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Impact of Federal Reserve Interest Rate Cuts on Fixed Rate Mortgages

(January 18th, 2008)

The US Federal Reserve cut its Federal Funds rate to 4.5% on October 31st, 2007 and further cut those rates to 4.25% on December 11th, 2007. The federal funds rate is the rate at which depository institutions (banks and other financial institutions) lend money to each other via overnight loans. The Federal Funds rate is an open market operation that the Federal Reserve Chairman Ben Bernanke uses to to control the money supply in the US economy.

Now that the Federal Funds rate is at 4.25% and it is expected that the Fed will further cut interest rates to 3.75% on January 31st, 2008, how does this impact the fixed interest rates on mortgage loans? Unfortunately, interest rates on fixed mortgage loans will not be impacted much, if at all. The new 4.25% interest rate will favor those people who are borrowing short term loans such as personal loans, payday loans, auto loans, etc. However, bigger factors such as inflation, trends of the US stock markets (the Nasdaq and the New York Stock Exchange), the money supply in the US as well as purchasing power of individual US consumer play a huge role in setting long term mortgage interest rates.

The cost of an Average 30 year fixed-interest mortgage has dropped half a percentage point (0.5%) since the Fed starting cutting rates on October 31st, 2007. But there is little chance this rate will go further lower. Infact, Freddie Mac (the large government controlled mortgage financing company) and the National Association of Realtors have said that interest rates on 30 year fixed term loans will cost an average of 6.5% in 2008. This clearly indicates the Fed's rate cutting plans will not have an impact on long term mortgage loans.

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Do Not Fall for Rent to Buy Mortgage Loan Schemes

(January 12th, 2007)

In current times of falling home prices in the US and the $1.8 trillion sub-prime mortgage debt that financial banks have to deal with, "Rent to Buy" signs are popping up everywhere to lure consumers into purchasing homes at "cheap mortgage rates." Rent to Buy is a marketing gimmick used by landlords to lease out their homes and receive rental income, only because they cannot sell their homes in the existing mortgage market. If you are renting, there is little benefit for you to fall for these schemes. The reason is because most Rent to Buy schemes do not result in a purchase. People with bad credit, no down payments and lots of credit card debt also qualify for rent to buy schemes. That's why you should avoid them.

New and existing home sales are expected to be 5.09 million in 2008, down 11% from the levels in 2007 (Source: Freddie Mac). There's an increased inventory of unsold homes in the US and home prices are stagnant or falling very fast. Real estate investors who are hoping to flip homes (a process of buying wrecked up old homes, do some home improvements and sell them at a higher price in the market) cannot sell them because wrecked homes are the hardest to sell in a market of falling prices and increasing inventory. So now, they are trying to rent them out.

Rent to buy contracts state that for every month's rent you pay, 1 portion of it will go towards the purchase price of the home, while the other will go towards "interest." They make it seem like this is a normal mortgage loan where a portion of your payment goes towards the original principal while the other goes towards interest. They make it seem like taking up a rent to own mortgage deal is worthwhile for you, and helps you build equity in to the home. That is rarely the case.

20 years ago, you wouldn't qualify for a mortgage without a substantial down payment, atleast 25%. Now because of the housing boom in the US in 2000 - 2005, lenders are hoping to make the big bucks by giving out loans to people with little or no down payments. With the current sub-prime mortgage debt, lenders have stopped doing this because they realize the risks of giving out loans to people with no savings or down payments, they will most likely default.

People who have recently declared bankruptcy, or people who have lots of credit card debt and no down payments are the number 1 target for rent to own schemes. Here are some pitfalls to avoid if you do ever sign up for a rent to buy mortgage loan:

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Mortgage Tips - Borrowing the Right Mortgage Loan for Financial Success

(January 3rd, 2007)

i) Pay Off Your Mortgage Loan Early

When you sign that 25 year fixed term mortgage, it will seem like it will take you forever to pay off your mortgage. However, this amortization term could be significantly reduced if you follow any of these tips:

- Pay a little extra every month towards the principal mortgage. For example if you pay an extra $200 per month towards your mortgage loan, that is a whopping $2400 a year! That will probably reduce your mortgage term by 2-3 years.

