Friday, September 13, 2013
Thursday, September 12, 2013
Wednesday, September 11, 2013
Wednesday, September 4, 2013
Saturday, August 31, 2013
Friday, August 30, 2013
Monday, July 29, 2013
Friday, July 26, 2013
How to Understand Your Mortgage Disclosures
The volume of paperwork that goes into a new mortgage loan, even a refinance of an existing loan, can seem overwhelming. The federal government requires a lender to provide a number of important disclosures to any new loan applicant within 72 hours of signing a loan application, as well as during and after the loan application and funding process. Because the government uses mandatory disclosures as a method of protecting consumers from a process they may not understand, the sheaf of paperwork a loan officer slides across the desk to the borrower can be a bit of a surprise.Understanding the primary purpose and function of these documents will make your mortgage process much less intimidating. With that in mind, here are some of the documents you are likely to see.
Before your loan closes
After submitting your loan application, your loan officer or broker has three days to give you a number of documents, collectively referred to as the upfront disclosures. Here is a quick description of some of these documents.
The Truth-In-Lending Disclosure Statement: Sometimes referred to as the TILA disclosure, this is one of the first documents you’re likely to see. It explains:
- Annual percentage rate (APR)
- Total amount financed
- Total monthly payment
- Total of all payments
- Total finance charges
- Late payment charges
- Prepayment penalties
- Insurance requirements
- Assumability restrictions
The Good Faith Estimate: This breakdown of total settlement costs is a critically important document. The government now requires lenders to come much closer to this estimate than was required in the past. This document is now a good indication of what the loan will cost to originate. It includes an estimate of the following fees:
- Loan origination fees
- Credit report fees
- Appraisal fees
- Loan points
- Prorated interest
- Homeowners and mortgage insurance premiums
- Title search fees and title insurance premiums
- Document preparation fees
Initial Escrow Account Disclosure: Finally, you’ll see a document detailing:
- Escrow account requirements
- Cash requirements at closing
After your loan process is complete, your loan officer will give you another set of disclosure documents to review and sign. Compare these new documents with the initial disclosure documents you already received. Notify your lender of any differences between the two sets of documents before you sign them.
Your lender will give you a package of loan disclosure documents for your files. These will include many of the same documents signed earlier at your loan closing. Compare those documents to what you already signed at closing and ask your lender about any discrepancies. Documents in this package will include:
Final Truth-in-Lending Disclosure Statement: This discloses:
- Annual percentage rate (APR)
- Total amount financed
- Total finance charge
- Total of all payments
- The demand feature
- Late payment fee information
- Prepayment penalties
- Final settlement charges and fees
- Final closing expenses
Finally, there are two additional disclosures you’re likely to see for most loans you might choose. They are:
- Private Mortgage Insurance Disclosure: Explains private mortgage insurance benefits.
- Appraisal Notice: Informs you about your right to have a copy of the appraisal report.
The disclosures described here are part of most loan products you might purchase from a lender, but you may see other disclosures due to local or state requirements or based on the type of loan product you need.
Lenders hope to earn your commitment to the lending process as quickly as possible. One way they do that is to get the upfront disclosures delivered, signed and returned quickly. This is in the borrower’s best interest, and it keeps the lending process moving forward and ultimately results in the consumer getting the money needed to purchase a home or refinance an older mortgage.
Wednesday, July 24, 2013
Wednesday, July 10, 2013
How Much Paperwork to Buy a House?
The more things change, the more things stay the same. This popular adage is definitely not true when it comes to the amount of paperwork involved in buying a home!
To understand how things have changed, we need to compare the past to the present. Luckily my father is very organized and has his entire file of documents from when he bought the family house almost 45 years ago in Virginia. More recently, when he made what he calls his “final” property purchase, he couldn’t believe the stack of paperwork involved in the purchase.
Here’s a comparison of the amount of paperwork involved with a home purchase “then” and “now,” along with brief descriptions of the voluminous stack of documents you’ll encounter the next time you buy real estate.
Purchase contract
Then (1 page): In 1969 the purchase contract was a full page long and covered all the material issues related to buying the property, with no other disclosures, reports or documents related to the transaction.
Now (200 pages): The 2012 purchase contract was 10 pages, plus approximately 200 more pages of contract addendums, disclosure reports from the seller and agent(s), third-party disclosure information, plus federal, state and local disclosures, disclaimers, questionnaires, certifications, escrow instructions, inspections, advisories, verifications, counteroffers, receipts for reports and notices.
Mortgage loan
Then (4 pages): Three-page deed of trust/mortgage note and one-page settlement sheet.
Now (100-125 pages): 13-page deed of trust, five-page promissory note, 50-70 pages of lender disclosures, 3-10 pages of federally required HUD-1 statement and good faith estimate, and other paperwork required as documentation for the loan.
Title insurance
Then (5 pages): Chicago Title cover page plus five total pages of the title abstract, survey, schedule of exclusions and general exclusions pages.
Now (15-20 pages): The title abstract, title insurance policy, exclusions, plat/survey and general information.
Property insurance
Then (unsure): Unfortunately his insurance policy document was not in the file, but his annual policy coverage premium — $25.06 — was noted on the settlement sheet. But this payment might have covered more or fewer perils than a policy covers today, so that annual amount probably is not comparable to a modern-day policy.
Now (30-40 pages): A standard homeowners policy covers the dwelling, liability and medical, and has pages and pages of items that are excluded from coverage.
HOA documentation
Then: His property was not in a homeowners association, so no documentation in his file. This item is included as a reference point for current buyers whose properties are in common interest developments (HOAs).
Now (200-300 pages): Covenants, conditions and restrictions (CC&Rs), bylaws, board of directors meeting notes, financial statements, budgets, disclosures, reserve studies and more.
As you can see, the current-day acquisition of a property really entails 300 to 600 pages of documentation that goes along with a purchase. This number of pages can vary widely depending on the state, the type of property and the complexity of the issues related to a particular dwelling.
Unfortunately, most people review little, if any, of the paperwork related to their purchase — they just sign whatever is presented to them. All buyers would be much better off and would significantly reduce the risk of something going wrong by educating themselves and doing a detailed review of every page of every document that pertains to their purchase. Yes, this takes extensive time, energy and effort, but real estate has a lot of risks and issues, and you should work hard to protect yourself on every property you buy.
To understand how things have changed, we need to compare the past to the present. Luckily my father is very organized and has his entire file of documents from when he bought the family house almost 45 years ago in Virginia. More recently, when he made what he calls his “final” property purchase, he couldn’t believe the stack of paperwork involved in the purchase.
Here’s a comparison of the amount of paperwork involved with a home purchase “then” and “now,” along with brief descriptions of the voluminous stack of documents you’ll encounter the next time you buy real estate.
Purchase contract
Then (1 page): In 1969 the purchase contract was a full page long and covered all the material issues related to buying the property, with no other disclosures, reports or documents related to the transaction.
Now (200 pages): The 2012 purchase contract was 10 pages, plus approximately 200 more pages of contract addendums, disclosure reports from the seller and agent(s), third-party disclosure information, plus federal, state and local disclosures, disclaimers, questionnaires, certifications, escrow instructions, inspections, advisories, verifications, counteroffers, receipts for reports and notices.
Mortgage loan
Then (4 pages): Three-page deed of trust/mortgage note and one-page settlement sheet.
