Tag: mortgage

If rates are low, why am I paying so much?

~ Carolyn Warren ~ Leave a comment

interest rate house  I received this question from Maria today:

Q: I have an adjustable mortgage and my current interest rate is 9.375%. Why would this not decrease considering we are at a low national average?

A: That is a good question Maria, and one a lot of people have. There are two reasons why your rate could be 9.375% when today’s fixed rate is only 3.5%.

First, it depends on what your margin is. If you have a high margin, you’ll have a high interest rate, no matter how low rates go. I’ll explain.

An adjustable rate mortgage has a margin as well as the index it is based on. Let’s say your loan is based on the index called LIBOR (London Inter-Bank Offered Rate), the most common index used for adjustable rate mortgages. Today, the LIBOR rate is 0.48%.  Your margin is added to that rate to determine what your interest rate is. If your margin is 9%, then your rate would be 9.48%. WOW, that is a high rate!
And it’s pretty close to what you are paying.

You can see the importance of paying attention to what your margin is when you take out an adjustable rate mortgage (ARM).

The second reason why your rate is so high could be the floor. Every adjustable rate has a start rate and a floor. The start rate is the interest rate you start out at. The floor is the bottom your interest rate is allowed to go.

A lot of subprime ARMs were written with the start rate the same as the floor.  If your start rate was 9.375% and the floor is the same as the start rate, your interest rate can never go below 9.375%, no matter what. OUCH, that hurts a lot when rates go down!

You can see the importance of also paying attention to what the floor is on an ARM.

Unfortunately, a lot of smooth-talking loan sharks sold ARMS with bad terms, which earned them high commissions. The higher the margin was on an ARM, the higher commission the loan officer earned. In Mortgage Rip-Offs and Money Savers, I tell a story about a loan officer who made $40,000 commission on one ARM that had a high margin and a prepayment penalty. And by the way, if you haven’t read this book yet, go check out the reader feedback and pick up a copy. It’s a real eye-opener.

The Truth-in-Lending form shows you all the terms of your ARM, including: start rate, index, margin, floor, and cap (the maximum interest rate). Back in the subprime heyday, a lot of loan officers never bothered to send customers–or should I say victims?–the TIL. Or, they sent the TIL, but it was left blank. A proper TIL for an adjustable loan is supposed to show you a worse case scenario of how your loan can change.

By the time borrowers got to the signing table and finally got to see a proper Truth-in-Lending for the first time, they glossed over it and signed away without paying any attention. Of course, it didn’t help that some of these signers distracted people with jokes and gossip and other conversation while they were signing.

Get out your TIL from the stack of papers you signed. Look at the figures for the margin and floor. That will tell you why you’re paying almost 5% higher than today’s rate. Also look to see if there is a prepayment penalty; and if so, when it expires. If you don’t have a prepay penalty in place now, you definitely want to look into refinancing.

Folks, before you or someone you care about signs for a mortgage, take a couple days to read Mortgage Rip-Offs and Money Savers. It could save you thousands, if not tens of thousands, of dollars as well as a lot of stress and grief.

New Law Coming for Adjustable Rate Loans

~ Carolyn Warren ~ 1 Comment

Adjustable rate  Are you nervous or confused about what’s going to happen with your adjustable rate mortgage (ARM)? The Consumer Financial Protection Bureau set nine new laws in place this month. One of these laws is designed to help home owners who have an ARM so that they aren’t shocked when their rate goes up.

In the past, too many borrowers didn’t understand their loans and were taken by surprise when their monthly payments increased. They discovered they could no longer afford to live in their homes, and we all know what happened after that. The CFPB aims to prevent another mass foreclosure disaster.

The new law states that lenders must send you a notice between 210 and 240 days before your first interest rate adjustment. This notice should give you an estimate of what your new rate and payment will be.

In addition, the lender must send you a notice between 60 and 120 days before a payment change. This is different than the above, because if the interest rate hasn’t changed, your payment will not change. Or, if the interest rate changed slightly but your loan balance is lower, your payment might not change. With an ARM, your new payment is calculated using the interest rate and your current balance. This is why people with an ARM can see their payment go down as their balance gets paid off.

