Mortgages: February 2021 Archives

People always assume they'll be able to refinance later. Even most of my articles have it as an implicit assumption.

But what if you can't refinance later?

There are situations where it happens. Many situations, as millions of people are finding out now. When I originally wrote this I was getting large numbers of search engine hits from people who were looking to refinance into another negative amortization loan, but Wall Street had figured out that they weren't good investments by then. Later it was due to over-reaction to losses that were,at the root, the lenders and investor's own fault - but the practical upshot was that millions of people who should have been able to qualify to buy or refinance couldn't. But people don't pay attention to most real estate problems until they're smacked in the face with a cold haddock. With a half million dollar investment on the line, this is roughly equivalent to pigs following a swineherd to the slaughterhouse, but people still do it.

It is one thing for an investor who can afford to lose the entire investment to make a bet on the future of the market. If they win, they win. If they lose, the investment may be gone but they've still got a place to sleep for the night. It was a calculated risk where the dice came up snake eyes. Never any fun to have happen, but survivable. Furthermore, in order to be able to win, it must be possible for you lose.

It is something entirely different to counsel someone to make a bet they cannot afford to lose. If the consequences of a losing bet include homelessness, bankruptcy and might as well be permanent damage to your credit rating which makes it impossible to get started again, that's a different category of bet.

Real Estate loans, done wrong, are a "bet the farm" type bet - on something that nobody involved in the decision making process can control. Not the consumer, not the loan officer, and definitely not the real estate agent who says, "I know someone who can do the loan, and the Payments will be affordable."

There are several things that can prevent someone from successfully refinancing. Some of them may be somewhat under consumer control; most of them are not. These include:

Time in line of work: You can change employers and not fall afoul of this, but changing from employee to self-employed (or vice versa) can mean you don't qualify. Changing careers because the economy means there's no demand for what you used to do is also a turndown for at least two years - potentially forever if the new career doesn't make enough.

Documentation of income can mess you up more than anything else, often for the same reason that time in line of work does. You were getting a regular paycheck and a W-2, now you've gone to self employed, the clients have been a little slow in paying, and you've been very certain to take all of the legal deductions on your tax form. Good for your tax bill, not so hot for your ability to qualify for a loan, particularly if you've had to put more than usual on credit. Once again, the interest expense for business items may be deductible, but it can also put a huge crimp in your debt to income ratio. Not to mention that stated income loans are no longer available anywhere I'm aware of, making life difficult for the small business owner who wants to buy real estate.

Changing from owner occupied to investment property can sink you, particularly with a loan to value ratio over 80 percent. Your employer says you can keep your job, but you've got to move to Timbuktu, which means you can't live here any more, and because you can't live here, you no longer qualify for "owner occupied" loans

Loan guidelines change over time. This one has been a killer problem for a lot of folks of late, as when I first wrote this, guidelines had tightened more in the previous few months than they loosened in the previous ten years, and it continued to the point where it got ridiculous. There is no more stated income, no more 100% conventional financing, as neither PMI companies nor second mortgage lenders will touch it right now. The down payment assistance programs are dead. Even if you are one of the folks who still theoretically have significant equity, you may not be able to refinance into something sustainable.

Then there are market problems. If the property has lost value from when you bought, you may owe more than the property is worth. For quite a while I;ve been writing about what a pain it is to refinance when you're upside down, as well as the fact that it's not likely to be an improvement over what you've already got, even with Fannie and Freddie's 125% refinancing program.

I wrote Losing Property Value with Highly Leveraged Properties in March 2006 (updated just a few months ago), when people were still in denial about the problem, or thinking it was somebody else's problem. But the problem is always a possibility, and it's no respecter of anyone's stress level. Life is what happens while you're making other plans.

With this in mind, at least for your own principal residence, you want to have a sustainable, fully amortized loan in place, with a fixed period of at least five years. Actually, I'd be comfortable enough with shorter fixed periods now that the air is out of the market. Even if we do lose a little bit more, which I don't think we will here locally, by the time three years are up, values are very likely to be at least 20% higher - and you will have paid down the loan by several thousand dollars. But most people who chose shorter fixed period loans, or Option ARMS (which have no fixed period at all) was the low initial payment allowed them to appear to qualify for the loan for a more expensive property than they could really afford. This is precisely the reverse of how it needs to be done: Figure your purchase price budget using an available thirty year fixed rate loan, and then if you want a loan with a shorter fixed period in order to save interest and closing costs, you still want to stay within the same purchase budget, not choose a loan because that's the only way you can afford the payments on this property that's way beyond your budget. Lest you now have figured it out yet, that's a recipe for personal disaster of a sort that takes many years to recover from, and some people never do recover from it.

For this reason, having an unsustainable loan, where the payments are going to adjust to something you cannot afford later, can change the answer to "Is it a good idea to refinance?" from "No - the available tradeoffs between rate and cost don't save me any money (or don't save enough)" to "Yes - I need to move to a more sustainable loan, and if I don't do it now, I may not be able to qualify later." If the market value of the property may be ripe for deflation, if your employment or income may become unstable or undocumentable, if your payments are predictably going to adjust to something unaffordable within two to three years - in all of those situations I have advised people that refinancing may not put them into what appears to be a better situation now, but if they wait, their current loan is going to become unaffordable and there is a serious chance they will not be able to qualify for another loan when it does. Sometimes the situation can be as simple as loan guidelines are likely to tighten up later - I predicted the demise of 100% conventional financing as a consequence of market deflation almost five years ago. Being temporarily "upside down" on your mortgage or having insufficient equity to refinance well under current guidelines is not a big deal if your loan is a fixed rate fully amortized loan, or even a medium term hybrid ARM. The loan is in place, on terms that you can handle. You keep on making those payments, your lender is happy, your pocketbook can handle it, your loan balance decreases, and prices will come back - sooner than a lot of people think, in the current media hullabaloo. In a year, or two, or three, you'll have equity, be able to sell for a profit, your job or income will be stable and documentable again, and the rough patch will be behind you. It's what happens when you need to refinance now and can't that gets folks into trouble.

Caveat Emptor

Original article here

One of the things that always seems to be aiming to confuse mortgage consumers is advertising based upon whether the loan is fixed rate, and for how long.

First, I need to acquaint you with two concepts: amortization and term. The term of the loan is nothing more than how long the loan lasts. How many months or years from the time the documents are signed until it is done. At the end of the term, the loan is over. In some cases, the payoff schedule (or amortization) will not pay the loan off in this amount of time, leaving you with a balance which you must pay off at that time. When this happens, it is known as a "balloon payment."

Amortization is the payoff schedule. In other words, if the term was long enough (it isn't always) how long would it take you to pay the loan off with these payments?

There are four basic types of home loans out there. The first is the "true" fixed rate loan, the second is the "true" ARM, or Adjustable Rate Mortgage, the third is the hybrid, which starts out fixed but switches to adjustable, and finally, the Balloon.

"True" Fixed rate loans have the interest rate fixed for the entire life of the loan. Loan term of a true fixed rate loan is always the same as amortization period. Until you pay it off or refinance, the rate never changes. They are most commonly fixed for thirty years, but are fairly common in fifteen year variety, and widely available in 25, 20, and even 10 year variants, and the 40 year loan is one of those things lenders bring in and out of availability depending upon how badly they need it to sell loans. The shorter the period, the lower the rate will be in comparison to other loans available at the same time, but the higher the payment, as you have to get the entire principal paid off in a much shorter period of time. I seem to always use a $270,000 loan amount, so let us consider that. Making and holding a few background constraints constant, when I originally wrote this the rates from a random lender for a thirty year fixed rate loan was 6.25% at par (no points, no rebate). The 20 was 6.125, the 15 year 5.75. The 15 sounds like a better deal, right? But where the payment on the 30 year fixed rate loan was $1662.43, the payment on the 20 year fixed rate loan was $1953.88, and the payment on the 15 year loan was $2242.11 So you may not be able to afford the payment on the 15 year loan. (This particular lender didn't have 25 or 10 year loans.)

Some thirty year fixed rate loans are available with interest only for a certain period, usually five years, and then they amortize over the last 25 years of the period. Some people do this because they expect a raise in their income over the next few years, and some just do it for cash flow reasons, planning to sell or refinance before the end of the fifth year. Using the example in the preceding paragraph, this would have you making a monthly payment of $1406.25 for the first five years, then $1781.11 for the last twenty-five.

If there is a pre-payment penalty on a thirty year fixed rate loan, it is typically in effect for five years. Considering that over 50% of everybody will refinance or sell within two years, and over 95 percent within five, this is an awfully long time for a pre-payment penalty to be in effect. Practically everyone with a five year pre-payment penalty is going to end up paying it.

