Friday, June 30, 2006

Refinancing for the Right Reasons

In todays mortgage industry, it's required that you show benefit for the borrower when they want to refinance their current mortgage. This requirement of showing benefit is in place to help borrowers avoid predatory lending practices from some of the more unscrupulous individuals out there.

There are many ways to show benefit. Some common ways are very simple indeed, such as Refinancing for a Lower Interest Rate, or a Shorter Term. Other ways could be to consolidate debt, or get cash out for home improvements. I consider these to be valid reasons for refinancing.

Before I came to be a mortgage planner, I had worked for eight years, extensively in the wedding industry, helping wedding professionals with their internet marketing and business development. While I was doing such work for an online wedding directory & magazine, we had received many inquiries from mortgage brokers requesting to advertise to brides and grooms about refinancing their mortgages to get cash out to have that wedding of their dreams. After proof-reading hundreds of articles, many about being budget conscious and having a frugal wedding within ones means, I had feelings that this was not a smart idea, in general, for most couples. They would be putting themselves in further debt at the onset of their lives together, and the interest paid on such debt would be far more than had they just had a more frugal wedding within their means to begin with.

Now, as a mortgage planner, I posed the question to several online bridal communities and forums. And without a doubt, many of the bride / groom 's that responded said they thought this would be an awful idea and they wouldn't ever think about doing such a thing. Many gave reasons regarding regarding interest paid on debt over the years, preference of having a more frugal wedding, etc...

So I ask the question to you. Are the reasons your thinking about refinancings valid and worthy? You should be educated on the purpose of why you need or want to refinance, and know why the program your getting into is the best for your situation.

Wednesday, June 21, 2006

What are Points? And Why Pay Them?

To be honest, you don't pay points - but you do have the option to. The benefits to 'paying points' are significant for many borrowers, if they learn and know how to exercise them to their utmost value. Let's take a look at how to do that.

A 'Point' is a fee that a borrower pays the lender at the loan closing. Points are expressed as a percentage of the loan amount. So, if you are paying 1 point, and your loan amount is 100,000; you would be paying $1000.

Many people 'think' they must pay points, when in fact they do not; however, if you decide to go to a 'no-points' loan, your interest rate is often higher.

Here's a simple example:

Say your lender offers a no-points interest rate of 7%.

They may also offer the following:

6.75% and 1 point
6.25% and 2 points
6% and 3 points
5.75% and 4 points

There are hundreds if not thousands of mortgage lenders in the U.S.; all competing for a finite amount of business, lenders pay 'finders fees' to independent brokers for beinging them borrowers.

When utilizing the option of paying points, it is called 'Paying Points to Buy-down Your Interest Rate', essentially what your doing is paying directly to the mortgage broker at closing, the finders fee that the lender would have otherwise paid. This can be a positive benefit for many borrowers, but should be weighed properly with what your overall goals are.

Some borrowers have little wiggle room because they are cash-sensitive, and may need to avoid points so that they have enough money on hand to complete the deal.

Other borrowers are income-sensitive, so they need to pay as many points as possible up front, to lower their interest rate (and thus their monthly payment) so that their mortgage payment will not be excessive.

There are two other factors that should guide you, if you are not constrianed by cash or income shortfalls.

Your first question should be, how long do I realistically plan on staying in this property. If you plan on staying for the long haul, you will want to think about paying points upfront. as you will be able to benefit from a lower interest rate over the whole life of the mortgage.

If you plan on only staying for short time (less than 7-10 years), or you already envision refinancing your mortgage sometime in the near future to perform home improvements or for other cash needs (schooling for children comes to mind); you may want to avoid points and pay the higher interest rate; because you won't be there long enough to see any major differences.

You may also envision a length of stay in your mortgage because of falling interest rate expections; I do NOT recommend borrowers making decisions based upon their speculation of interest rates which you can not forecast; unless of course you own a crystal ball that works. If you do, let me know, I have some questions I need answered!

Secondly, even when you plan on staying in your home for the long haul, there may be things that you could use your money on that take priority over 'paying points to buy down your interest rate'. A useful way to compare and determine what is right for your needs, is to look at paying points to lower your rate as an investment in that shows a greater return the longer you stay in your mortgage loan.

Monday, June 19, 2006

Maximizing Your Purchasing Power

I hope everyone had a enjoyable weekend and Happy Fathers' Day. Today I'll discuss the differences between pre-qualification and pre-approval of a home mortgage.

When you go to make an offer on a property, you can maximize your purchasing power by coming to the table already pre-qualified or pre-approved for financing by a mortgage lender. you can go to the seller and say "I've got pre-approval for a loan that is enough to purchase this home..." This makes you far more attractive to the seller, than a person who isn't already approved, but makes the same offer (or more because they know your ready now.)

Here's some info on the differences between the two:

Pre-Qualification:

  • Pre-qualification is ususally free.
  • Provides and estimate of your buying potential.
  • A Lender or Broker will review your credit report, earnings & savings, debt, and other information to get an estimate of the amount of mortgage the borrower will qualify for. This usually is based off of documents the borrower has on hand, or from what the borrower tells the lender.