Currently, the law states lenders have to provide you when an annual notice that posts the new interest rate, but not the payment. If you want to know how your new payment in advance of receiving the bill, you have to go hunting for an amortization calculator–not very convenient.

I am pleased with this new law. But because there is a compliance period after a new law being enacted, lenders have until February 2014 to comply. Let’s hope most of them jump on board sooner.

In future posts, I will discuss additional new laws. Feel free to subscribe. I make posts on Mondays and occasionally on another day as well.

Home Buyers: Don’t Move Your Money!

~ Carolyn Warren ~ 3 Comments

account closed If you plan to apply for a home loan within the next three months, do not move your money around. Here are three tips:

• Don’t consolidate bank accounts.

• Don’t close a bank account.

• Don’t open a new account at a new bank.

If you want an easier, smoother loan closing, just leave your money as it is. Here’s why.

Right now, underwriting guidelines are super strict. Underwriters are expected to triple-verify everything. They want ironclad proof that down payment money and reserves (money in savings) are your own, not borrowed. In the past, borrowers who did not have enough cash to qualify for the home they wanted, used trickery to get qualified. They borrowed money from friends, took out cash advances on credit cards, or magically made cash appear from God-knows-where. There are tales of cash coming from drug sales, lap dances, and dumpster diving. I even heard a story from a loan officer friend about cash for the down payment coming from a giant garbage bag hidden in the kitchen. (He was visiting the home to take a loan application when the client showed him a hundred grand in bills in a big, black bag that was under the sink.)

Underwriters do not like what’s called “mattress money.” Why? Because money you pulled out from under your mattress might have actually been a secret side loan that has now pushed your debt-to-income ratio too high.

All down payment money must have a clear, proven, verified paper trail showing the money is and has been your own. Therefore, you are required to submit two months’ bank statements verifying the funds. If the bank statement shows a large deposit coming from a different bank account, that is a problem. Now you have to provide two months’ bank statements for that account. If you have shut down or opened new accounts, this gets complicated.

The last thing you want is complicated! Complications add more paperwork, more letters of explanation, more underwriting supervisors getting involved, more time to get your final approval, more time to close, and more headaches for you.

I’ve had clients who thought they were simplifying things by consolidating their accounts right before applying for a mortgage, but they ended up doing just the opposite. I’ve also had clients move large sums from investments to checking accounts in order to “get ready” to buy a house. Don’t do that. Leave your funds where they are and then ask your loan officer how to best transfer your down payment to the closing agent.

You might have a bank account in another state that requires three-days’ notice to move the money. This is okay. You will move the money and paper trail it, according to your loan officer’s instructions, at the appropriate time — not right before getting your pre-approval.

The exception to the above is if you will not be buying a house for at least four months. In that case, you have time to move your money, because you don’t have to show bank statements from that far back.

If you have any questions about this, please let me know. My goal is to help you have a pleasant, stress-free loan experience. When you are well-qualified and do everything according to the (underwriting) book, then it is possible to have a good finance experience–even now.

Big Settlement Helps Tax Payers

~ Carolyn Warren ~ Leave a comment

banker regretHave you ever made a purchase you regret? Probably so, but not as much as the purchase made by Bank of America.

At the cusp of the housing crash, Bank of America bought Countrywide, a lender that did both good and bad loans. Then Bank of America turned around and sold these loans to you and me — by selling them to Fannie Mae. I’ll explain.

Fannie Mae is the nickname for FNMA (Federal National Mortgage Association.) FNMA buys loans from banks and other mortgage lenders. It is owned primarily by American taxpayers. The U.S. government took 79.9% stake in Fannie Mae and its brother, Freddie Mac, in September 2008.

Fannie Mae didn’t like being sold a boatload of bad loans by Bank of America and cried, “FOUL!” There’s been an ongoing argument ever since. But today, Bank of America announced a settlement agreement with FNMA.

Bank of America has agreed to pay Fannie Mae $3.6 Billion and buy back 30,000 mortgage loans that were originated between January 2000 and December 2008, the years of the infamous “bad credit, no problem” loans.