Now (100-125 pages): 13-page deed of trust, five-page promissory note, 50-70 pages of lender disclosures, 3-10 pages of federally required HUD-1 statement and good faith estimate, and other paperwork required as documentation for the loan.
Title insurance
Then (5 pages): Chicago Title cover page plus five total pages of the title abstract, survey, schedule of exclusions and general exclusions pages.
Now (15-20 pages): The title abstract, title insurance policy, exclusions, plat/survey and general information.
Property insurance
Then (unsure): Unfortunately his insurance policy document was not in the file, but his annual policy coverage premium — $25.06 — was noted on the settlement sheet. But this payment might have covered more or fewer perils than a policy covers today, so that annual amount probably is not comparable to a modern-day policy.
Now (30-40 pages): A standard homeowners policy covers the dwelling, liability and medical, and has pages and pages of items that are excluded from coverage.
HOA documentation
Then: His property was not in a homeowners association, so no documentation in his file. This item is included as a reference point for current buyers whose properties are in common interest developments (HOAs).
Now (200-300 pages): Covenants, conditions and restrictions (CC&Rs), bylaws, board of directors meeting notes, financial statements, budgets, disclosures, reserve studies and more.
As you can see, the current-day acquisition of a property really entails 300 to 600 pages of documentation that goes along with a purchase. This number of pages can vary widely depending on the state, the type of property and the complexity of the issues related to a particular dwelling.
Unfortunately, most people review little, if any, of the paperwork related to their purchase — they just sign whatever is presented to them. All buyers would be much better off and would significantly reduce the risk of something going wrong by educating themselves and doing a detailed review of every page of every document that pertains to their purchase. Yes, this takes extensive time, energy and effort, but real estate has a lot of risks and issues, and you should work hard to protect yourself on every property you buy.
Tuesday, July 9, 2013
10 Reasons You Can’t Buy a House
Even if you have the down payment for a new house, that might not be enough to move into your dream house. Despite the uptick in the housing market, banks are using much more stringent standards when making a mortgage loan.
It’s not just the expected problems like late payments, charge-offs, collection accounts or judgments against you that can prevent securing a mortgage. More common events might stop you from making your dream home become a reality.
Here are 10 events that can hurt your credit score and how to prevent them:
Your credit has been checked too often. Applying for credit cards or loans can shave precious points off your credit score. And if you’re close to the threshold between a “good” or “fair” credit score, even a few points can be the difference between qualifying for a loan.
To be safe, hold off applying for anything for six months before applying for mortgage.
Applying or obtaining new credit while in escrow. Fannie Mae now requires lenders to run a new credit report just prior to loan funding. So if you open a new credit card or finance furniture for your new digs before closing, expect to provide a good explanation and possibly have the deal fall through.
Not having credit. Pre-bubble days no credit was considered good credit, but in today's market, a lender needs to see that a home buyer has a history of managing credit obligations. If you are new to the credit market and do not have a long enough credit/payment history, you may not be able to get a mortgage.
Not having PMI. Qualifying for a mortgage isn’t the only approval you need. If your down payment isn’t 20% of the purchase price, you’re going to need private mortgage insurance (PMI). PMI is generally required by lenders as a means of protection in the vent you default on the loan. But just because you qualify for a mortgage, doesn’t mean you’ll qualify for PMI; these companies run their own credit check and assess credit worthiness independent of the mortgage lender.
Lack of reserves. Mortgage lenders like to ensure borrower has proper reserves (savings account, IRA, 401(k), stocks, etc.) in case of a physical issue with the house or loss of the borrower's job. And inadequate reserves kill many loans.
Appraisal issues. The price negotiations aren’t necessarily over just because the buyer and seller agree on a price. In an unstable market, an agreed upon price may be more than the appraised value of the home. It that’s the case a buyer has to cough up more cash for the down payment to maintain the proper loan to value ratio.
Your available credit to debt ratio is too high. The preferred credit to debt ratio varies by lender, but tends to hover around approximately 36%. If your credit to debt ratio is higher than this amount, it is wise to pay your cards down to this level or expect to be denied a mortgage.
You have been the victim of identity theft. Applying for a mortgage could tip you off that your information has been used to open fraudulent credit accounts that were probably not paid. If you are a victim of identity theft, notify the police, the credit bureaus and creditors immediately and advise them of what has happened in order to begin the process of cleaning these fraudulent items off of your credit reports.
You may not have been at your job long enough. Potential lenders want to know you have a stable income and the ability to pay your mortgage payment along with your other obligations. So if you just started a new job, you might have to wait three to six months (maybe longer depending on credit history, etc.) before putting in a purchase offer.
You only have one type of credit history. If you only have a department store credit card or one consumer credit card, lenders won’t be convinced you can aptly handle a budget. They want to see diversity (car loan, a store card and a credit card) to assess your full potential as a debtor lender.
Credit Sesame is the consumer’s credit and lending expert, providing smarter financing for your world. We provide a complete picture of your credit and loans in one place, including your free credit score, credit monitoring, customized analysis, and unbiased loan and savings recommendations – all for free. Our proprietary savings recommendation engine, with bank-level analytics, monitors the market, runs thousands of scenarios and analyzes each consumer’s debt, to identify the best loans and savings opportunities.
Friday, July 5, 2013
Understanding Credit Ratings
Credit plays a role in
everything from buying a home,
to signing up for cell phone service or utilities, to getting car insurance. A
credit score is a snapshot taken by the three leading credit bureaus,
TransUnion, Equifax and Experian, that allows lenders to determine whether or
not you will be extended credit, the amount of credit and even the terms
(interest rate, loan amount, repayment schedule).
While I am not a credit counselor, I can give you a little bit of information about credit scores and some basic steps to keep them healthy, which are important for you to know when applying for home financing.
What is a credit score and how is it calculated?
A credit score is a number between 300 and 850 that is used to predict how likely you are to pay your bills. Many of the companies with whom you have a loan or a line of credit report back to the three credit bureaus information such as whether you pay on time, your credit amount, etc. Your credit score is calculated from this personal financial information. The higher your credit score, the better the credit terms you will receive. The lower your score, the higher the interest rates you may have to pay. Generally, scores over 700 are considered excellent while scores below 600 are considered poor.
You are eligible for one free credit report per year from each of the three credit reporting agencies. Take advantage of this opportunity to monitor your credit report and ensure there are no mistakes or surprises with your credit.
How can I improve my credit score?
While I am not a credit counselor, I can give you a little bit of information about credit scores and some basic steps to keep them healthy, which are important for you to know when applying for home financing.
What is a credit score and how is it calculated?
A credit score is a number between 300 and 850 that is used to predict how likely you are to pay your bills. Many of the companies with whom you have a loan or a line of credit report back to the three credit bureaus information such as whether you pay on time, your credit amount, etc. Your credit score is calculated from this personal financial information. The higher your credit score, the better the credit terms you will receive. The lower your score, the higher the interest rates you may have to pay. Generally, scores over 700 are considered excellent while scores below 600 are considered poor.
You are eligible for one free credit report per year from each of the three credit reporting agencies. Take advantage of this opportunity to monitor your credit report and ensure there are no mistakes or surprises with your credit.
How can I improve my credit score?