Pre-Approval:

  • Some, not all, lenders charge you the nominal cost of your credit report in order to get pre-approved.
  • The lender will verify all provided information of employment, assets, and income.
  • In return the lender will provide a letter of mortgage approval for a certain amount to the borrower.
  • Pre-approval can also speed up the process of coming to a final purchase price with the seller.

Once the seller accepts your offer and you agree on a purchase price, you will both sign a Purchase and Sales Agreement (contract). This agreement spells out all the terms and conditions that each party must meet for the sale to go through. Generally, these conditions include the buyers ability and timeline to obtain a loan and the completion of certain property repairs by the seller. These documents can be fairly straightforward, but you should read them carefully just the same.

Also, be mindful, that if your financial situation changes (you apply for new credit cards, auto loans, etc...) before the closing of the loan for the purchase of the property, you must contact the lender. The loan prequalification or pre-approval may no longer be valid.

Friday, June 16, 2006

Buying A Home? Know How Much You Can Afford?

Knowing what a mortgage lender considers when determining what they feel you can afford is crucial to finding the right mortgage, here are some tips about it:

Do you have enough income to repay the lender?
Income can be an important issue when applying for a mortgage, lenders want to know what you make, what your monthly debt obligations (credit card bills, etc) are, and if you have any other loans such as school or auto loans. If your debt-to-income (DTI) ratio is too high you may be asking for too much of a loan. Your DTI is based upon what your new monthly mortgage payment will be PLUS, your monthly debt obligations (car loan, credit card minimum payments, school loans, etc…) divided by your gross monthly income.

For example, say you have $750/mo in debt obligations, and you make a gross monthly income of $4000. Your back-end ratio (your debt to income %) would be approx. 19%, that’s not bad at all. On the front-end ratio (your expected mortgage payment) lenders normally allow up to 29% of your gross monthly income, so in this example you know that could be approximately $1200. When you add your monthly debt $750, to your expected mortgage payment of $1200, and divide them by your income of $4000, you’ll get a DTI of 48.75%. Lenders often have guidelines to turn down applications where your DTI is over 50-55%.

Have you been trustworthy and paid your bills on time in the past?
Your credit history is an important determining factor to obtaining financing. But it is not the end of the road if you have less than perfect credit, many lenders will still provide the mortgage for sub prime borrowers, but you’ll end up paying a little more in interest.

Do you have something to use as collateral?
If you should fail to be able to repay the lender, they want assurances that they won’t be left out in the cold holding the bag. This normally comes in the form of a down payment to show your seriousness and intentions.

Thursday, June 15, 2006

What is a Mortgage Consultant?

A Mortgage Consultant (a.k.a. Mortgage Broker, a.k.a. Mortgage Planner), is an intermediary between the borrower and the mortgage lender. The mortgage consultant will do the leg work of shopping your needs around to several different lending institutions to find the best product and service to fit your situation. They look for products that will best suit your specific situation and circumstances based upon a combination of features, rates, and add-on options. One good thing about using a mortgage consultant is that there is usually no charge for their services, the lender pays their fee! If your situation dictates that you are interest rate sensitive though, you can 'pay points' to the mortgage consultant and the mortage lender will lower your rate (known as a Rate Buydown, I'll go over this concept in future blog posts).

So Why Should You Use a Mortgage Consultant?

Homeowners should aggresively search out the best product and terms from a lender. This seems like common sense, but can often times be overwhelming. Thus, using a mortgage consultant becomes an alternative option when compared to negotiating personally with only one or a few lenders. Mortgage consultants have access to a large variety of lenders and often 'whoelsale lenders' who do not deal directly with the individual consumer/borrower. They are skilled in negotiating with lenders for the best possible terms, and displaying your specific situation in the most favorable light possible.

Mortgage consultants are also a wealth of knowledege, unbiased information, and help when analyzing the dozens of options available in todays mortgage industry. Questions that seem like impassable blocks to inexperienced borrowers, are often easily managed by an experienced mortgage consultant. Things like, the advantages of cash-out refinancing instead of a HELOC/HELOAN, troubles getting financing because your self-employed, or arranging financing for investment properties are often very simple things for a mortgage consultant because of their extensive experience.

Just like a baseball team has a Manager, a batting coach, a pitching coach, a physical trainer, and other coaches; you should have similar people on your team including a real estate agent, certified financial planner, mortgage consultant, etc...

Welcome to My Mortgage Consultants Blog!


Greetings to All,

In an attempt to help educate consumers (i.e. borrowers) who are in need of mortgage services, I have created this blogger to discuss common topics and issues that my clients have asked or endured.

If you have a question you feel should be addressed on this blog, or requests for topics that you think others should know about, feel free to email me at: reggie.whitcomb@redwoodfp.com

I hope you find the information that I post here to be informative and helpful to you.