Over the years, we’ve
Q : What are the most commonly made mistakes in Buying a house?
A : If you’re like most people, purchasing a home is the biggest investment you’ll ever make. If you’re considering buying a home, you’re likely aware of the complexity of the endeavor. Because of the numerous factors to consider when purchasing a home, it’s important to prepare as best you can. Some common home-buying principals and caveats are presented below for your consideration.
By keeping them in mind, you’ll help create a successful and more enjoyable experience. These Top Ten lists are by no means exhaustive. Since your home could cost you 25 to 40 percent of your gross income, it’s important to conduct research, ask questions and study the process carefully.
Buying a home
Looking for a home without being Pre-Approved…
As a potential buyer competing for a property, you’ll have a better chance of getting your offer accepted by being as prepared as possible. Consider this hierarchy of preparedness: – Neither pre-qualified nor pre-approved – Pre-qualified – Pre-approved.
The benefits available at each level can be easily understood when viewed from the seller’s perspective. Imagine you’re a seller in receipt of multiple offers to purchase your property. A complete stranger (buyer) is asking you to take your property off the market for at least the next two to three weeks while they apply for a loan. As the seller, lets consider the type of buyer you’d prefer to deal with.
Q : What are the most commonly made mistakes in Refinancing a house?
A : Refinancing with your existing lender without shopping around… Your existing lender may not have the best rates and programs. There is a general misconception that it is easier to work with your current lender. In most cases, your current lender will require the same documentation as other companies. This is because most loans are sold on the secondary market and have to be approved independently. Even if you have made all your mortgage payments on time, your existing lender will still have to verify assets, liabilities, employment, etc. all over again.
Not doing a break-even analysis… Determine the total cost of the transaction, then calculate how much you will save every month. Divide the total cost by the monthly savings to find the number of months you will have to stay in the property to break even.
Example: if your transaction costs $2000 and you save $50/month, you break even in 2000/50 = 40 months. In this case you’d refinance if you planned to stay in your home for at least 40 months.
Note: This is a simplified break-even analysis. If you are refinancing considering switching from an adjustable to a fixed loan, or from a 30-year loan to a 15-year loan, the analysis becomes much more complex.
Q : What are the most commonly made mistakes in getting a Home Equity Loan?
A : Not knowing if your loan has a pre-payment penalty clause. If you are getting a “NO FEE” home-equity loan, chances are there’s a hefty pre-payment penalty included. You’ll want to avoid such a loan if you are planning to sell or refinance in the next three to five years.
Getting too large a credit line. When you get too large a credit line, you can be turned down for other loans because some lenders calculate your payments based upon the available credit–not the used credit. Even when your equity line has a zero balance, having a large equity line indicates a large potential payment, which can make it difficult to qualify for other loans.
Not understanding the difference between an equity loan and an equity line. An equity loan is closed–i.e., you get all your money up front and make fixed payments until it is paid if full. An equity line is open–i.e., you can get numerous advances for various amounts as you desire. Most equity lines are accessed through a checkbook or a credit card. For both equity loans and lines, you can only be charged interest on the outstanding principal balance.
Use an equity loan when you need all the money up front–e.g., for home improvements, debt consolidation, etc. Use an equity line when you have a periodic need for money, or need the money for a future event–e.g., childrens’ college tuition in the future.
Not checking the lifecap on your equity line. Many credit lines have lifecaps of 18 percent. Be prepaired to make payments at the highest potential rate.
Q : Should I Refinance?
A : The most common reason for refinancing is to save money. Saving money through refinancing can be achieved in two ways:
1) By obtaining a lower interest rate that causes one’s monthly mortgage payment to be reduced. 2) By reducing the term of the loan, thus saving money over the life of the loan. For example, refinancing from a 30-year loan to a 15-year loan might result in higher monthly payments, but the total of the payments made during the life of the loan can be reduced significantly.
People also refinance to convert their adjustable loan to a fixed loan. The main reason behind this type of refinance is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas adjustable loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock in low rates. When rates are high, homeowners prefer adjustable loans to obtain lower payments.
