Monthly Archives: January 2007
Honey?The Bank Is On The Phone?Since We Were Two Days Late On Our Payment
Posted January 25, 2007 – 10:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceUnlike previous down mortgage cycles, lenders are pulling out all the stops to blunt foreclosures. From the use of computer models focusing on customers that ?might? fall down together with a lender commitment to slow down any borrower from falling into a non-performing loan. So if a borrower is say two days late from a normal payment pattern, customer service is on the phone to find out what is going on. Options may range from refinancing the loan with different payment terms or even consider a short sale (settling for less than what is owed) if the borrowers are selling. With many homeowners? just packing up and leaving after not being able to sell many lenders are trying to perform an intervention before the borrowers panic and disappear. With a slow resale market lenders are not setting back and waiting for payments to get down three or four payments. There is just too much at stake for the lender and the borrower. Being proactive is the rule of the day. In the area of Adjustable Rate Mortgages, lenders are pre-empting ?payment shock? by calling months ahead to determine the budget status of families looking down the barrel of a huge increase. Some lenders who are able through this intervention to obtain the whole story that will allow for skipping a payment called a forbearance process where the arrears are made up in smaller parallel payments while continuing on with the regular payment. Lenders are hedging their bets by getting involved in the non-payment or late payment profile process early on to dampen losses resulting from foreclosure. Three years ago Aaron and Gwendolyn moved from sharing an apartment to marriage to having a set of twins to buying their first home. Aaron four years out of college was employed at a local engineering firm specializing in water treatment and sewer/water construction work for several cities and counties in a 60-mile radius. Aaron started at an entry-level engineering position and was working his way up project by project. He was working to passing exams and satisfying requirements to become a Professional Engineer and thus command more money. The pay increases due to a slowing workload were lagging what was projected. Gwendolyn is a Registered Nurse worked a flexible schedule of three twelve-hour shifts per week and since she worked from six in the evening to six in the morning they were able to avoid any outside childcare. This gave her plenty of time with the twins who were experiencing the terrible twos period of pleasantry. When Aaron and Gwendolyn bought their home due to cash flow considerations they chose an Adjustable Rate Mortgage with a start rate of 1.5%. With a purchase price of $325,000.00 the couple was able to negotiate an 80/15 piggyback combo with a combined loan to value of 95% CLTV. The first mortgage of $325,000 x 80% = $260,000.00. The second mortgage of 15% amounted to $325,000 x 15% = $48,750.00. The payment on the first was based on 1.5% so the payment for the first year was $897.31/month. The payment was scheduled to go up 7.5% per year for the first five years UNLESS the negative amortization exceeded 115% of the original balance, which would trigger amortizing the whole mortgage balance at the fully indexed rate. It is now winding up the end of the third year going into the fourth. The first year minimum payment was $897.31/month. The second year increased 7.5% to $946.61/month. The third year increased to $1,036.96/month. At the beginning of the month a noted rate increase was received. In reviewing, the prior month?s payment was $1,036.96/month. In the meantime, because the second mortgage was going behind a negative amortization first mortgage the best second mortgage available was one that is tied to the prime rate. Currently the prime is at 8.25%. Due to the risk level an additional 1.50% margin is added to the prime rate giving a current rate of 8.25% plus 1.50% = 9.75% rate on the second mortgage. The payment is now $415/month on the second mortgage but will float with prime. All during this period the taxes have risen to $3,900/year for a monthly escrow of $325/month. The hazard insurance has been holding with slight increases to $2,900/year = $241.66/month. The prior month?s payment was $1,036.96/month plus $415/month on the second mortgage plus $325/month in taxes and $241.66/month in hazard insurance for a total housing payment of $2,018.62/month. This was stretching the budget but Aaron and Gwendolyn were just making it together with all the expenses of the twins and settling in to a new home. Now with the most recent notice it brought home the downside of a negative adjustable rate mortgage showing its teeth from the ARM disclosure. There was a mountain of paperwork to sign at the closing outlining what was to transpire in the course of time with regard to this particular negotiated mortgage deal. The mortgage broker chose to present a 3.75% margin on top of the one-month LIBOR index, which is now at 5.32%. So the current fully indexed rate is at 5.32% plus 3.75% margin for a rate of 9.07%. With the broker structuring the deal at a 3.75% margin it gave a bigger Yield Spread Premium payment from the lender to the broker at closing. Margins could have been set closer to 2.00% or 2.25% to slow down the steep increases. If the lower margins had been selected, then the fully indexed rate would have been 2.0% + 5.32% = 7.32% or 7.57%. This is a big difference. The end result was to set the borrowers up to explode payment wise in three years in a rising market. With a 115% LTV loan to value limitation the mortgage could float up to approximately $260,000 x 115% = $299,000 before full amortization would take place by recasting the payment to pay out in the remainder term. Note: ARM rider terms can very from case to case. Many differences are based on the index selected. Acronyms such as COSI, MOSI, MTA, 1-month LIBOR, 6-month LIBOR, 1-Year Treasury, 3-Year Treasury, 5-Year Treasury, etc. populate the market place. Some are more stable while others spike up and down over time. The consumer needs to carefully select something that will work for them. Look at the