To use this calculator, be sure
to select "What If I Pay More Every Month" option on
the left sidebar. For example, for a $250,000 loan amortized over
30 years @ 5% interest rate, you would save a total of $21,298.29
by just making a $60 extra payment every month. This calculator
is so powerful that it will output the financial analysis for
you in plain English, an example follows:
"When it comes to a home mortgage
loan, you can actually pay off the loan much more quickly and
save a great deal of money by simply paying a little extra each
month. If you take out a 30 year loan for $250,000.00 with a 5.000%
interest rate, for example, your monthly payment (interest and
principal only) will be $1,342.05. By the time the 30 year time
period is complete, you will have paid $483,133.89 for your home.
If you pay just $50.00 more each month, you will pay only $461,835.60
toward your home. This is a savings of $21,298.29. In addition,
you will get the loan paid off 2 Years 4 Months sooner than if
you paid only your regular monthly payment."
There
are 2 main types of mortgages; fixed rate and adjustable rate
mortgages. If you have a solid understanding of how mortgage interest
rates work and what economic/social factors affect them, you will
better be able to structure your mortgage loan; for example decide
between a fixed rate mortgage or an adjustable rate mortgage.
It is also beneficial to know the future direction of interest
rates in the economy that will impact mortgage interest rates.
The Mortgage Industry
The mortgage industry has 3 main parties doing
business; the mortgage originators, the aggregators and the investors.
1) The Mortgage Originators
The mortgage originator is the first company
with which a borrower does business. Examples of mortgage originators
include banks, mortgage brokers and bankers. The difference between
banks & mortgage brokers is that banks use their own money
to close the mortgages, while mortgage brokers act as a source
of connection between the borrowers & the banks. The difference
between banks & mortgage bankers is that mortgage bankers
use a 'warehouse line of credit' to fund loans and then sell these
newly originated loans to investors in the secondary market.
Many banks prefer to aggregate or accumulate
mortgages for a period of time before selling them on the secondary
market as a whole. Other banks prefer to sell each mortgage individually
as soon as they are originated. This is done so as to eliminate
risk; because as soon as a bank locks in a specific interest rate
for a borrower, it is taking on a great risk. While interest rates
on the market may have moved higher, the bank is locked in at
a lower interest rate thus not allowing it to make more money.
In order to avoid this, some banks hedge the interest rate on
their mortgages sold so as to avoid interest rate fluctuations.
Mortgage originators make money via the closing costs that are
charged to originate a loan + the interest rate differentials
between what the borrower locks in and the premium that secondary
market investors will pay.
2) The Aggregators
The Aggregator is the second participant in
the secondary markets. Examples of an aggregator include large
mortgage originators affiliated with the Federal government and
Wall Street. They are Fannie Mae and Freddie Mac. Aggregators
purchase newly originated mortgages from smaller originators (such
as mortgage bankers & the banks) and together with their own
originations securitize their investments into private mortgage-backed
securities.
3) The Investors
Investors are the final buyers of mortgage-backed-securities.
They are insurance companies, pension funds, hedge funds such
as Bear Stearns, foreign governments and some mutual funds. Collaterized
mortgage & debt obligations sold to investors offer a higher
yield potential based on the quality of credit and risks of interest
rates.
Who Determines Mortgage Interest Rates?
To a large extent, the mortgage-backed-securities
(MBS) investors' do. If you read the article on >> Mortgage
Loans: A Look Behind the Scenes <<, you know that a mortgage
loan originated from a bank ends up as a mortgage-backed-security
sold to the end investor. Free market forces determine the price
investors will pay for a mortgage-backed-security and this has
a direct bearing on mortgage interest rates.
To
investors, a mortgage loan is a source of future cash flows or
incoming payments from borrowers. These cash flows are freely
traded on the secondary mortgage market where they are bought,
sold, stripped and securitized. A secondary mortgage market is
where mortgage originators such as banks and lenders trade with
mortgage securitizers (like Fannie Mae and Freddie Mac) and other
investors. In this article, we will explain how a borrower's monthly
payment ends up with many different investors holding mortgage-backed-securities
(MBS), collaterized debt obligations (CDO) or collaterized mortgage
obligations (CMO).
There are 4 main participants in a mortgage
transaction; the mortgage originator, the aggregator,
the securities dealer and the investor.
1) The Mortgage Originator
The mortgage originator is the first company
with which a borrower does business. Examples of mortgage originators
include banks, mortgage brokers and bankers. The difference between
banks & mortgage brokers is that banks use their own money
to close the mortgages, while mortgage brokers act as a source
of connection between the borrowers & the banks. The difference
between banks & mortgage bankers is that mortgage bankers
use a 'warehouse line of credit' to fund loans and then sell these
newly originated loans to investors in the secondary market.
Many banks prefer to aggregate or accumulate
mortgages for a period of time before selling them on the secondary
market as a whole. Other banks prefer to sell each mortgage individually
as soon as they are originated. This is done so as to eliminate
risk; because as soon as a bank locks in a specific interest rate
for a borrower, it is taking on a great risk. While interest rates
on the market may have moved higher, the bank is locked in at
a lower interest rate thus not allowing it to make more money.
In order to avoid this, some banks hedge the interest rate on
their mortgages sold so as to avoid interest rate fluctuations.
Mortgage originators make money via the closing costs that are
charged to originate a loan + the interest rate differentials
between what the borrower locks in and the premium that secondary
market investors will pay.
2) The Aggregator
The Aggregator is the second participant in
the secondary markets. Examples of an aggregator include large
mortgage originators affiliated with the Federal government and
Wall Street. They are Fannie Mae and Freddie Mac. Aggregators
purchase newly originated mortgages from smaller originators (such
as mortgage bankers & the banks) and together with their own
originations securitize their investments into private mortgage-backed
securities.