"True" Adjustable Rate Mortgages, or ARM loans, are adjustable from day one. The interest rate is, from the time the loan starts, always based upon an underlying rate or index, plus a specified margin. There is no fixed period whatsoever on a "true" ARM. This makes them in general hard to sell, because people cannot plan their mortgage payments, and except for the Negative Amortization loans sold on the basis of a temporarily low payment, these loans have always been very rare.

(If someone offers you a rate that appears way below market rates, like 1%, they are offering you a Negative Amortization loan. The 1% is a "nominal" or "in name only" rate, the real rate on these is month to month variable from the start based upon an underlying index, making this a "true" ARM.)

If there is a prepayment penalty on a "true" ARM, it must therefore be for a longer period than the fixed period, which is zero. You are taking a risk that you will have to pay a pre-payment penalty because the rate did something that you did not anticipate, and you may not be able to afford the payments if the rates change but the penalty is still in effect.

Rate adjustments on ARMs can be monthly, quarterly, biannually, or annually, with monthly being most common, including for every Negative Amortization loan I've ever seen.

The third category is the hybrid loan. Hybrids are often called Adjustable Rate Mortgages, and most loan officers are really talking about hybrids when they discuss ARMs. You should ask if uncertain, but in general, everybody from the lender on down calls them ARMs (I myself almost always call them ARMs), but when you get down to the technical details, they are a hybrid. Hybrids start out fixed rate for a given period, then become adjustable. The overall term of the loan is usually thirty years, but the forty is more likely to be available for hybrid ARMs than for fixed rate. Unlike Balloons, if you like what they adjust to, you are welcome to keep hybrids for as long as they fit your needs. There is no requirement to refinance a hybrid after the fixed period.

Hybrids are widely available with 2, 3, 5, 7 and 10 year initial fixed rate periods, and they may also be available "interest only" for the period of fixed rate at a slightly higher interest rate. Two years fixed is typically a subprime loan, and while five and seven and ten year fixed periods are available from some subprime lenders, they are more commonly "A paper" loans. Three is common both subprime and "A paper". Once they begin adjusting, "A paper" typically (not always!) adjusts once per year, while every hybrid subprime I've ever seen adjusts every six months.

WARNING: I often see hybrid loans advertised and quoted as "fixed" rate loans, and you find the fact that they are hybrid ARMs buried in the fine print somewhere. Yes, they are "fixed rate" for X number of years. But this is fundamentally dishonest advertising. This is one of the reasons I keep saying that any time you see the words "Fixed rate," you should immediately ask the question "How long is the rate fixed for?" Please go ahead and ask, for your own protection. Ethical loan officers know that people get sold a bill of goods on this point every day, and so they're not offended. And you don't want to do business with the unethical ones, right?

Now, I am a huge fan of hybrid loans myself. When I originally wrote this, I went so far as to say that I would never have a thirty year fixed rate loan on my own home unless the rates do something economically unprecedented. Well, that has now changed due to the stringency of qualification requirements and how people's economic circumstances can change to make it impossible to qualify for a new loan. The benefit to hybrids is you get a lower interest rate because you're not paying for an insurance policy that the rate won't change for thirty years, without jacking up the minimum payment to something you may not be able to afford. Most people voluntarily abandon their thirty year interest rate insurance policy (also known as "Thirty year fixed rate loan") within about two years anyway. So why would I want to spend the money for that policy in the first place, when I'm likely to only use two or three or five of those years?

Nonetheless, particularly with subprime loans, you need to be careful. I have seen precisely one subprime loan in my life without a pre-payment penalty, and I've seen a lot of loans (at least thousands, maybe tens of thousands - I wasn't counting at the time - where your average real estate agent has seen maybe a few dozen, and your average bank loan officer maybe a few hundred). Many loan providers, even "A Paper" loan providers will stick you with a three or five year pre-payment penalty on a two year fixed rate loan. Why? Because it increases their commission. So if you take one of these loans, you will have a period of time when you don't know what the rate will be doing, but if you refinance or sell during that period, you will have to pay your lender several thousand extra dollars. This puts many people on the horns of a dilemma - whether to keep making payments they can't afford, or pay the pre-payment penalty. The bank wins either way.

One final point about hybrid loans. Once they adjust, they all adjust to the same rate plus the same margin. Unless you need the lower payment to qualify for the loan, it makes no sense to pay three points to buy the rate down on a five year hybrid ARM (or anything else) when it takes eight to ten years to recover the cost of your points. Why? Because you'll never get the money back! When the rate adjusts on the loan you paid three points for (IF you keep it that long), it goes to the same rate as the loan where they would have paid all of your closing costs. Judging by the evidence, most people don't understand this.

The final category of loan that I'm going to discuss here is the Balloon. This is a loan where the amortization is longer than the term. So if the amortization is thirty years, you make payments "as if" it were a thirty year loan, but since the actual term of the loan is shorter, you will have to sell, refinance, or somehow make extra payments to pay it off before the loan term expires. The thing I don't understand is that Balloon rates are typically higher than the comparable hybrid ARM, despite the fact that you either have to come up with a large chunk of cash at the end or sell or refinance prior to that. This makes them a less attractive loan. Furthermore, pre-payment penalties are every bit as common. Balloons are widely available in five and seven year terms with thirty year amortization, and I've seen three and ten, as well. Probably the most common "balloon" loan, though, is for those who do a fixed rate second mortgage, where the best loan available is usually a thirty year amortization with a fifteen year balloon. Since over half of everybody has refinanced within two years anyway, and 95 percent within five, the fact that it's got a fifteen year balloon payment just doesn't affect a whole lot of people, and it shouldn't scare anyone off.

WARNING!: I have seen Balloon Loans mis-advertised in the same way as I talked about with hybrid ARMS a few paragraphs ago. I regard this as even more misleading than advertising hybrid's as fixed. Unfortunately, many states do not have good regulations on rate advertising, and in many others, enforcement is lax. When a loan provider advertises, the entire game is to get you to call, and then control what you see and what you learn from that point on. Your best protection from this is to talk to other loan providers. Shop around, compare offers, tell them all about each others' offers. If something is not real, or it has a nasty gotcha!, if you talk to enough people, somebody will likely tell you about it. If you only talk to one person, you're at their mercy. Even if you somehow ask the right question to discover the gotcha!, the people who do this have long practice in distracting you, or answering another question that somehow seems similar enough that you let it go.

Caveat Emptor



Original here

Everybody knows that you want the lowest rate, and everybody knows that you don't want to pay any money you don't have to, in order to get it. However, not everybody makes the connection that it is always a tradeoff between the two. At any given point in time, each home lender has its own set of tradeoffs in place.

There are two components to the costs of a loan: Closing costs and points. Points have to do with the cost of the money. Closing costs relate to the work that has to be performed in order to get the loan done. These are not junk fees, although junk fees do happen.

Let us consider for a moment the home loan. You want to buy a home for your family, but don't have enough cash. Without somebody willing to loan you the difference, you cannot buy. You check with your family, your friends, your neighbors and they're all tapped out (or say they are). But there's a bank over there willing to loan it if you meet their terms.

The banks are not being altruists, of course. They're making a good chunk of change for doing so. But you would not believe the amount of complaints I hear out sympathetically about how this evil horrible bank is charging all this money and making people jump through all these hoops to get this money ("They want a pay stub! Actually they want two pay stubs! What is the problem with these nazis?"). Fact is that this bank is doing you a favor, risking hundreds of thousands of dollars on you so that you can own a home for your family. They are doing something for you that all of your friends and family were unwilling or unable to do: loan you the money to buy a home. I'd say that puts them pretty high on my "nifty list", not "Nazis", but it's your life. When you think about it, they're doing you a favor by making certain you can afford the payments on the loan (It's more than many agents and many loan officers will do), as well as insuring that if something goes wrong and you can't afford the loan, they'll get most of their money back. Real Estate is not sold on a whim. Just after the market peaked, another agent in my office had a listing of an $800,000 home. The family involved makes about $60,000 a year. Their interest alone was 76% of their gross pay, never mind property taxes and insurance. An unscrupulous agent sold them the house based upon the ability to flip it whenever they wanted, and found them a similar loan agent to get them a negative amortization loan so they've got about fifteen hundred dollars a month being added to their mortgage and they still can't make the payment. But real estate is not like stock; you can't sell it at will. The market cooled just a little bit. They lost their entire investment before they even came to us, and they came to our office to get it sold before worse things happened, and we did everything that could be done, and still nobody wanted to buy it until the price was reduced.