- Make one extra full payment every year. For example, if you are currently paying $1300 a month for your mortgage for 12 months of the year, try to pay $1300 a month for 13 months every year. This will reduce your mortgage term by atleast 3-4 years.

- If you have extra cash sitting in your home, spend it on value based home improvements or building more equity in to the house. Do not park the cash in a meagre 3% savings account. Spend the money on refurnishing your kitchen or bathrooms and increasing the value of your home.

ii) Pre-Payment Penalties

No matter what type of mortgage loan you borrow, be sure to inquire about any pre-payment penalties. Pre-payment penalties usually occur when you want to pay off the home faster than the lender allows it. For example, if you refinance your mortgage loan and pay off the older loan with higher interest rate, the lender might charge you a pre-payment penalty for doing so. You do NOT want that! This penalty could be a fixed amount of a percentage of the loan. Since it is a useless expense and a false cash trap, be sure to ask about this before you sign up for any mortgage loan.

iii) Know About Your Adjustible Rate Mortgage (ARM)

If you choose to take out an adjustible rate mortgage, be sure to answer the following questions:

1) When will your interest rate adjust the first time and by how much? Your interest rate could adjust within the first 1-2 years so be sure to know exactly when, and prepare for it!

2) You should know that Adjustible Rate Mortgages are tied to interest rates set by the Federal Reserve that fluctuate from one month to the next. Therefore, if you pay 6.5% interest this month, next month's interest could be 6.8%. This is because the interest rate is tied to a 10 Year US Treasury bill rate + 2-3 percentage points. Since the US Treasury Bill fluctuates from day to day, your interest rate could also do the same.

3) Know that ARMs can easily be refinanced into a fixed rate mortgage loan. Therefore if you are buying your house for the first time and your financial future is not secured, ARM is a good option. After 1-2 years of steady payments on your house, you could transfer to a fixed rate mortgage loan and not have to worry about the fluctuating interest rates.

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Mortgage Must Dos - 10 Things You Must do Before Borrowing a Mortgage Loan

(December 27th, 2007)

A typical mortgage loan in America lasts 25 years with the home being fully paid off in that time period. 25 years is a long period of time, therefore you want to have a mortgage loan that best suits your financial needs and lifestyle. Here we explain 10 things you must do before you take out a mortgage loan, in order to be successful in paying off your home and being financially sound.

1) Know How Much your Mortgage Payment will go Up

According to statistics, nearly half of homeowners who borrowed interest-only or Option ARM loans do not know when their loans will reset, nor do they know by how much their monthly mortgage payments will go up. That's one of the reasons why so many homes are being foreclosed in America in 2008. Option ARM and interest-only mortgages offer a low introductory interest rate that is lower than any other fixed-rate mortgage. However, after 2-3 years, the interest rate usually resets to a higher interest rate, thus forcing the borrower to cough up more money in mortgage payments. Here's an example of how a typical Option ARM mortgage resets:

Most 2/28 loans are tied to an Index called the 6 month LIBOR rate (London Interbank Offered Rate). The LIBOR rate is the rate at which European banks borrow and lend money to/from each other. Most ARM mortgages given to borrowers with good credit charged LIBOR + 2.75%. 2/28 loans will now reset to LIBOR + 6.25%. With current LIBOR rates hovering at around 4.6%, here's how the interest rate game works out:

That's a jump of almost 4% in interest rate! That means borrowers will have to pay hundreds or even thousands more dollars in their monthly mortgage payments. This obviously leads to thousands of sub prime borrowers defaulting on their loans. What's worse is that 2/28 loans reset once every 6 months with an increase of 3% interest the first time and 1% every time after that. Over the long run, interest rates on 2/28 ARM mortgages will just keep increasing, while many borrowers will have the same income. This obviously leads to a deficit in their household budgets, forcing them to default on their payments.

Here are some limits on Option ARM & interest-only loans that you should know about:

2) Stated-Income Loan? Do NOT Fall for These!

Stated-income loans are loans where you do not have to prove your incomes by submitting your pay stubs or W2 forms to the lender. If your mortgage broker tells you that he's setting you up for a stated-income loan whilst you have a regular job with monthly income, ask him why? This is because the broker will inflate your earnings and assets and get you a really expensive mortgage loan forcing you to take out tons of debt. The broker will obviously benefit with a larger commission paycheck but you will be forced to live with an expensive mortgage loan on which you will have trouble making monthly payments.