Just like originators, aggregators must hedge
their mortgages from the time they purchase a mortgage, through
the securitization process until it is sold to a securities dealer.
They make money by adding a markup in the price they pay for mortgages
and the price at which they can sell the mortgages to securities
dealers'
3) Securities Dealers
After a mortgage-backed-security (MBS) has been
created, it is sold to a securities dealer who then sells to investors.
Many Wall Street brokerage firms have special trading desks with
securities dealers who create all sorts of deals with their MBS
including collaterized debt obligations (CDO) or collaterized
mortgage obligations (CMO). Some of these CDOs or CMOs have AAA
credit ratings compared to the underlying MBS loans. Dealers make
a profit by adding a markup on their mortgage backed securities
before selling to investors.
4) Investors
Investors are the final buyers of mortgage-backed-securities.
They are insurance companies, pension funds, hedge funds such
as Bear Stearns, foreign governments and some mutual funds. Collaterized
mortgage & debt obligations sold to investors offer a higher
yield potential based on the quality of credit and risks of interest
rates.
From the time a bank originates a mortgage
loan, it is cut, sliced & traded and can become part of a
Collaterized Mortgage Obligation (CMO) or a Collaterized Debt
Obligation (CDO). The end user of the mortgage can be a hedge
fund that will take advantage of interest rate fluctuations to
leverage their investments, or it might be a a foreign country
bank that likes the AAA credit rating. Because the secondary mortgage
market is huge with many Wall Street firms, government agencies
& banks, the mortgage loan you borrow is cut and traded amongst
tons of different parties.
You
might be surprised to find out that your neighbour next door has
a lower interest rate on his mortgage than you do, even though
you bought your properties at about the same time. This has happened
to thousands of Americans countrywide but we'll tell you why that
is the case. Being so competitive, the mortgage market always
has a tradeoff between loan closing costs & interest rates
charged. Your neighbour who got the lower interest rate may have
paid a lot more in closing costs than you did, and that's why
he has a lower interest rate. What's more, a large portion of
those closing costs may have been added to the loan balance, making
it seem like he got a really good deal (because he did not have
to pay cash for closing costs). So how can you balance the tradeoff
between closing costs & interest rates making sure to pay
the least in closing costs and getting the lowest interest rate
possible? We will show you how to shop for mortgages and compare
their real costs of borrowing.
i) Get Quotes from 3 Different Lenders
Taking out a mortgage might be the biggest financial
decision you ever make. Therefore, shop around and collect mortgage
quotes from atleast 3 different lenders. Compare the interest
rate on the mortgage with a good faith estimate of closing costs
including discount points. Lenders who offer very low cost mortgages
have to make some money, and they will do so by charging higher
interest rates. Most newly originated mortgages are sold to the
secondary markets where higher interest rates are charged. Therefore,
a lender who offers very low cost mortgages will have to sell
his mortgages on the secondary market to make up for the discounts.
A lender who charges higher closing costs may not have to sell
his mortgages on the secondary market because he can still make
money without charging higher interest rates. This is why the
mortgage market is so competitive.
ii) Compare Costs Between Lenders
Mortgage costs vary by the type of mortgage,
total amortization, from lender to lender and state to state.
It can be very hard for the consumer to compare the costs because
of the enormous complexities. One way to deal with this problem
is to ask for a guarantee estimate of total closing costs, also
known as a "good faith estimate." A good faith estimate
can be requested in the shopping process, before you apply for
the mortgage. Good faith estimate is therefore the first inquiry
you will make to a mortgage lender, and it has no obligation (you
are not obliging yourself to buy the mortgage at this stage).
The lender will be more than willing to provide you with a good
faith estimate because it is your initial inquiry and the lender
does not want to refuse your business. Most lenders however will
not be able to guarantee the good faith estimate because certain
closing costs such as title insurance depend on third party insurance
companies. The trick here is to make the lender guarantee on costs
charged directly by him and not depending on third parties. Examples
of closing costs included in the good faith estimate include:
Home
title is what gives you ownership of the property you are about
to purchase. As the purchaser, you want a title that
is clean and free of liens meaning no one else has made a claim
against the home. This is common if the current owner has not
been repaying his mortgage loans and the bank or other creditors
have put a claim against the home. Other liens include unpaid
taxes, easement (provision that allows other people other than
the owner of the home to use the home for specific purposes such
as to reach power lines or a cell phone tower). Title insurance
is also very important for the lender because they want to know
that the mortgage loan they are handing out is going to the actual
owner who can sell the property to you.
The Title Search
A title search is done by a professional
firm that inspects public records & computer databases. It
checks for any liens on the house, deeds, wills, trusts and also
traces the history of the property over many years in the past.
It checks whether all the past mortgages, taxes and liens have
been paid on the house. If not, that suggests a problem and you
should back out from the deal! Does anyone have an easement right
on the house? Are there any pending lawsuits or legal cases involving
the house in the courts?
Despite of all these checks, it could
be possible that the title search missed one important lien and
it comes back to bite you years after you have purchased your
home. In order to avoid this problem, you can purchase
title insurance. Title insurance is available from all title insurance
companies nationwide, their agents & attorneys. The fee you
pay for title insurance is a one time up front investment based
on the purchase price of your home. It might be as much as 1-2%
of the selling price of your home. It also depends on the type
of policy you purchase, and its comprehensiveness.
The policy protects you from losing
your home by making the insurance company liable for any liens
& antitrusts that spring up after you have purchased the home
and bought title insurance. For example if an important
document was missed or overlooked before you purchased your home,
and you lose your home, the insurance company will pay you for
the damages. This happens only if you purchased title insurance;
if you didn't, you will totally lose your home! This is why we
advise to purchase title insurance before signing up for a home.
-
Is there a local school nearby? Can you tell me about it?
- Are there any big industrial projects near
the home? Examples include new shopping malls, highways, housing
or airport developments?
