Simply The Best Loans

As mortgage rates increase for the 8th straight week and the number of new loan applications reaches a 7-month low, the Bush administration is considering changes to the mortgage-interest tax deduction as well as other areas of the tax code. Part of the proposed tax reform will limit the deduction for first mortgages and could eliminate it for second mortgages or home equity lines of credit.

To read articles outlining or offering opinions on proposed tax reform, click on the following links:

How would you fare? Would lower tax preparation costs and greater simplicity in understanding the tax code off-set the potential for an increase in your tax bill if you live in a high tax state or a state with high home prices?

Winners & Losers Should the tax code continue to facilitate homeowners garnering huge deductions on their $1 million mortgages? Shouldn’t tax breaks be more evenly distributed among taxpaying homeowners? Will tax reform help or hurt economic growth?

Tax reform Is a mortgage-interest tax deduction sacred?

Crazy idea Maybe it’s crazy, but Uncle Sam needs the money!

Mortgage-interest deduction The mortgage interest deduction will cost the Treasury $72.6 billion this year alone, according to congressional estimates.

Whether you are a current homeowner or you are considering homeownership at some future time, I am interested in your thoughts on these topics. Politicians and economists can argue the pros and cons all day long but they’re a very small portion of the population. Average homeowners/taxpayers are rarely given the opportunity to voice their position. There are strong arguments for and against tax reform but, as always, changes of any kind could have unforeseen impact on many taxpayers, whether they’re homeowners or not. Send me an email telling me your thoughts on these issues. To email me, click here.

In a meeting earlier today, an associate agreed that anyone with an adjustable rate mortgage should consider refinancing into a fixed rate. As the discussion progressed, I realized my associate had an interest-only ARM himself. Since the ARM had a “fixed” rate period, he wasn’t considering his own mortgage when he made the comment about refinancing.

This mindset could be a problem for many borrowers who, because of their “fixed” period, haven’t considered that they need to refinance yet. The risk—-by the time the “fixed” period expires, the rate adjustment may be so high that the payments are no longer affordable.

While there is no way to predict exactly what rates will do over the next several years, it’s a fair guess that they probably won’t be as low as they have been in recent history.

What does this mean to the average homeowner with an ARM?

Every ARM has caps and margins which are added to the index rate when the rate is going to adjust. If your caps are 5/2/5, that means on the first adjustment period, the rate can increase up to 5%, the annual increase thereafter is a maximum of 2%, and the maximum over the life of the loan is 5%. The new rate will be determined by adding your margin to the current index rate. So if your margin is 2.25 and the current index is 6, then you add 2.25 to 6 to get your new adjusted rate of 8.25. The caps are there to ensure that your rate can’t go above the maximum increase allowed for the loan program.

What does this mean in terms of monthly payments?

Let’s say, if you locked your 3/1 Libor ARM at 5.5 a year ago and the caps are 5/2/5 with a margin of 2.25, that means 2 years from now if the libor, currently at 4.35, is 6.35 the new interest rate will be 8.6 percent. If you’ve made interest-only payments on your $300,000 loan, you still owe $300,000. Therefore, your interest-only monthly payment which was $1375 is now $2150. That’s a $775 per month increase which would significantly impact most individuals’ budgets.

If the same loan were refinanced now into a 30-year fixed rate of 6%, the principal and interest (P & I) payment would only be $1798.65, an increase of only $423.65. Even adding escrow in most cases would keep the payment below the $2150 of the earlier scenario. And, on top of the fact that your principal and interest payments will never increase, you also have the benefit of making monthly payments toward the principal instead paying only the interest. This ensures you build equity even if the real estate market cools considerably and property isn’t appreciating very much.

So the question is can you afford to wait? While you must also consider the cost of refinancing into a new mortgage, it may still be more cost effective than risking a significantly higher payment down the road.

Mortgages Personal Finance Interest Rates

Many homeowners, who purchased homes in the last 2 to 4 years while interest rates have been on the downward swing, ARMed themselves. Now those ARMs are looking a little financially dangerous.

When the trend is downward for interest rates, a good mortgage choice is a short-term ARM (adjustable rate mortgage). For some of these homeowners, especially those with pay option ARMs, monthly payments were even more affordable and they were able to purchase homes in a higher price range than they could have under different market conditions. With soaring appreciation, new homeowners haven’t been concerned with building equity in their properties by reducing the loan principal.