This is why stated-income loans have also come to be known as "liar loans."

3) Count child support and alimony as income

Lenders will count child support and alimony income as your regular income if you can produce proof and documents from the court system. Make copies of any child support deposits or checks you get so as to provide proof to the lender. Note however that if one of your children is about to turn 18, the lender will not accept alimony income as your regular income, as it will stop in the near term. The ages of your children as well as when their alimony income will stop will be written out in your court documents.

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Want a Mortgage Loan? Get Pre-Approved!

(December 24th, 2007)

Before you start looking for a home and make an approval, you need to get pre-approved by a lender. You will have to fill out a form that states everything financial about your life including the down payment you have, how much you owe on credit cards, student loans, auto loans, etc. The lender will examine your statements, check your credit report and approve or disapprove your application.

It is important to get pre-approved 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!

Pre-Qualified means the lender did not look at your income/expenses, credit scores and does not really know much about you. Therefore, he could reject your application at any time.

Here's a 7 step strategy to follow that will help you succeed at your mortgage application and get a good deal.

1) Get Your Credit Reports

You should look at your credit reports, before a lender does. The number derived from that credit report (also known as your credit score) plays a huge role in the interest rate you get on your loan, as well as the size of your mortgage loan. The lower your credit score, the higher your interest rate because banks will term you as a higher risk of default client.

You have the right to receive a free credit report once every year from www.annualcreditreport.com Check your credit report from all 3 major credit bureaus including Experian, Equifax and TransUnion. This is because each credit bureau has its own algorithm of calculating credit scores.
Note: You will not get your credit score from www.annualcreditreport.com If you want to know your credit score, you will have to purchase it from FICO @ www.fico.com. FICO was developed by the Fair Isaac Corp. and will rate your scale from 400 to 850. This FICO score is important because it is virtually used by almost any lender.

You can obtain your FICO score from www.myfico.com/Products/FICOOne/Description.aspx @ $15.95. With this, you'll get your credit scores from each of the 3 major credit bureaus (Experian, Equifax and TransUnion) with a detailed explanation of how they determine your scores. It will also provide tips on how to increase your credit scores.

2) Fix the Mistakes

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.
Note: If you are undergoing a financial difficulty for any reason including injury, disability, layoff or family crisis, write a statement and give it to your credit bureau. This can be attached to your credit report.

3) Gather your Documentation

Use our mortgage documents checklist to gather all your paperwork. You will need a copy of all your credit card debts, 401k retirement savings statements and proof of another assets you own to do this successfully. For example, although the lender will not ask to see your credit card statement, you will need this document to declare your credit card debt.

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Beware of Option ARM (Adjustible Rate Mortgages)

(December 23rd, 2007)

There is a new but very dangerous player in the mortgage industry; it is called Option Adjustible Rate Mortgage (ARM). This is a very complex loan that if not understood properly, could ultimately cost you your home! Option ARM is a type of mortgage plan with as many as 4 different monthly payments and an interest rate that could fluctuate month to month!

Every month when it comes time to make that mortgage payment, the borrower can choose his payment to be one of four types:

The goal of Option ARMs is to minimize the monthly payment and get it as low as possible. Some loans even deceive people by advertising "1% mortgage loans" where the actual interest rate is 6%, except that the unpaid 5% portion is added to the original debt of the borrower, thus increasing his debt. You would think that with every monthly payment you make, you are working towards paying your mortgage off... Wrong! Infact, you are only increasing the size of your mortgage loan, and getting more into debt!

The reason behind creating option ARMs was to help the first time home buyer be able to afford the monthly payments on ever increasing house prices in the US. Since most first time home buyers do not have a lot of money to put down towards the house, they are turning towards Option ARMs to help them.

Fact: Less than one in every 100 borrowers took out an option ARM in 2003; more than 13 in every 100 borrowers did so in 2006 (Source: LoanPerformance, a company that follows lending trends in the mortgage industry).