- Who provides local city services and how are
they funded?
- If buying a single-family detached home, what
is the status of new upcoming homes adjacent to your home that
might affect your home?
- If buying a condominium, what are the rules
regarding pets, free parking, visitor parking, rentals and condominium
fees?
- If purchasing an old home, what repairs/improvements
have been made on the home?
- When constructing your own home, how will
the photo model differ from the actual built home? What is the
track record & history of the builder and its results? How
many homes has the builder built in the past several years.
ii) Questions to Ask When You've Found your
Home
- Does the total square footage include basement
& unfinished space?
- Does the total square footage include the
garage?
- Have the interiors/exteriors of the building
been measured?
- What other fees are included? What are the
amounts for private mortgage insurance (PMI), maintenance/home
improvement costs, taxes & home insurance?
- Can you give me a conservative estimate of
the mortgage closing costs?
The
last decade has seen a stellar growth in home inventories being
sold in America and prices going higher. Many young people though
were still in school and could not afford to purchase homes during
this time. The aging baby boomers smiled as they cashed in the
new equities built up in their homes and used this excess cash
to further drive up home prices. But that real estate boom is
now busting as home prices fall and the American economy plunges
into recession. Is this the right time for young people and first
time home buyers to cash in on this opportunity? Unfortunately,
the answer is no!
Fact: Banks
are no longer offering mortgage loans to people with little
or no down payment, unless their credit scores are higher
than 650.
One of the reasons is that the banks have sworn
not to lend mortgages to anyone who has a down payment of less
than 10%. Between 2001 - 2005, many banks & mortgage brokers
were more than willing to give away mortgages to people who had
down payments of less than 5%, or even 0%. This was done so as
to cash in the fast rising housing market. Now that they have
realized that these sub-prime borrowers cannot repay their loans,
banks have cut out lending loans to such people. In order to purchase
a home in the current market, a buyer would need atleast a 10%
down payment as well as a credit score higher than 650. Banks
will also place a closer scrutiny on your employment and will
want to know for how long you have stayed at your old residence
and whether you have been able to afford the rent payments. If
history indicates that you have flipped residences many times
over the past 1 year, this may mean you are a risky borrower and
the banks will not want to lend money to you.
First time home buyers would therefore be better
off accumulating a larger down payment whilst they are renting.
This is better than jumping into a real estate market that could
further weaken as the American economy plunges deeper into recession.
Lenders will look at your debt-to-income ratio to determine whether
you are a risky borrower. If you have credit card debt, high student
loans as well as auto loans, you will get rejected for a mortgage
loan.
What if you do have a down payment of more than
10%? Well then the answer depends on if you are willing to take
the risk of further downsliding home prices. While falling home
prices is like a blessing for first time home buyers, they also
create a ton of risk. The median price of a home fell 3.3% in
2007 in America, according to the National Association of Realtors.
In some markets such as Florida or California, home prices have
gone down as high as 10% - 12%! With the adjustable mortgage interest
rates resetting in the near future, a further wave of home foreclosures
threaten to drive home prices further for the rest of 2008. And
no one is certain when prices will stop sliding.
Are
you a young first time home buyer looking to purchase your first
home? Here are 7 things you must do for homework before you even
think of buying a home.
i) Research Home Prices & Areas
Look at the type of home you want to purchase
in your State or wherever you are going to relocate. Look at the
inventory that is available out there and their going prices,
that is what you should expect to pay. There are a few websites
such as www.zillow.com
and www.homegain.com that
show homes available for sale in America. Also visit www.mls.com
or www.realtor.com
for more listings.
ii) Use Our Mortgage Calculators
Home
Affordability Calculator -> This home affordability calculator
will help you determine how much of a mortgage loan you can afford
to take out in the 3 repayment periods (15 years, 20 years or
30 years). It asks you for the monthly payment you can afford
and its applicable interest rate.
Prequalify
for Mortgage Loan Calculator -> Want to know how much of
a mortgage loan amount you can afford to take out? This calculator
takes into account your current monthly income, the loan amortization
term (15, 20, 30 years), interest rate you get and the down payment
that you put down. It also asks you for your monthly housing and
other expenses.
Mortgage
Refinancing Calculator 2 -> This mortgage refinancing calculator
will tell you whether you should refinance your current mortgage
loan on a lower interest rate. It will compare your currently
monthly mortgage payments with your payments on the new refinanced
interest rate, outputting the net savings you will have (Monthly
Payment Reduction). The mortgage refinancing calculator is so
sophisticated that it will also output the break even point on
your closing costs.
iii) Find Out Your Total Monthly Housing Costs
On top of your mortgage payment, be sure to
allocate costs for home insurance, property taxes, home improvements,
repairs & maintenance, etc.
Annual property taxes are set
as a percentage by the government every year and can be paid as
one lump sum payment, or as part of your monthly payments. If
you make payments to your lender, your lender will hold your tax
obligations in an escrow account, and remit to the government
at year end.
Insurance - Just like property
taxes, property insurance is payable monthly and is accumulated
in an escrow, and remitted to the insurance agency at year end.
Property insurance protects the house from theft, fires, and other
disasters. The other type of insurance is Private Mortgage Insurance
(PMI). Borrowers have to pay PMI if their down payment is less
than 20% of the purchase price of the home. This PMI protects
the lender from your defaults and if you go in to foreclosure.
The average annual premium for Private Mortgage Insurance (PMI)
is $477 in Utah and $1372 in Texas.
To get an idea of the insurance you have to
pay in the state where you choose to live, call a local insurance
agent in that state. Ask them how much insurance you would expect
to pay on an annual basis for the type of home you are wanting
to purchase.