Although there are no quick fixes when it comes to improving your credit score,
you can take steps to rebuild your score over time:
1. Continue paying your bills on time — your payment history matters.
2. Don't max out your cards or even run the balances up high.
3. Hold off on applying for new credit or cancelling an old card, since length of credit helps.
4. Pay down high balances, but don't just transfer debts among several lenders.
5. Settle any collections or past due accounts that you possibly can.
6. Dispute and resolve any inaccurate items in your credit report. The last two years of your credit history are the most important.
Credit scores affect your life — beyond just mortgage interest rates.
Credit scores are often used in determining prices for auto and homeowners insurance. Employers have also begun using the scores as part of background checks when making hiring decisions. The practice of using credit scores in nontraditional ways is expanding. It's more important than ever to educate yourself about credit. If you have more questions, I can help you find more in-depth information.
Friday, June 21, 2013
Wednesday, June 19, 2013
How Interest Rates Affect the Housing Market
Mortgages come in two primary forms, fixed rate and adjustable rate, with some hybrid combinations and multiple derivatives of each. A basic understanding of interest rates and the economic influences that determine the future course of interest rates can help consumers make financially sound mortgage decisions, such as making the choice between a fixed-rate mortgage or adjustable-rate mortgage (ARM) or deciding whether to refinance out of an adjustable-rate mortgage.
In this article, we'll discuss the influence of interest rates on the mortgage industry, and how both will ultimately affect the amount you pay for your home.
The Mortgage Production Line
The mortgage industry has three primary parts or businesses: the mortgage originator, the aggregator and the investor.
The mortgage originator is the lender. Lenders come in several forms, from credit unions and banks to mortgage brokers. Mortgage originators introduce and market loans to consumers. They sell loans. They compete with each other based on the interest rates, fees and service levels that they offer to consumers. The interest rates and fees they charge consumers determine their profit margins. Most mortgage originators do not portfolio loans (they do not retain the loan asset). Instead, they sell the mortgage into the secondary mortgage market. The interest rates that they charge consumers are determined by their profit margins and the price at which they can sell the mortgage into the secondary mortgage market.
The aggregator buys newly originated mortgages from other institutions. They are part of the secondary mortgage market. Most aggregators are also mortgage originators. Aggregators pool many similar mortgages together to form mortgage-backed securities (MBS) -- a process known as securitization. A mortgage-backed security is a bond backed by an underlying pool of mortgages. Mortgage-backed securities are sold to investors. The price at which mortgage-backed securities can be sold to investors determines the price that aggregators will pay for newly originated mortgages from other lenders and the interest rates that they offer to consumers for their own mortgage originations.
There are many investors in mortgage-backed securities: pension funds, mutual funds, banks, hedge funds, foreign governments, insurance companies, and Freddie Mac and Fannie Mae (government-sponsored enterprises). Since investors try to maximize returns, they frequently run relative value analyses between mortgage-backed securities and other fixed income investments such as corporate bonds. As with all financial securities, investor demand for mortgage-backed securities determines the price they will pay for these securities.
Do Investors Determine Mortgage Rates?
To a large degree, mortgage-backed security investors determine mortgage rates offered to consumers. As explained above, the mortgage production line ends in the form of a mortgage-backed security purchased by an investor. The free market determines the market clearing prices investors will pay for mortgage-backed securities. These prices feed back through the mortgage industry to determine the interest rates offered to consumers.
Fixed Interest Rate Mortgages
The interest rate on a fixed-rate mortgage is fixed for the life of the mortgage. However, on average, 30-year fixed-rate mortgages have a lifespan of only about seven years. This is because homeowners frequently move or will refinance their mortgages.
Mortgage-backed security prices are highly correlated with the prices of U.S. Treasury bonds. This means the price of a mortgage-backed security backed by 30-year mortgages will move with the price of the U.S. Treasury five-year note or the U.S. Treasury 10-year bond based on a financial principal known as duration. In practice, a 30-year mortgage's duration is closer to the five-year note, but the market tends to use the 10-year bond as a benchmark. This also means that the interest rate on 30-year fixed-rate mortgages offered to consumers should move up or down with the yield of the U.S. Treasury 10-year bond. A bond's yield is a function of its coupon rate and price.
Economic expectations determine the price and yield of U.S. Treasury bonds. A bond's worst enemy is inflation. Inflation erodes the value of future bond payments - both coupon payments and the repayment of principle. Therefore, when inflation is high, or expected to rise, bond prices fall, which means their yields rise - there is an inverse relationship between a bond's price and its yield.
The Fed's Role
The Federal Reserve plays a large role in inflation expectations. This is because the bond market's perception of how well the Federal Reserve is controlling inflation through the administration of short-term interest rates determines longer-term interest rates, such as the yield of the U.S. Treasury 10-year bond. In other words, the Federal Reserve sets current short-term interest rates, which the market interprets to determine long-term interest rates such as the yield on the U.S. Treasury 10-year bond.
Remember, the interest rates on 30-year mortgages are highly correlated with the yield of the U.S. Treasury 10-year bond. If you're trying to forecast what 30-year fixed-rate mortgage interest rates will do in the future, watch and understand the yield on the U.S. Treasury 10-year bond (or the five-year note), and follow what the market is saying about Federal Reserve monetary policy.
Adjustable-Rate Mortgages
The interest rate on an adjustable rate mortgage might change monthly, every six months or annually, depending on the terms of the mortgage. The interest rate consists of an index value plus a margin. This is known as the fully indexed interest rate. It is usually rounded to one-eighth of a percentage point. The index value is variable, while the margin is fixed for the life of the mortgage. For example, if the current index value is 6.83% and the margin is 3%, rounding to the nearest eighth of a percentage point would make the fully indexed interest rate 9.83%. If the index dropped to 6.1%, the fully indexed interest rate would be 9.1%.
The interest rate on an adjustable-rate mortgage is tied to an index. There are several different mortgage indexes used for different adjustable-rate mortgages, each of which is constructed using the interest rates on either a type of actively traded financial security, a type of bank loan or a type of bank deposit. All of the different mortgage indexes are broadly correlated with each other. In other words, they move in the same direction, up or down, as economic conditions change. Most mortgage indexes are considered short-term indexes. "Short-term" or "term" refers to the term of the securities, loans or deposits used to construct the index. Typically, any security, loan or deposit that has a term of one year or less is considered short term.
Most short-term interest rates, including those used to construct mortgage indexes, are closely correlated with an interest rate known as the Federal Funds Rate.
Forecasting Changes
If you're trying to forecast interest rate changes on adjustable rate mortgages, look at the shape of the yield curve. The yield curve represents the yields on U.S. Treasury bonds with maturities from three months to 30 years. When the shape of the curve is flat or downward sloping, it means that the market expects the Federal Reserve to keep short-term interest rates steady or move them lower. When the shape of the curve is upward sloping, the market expects the Federal Reserve to move short-term interest rates higher. The steepness of the curve in either direction is an indication of by how much the market expects the Federal Reserve to raise or lower short-term interest rates. The price of Fed Funds futures is also an indication of market expectations for future short-term interest rates.
Concluding Tips
An understanding of what influences current and future fixed- and adjustable-rate mortgage rates can help you make financially sound mortgage decisions. This knowledge can help you make a decision about choosing an adjustable-rate mortgage over a fixed-rate mortgage and can help you decide when it makes sense to refinance out of an adjustable rate mortgage. Below are a few final tips.
