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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.

No matter what type of transaction you may be planning, it is necessary to read the fine print. As frustrating as it is, with the “us versus them” mentality of today’s world, it’s imperative that you read every line of a contract, agreement, lease, lien, etc. Businesses, in all forms, have contracts for just about everything. Even the most simple exchanges.

When conducting business of any kind, the “bigger” the company, the “longer” the contract and the “finer” the print. Even when consumer protection is mandated by laws and regulations, many business use finely-printed caveats or loopholes to “stack the deck in their favor”.

Federal regulations require that the terms and conditions when you are borrowing money for a home be written out as part of the settlement paperwork. Those terms and conditions are there, but they may be buried in small type and legal jargon. I’ve seen settlement paperwork that even the closing attorney found cumbersome and confusing.

Once you have decided to purchase a home or refinance one and complete the loan process, you are scheduled for closing with a settlement agent, usually a real estate attorney or title company. With the real estate boom of the last several years, the number of closings an agent has to complete in one day can be huge. Agents rarely schedule more than an hour for any particular closing.

What you should do? Arrange to get there early. Ask to have the closing paperwork ready and take the time to read every word. When you don’t understand something, make a note and then ask your settlement agent to explain it. If the settlement agent is unable to answer your questions, call your loan officer.

Don’t sign the paperwork without having your questions addressed to your satisfaction.

All new buyers getting their first mortgage want to know when to lock their interest rate. Even second and third homebuyers worry over when to lock. While there is not one definitive rule, there are some general guidelines you can follow, no matter what the market rates are doing.

First, most rate locks are for 30 days. Lenders will lock rates for longer periods but you will pay extra for locking your rate for an extended period of time. For instance, if you have contracted on a new construction that won’t be ready to close for 3 to 6 months, you may not save enough on the rate to make up what it will cost to lock it for the extended number of days.

One-time float down deals are good when the market is fluctuating a great deal, but again, you will pay extra for the opportunity to change the rate after you’ve locked-in.

Rates rarely fluctuate more than a half-point at any given time, more often, it changes only an eighth or a quarter of a point up or down. Your best bet, in my opinion, is to talk to your mortgage professional. Find out how much the rates are changing in any given time period. Make sure you’re looking at rates over the course of at least a week or two.

Once you’re within 30 days of closing, your loan officer should watch the rates closely each day and give you regular updates on if or how much the rates are changing. Rates tend to be highest on Mondays and Fridays and lowest mid-week. If there is not much change from day to day, it may be worth waiting until you’re within 15 days of closing to lock your rate. Lenders give a break on pricing at 15 days and, sometimes, another at 7 days. You can save as much as three-quarters of a point in a fluctuating rate market by waiting until closer to settlement to lock the rate. However, for buyers that have been approved with an interest rate cap in underwriting, it may be safer to lock at an approved rate as early as possible, usually within 30 days of settlement.

As with all things, timing is everything. By working with a mortgage professional that helps you understand and monitor current rate trends and changes within the market, you could save by waiting to lock-in your interest rate. Ultimately, unless you’re in a niche or subprime loan program with specific guidelines, when to lock your rate is your choice. A qualified mortgage professional can guide you in making the best choice for your loan circumstances.

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.

Adjustable Rate Mortgages have been very popular over the last few years. When interest rates are going down, they are very favorable. The most popular of these programs have been the 3/1 and 5/1 ARMs with interest-only payments.

Alan Greenspan has warned homeowners who used hybrid loan programs, which allowed for no downpayment and interest-only payment options, to purchase their homes may be in trouble with interest rates on the rise. A recent Washington Post article by Nell Henderson, overviewed Greenspan’s acknowledegment of the impact Hurricanes Katrina and Rita will have not only on the U.S. economy but on the economy world-wide. In addition, Henderson’s article references Greenspan’s comments to Japanese executives in Tokyo, which agree with predictions that higher energy costs will force consumers and businesses to cut spending.

Once consumers and businesses begin to cut spending, the economy slows. Companies may be forced into freezing wages or laying off employees. If the Fed continues to push interest rates up and inflation increases, consumer budgets will be further strained. Even with conservative estimates, those with an adjustable mortgage could be facing up to a 30% increase in their monthly payments as rates continue to rise.

Salary increases have been fairly flat in recent years. Businesses facing rising costs usually reduce spending, therefore, salaries are not likely to increase. If you’re facing the potential of an adjustment in your interest rate in the next 2-3 years, refinancing into a fixed rate now may save you from having an over-extended budget later.

For homeowners who commute 30 minutes or more to work one-way, gasoline prices have already put a dent in their discretionary income. As the costs other goods and services continues to increase due to higher fuel costs, budgets will tighten even further.