The
spread between the 30 year fixed mortgage & the 5 year Adjustable
Rate mortgage continues to widen in this commodities bull market
where the price of oil, gold, grains & basic materials continues
to go through the roof. In Bankrate.com's rate survey for the
week of Monday February 25th, 2008 the 5/1 hybrid ARM stood at
5.77% while the rate for 30 year fixed mortgages stood at 6.37%.
At the beginning of 2008, both mortgage products stood at roughly
6.14%. This means the 5/1 hybrid ARM is becoming cheaper for investors
to borrow and with which to finance their homes.
At the beginning of 2008, it made no sense to
borrow a 5/1 hybrid ARM when the 30 year fixed was available at
identical interest rate of 6.14%. Since then the 30 year fixed
has gone up 23 basis points while the rate on the 5/1 hybrid ARM
has fallen 37 basis points. What's more interesting to find is
that the 30 year fixed has spiked up even higher since the last
Bankrate.com survey, probably at around 6.50% right now. This
means it has risen another 13 basis points. The gap between the
two mortgage products could now be a significant 3 quarters of
a percentage point.
Does this mean you should purchase the 5/1 hybrid
ARM mortgage instead of the 30 year fixed because it is cheaper?
Well the answer once again is, "it depends." If you
are looking to get in to the housing market for the short term
(maybe 3-5 years), then yes a 5/1 hybrid ARM makes sense. However,
you must get out of the house within the next 5 years because
I expect mortgage rates to go higher in that time period. This
is because we will pay later for the Fed's loose monetary policy
and rate cutting campaigns today.
Consumers
have to choose between the different range of mortgage products
available out there - from Adjustable Rate Mortgages (ARMs), 30
year fixed term, balloon mortgages, jumbo loans and more. In this
article, we will differentiate between choosing a 30 year fixed
mortgage and a 5 year adjustable rate mortgage. Which one of the
two is better? The answer is, it depends on how much of a home
you can afford. There is no right definitive answer as to which
is better. The consumer has to look at his financial need and
his short/long term financial goals.
Some people don't like change. These are the
conservative people who value long term financial security and
a 30 year fixed term mortgage provides just that; a mortgage rate
& payment structure that will not change with market conditions.
Instead of worry about how much they will pay in interest this
month, these people will be able to sleep every night peacefully.
The major disadvantage of 30 year fixed term mortgages to lenders
is the increased amount of long term risk and the time value of
money. The banks will figure they are tying up their money in
a fixed interest rate investment for a 30 whole years; who knows
whether the borrower will even be able to repay that loan back?
And what if mortgage rates move higher in those 30 years; the
bank will lose money due to opportunity cost!
This is why it is more expensive to borrow a
30 year fixed mortgage than a 5 year ARM. Lenders want to be compensated
for the increased risk of lending a 30 year loan, that is why
the interest rate difference between the two is usually 1-2%+.
Between the 30 year fixed and 5 year ARM, which one should consumers
therefore choose? Borrowers should look at the timeline of their
lives for the next 5 - 15 years. How long will they want to occupy
the house? For example if you expect to call the moving trucks
in another 7 years, there is no reason why you should opt for
the 30 year fixed term mortgage and pay a higher interest rate
for it.
Let's take a look at this video on sub prime
mortgages. The video host interviewed mortgage broker Richard
Smith in 2004 who was 'riding high' on jumbo mortgage loans (mortgage
loans over $417,000). Mr. Smith specialized in low payment mortgages
on high price houses, extending the mortgage term to 40 years
or more! People could have a 1/2 million dollar home for as low
as $1200 a month! "It's really all about driving the payment
down as low as possible so that people can afford the payment."
(Continued Below)
When the same broker was called upon recently,
there was nobody home! The mortgage lending landscape has changed!
Tina Mulligan, a mortgage lender says you need two things before
you can qualify for a mortgage loan right now:
i) A good down payment so that you have an investment
in your property
ii) Higher credit scores (at least over 680)
iii) Enough income to substantiate the purchase
of your house
35 mortgage lenders have gone out of business
in 2007 (precisely in the last 6 months). Tina quotes, "When
the market slows down, this will affect the value of properties."
This means in a market slowdown, home prices will decline as sellers
find it hard to find buyers who are willing to pay the higher
prices, thus driving prices even lower. In other words tighter
standards and fewer lenders mean fewer qualified buyers.
Stacy Johnson, CPA quotes, "An unwinding
real estate market that ultimately leads us in to a nationwide
recession. Possible, but not likely! By the way, this is not the
first time that lenders have over lent!" So Mr. Johnson is
partially blaming the sub prime mortgage lenders for this recession
in the housing market because in order to make more profits and
sell more homes, they allowed people to take our $400,000 mortgages
for as low as $1200 a month!
What's in for the mortgage & housing market
in America? Do you have any thoughts/comments? Feel free to post
below!
Most
of us will not make it to the kind of bank accounts that Donald
Trump or Bill Gates have, but many households in America are aiming
for the $1 million mark (exclusing their residences). That's right,
in 2004, the number of households in America that have
$1 million in liquid cash and investments excluding their residences
grew by 21% to 7.5 million. In this article, we are going
to study the mortgage tactics of these rather affluent people
because it's not all about the amount of money they make, it's
about how they treat their money.
Many people believe that the rich are most likely
to have fully paid off homes than the average and middle class
people. That is not true! Infact, here are some interesting facts:
i) More than 1/2 the rich people in
America (55.5%) have a mortgage on their primary residences
ii) Only 44.6% of average & middle
class people have a mortgage on their primary residences
iii) Rich people have other real estate
investments and 15% of them carry 2 or more mortgage loans.
This is compared to only 4.7% of average & middle class people.
Although these people could afford to fully
pay off their homes in cash, they choose not to. This is because
of the priviledge of mortgage interest tax deductions. Simply,
the interest charges you pay on your mortgage loan is tax deductible.
