Do The Right Math: Compare Mortgage Quotes Accurately

It doesn’t matter how many times you trawl the internet for information. When looking for tips on taking out a mortgage, you will always be given this advice: compare mortgage quotes.

This is the first and most important rule for would-be homeowners. Always compare mortgage quotes. Unless you do, you cannot distinguish the good offer from the bad. Only when you compare mortgage quotes can you assure yourself that you are getting the best possible deal there is.

Comparing mortgage quotes, however, is not as simple as pitting one figure against another. You have to factor in other things too. At the same time, you need to have at least a working knowledge of the mortgage terms and realities you will be dealing with.

Tips for Comparing Mortgage Quotes

Below are some tips to ensure that your comparison yields as precise a result as possible:

1. If you want to make comparisons using very accurate data, get quotes from different lenders or brokers on the same day. Mortgage quotes change daily. At times, they even change several times in one day. If you compare a rate you got from one lender on Tuesday to one you got from someone else on Thursday, and rates increased from Tuesday to Thursday, the second lender looks like the better lender, but that may not be the case.

2. When you compare terms, compare mortgage quotes for similar lock periods. A lock period is the specific span of time that guarantees implementation of a certain rate. As a rule of thumb, longer lock periods have higher rates. Lock periods are generally offered in increments of 15, 30, 45 or 60 days.

3. Compare mortgage quotes that have the same points, such as zero or one. In the mortgage business, a point is one percent of the loan amount paid at closing, or with most refinances, added to the loan amount. Three points, for example, means three percent of the loan amount.

4. You should be aware that mortgage quotes follow a tiered pricing. This gives you the opportunity to buy the rate and bring it up or down. How? It’s very simple. To make the points decrease, increase the mortgage rate. To make the points increase, reduce the rate. I only quote zero point loans for my clients, however, there is always an option to pay points and buy down the rate.

5. In the quote you ask for, ask that the quote be separated from standard closing costs to close a loan in your state. Property taxes, home insurance, title charges, appraisal costs, escrows for tax and insurance and prepaid interest are not lender fees. What falls under lender fees are application, processing and underwriting fees. I am happy to say that we don’t charge any of those fees.
Things to Watch Out For When Comparing Mortgage Quotes

1. Locks of 45 days or more have a higher rate.

2. If lenders are asking you to pay points on the loan, be sure to have them quote the points in dollars. This is for your protection. Unscrupulous lenders might later on change the base amount to collect more from you. This is because points are computed as percentages. The bigger the base, the higher the commission, for example.

3. Beware of lenders that are not upfront about the loan process to you. A trustworthy mortgage company is always willing to answer your questions and explain points of misunderstanding.

Comparison is good because it highlights the defects of one and showcases the suitability of another. All the reputable websites that dispense mortgage tips will always tell you to compare mortgage quotes.

How to Select the Home Mortgage That Is Right For You

If you are seeking to finance the cost of a new home, you may be faced with more than one home mortgage loan option, including those with various interest rates, payment terms and length. For those not versed in today’s home mortgage options, choosing the right mortgage to apply for may not be so easy.

How to Select the Home Mortgage That Is Right For You

In order to select the right mortgage loan for you, you will first want to have an idea how many years you plan to live in the home that you intend to purchase. A conventional fixed rate home mortgage is typically designed for someone who intends to live in a home for at least 10 years. The fixed rate home mortgage loan is the most popular of the home mortgage loan programs. With this style of loan, the interest rate remains the same for the entire life of the loan.

Another style of loan is the adjustable rate home mortgage, also known as an ARM loan. This option allows the interest to adjust based on current market rates, which means, one year the interest rate may be low and the next year it may be significantly higher. Check out my earlier posts for a complete explanation on how this type of mortgage works. Here’s part I and here’s part II.

An Interest Only home mortgage, is a type of loan that where the homeowner is permitted to make payments on the interest alone for a specified amount of time. After that time concludes, the payments are applied toward the principal balance of the loan.This type of loan will have significantly higher payments once the interest only period is concluded.

Balloon home mortgages offer smaller payments in the beginning, but come with a large payment due at the end of the loan. Be careful with this type of loan, as there will be one large payment due at the end of the loan, which in some cases may be the entire principal balance.

