mean to you over the life of the loan. Have your loan office explain every aspect of the loan program and ask questions about anything you don’t understand.

A mortgage is a long-term financial committment. Make sure it’s one you can live with!

The internet is a wonderful tool but it can be a source of problems to mortgage shoppers if they don’t really understand the process and the program(s) being offered. The following are two examples of potential pitfalls of internet mortgage shopping.

Pay Option ARM Amortization
A client has come to me to refinance his 3/6 Pay Option ARM. He found the program after shopping on the internet for a low rate two years ago. Pay option ARMs offer a payment selection each month: minimum payment, interest-only payment, full principal and interest payment, or 15-year payment. What most borrowers don’t understand is how these payment choices really work and what their impact is on the principal balance over the life of the loan.

If you make the full principal and interest payment or the 15-year payment, you are maximizing the full benefits of the lower interest rate you get with these type ARMs. However, if you make the minimum payment or the interest-only payment, there is potential risk. With the interest-only payment, you are not reducing the principal loan balance so at the end of the fixed-rate period (in this case, 3 years), you still owe the same amount as you did when you first closed on the loan. With the minimum payment, you’re probably not even covering the full interest amount each month, which is then tacked onto the principal balance. In effect, you are then paying interest on interest.

Essentially, it works like this. If you have a $250,000 principal balance and the minimum payment is $1100 but the full interest-only is $1295, the $195 difference is tacked on to your $250,000 each month you make the minimum payment.

For my client, the result is that after making minimum payments for the last two years, his original loan balance has increased by over $10,000.

This can create serious problems if you are in a position where you need to sell your property and appreciation hasn’t off-set this principal balance increase. Not to mention, you are now paying interest on interest charges.

Pay Option ARMs are great loans when the borrower fully understands how they work and maximizes their advantages while avoiding their disadvantages.

Next, Part II…..Payment Versus Program Focus.