For example if you earned $75,000 this year and paid $12000 in
mortgage interest, your total net income will be reduced by the
$12,000 ($75,000 - $12,000 = $63000). You will therefore be taxed
on an income of $63,000. We have a full article on the topic of
mortgage
interest tax deductions.
What's more interesting is that the rich only
borrow debt that they see has value. The richest 10% of Americans
are half as likely to have credit card debts (only 22% of these
people have $2000 credit card debts or less, as opposed to 44.5%
of average & middle class people). Rich people are also less
likely to have auto loans (25.3% of them do, as opposed to 45.2%
of all average & middle class people).
You
get the official pink slip, your employer tells you they are laying
you off because business is slow. An example is the layoff of
more than 5000 employees by CitiGroup due to dismal financial
results in 4th quarter of 2007. Citigroup wrote down $18.1 billion
of sub prime mortgages in in the fourth quarter and had no choice
to but lay off thousands of workers. What will happen to these
workers and their mortgages/homes? Two classes of people will
emerge from this incident:
i) Those workers who saved up money in an emergency
fund, just when a rainy day such as this arrives.
ii) Those workers who had no saved up money
because they spent it all.
If you have an emergency fund, good for you!
The other workers may turn to their home equity lines of credit
to get some urgent cash. Others will refinance their mortgages
in order to get a cash payment. Unfortunately, the banks do not
like to lend money to those people who NEED it, they like to lend
to those people who WANT it but could live without it. This means
the banks will be hesitant to lend money to people who just lost
their jobs, because they face a risk. These workers may not be
able to repay their loans because they do not have a steady job/income.
Before the day they officially lost their jobs,
these workers would have been able to go to the banks and refinance
their mortgages and get a cash payment through their home equity
loans. This is because the banks cannot foreshadow these workers
losing their jobs. But today unfortunately, these workers will
get denied for their home equity lines of credit. Thus the lesson
of this article is, how do you prepare for such an emergency?
i) Set up a home equity line of credit when
you have a steady income every month, just so you can get a cash
out payment if you do lose your job. Many banks will be willing
to pre-approve you for a home equity loan if you have steady income
every month, have built equity in your home and have a good credit
score.
ii) Save for an emergency fund such that in
case you lose your job, you have money set aside to make the mortgage
payments and finance your current standard of living.
Mortgage
fees will be getting more expensive for certain groups of borrowers
says Freddie Mac. You know how if you get in to an accident, your
auto insurance rates shoot up? Something similar is about to happen
to mortgage rates. A fee of $250 will be tacked on to every $100,000
borrowed. Thus if you borrow $300,000 you will be hit with a mortgage
fee of $750. These fees could actually be higher if your credit
score is lower than 680 and if you are borrowing more than 70%
of the home's principal value (meaning less than 30% down payment).
Any home loan that is insured by Fannie Mae
or Freddie Mac will have these fees. Both companies say the risk
of guaranteeing mortgage loans for people has shot up really high.
Thousands of sub prime borrowers are defaulting on loans that
were guaranteed by the two companies and this has to change. These
fees will also compensate the companies for being in the era of
declining housing prices, more foreclosures & defaults as
well as real estate investors losing money.
This new system of fees is known as "risk
based mortgage pricing." Under risk based mortgage pricing,
the riskier the loan, the higher the fees involved. People who
take out 40 year mortgages, or investors buying investment properties
will also pay the higher fees. These fees come into effect February
2008 and any loans issued on/after this date. Loans that were
taken out prior to February 2008 will also face increased costs
in the form of higher interest rates or as closing costs.
Credit Scores & Risk Based Mortgage Pricing
The timing of these new fees is very bad. It
comes at a time when credit scores of consumers take a dive during
and after the holiday shopping season (Christmas and new years
shopping season). This is a time when consumers run up balances
on their credit cards. Due to maxed out credit limits, their credit
scores drop immensely.
For consumers who are thinking of refinancing
their mortgage loans in the new year, they will be shocked; especially
those who ran up their credit cards during their holiday shopping
season. As stated earlier, the increased balances on their charge
cards will drop their credit scores to below 680, thus forcing
them to pay the extra quarter point fees. Many consumers might
not qualify for any type of mortgage loan, and others will realize
refinancing their mortgages does not make sense due to increased
fees.
Yes it is true that most people want to fully
pay off their homes, so that they do not have to worry about the
mortgage payment each month. Most people also realize that if
you select the 30 year mortgage, you will be paying a heck of
a lot of interest, adding up to $200,000 - $500,000 depending
on the size of your mortgage loan. And who blames them? Heck,
I would love to pay off my home in as little as 5 years and save
all the money I would pay in interest, but that is hard to do!
Thus, in order to accomplish their goals, people
set aside a few hundred or a few thousand dollars each month and
put this money towards the original principal balance of their
mortgages. I will use a real life example to illustrate the points
I am trying to make, which are congruent to that of Dan Green
from the Mortgage Reports.com Also note that I will be using a
real life number of $285,000 rather than a standard "$100,000"
number, which is always hypothetical and not real life.
Coree has a $285,000, 15 year
fixed-term mortgage loan and is paying current market interest
rate of 6.2%. Using our Simple
Mortgage Loan Amortization calculator, here are the numbers:
Monthly
Payment: $2,435.90
Total Payments
over 15 Years: $438,461.18
Total Interest
paid: $153,461.18
> After
15 years, Coree would have paid off the $285,000 mortgage
balance ($438,461.18 - $153,416.18).
Now lets consider a different scenario where
Coree amortizes her $285,000 mortgage loan over a 30 year term
with the same 6.2% interest. Here are the numbers:
Monthly
Payment: $1,745.54
Total Payments
over 15 Years: $628,393.17
Total Interest
paid: $343,393.17
Right off the bat, you will figure Coree is
paying too much interest in the 30 year term, a whopping $189,931.99
($343,393.17 - $153,461.18).