For any type of mortgage loan, make sure to steer clear of negative amortization.Check out my post on this subject for a full explanation of the risks of any mortgage loan that has this provision.

If you are planning to refinance your existing home or apply for a new home mortgage loan, a good lender or mortgage broker will help you select the best loan for your individual situation.For further information on any type of mortgage option, feel free to give me a call.

 

 

Pre-Qualified vs. Pre-Approved When Buying a Home

These days, getting a letter or post card in the mail that says “Congratulations! You have been Pre-Approved or Pre-Qualified for a mortgage,” are as commonplace as the numerous credit card offers that we all receive, and they are worth the paper they are printed on.

Having a Pre-Approval from a lender or broker in your pocket, will greatly improve your chances of buying the house you want.

Here are some important facts about Pre-Approval for mortgage loans..

Apply before you buy

Although many people used to look at homes before applying for a mortgage loan, nowadays it is critical that you apply for a mortgage Pre-Approval first. This will allow you to know exactly how much you can afford to spend on a house, and find the property you want much more quickly and easily.

Pre-Approval vs. Pre-Qualification

There is a great deal of confusion between these two terms. To be Pre-Qualified simply means that based on your income and debt and the amount of cash you have for down payment and closing costs, assuming your credit meets the standards of the lender, you are qualified to apply for a mortgage loan at today’s interest rates. A Pre-Approval letter is different.

Obtaining a Pre-Approval letter

In order to obtain a Pre-Approval letter with most lenders or brokers, you fill out a mortgage application form listing your income and assets, and a credit report is run. Some lenders may ask for additional documentation, while others will issue a Pre-Approval subject to receipt of documentation to substantiate what has been filled out on the application. Once you receive your Pre-Approval letter, you can start shopping for your new home.

Looking at the right homes

If you have a Pre-Approval letter, you know exactly how much you can afford to spend on a property, and can narrow your search down to homes within this price bracket. This will help you to find a property to match your needs much more quickly, and make buying easier.

More negotiating power

If you have a Pre-Approval on your mortgage loan, you will be seen in the same way as a cash buyer. You already have the funds in place, so the seller is more likely to accept an offer immediately, even if it is below the price estimate. This is because they can be more certain that their house is sold, and can take it off the market pending the close of sale.

Quicker sale closing

One of the lengthiest parts of house buying and selling is the closing of the sale. If you have agreed to buy a house but do not have a mortgage in place, then it can take time to arrange the funds, and you might even find that you cannot get the funds you need. However, if you have a Pre-Approval, the funds are essentially guaranteed, and you can push through the transaction much more quickly. This will make buying a house much less stressful, and help you to get the home you really want.

What Size Mortgage Can I Afford?

When shopping for a house, it can be easy to fall in love with the home of your dreams. Be careful, however, that you are aware of how much house you can afford so your dream home isn’t crushed at the lender’s office.

Lenders often talk about qualifying ratios or debt ratios. These numbers can seem a bit mysterious, but a few simple formulas will give you an idea of what size mortgage loan you may be able to afford. Although this is helpful to determine a house budget, never rely on these numbers alone when planning a purchase. Consider obtaining a pre-approval for a loan from your broker or lender, so you know the exact amount you have to work with.

What size mortgage can I afford?

Grab a piece of paper and follow these steps to determine how much you can afford for a conventional mortgage. (Formulas for governmental or FHA mortgages will differ.)

1) Determine your monthly gross monthly income (before taxes).

2) Multiply this amount by 0.28. This is your maximum monthly housing expense. (Lenders allow 28% of monthly gross income for housing expenses. This is also known as the front end ratio.)

3) Now multiply your monthly gross income by 0.36. This is the allowance for your long-term monthly expenses. (Our company is a bit more flexible with that number, and may stretch it to 40 or 45% depending on the strength of the application). Many lenders allow that percentage of monthly income to go toward long term debt that can’t be paid off in 10 months.

4) Add up your monthly long-term obligations including child support, auto loans, credit cards minimum payments, and other payments that can’t be paid off in 10 months.