Don't believe everything you hear on TV. It's not always "a good time to refinance out of your adjustable-rate mortgage before the interest rate rises further." Interest rates might rise further moving forward. Find out what the yield curve is saying.
In this article, we'll discuss the influence of interest rates on the mortgage industry, and how both will ultimately affect the amount you pay for your home.
The Mortgage Production Line
The mortgage industry has three primary parts or businesses: the mortgage originator, the aggregator and the investor.
The mortgage originator is the lender. Lenders come in several forms, from credit unions and banks to mortgage brokers. Mortgage originators introduce and market loans to consumers. They sell loans. They compete with each other based on the interest rates, fees and service levels that they offer to consumers. The interest rates and fees they charge consumers determine their profit margins. Most mortgage originators do not portfolio loans (they do not retain the loan asset). Instead, they sell the mortgage into the secondary mortgage market. The interest rates that they charge consumers are determined by their profit margins and the price at which they can sell the mortgage into the secondary mortgage market.
The aggregator buys newly originated mortgages from other institutions. They are part of the secondary mortgage market. Most aggregators are also mortgage originators. Aggregators pool many similar mortgages together to form mortgage-backed securities (MBS) -- a process known as securitization. A mortgage-backed security is a bond backed by an underlying pool of mortgages. Mortgage-backed securities are sold to investors. The price at which mortgage-backed securities can be sold to investors determines the price that aggregators will pay for newly originated mortgages from other lenders and the interest rates that they offer to consumers for their own mortgage originations.
There are many investors in mortgage-backed securities: pension funds, mutual funds, banks, hedge funds, foreign governments, insurance companies, and Freddie Mac and Fannie Mae (government-sponsored enterprises). Since investors try to maximize returns, they frequently run relative value analyses between mortgage-backed securities and other fixed income investments such as corporate bonds. As with all financial securities, investor demand for mortgage-backed securities determines the price they will pay for these securities.
Do Investors Determine Mortgage Rates?
To a large degree, mortgage-backed security investors determine mortgage rates offered to consumers. As explained above, the mortgage production line ends in the form of a mortgage-backed security purchased by an investor. The free market determines the market clearing prices investors will pay for mortgage-backed securities. These prices feed back through the mortgage industry to determine the interest rates offered to consumers.
Fixed Interest Rate Mortgages
The interest rate on a fixed-rate mortgage is fixed for the life of the mortgage. However, on average, 30-year fixed-rate mortgages have a lifespan of only about seven years. This is because homeowners frequently move or will refinance their mortgages.
Mortgage-backed security prices are highly correlated with the prices of U.S. Treasury bonds. This means the price of a mortgage-backed security backed by 30-year mortgages will move with the price of the U.S. Treasury five-year note or the U.S. Treasury 10-year bond based on a financial principal known as duration. In practice, a 30-year mortgage's duration is closer to the five-year note, but the market tends to use the 10-year bond as a benchmark. This also means that the interest rate on 30-year fixed-rate mortgages offered to consumers should move up or down with the yield of the U.S. Treasury 10-year bond. A bond's yield is a function of its coupon rate and price.
Economic expectations determine the price and yield of U.S. Treasury bonds. A bond's worst enemy is inflation. Inflation erodes the value of future bond payments - both coupon payments and the repayment of principle. Therefore, when inflation is high, or expected to rise, bond prices fall, which means their yields rise - there is an inverse relationship between a bond's price and its yield.
The Fed's Role
The Federal Reserve plays a large role in inflation expectations. This is because the bond market's perception of how well the Federal Reserve is controlling inflation through the administration of short-term interest rates determines longer-term interest rates, such as the yield of the U.S. Treasury 10-year bond. In other words, the Federal Reserve sets current short-term interest rates, which the market interprets to determine long-term interest rates such as the yield on the U.S. Treasury 10-year bond.
Remember, the interest rates on 30-year mortgages are highly correlated with the yield of the U.S. Treasury 10-year bond. If you're trying to forecast what 30-year fixed-rate mortgage interest rates will do in the future, watch and understand the yield on the U.S. Treasury 10-year bond (or the five-year note), and follow what the market is saying about Federal Reserve monetary policy.
Adjustable-Rate Mortgages
The interest rate on an adjustable rate mortgage might change monthly, every six months or annually, depending on the terms of the mortgage. The interest rate consists of an index value plus a margin. This is known as the fully indexed interest rate. It is usually rounded to one-eighth of a percentage point. The index value is variable, while the margin is fixed for the life of the mortgage. For example, if the current index value is 6.83% and the margin is 3%, rounding to the nearest eighth of a percentage point would make the fully indexed interest rate 9.83%. If the index dropped to 6.1%, the fully indexed interest rate would be 9.1%.
The interest rate on an adjustable-rate mortgage is tied to an index. There are several different mortgage indexes used for different adjustable-rate mortgages, each of which is constructed using the interest rates on either a type of actively traded financial security, a type of bank loan or a type of bank deposit. All of the different mortgage indexes are broadly correlated with each other. In other words, they move in the same direction, up or down, as economic conditions change. Most mortgage indexes are considered short-term indexes. "Short-term" or "term" refers to the term of the securities, loans or deposits used to construct the index. Typically, any security, loan or deposit that has a term of one year or less is considered short term.
Most short-term interest rates, including those used to construct mortgage indexes, are closely correlated with an interest rate known as the Federal Funds Rate.
Forecasting Changes
If you're trying to forecast interest rate changes on adjustable rate mortgages, look at the shape of the yield curve. The yield curve represents the yields on U.S. Treasury bonds with maturities from three months to 30 years. When the shape of the curve is flat or downward sloping, it means that the market expects the Federal Reserve to keep short-term interest rates steady or move them lower. When the shape of the curve is upward sloping, the market expects the Federal Reserve to move short-term interest rates higher. The steepness of the curve in either direction is an indication of by how much the market expects the Federal Reserve to raise or lower short-term interest rates. The price of Fed Funds futures is also an indication of market expectations for future short-term interest rates.
Concluding Tips
An understanding of what influences current and future fixed- and adjustable-rate mortgage rates can help you make financially sound mortgage decisions. This knowledge can help you make a decision about choosing an adjustable-rate mortgage over a fixed-rate mortgage and can help you decide when it makes sense to refinance out of an adjustable rate mortgage. Below are a few final tips.
Don't believe everything you hear on TV. It's not always "a good time to refinance out of your adjustable-rate mortgage before the interest rate rises further." Interest rates might rise further moving forward. Find out what the yield curve is saying.
Thursday, June 13, 2013
7 Ways Why Owning Beats Renting
Tax breaks. You can deduct the interest on your mortgage, property
taxes, and some purchase expenses.
Appreciation. Historically, long-term real estate values have demonstrated steady growth.**
Appreciation. Historically, long-term real estate values have demonstrated steady growth.**
Equity. Rent money is money you never see again. Mortgage
payments can help build equity.
Savings. Home equity is forced savings. And when you sell, you
can generally take up to $250,000 ($500,000 for a married couple) as a
gain without owing any federal income tax.
Predictability. Unlike rent, fixed-mortgage payments don’t rise over
time. (Of course, property taxes and insurance costs can increase.)