history of the index and understand it. If the ARM loan is not fully understood in detail, pass and get something else. The stakes are just too high. This month?s notice put Aaron and Gwendolyn in shock. The mortgage amount on the first was now at $299,000 and the mortgage was being recast to fully amortize at the fully indexed rate of (5.32% index + 3.75% margin) 9.07% adjusting monthly per index movement. The new payment based on $299,000 principal and 9.07% rate with a remainder term of 323 payments leads to a payment of $2,477.59/month. This was a $2,477.59 - $1,036.96 = $1,440.63/month increase in payment. This was indeed a budget destroyer. Normally, their mortgage payment was paid on the 1st of the month within a few days, but not this time. Aaron and Gwendolyn thought about selling or just walking away. With a new first mortgage payment of $2,477.59/month + $415/month on the second + $325/month in taxes + $241.66/month for hazard insurance for a new payment of $3,459.25/month. This was just an overwhelming number to them. It was great while it lasted paying the absolute minimum and staying in the $2,000/month range, but the chickens had come home to roost. Gwendolyn called out to Aaron, ?Honey! The bank is on the phone ?since we were two days late on our payment?they want to make a deal.? Aaron thought it strange with just two days off from his normal payment date the bank would be calling and pounding on him for the money. The account executive flagged the file as one experiencing a major increase in the payment. She was proposing to role the first and the second mortgage into a new loan based on a fixed rate on a 40-year term with a rate of 6.25% fixed. The bank was willing to cut closing costs in half and add them to the mortgage and waive the six-month?s interest rate penalty on the first mortgage and roll the escrows over on the new loan. Looking at the numbers the first mortgage of $299,000 was added to the payoff on the second mortgage of some $47,772.88 for a total payoff of $346,772.88 plus accrued interest and closing costs of $4,000 for a new loan amount of $350,775.00. Fortunately for Aaron and Gwendolyn their property had appreciated from $325,000 to $375,000. Using an AVM (Automated Valuation Model) the bank was satisfied with the value found online and was waiving the appraisal. This was a 95% LTV loan and the bank was going to portfolio the loan and waived the PMI insurance by eating it. The new payment based on the $350,775.00 loan was $1,991.49/month for principal and interest. With taxes and insurance the fixed rate payment was now $1,991.49 + $325/month in taxes + $241.66/month in insurance for a new proposed housing expense of $2,558.15/month. This was ($3,459.25 -$2,558.15 =) a savings of $901.10/month with a fixed rate mortgage with only increases for taxes and insurance to deal with over time. Aaron and Gwendolyn thought about the scenario for about five seconds and took the deal. It was either accepting this deal or move. Their credit would be destroyed in the process if they chose to do something else. If they tried to sell with selling costs there would be nothing left. This credit challenge would have been difficult to overcome. It was going to be rough for a few months but as soon as Aaron got his Professional Engineer (P.E.) designation he would be making a lot more money and his stature in the engineering community would skyrocket with his civil engineering background and other positive options would be available. With what is happening in the market place, lenders are taking hits on short sales for as much as 10% to 20% of what is owed just to get it off the books. If the lender can work out a situation and the terms are made flexible and loans are rewritten all designed to keep the owner in the home and keep the property out of foreclosure. If a property goes into foreclosure there is a good chance a lender will take a major hit so all kinds of inducements and incentives are put into play to keep the loan in a performing status. Lenders are now doing ?workouts? before the situation gets dire for the borrowers. A foreclosure on a borrower?s credit is a very adverse event to overcome. In some cases some lenders will not look at applications for a year or two after establishing a new housing history. There is a great benefit to borrowers to work it out. In this case, Aaron and Gwendolyn were able to save their homestead and reduced their mortgage to a manageable level. They agreed among themselves, to make extra payments just as soon as Aaron got his P.E. ticket and put the amortization down in the twenty-year range just to justify the big run up in negative amortization. Many other couples are not being offered options as the loan has been sold into the secondary market and the service departments may not be able to offer generous options. In that case the homeowner needs to immediately seek help to change things up before it gets totally out of hand. It will end up in the tank with credit ripped to shreds if efforts are not made to engage the lender early in the cycle. Once ?Notice Of Default? is filed it will be tough. The adverse credit event will likewise show up on the borrower?s credit and further complicate things by plummeting FICO scores. To review: IF an ARM product is the answer, then the lowest possible margin needs to be negotiated coupled with a stable index. An option ARM has the power to allow a borrower to pay above the minimum payment and insure it does not go negative. Some lenders offer a bi-weekly plan, which accelerates the payments by making an extra payment per year and reducing the negative amortization. In any case, a consumer needs to shop and enter into an ARM mortgage with full knowledge of what the terms and conditions of the deal. Otherwise, ?Honey?The Bank Is On The Phone?Since We Were Two Days Late On Our Payment?They Want To Make A Deal?? OR ?If we don?t have a payment by Friday, a Notice Of Default will be filed and Foreclosure proceedings will follow.? Homeowners need to be proactive if there is an impending problem with payments they may just get a sympathetic ear. Dale Rogers www.brokencredit.com www.sellerhelpsbuyer.com All rights reserved. Article may be reprinted as long as the content remains intact, unchanged, and all links remain active.