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5 Smart Moves to Get the Best Mortgage Loan Interest Rate

(December 22nd, 2007)

If you are looking to purchase a new home, there are 5 things you can do to ensure you get the best and the cheapest interest rate for a fixed 15, 20 or 25 year mortgage term. The really tempting mortgage rates you see on websites like bankrate.com or on the newspapers are for those people with excellent credit histories, not for the average borrower. Those interest rates also require larger down payments, and have literally no credit card debt or very little debt. Most home buyers will have to pay more than what is advertised. Here are 5 tips to help you get the best mortgage interest rate:

i) Pay every bill as soon as it arrives

That's the most important aspect to lenders. Lenders want to know if you will pay your mortgage bills every month after month, without any troubles or delays. If your credit histories show that you have skipped a few payments or are 3-5 days late on your payments, you will be termed as a higher risk hence having to borrow at a higher interest rate. You should also know that a late payment just 2-4 months before you apply for the lower interest rate mortgage will also be termed as a high risk and you will likely not get favourable interest rates. This is why the tip says, pay every bill as soon as it arrives, do not be late!

ii) Make a larger down payment

Lenders know that the more money you put down on a home, the less likely you are to default. Therefore, if a few thousand or even ten thousand dollars helps you save 0.25% in mortgage interest costs, then it is definitely worth it!

iii) Reduce your Debts

Lenders will look at your total credit card debt, auto loans & student loans. They will look at the total amount you owe, the monthly payments you make and compare this against your monthly income. If you will have lots of disposable income left over after paying your debts, you are fine. However, most people won't have this.

Here's a good rule of thumb: Reduce all your credit card debt so that you are using a maximum of no more than 35% of your credit limit.

iv) Do not apply for new credit cards or consumer loans

If you do that whilst you are nearing your application for a lower mortgage interest rate, lenders will be forced to check your credit report. When they do, those inquiries of applying for new credit or loans will show up as entries. This will lower your credit score by up to 12 points, which can make a difference between a good lower mortgage interest rate and a higher one.

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How Much Mortgage Loan Can You Really Afford?

(December 21st, 2007)

So you want to buy your first new house. But how much of a mortgage loan can you really afford? This affordability question is one of the most crucial questions you must ask yourself; if you want to have a successful mortgage deal where you can afford the monthly payments and avoid any chances of foreclosure or your home being taken away from you.

All this depends on your annual income versus your annual costs. If you keep your mortgage loan in line with your annual income, you should have no trouble writing that check every month; or else you will dread every check you write.

i) Housing Costs

Your mortgage loan costs including the pricipal owing balance, interest, taxes, closing costs + home improvement fees should not exceed 28% of your annual gross income. By gross income, we mean the income you earn before income taxes are deducted.

ii) Debt Obligations

Your other debts including any student loan payments, credit card debt, auto loans, child support payments etc should not exceed 36% of your annual gross income. Want to see how you fair? Select our 28/36 mortgage calculator to determine how much of a monthly mortgage payment you can really afford.

For example, consider you and your spouse make $75,000 a year gross income (before taxes). This enables you to have housing costs of up to $1750 per month. This is how we derived this number:

$75,000 annual income / 12 months = $6250 per month
$6250 per month * 28% = $1750 per month

This amount also includes property taxes, condo/townhouse fees, etc.

You must also hold all your debt payments to less than $2250 per month. This amount is derived by:

$6250 per month * 36% = $2250 / month.

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7 Biggest Mortgage Loan Borrowing Blunders

(December 19th, 2007)

A mortgage loan we take out will probably be our biggest debt ever and knowing how to handle it effectively is extremely important. In this article, we outline the 7 mortgage mistakes you should avoid doing at all costs! This will help your mortgage deal close favorably in your terms and you shall have no problem making those monthly payments:

i) Not Looking for the Best Deal

Check the interest rates offered by dozens of lenders in the American mortgage system. Also, check their closing cost estimates as well as other fees. If you find an interest rate at a quarter point lower, this could save you hundreds of dollars of interest costs every month + tens of thousands of dollars over the life of the mortgage term. Obtain quotes from your local mortgage brokers, banks and lenders.

ii) Not Checking your Credit Report

Do not apply for a loan without checking your credit report first. This is because there may be mistakes on your credit report that will cost you the favorable interest rate you were looking for. For example, if your credit score is lowered thanks to an error on your credit report, and you fail to correct it, you will find it difficult to find a good mortgage loan with a lower interest rate; you will end up having to sign up with a higher interest rate. Read more about this topic @ our 7 step strategy for a successful mortgage deal; Want a Mortgage Loan? Get Pre-Approved!

