Mortgages: June 2013 Archives

The original article was written when rates were higher. Rates are lower now so the answer is slightly different, the thought process to make that decision is the same.

I have an adustable rate mortgage (5.875) which is set to adjust in DELETED. My prepayment penalty I'm told expires DELETED (same time). My first goal is to lock in a fixed rate asap. My second goal is to cash out any equity, but not necessary. I've recently been hearing horror stories about people losing their homes over their rate adjustment. Should I refinance now and bite the bullet on the prepayment penalty? or Attempt to refinance quickly as soon as the penalty expires?

later:

my credit score is 712. My current mortgage is 244,000.00 and homes of the same model are selling between 255 - 265,000.00. What more can you tell me?

The answer to this depends partly upon stuff I don't know, and partly upon stuff nobody knows yet.

5.875 is good enough that you probably don't want to give it away before you have to, especially since you're going to pay $5700 to $7200 in penalties. 6.25 is about where A paper 30 year fixed rate loans with no points rates were when I originally wrote this, so over the next year, and it will cost about another $1000 in interest between now and then, as well.

The problem is that nobody knows what rates will be like when your fixed period and prepayment penalty expire. Nobody knows what your property value might be then either. Nor do I understand your local real estate market well enough to even guess (it's a long way from Southern California!).

It's going to be hard to get enough back in 18 months to pay for a pre-payment penalty. On the other hand, this could be balanced out if rates end up being much higher then, or if your equity situation is likely to deteriorate.

One thing I can tell you for certain is that there's no easy answer yet. Every answer I give is going to depend upon things nobody knows yet.

Let's assume rates are going up. Otherwise there would be no point to this conversation. If rates are the same or lower than they are now, any money you spend on refinancing or a prepayment penalty now is wasted.

But if we postulate a rate of 7% when your pre-payment penalty expires, that will cost you roughly $17,100 per year on $244,000. 6.25% of $250,000 (your loan with your penalty added) is roughly $15,600. You save approximately $1500 per year on your interest by refinancing now, if this assumption on interest rates is correct. However, refinancing now will cost you about $7000. $7000 divided by $1500 per year is roughly 4 years 8 months after that to get your money back. I wouldn't do it. That's about six years you've got to keep your loan to break even on the cost of refinancing now, and it's conditional upon things happening that nobody knows.

You don't have a whole lot of equity currently, and if your market falls further, you could be upside down, in which case you're going to have to pay your loan down in order to refinance. If there's no way you could come up with that money, that's another reason to consider refinancing now. However, you would be guaranteed to use up pretty much all of your equity by refinancing now. At this update, refinancing at 100% loan to value ratio isn't going to happen except for a VA Interest Rate Reduction Refinance Loan (IRRRL), and the person writing the original question was not in a VA loan because as far as I'm aware, they only permit fixed rate loans.

In your position, I'd just sit tight. Of course that's very hard psychologically, because you are leaving yourself open to the vagaries of the market, which are not under anybody's personal control. Otherwise the federal Reserve Board and company would lower rates every time they wanted to refinance their own personal loans, and that's just not the way it happens, because that's not the way it works. But spending that much money now and over the next eighteen months just in case rates go up and it saves you enough money over the next six years to break even just doesn't make financial sense. Most folks don't keep their loans that long, which means you've wasted whatever portion of the sunk costs you haven't gotten back.

Just one word in closing: There is not and never has been a legitimate reason for a loan officer to stick someone with a credit score over 680 with a prepayment penalty. The only excuse I can come up with is that the borrower requested one in order to get a slightly better tradeoff between rate and cost. You can choose to accept one if you want, but my experience says that most folks end up paying them, and the penalty is a lot more than you're likely to save by accepting one.

Caveat Emptor

Original article here

Just got a search "how can I tell if my prepayment penalty applies to selling my home"

Read The Full Note. You need to do this before you sign it. I know that many people are just thinking "Sign this and I get the house!" or "Sign this and I get the money!" but a lot of loan providers - often the very biggest - scam their customers by talking about one loan with very favorable characteristics, and when it comes time to sign they actually deliver a completely different loan with a prepayment penalty, burdensome and unfavorable arbitration requirements (I've seen stuff that amounted to "the bank chooses the arbitrator"), and any number of other unfavorable terms, not to mention having a higher rate and three times the cost, and being fixed for two years as opposed to the thirty they told you about.

Any loan officer can make up all sorts of paperwork along the way to lull you into a sense of security. The only paperwork that means anything are the papers you actually sign at closing with a notary present. The Trust Deed, the HUD-1 form, and the Note. Concentrate on these three items. The HUD-1 contains the only accounting of the money that is required to be correct (things like do you need to come up with more money than you were told?). And the Note contains all the other information on the loan that your provider might actually deliver. Notice that wording - I said might deliver. Just because you sign the Note doesn't necessarily mean you get any loan, let alone the one that Note is talking about, but these are the terms you're agreeing to now, and most Notes do actually fund. They can't change the terms without getting you to sign a different Note. But once you sign and the Right of Rescission (if applicable) expires, you are stuck.