There's a lot of this out there. You would likely be amazed at the loans a competent loan officer can still qualify people for, and that if you understood what you were getting into, you'd drag them into the sunlight and run a wooden stake through their hearts before running away, instead of believing them to be your friend. I'd have gotten an extra client a week, at least, if I didn't sit down with the people to find out what they can really afford before I showed them the $800,000 house that's going to get me paid a Huge Pile Of Money, when I really should be telling them about 2 or 3 bedroom condominiums, or even telling them to continue renting. It's hard to get a client enthusiastic about a 900 square foot 2 bedroom condo when someone else is showing them a 5 bedroom 2800 square foot House! With It's Own Yard! No Shared Walls! and telling them they Know Someone Who Can Get The Loan! Well, I could have gotten them the loan, too, if they really wanted it, but it really doesn't help them if they can't make the payments. The world will catch up to those other agents and loan officers, and I put a certain value on the good opinion of the man in the glass.

Getting back to the issue of closing costs, there is work that has to be done before you get your loan. The people who do that work are entitled to be paid. You don't work for free. They're not going to work for free. As I have covered elsewhere, realistic closing costs without junk fees are about $3400, and can easily be higher. The bank is not just going to absorb these costs because they're going to make money off the loan. They have money, and if you want them to loan it to you, you need to meet their conditions.

Each home loan, whether the lender intends to sell it or not, has a value on the secondary market. They also cost the lender a certain amount (they have to pay for all money they lend, whether by borrowing or by opportunity cost). Based upon these two facts, the lender sets a level of discount points or rebate for each rate for each type of loan. When you pay discount points, you are actually paying the lender money in order to buy a rate that you would not otherwise be able to get. When there is a rebate, it means that the lender will pay out money for a loan done on those terms. A rebate can be thought of as a negative discount, and vice versa. Whatever the level it is set at by the lender, there's going to be an additional margin so that the broker or loan officer can get paid, even if the loan officer is an employee of that lender. This margin is not necessarily smaller by going direct to a lender - actually a broker usually has a better margin than that lender's own loan officers. As I say elsewhere, the supermarket banks often have their best rates posted, and I'm usually getting someone a better loan (lower cost/rate tradeoff) with the same lender.

But within a given type of loan, the lender always sets the loan discount higher for the lowest rate. The lower the rate, the higher the discount and the higher the rate the lower the discount. Choose the lowest rate, and pay not only closing costs but the highest discount as well. Whether it's coming out of your checkbook or being added to your mortgage, you are still paying it. Choose a somewhat higher rate, and there will be no discount points, just closing costs. There's a name for this rate where there's no points but no rebate; it's called par. Rates below par involve discount points, rates above par will get you some or all of your closing costs paid by the bank or broker.

Many people will want the lowest rate; after all that has the lowest payment. But it is (or should be) the client's choice, not a choice made for them by the loan officer. It's actually easier to qualify for lower rates, because the payment is lower. However these lower rates can be costly, because the fact is that the median mortgage age in this country is about two years, and fewer than 5% of all loans are more than 5 years old. This means there's a 50% chance you've refinanced (or sold and bought a new home) within two years, and over 95% within 5 years. The exact numbers vary over time, but I see no reason for these consumer habits to change. Furthermore, I'm a consumer, and so are you. There are people who bought a place and paid off their 30 year loan and now own the property free and clear, but they are rare these days. Much more common is the person who bought their house in the 1970s, has refinanced ten or twelve or fourteen times, and now owes ten times the original purchase price. More common yet is the person who's on the third, fourth, or fifth house since then. You might be one of the first group, or you might not be, pretend you are, and be hurting only yourself. It's likely to be a costly illusion.

Let's look at three different 30-year fixed rate loans. All of them start from needing $270,000 in loan money. Rates are lower now than when I first wrote this, but the comparison of results is still valid.

Loan 1 gets a 5.5% rate, but has to pay two points to get it, so his loan balance starts at $270,000 plus $3400 plus two points, or $278,980. He paid $8980 to get his loan. Loan 2 gets a 6% rate at par, and his loan balance starts at $273,400, because he only had to pay $3400 to get the loan. Finally, Loan 3 chooses a 6.5% loan where all closing costs are paid for him by the bank or broker. His loan balance starts at $270,000.

Your first month interest with Loan 1 is $1278.66, and principal paid is 305.36, on a payment of $1584.02. Loan 2 pays $1367.00 interest and $272.17 principal with a loan payment of $1639.17. Loan 3 is going to pay interest of $1462.50, principal of $244.08, and have a total payment of $1706.58. So far, it's looking like Loan 1 is the best of all possible loans, right? But look two years down the line when 50 percent of these people have refinanced or sold:

Remember, the original balance was $270,000. Loan 1 has paid $2130 less in interest the Loan 2, while Loan 3 has paid $2301.92 more. Furthermore, Loan 1 has paid down $7728 in principal, while Loan 2 has only paid down $6921 and Loan 3 still less at $6237. It's really looking like Loan 1 was the best choice.

But remember, 50% of all loans have refinanced or sold within two years. When you refinance or sell, the benefits you paid money to get stop. But the costs to get those benefits are sunk on the front end, and you're not getting them back. Look at the balance of Loan 1. The person who chose this still owes $271,251 - $1251 than they did before they chose the loan in the first place. Furthermore, his balance is $4773 higher than loan 2, and even though he paid $2130 less in interest, he's still $2643 worse off. Furthermore, whether he refinances or sells and rolls the proceeds over into a new property, the new loan is going to be for $4773 more money than Loan 2's new loan. Assume everybody got a really fantastic new loan at 5%. Loan 1 is going to have to pay $238 more per year to start with in interest expense for his new loan, simply because his remaining balance on the old loan was higher. Loan 3 is in even better shape than Loan 2. He's paid $2301.92 more in interest, but his balance is $2715.99 lower, for a net benefit over loan 2 of $414, not to mention that his interest costs on his new loan will be almost $136 lower simply because his starting balance is lower.

Now let's look 5 years out, when over 95% of the people will have sold or refinanced.

At this point, Loan 1 has saved $5353 in interest relative to Loan 2, while Loan 3 has spent $5783 more. Loan 1 has cut his balance difference to $3535 more than Loan 2, so he looks like he's ahead! Furthermore, Loan 3 is really lagging, having paid $5783 more in interest although the difference in balance is only $1660 to his good.

Well, loan 2 is ahead of loan 3 pretty much permanently at this point. Assuming all three refinance or sell and buy a new property with a 5% loan right now, Loan 3 is only going to get back $83 per year of the $4122.80 he's down relative to Loan 2. Especially considered on a time value of money, that's permanent. But despite Loan 1 being ahead of Loan 2 right now, Loan 2 will get back almost $177 per year. Ten years on, assuming a ver low 5% rate, loan 2 is back to even, and most of us are going to be property holders the rest of our lives. Consider also that 95% of the people who chose loan 1 NEVER got this far - they never broke even in the first place.

The point I'm trying to get across is that money you roll into your balance hangs around a very long time. And you're sinking potentially many thousands of dollars into a bet that most people lose. Yes, if you keep the loan long enough, the lower rates (at least for thirty year fixed rate loans) will pretty much always pay for themselves, several times over in many cases. The other point I'm trying to make is that most people don't keep their loan long enough for the benefits to pay for their costs to get those benefits.

As a final consideration, consider what happens if one year later interest rates are one-half percent lower. I can get Loan 3 the same loan that Loan 2 has for zero cost. He's got the same interest rate as Loan 2, whom I can't help right now, but a lower balance - neither one of his loans cost him anything. And it has happened that the rates dropped down to where I could get someone 5.5% on a thirty year fixed rate loan for zero - lender pays me enough to pay all the closing costs. Net to them, zip. Suppose rates do this again. I call Loan 2 and Loan 3, and now they've both got 5.5 %, but this doesn't help Loan 1. Now Loan 2 has the same as Loan 1, while only adding $3400 to his balance to get it, as opposed to Loan 1 adding nearly $9000, and Loan 3 has the same loan without adding a dime to his balance. Who's in the best position?

Caveat Emptor

Original article here

The short answer is not only "yes" but "damned straight"

I refinanced my house, and the lender put as one of my payoffs my Acura lease that I have 3 years left, whick equals about $19,000. I told him that was a lease and not a credit card, and he said he would take it off. I'm supposed to get my money tomorrow wired to me, but when he sent me a good faith estimate to sign today the Acura lease was still there. He said I would have to take it like that cause he forgot. I'm not gonna pay $20,000 on a 3 year lease left for a 30 year fixed rate refi!!! In the end I will have paid over $40,000 for a car I will only have for 3 more years. Can he do this to me? I need the money and signed everything else??? Please help

The first thing you have to understand is that THE most important measure of whether you can likely afford a loan is your debt to income ratio. If you make $5000 per month gross and you have to pay $3000 of it in debt service that's a 60% debt to income ratio.

