Articles about Mortgages

With mortgage rates at near-historic lows and the economy showing signs, albeit small ones, of a recovery, both fixed and adjustable rates will eventually increase.

Fannie Mae, Freddie Mac and the Federal Housing Administration have programs that allow borrowers with little or no equity in their homes to refinance existing mortgages. It is best to contact a mortgage professional directly if you’re seeking more details on such programs.

The question, though, is: Who should be looking into refinancing at this time?

The answer is: You should be looking to refinance at this time if you have either an adjustable rate mortgage or an interest-only mortgage.

Adjustable Rate Mortgages

Adjustable rate mortgages, known as ARMs, are tied to economic-related indices, such as Treasury rates. These indices, which are used to set the ARM rates, are low at this time. As they increase, so will the rates impacted by them.

While many ARMs have been adjusted downward in recent months, it is likely that they will be moving upward either in late 2010 or early 2011. Refinancing options for fixed rates will still be available in the future, but those rates will also increase.

In strategizing your mortgage plan, long term versus short term, you should weigh your options and, if applicable, secure your long-term rate at this time.

Interest-Only Loans

As with ARMs, interest-only loans have a period of time in the beginning where the payment is one amount, then over time it changes. Interest-only loans have a period in the beginning of the term of the loan, usually five or 10 years when the full amount of payments consists of interest only, after which the entire principal must be paid back, spread out over the remaining term of the loan.

When payments change from interest to principal, they will typically increase significantly, and if you have this type of mortgage, now is the time to look at refinancing.

First-time homebuyers who’d expected the $8,000 tax credit to expire last November 30 should be aware that it has been extended to mid-2010.

The catch is that the borrower must close on the home before April 30, 2010. If you are unable to close on the property by that date, you must have a fully executable sales contract and close by June 30, 2010, to remain eligible.

First-time homebuyers are those who have had no ownership in a primary residence in the last three years. This group includes owners of rental properties who haven’t owned a primary residence in the last three years.

The maximum income for a single filer is $125,000, and $225,000 for married filers. First-timers who have non-occupying co-borrowers on the loan with them are still eligible. The tax credit is set at a maximum of $8,000, or 10% of the purchase price, whichever is less. If you purchase a home for $60,000, you are eligible for a $6,000 credit. If you purchase a home for $400,000, you are still eligible for only $8,000.

Properties must be primary residences, meaning that the credit excludes second homes and rental properties. You must own the property for at least 36 months, or else you forfeit all or part of the tax credit.

Existing homeowners who are moving into a new primary residence and have owned a primary residence for at least five of the last eight years are eligible to receive a $6,500 tax credit. Please contact your tax professional for more details.

With all the changes that have been going on with home financing over the last few years, none needs more attention by homeowners and would-be homeowners at this point in time than the subject of credit.

Historically, income, assets and credit were the determining factors in whether a potential borrower was approved for a mortgage. In the recent and fairly recent times of low- and no-documentation loans, lenders got away from that, and that, in part, contributed to the current situation we are now in. That being the case, lenders are analyzing mountains of data from mortgages taken out in recent years and have come to the conclusion that borrowers with higher credit scores, regardless of income and assets, are less likely to default on their mortgages.

What this means for buyers is that keeping credit as well-managed as possible should be a priority, whether or not buyers are looking for a home. Below are two of the major contributing factors that make up a credit score:

• Balances Versus Limits: Keeping balances as low as possible, ideally under 30% to 40% of the limit on a credit card and other trade lines, will help keep scores high. Having a balance that is very close to the limit will cause scores to drop - but less than they would if the balance were over the limit.
• Recent History: Having made payments on time over the last 12 to 24 months will give the lender an indication of a buyer’s payment habits and let the lender know how likely the buyer is to make payments after taking on a mortgage.

Finding a mortgage these days, despite all the negative economic news we are hearing in the media, is easier than it has ever been.

Before you take the leap, though, there are a few things you should think about.

The first question that you might want to ask yourself is how long you intend to occupy the property.

Fixed or adjustable?