But if we take this number $189,931.99
and calculate the mortgage interest tax deductions that Coree
can make, the cost-benefit analysis will make more sense. Imagine
Coree is in the 28% tax bracket.
If she pays $189,931.99 more in interest over
the 30 year term, she will have a mortgage interest tax rebate
of $53,180.95 more than she would if she had chosen the 15 year
mortgage. Here is how we derive that number.
Kibler
says he likes to see buyers put down at least 10 percent,
because they will have a cushion should home prices dip.
If you pay $300,000, for example, and need to move after
a year, you'll only have to pay off a $270,000 mortgage
balance. That gives you the freedom to sell for slightly
under what you paid for the house and pay a real estate
commission.
I do not want to argue against a famous New
York city financial planner but contrary to his thoughts, the
10% down payment that people put down on their homes is NOT to
be treated as a cushion if home prices dip. That 10% x $30,0000
= $30,000 should be considered a potential capital loss! Here's
why:
i) If you sell your home for less than
what you paid for it, you have a capital loss, irrespective
of how much down payment you put on the house. Whether you financed
with a $0 down or a $50k down, you will have to eventually absorb
the loss. Two worst things could happen, you would lose all the
precious $50k cash that you put down on the house, or you would
have to absorb the loss by making payments on that $50k loan over
several years of time (the normal mortgage amortization schedule).
Why would anyone want to purchase a
home that could go down $30,000 in the next 1-2 years?
People should wait it out! It's better to buy at the bottom of
the real estate market crash, than to purchase in the middle and
take losses. With the Federal Funds rate expected to be lowered
up to 1% over the course of 2008, it makes sense to wait until
mortgages rates are lower, and when the US economy begins to recover
again.
The best way for home buyers to protect
themselves from falling real estate prices is to limit their investments
in it. This means you should not put down any more principal
(down payment) on your home than you absolutely have to. Say you
sell your home in 1 year from now for a $30,000 loss; two outcomes
occur.
i) You would have paid that $30,000
a year ago for the initial down payment, leaving you
with no cash in the bank.
ii) You would NOT have paid that $30,000
leaving you with that amount of money in the bank, which
could have earned you a decent 3% - 4% interest accumulating to
$30,000 x 4% = $1200
I'd rather take a gain of $1200 over
a year than a full blown out loss of $30,000 in that
year. What do you guys think? Post your comments & thoughts
below.
There
are millions of people in America right now who are classified
as sub-prime mortgage borrowers, meaning they either have bad
credit, very little down payments and lots of credit card debt.
What happens if someone is a sub-prime borrower and cannot afford
to make the monthly payments on his/her mortgage anymore? Here
are 10 smart steps to follow if you fall in to such a problem.
i) Inform your Lender - If
you know you are going to miss next month's mortgage payment,
inform your lender immediately. Do not wait for them to call you
and harass you, take the initiative and inform them. Lenders like
on time loan payments, but they also like borrowers who keep them
informed and communicated. Lenders value information, so you should
not hesitate. It is also recommended to inform the lender in writing,
because in case he takes you to court, you have a written proof
of good faith and intentions.
ii) Come Clean on Your Financial Situation
- If your lender asks you questions, come clean. Do not hide your
personal assets, or your financial situation. If you have credit
card debt, do not hide this from the lender. Infact, inform him
that because you are paying a lot of interest towards credit card
debt, you are having trouble paying the mortgage, etc. Be credible
in your dealings and communication. If you lie to the lender,
he will probably force you into foreclosure; so don't!
iii) Calculate How Much You Can Pay
- If you cannot make the full mortgage payment, that's
OK. How much can you afford to pay? 50%? 75%? Communicate this
to the lender. The lender might consider a mortgage refinance,
or rescheduling of your debts, or some other program. But if you
do not communicate this information, the lender doesn't know anything
and cannot do anything for you! Here are a few precautions before
you give a final number to your lender
- Communicate a lower number than you think. This is because you
may be too optimistic at the time, and might not actually be able
to pay the final number you speak.
- You could probably lose your job after or
an unfortunate event could happen, couldn't it? Therefore, give
a lower figure.
- Always give your figure in a range, starting
from lower to higher. For example, start off with $700 per month,
and add to it, $780 per month or arrive at your final figure of
$850 per month. Do not work downwards, from $850 per month to
$700 per month, this will just annoy the lender. Cognitive psychology
states that bad news should be released all at once, while good
news should be revealed in pieces. With this example, you are
doing just that!
iv) Make regular lower payments
- If your lender agrees to accept a lower monthly payment, do
not default on this! Make regular on time payments for many years,
and this will build your credibility with your lender. If you
default on the lower payment, you're in for some hot soup! Do
not think of paying 100%
Homeowners
whose Adjustible Rate Mortgages (ARMs) are set to reset this year
will experience the biggest benefits of the Fed's surprise 75
basis points rate cut on January 22nd, 2008. This is because as
the Fed cuts rates, mortgages will become cheaper to borrow. As
many as 2 million homeowners face resetting ARMs this year and
lower interest rates mean they will get less shock of higher payments,
and may actually be able to still afford keeping their homes and
their mortgages. Lower interest rates also allow ARM borrowers
to qualify for mortgage refinancing.
On Tuesday January 22nd, 2008, the Fed made
a surprise 75 basis points rate cut that decreased the central
bank's key lending rate from 4.25% to 3.5%. This was the most
agressive rate cut in 20 years because the Fed realizes credit
in America is at a very dangerous stage. Bernard Baumohl, MD of
Economic Group Outlook quotes, "Whenever you lower rates,
it can't hurt the consumer. The Fed never promised it could change
things dramatically overnight. There's a certain timeline with
a cut in rates of nine months to 18 months when the economy feels
the benefits."