This settlement and buy-back is in the best interest of taxpayers, because those risky and rotten loans are now back in the hands of BOA.

Now that Bank of America has that regrettable purchase-and-resell issue resolved, they can get on with the business of making more money. In spite of the settlement, they project a modest profit coming up.

So, today’s news is good news for everyone involved.

 

 

FHA Loans Projected to Tighten Up

~ Carolyn Warren ~ Leave a comment

CA house1 Heads Up to home owners seeking the low down payment FHA loan: the longer you wait, the more difficult it gets.

FHA loans have been popular with first-time home buyers who need a low down payment. FHA requires only 3.5 percent down rather than 5 percent down for a conventional loan.

FHA loans are also popular for folks who don’t have a 740+ credit score preferred for a conventional loan, but who still want the same low interest rate.

But beware, the FHA guidelines are slated to tighten up.

New, Stricter Requirements for an FHA Loan

Senator Bob Corker, R-Tenn, has asked the commissioner to impose stricter rules for FHA, as follows:

1) Higher credit score requirement.

Minimum middle credit score of 620. Currently, some lenders will go down to 580 or even lower, but charge a higher interest rate for the additional risk.

2) Longer wait for people who had a foreclosure in the past.

A down payment requirement of 20 percent for those who had a foreclosure within the past seven years. Currently, many lenders allow 3.5 percent down with a wait period of four years after a foreclosure, if there were extenuating circumstances.

3) Lower loan limit.

Drop to $625,500 maximum loan. Currently, the limit is $729,259 in areas of the U.S. where the median value of homes is higher.

What Will Happen

We don’t know what changes the Senate will pass, but we can count on negotiations over these issues; and most likely, a tightening of requirements for the FHA loan. Senate Banking Committee Chairman Tim Johnson prefers to pass a bill by unanimous consent. So if you have an opinion about these issues, it would be wise to contact your state Senate representative now. And if you know someone who is a candidate for an FHA loan this year, you might want to pass this information on to them, as well.

Worried Your Loan Won’t Close on Time?

~ Carolyn Warren ~ 1 Comment

worried faceI received a question from a home owner who is refinancing. In the past, he went through a nightmare with his loan closing late, and he doesn’t want that to happen again.

He wrote: “My loan officer knows my concern and he keep ‘verbally’ saying it will be completed in 45 days – I just have had experience that it always goes longer and just wondering if there are anything I can get from him that would have more teeth and more motivation for him to ensure it does close in 45 days – i.e. without me babysitting, getting frantic and calling everyone every other day because 45 days is next week (you know how that goes… and I don’t want to go through that again with any loan ever – and just have it leisurely close on its own in 45 days would be refreshing.”

My reply:

There is only so much any of us can control… you, me, the loan officer. There are multiple things that can go wrong in the middle of the loan process that can cause a delay, so the best thing you can do is to make sure you’re doing everything in YOUR power to prevent that. For example, get all the required documentation to the loan officer on the same day he asks for it. Expect to receive requests for letters of explanation from the underwriter in the middle of the process, and get those letters done and submitted the same day. (These letters need to be only two to four sentences, so they are truly quickies. Ask your loan officer for help writing them, if needed.)

Don’t be a pest, because nobody likes to be micro-managed. It’s insulting and off-putting. Expect an update weekly. Feel free to email or call for the weekly update if it doesn’t come automatically. There will not be news available on your loan on a daily basis.

Since this is a refinance, you don’t have a real estate agent that will be in contact the loan officer, so that is one disadvantage for you. Also, underwriters favor purchase loans over refinances when it comes to deadlines, because purchase loans are contractually obligated to close by a certain date, and people have to move out of homes, etc. With a refinance, it’s not an emergency if your loan closes one day late: that is the attitude of the underwriters, so your loan officer has that challenge.