The flip side now is rates are going up and those previously low payments are going up too. With the onslaught of hurricanes to our Gulf coast and the resulting shortages in gasoline and natural gas, other costs are increasing as well. With the approaching winter months comes the question of whether or not those ARM mortgage payments will continue to be affordable. Increased costs for fuel, goods and services means that previously comfortable budgets are going to be strained.

Any homeowner finding their monthly payments increasing and/or concerned about higher rates when their ARM fixed period expires should be considering refinancing their mortgage now, while 30 year fixed rates are still below 6%.

If mortgage rates continue upward and basic expenses continue to increase, homeowners that have stretched themselves are going to find meeting their monthly obligations much more difficult. Refinancing now can ensure that your payments remain within your budget. In addition, if a homeowner has equity in their property, refinancing provides the opportunity to tap the equity to pay off other unsecured debt or to hold funds in a liquid investment account which allows easy access in case of a financial emergency such as a loss of income.

Are you ARMed?

Mortgages Credit Personal Finance

Economic growth is largely dependent on consumer spending. With gas prices over $3 a gallon and $100 billion in losses from the devastation of the hurricane-ridden Gulf coast, consumer spending dropped by 1 percent in August, the biggest decline since the fall of 2001.

Additionally, the personal saving rate of Americans in August was a negative at 0.7 percent. While that was higher than July’ s all-time low of negative 1.1 percent, it’s not an improvement when you consider that it means Americans are spending all their after-tax income and then some. Many are dipping into monies that had previously been ear-marked for college tuition, retirement, and/or emergency funds. Now that money is being used to cover the increased costs of commuting and goods. Unfortunately, it’s only the beginning.

Some of the economic reports read as if Americans are dipping into their savings just because they are spend-happy. The truth is, for those that have savings, increased costs of gas, goods and healthcare coupled with a fairly stagnant wages, tapping those funds provides the only alternative for meeting daily needs.

For those who have no savings to tap, the increased cost of gas and day-to-day necessities, like food and medicine, have had to utilize additional credit. Those with no credit are fairing the worse. While the Fed worries about inflation, the average citizen is worried about how to pay the ever-increasing bills. A recession is appearing on the horizon.

Americans need realistic solutions to these financial burdens. Increased short-term interest rates are compounding the problems of the already strapped consumer, but even if rates were dropped, giving consumers the ability to further deepen their credit card debt won’t help on a long-term basis.

Whether or not we are facing a major recession, it will be necessary for all Americans to make some major adjustments in their everyday activities. The rising cost-of-living over the coming winter months will put an additional burden on the already strained budgets of most. Finding ways to reduce and/or eliminate unnecessary expenses, becoming more economical in day-to-day activities and conserving financial resources is the only way that we can survive successfully.

Consider your habits, your activities, your debt, your income and your savings. Think about what you really need versus what you want. As a society, we are often portrayed as being to addicted to the acquisition of “stuff” and that’s true to a large degree. As time goes on, it will increasingly necessary for each individual to evaluate what’s really needed. Taking any steps necessary to protect your financial security is the best defense in uncertain, volatile economic conditions.

Like physical fitness, financial well-being takes regular effort and practice. Recent reports are indicating that the majority of Americans lack basic understanding of the fundamentals of personal finance. Few Americans truly understand credit scoring and what factors impact their scores. Over half do not regularly review their credit reports. More than one-third of Americans report they don’t budget to manage their monthly expenses.

With soaring gas prices and the resulting increases in the cost of food and services, it’s important to look closely at where your money goes. Do you know what you’re spending on groceries each month? Eating out? How many tanks of gas do you use in a month? Do you race back and forth across town because you didn’t plan ahead? How effective is your current savings plan? Do you have money put aside for an emergency or are you dependent on credit cards if something unexpected arises? Do you have a budget? Do you stay within it or are you regularly spending more than you earn?

Since Americans currently have billions in unsecured credit card debt, it’s probably safe to assume that most are not managing their money as well as they could. Sometimes it’s not about know-how but simply about effort. If you’re not sure why you come up short each month or after paying the bills, you don’t have anything left over for savings, it’s a good time to do a little personal evaluation.