Freedom. The home is yours to enjoy as you like. You can upgrade
and decorate it to reflect your personal style and needs.
Community. Your investment extends beyond your home. As a
homeowner, you can become an active participant in your neighborhood, make new
friends, support local schools and businesses and get involved in community
organizations.
To see if buying makes financial sense for you, try the Rent vs. Own Calculator.
Thursday, June 6, 2013
Study: Investors to Buy Fewer Properties over Next Year
As real estate prices climb in the majority of markets throughout the country, investors are currently becoming more reluctant to purchase the same amount of inventory compared to last summer.
Among 3,020 respondents who participated in a survey conducted by ORC International for MemphisInvest.com, 48% said they plan to buy fewer properties in the next 12 months than their overall transaction total over the course of the last year. When the same survey was conducted in August 2012, this question came back with a 30% result.
Meanwhile, only 20% of investors said they would increase their purchases through April 2014 compared to 39% of survey respondents 10 months ago.
“Higher prices are reducing returns on investment and investors are responding by cutting back on their purchasing plans until conditions sort out,” said Chris Clothier, director of sales and marketing and partner in MemphisInvest.com and Premier Property Management Group. “Fewer foreclosures, rising property values and competition from hedge funds are making it tough to find good ideals on distress sales.”
Even though investors are forecasting to buy less assets in the year to come, over half who own rental properties or plan to acquire them in the next 12 months plan to hold the properties for at least five years or more. Furthermore, one-third of the survey respondents said they would like to hold these assets for at least 10 years.
“Cash flow is much more important than appreciation,” Clothier stated, for real estate investors, who have purchased 24% of all existing homes sold in 2012, according to the National Association of Realtors.
Additionally, the study revealed that the way purchases are being made has also changed over the last 10 months. For example, in August, nearly one out of four investors said they will use all cash on their next purchase and the rest of the survey respondents would use some sort of financing. Now, 37% of investors would pay for their investment properties they own with all cash.
Clothier said this strategy “makes sense” as prices increase since they “lower investors’ costs.”
Among 3,020 respondents who participated in a survey conducted by ORC International for MemphisInvest.com, 48% said they plan to buy fewer properties in the next 12 months than their overall transaction total over the course of the last year. When the same survey was conducted in August 2012, this question came back with a 30% result.
Meanwhile, only 20% of investors said they would increase their purchases through April 2014 compared to 39% of survey respondents 10 months ago.
“Higher prices are reducing returns on investment and investors are responding by cutting back on their purchasing plans until conditions sort out,” said Chris Clothier, director of sales and marketing and partner in MemphisInvest.com and Premier Property Management Group. “Fewer foreclosures, rising property values and competition from hedge funds are making it tough to find good ideals on distress sales.”
Even though investors are forecasting to buy less assets in the year to come, over half who own rental properties or plan to acquire them in the next 12 months plan to hold the properties for at least five years or more. Furthermore, one-third of the survey respondents said they would like to hold these assets for at least 10 years.
“Cash flow is much more important than appreciation,” Clothier stated, for real estate investors, who have purchased 24% of all existing homes sold in 2012, according to the National Association of Realtors.
Additionally, the study revealed that the way purchases are being made has also changed over the last 10 months. For example, in August, nearly one out of four investors said they will use all cash on their next purchase and the rest of the survey respondents would use some sort of financing. Now, 37% of investors would pay for their investment properties they own with all cash.
Clothier said this strategy “makes sense” as prices increase since they “lower investors’ costs.”
Tuesday, June 4, 2013
Ask Stacy: How Can I Fight My Property Taxes?
Ask Stacy: How Can I Fight My Property Taxes?: A reader thinks his property taxes are too high and wants to appeal them. I've been successful challenging mine. Here's what I did.
Tuesday, May 28, 2013
Why the "Buy & Hold" Strategy is Best
I have found in my 20+ years of investing that the process of purchasing real estate is the most significant part of the ownership cycle. Selling is straightforward in the right market, and the only time in the property transaction you become accountable for commissions and capital gains tax. It can kill the whole deal if done improperly and at the wrong time.
Your goal in property investing must be to develop as much equity as you can in the property while still having enough passive income to get you there. So long as you own the property, you’ll have the extra advantage of tax sheltering that you cannot obtain from any short term methods. THIS is the basic reason that explains why the Buy and Hold methodology is king.
Most people fall within the 20%-36% income tax bracket, and for all you Californians out there, California has one of the highest state tax rates. What’s even scarier is that most individuals work the first 4 months of each year simply to pay their taxes!
The reality is, you will never get ahead financially until you learn to shelter your revenue from taxes. The rich population in this country understand how to shelter their income from taxes, which is why many of them practice the Buy and Hold technique and own rental properties of their own.
As time goes by and you pay off your loan, you get the advantage of additional cash flow which is very useful in retirement. One option you have is to do what is referred to as a 1031 Exchange into a bigger, more valuable property that produces heavier cash flow. The beauty of a 1031 Exchange is it defers the capital gains tax (which just increased on January 1, 2013) into the future and allows you to transfer more of your equity to your new purchase. This is another benefit to building wealth in real estate only the Buy and Hold strategy offers.
Traditionally, properties have doubled in value every 7 to 10 years going back 50 years in time. Imagine your equity position if you hold a property for 20 or 30 years!
If you sell, you not only lose out on future appreciation, but you must pay commission and capital gains tax. I look back to some of the first properties I owned and wish I’d never sold them. While I sold them for a decent profit at the time, their value today is 2 or 3 times as much. It made no sense to sell and let the subsequent owner make all that appreciation. I managed not to sell one property I bought many years back and finally paid it off. The cash flow on that one property today is over $1200.00 per month after expenses. That’s more than the average social security check, and rents have gone up thanks to inflation. (I never pictured myself liking inflation till I started owning real estate!)
At a recent event, I was seated at a table next to a man who’d been buying rental property since since 1999. He never sold any of the homes he purchased. Many of these properties have doubled in price and he is now thinking about using 1031 Exchanges to move into bigger properties. The cash-flow and tax shelter he received over time have been an important asset to him, and now for estate planning purposes he is consolidating his holdings into bigger properties to one day will to his heirs. His plan was to leave a legacy to his kids and grand-kids. The Buy & Hold strategy permitted him to realize his dreams.
If you are tempted to make use of your properties as an ATM machine, it will not permit you to develop equity and true wealth over time. Real estate is meant to be a “retire rich” program, not a “get rich quick” program. In my opinion, the single reason to take money out of a property is to put a down-payment on another. Even then, you have got to be careful that the rental income on the property you are refinancing has increased enough to cover the new higher payment. You do not need to build a house of cards by weakening the structure of your portfolio.
True wealth in real estate is realized through equity growth and appreciation. Cash flow, although a must, is the glue that holds the deal together to permit you to wait until the value grows. Let your tenants cover your payments and make you rich!
5 Home Renovations That Could Hurt Resale
Unlike the homeowner of 25 years ago, today’s typical buyers plan to live in their homes for just five to seven years. So it’s more important than ever to consider resale when making home improvements.
Even if you’re a buyer, it’s important to think like a seller, too, from the time you sign the purchase contract through any home improvement or renovation projects. The goal: Think about how your improvements might affect the sale of your home down the road.
Below are five home renovation/improvement projects that could actually hurt your home’s resale.