If you’re reasonably sure that you are going to be there for the short term, an adjustable-rate mortgage might be something worth looking into.

If you are unsure, consider going with a  fixed-rate mortgage.

The reasons for this are twofold.

First, you protect yourself against rate increases that an adjustable-rate mortgage would have.

Second, if you do wind up staying and want to refinance into a fixed-rate loan, chances are that the rate will be higher than it is now in early 2010.

Rates have been at record lows for a long period of time.

When the economy turns around, and it eventually will, both fixed and adjustable rates will increase.

Comparing mortgages

These days, mortgage disclosure laws for brokers and banks alike continue to get more stringent, with the best interest of the consumer in mind.

As a result, you are now truly able to compare apples to apples.

You should take the time to talk to different lenders and see what they have to offer, and then compare their documents to see which one really is offering the best deal.

It’s also important to understand what’s best for you in the long term.

If you’re planning to stay in the property for an extended period of time, say, 20 years or more, ask how getting a lower rate would benefit you, even if you have to pay more in fees to get it.

A savings of even $30 per month over 20 years will amount to $7,200.

Many properties in the current market - especially distressed ones or those that have been vacant for an extended period of time - can be good buys.

But they can also come with challenges.

The challenges could be significant damage from water or mold, or missing essentials like furnaces, hot water heaters or, in some cases, copper tubing.

Traditional mortgage programs, such as those offered by Fannie Mae and Freddie Mac, shy away from properties in need of major repairs or replacements.

There are other options, though, such as the increasingly popular Federal Housing Administration (FHA) 203(k) rehab program.

The program rolls the purchase price and estimated repair costs into one loan.

Let’s say you’re looking at a home with a purchase price of $100,000, and it needs $15,000 worth of work.

You would go to an FHA lender that handles 203(k) loans and get a loan for $115,000.

The first $100,000 would be disbursed at closing, with the remainder provided as the project progresses.

An independent FHA consultant is hired by the buyer, on behalf of the lender, to oversee the process and to protect the interests of you and the lender.

A general contractor is then selected.

A general contractor must be used, instead of doing it yourself or hiring someone you know to do it, unless he or she is a general contractor.

The contractor must have references and a line of credit that will allow him or her to pay for materials and services until he or she is reimbursed from loan proceeds throughout the course of the project.

Work must generally start within 30 days of closing and must be completed within 90 days of the start date.

Mortgage rates are relatively low at the moment, but there’s little doubt they’ll begin creeping up. It’s important, then, to have some knowledge of how mortgage rates are determined and what the picture might look like in the future.

Fixed Interest Rates

Fixed interest mortgage rates are tied to the 10-year U.S. Treasury note and are indirectly tied to the prime rate. In today’s economic times, the 10-year note tends to be a more stable investment than the stock market. The demand for this type of security increases the price, which decreases the yield, which is tied to fixed mortgage rates, resulting in lower fixed rates. Once the demand for stocks increases and bonds decreases, the yield will rise, and so will fixed mortgage rates.

Adjustable Interest Rates

Adjustable mortgage rates, as well as credit card rates and car loan rates, are often tied to variable indices, such as the U.S. prime rate. The prime rate is the rate at which banks lend money to one another. It is presently at a historical low in light of the economy.

But when the economy starts to turn around, prime and other indices will be likely to rise, and this is to be expected, as they have been low for some time now.

Other countries, including Australia, have started to increase the prime rate, as they are seeing slight improvements in their economies. The U.S. prime rate should remain where it is now for the foreseeable future, but it will eventually increase.

There are many differences between conventional and Federal Housing Administration (FHA) mortgage loan programs.

When considering the purchase of a home, it’s important that you compare the two.

If you’re looking to purchase a home using FHA, you must put down a minimum of 3.5% and you need a credit score of 620 or higher.

Regardless of the loan-to-value ratio, you’ll also pay an up-front mortgage insurance (MI) premium of 1.75% of the financed loan amount and normally there is a monthly mortgage insurance premium after that.
Homebuyers using conventional financing must put down at least 5% and have a minimum credit score of 720.