Nevertheless, your loan officer does have a personally vested interest in getting your loan closed asap. Unlike the underwriters, your loan officer is not on salary and gets paid only if and when your loan closes. So he is truly on your side. And this brings up a possibility…

Loan officers work on commission, or you might say, for rewards. You could offer your loan officer a reward for closing on time. You’ve heard the saying that honey is more effective than vinegar? If it’s truly important to you to get your loan closed by day 45, then you might email your loan officer that you are trusting him and that when your loan closes on time, you promise to write him a glowing thank you letter that will include a gift card to Amazon.

Notice how I phrased that to be polite and respectful, not insulting.

One last thing. There are events that occur that none of us can control. If the appraiser drops dead before he completes the appraisal report, if there is an earthquake, if war breaks out, your loan might be delayed. This is why there is no such thing as a guarantee that anyone’s loan will close on time. Good luck, and let me know how it goes.

Feel free to chime in and add your own comments and ideas.

Loophole in the SAFE Act

~ Carolyn Warren ~ Leave a comment

testing How safe are you really with the SAFE Act?

The SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act of 2008) mandates nationwide licensing and registration for residential mortgage loan originators. The law was enacted with the idea of making borrowers safer from loan fraud, fee scams, lies, and hidden tricks.

While that sounds good, there is a loophole you might not be aware of (but should).

Namely, the SAFE Act supposedly ensures that all loan salespeople, brokers or bankers, receive an adequate base of training in order to get licensed. However, only non-supervised institutions have to pass the NMLS testing process. This means that bank employees are except from this training and testing.

Yes, you got that right! Loan officers at Bank of America, Wells Fargo, Chase, and other registered banks only have to register–not pass a test.

Listen to what one insider says:

I have files of cases of loan originators who failed the test and ended up working for a bank.

Here’s what another insider said:

For the past year I have been helping loan officers prepare to pass the federal and state test. The potential mortgage loan originators are new, and a large percentage are from the banking side of the industry. The 80 loan officers I have worked with shows me that the loan officer coming from the banking side are not understanding of the laws and are having a very difficult time passing the test. In some cases, it is like deer in the headlights.

This is one of the reasons why I say you do not choose your lender according to the institution. You are not assured of working with a higher level of expertise with a banker than you are with a broker. More often, it’s the other way around. It is truly an individual consideration. You must not execute blind trust in a loan officer simply because he or she works for a Big Bank.

Please don’t misunderstand. I know expert, experienced, ethical loan officers who work at Chase and Wells Fargo. But I consider them to be above the norm: the Mortgage Stars. I am not against getting a loan at a bank, but I am against having more faith in a bank than in a mortgage broker, because that is not the reality.

At present time, the law favors the bank employees with an advantage, so when you’re loan shopping, keep that in mind. Choose your lender by the individual loan officer, not by the type of lending institution or by the name on the building.

Lowest Interest Rate Mortgage

~ Carolyn Warren ~ Leave a comment

The lowest interest rate mortgage programs make good sense for some people. But not for all. I’ll explain.

The longer an investor guarantees your interest rate, the higher the risk is to the investor. Therefore, the 30-year fixed rate program has a higher rate than the 15-year fixed rate. And the 15-year fixed rate is higher than the 10-year fixed rate.

The adjustable rate programs that guarantee your rate for less than 10 years offer the lowest interest rates. Today, I received in the mail a very attractive rate offer of 2.55%/2.88% APR. Let’s take a closer look.

You get 2.55% guaranteed for the first five years. After that, the rate will adjust based on Prime Rate + 0%. This means you pay about 1% less than the 30-year fixed rate, which is currently at 3.5%.

If your rate now is 4.5%, then refinancing to 3.5% probably is not going to make sense, after you account for the closing costs. But if you lower your rate by 2%, then it might. Here is a scenario for which it could make good sense:

* Your loan balance is fairly low.

* You continue paying your current payment with the extra going toward principal balance. Ideally, you would be a person who is already paying more and you would continue doing that. This way, your balance would drop significantly each month; especially with only 2.55% going toward interest.

* Your goal is to own your home free-and-clear as soon as possible.