5) Subtract the total of those obligations from your long-term monthly expenses in step 3. This is your monthly housing expense. (This number is used for the back end ratio, or debt to income ratio, to make sure your total debt does not exceed 36% of your monthly income.)

6) Compare the maximum monthly housing expense from step 2 and your monthly housing expense from step 5 and take the smaller of the two. This is the amount you can afford each month for payment of principal, interest, taxes, and insurance – also called PITI.

The length of the mortgage and interest rates will affect the total dollar amount of the loan, so talking with a lender will give a big picture view of what you can afford. Getting pre-approved for a mortgage will take the guesswork out of deciding a price range for a potential house and reduce stress in the home-buying process.

Give me a call about any possible mortgage scenario or if you need a pre-approval, I will be happy to help.

30 Year vs. 15 Year Mortgage, Which is Best?

Discussions of mortgages often focus on interest rates, but there is a much more basic decision to make. Should you go with a 30 year mortgage term or a 15 year mortgage term?

30 Year vs. 15 Year Mortgage, which is best?

Any discussion of mortgages tends to turn on two points. How can you qualify for the most money with the lowest payment, and how can you get the lowest interest rate for the mortgage? While these are two important issues, there is an additional one that people fail to consider, resulting in significant wasted money.

The term of a mortgage is extremely critical for a couple of reason. First, it sets the length of the obligation you are undertaking. Second, it defines the amount of interest you are going to pay over the life of the loan. These are huge issues when it comes to building equity, and deciding if a 15 or 30 year mortgage is best for you.

The longer the loan, the more total interest you are going to pay. The trade off, of course, is, you are going to have smaller monthly payments the farther you stretch out the obligation. While this may sound like a good goal when you first get the mortgage, it can backfire on you in the long run.

Most people focus on interest rates as a way to save money on morgetgas. This is a valid approach, but playing with the length of the loan is a better way to save money. If you can cut the payments in half by going with a shorter loan, you can save huge amounts on the total interest paid to a lender.

The decision on the term of the loan is relatively simple, but entirely dependent upon your personal situation. There is no absolute correct choice. First, you need to determine if you can comfortably afford the higher payments that come with a shorter term loan. In general, a 15 year mortgage will have monthly payments 20 to 25 percent higher than a 30 year loan.

If you can afford the higher payment, then that is the correct choice for you. By doing so, you will pay the loan off faster, and be building equity in the home quicker. However, if the monthly payment on a shorter term loan will stretch your budget, the more popular 30 year mortgage is best for you. Although you will pay more interest over the life of the mortgage, your monthly payment will be considerably lower.

If you do opt for the 30 year loan, make sure the mortgage has no prepayment penalty, allowing you to make extra payments toward the principal balance of your loan, which will not only reduce the total interest you pay over the life of the mortgage, but will also effectively reduce the remaining term of your loan.

If you would like me to run an amortization schedule for you that will show how much you will save by making extra payments toward your loan balance, please feel free to contact me.

Are Adjustable Rate Mortgages Worth It? Part II

In part one of this two part post, I talked about the benefits and drawbacks of adjustable rate mortgages (ARM), the safeguards built in to most ARMs.in the form of rate caps, and the dangers of negative amortization.

In this post, I would like to focus on a few things that you can do to help ensure you’re making the right decision and getting the best deal that you possibly can on your adjustable rate mortgage.

Shop Around:
Don’t go with the first offer you get. It may sound ridiculous that someone who is making what is often the biggest purchase of their life would jump at the first loan that’s offered to them. But first-time home buyers, who are sometimes surprised that they’ve been offered a loan, can be especially susceptible to this type of knee jerk reaction. Also, lenders who practice hard sell techniques, indicating that the loan rates could change at any moment, can pressure consumers into making quick, ill-advised decisions.

Make Sure You Know the Terms:
You may be thinking, “Of course someone would know the terms of a loan!” This isn’t always the case. When someone is ignorant of the terms of a mortgage, they either haven’t asked the right questions, or after asking a question and getting an answer, they don’t ask for clarification if they’re confused. You must ask questions, understand the answers thoroughly and ask for further explanation if needed.