There is no up-front MI on conventional loans.

However, there is monthly MI on all loans where the loan-to-value ratio is greater than 80%.

Conventional financing will accommodate borrowers with credit scores as low as 620.

However, the premiums that are charged in such things as up-front fees or rate increases will usually make FHA loans a better choice for borrowers with credit scores in this lower range.

Income guidelines are more conservative with FHA than with conventional programs.

FHA is more liberal with credit, so it may be a better choice if you’ve had recent credit issues but make more than enough income to cover all your monthly expenses.

Conventional financing requires two months of liquid asset reserves.

This means you must be able to cover two months of the mortgage, including taxes and property insurance, from sources such as checking or savings accounts or a retirement account. FHA has no reserve requirements.

With all of opportunities in the current market to purchase undervalued properties, people looking to get into the world of property investing might want to explore their options. But there are a few things to keep in mind.

Investors looking to finance an investment property must put down 25% to 30% of the purchase price and have a credit score of 720 or higher, with no history of foreclosure or bankruptcy in the last seven years.

Mortgage rates on investment properties are also higher than they are on properties in which owners intend to live. Conventional loan programs are the programs of choice for investors, as the Federal Housing Administration typically lends only on primary residences. Additionally, rental income must be documented in the form of a signed lease. Any prior rental income from other properties must go back at least two years and be supported by signed tax returns. Rental income is typically calculated at 75% of the amount on the rental lease, as lenders allow for what is called an occupancy rate, meaning there will be times when the property will be without tenants.

Asset reserves on investment properties are six months of principal, interest, taxes and insurance for each rental property owned.

If you purchased a multifamily property, though, and live in one of the units, you would be buying it as a primary residence versus an investment property. Anything with more than four units would require a commercial loan.

If you’re looking to buy a foreclosure property, the following information will help you navigate the waters.

A foreclosure is any property that is in the process of being taken back by the lender. A short sale is when a borrower is selling a property for less than is owed on it.

A real estate-owned (REO) property means that the foreclosure process has been completed and the bank owns the property outright.

These days, the market is full of the aforementioned properties. If you’re looking to buy one, find yourself a good real estate agent who has worked with these before.

While prices for these types of properties are often lower than comparable non-foreclosure properties, keep in mind that the process of purchasing one can be more drawn out than it is when buying a property via conventional channels.

Lenders must approve the sales, and with the volume that many are carrying, it may take weeks to hear if an offer is even accepted. Because there are so many undervalued properties, there may be many bids on each, driving up the price in a bidding war.

Financing a foreclosure is pretty much the same process as financing a traditionally purchased property. The purchase process may be slow at the beginning, but after an offer is accepted many lenders want to close quickly, often within weeks, to get the properties off their books.

New laws have been introduced in an attempt to avoid surprises for borrowers at the closing table in both purchase and refinance transactions

The laws require initial disclosure of fees, and re-disclosure in the event of fee or rate changes.

Traditionally, when a borrower has made application to a lender, the lender, by law, was and is required to disclose certain information.

This information includes two documents.

The first document is called the good faith estimate (GFE).

This shows the rate, the fees and the charges the lender expects to collect in the course of the transaction.

The second document is called the truth in lending (TIL) disclosure. This shows what is called the annual percentage rate (APR).

The APR is a calculation that rolls fees and costs of the loan into the loan itself.

The APR is normally higher than the rate.

So now, if you go to two lenders with the same rate and same loan amount, the APR given by each one will
be determined by the cost associated with the loan.

You can now compare apples to apples.

Now, before lenders can charge you any fees, other than for obtaining your credit report, they must receive from you, in writing, a statement that you acknowledge what they are proposing to you in the way of fees and APR.

If there ends up being a change in the loan amount, or a rate or fee change that results in an APR change of greater than one-eighth of a percent (.125), the lender must re-disclose this.

Under the new laws, borrowers also now have a minimum of three business days to review and approve the changes before the file can go to closing.