After five years, you would have a very low or no balance. If a small balance was remaining, say $50,000 or less, then even if the interest rate was higher, it would not be problematic. With an adjustable rate, your new payment will be calculated based on the Prime rate and your current lower balance. So even if the rate goes up at the five-year mark, your payment probably would not exceed what you’re paying now anyway.

Don’t Take This Loan If…

* You are not 100 percent confident you can continue paying the higher payment — and will continue to do so. If you’re the type who might give into temptation to make the minimum payment due, this is not for you.

* Your balance is high, such that after five years, you will still have a significant balance owing.

* If you are the type of person who will lie awake at night fretting over what rates might do in the future.

Fine Print on This 5/1 ARM Offer

With the offer I’m looking at, closing costs are only $495. No prepayment penalty. Relock your rate any time you like.

If you’d like to consider this loan for yourself, please feel free to shoot me an email via my “Ask Carolyn a Question” page. You’re also welcome to post a comment or question.

What took you so long, Mr. Bernanke?

~ Carolyn Warren ~ 3 Comments

Today, Ben Bernanke, U.S. Federal Reserve Chairman, said mortgage lending standards appear to be “overly tight.” Well, finally! I don’t mean any disrespect, but what took you so long to come to that conclusion? Mortgage professionals have been saying this for a couple years now.

Our economy will not fully recover until the housing market improves. And with the current extreme underwriting guidelines, that is not happening fast enough.

We went from “if you have a pulse, you’re approved,” to “if you have perfect credit, high income and low debt, you may or may not be approved.” Underwriters are running on FEAR. They’re scared to death of approving a loan that might go into default. Consequently, the approval process at the big banks and with many other lenders has gone over the line of common sense.

I’m calling for REASON and COMMON SENSE to come back to underwriting. For example, if an otherwise perfect borrower had one weird credit snafu, give the person some grace and let them buy a house. What’s the point of denying someone with a good income and good down payment just because of one “oops” on their credit report?

Here’s another true scenario for you to start using common sense on: A self-employed married couple, both attorneys, have $1 million in liquid reserves. They want to refinance their $500K mortgage to get a lower rate and lower payment. Look at the picture: they could choose to pay off the mortgage, if they desired; but their tax adviser has told them to refinance and keep their cash in investments. What did the lender say? DENIED! That’s right, their request to refinance was denied by several banks and lenders. Why? Because their tax returns showed they made less money this year than in their previous year.

Declined income = no loan. (Even if the debt-to-income ratio was still reasonable.)

I could give you more real life scenarios like this, but I think you get my point. Let’s bring common sense back into underwriting, loosen the ridiculously over-tight rules, and get our economy moving up again.

To comment, see the top of this post. As always, thank you for stopping by.

Urgent Messages to President Obama

~ Carolyn Warren ~ Leave a comment

The housing industry has sent urgent messages to President Obama following his re-election. The reason this is important to all of us is because what happens in the housing market affects the entire U.S. economy.

In a nutshell, here are the urgent messages sent to the President after his re-election. I will skip the obligatory congratulatory remarks and get right to the nitty-gritty:

 Mortgage Bankers Association: Strongly urge that burdensome regulation and exposure to litigation do not cut off the supply of mortgage credit to consumers.  In other words, don’t strangle us with your pedantic red tape; let us make loans to good people.

 SIFMA, which represents securities firms, banks and asset managers: Fix the Dodd-Frank law.  In other words, fix that horrid law you passed that has hurt real estate all across America.

National Association of Home Builders:  Make sure creditworthy consumers and small businesses can get mortgage loans, tackle housing reform in a responsible manner, and resolve the foreclosure crisis: all of which are vital to spur job growth and strengthen the housing and economic recovery.  In other words, let us get back to work so that all Americans can get back to work.

American Institute of Architects: We urge the White House and newly elected Congress to launch a new era of statesmanship by putting aside differences… solve the impending budget impasse…where mandatory budget cuts and tax hikes threaten to cost more than 60,000 construction jobs. In other words, stop fighting and fix the economy already.

There is nothing in any of the above messages to disagree with. We all want a more robust economy, and the housing industry is a key factor. The question now is whether or not President Obama can lead us to it. Time will tell.