Often information regarding an ARM is given in a simple sequence of three numbers, which may look something like this—3/1/6. In this example, you’re first given the initial cap change of 3, which is the maximum change allowed the first time the rate is adjusted. This maximum is often higher than subsequent changes. The second number represents the periodic change cap. This number, which in our example is 1, is the largest interest rate adjustment allowed during all other changes. The final figure is the life cap or the maximum adjustment that can be implimented during the term of the loan. In our example the life cap is 6, which is typically the highest amount you’ll see for a life cap on a first mortgage.

Ask Yourself “What if?”:
Taking the time to ask yourself this question and answering it honestly can save you a lot of heartache and money down the line, and help you determine if an adjustable rate mortgage is worth it to you. In other words, know the effect a 3 percent rise in the interest rate would have on your pocketbook in the first adjustment period. If you procure a loan with an interest rate that can be altered every six months, could you afford a big spike in the rate? Would your ability to pay and the security of your home be jeopardized by an upward trend in mortgage rates? Look at the actual numbers.

Let’s say you’re paying $602 dollars at 4% on an ARM that totals $126,000 and the loan goes to 7% in the first year. Your payment would then be $838 per month or $232 more each month and $2,784 more a year. Remember, that elevated amount only represents the difference in interest and does not include principal, which means suddenly you’re paying a lot more for your house than you intended. How much more? Over the course of a 30-year mortgage you will have paid more than $100,000 in additional interest! That is not a bargain.

Study Financial Trends:
To help you determine if an ARM makes sense for you, take some time and get the latest information on what is happening with interest rates. Study what’s occurred over the past 12 months and read up on what the experts are predicting. Check the index your potential lender uses to determine if rates will rise, fall or stay stable. Ask the lender what index they utilize to calculate if your mortgage payment will change. They should be able to tell you this and also inform you of the margin, which is the additional amount the lender adds to the index rate. It is usually from one to three points and is constant for the length of the loan. Study the index’s past performance to determine how stable it is and how often it changes. Some indexes will be adjusted monthly.

Consider a Less Expensive Home:
This is an option about which most people do not want to think. However, your first home does not have to be your last home. Buying a less expensive home at a fixed-rate can pay dividends in the next five to ten years. By paying more than interest on a loan, the homeowner benefits in two ways.

First, because the consumer is paying principal and not merely interest, they are slowly retiring the debt on the house, building equity and actually becoming the owner of the property. If the owner sells the home ten years down the road, he or she will realize a profit that can go towards the down payment for a bigger and better home.

A fixed-rate mortgage also allows you to benefit more from any appreciation in the property. If in ten years, you’ve paid $12,000 in principal on a home worth $100,000 and that same home rises in value by 3% per year, which is a negligible amount, then you would have a home that’s worth about $134,000 and a total gain of $46,000. Imagine how helpful that $46,000 would be in purchasing your dream home!

Try to think in the long term when it comes to home ownership. It can pay off in a very short amount of time, especially if you live in an area where property and home prices continue to escalate.

So, are adjustable rate mortgages worth it?
Although an Adjustable Rate Mortgage may look promising at first glance, it does have its pitfalls. When purchasing a home, carefully consider all of your options, do your homework and think about the future and what will be best for you and your family. An ARM may help you realize the American dream of home ownership; however, securing an adjustable rate mortgage under the wrong circumstances can turn that dream into a nightmare.

Are Adjustable Rate Mortgages Worth It? Part I

The Adjustable Rate Mortgage (ARM) has become a popular way for Americans to get more immediate bang for their buck when purchasing a home.The question is, are adjustable rate mortgages worth it?

For a long time ARMs, also known as flexible and variable rate mortgages, have been considered a good option for buyers who are looking to sell their home or refinance in 3 to 5 years. The theory being that the homeowner makes lower payments with little risk of the mortgage payment being adjusted during that short time period.

Because the monthly payment on an ARM is considerably lower than that on a traditional fixed-rate mortgage, a buyer can qualify to purchase more home than they could if they took out a loan with a fixed-rate.  For the potential homeowner, this looks like a very attractive proposal.

The primary drawback to an ARM is the fact that if you hold onto the mortgage long enough it is almost certain to go up. Although exact times for periods of adjustment are stated, exactly how much and how many times it will rise is relatively unpredictable.