You can get a free copy of your credit report @ www.annualcreditreport.com

iii) Taking out a Loan that you cannot Afford

One of the biggest mistakes that all borrowers do is borrow beyond their limits, and take out too much debt. Real estators and loan officers also like to entice consumers with stylish more expensive homes than they can really afford to purchase, obviously because they get a bigger cut of the house you purchase.

Here's a piece of advice. Do not let your lender tell you how much of a mortgage loan you can afford to take out. Because this is NOT really what you can afford, it is inflated. Do your own Math, use our mortgage calculators to determine your affordability.

For example, many people will think whatever their lender says they can borrow, means that is the amount they can afford. If your lender shows you a $750,000 house while your income is less than $100,000 a year, obviously he's not on your side, he's out to rip you off!!

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6 Reasons to Avoid Option Ajustible Rate Mortgages (ARMs) & Interest-Only Loans

(December 17th, 2007)

Interest-only loans and Option ARMs are two of the most dangerous mortgage options available out there. These types of mortagages cater for people who cannot afford the monthly payments on 30 year fixed term mortgages. Instead, these loans allow these people to make only the minimum interest payments every month, thus allowing them to fulfill their "American dream." Most of these sub-prime borrowers take out an interest-only loan because:

i) None of the principal mortgage balance is to be repaid within the first 5-10 years of the mortgage contract

ii) Interest-only loans offer introductory interest rates that are lower than those provided by a fixed-rate mortgage

After the introductory rate period is over, mortgage payments owed by these borrowers shoot up high. These borrowers cannot come up with the extra money needed to cover the increase in their monthly payments, nor are they allowed to refinance their mortgages, nor are they able to sell their houses. That's why we currently have an epidemic in the American mortgage industry; many people are losing their homes to foreclosures. You do not want to become a foreclosure statistic.

Here are 6 logic reasons to avoid interest-only and Option ARM mortgages

1) You Still Owe that Mortgage Debt

If you take out a mortgage loan for $250,000 and make interest payments on it for 5 years, you will still owe $250,000 at the end of those 5 years. None of those interest payments you make will be applied towards building a nest egg or equity in the house, it goes to fulfill the interest charges. This is another sophisticated version of renting.

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2/28 and 3/27 are Very Dangerous Mortgage Loans

(December 15th, 2007)

In 2004 - 2005, there was a boom in the number of 2/28 and 3/27 loans that were given out to sub-prime borrowers (borrowers with poor to bad credit histories). The effects of these loans are now surfacing with America facing a record number of foreclosures in 2008. These adjustible rate mortgages were the most common given to every 3 out of 5 sub prime borrowers. Now, very few lenders are offering these loans.

The ideology behind interest-only loans was to offer a 2-3 year introductory interest rate that was lower than most fixed-rate mortgage interest rates. By making on time payments for 2-3 years, these borrowers were promised that they will be able to increase their credit scores and thus refinance into a newwer mortgage loan with far lower interest rates. This was before their 2/28 or 3/27 ARM mortgages reset to a higher interest rate after 2-3 years. Shady mortgage brokers also promised borrowers that they will never have to deal with higher monthly payments, and that is not really a concern. But events have unfolded against the sub prime borrower.

Most sub prime borrowers are unable to refinance into a lower interest mortgage loan because they were unable to increase their credit scores whilst in their introductory 2-3 year periods. Plus, they did not build enough equity in their homes to be able to refinance their homes. This was particularly the case with borrowers who had no money down and borrowed upto 100% of the purchase price of the home.

How 2/28 Loans Work

Most 2/28 loans are tied to an Index called the 6 month LIBOR rate (London Interbank Offered Rate). The LIBOR rate is the rate at which European banks borrow and lend money to/from each other. Most ARM mortgages given to borrowers with good credit charged LIBOR + 2.75%. 2/28 loans will now reset to LIBOR + 6.25%. With current LIBOR rates hovering at around 4.6%, here's how the interest rate game works out:

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