A third reason why homeowners refinance is to consolidate debts and replace high-interest loans with a low-rate mortgage. The loans being consolidated may include second mortgages, credit lines, student loans, credit cards, etc. In many cases, debt consolidation results in tax savings, since consumers loans are not tax deductible, while a mortgage loan is tax deductible.
The answer to the question “Should I refinance?” is a complex one, since every situation is different and no two homeowners are in the exact same situation. Even the conventional wisdom of refinancing only when you can save 2% on your mortgage is not really true. If you are refinancing to save money on your monthly payments, the following calculation is more appropriate than the rule of 2%:
1) Calculate the total cost of the refinance example: $2,000 2) Calculate the monthly savings example: $100/month 3) Divide the result in 1 by the result in 2 in this case 2000/100 = 20 months.
This shows the break-even time. If you plan to live in the house for longer than this period of time, it makes sense to refinance. Sometimes, you do not have a choice you are forced to refinance. This happens when you have a loan with a balloon provision, but with no conversion option. In this case it is best to refinance a few months before the balloon comes due.
Whatever you choose to do, consulting with a seasoned mortgage professional can often save you time and money. Make a few phone calls, check out a few web sites, crunch on a few calculators and spend some time to understand the options available to you.
Q : Should I pay points? Does a 0 point/0 fee loan really exist?
A : The best way to decide whether you should pay points or not is to perform a break-even analysis. This is done as follows: Calculate the cost of the points. Example: 2 points on a $100,000 loan is $2,000. Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50 per month Divide the cost of the points by the monthly savings to come up with the number of months to break even. In the above example, this number is 40 months. If you plan to keep the house for longer than the break-even number of months, then it makes sense to pay points; otherwise it does not. The above calculation does not take into account the tax advantages of points. When you are buying a house the points you pay are tax-deductible, so you realize some savings immediately. On the other hand, when you get a lower payment, your tax deduction reduces! This makes it a little difficult to calculate the break-even time taking taxes into account. In the case of a purchase, taxes definitely reduce the break-even time. However, in the case of a refinance, the points are NOT tax-deductible, but have to be amortized over the life of the loan. This results in few tax benefits or none at all, so there is little or no effect on the time to break even. If none of the above makes sense, use this simple rule of thumb: If you plan to stay in the house for less than 3 years, do not pay points. If you plan to stay in the house for more than 5 years, pay 1 to 2 points. If you plan to stay in the house for between 3 and 5 years, it does not make a significant difference whether you pay points or not!
Q : What is a FICO score?
A : A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.
Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.
Q : Why do interest rates change?
A : To understand why mortgage rates change we must first ask the more general question, “Why do interest rates change?” It is important to realize that there is not one interest rate, but many interest rates! Prime rate: The rate offered to a bank’s best customers. Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate). Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years. Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30-year denominations. Federal Funds Rate: Rates banks charge each other for overnight loans. Federal Discount Rate: Rate New York Fed charges to member banks. Libor: London Interbank Offered Rates. Average London Eurodollar rates. 6 month CD rate: The average rate that you get when you invest in a 6-month CD. 11th District Cost of Funds: Rate determined by averaging a composite of other rates. Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly. Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans. Interest-rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.
Q : What is the difference between Pre-Qualifying and Pre-Approval?
A : A pre-qualification is normally issued by a loan officer, who, after interviewing you, determines the dollar value of a loan you can be approved for. However, loan officers do not make the final approval, so a pre-qualification is not a commitment to lend. After the loan officer determines that you pre-qualify, he/she then issues you a pre-qualification letter. This pre-qualification letter is used when you are making an offer on a property. The pre-qualification letter indicates to the seller that you are qualified to purchase the house you are making an offer on.
Pre-approval is a step above pre-qualification. Pre-approval involves verifying your credit, down payment, employment history, etc. Your loan application is submitted to an underwriter and a decision is made regarding your loan application. If your loan is pre-approved, you are then issued a pre-approval certificate. Getting your loan pre-approved allows you to close very quickly when you do find a house. A pre-approval can help you negotiate a better price with the seller, since being pre-approved is very close to having cash in the bank to pay for the house!