Much of what happens with an ARM depends upon developments in financial markets. If the interest rate on an ARM rises enough, one could end up paying more per month on a variable rate loan than one would on a fixed-rate mortgage.

However, with an ARM there are some protections afforded the home buyer. Most ARMs have limits or caps on how much an interest rate may change both during the length of the loan and the pre-determined adjustment period.

The loan contract for an ARM will state how long the adjustment period will be. Commonly, lengths of time regarding interest changes are six months or one, three or five years. If a consumer secures a loan with a one-year period of adjustment, then the rate may be changed on a specified date only one time per year. Additionally, if you’re so inclined at a future date, a lender may allow the consumer to convert the ARM to a fixed-rate mortgage.

When adjustable rate mortgages are definitely not worth it:

A word of warning concerns ARMs and negative amortization. Amortization is the reduction of any debt as achieved through loan payments. If an ARM has a negative amortization clause it negates most of the benefits that a cap offers.

Negative amortization occurs when the monthly payment is capped and the interest rises to a point where a homeowner is no longer paying the full monthly interest on the loan. That difference, between what one pays and what one owes, is added to the mortgage balance, increasing the debt owed. Not all ARMs are set up this way and it’s best to avoid those that are.

The worst case scenario for an ARM occurs when the rates rise higher than the fixed-rate and negative amortization occurs. In essence, a consumer can find him or herself unable to make payments on a home that continues to accumulate debt, possibly to the point where more money is owed on the home than it is worth.

If, however, rates go down or remain the same and the consumer is able to lock in, convert to a fixed-rate, refinance or sell, then they come out ahead. Switching to a fixed-rate will raise the monthly payment considerably, since this type of loan involves paying principal too.

There are a few things that you can do to help ensure you’re making the right decision and getting the best deal that you possibly can on your mortgage.

More on that in Part II

 

Why Using a Mortgage Broker Can Save You Money

Mtg Broker

Being able to get the house you want should make you very happy. But what if, after you move in, you find out that you may have been able to get a much better financial deal than what you got? Would you still be as happy? It is quite possible to get the best deal in the first place by using a mortgage broker.

Here is how a mortgage broker can save you some money.

It needs to be stated from the start that a mortgage broker will not always be able to get you the best deal, but could, probably, in most cases. Too many people are still accepting the first offer they are given for their mortgage. Getting that good deal, however, takes more than just comparing loans.

A bank lender will only be able to offer mortgage products that their own bank creates. These products, of differing values, are limited.

Sometimes a lending agent may not want to compare the different products his or her bank offers in order to find an exact match for your needs. At other times, a bank agent will work very hard for you.

A mortgage broker, however, only gets paid when a sale is made – in other words – when a mortgage is signed. This means that it is in their best interests to get for you a highly competitive deal.

Mortgage brokers deal with many different lending companies on a regular basis and know what each of them have been willing to do – in the very recent past. When you contact a mortgage broker, there often will not be any fees. They will then get your information from you and send it to  companies they think will give you a very competitive offer.

Another benefit comes from the way that mortgage brokers perform their services. A banker will give you a more institutionalized service, and your interaction with him or her will be more formal.

A mortgage broker, however, will be glad to take more personal time with you, making you feel more welcome and will probably spend more time with you and for you. In fact, he or she may even come to your house.

Mortgage brokers have access to mortgages at a slightly lower price than a banker might provide. This is because they deal with wholesale prices rather than the retail. Their service offered to lenders means a savings for the lender because the lender does not need to maintain sales staff – except when a sale is made.

When there may be a problem with your credit, the value of a mortgage broker can really be seen. Because they know many different lenders and each of their specialties, they can work to find lenders that can give you a great deal.

They would already know which lenders regularly give money to those with bad credit – or whatever special need you may have. A bank representative, however, while still able to offer a number of products, is limited to only what their branch offers and the special deals they give.

And that’s why using a mortgage broker can save you money!

An Introduction to Mortgage Loans

The mortgagee and mortgagor are bound by the mortgage loan agreement.