Is this rate cut really going to help the 2
million homeowners who face resetting rates this year? Dave Loyst,
VP of Retail Lending at Bear Stearns quotes, "Mortgage rates
already have fallen and they still are falling. Every deal is
a struggle, but we're still doing loans. I think this rate cut
absolutely is going to help the real estate market."
He adds, "This definitely will help the
mortgage situation. With rates falling, more people are able to
qualify for refinancing and more people who were left out from
buying homes before will be able to do so now."
How Much Cheaper is the Mortgage?
Consider a 5-1 Adjustible Rate mortgage of $350,000
with a 6.52% interest rate as of Oct 7th, 2007 (assuming a 20%
down payment). The rate for that loan was 5.04% this week starting
January 21st, 2008. That translates in to a whopping $5100 savings
in annual mortgage payments! That would save a typical family:
$5100 / 12
months = $425/month in mortgage savings
This rate cut is also very good for the long
term. Mr. Loyst thinks mortgage has been made 'affordable' for
the average American family with this rate cut. Investors and
home buyers who have been shunning the real estate market for
the last 8 - 9 months will come back in the market looking to
buy. He quotes, "People will come out looking to buy houses...and
it will help slow down the depreciation of real estate (values)
in certain areas."
Understanding
your mortgage payment structure helps you pay off your home faster,
and save more money in interest costs over the life of the loan.
Almost anyone who owns a home has a mortgage to pay off. Latest
mortgage rates are published on every newspaper and on TV. This
may make it seem like mortgages have always been available, since
man was born. But this it not the case! The modern art of mortgage
loan financing was pioneered in 1934 by the US Federal government
that wanted to wear off the effects of the Great Depression of
1934. They did this by minimizing the required down payment on
home purchases. Before 1934, you couldn't get a home unless you
had 50% of the purchase price in your bank. This was reduced to
20% in 1934, and nowadays, you could get away with 10%! The aim
of this article is to teach you how to set up your payment structure
so as to be able to pay off your loan as fast as your income allows
it, as well as save money on interest costs.
There are 2 primary factors that determine your
monthly mortgage loan payment. One is the size of the
loan (the total loan amount you borrow) and the second
is the length of amortization of the loan. This
can range from 15 years, 25 years or even 30 years. It is interesting
to note that there is an inverse relationship between the size
and length of the loan. The greater the length of the loan, the
less the monthly payments will be. This why 30 year mortgages
are becoming very popular in America.
PITI - The 4 Components of a Mortgage Loan
Once you have determined the size of the mortgage
loan as well as the length of the amortization term, there are
4 factors that will determine your monthly mortgage payment. These
factors are Principal, Interest, Taxes and Insurance. Assume you
borrow a $200,000 mortgage loan; we will analyze those 4 factors
using this amount.
i) Principal - A portion of
your monthly payment is dedicated towards the original principal
loan, in this case being $200,000. Mortgage loans are structured
in such a way that in the first few years of the life of the loan,
most of your monthly payment will go towards interest, and little
towards the principal. As you pay down the principal over 2-3
years, more of your payment will then be applied towards the principal,
and less towards interest. This is why we say it is essential
to have a 20% down payment in cash, so as to minimize the interest
costs you will pay.
ii) Interest - Interest is
the reward that the lender gets by risking his money to you and
allow you to purchase the home. The interest rate on the mortgage
has a direct impact on monthly payments; higher interest rate
means a higher monthly payment. For example, the total monthly
payment on a $200,000, 30 year mortgage loan with 5.5% interest
is calculated as follows...
->
It is important to get pre-approved for a mortgage
loan because most real estate agents will not show
you any properties unless you have that letter. Getting
a pre-approved letter will avoid all the hassle, lessen
your closing costs and what's best, the process is
free!
Note: Do not settle for a "Pre-Qualified"
mortgage because that means nothing. You have to be
pre-approved, not pre-qualified!an
-> If you have a down payment
of less than 20% on your home, you have to get Private
Mortgage Insurance (PMI) that protects your lender
from your defaults. This PMI could potentially add
several hundred dollars to your monthly mortgage bill.
To get your way around that, mortgage brokers often
recommend two loans; a primary mortgage for 80% and
a home equity loan for the remaining 20%. The home
equity loan will serve as the 20% down payment clause
and avoid you having to purchase PMI. This idea was
sound when interest rates for home equity loans were
like 5%, which matches to that of mortgage loans.
However, interest rates on home equity loans now hover
between 7% - 9%, which makes them a less popular deal.
You would actually be better off buying PMI than taking
out a home equity loan.
-> The credit bureaus
literally receive millions of pieces of information
every day about consumer's buying habits, defaults
and late payments. This makes them very prone to errors.
Infact, 75% of all credit reports contain atleast
1 error. Therefore, it is advised to check every entry
that appears on your credit report.
Posted In: 
There
are 2 main types of mortgages; fixed rate and adjustable rate
mortgages. If you have a solid understanding of how mortgage interest
rates work and what economic/social factors affect them, you will
better be able to structure your mortgage loan; for example decide
between a fixed rate mortgage or an adjustable rate mortgage.
It is also beneficial to know the future direction of interest
rates in the economy that will impact mortgage interest rates.
To
investors, a mortgage loan is a source of future cash flows or
incoming payments from borrowers. These cash flows are freely
traded on the secondary mortgage market where they are bought,
sold, stripped and securitized. A secondary mortgage market is
where mortgage originators such as banks and lenders trade with
mortgage securitizers (like Fannie Mae and Freddie Mac) and other
investors. In this article, we will explain how a borrower's monthly
payment ends up with many different investors holding mortgage-backed-securities
(MBS), collaterized debt obligations (CDO) or collaterized mortgage
obligations (CMO). 