Q : What is a rate lock?
A : You cannot close a mortgage loan without locking in an interest rate. There are four components to a rate lock:
1) Loan program
2) Interest rate
4) Length of the lock
The longer the length of the lock, the higher the points or the interest rate. This is because the longer the lock, the greater the risk for the lender offering that lock.
Let’s say you lock in a 30-year fixed loan at 8% for 2 points for 15 days on March 2. This lock will expire on March 17 (if March 17 is a holiday then the lock is typically extended to the first working day after the 17th). The lender must disburse funds by March 17th, otherwise your rate lock expires, and your original rate-lock commitment is invalid.
The same lock might cost 2.25 points for a 30-day lock or 2.5 points for a 60-day lock. If you need a longer lock and do not want to pay the higher points, you may instead pay a higher rate.
After a lock expires, most lenders will let you re-lock at the higher of the original price and the originally locked price. In most cases you will not get a lower rate if rates drop.
Lenders can lose money if your lock expires. This is because they are taking a risk by letting you lock in advance. If rates move higher, they are forced to give you the original rate at which you locked. Lenders often protect themselves against rate fluctuations by hedging.
Some lenders do offer free float-downs i.e. you may lock the rate initially and if the rates drop while your loan is in process, you will get the better rate. However, there is no free lunch the free float-down is costly for the lender and you pay for this option indirectly, because the lender has to build the price of this option into the rate.
Q : Can my loan be sold? What happens if my lender goes out of business?
A : Your loan can be sold at any time. There is a secondary mortgage market in which lenders frequently buy and sell pools of mortgages. This secondary mortgage market results in lower rates for consumers. A lender buying your loan assumes all terms and conditions of the original loan. As a result, the only thing that changes when a loan is sold is to whom you mail your payment. If your loan has been sold, your existing lender will notify you that your loan has been sold, who your new lender is, and where you should send your payments from now on.
If your lender goes out of business, you are still obligated to make payments! Typically, loans owned by a lender going out of business are sold to another lender. The lender purchasing your loan is obligated to honor the terms and conditions of the original loan. Therefore, if your lender goes out of business, it makes little difference with regards to your loan payments. In some cases, there may be a gap between the date of your lender’s going out of business and the date that a new lender purchases your loan. In such a situation, continue making payments to your old lender until you are asked to make payments to your new lender.
Q : What is PMI? Can I get rid of the PMI on my loan?
A : PMI or Private Mortgage Insurance is normally required when you buy a house with less than 20% down. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. This insurance protection is provided by private mortgage-insurance companies. It enables lenders to accept lower down payments than they would normally accept. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender’s losses in the unfortunate event of foreclosure. Therefore, without mortgage insurance, you might not be able to buy a home without a 20% down payment.
The cost of PMI increases as your down payment decreases.
Example: The cost of PMI on a 10% down payment is less than the cost of PMI on a 5% down payment. Your PMI premium is normally added to your monthly mortgage payment.
The decision on when to cancel the private insurance coverage does not depend solely on the degree of your equity in the home. The final say on terminating a private mortgage-insurance policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, in most cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. Some lenders may require that you pay PMI for one or two years before you may apply to remove it.
To cancel the PMI on your loan, contact your lender. In most cases, an appraisal will be required to determine the value of your property. You will probably also be required to pay for the cost of this appraisal. Another way of cancelling the PMI on your loan is to refinance and to get a new loan without PMI.
Q : What is an APR?
A : The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. Typically the APR is found next to the rate.
The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan. The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the “true cost of a loan.” It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees. If life were easy, all you would have to do is compare APRs from the lenders/brokers you are working with, then pick the easiest one and you would have the right loan. Right? Wrong!
Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR is not necessarily a better rate. The best way to compare loans in the author’s opinion is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. Then delete all fees that are independent of the loan such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.
The reason why APRs are confusing is because the rules to compute APR are not clearly defined.