There is no one-size-fits-all solution to these problems but proper planning now can prevent agonizing over your bills later.

Things to consider:

1. If you have an ARM, is it already adjusting or is your fixed period going to expire within the next 2-3 years? If so, talk to a qualified mortgage professional or other financial advisor about the potential benefits of refinancing into a fixed rate now.

2. Do you have a significant amount of unsecured debt? If so, begin paying that debt down. The less unsecured debt you have the better off your long-term financial picture will be.

3. Do you have a pool of emergency funds that can cover all your expenses for several months if you have an unexpected loss of income? Pay yourself first, even if you are trying to reduce your credit card debt, make sure you are putting some money away each month for emergencies and retirement.

4. Are you expecting to fund your child’s college education? Re-consider this plan. You may be better off investigating other ways for your child to get a college education and saving for your retirement instead. There are numerous scholarship, grant and financial aid programs that can allow your child to get his/her education without you bearing the financial burden. Work-study programs also provide students with the ability to gain real work experience while paying for their education.

5. Do you have an equity line of credit? If the rate on your equity line is increasing rapidly, you may want to consider refinancing into a fixed rate 2nd mortgage or refinancing your 1st and 2nd into one loan with a fixed rate. A mortgage professional or other financial advisor can help you determine if the aggregate APR will make such a move cost effective.

6. Do you have a financial plan, goals? If you do, great, review them. If you don’t, begin establishing your goals and the plan necessary for you to meet them. Be realistic, but plan positively. Look at things like your income, debt, net worth, savings plan, retirement plan, investment strategies and seek the help of a qualified professional if you’re uncertain what to do.

7. Evaluate your current budget and spending habits. Where can you make changes that will have a positive impact on your bottom line? Knowing what, where and how you spend you money can mean the difference between financial security and financial disaster.

8. Save for what you want! Before credit was so readily available, people who wished to buy a new living room set, go on a special vacation, or purchase a new car, saved up for it. By budgeting and planning ahead, you can prevent over-extending yourself and creating unnecessary debt.

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

Associated Press reported Freddie Mac’s recent annoucement that 30 year mortgage rates have risen to their highest level since March. Currently at 5.98, which is up .7 percent from last week, according to nationwide averages.

Rising interest rates are the result of the Fed’s strategy to keep inflation under control. As natural disasters have severely impacted our ecconomy in recent weeks, the Fed’s strategy may not provide the expected relief. Additionally, higher rates and increased fuel costs are further eroding the discretionary income of consumers. Many are tempted to limit or put off saving due to more immediate financial pressures.

Now, more than ever, it’s time for individuals to take the long view and save for their future. While Americans commonly plan for shorter-term expenses such as college funds for their children, they routinely fail to plan appropriately for their long-term financial needs.

For further insight, read Matt Branaugh’s, article “Save for Retirement First, then for College” on www.delawareonline.com.

Personal Finance

With the change in interest rates over the last few months, re-evaluation of your adjustable rate mortgage is a good idea. A client who purchased a home last year with a pay option, interest-only ARM recently asked me to do just that for him.

At the time of his purchase, he had not sold his home in Northern Virginia but needed to go ahead and close on the new home in Richmond. The program we chose for him was great at the time because the lender didn’t take issue with the new purchase being made prior to the current home being sold. The lender also didn’t object to the equity line loan that we used to bridge funds for down payment and closing costs. The pay option allowed my client to keep his payments affordably low while he was making mortgage payments on both houses.

Now, a little over a year later, the former home has been sold, the index on the ARM went up and his payments have been continuing to adjust upward too. (Note: Many pay option ARMS are based on indices that adjust monthly.) The increase in payment from his initial one has been over $350 per month. That is an uncomfortable increase for most homeowner’s budgets. Looking at the situation now, circumstances being very different, the pay option ARM just didn’t make sense anymore. While there was the expense of refinancing in the form of closing costs, we roled those costs into the new loan amount so that he wasn’t out-of-pocket any monies at the closing table.

Through the evaluation, even though the loan for the refinance would be higher to cover closing costs, converting to a fixed rate saved him the $350 a month increase and he no longer has to worry about his payments adjusting. With the increase of fuel costs, that $350 savings is a big plus and more than offset the expense of the refinance.

Situations like these are common. The best way to ensure that your mortgage is right for you now is to have your mortgage professional help you evaluate it based on current conditions. If the mortgage you got only two or three years ago no longer works for you as market conditions change, then it’s better to address it now than to wait until the situation worsens further.

Protect your home investment and your fiscal health. Regularly reviewing your mortgage should be part of that process just as you regularly review your other investment choices. A qualified mortgage professional can help you determine what solutions are available and which one is going to ensure that you continue to meet your long-term financial goals.

Mortgages Credit Personal Finance

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?

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