Keep a record—-it’s really that simple. Start keeping a record of what you spend during the week or the month. See where your money goes. Once you know how you’re spending your money and are conscious of little spending habits that, over time, have big impact on your bottom line, you can come up with an alternatives.

Knowing where your money goes is the first step to being financially fit. Just like taking those first steps toward physical fitness, walking for 20 minutes after dinner or taking the stairs instead of the elevator, a little effort can have big payoffs down the road. Get financially fit!

Credit Personal Finance

Hurricane Rita has come right on the heels of Katrina and much of the disaster area has been savaged again. Relief of all types is being offered by numerous charities, agencies, businesses and individuals. Fannie Mae, the largest underwriter of home mortgages, has announced their plan for assisting the hurricane victims and their families. The following is an excerpt of Fannie-Mae’s recent press-release from PRNewswire:

With Fannie Mae’s disaster relief provisions, lenders make individual case-by-case evaluations as to the appropriate relief measures needed and can help borrowers in several ways, including suspending mortgage payments for up to three months, reducing the payments for up to 18 months, or in more severe cases, creating longer loan payback plans. Such assistance is designed to meet the individual needs of borrowers.

“The gulf coast has been hit very hard by these two storms and homeowners in these areas will need assistance and flexibility as they face difficult and uncertain financial circumstances,” said Donald M. Remy, the Fannie Mae senior vice president and New Orleans native, who is coordinating the company’s response to the disaster. Fannie Mae’s business guidelines advise lenders to counsel borrowers on all possible mortgage payment work-out options, and to inform homeowners of disaster relief available from federal agencies. Payment relief is available for single-family mortgages (including condos) serviced by Fannie Mae lenders in areas affected by the hurricanes. Holders of Fannie Mae mortgage securities will be paid as usual during the relief period.

Mortgage lenders doing business with Fannie Mae will, according to Fannie Mae’s guidelines, determine appropriate relief steps by considering:

* any uninsured losses;

* extended unemployment; and

* extraordinary expenses related to the storms that affect a homeowner’s
ability to make their mortgage payments.

In addition, lenders are now required to temporarily discontinue reporting delinquencies to credit bureaus if they are aware that the borrower’s delinquency is attributed to hardships as a result of a natural disaster. If the servicer has any doubt about the effect of the disaster on the condition of a property or the borrower’s employment or income status, it should refrain from taking adverse action against the borrower until it can determine the true status.

For information on mortgage relief, homeowners who have experienced hardships should contact the lender to whom they send their monthly mortgage payment.

Katrina | Fannie Mae | Disaster Relief | Rita

If you’ve bought a new home in the last few years while interest rates were favorably low, it’s time to look at your current mortgage and determine if the financing you have is reasonable or perhaps a little “too creative” for the current market. In the last few years, many buyers were lured into making home purchases with hybrid mortgages that offered creative features such as no income verification, no asset verification, minimal payment options, 100% loans, interest-only payments and so on.

In a market that had been seeing a steady decline in mortgage rates over a period of several years, these mortgage programs seemed like safe bets. With today’s rates on the increase and the economy experiencing numerous ups and downs due to rising gasoline costs and back-to-back hurricanes slamming into the Gulf coast, previous financing choices may need re-evaluation.

If you bought more house than you could reasonably afford and you have been making interest-only payments, you may be facing negative amortization on your principal balance. Not a significant risk when property values are soaring upward, but a potential financial pitfall if values level or decline.

If you have no money put aside “for a rainy day” and find yourself without income due to an accident, health or job loss, your mortgage may no longer be affordable.

If your adjustable rate mortgage is based on an index that is volatile and/or adjusts frequently, such as once a month, you may soon find your steadily increasing payments are no longer comfortable.

What do you do?

Obviously, you don’t want to take any drastic measures, such as selling your home, if you don’t have to, but you should look at your financial situation and evaluate what choices you can make to manage your mortgage payments and maintain your fiscal health.

If your property has appreciated at all since you purchased it and you can manage the payments, you should refinance into a fixed rate mortgage. Doing so now will ensure that you have a competitive rate, probably below 6% with good credit, and you won’t have to worry whether interest rates go up or down in the future.

If you have a low rate ARM that is fixed for several years but have been making interest-only payments, calculate what a full principal and interest payment would be and begin paying that amount toward your mortgage each month. This will ensure that you build equity in your property even if values flatten.