Get that other loan - the one your loan provider has been talking about up to now - out of your head. This is the moment of truth as to what they actually intend to deliver. The majority of the time, the loan they actually deliver is significantly different from the loan they were talking about before now, and this document is where the truth lies. Amount of the loan (does that match what you were told?). Length of the loan. Period of fixed interest. What the fixed rate is, and how the rate will be computed after the rate starts adjusting. The Payments: how closely do they match what you were told? Payments are a lot less important than the interest you are being charged, but if the payments are $5 more than you were told (or if the interest rate is different), you were basically lied to. If the real loan was available and the principal correctly calculated, the payment should be within $1. $20 off gives the loan provider literally thousands of dollars to soak you for extra fees in, even if the rate is correct. A competent loan officer knows what loans are really available and whether you are likely to qualify, and can calculate pretty closely how much money it takes to get the loan done. From this flows the payment. Payment is a lot less important than most people think, but you do need to be able to make it, every month. Furthermore, that's how most people shop for loans and how unethical loan officers sell bad loans. Shopping by payment is a good way to end up with a bad loan. Many loan officers will tell you about this nice low payment, and conveniently neglect to mention the fact that if you make this low payment, you'll owe the bank $1200 more at the end of the month than you did at the beginning.

So take the time to read the entire Note before you sign. There are all sorts of things lenders slip in. I worked for a very short period at a place that trained its people in how to distract you from the numbers on this and the HUD-1 and the Trust Deed. This is a legally binding contract you are entering into, you are agreeing to everything it says, and there aren't a whole lot of methods of getting out of it if you don't like what it says later. Once the loan funds, you are stuck with the terms, the costs, and everything else. The only way out, in general, is to refinance, which means paying for another set of loan costs and quite likely the prepayment penalty on this loan. Prepayment penalties are multiple thousands of dollars. So don't allow yourself to be distracted. Read The Full Note.

Caveat Emptor

Original here

I've written articles on when you can't make your mortgage payment and how to react if you see foreclosure coming in time to do something about it, and even on Short Payoffs, but all of those are owner (seller) oriented. This is intended as a basic buyer's guide to getting a bargain from people who bit off more than they could chew, with emphasis on the current local market but applicability anywhere.

There are essentially four phases in the foreclosure process. The first is pre-default. They've made late payments or none at all, and there's no way they can keep the payments up, but they won't do the intelligent thing, which is sell for what they can get. Many people who own properties headed for default are deep in Denial. Yes, this is often because something bad happened to them for reasons beyond their control. I'd be happier if those sorts of things didn't happen, but the amount of rescuing that's going to get done is not as much as I would like - if you don't qualify for a loan modification, you are on a course for disaster. There are very few White Knights running around, and the ones who claim to be White Knights are usually blackguards. Unless the seller knows of some factor that is going to change, this is the smart time to deal with the problem. Before the Notice of Default is recorded, nobody really knows but the owner and the bank. Once the Notice of Default hits, all the sharks come out because everyone knows the owner is in Dire Circumstances. Let's face it: most folks will make the payments on their home even if they let every other bill slide. When someone can't make their mortgage payment, and it's public information as a Notice of Default is, everybody and their pet rock knows that you don't have any choice but to sell. They'll flood you with offers, but they won't be good offers.

Now if you're looking to buy at this stage, the thing to do is examine the Multiple Listing Service. "Motivated seller" and similar phrases are often code for "These people can't make their payments!", particularly in the current market with prices declining somewhat and many people who stretched beyond their means. It would be great to be able to get a list of properties that are sixty days or more delinquent, as this would include the folks in denial, but it just isn't going to happen. The only folks who know are the banks and the credit reporting agencies, and they are prohibited by privacy laws from disclosure. So at this point all you have to deal with are the people who are not in denial. When the market is rapidly appreciating, this is a good place to find a bargain, because once the Notice of Default hits, the sharks swarm, so if you can find these people before that, you're in a strong bargaining position if you correctly suspect they can't make their payments. The taxes being delinquent is often a good indicator of this, but there is no way to know for sure unless the people or their agent tell you, and the agent who tells you has just violated fiduciary duty. This can mean prospective buyers overplay their hands in negotiations, which is fine if you intend to move on if you can't get a "Manhattan for $24" type deal, but if it's a property you want and can make money on, overplaying your hand can poison the atmosphere. There aren't many "Manhattan for $24" type deals out there. There are a lot more good opportunities for someone willing to pay a reasonable price and hold the property a while or make improvements. Deals so good that they instantly make oodles of money, someone will usually come along and offer the poor schmoe on the other end a better deal, and if the poor schmoe has a decent agent who's looking out for their interests, they can switch to the other offer. Buyers and escrow companies don't like it, but it can be done. It's extra work for the listing agent, so they may not want to, and they may not have done the best set-up, but it can usually be done anyway.