Debt to income ratio is total cost of housing PLUS contracted monthly outlays divided by gross monthly income. It includes student loans, car leases as well as car purchase payments - everything you have contracted to pay out on a periodic basis. They want to measure how well you can afford to make payments out of continuing income. In the email quoted above, I see warning signs of being over-extended already.

For myself, I don't like the idea of refinancing a short term debt into a long term debt. I don't like suggesting it to clients - while debt consolidation refinance can be powerfully beneficial, there are huge traps that most people fall into. The benefits only happen if you keep making the equivalent of the same payments, and only if you keep doing it longer than the consolidated debts would have lasted. If you're doing it for reasons of cash flow, the only justification is to keep yourself out of bankruptcy. This person seems to understand that debt consolidation is generally a bad thing, but wants some cash out that they really can't afford.

That is the only reason a loan officer should broach the idea of debt consolidation. Unfortunately, it happens far too often because loan officers are paid on the basis of loan size. Larger loan equals bigger paycheck. Also, all too many consumers understand only cash flow, and that cutting their payments means they apparently have more money to spend on entertainment, travel, toys, or whatever else their personal desires point them towards.

The basic challenge illustrated, however, is that in order to qualify for the loan, this person does not make enough money - or hasn't proven they make enough money - to satisfy the underwriting guidelines on debt to income ratio. In plain English, they cannot afford the loan they are contemplating. Perhaps they could afford it if they only had the home loan, but they have car payments, car leases, student loans, credit cards, and installment payments on other goods as well. All of these are contracted monthly outlays. You must continue to pay them.

(Believe me, you don't want to tell a prospective lender you want to stiff existing creditors! They don't take it well)

The homeowners nonetheless want the money. The email didn't say why, but I strongly suspect it's a desire rather than a need. So the loan officer is trying to find a way to get it to them by qualifying them for the loan. It's within the context of serving the client's perceived "needs", and yet it rarely serves client interests. There are damned few loan officers who reflexively use this kind of red flag as a reason to sit and and consider whether the client real interests are served by the loan; after all, if the answer is "no" they don't have a loan and they don't get paid. I try, and I usually find out later that they got a worse loan from someone else because they didn't want to tell me they appreciated my concern but wanted to do it anyway. Nonetheless, if loan officers supposedly have a fiduciary responsibility (and we do) it should be an obvious requirement for situations where the client may be compromising their long term ability to afford the loan. I doubt the results of the Era of Make Believe Loans would have been so devastating if consumers in this situation had some mandatory protections in the form of counseling on the effects of getting this money. This is one thing that should have been done in response to the over-extension of credit to so many homeowners, and wasn't. Might have something to do with the fact that the big banks make large campaign contributions, while homeowners, not so much.

There are tricks that enable the lowering of debt to income ratio, and debt consolidation is the chief of those. It has perils for the consumer, but it does exist. By spreading the principal payments over 30 years (and usually by lowering the interest rate), debt to income ratio can be greatly lowered. This gets the loan approved, which means the consumer gets the money they want and the loan officer and their company get paid. Win-win in the present tense. All too many of these, however, sabotage that homeowner's financial future - it just takes a while for that to be apparent.

Keep in mind, the question is not "Do they owe this money?" They do. There is no question about that. Nor are their existing debts the moral responsibility of a real estate loan officer. The question is whether a way to restructure the debt exists that both qualifies this homeowner for the new loan they want, and does not unduly compromise their financial future. The question for the lender and the underwriter, however, is even more concrete: Does the new loan or loan structure comply with underwriting guidelines such that there is a reasonable expectation of future payments being made on time? That is the bottom line. If the projected monthly payments are too high, the answer to the question is "no", so people go looking for ways to lower those monthly payments and change the answer to "yes."

A $500 car payment that would have been paid off in 3 years may add only $100 or so to a real estate loan payment. If the homeowner makes $5000 per month, that cuts their debt to income ratio by about 8% right there. For a loan officer, 8% off Debt to Income Ratio is a huge amount, and I've seen situations where debt consolidation cuts 20% off a Debt to Income ratio. When 45% is the cutoff, consolidating debt can make a huge difference in a homeowner's ability to qualify. The trick is for it not to lock the consumer into a situation where a year from now they've got to have a new car to get to work because the old one disintegrated, and there's just no way they can afford it. The lender and underwriter do not care about that. They care whether the projected monthly cost of housing plus debt service is within guidelines.

I don't know by how much, but its apparently this person is in that kind of situation. They want the money, but given their other debts, they can't afford it without consolidating their other payments into the loan. The homeowners have the right to refuse, but then the lender has the right to refuse to fund the loan. It is a strict quid pro quo: cut your payments by this much (in addition to whatever other underwriting requirements there may be) and we will fund your loan. Don't, and we won't. While declining to consolidate may be the smart thing to do in many situations, most consumers decide they want whatever benefit the loan has enough that they decide to do what the lender requires. It is the homeowner's choice, but the bottom line is that if you want the loan in such a situation, then yes you have to do it.

Caveat Emptor

Somebody asked me about a deferred payment mortgage for a purchase. The long and the short of the story is that they don't have any cash to put down, and they can't qualify for the payments under any kind of reasonable debt to income ratio.

A few years ago, in the era of Make Believe Loans, we could have gotten this person a loan. It wouldn't have been the smartest thing in the world, but we could have done it. I'm confident I would have turned him off the idea back then too, as I did many others who hated me then but may now be reconsidering. Most have figured out that the loan officers who had a policy of "just shut up and get paid for putting the loan through" were not their friends after all.

Even then, however we would have to have dealt with calculating debt to income ratio, as well as the fact that purchase money loans evaluate the property on a lower of cost or market basis, where the appraisal is the "market" and the official purchase price is "cost." Since it's the lesser of the two values that is used, there is never equity at purchase in excess of whatever down payment you make, at least as far as the lender is concerned.

A paper fixed rate loans use the fixed rate of the loan for calculating front end ratio. They are permitted to use a higher rate than actual, but not a lower one. If your rate is 6%, and they use 6.25% because the rate isn't actually locked on a $300,000 thirty year fixed rate loan, the number they will use is $1847.16. This is not an arbitrary number; it's the most important measurement of whether or not you can afford the loan. The front end ratio, which is the loan payment itself, is not generally a deal breaker if it's too high, but the back end ratio, which is the loan combined with taxes, insurance, homeowner's association, and all your other monthly debt service, is a deal breaker - as well as the most important measurement of whether you can afford the loan. Those other numbers are all fixed based upon your situation. You owe what you owe, property taxes are what they are, and you only make what you make - or actually, as far as the lender is concerned you make what you can prove you make. I've written against overstating your income from the very first on this site.

Why do they use the higher number? As insurance against available rates going higher. If rates decline and you can actually lock in something better (or for a lower cost), no problems ensue. But if that payment goes up at all when you go to lock the loan, that means the file has to go through another complete underwriting. One dollar per month or ten thousand, it makes no difference. Up is up. So to avoid that, loan officers who are not complete doofuses add a quarter percent or so to the rate they expect in order to generate a "qualifying rate" and "qualifying payment" with some room for error when the loan isn't locked. That way if things do get worse, the whole process doesn't have to start all over again. (Regular readers will understand it's really about the tradeoff between rate and cost, but a higher cost for the same rate also triggers re-underwriting, albeit focused on cash to close rather than debt to income ratio)

When you move to A paper ARMs, the allowable back debt to income ratio actually goes down, usually to 38% from 45%. Not only that, but the rate used to compute the payments is usually much higher than actual. The calculations require the use of, not the initial rate on the note, but the final, fully indexed rate on the note. They use current rate for the underlying index the ARM is based upon, plus the rate margin. Say the initial loan rate is 5.25% but the underlying index is at 4.75% plus a margin of 2.25%, they will use 7% for the purposes of determining whether or not you actually qualify for the loan. In the $300,000 example above, this means they'll use $1995.91, even though the actual rate and payment is lower - and due to lower maximum debt to income ratio, the ceiling on what you can afford at a given income level will be lower. Depending upon the lender, they may even add a bit of a margin to that qualifying rate. This makes it significantly harder to qualify for an A paper hybrid ARM than a fixed rate loan, even though the rates and payments are lower, and is certainly one reason why there aren't more of these loans out there. Nonetheless, this procedure they use for qualification does mean that someone who manages to qualify should be able to afford whatever the payment eventually adjusts to.