If refinancing or paying toward your principal balance is not possible for you with your current finances, you may want to consider selling your property now while values are up. Then you can take the profit and make a down payment on home more reasonable for your financial picture. While this would not be the preferred choice for most of us, it may be the prudent one if you’re on shaky ground financially anyway. It would also guarantee you won’t risk facing foreclosure if your finances worsen or increasing interest rates drive your payments too high to manage. It is far easier to sell a home now and buy up again in the future than to find yourself in foreclosure which can prevent a purchase of any kind for several years.

Even if you are quite comfortable with your finances and your current mortgage loan, regular evaluation of both can help you continue to maintain and meet your financial goals both now and in the future.

Mortgages Personal Finance Interest Rates

The Dept. of Housing and Urban Development (HUD) brought charges against one of the country’s large, well-known real estate brokerage firms, Coldwell Banker, indicating that some of its offices had “illegally paid higher commissions and provided gifts and other incentives to real estate agents who steered purchasers to an affiliated title agency.” While Coldwell Banker Residential Real Estate, Inc. admitted no wrong-doing they agreed to pay $250,000 in settlement and to “cease the practices the federal government claimed were illegal under a 1974 law that prohibits giving “things of value” in exchange for referrals of settlement business” as reported by Kenneth R. Harney in a recent Washington Post article.

But are referrals to title agencies the only places that large real estate brokerages may be taking advantage of their trusted position with home buyers? Probably not!

According to the Post article, “ownership of settlement and mortgage [companies] is common among the country’s major real estate brokerages. [These companies or] affiliates can be highly profitable, sometimes generating millions of dollars of additional revenue a year for the brokerage, though not necessarily any direct remuneration for individual sales agents.”

While the costs of settlement include items like title insurance, closing agent fees, recording fees and the like, those costs are small in comparison to the expense of getting the mortgage loan for new home. If the real estate agent you’re working with sends you to the affiliated mortgage company, you may be paying more for a mortgage than you should. Why?

Loan originators or officers are similar to sales people. They usually have to build a network to gleen referrals for mortgage loans. When they have a somewhat “captive” audience of referrals from the real estate company that owns them, the loan officer may become more of a paper processor. Such loan officers are not as motivated to evaluate and study a variety of loan programs and/or your particular financial concerns or goals before getting you a loan.

Oddly enough, even though real estate brokerages own mortgage affiliates, the extra profits may not benefit the agent but are left in the hands of the brokerage firm owners and executives. Yet, the agents are “instructed” to send the affiliate their referrals. However, if the agent is the recipient of “perks” such as vacations, free advertisements, reimbursement of MLS fees, etc. for their referrals they are almost guaranteed to direct their clients to the affiliated companies.

What this means to the homebuyer is they may not be getting as good a deal as they could elsewhere and may be paying more in fees than necessary. Federal law provides homebuyers with the right to chose their mortgage company as well as their closing and settlement providers.

Before contracting to buy a home, a prospective buyer should take time to learn about their options and investigate several possibilities. It is better to consult with a mortgage professional to determine how much mortgage and what type loan programs h/she qualifies for before looking for a real estate agent. Prospective buyers should also inform their mortgage professional what their financial concerns and goals are so that the loan officer can offer mortgage options that facilitate those needs.

Mortgages | Personal Finance

Right now the victims of Hurricane Katrina are trying to re-establish the basics of human life………shelter, clothing, food and a job to support these needs. Those displaced or affected in Florida by last year’s onslaught of storms have barely had time to recover, yet another storm is bearing down on them now.

Victims who had credit available have been utilizing it to cover their basic needs. Since the Federal government has announced that it is going to allow victims to tap into retirement/pension/IRA funds without the usual tax penalty, some victims are now tapping those funds to re-establish themselves and their families.

Unfortunately, when you take from one place, you usually have to give in another. The financial fabric of most of the victims is so loosely woven that a single tug on a loose thread could easily unravel the whole cloth. It amounts to trading a problem today for a different problem down the road. The problem down the road? How to pay for their kids education, their retirement, and their future healthcare needs.

So where are we now? Inflated gas prices is merely a tip on an iceberg of gargantuan proportions. The trickle down effect of this disaster on our economy will be felt on multiple levels.

There are many possible answers depending on individual circumstances but one thing is certain, everyone needs a plan. Not just the hurricane victims but you, me and every other citizen in this country. Why? Because we’ve barely begun to feel the impact of this disaster on our society and it will get worse before it gets better.