The reason it's smart for sellers to sell at this time is that this is when they are going to get the best deal. The mere act of entering Default is likely to cost thousands of dollars. Furthermore, this is the phase with the most opportunity to find a property at a better than usual price for buyers, because most of these don't get to actual default. Someone will come along and make an offer, and a listing agent who gets an offer on one of these is likely to advocate taking the first reasonable offer, reasonable being defined as "anything vaguely in the neighborhood of the asking price," and the asking price itself is likely to be lower than it otherwise would be.

The second stage of the foreclosure process is default. The Notice of Default has been filed, and because it is a matter of public record, the sharks instantly react to the blood in the water. The seller is going to get dozens to hundreds or even thousands of solicitations. Also, once the property is in default, the bank can require the owner bring the Note entirely current in order to get out of default. Whether or not the property is listed, they're going to have agents offering to sell it for them, individual buyers who want those Manhattan for $24 deals, and lawyers offering to "protect" them by declaring bankruptcy. By the way, I've never heard of anyone who came out better in the end by declaring bankruptcy, so you probably don't want to do it if you're in this position. I know it's your home, and you're likely extremely emotionally attached to it, but declaring bankruptcy doesn't mean you don't owe the money when it comes to a Trust Deed.

Every single one of these folks, lawyer, agent, or prospective buyer, knows that you're in default. Some owners are still in denial at this point, but all denial means at this point is that such an owner is not likely to take the best offer they'll get. It's at this phase that most "subject to" deals happen, usually with highly appreciated properties with significant equity over and above the trust deed. If the owners owe anything approaching the value of the property, that's a silly situation to do a "subject to" purchase for buyers, and most of the prospective buyers (those with decent advisors or agents or experience) won't do it if the equity is less than a certain amount or proportion of the value.

The third phase of a foreclosure is the auction. This is typically a very short period. Five days before the auction date itself, the owner loses the legal right to redeem the property, although the bank will usually let them until the last possible instant. There is also a legal requirement to vacate the property before the auction. "Subject to" deals can still go through as long as the bank will accept redemption. Buying at the auction itself requires cash or an acceptable equivalent. You don't go to the auction and then get a loan later. At the very least you have to have the loan prearranged and a check for the proceeds in hand. This can mean that the rate is significantly higher, and it can be difficult to refinance within the first year.

The fourth phase is after the auction. In California, if the property does not get a bid for at least ninety percent of appraised value, it does not sell and becomes owned by the bank. The bank doesn't want it; they're not in the real estate business and in fact, they are legally required to dispose of it within a certain time. In the current market, this can be the best place to acquire a property. The bank knows they're taking a loss, and the longer it goes, the bigger the loss. Mind you, because the bank usually takes a loss, few properties go to this stage. Not only do they take a loss, it also ties up a lot of their working capital - money they could otherwise use to make a profit, but can't, because this property is a non-performing asset. The lenders will usually do anything reasonable in order to avoid auction, but once it goes to auction, they want to get rid of it. They usually require a substantial deposit, but the purchase price can be the best of all.

One thing to be wary of in foreclosures is they are often in less the ideal condition, to say the least. These people know they are losing the house, and usually that they are going to come away with nothing in the best realistic case. They have no incentive to take care of the property, and many actively work to mess it up - I have been in more than one where they ripped the copper plumbing out of the walls for sale and took a hammer to everything else. This is cause for care in purchasing them, and inspections, because not all of the damage may be obvious. Furthermore, many of them may have been unable to afford proper maintenance for some time before they lost the property. Purchasing a foreclosure often means you will need a large reservoir of cash in order to fix up the property to habitable condition.

Caveat Emptor

Original article here

Got a search for that, and it occurred to me that it is a valid question. The answer is yes.

The degree varies. You can simply contact the bank to make yourself responsible for payment. They are usually happy to do this, although unlike revolving accounts you typically will not receive back credit on your credit score for the entire length of time the trade line has been open. Nonetheless, if the bank reports the mortgage as paid as part of your credit, it can help you increase your credit score, so long as the mortgage actually gets paid on time every month. One 30 day late is plenty to kill any advantage for most folks. This is typically free. Hey, the bank has one more person to pay the mortgage! This is often used as a way to start rebuilding credit after a bankruptcy or other financial disaster. A friend or family member qualifies for the loan, then adds the person looking to recover to the loan later.