One of the reasons subprime loans got so popular was that they stopped using this method of determining whether an applicant qualified for the loan. The subprime lenders started qualifying applicants based strictly upon the minimum initial payment, despite the fact that they knew good and well that the payment was going to adjust upwards at a known time. Even if the initial payment was "interest only" or negative amortization. They just assumed that the people would get raises, be able to refinance with increased equity, or just be able to lift themselves up by their own bootstraps, or something else equally hope based. Three strong verses of "Kumbaya" would have been about as intelligent, but it worked so long as Wile E. Coyote didn't look down. It shouldn't be a surprise to anyone that this is one of the reasons why subprime crashed so hard, especially in conjunction with stated income loans. Because this made it absurdly easy to qualify for a loan, especially a larger loan than people could really afford, subprime loans were ridiculously popular for a while, even among people who should have been able to qualify for A paper had they limited their budget to what they could afford. When the adjustments hit, it was predictable as gravity that those folks who qualified subprime couldn't make their payments. When the market values stopped rising so quickly that they supported serial refinancing, it didn't take very long for large scale problems to emerge. In the overall scheme of things, subprime loan qualification was good for real estate agents who wanted easy commission checks, irresponsible loan officers, and people with the sense to cash out of the market while things were still going crazy. For the people who applied for subprime loans, not so much.

You should want to qualify with the toughest standards you can meet, preferably A paper full documentation, and even the A paper ARM standards if you can, but this concept was a little bit difficult to get across to the people who already had their hearts set on a property that was way too expensive for them, especially when everyone else is encouraging the speculative atmosphere. It got to the point where newspapers were running articles on "What's a fair margin over index for negative amortization loans," when the correct response would have been, "RUN AWAY."

The whole situation is enough to make you understand exactly how many people outsmarted themselves in pretty much the same wise as the people pictured in this clip:

Unlike the fictional characters portrayed, however, the consequences for borrowers who get in too deep does not end when the director yells, "Cut!" You might want to bear this in mind when figuring out exactly how much loan you can really qualify for. Even the subprime lenders who survived have now figured it out, proving that even the silliest English Knight ("Ca-niggit") can learn when the pain gets bad enough.

Caveat Emptor

Original article here

Been reading some of your informative tips. I am looking at refinancing and getting a $378000 mortgage. Now in the case of having a 3 yr prepay penalty, vs paying 1.5% in points to make it a 1 yr prepay, am i right in assuming it's wiser for me to pay the points than accept a three yr prepay when i know I will sell/move within 2 yrs? Any info you can provide would be great. I'm wondering if I'm missing something here.

I think they (sic) points would cost me around $5800.

I compute 1.5 points on $378,000 as being approximately $5756.

Here in California, the maximum prepayment penalty is six months interest, and that is the industry standard nationwide for when there is a prepayment penalty. A few lenders will pro-rate it, but for the vast majority, they will charge the same penalty on the day before it expires as on day one. This is pure profit, and they're generally not going to turn down pure profit any more than most people will turn down a bonus. So if your interest rate is 6 percent, you're going to pay a 3 percent prepayment penalty if you sell or refinance before the prepayment penalty expires. For Negative Amortization loans, the prepayment penalty is based on the real rate, not whatever fake come-on "nominal" rate they told you about.

On some loans, the prepayment penalty is triggered by paying any extra money. One extra dollar and GOTCHA! But probably eighty percent of loans with prepayment penalties give you the option of paying it down a certain amount extra each year, usually 20 percent, without triggering the prepayment penalty. (That's 20% of the balance at the beginning of the year, but making a flat payment of 20% will trigger the penalty because you're also paying it down with your monthly payments).

Assuming that it is a case of you won't move in less than one year, this is equivalent to the prepayment penalty on a loan with interest rate of between 3.05% (100 percent prepayment penalty) and 3.81% (80% prepayment penalty). Since even the 1 month LIBOR was a little over 3.8 percent when I originally wrote this, it was a cut and dried case of pay the point and a half.

Of course, if there is a possibility that you will need to move in less than one year, paying these 1.5 points could well be a costly exercise in futility. I can't begin to gauge that risk without more information. But if you're in any number of professional situations ranging from the military to corporate executive, this is common.

Given that you're talking about prepayment penalties, you're likely in a subprime situation. Subprime, when I originally wrote this, had a fairly uniform rate of 1.5 points of cost equals 3/4 of a percent on the interest rate. I'm going to assume you're getting about a 6.25% rate. If you decided to buy it off via rate, you'd be looking at a 7% rate. These days, the few subprime lenders still in business are looking for "A paper" borrowers who don't realize they're "A paper" borrowers.

Let's punch in the two loans. $383,750 (balance with 1.5 points) at 6.25% gives you a payment of $2362.81. Running it out 24 months gives you a balance of $374,467. You have spent $56,708 on payments.

378,000 at 7% gives you a payment of $2514.84. Running it out 24 months gives you a balance of $370,043.00, and you've spent $60,356 on payments, while paying your balance down $7957.

Now, assume you sell the home for $X at the end of this period. The first loan saves you $3648 in interest. The second loan gives you $4424 more in your pocket in two years. The second loan, with the higher interest rate and higher payment, as opposed to the higher balance, nonetheless saves you $776 as opposed to the loan with the lower interest rate, and also leaves you more money with which to buy your next home, which means lower cost of interest on your next home loan, as well. Of course, this is subject to some pretty significantly naked assumptions as I don't know anything more about your situation. Furthermore, it assumes that your income is not marginal, and that you would qualify for both loans. It is perfectly possible that you would qualify for the lower payment, and hence the lower rate would be approved, but not be able to qualify for the higher payment associated with the higher rate (The reverse is not the case). Finally, I assumed that because you know you're going to have to move in two years, you are looking at a two or three year ARM in the first place, as opposed to a longer fixed term.

I hope this helps you. If you have any further questions, please let me know.

Caveat Emptor

Original here

This question brought someone to the site

Can I change lenders after the loan is approved?

The answer is yes, but you need to start the loan process all over again.

Actually, you can change lenders any time you want to, just like you can refinance at any time. It may be expensive, it may be counter-productive, and it may or may not be an intelligent choice, but it is your choice. It's not like the lender can do anything about it. Deciding not to consummate a particular loan may also be the smartest thing you could possibly do, especially if you were significantly lowballed on the initial quote.

There can be external factors that prevent you from doing so. If you owe $500,000 on a property that has fallen in value to $450,000, you're not going to be able to refinance on any kind of decent terms unless you pay that loan down. If your credit is no longer as good as when you last got a loan, if your monthly bills are too high a proportion of your income, or any of a couple dozen other possible reasons, you won't be able to obtain financing as good as your current loan. This doesn't mean that you cannot legally decide to take something less advantageous. People voluntarily took out negative amortization loans right up to the moment the lenders did away with them and then people screamed they couldn't get them anymore. It didn't matter how much they hurt themselves - they wanted the low payments. It's all tied up in the freedom thing, even if it does mean you're free to make mistakes.

Just because you are free to change lenders, does not mean that there will not be consequences. That's also part of the freedom to make your own mistakes. It can be very expensive to change lenders. You are basically back to square one when you change lenders, a fact many loan providers make rapacious use of when they pull a bait and switch routine. I add that in the vast majority of these cases, that bait and switch was planned with malice aforethought, as you know if you're a regular here.

When you decide to begin the process over, you may or may not have to do everything over. If you're at a direct lender, there's no alternative. You have to do the loan paperwork all over. Credit Report and everything else, application and all the disclosures. Most folks are going to have to get a new appraisal. If you put down a deposit with the lender, you're likely to lose it. They did all of this work, and they're not getting paid for a funded loan. It's rare that lenders will refund deposits. That's why they require them, to commit you to the loan and prevent you from changing your mind. Mind you, the consequences of agreeing to a bad loan are usually much worse than losing the deposit, but people are silly about cash deposits. There's a good chance that if the lender requires a deposit, they're a lender you don't want to be doing business with in the first place.

When you change lenders even though you're staying with the same broker, the consequences are much smaller. Since the application, etcetera, should have all been done in the broker's name, the loan officer has to begin the underwriting process all over, but the basic paperwork is pretty much the same. They have to give you new copies of the required paperwork reflecting the new loan, but that's it. On the other hand, if there's something underhanded going on, it's almost certainly the doing of the loan officer, so staying with the same brokerage is likely to be perpetuating the problem. This applies to direct lenders as well.