A homeowner/seller may have a green thumb and be really proud of the time spent on the garden, the hedges or landscaping. But the next buyer might see it as too much maintenance, especially if you went overboard with your green thumb. Potential buyers may not be willing to pay for it (as part of the home’s overall price), hire a gardener or do the work themselves. This is especially true with Millennials and Gen X-ers. Of course, your property needs curb appeal, and nice landscaping does sell. But it could be just as easy to do a quick, inexpensive yard once-over before going on the market.
Converting a garage into a family room may make sense if you don’t have a nice car or you simply want a bigger family room. Some people think a driveway is enough. But this is a huge “no-no” in real estate. A garage is expected, especially in the suburbs. If you take it out, you lose a huge chunk of buyers who simply won’t consider a home without a garage.
It’s common today for people to transform a bedroom into a huge master closet or into a home office with a built-in desk and cabinet. If you do, make sure the room can be easily turned back when you put the home on the market. Buyers with kids may need that bedroom. They’ll see the room you converted into a home office or closet as more money they’ll need to spend to turn it back into a bedroom.
A home office is the easiest to undo, as long as you haven’t built in intricate desks, shelves and cabinets. A large closet generally goes within a master bedroom, which includes taking out a door or putting up a wall, all of which is harder to undo.
Similar to landscaping, a pool requires maintenance and is an even bigger liability. This is very particular for certain parts of the country. If you’re in the South, in a warm environment, you can get away with it much more easily. A pool would be a common “must-have” on many buyers’ wish list.
If you’re in an area where it’s only warm a few months a year and pools aren’t common, adding one could be a big mistake. Then again, it’s your home, and if you plan to be there a long time, add the pool. Just know that it may be a turn-off to future buyers. When in doubt, consult your agent.
Often, homeowners put in tile, sinks, vanities, countertops and floor coverings that are hard to replace, and yet are specific to their tastes.
For example, you may be obsessed with the Moroccan tile from your Marrakesh vacation last year and want it in your kitchen. But the next buyer may not be so enthusiastic.
Similarly, installing ceramic or marble tile all over the floors may be a costly mistake that others won’t want to pay for. Some homeowners assume that because they spent $50,000 in such upgrades, their homes will be worth so much more. But what may be a highly personal touch could make your home look like a “fixer-upper” to others. The end result: You’ll turn off a lot of buyers who don’t like your taste and don’t want to do the work to undo it.
Even if you’re a buyer, it’s important to think like a seller, too, from the time you sign the purchase contract through any home improvement or renovation projects. The goal: Think about how your improvements might affect the sale of your home down the road.
Below are five home renovation/improvement projects that could actually hurt your home’s resale.
1. Going overboard on landscaping or gardens
A homeowner/seller may have a green thumb and be really proud of the time spent on the garden, the hedges or landscaping. But the next buyer might see it as too much maintenance, especially if you went overboard with your green thumb. Potential buyers may not be willing to pay for it (as part of the home’s overall price), hire a gardener or do the work themselves. This is especially true with Millennials and Gen X-ers. Of course, your property needs curb appeal, and nice landscaping does sell. But it could be just as easy to do a quick, inexpensive yard once-over before going on the market.
2. Converting a garage into a family room
Converting a garage into a family room may make sense if you don’t have a nice car or you simply want a bigger family room. Some people think a driveway is enough. But this is a huge “no-no” in real estate. A garage is expected, especially in the suburbs. If you take it out, you lose a huge chunk of buyers who simply won’t consider a home without a garage.
3. Taking out a bedroom
It’s common today for people to transform a bedroom into a huge master closet or into a home office with a built-in desk and cabinet. If you do, make sure the room can be easily turned back when you put the home on the market. Buyers with kids may need that bedroom. They’ll see the room you converted into a home office or closet as more money they’ll need to spend to turn it back into a bedroom.
A home office is the easiest to undo, as long as you haven’t built in intricate desks, shelves and cabinets. A large closet generally goes within a master bedroom, which includes taking out a door or putting up a wall, all of which is harder to undo.
4. Adding a swimming pool
Similar to landscaping, a pool requires maintenance and is an even bigger liability. This is very particular for certain parts of the country. If you’re in the South, in a warm environment, you can get away with it much more easily. A pool would be a common “must-have” on many buyers’ wish list.
If you’re in an area where it’s only warm a few months a year and pools aren’t common, adding one could be a big mistake. Then again, it’s your home, and if you plan to be there a long time, add the pool. Just know that it may be a turn-off to future buyers. When in doubt, consult your agent.
5. Adding highly personalized colors, finishes or fixtures
Often, homeowners put in tile, sinks, vanities, countertops and floor coverings that are hard to replace, and yet are specific to their tastes.
For example, you may be obsessed with the Moroccan tile from your Marrakesh vacation last year and want it in your kitchen. But the next buyer may not be so enthusiastic.
Similarly, installing ceramic or marble tile all over the floors may be a costly mistake that others won’t want to pay for. Some homeowners assume that because they spent $50,000 in such upgrades, their homes will be worth so much more. But what may be a highly personal touch could make your home look like a “fixer-upper” to others. The end result: You’ll turn off a lot of buyers who don’t like your taste and don’t want to do the work to undo it.
Thursday, May 23, 2013
Ask an Expert: Will Carrying a Balance Improve My Credit Score?
Ask an Expert: Will Carrying a Balance Improve My Credit Score?: Whether it's better to maintain a balance or pay your credit card off in full each month is one of the most common questions about credit scores.
Wednesday, May 22, 2013
What to Consider Before Buying an Investment Property
The housing market is rebounding and interest rates are still low, meaning an investment property might make a lot of sense for you. Before you move forward with purchasing an investment property, take note of these considerations.
Rental Property
If your property doesn’t generate rental income, you are counting on it increasing in value at a rate higher than inflation. Look at the market that you’re considering and if historically that holds true for homes in the area.
Time Shares
Time shares aren’t generally thought of as an investment, since re-sale can be difficult and — at times — at a lower price.
Real Estate Development
Development deals come with a high price tag and a lot of risk. While the return can also be high, for the average investor, the risk doesn’t outweigh the potential reward.
Foreign Real Estate
Before buying property in another country, make sure you are aware of the differences in their real estate laws and protections. Also take into consideration the country’s economic and political stability.
Associated Costs
If you purchase an investment property, the mortgage will not be your only expense. Consider necessary insurance, differences in tax treatment of investment property vs. primary residence, upkeep and, if you plan to visit your property — travel costs.
Once you’ve thought through the considerations above, an investment property may still be a good financial move for you. Interest rates are low, and while home prices are rising, they are still relatively low in many markets.
Sales Edge Up as More Homes Come Onto the Market
NAR chief economist Lawrence Yun noted that the limited inventory of homes for sale and tight credit has constrained sales.
However, the inventory of existing homes for sale rose 12% from March to 2.2 million homes in April, the highest level since September 2012.
In April, “we started to see improvement in the number of homes for sale,” said Re/Max chief executive Margaret Kelly said. “It may take a few more months, but as prices rise and more homeowners gain positive equity, we should see an increase in the inventory of homes for sale, resulting in a much better selection for potential homebuyers.”
Wednesday’s report shows the median sales price was $192,800 in April, up 11% from a year ago.
However, the number of listed homes for sale is 13.6% below the listings in April 2012.