What fees are included in the APR? The following fees ARE generally included in the APR: – Points – both discount points and origination points – Pre-paid interest. – The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30! – Loan-processing fee – Underwriting fee – Document-preparation fee – Private mortgage-insurance – Appraisal fee – Credit-report fee.
Q : When Should I Lock?
A : Interest rates are impacted everyday by forces in national and global economies. The economic indicators that are key to the mortgage markets are those that will impact the cost of money – most notably inflation. If any economic data indicates that the prices for services or goods, at a retail or wholesale level, could potentially increase faster than expected, prices for mortgage and bond securities will fall, driving interest rates up.
This would be most commonly referred to as the economy, “heating up”. Economic news of a slowing economy, such as softening prices or rising unemployment will usually result in higher prices for mortgage or bond securities and subsequently lower interest rates. The driving force behind it all is the Federal Reserve, which sets the monetary policy in the United States in an effort to maintain a healthy and robust, yet stable and non-inflationary economy. By raising and lowering the cost of money (the federal discount and federal funds rates), this institution is able to impact the full spectrum of the financial markets. Because of the unpredictability of these economic factors and the subsequent volatility of interest rates, it is important to know what a lock is and how your lender’s lock policy works. A lock is a lender’s guarantee that the rate you have selected is protected against rate fluctuations in the marketplace. Different lenders have different rate lock policies and some are trickier than others. So it is important to know how your lender’s lock policy works. There are three basic factors that you should consider in deciding when to lock in your interest rate:
1) How long is your escrow period?
Locks are available for varying lengths of time, usually 15, 30, 45, 60, and 90 days. As the lock period increases, so will the cost of the loan, either an increase in the rate or the fees, or both. Taking a longer lock may cost a little more, but will protect you from potentially large increases in rates during that time period.
2) What are the current market trends? By taking a look at bond market activity and current economic news, you can get a general idea of how interest rates will be impacted. In a rising market it is best to lock a rate as early in the lending transaction as possible. If interest rates are in a downward trend you may want to watch the market and lock when you feel the rate is acceptable. But keep in mind that interest rates generally move up faster than they move down; there is a risk in waiting for the “perfect” rate that may never come around. The bottom line is, when a good interest rate is available, it is best to secure it.
3) Get it in writing. Once you have decided to lock your rate, make sure you obtain a lock-in agreement in writing. Verbal agreements are difficult to prove in case of a dispute. Read your lock-in agreement carefully and understand your lender’s terms to avoid confusion and disappointment. Understanding the lock-in process and your lender’s policies, and especially having your lock-in agreement in writing, will bring peace of mind and will contribute to a positive lending experience.
Q : Truth About Closing Costs
A : Too many fees? Too many numbers? How do you really compare lenders to get the best deal? The confusing array of costs associated with closing a mortgage loan transaction CAN BE SIMPLIFIED. Don’t let other lenders keep you in the dark.
Here are some simple rules to keep your closing cost comparisons easy to figure out:
1. Don’t compare prepaid items or taxes. Prepaid items are NOT A COST of OBTAINING your loan. They reflect a cost of servicing the loan and may differ slightly from lender to lender. In those states where it applies, mortgage taxes are not determined by the lender.
2. Except on purchase transactions, you should include estimates for ALL closing fees. Your lender SHOULD work on your behalf to ensure that all of the fees are as low as possible, even if they are not providing those services. On purchase transactions settlement and title fees are typically controlled by the seller, so you should not compare those fees.
3. Don’t let different names for fees complicate the comparison analysis. equitystore.com provides a detailed estimate and explaination of each fee to keep the closing cost scenario as simple as possible.
4. When you lock-in your rate and points, you should also be locking in your fees! The most important rule of all! If your lender cannot guarantee their rate, points AND CLOSING COSTS, be ready for a surprise at closing.
Q : What are “Freddie Mac” and “Fannie Mae”?
A : Freddie Mac refers to the Federal Home Loan Mortgage Corporation and Fannie Mae refers to the Federal National Mortgage Association. Both are organizations created by Congress to buy loans from lending institutions.