Dale Rogers is a thirty-year mortgage veteran and frequent contributor to the Broken Credit Blog. The BCB is a free website created to assist the general public with information about credit repair and responsible mortgage lending.
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Second Mortgages - Are they twice as much trouble ?
Posted January 9, 2007 – 10:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceA second mortgage is the second loan that is secured against the home and second in importance to the first. This means that should the borrower not be able to pay off the loan in full and the bank or money lender repossessed the home to recoup their losses, the first loan would be paid off first and the money that was over would be used to pay off the other loan. The second loan has a higher interest rate than the first one to compensate the lender for the extra risk he has to take. The loan charges on the other hand will be less as there is already a loan registered on the borrowerâs name. It is not difficult to qualify to borrow a second loan as the loan is secured against the home. It is always better to first shop around for money lending agencies and the banks that have the best interest rates and loan charges. This loan is usually used for home renovations. Renovating the home periodically is important to keep up the value of the property. Major repairs can cost a lot of money but have to be done and the best way is to borrow the money and get the jobs done. The best way is to get quotes from various building companies and building supply companies for the work that has to be done. When you have the best prices you can apply for a loan for the correct amount you will require. This loan can either be taken in a lump sum or you can open a line of credit and spend the money as you need it. In this instance the line of credit would work very well as you will be able to pay for labor and material as the phases of the project are completed and the money will be spent for the purpose for which it was borrowed. This line of credit works much like a credit card. A second mortgage can be taken on the home to pay for a childâs college or university fees. As this loan is usually a large amount of money this would be ideal to pay theses expenses. Lee Van writes informative articles on a range of subjects including Second Mortgages http://www.secondmortgagessite.com
Lee Van has a information site covering all aspects of Second Mortgages
http://www.secondmortgagessite.com
Adjustable vs Fixed Rate Mortgages
Posted January 5, 2007 – 10:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceAdjustable vs Fixed Rate Mortgages
Brought to you by http://www.wolverinefinance.com
Mortgage rates can either be fixed for the duration of your loan or can be adjustable. An adjustable rate mortgage is a loan that is set up with an interest rate that changes based on pre-determined criteria, primarily tied to the federal interest rate. If the interest rates are up, then your interest rate on your loan will be higher, if the interest rates are low then the interest rate on your loan will go down.
Adjustable rate mortgages (ARM’s) are generally fixed interest rates for a period of time and then become adjustable. Generally speaking, the introductory interest rate for an ARM loan will be lower than a fixed rate mortgage. This is done in order to lower initial payments and allow people to take out larger mortgages, or give them smaller payments for the introductory period. This is attractive to people who may know that their income will be increasing over that period of time.
Whether or not to choose an ARM or a fixed rate mortgage has been debated for as long as there have been ARM’s. Though people feel strongly in both camps, simple mathematics can assist you in determining which mortgage is best for you and your personality. Your personality? Yes. Some people are not comfortable with any uncertainty in their lives. The idea of having an uncertain mortgage payment in the future may cause them more stress than the money they are saving is worth. Therefore, factor your own comfort level into the equation.
Generally speaking, ARMs are 2, 3 or 5 years, though they can be longer or shorter. At the end of that period your interest rate will become variable unless you sell your home or refinance. If you think that the likelihood of your selling or refinancing within the period of the ARM is strong, than the lower interest rates of the ARM loan will be of great benefit to you. If you think it is unlikely that you will sell or refinance within that period, then you may not benefit from an ARM.
Bob and Robyn are a young married couple just starting out. Bob is in advertising sales and Robyn is a teacher. Bob is fairly confident that his income will continue to increase over the next several years as he works his way up to becoming an account executive. Robyn’s income is more predictable and is on an upward trend. Being a young couple they do not have the finances for large mortgage payments.