The NAR report also shows that 32% of sales were all-cash transactions and only 18% of sales involved foreclosures and REO.
Cash transactions were up from 29% in April 2012 and distressed sales were down from 28% a year ago.
Friday, May 17, 2013
Finding an Inspector
Now that you know why you need a home inspection, how do you find a good home inspector?
Hire Your Own:
A seller may offer up an inspection report. While they may have the best intentions, it is always better to hire an individual you’ve vetted who is working for you.
Certification:
Ask your inspector if they hold any certifications or memberships that qualify them as a home inspector. An inspector can be accredited through the American Society of Home Inspectors. In addition, they may be a member of the National Association of Certified Home Inspectors.
Experience:
Ask how long they have been inspecting homes and request they provide references. In addition, ask if home inspection is their primary occupation.
Comprehensiveness:
What does the inspector cover in their inspection report? They should be able to provide you with a list. In addition, ask how long the inspector thinks the inspection should take. A normal inspection should take as long as 2 to 3 hours.
Errors and Omissions Insurance:
Even the best inspectors make mistakes, so ask if your inspector carries errors and omissions coverage.
The Inspection
Once you are ready for the inspection, make sure you are present when it occurs. Ask questions and pay attention to comments the inspector makes as you walk through the home. While a good inspector should have a camera, you may also want to bring your own to keep record and help you remember where the inspector found problems.
Finally, make sure you thoroughly read the inspection report. It may elaborate on problems the inspector pointed out during the inspection, or even include issues the inspector failed to mention during the walk through.
Tuesday, May 14, 2013
Investing in Real Estate
If you are just getting started with
real estate investing, there are some important things you should consider
before taking the big leap.
Buying a property can be a daunting
idea when you realize all of the things that need to be done. Looking,
researching, negotiating, losing out to someone else, getting finance organized,
getting legal advice, getting inspections done (building, pest, strata etc.)
and finally, draining your bank account to finalize the purchase!
Here we will discuss a few things to
think about to help lessen the burden.
Clarify
Your Goals
It’s a good idea to do some reading
and research about property investing, if you haven’t already.
After getting some expert advice, either from advisors or books, you should have a good idea about what strategy you want to follow to achieve your wealth creation goals.
After getting some expert advice, either from advisors or books, you should have a good idea about what strategy you want to follow to achieve your wealth creation goals.
Common strategies in property
investing include:
- Long Term Investing for
Positive Cash flow
- Long Term Investing for Capital
Growth
- Short Term Holding, Renovating
and then “Flipping”
- Short Term Holding, Speculating
on the Property Cycle
The type of property that you want
to buy is also an important decision. Apartments, townhouses and units will
have different returns compared to houses or even commercial property. The area
that you invest in will play a critical role in how your investment performs as
well.
With longer term investing, it can
take years to start seeing gains from your investment.
Property investment is definitely not a get rich quick scheme and once you purchase that first property, you will need to let go for a while and just focus on keeping up with the costs.
Property investment is definitely not a get rich quick scheme and once you purchase that first property, you will need to let go for a while and just focus on keeping up with the costs.
Short term holding of property is a
riskier exercise for the novice and it is recommended you take a long term
position if you are new to
the area.
the area.
Get
Your Finances in Order
You normally need a decent deposit
and pattern of savings before purchasing an investment property. The exception
to this is if you already have substantial equity in another investment (such
as the family home or stocks).
Always aim to reduce personal debt
such as credit cards and personal loans as this reduces your cash flow and is
looked on negatively by
the banks. If you end up buying a property which is negative cash flow, you will need to demonstrate to the lenders that you can sustain these payments.
the banks. If you end up buying a property which is negative cash flow, you will need to demonstrate to the lenders that you can sustain these payments.
Dive
In
Once you’ve decided on your strategy
and gotten your finances in order, start researching areas that will be in high
rental demand. This is one of the most important factors, because if you
purchase your property but then struggle to rent it out, you will be left
paying off the mortgage out of your own pocket.
After doing your proper research and
due diligence, make an offer on a property where the numbers stack up as a good
investment. Remember that investing in property is a decision based on
calculations and statistics; it should not be an emotional decision such as
buying your own home.
You should avoid procrastination too
much because time in the market is normally better than “timing the market”.
Good luck with your investment endeavors!
Friday, May 10, 2013
10 Mortgage Misconceptions
Mortgages are tricky and often hard to understand. Because most people only purchase a home every five to seven years, prospective home buyers understandably don’t spend a lot of time in the interim educating themselves about mortgages and the mortgage process.
With the real estate market picking up and mortgage rates prime for refinancing, Zillow has compiled a list of common mortgage misconceptions based off the results of the just released 2013 Mortgage IQ Survey.
Your interest rate reflects the true cost of your mortgage
Your annual percentage rate (APR) is actually the figure that represents the true cost of your mortgage. It is inclusive of your interest rate, points, mortgage insurance (when applicable) and other fees, including origination and underwriting fees. It does not include the cost of your homeowners insurance policy. The APR is typically higher than your interest rate because it incorporates the rate and the fees. In fact, when shopping for a mortgage, it is best to compare loans based on APR instead of the interest rate because it gives a better sense of the total cost over the life of the loan.
Mortgage rates are only released once per day
Mortgage rates for all types of mortgages can change frequently, sometimes dramatically, throughout the day. Because of the rapid changes in mortgage rates and a lender’s ability to control what is offered, it is important to shop around for the best rates. Getting multiple loan quotes is highly recommended.
All lenders are required by law to charge the same fees for appraisals and credit reports
There are no laws that require lenders to charge the same fees for services such as appraisals or credit reports. In fact, in order to make their loan quotes more competitive, some lenders may waive charges for such services. Conversely, some lenders may charge higher fees for these services, so it’s important to shop around.
I must get my mortgage through the same lender I was pre-approved with
A pre-approval is a conditional agreement that estimates the size of the home loan a lender would fund for you. It typically involves income verification and a credit check. However, you are under no obligation to proceed with the lender that gave you the pre-approval. Make sure you get at least three loan quotes before proceeding with a mortgage.
You will almost always get the best mortgage interest rates at the bank where you have a checking account
While some banks do give their customers discounts, it’s unlikely your bank will offer the best interest rate available simply because you bank there. To get a competitive mortgage rate and terms, get quotes from multiple lenders either in person or online — including your bank — and pick the one that works best for you.
When taking out a mortgage with your spouse, lenders will look at each of your credit reports equally when determining the interest rate you qualify for
When applying jointly for a mortgage, lenders will pull your credit scores from each of the three major credit reporting agencies: Experian, Equifax and TransUnion. They’ll then take the middle score of each set and use the lower of the two to help determine your mortgage interest rate. This means that the least creditworthy borrower will have the greatest effect on your monthly payment. It does not matter who the primary or secondary borrowers are.
You cannot get a home loan with less than a 5 percent down payment
It is a common misconception that you need to put down 10 percent, 15 percent or even 20 percent on a home, especially in light of the recent housing crash. But with as little as 3.5 percent down, you can often obtain a mortgage through the Federal Housing Administration (FHA). FHA loans have become a popular loan option for those who may not have a large down payment or have blemishes in their credit history. FHA loans are available to everyone, not just first-time home buyers. (Find out more about the advantages and disadvantages of an FHA loan here.)