Mortgage loans are financial loans taken for real estate properties that the borrower has to repay with interest within a fixed period of time. A mortgage loan requires some sort of security for the lender. This security is called the collateral and in most cases, it is the real estate property itself for which the mortgage loan has been taken. Since the property itself is kept as the collateral, no further security is needed.

The person who lends the mortgage loan is called the mortgagee, while the person who borrows the loan is called the mortgagor. The mortgagee and mortgagor are bound by the mortgage loan agreement. The agreement entitles the mortgagor to receive a financial loan from the mortgagee. The promissory note in the agreement secures the mortgagee, which entitles them to the collateral and a promise made by the mortgagor to repay the mortgage loan in due time. The typical period for a mortgage loan may be 10, 15, 20 or 30 years.

There are two fundamental types of mortgage loans, fixed-rate mortgages and adjustable-rate mortgages. Fixed-rate mortgages have interest rates that are locked for the life of the mortgage, while adjustable-rate mortgages have interest rates that may go up or down according to a market index. Therefore, fixed-rate mortgages provide security to the mortgagor, while adjustable-rate mortgages provide security to the mortgagee.

Mortgage loans above 80% of the property value need added security for the mortgagee. This is done in the form of insurance policies, called mortgage insurance. The premiums of mortgage insurance policies are passed on to the borrower in their monthly payments. Depending on your credit score and the amount borrowed versus the value or purchase price also known as the loan to value (LTV), you will either need a Conventional Mortgage with mortgage insurance, or a government backed mortgage given by the Federal Housing Administration (FHA). More information about these types of mortgages will be given in a future post.

Beg, Borrow or Steal, But Make That Mortgage Payment

One of the most common things I hear when a prospective client contacts me for a mortgage refinance is “I just missed a mortgage payment and I want to refinance before it’s too late”. When I ask them about their credit, most of them reply “Oh I pay everything on time, I just got behind this one month on the mortgage”.

It breaks my heart to tell them that in many cases, it already is too late. The reason is simple if you really think about it: If your home is your biggest investment, your greatest potential asset and your largest current liability, there is nothing more important than showing that you are able to make the payment on it every month. If you are in a cash crunch, you’re better off missing or underpaying almost any other payment, such as a credit card bill, even your utility bill, instead of missing or even delaying your mortgage payment, because missing one mortgage payment can cost you tens of thousands of dollars over the years.

When you miss a mortgage payment, your credit score may not go down dramatically. But your mortgage credit quality will take a serious beating, and you’ll carry it around for years. When you start out with a mortgage, regardless of what your FICO credit score is, you are rated an “A”, meaning you make your mortgage payments on time. If you miss a payment, and even if you’re just late enough to qualify as 30 days late, the lateness is recorded and you will become an “A-” or a “B”. Just one mortgage lateness can keep you out of the refinance market for up to two years by automatically locking you out of the lowest payment programs. If it sounds a bit like high school, it is, but this time it’s for keeps. Keep missing or delaying payments, and you’ll quickly see your mortgage quality decline to a “C” or “D”, which could prevent you from refinancing entirely, by eliminating your eligibility from even standard rate programs.

This hurts the most when you refinance or are ready to buy a new house, because you are usually borrowing more money than you were previously, either to pay off bills or make home improvements, or because you’re buying a bigger house. So not only are you moving to a higher balance, but your now derogatory mortgage credit will force you into a high rate. If you need the cash to pay off bills and improve your credit urgently, or to purchase a home in a new area because you are relocating for work, you can wind up in a horrible Catch 22, very often disqualified for financing entirely, or with financing so unaffordable that you would rather not.

So what can you do about this? If you do better with automatic payments, sign up for direct debit payment with your lender, or arrange for your bank to automatically pay your mortgage every month on a specific date far enough ahead of the due dates for your other bills, so you won’t be tempted to pay something else. The day after payday is a great day to do this. And the date should be far enough ahead of your due date that the bill is paid and posted on time. It might hurt that first month, but it will even out once you get used to the new schedule.

No matter what, make sure you satisfy your mortgage payment obligation. Most everything else on your credit report can be repaired or negotiated, but not your mortgage lates. Don’t wind up in a situation where you’re ready to dance but too late to the party. Plan ahead, and as always, protect your financial future today.