Despite our habit of dealing with today’s challenges without thinking of tomorrow’s, we all need a plan for dealing with both today and tomorrow. I don’t have any ready answers, I only see the need. My goal is to find realistic, doable answers for all of us and to share that information.

Even though we aren’t all direct victims of these disasters, we all have to work together to overcome them. With some thought and strategic planning now, we can have more confidence in a vital economy and financially secure society tomorrow.

Credit
Hurricane Katrina

Much of the information on this site has been dedicated to helping consumers become more savvy in their mortgage investments. There are many types of investments that individuals can make in order to create wealth and provide for their current and future financial needs. Learning how to avoid investment pitfalls is important for anyone considering any type of investment.

Several recent news items have brought my attention to retirement investments. These are the monies that individuals save and/or earn over their career. In most instances, individuals are dependent on the safe investment of these funds to ensure a financially secure retirement. Knowing what to look for when choosing investment “guidance” can mean the difference between financial security or financial disaster.

The choice of investment vehicles in today’s market is extensive and, often, confusing. There are variable annuities, real estate investment trusts (REITs), mutual funds, wrap accounts and many more. With more baby boomers nearing retirement age, they are looking for assistance in making these investments. A number of those presenting themselves as investment advisers today are often little more than licensed stockbrokers.

The number of licenses issued last year by NASD, the private sector regulator of the securities industry was 660,000, a 58% increase over the number in 1990. With the increase in licenses came the increase in scams as indicated by the 53% increase in disciplinary actions filed last year over those filed in 1992, the earliest figures available.

Does this mean you shouldn’t seek investment advice from a “financial adviser”? No, it doesn’t. What it does mean is that anyone seeking a solid, experienced financial adviser should have more than just a recommendation from a friend before deciding to trust their hard-earn money to them for investment.

According to Dean Starkman, in an article for the Washington Post,

There are 10 questions that “regulators and other experts say consumers should ask before hiring a financial adviser”:

1. How are you paid?
2. Do you get paid for selling some products more than you get for others? Are you restricted in what you can recommend?
3. Have you ever been disciplined by a regulator or sued by a client?
4. Are you a broker or a registered investment adviser? What licenses do you hold?
5. What is your employment history? How many firms have you worked for?
6. For registered investment advisers: Will you send me both parts of your Form ADV?
7. For brokers: What is your CRD number? (Handy for background checks.)
8. For brokers: Which broker-dealer do you work for? (The broker-dealer’s record should also be checked.)
9. May I have the names and phone numbers of long-term clients?
10. Waht is the actual annual amount–in dollars–that I’ll be paying for financial services, including commissions, loads and expense fees charged by mutual funds?

Keep in mind that some advisers make money by re-investing your money. Every time they trade your stocks, mutual funds, etc. they get a commission. Earning a commission is fine, in and of itself, but moving your money endlessly in order to make more commissions is not what you want a financial adviser to do. You want a financial adviser to help you understand and learn about what safe, reliable investments you can make that will provide you with the financial security you want.

Don’t depend on a financial adviser, who is making commissions by investing your money, to keep your best financial interests at heart. Find a reputable and experience adviser and pay him/her for their time to explain and recommend investments with low-to-moderate risk that will help you meet your financial goals for now and the future.

There are numerous companies that have experienced, reliable advisers that can help any individual learn and understand the pluses and minuses of various investment vehicles. They work hard to research and keep abreast of the market, trends, etc. Pay them for their expertise just as you would pay a CPA, lawyer or other professional. Once you understand the types of investments that you want to make, if you have found an adviser that you are comfortable with and trust, allow them to help you make the investments you feel are within your risk threshold.

Does this mean you need to become an investment expert? No, it just means that you get what you pay for. If you expect great investment advice, but are unwilling to pay for it up front, you are unlikely to get the advice that’s best for you but the advice that will pay the adviser.

If you don’t take the time to understand what’s happening with your money, you will have no one but yourself to blame if you find that money has been invested poorly. There is no such thing as a sure thing in the market and you don’t want to hang your financial future on one or two high risk investments. Most important, no one is going to watch out for your investments as much as you will. Be willing to pay for the assistance and advice you need but don’t plan to hand over the responsibility to someone else.