There is always a moment of truth in every loan, when the final loan papers are presented. If they do not reflect what you were led to believe in order to get you to sign up, you probably shouldn't sign them. Many people do sign loan documents that amount to shooting themselves in the head financially. Refusing to sign can cost you money, make no mistake. But agreeing to bad loans will usually cost you more. Nor are you legally committed to that lender until, well, at least after you sign the note, and not completely until the loan is funded and recorded.

It is comparatively rare that you should sign loan papers if the loan you are agreeing to is not what you were lead to expect. There is no "Get Out of Contracts Free" card in the real world, and once that loan is funded, you are bound to all of the terms of the contract, and this includes not only high potential costs and rates, but prepayment penalties and everything else.

With that said, I should talk about one reasonably common exception: Purchase money loans. The escrow period in purchases runs only so many days, and you have to have everything done during that period, or the good faith deposit you made to hold the property is at risk. It's still usually a good idea to negotiate an extension on your purchase escrow rather than agree to a bad loan or even a less good loan, but there are cases where it can be smarter to sign the loan documents now and refinance later.

For refinancing your primary residence, just because you sign documents does not mean you are stuck. There is a federally mandated three day right of rescission when you refinance your primary residence. It's not a good idea to sign just because you can rescind later; that three days is gone before most people are realize it. The rescission period is a last chance to avoid disaster, and signing loan documents can commit you to paying certain costs and fees even if you later rescind. Better not to sign in the first place if you find a problem, and you should always look for problems before you sign.

Just because you signed and the loan funded does not commit you to it for ever and ever. You are always legally free to refinance or sell. There may be prepayment penalties, and you won't get the costs you paid to get the loan you are replacing loan back, but if you're at nine percent interest rate and you can have six on terms as good or better, it's likely to be worth going through the paperwork and paying any prepayment penalty. The math may say otherwise in specific cases, but that is once again a matter of specific situation versus broad rule. Prepayment penalties don't mean you cannot refinance, they only raise the opportunity costs of doing so. Lenders put them into contracts because they not only raise that opportunity cost, they also provide a good boost to their profit if you do jump over that raised bar.

So you can change lenders at any time. There may be reasons not to do so, but that doesn't mean you cannot do it. In every situation, the answer as to whether you should is in your contract and in the math, and it may take a good amount of informed professional judgment to help you make the choice, but that choice is always yours.

Caveat Emptor

Original article here

First, I just got engaged, and my fiancee and I have been discussing what we want in a house after we get married. It will be the first house for both of us. She spent the last two years living with her parents to pay down her credit card debt.

So she doesn't have a current rental history. Given that she makes more than I do, if we purchase together, my understanding is she will be the primary borrower. Thanks to your site, I've figured out what I can afford without her, and it isn't what we are looking for.

My questions are:

1. Are lenders going to be reluctant to loan to us if she doesn't have a recent rental history? If so, how much time would a lender require.

2. Once we figure out when we are going to be ready to buy, how early is too soon to get a buyer's agent and start looking?

Yes, lenders are more reluctant to lend to you with insufficient rental history. What they are looking for there is a verifiable history of making regular payments for housing.

Used to be, A paper lenders wanted two years history of making housing payments on time, and might have waived it down to twelve months in some cases. Sub-prime generally wanted the same two years, but it's pretty easy to get it waived down to one year, and occasionally possible to get it way down. Three months in one loan I did about two years ago. All the way down to zero? Probably not.

For a while, with the general loosening in underwriting requirements, this had largely gone by the wayside. One of my favorite A paper wholesalers called as I was originally writing the article, and I asked him about Verification of Rent, and he said "We just don't require it any more unless there's something fishy about the situation." Basically, it's up to the underwriter and whether they make it a requirement for the loan. With the way the investor market has changed due to recent losses, Verification of Rent (aka VOR) has become more important again, but it's one of the few things they will still consider waiving if the rest of your credit and financial picture is strong enough. You can never count on getting it waived, but if you're strong enough otherwise, it does still happen.

There are potential ways to satisfy the requirement, even if they're being a stickler. If your fiancee has been paying rent to her folks, it's likely that the lender will accept canceled checks for six to twelve months as evidence that she has been paying rent. In the case of family situations like this, they want to see real solid evidence of the rent payments being made on time, they want to see that the checks were written and cashed at appropriate times, and they will not, generally speaking, accept a family member's word for it unsupported by paperwork. When you're renting an apartment or something from an unrelated third party, that third party has no particular motivation to paint your situation as being better than it is and they will usually accept that person's word.

I've seen people advocate this as an application for a stated income loan (when stated income loans were available) , where you qualify as a lone individual, but state your income as being enough to qualify for the property and necessary loan that you want. The thinking goes that combined, you make the money, and it's only the fact of some "obnoxious administrative rules" that you can't use her income to qualify. That much is true enough, and that such rules were relaxed when the article was originally written was one thing in their favor. However, it's still lying on a mortgage application (i.e. fraud), and that lender can make life very sticky for you if they should desire to. For one thing, you are de facto using her income to qualify for the loan without giving them a chance to scrutinize her credit record. For another, it's very possible that stating enough income is something the underwriter will challenge (which will happen if you go over the 75th percentile for your occupation), at which point you're not going to get the loan. I wouldn't want to do it without notifying the lender's representative in writing as to what was going on, and it's unlikely that they would approve and fund a loan under such circumstances, but doing otherwise is fraud. I'm sure everyone is all excited by the prospect of doing business with a loan provider who's "only a little bit crooked," right? Finally, stated income is not available from anywhere I am aware of at this update, and new regulations actually prohibit it in a lot of situations. Even if not prohibited, there's a lot less willingness on the behalf of lenders to accept stated income loans, and when they eventually return, expect them to only allow a much lower loan to value ratio, necessitating a larger down payment than most people have, especially for a first time purchase. Plus, of course, the rate is going to be much higher, impacting your debt to income ratio and therefore, your ability to qualify for a given property. Finally, none of the various government programs to help encourage home ownership has ever accepted a loan done on a stated income basis.

There is one issue I haven't dealt with that relates to all of this: Payment shock. The idea behind payment shock is that you're used to living on so much money, and people (in the aggregate) strongly tend towards living the same lifestyle over time. Payment shock becomes an issue when your new payments for housing (loan, taxes, insurance, etcetera) are a certain percentage more than you are used to paying for that same thing (rent, in your case). How much more varies from lender to lender and even according to circumstances. For instance, many sub-prime lenders will take into account all of the bills you are paying off in a refinance. Exactly what percentage increase triggers the "payment shock" used to be lender specific, but of late Fannie and Freddie have instituted payment shock guidelines.

When payment shock is a factor, they are going to require you to have some cash reserves somewhere. Typically, it's two to three months PITI, or principal, interest, taxes and insurance, on your new loan. It generally needs to be in checking, savings, non-restricted investment accounts - some form where you can get to it, not IRAs and 401s, which have restrictions on access. This needs to be left over after your down payment, closing costs, etcetera. So even though you are not making a down payment on the property (difficult currently unless you're buying with a VA loan), you can need to have the money to do so available to you.

Payment shock is one of those things that can make a situation look fishy. If you are trying to avoid payment shock requirements and state that you are paying an amount of rent that is clearly above market rates, they will want to verify it. Can you say, "Out of the frying pan and into the fire?"

Caveat Emptor

Original Article here

I thought I'd share this with you as an example of the sort of mind set to beware. This is a real email I received, with identifying information redacted.

I found you through the DELETED web site and I thought you might appreciate the following idea for GENERATING MORE REFINANCE BUSINESS:

What would happen if you sent the following email to your email list of former and prospective clients?

====================================

Subject: OWN YOUR HOME FREE AND CLEAR IN 8-11 YEARS

Dear (former or prospective client):

We recently found an interesting 23 minute video on the web that shows you how to Bring MORE MONEY into your Life, OWN YOUR HOME FREE AND CLEAR IN 8-11 YEARS - instead of 30 years, AND SAVE 66% in Total Mortgage Interest. The video is about a computer program called the DELETED (May be a proprietary name). You can view this video by copying either of the addresses below into your browser and press "Enter":

CLICK --> (DELETED!) <-- CLICK

(Please Note: Your default video player will play the video, and your browser will stay blank.)

If you like the idea of bringing more money into your life, if would like to own your home FREE AND CLEAR in 8-11 years - instead of 30 years, and if you would like to save about 66% in total mortgage interest, get back to me at (123) 456-7890. We can make it happen for you.