If you want to go one better than that, you can actually modify the deed of trust to make yourself responsible for payment, although it really has no measurable benefit as opposed to simply agreeing to be responsible, and it costs money to negotiate, notarize and record the modification.

Unless you can get a better rate by doing so, I would advise against a full re-qualification for the mortgage just to add someone. It's a lot of hassle and expense for no particular gain. If you want to get me paid, I'm cool with that, but there are better ways to accomplish the gain to your credit at far less expense.

A Caveat: One thing some people want to try is "trading" borrowers. For instance, a woman who wanted to remove her ex-husband from the loan and add her new husband. That doesn't work. In order to let someone off the loan, the remaining borrowers must qualify on their own without the person to be excluded. In short, a full refinance is required to let someone off the hook. But adding someone can only benefit the lender.

Often, you may run across the "I want a commission" mentality. Someone who wants the commission money more than they want to do what is in the best interests of the bank they work for. The bottom line for the bank is they have money at risk from an outstanding loan, so anything which increases the probability of it being repaid (like adding someone else who's responsible for that money) is a Good Thing from the bank's viewpoint. You want to add another person to the list of those responsible for repayment? That's great as far as management is concerned. Nonetheless, many employees will tell you to do what causes them to be paid a new commission.

Caveat Emptor

Original here

Quite a while ago, when loan standards were other than they have become, I wrote an article with the title Is a VA Loan a Good Deal? Back then, if you could qualify for a loan that was both A paper and full documentation, I could get you a better loan as measured by cost of interest for the same closing cost, maybe even if you didn't have a down payment. Lenders were eager to make loans at 100% loan to value ratio, and since conventional conforming rates have always been the lowest for a given cost, they could beat VA loans despite not being designed for the same situations.

That is no longer the case.

100% financing for ordinary conventional loans has completely self-destructed, at least for now. I am firmly of the opinion that it will be back for full documentation borrowers who can prove actual income via tax returns or W-2 forms, but for right now, it is gone. FHA loans only go to 96.5% Loan to Value ratio, and the down payment assistance programs that formerly enabled people to get FHA loans without a down payment have been put out of business by legislation. This leaves the VA loan as the sole loan program available that currently allows purchase of real estate without a down payment. Not only do VA loans allow over 100% financing, they have absolutely no ongoing mortgage insurance charges. There is a half a percent funding fee charged by the VA, but this is eligible to be rolled into the loan itself, and the funding fee is waived if the veteran has 10% or greater service related disability.

Not everyone is eligible for a VA loan. You must have earned it via time in the armed services. Currently active-duty service-folks are potentially eligible, providing they have met the criteria. In some cases, a spouse of a deceased serviceperson is also eligible for a VA benefit. This still isn't as many people as was true formerly. Thirty years ago, far more people served in the military than currently do. Even though San Diego is a military town, most veterans seem to leave when their tour is over, so the population of discharged veterans is lower than might be expected. They're here, but they have mostly come back because of civilian employment or following spouses who are themselves in the military, rather than choosing to retire here.

Indeed, Active duty servicemembers have an advantage over retirees. They are able to draw a housing allowance if they do not live in military housing - a housing allowance that can pay their mortgage instead of rent, and when reassigned, they can rent the property to another military family, knowing the military family receives that same allowance. A military family that exercises due diligence can retire owning five or more properties, all with positive cash flow, and most likely with huge amounts of equity, if not owned outright. Current BAH allowances for San Diego won't purchase a mansion, but they will cash flow out for quite reasonable properties in desirable parts of town. Since VA loans are all fully amortized, this will eventually pay the mortgage off, leaving them with only property taxes and maintenance for the expense of owning the property.

For a decade or more, VA loans were pretty much useless in high cost areas because of loan limits too low to purchase desirable properties. There for a while, they were only useful for one bedroom condominiums here in San Diego because the price of housing had so far outstripped VA loan limits that that was all that could be bought with them. That has now changed, both because prices have fallen and because VA loan limits have risen dramatically thanks to new legislation. Recent legislation has extended VA loan limits above "regular" conforming loan limits..

The one limit to VA loans is a good one to have: They require documentation of earning enough income to be able to afford the payments, either through tax returns or w2 form. This prevents something that has happened all too often for several years, real estate agents and loan officers selling someone a property that there is no way there are able to afford in the longer term. This was another reason VA loans were often bypassed for about a decade there, but I actually like this protective feature. Debt to Income Ratio is more important to protect the borrower than it is to protect the lender!

So even though not everyone is eligible for a VA loan, if you are one of those who has earned eligibility through service to the country, the VA loan has become the best "magic bullet" currently available to assist you in buying real estate. By not having a mortgage insurance requirement, or boosting the basic rate through adjustments as other loans have, and by requiring full documentation of income, they not only aid the veteran in affording the property, but have a significant protective element.

Caveat Emptor

Original article here