Bob and Robyn are presented with two mortgage proposals for their $150,000 mortgage. Proposal one is a 30-year fixed rate mortgage at 6% and the other is a 5-year ARM at an introductory rate of 5.25%. The fixed rate mortgage payments would be $899.33 per month, not including taxes. The ARM would have a 5-year period where payments would be $828.31 per month, not including taxes. Bob knows that even if he can afford the extra $70.00 per month for the fixed rate mortgage, that $70 per month may be better spent knocking down principle during the ARM period. He is further confident that as his salary increases, he is likely to upgrade his home within five years or refinance to make home improvements. Bob and Robyn took the ARM loan.
John and Catrina are a married couple with three grown children. John has been employed at the same company for 18 years and Catrina has been with her company for 12 years. They have consistent and stable income. Neither John nor Catrina expect any substantial increases in their salaries. After their last child moved out of the home they decided to downsize and buy a smaller home. They have a substantial down payment and will only be taking a mortgage of $100,000 on their new home. John and Catrina are presented with the same loan options as Bob and Robyn were. John and Catrina, however, know that it is unlikely they will sell or refinance in the next five years. They are comfortable with the payment schedule and, therefore, prefer the certainty of the fixed rate mortgage.
There are countless websites that offer mortgage calculators to determine your mortgage payment. For your convenience we offer one on our site. You can review the different payment schedules based on the interest rates quoted for the fixed-rate and the ARM. Once you know the different payment amounts you will be able to determine which loan makes the most sense for you and your unique circumstances.
Your mortgage professional should also be able to assist you in reviewing the options and making the best decision for you. The more open and honest you are with your mortgage professional the more helpful they will be. It is only if they are armed with full and honest information that they will be able to make recommendations to you. About the Author: Max Hunter is the author of many credit related articles. If you are looking for help with Home Loans or any type of credit issue please visit us at http://www.wolverinefinance.com For Credit Repair Software, other products, ebooks & articles, visit http://www.globalbizwiz.com
I own a mortgage company and want to keep people in the know! I also have a For Sale By Owner website where you can post your home for free. www.MyUglyYellowSign.com By the way…Keep your credit clean…You'll always pay more if your credit is poor!
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Posted January 4, 2007 – 10:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceThere are 4 main mortgage programs available on the market today, fixed rate, adjustable rate, interest only, and option arms. In order to understand how these mortgages can affect you lets take a look at how they work. Lets start with a fixed rate mortgage. This mortgage is by far the safest mortgage for most homeowners with rates as low as they are today. You never have to worry about your interest rate increasing your payments and as years go by you are paying down the principle on your mortgage. A fixed rate is key if you plan on staying in your home for years to come. You can always take out a second mortgage to payoff credit cards, get cash out or whatever your needs may be. An adjustable rate mortgage in todayâs market is a good decision if you can not get a fixed rate mortgage at or below 7.5%. We all know that mortgage rates only have one way to go and thatâs up. If you plan on refinancing again in two years or more expect interest rates to be around 7% or higher. An adjustable rate mortgage gives you the ability to save a few bucks a month but also forces you to refinance that mortgage within a set amount of time. An interest only mortgage only requires you to pay the interest, leaving the principle untouched. If you plan on making extra payments on your mortgage you may as well take a fixed rate mortgage which usually has a lower interest rate anyways and helps you avoid refinancing again if you decide not to make extra payments towards your interest only mortgage. Usually on an interest only mortgage after 5 or 10 years you have to start to pay principle anyways. If you are a procrastinator, you will see a significant increase in your mortgage payments when you have 25 or 20 years left to pay on the original balance of your mortgage from 5 or 10 years ago. An option arm mortgage is more of a tool then anything. You have to be very careful with this loan or it can really bite you in the butt. This loan is for homeowners who can get a better return on their money by putting it in the stock market, IRAs or other investment opportunities. With the option arm you have 4 different options to pay each and every month, hints the name option arm. You can make a below interest only payment, an interest only payment, a 15 year adjustable rate mortgage payment or a 30 year adjustable rate mortgage payment. If you make the below interest only payment each month you will start to see your mortgage balance increase. In order for this to make any sense, the money that you save and invest needs to make up the difference of your mortgage increase. If you are thinking about refinancing in todayâs market make sure you look at these options very carefully. I talk to people daily who never really understood what they were doing when they took out their interest only loan, all they cared about was how low the payment was. With the housing market slowing down as much as it has, paying down your principle may be the way to gain equity in your home for the next few years. There are many homeowners out there who owe what their house is worth and can only afford the interest only payment. Unless their income increases significantly they may find themselves between a rock and a hard spot.
Future Planning Financial is dedicated to educating homeowners by honest and upfront mortgage lending. We strive to help you understand every aspect of the mortgage refinancing process as possible. We know that making the right decision today can save you tens of thousands of dollars for years to come. To discuss your individual needs visit us at <a href="http://www.fpf-direct.com/apply.html">www.fpf-direct.com</a>.
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