Best regards,

(They had the gall to sign my name to this abomination!)

Here's WHAT YOU GET OUT OF THIS as a mortgage broker:

If your client wants to go ahead, a HELOC (DM: Home Equity Line of Credit) is required to implement the program, so they will need YOU to arrange an "Advanced" (Home Equity) Line of Credit for them (earning you a fully disclosed HELOC fee). Plus, you will Earn a $900 to $1500 fully disclosed commission for each DELETED you arrange, depending on your cumulative sales of the DELETED Program. All you do is help your client save tens of thousands of dollars (or more) in mortgage interest. They can also pay off credit card and other debts more quickly at the lower (HELOC) interest rate, and be guided step-by-step to become DEBT FREE.

This MMA program is a great RELATIONSHIP BUILDER. It will stimulate discussion with your clients and get you MORE REFINANCE BUSINESS.

....................................................

As an alternative, if you don't want to send out special emails like this, you certainly talk with people every day who decide NOT to refinance, or NOT to refinance with you. What if you were to ask "one more question"?

FOR EXAMPLE: "By the way, if you don't want to refinance, I know of a way you can bring more money into your life AND own your home FREE AND CLEAR in 8-11 years - instead of 30 years, and save about 66% in total mortgage interest, WITHOUT REFINANCING. Would you like to know HOW to do this? (Yes/No)

(If yes): "Point your browser to DELETED. This will play a 23 minute video that explains how the DELETED works. Will you watch the video? As soon as you've watched it, call me, OK?"

....................................................

Some clients should not have a HELOC because they do not have the financial discipline to handle easy access to credit responsibly. The factor of financial discipline could be part of your discussion with the client.

In any event, the above email gets you into direct contact with clients you would otherwise NOT connect with, without bringing up the subject of refinancing their loan. This allows you to assess and attempt to meet the client's needs in a perceived context of genuine service.

Sounds good? Get back to me at DELETED for more information and to get started!

Best regards - for increasing prosperity all around,

NAME AND CONTACT DELETED TO PROTECT THE GUILTY

Offer some brokers a way to make money, and they won't care if it hoses their clients. Others just won't examine the program, because it looks like it helps clients while it makes them money, although in fact it does not help clients.

Their web video wouldn't run, and I wasn't going to lower my computer's security settings for SPAM. But I found their information elsewhere. It's an accelerator program combined with a debt consolidation program. It wasn't much work at all to find.

Lowlights include:

$3500 sign up fee for something that should be free, as it cuts the lender's risk factors significantly. Furthermore, as I wrote in Debunking the Money Merge Account Scam, this cost is literally never recovered, even if you keep the loan until paid off. You will pay the loan off sooner if you simply take the $3500 sign up fee and use it for a one-time direct paydown on the mortgage.

Multi-level marketing scheme. I sign up other folks to sell it, I get paid for their production. Now there is nothing intrinsically wrong with multi-level marketing, but it does serve to inflate costs. Sometimes it is less expensive than retailer's inventory carrying costs and marketing costs, but for financial services it is a dead give away that something is not right here because there are no inventory costs, and they're certainly spending enough money on marketing - $900 to $1500 commission plus over-rides per program sold. What a beautiful idea, to get the suckers to pay for your marketing!

Unrealistically low mortgage balances, and outrageously high assumptions of extras payments under the program. This has the effect of magnifying the apparent benefits. It posits extra payments on the order of what it would take to pay off the loan normally in ten years. In reality, if you could afford that level of payments, you'd have a ten year mortgage or a more expensive house. Your average total benefits will be half a months interest savings on anything deposited. So if you deposit your entire $5000 paycheck and you have a $2000 mortgage payment, that's about half a month's interest on $3000. At 6%, that's about $7.50 per month gain. Certainly not worth all the hoopla, is it? Definitely not worth thousands of dollars in sign up fees, not to mention the costs of that Home Equity Line of Credit. Considering the costs involved, you'd do better to ignore the program (which has a monthly cost of more than that), and just send the lender $10 extra per month. As a matter of fact, most of the increased benefits these programs claim has to do with the bank retaining a certain amount that they claim you just end up not spending - and I can do better than 6%, even net of taxes, with that money if I invest it elsewhere. If you can't do better than 6% elsewhere, just add whatever you want to your regular monthly payments when you send your lender their money, and ask them to apply it to principal. You will come out ahead. Not to mention I don't have to take out a second or refinance to get money out of investment accounts if I decide to do something else with it!

And that's the real kicker. There is no benefit to these programs that mortgage consumers cannot do cheaper or better themselves. The real benefits obtained by these programs are comparatively small, and in no way justify sign up expenses of hundreds to thousands of dollars, or monthly fees above $1 or so. Don't waste your money. If your lender will give you one of these for free, that's one way to get five extra dollars or so applied to your loan principal per month. If they want to charge you, don't waste your money on the sign up or the monthly fees. Instead, add whatever the program's fees are to whatever amount you would ordinarily pay, and you'll be ahead of the game.

I keep saying this because it is true: mortgage lenders do not want to compete on price, so they will try offering all kinds of bells and whistles that might appear to be neat stuff but are really a distraction from what's really important. Some very big names are trying to use these to sell much higher rates than people would otherwise be able to get, by distracting people with this shiny new toy of Mortgage Accelerator Programs that don't make nearly the difference that some folks say they do. Take your time and do the math. If you can save a fraction of a percent on the interest rate, or even just cut your closing costs by a thousand dollars because the other lender's trade-off between rate and cost is a little better, you'll be better off going to the other lender. Mortgage Accelerator Programs like this are an expensive waste of your money.

Caveat Emptor

Original article here

This question brought someone to my site:

If my house is going into foreclosure but the house is also in probate, can the lender actually go forward with the foreclosure sale while the house is in probate?

The short answer is yes, the lender may foreclose.

The Trust Deed (or Mortgage Note), that was signed by the now deceased whomever, gives a security interest in the property to that lender in exchange for money. The lender lived up to their end of the bargain. That security interest is valid until the loan is paid off. It is not removed by the death of the person that signed over the security interest.

Probate takes an absolute minimum of nine months. During this time, the court will likely allow those members of your family to continue to live there, but they will not likely approve disposition of the asset except in an emergency, and that emergency is going to cost your heirs money for the courts, and money for the disposition. On the other hand, the lender still needs to get paid according to the terms of the contract, and they are entitled to foreclose if the terms are not being met. I'm not a lawyer, but I've never heard of an estate being permitted to declare bankruptcy, which some living folks use to temporarily stave off foreclosure, almost always to their eventual major detriment. Since the executor is claiming that the estate cannot pay its bills and rarely are dead people earning any more money, declaring bankruptcy would seem like an open and shut case of "the creditors get all of the assets and your heirs get nothing." Probably not what anybody who's part of the situation wants.

There are simple steps possible to avoid probate for major assets. A trust is probably the most flexible of these, in that the trust owns the asset and the successor trustee takes over the management and within the limits of the trust, does what needs to be done without the courts getting involved. Flexible, much cheaper than getting a probate court involved, and your heirs get control right away. But it requires planning ahead (which many people are loath to do, being in denial about the idea of death) and an upfront investment.

Given the fact that there is a loan and a Trust Deed against the property, somebody is going to have to make those payments until the loan is paid off, whether by outright payoff, refinancing, or sale. Given that in the absence of a trust, your heirs probably are not going to have access to any liquid wealth you left either as it is also locked up in probate, the odds are that your heirs are either going to have to come up with the cash out of pocket, or the property is going to be foreclosed upon.

There are some good options. If your heirs are wealthy and have the cash, perhaps some one or combination of them will make the payments in the interim if it's been agreed they will be compensated later. Not likely, I'll admit, and they're likely to drive a bargain for larger eventual replacement. In some instances, the probate judge may agree to taking out a Home Equity Line Of Credit (HELOC) to make the payments, but somebody's going to have to be able to qualify to make the payments, and a dead person is not on the list of options, which means somebody still living is going to have to do it. The rates on these are typically horrendous, and cost a lot more than a little bit of planning.

Another excellent option is life insurance. Life insurance passes (usually) tax free on death outside of probate to a named beneficiary. Therefore, it's available pretty much right away to pay bills and stuff. It's also leveraged money, so a few dollars now buys more dollars when you need them. The difficulty is that you've got to have it beforehand. There's that planning thing rearing it's ugly head again, and the upfront investment of the premium dollars for the life insurance policy. Finally, any money created by this becomes the property of those beneficiaries, and there is no way to compel them to spend the money on bills of the estate. If the beneficiary is the estate, well, the money is locked up in probate again, and you've got to get the probate judge to agree with doing the necessary.