There are also alternative loan programs through other agencies, including the Department of Veterans Affairs (VA) and the United States Department of Agriculture (USDA). These loans also require little-to-no money down.
If you go through a short sale or foreclosure, you must wait 7 years before getting another home loan
In most cases, to buy a home after a short sale, you’ll typically only need to wait 2-4 years depending on your down payment and the loan type you select. The waiting period after a foreclosure is longer: Typically you’ll need to wait 3-7 years before getting another home loan. Even if you can afford to get a mortgage right now, you’ll need to have a good credit score, which can be difficult to rebuild in just a few years. Unique circumstances can lead to different outcomes, so make sure to check with a lender or two.
If you are underwater on your home loan, you are unable to refinance
It is estimated that millions of homeowners who are underwater and current on their mortgage can refinance using one of two special government programs. The first, the Home Affordable Refinance Program (HARP), is available to homeowners who have a loan backed by Fannie Mae or Freddie Mac. The second program, FHA Streamline Refinance, has recently been modified to help homeowners with loans insured by the Federal Housing Administration (FHA). Both programs help homeowners refinance into lower interest rate loans and may help dramatically lower payments without very much cost to the borrower. Zillow Mortgage Marketplace is the only online mortgage marketplace where you can get loan quotes for HARP and FHA Streamline. As an added bonus, it is the largest mortgage marketplace where you can anonymously get loan quotes, meaning you don’t enter any personally identifiable information and therefore cannot get spammed and hounded by lenders who were sold you contact information. See if you may qualify.
You can only refinance your home loan once every 12 months
With conforming loans backed by Fannie Mae or Freddie Mac (the vast majority of loans today), you can refinance as frequently as you’d like so long as you do not take cash out when you refinance and are just refinancing to lower the interest rate and/or term of your mortgage. The rule of thumb is to wait until the difference between your current interest rate and the available interest rate would save you enough money each month to cover the costs of refinancing in 2 years. The amount of time that you plan on being in the home should be considered, as well. In general, refinancing will be more financially beneficial the longer you are in the home. Use the refinance calculator to determine how long it will take to break even on the costs of refinancing.
With the real estate market picking up and mortgage rates prime for refinancing, Zillow has compiled a list of common mortgage misconceptions based off the results of the just released 2013 Mortgage IQ Survey.
Misconception No. 1:
Your interest rate reflects the true cost of your mortgage
Your annual percentage rate (APR) is actually the figure that represents the true cost of your mortgage. It is inclusive of your interest rate, points, mortgage insurance (when applicable) and other fees, including origination and underwriting fees. It does not include the cost of your homeowners insurance policy. The APR is typically higher than your interest rate because it incorporates the rate and the fees. In fact, when shopping for a mortgage, it is best to compare loans based on APR instead of the interest rate because it gives a better sense of the total cost over the life of the loan.
Misconception No. 2:
Mortgage rates are only released once per day
Mortgage rates for all types of mortgages can change frequently, sometimes dramatically, throughout the day. Because of the rapid changes in mortgage rates and a lender’s ability to control what is offered, it is important to shop around for the best rates. Getting multiple loan quotes is highly recommended.
Misconception No. 3:
All lenders are required by law to charge the same fees for appraisals and credit reports
There are no laws that require lenders to charge the same fees for services such as appraisals or credit reports. In fact, in order to make their loan quotes more competitive, some lenders may waive charges for such services. Conversely, some lenders may charge higher fees for these services, so it’s important to shop around.
Misconception No. 4:
I must get my mortgage through the same lender I was pre-approved with
A pre-approval is a conditional agreement that estimates the size of the home loan a lender would fund for you. It typically involves income verification and a credit check. However, you are under no obligation to proceed with the lender that gave you the pre-approval. Make sure you get at least three loan quotes before proceeding with a mortgage.
Misconception No. 5:
You will almost always get the best mortgage interest rates at the bank where you have a checking account
While some banks do give their customers discounts, it’s unlikely your bank will offer the best interest rate available simply because you bank there. To get a competitive mortgage rate and terms, get quotes from multiple lenders either in person or online — including your bank — and pick the one that works best for you.
Misconception No. 6:
When taking out a mortgage with your spouse, lenders will look at each of your credit reports equally when determining the interest rate you qualify for
When applying jointly for a mortgage, lenders will pull your credit scores from each of the three major credit reporting agencies: Experian, Equifax and TransUnion. They’ll then take the middle score of each set and use the lower of the two to help determine your mortgage interest rate. This means that the least creditworthy borrower will have the greatest effect on your monthly payment. It does not matter who the primary or secondary borrowers are.
Misconception No. 7:
You cannot get a home loan with less than a 5 percent down payment
It is a common misconception that you need to put down 10 percent, 15 percent or even 20 percent on a home, especially in light of the recent housing crash. But with as little as 3.5 percent down, you can often obtain a mortgage through the Federal Housing Administration (FHA). FHA loans have become a popular loan option for those who may not have a large down payment or have blemishes in their credit history. FHA loans are available to everyone, not just first-time home buyers. (Find out more about the advantages and disadvantages of an FHA loan here.)
There are also alternative loan programs through other agencies, including the Department of Veterans Affairs (VA) and the United States Department of Agriculture (USDA). These loans also require little-to-no money down.
Misconception No. 8:
If you go through a short sale or foreclosure, you must wait 7 years before getting another home loan
In most cases, to buy a home after a short sale, you’ll typically only need to wait 2-4 years depending on your down payment and the loan type you select. The waiting period after a foreclosure is longer: Typically you’ll need to wait 3-7 years before getting another home loan. Even if you can afford to get a mortgage right now, you’ll need to have a good credit score, which can be difficult to rebuild in just a few years. Unique circumstances can lead to different outcomes, so make sure to check with a lender or two.
Misconception No. 9:
If you are underwater on your home loan, you are unable to refinance
It is estimated that millions of homeowners who are underwater and current on their mortgage can refinance using one of two special government programs. The first, the Home Affordable Refinance Program (HARP), is available to homeowners who have a loan backed by Fannie Mae or Freddie Mac. The second program, FHA Streamline Refinance, has recently been modified to help homeowners with loans insured by the Federal Housing Administration (FHA). Both programs help homeowners refinance into lower interest rate loans and may help dramatically lower payments without very much cost to the borrower. Zillow Mortgage Marketplace is the only online mortgage marketplace where you can get loan quotes for HARP and FHA Streamline. As an added bonus, it is the largest mortgage marketplace where you can anonymously get loan quotes, meaning you don’t enter any personally identifiable information and therefore cannot get spammed and hounded by lenders who were sold you contact information. See if you may qualify.
Misconception No. 10:
You can only refinance your home loan once every 12 months
With conforming loans backed by Fannie Mae or Freddie Mac (the vast majority of loans today), you can refinance as frequently as you’d like so long as you do not take cash out when you refinance and are just refinancing to lower the interest rate and/or term of your mortgage. The rule of thumb is to wait until the difference between your current interest rate and the available interest rate would save you enough money each month to cover the costs of refinancing in 2 years. The amount of time that you plan on being in the home should be considered, as well. In general, refinancing will be more financially beneficial the longer you are in the home. Use the refinance calculator to determine how long it will take to break even on the costs of refinancing.
Subscribe to:
Posts (Atom)