You
might be surprised to find out that your neighbour next door has
a lower interest rate on his mortgage than you do, even though
you bought your properties at about the same time. This has happened
to thousands of Americans countrywide but we'll tell you why that
is the case. Being so competitive, the mortgage market always
has a tradeoff between loan closing costs & interest rates
charged. Your neighbour who got the lower interest rate may have
paid a lot more in closing costs than you did, and that's why
he has a lower interest rate. What's more, a large portion of
those closing costs may have been added to the loan balance, making
it seem like he got a really good deal (because he did not have
to pay cash for closing costs). So how can you balance the tradeoff
between closing costs & interest rates making sure to pay
the least in closing costs and getting the lowest interest rate
possible? We will show you how to shop for mortgages and compare
their real costs of borrowing.
Home
title is what gives you ownership of the property you are about
to purchase. As the purchaser, you want a title that
is clean and free of liens meaning no one else has made a claim
against the home. This is common if the current owner has not
been repaying his mortgage loans and the bank or other creditors
have put a claim against the home. Other liens include unpaid
taxes, easement (provision that allows other people other than
the owner of the home to use the home for specific purposes such
as to reach power lines or a cell phone tower). Title insurance
is also very important for the lender because they want to know
that the mortgage loan they are handing out is going to the actual
owner who can sell the property to you. 
-
Is there a local school nearby? Can you tell me about it?
The
last decade has seen a stellar growth in home inventories being
sold in America and prices going higher. Many young people though
were still in school and could not afford to purchase homes during
this time. The aging baby boomers smiled as they cashed in the
new equities built up in their homes and used this excess cash
to further drive up home prices. But that real estate boom is
now busting as home prices fall and the American economy plunges
into recession. Is this the right time for young people and first
time home buyers to cash in on this opportunity? Unfortunately,
the answer is no!
Are
you a young first time home buyer looking to purchase your first
home? Here are 7 things you must do for homework before you even
think of buying a home.
The
spread between the 30 year fixed mortgage & the 5 year Adjustable
Rate mortgage continues to widen in this commodities bull market
where the price of oil, gold, grains & basic materials continues
to go through the roof. In Bankrate.com's rate survey for the
week of Monday February 25th, 2008 the 5/1 hybrid ARM stood at
5.77% while the rate for 30 year fixed mortgages stood at 6.37%.
At the beginning of 2008, both mortgage products stood at roughly
6.14%. This means the 5/1 hybrid ARM is becoming cheaper for investors
to borrow and with which to finance their homes. 
Consumers
have to choose between the different range of mortgage products
available out there - from Adjustable Rate Mortgages (ARMs), 30
year fixed term, balloon mortgages, jumbo loans and more. In this
article, we will differentiate between choosing a 30 year fixed
mortgage and a 5 year adjustable rate mortgage. Which one of the
two is better? The answer is, it depends on how much of a home
you can afford. There is no right definitive answer as to which
is better. The consumer has to look at his financial need and
his short/long term financial goals. 
Most
of us will not make it to the kind of bank accounts that Donald
Trump or Bill Gates have, but many households in America are aiming
for the $1 million mark (exclusing their residences). That's right,
in 2004, the number of households in America that have
$1 million in liquid cash and investments excluding their residences
grew by 21% to 7.5 million. In this article, we are going
to study the mortgage tactics of these rather affluent people
because it's not all about the amount of money they make, it's
about how they treat their money.
You
get the official pink slip, your employer tells you they are laying
you off because business is slow. An example is the layoff of
more than 5000 employees by CitiGroup due to dismal financial
results in 4th quarter of 2007. Citigroup wrote down $18.1 billion
of sub prime mortgages in in the fourth quarter and had no choice
to but lay off thousands of workers. What will happen to these
workers and their mortgages/homes? Two classes of people will
emerge from this incident:
Mortgage
fees will be getting more expensive for certain groups of borrowers
says Freddie Mac. You know how if you get in to an accident, your
auto insurance rates shoot up? Something similar is about to happen
to mortgage rates. A fee of $250 will be tacked on to every $100,000
borrowed. Thus if you borrow $300,000 you will be hit with a mortgage
fee of $750. These fees could actually be higher if your credit
score is lower than 680 and if you are borrowing more than 70%
of the home's principal value (meaning less than 30% down payment).
This
is in response to a superb article written by Dan Green @ 
In
an article by 
There
are millions of people in America right now who are classified
as sub-prime mortgage borrowers, meaning they either have bad
credit, very little down payments and lots of credit card debt.
What happens if someone is a sub-prime borrower and cannot afford
to make the monthly payments on his/her mortgage anymore? Here
are 10 smart steps to follow if you fall in to such a problem.
Homeowners
whose Adjustible Rate Mortgages (ARMs) are set to reset this year
will experience the biggest benefits of the Fed's surprise 75
basis points rate cut on January 22nd, 2008. This is because as
the Fed cuts rates, mortgages will become cheaper to borrow. As
many as 2 million homeowners face resetting ARMs this year and
lower interest rates mean they will get less shock of higher payments,
and may actually be able to still afford keeping their homes and
their mortgages. Lower interest rates also allow ARM borrowers
to qualify for mortgage refinancing. 
Understanding
your mortgage payment structure helps you pay off your home faster,
and save more money in interest costs over the life of the loan.
Almost anyone who owns a home has a mortgage to pay off. Latest
mortgage rates are published on every newspaper and on TV. This
may make it seem like mortgages have always been available, since
man was born. But this it not the case! The modern art of mortgage
loan financing was pioneered in 1934 by the US Federal government
that wanted to wear off the effects of the Great Depression of
1934. They did this by minimizing the required down payment on
home purchases. Before 1934, you couldn't get a home unless you
had 50% of the purchase price in your bank. This was reduced to
20% in 1934, and nowadays, you could get away with 10%! The aim
of this article is to teach you how to set up your payment structure
so as to be able to pay off your loan as fast as your income allows
it, as well as save money on interest costs.