Another option is the named beneficiary Transfer on Death feature of most investment accounts. These also transfer outside of probate to named beneficiaries. Problem is, they require the investment of those dollars beforehand, and they also require that you keep the beneficiaries current, and all of this requires, once again, planning. The money also becomes the property of the beneficiaries, just like life insurance, and if there's no named beneficiary, it gets locked up in probate.

There is no free, no-planning-necessary, magic bullet. I strongly suspect it's all part of the various Lawyers Full Employment Acts, but we've all got to take the system as it exists. At the very least, you've got to do some planning ahead, and an upfront investment is probably going to return itself several times over. Remember, everyone is going to die sometime - I know of precisely zero exceptions thus far in the history of the world. Denial of this simple fact simply digs you in deeper, and puts your heirs in line to have to lose or waste a major portion of what you would have left covering for your deficiency, as is evidenced by the person who asked this question.

Caveat Emptor

Original article here

I went to a "direct from the providers" seminar on credit reports and credit scores.

Some of this information has changed from previous information, and some of it will change in the future. Credit Reporting, FICO scores, and related items are an evolving knowledge, as they figure out how to better predict future performance of potential borrowers.

A FICO score is nothing more or less than a prediction of the likelihood of a particular consumer having a 90 day late in the next 24 months. It is a snapshot, based upon your position and your balances as reported at the exact moment it was run.

I learned a bit more about the various other credit reports besides mortgage. They emphasize different things (naturally) and score differently. Auto scores go to 900, where mortgages range 300 to 850. Landlord tenant screens are different from a mortgage score. Revolving credit screens are different than mortgage screens. Finally, and most important, the "Consumer Screen" reports you get on yourself will always have a higher credit score than the ones mortgage providers run.

What makes up your credit score? Inquiries are 10 percent of your credit score. They only go back twelve months. Whereas I've been informed in the past that additional inquiries will get you zonked, that is not the case currently. Depending upon your length of credit history, after three to five "hard" inquiries in the last twelve months, they quit counting. A hard inquiry is done at your request for reasons of granting credit. Fewer is better. Longer history of credit means they will allow you more inquiries.

Multiple mortgage inquiries, if done within the correct time frames, still only count as one, no matter how many. Automobile inquiries also count differently than other inquiries.

Types of credit used is 10% of the weight. They're looking for a reasonable balance between types. The absolute worst type of account to have is from one of those zero interest finance companies. You know the ones, "Buy this sofa now and no payments and no interest for twelve months." People who are broke but need or want stuff now do this, and that's why the hit happens. They are deferring payment on something they can't really afford. You suffer guilt by association.

15 percent of the weight is length of credit history. How long you have had revolving accounts divided by the number of revolving accounts you have had. You have three cards that have all been going for thirty years, that's a better picture than five cards of which four are brand new. As far as the credit score is concerned, however, five years is as good as forever.

I've been telling people not to close open accounts. This is confirmed as not a good thing to do. Closing an open account can cause your credit to drop by as much as 80 points in some circumstances. If it doesn't cost you anything, don't close it.

Balances is thirty percent of your score. There are significant hits at fifty and seventy five percent of your credit limit on each card. Significantly, a small balance is a little bit better than zero, even. This is one reason you want to charge something you'd buy anyway to your credit card, just make sure you pay it off when the bill comes. Some credit cards (specifically charge cards in particular, not to mention any specific names of charge card companies where the balance is due in full every month) will report your high balance as being your limit, which can have the effect that you appear to the reporting agency as "maxed out" if you've charged something big. So make certain your credit limit is being accurately reported. If your balance is incorrectly reported, in general the only way to correct it quickly is with a letter from the provider, signed and on their letterhead, saying "Your balance as of (date)is $X"

Payment history is 35 percent of your score. This is divided into three categories: within the last 6 months, 7 to 23 months old, and 24 months or older. If you have had a delinquent credit reported within 6 months, you are getting the full impact in terms of lowering of credit score. Between 7 and 23 months is a lesser impact. Over 24 months is still less impact.

Important: DO NOT PAY OFF OLD COLLECTION ACCOUNTS! It can cause a 100 point drop in your score. Here's why. You owed $X to company A, and five years ago they sent it out for collection. Now you go back and pay it off, and the date it's marked with is TODAY. It's gone from being over two years old to being current as of now, bringing the full impact to bear once more. The one exception to this is a deletion letter. If you get a deletion letter on their letterhead signed by them saying "Please delete this account," you can make it vanish off your credit report as if it never was. Note that you may still have to pay off collection accounts, but do it as a part of escrow, where the loan is done before your credit is hit.

There are tools out there that can be used to analyze and tell you how to improve your score or how best to improve it with a given amount of money.

Bankruptcy: Three things determine what kind of credit score you'll have coming out of bankruptcy. 1) Percentage of trade lines you include in the bankruptcy. More is worse, lower is better. Including half your trade lines will not hurt you nearly so bad as including all your trade lines. 2) Number of inquiries. If you've still got one or two open lines you didn't include, you may not need more after discharge and you won't go apply for more. The poor schmuck who includes everything needs more to start a credit history, and is dinged HARD for each turndown inquiry. 3) Post bankruptcy payment history: if you included everything in the bankruptcy, you have no history until you get more credit. Can you say, "Vicious Circle," boys and girls? No payment history is even worse than a bad payment history, but any reports of delinquencies after bankruptcy hits you much harder than if you were never bankrupt and had a late.

Last individual points:

Rate on credit card does not affect FICO score.

Nor does salary, occupation, employment history, title, or employer, although time in line of work is a separate criterion for mortgage providers.

Credit Repair Services cost a lot of money for things you can do for free.

If you are disputing a medical collection (and only a medical collection) it doesn't count on your score.

Caveat Emptor

Original here

This is something that many folks don't understand about the loan market.

The labels "conforming", "jumbo" or, more accurately, "non-conforming" (and "temporary conforming" when we had it) only apply to so-called "A paper" loans, largely underwritten through Fannie Mae and Freddie Mac standards. The reasons for the labels are that they "conform" to Fannie and Freddie's requirements in all particulars, or that they conform in all respects except loan amount. But Loan to Value ratio, Debt to Income ratio, Time in Line of Work and everything else are according to the standards set down by Fannie and Freddie.

Government loans, VA and FHA, do not have conforming and Jumbo amounts. In the case of the VA loan, it's my understanding that they no longer have an explicit legal limit at all - just a limit on what lenders are willing to do given the limited nature of the guarantee. In the case of the FHA, there is a dollar limit, and it's usually even the same dollar limit at the upper bound as the temporary conforming limit. But to treat this as anything but a coincidence that saves brainwork on the part of the Department of Housing and Urban Development would be incorrect. In point of fact, the "regular" FHA limit is different from the conforming limit. Fannie and Freddie are now part of the government, but it's a different part than the FHA.

Subprime loans have none of this; only pricing and policy breakpoints, usually around $500,000, set by individual lenders.

So why is this such a big deal? You ask. Very simply, conforming loans get the best
tradeoff between rate and cost - what laymen think of as the best rates. It's an ambition worth having to have a conforming loan as opposed to anything else. The relationship between everything else varies over time, but you can expect sub-prime to have the highest rate/cost tradeoffs, while whether government beats non-conforming is time dependent. For about the past 18 months, government has been better, but back in 2003 for instance, non-conforming rates were generally lower than government - one more reason why government loans lost favor for several years. Conforming loans are also consistently available, and the government doesn't get involved. This was kind of a big deal several years ago when it could take four months for the government to process the paperwork needed for their loans. If I was told somebody wanted to buy my property with a government loan, there was quite a while there where I would have preferred another buyer.

Loans underwritten through Fannie and Freddie are also the most common sorts of loans out there, and they had the effect of standardizing the A paper market a couple decades back. When it was every lender for themselves, the standards varied by quite a bit. When they all want to sell to Fannie and Freddie, they all started using Fannie and Freddie's standards. Doing so meant they could loan the same money out several times per year, getting an origination bonus each time, rather than loan out the money and then only as it was repaid could they book the income. They could make far more money originating the loan and selling it to Fannie and Freddie than they could by actually holding it in their own portfolio. So-called "portfolio loans" still exist - large amounts of non-conforming loans end up being portfolio loans, which is one reason why they carry higher rates. When there's a ready, standardized secondary market for loan notes, and lenders can "turn" the money several times per year, they're willing to do the loans for less, which is a win for everybody.

Caveat Emptor

Original article here