Points are up-front fees paid to obtain a better interest rate on a loan. One point equals one percent of the loan amount. A lower interest rate may result in a lower monthly payment, but it is important to consider how long you intend to be in the loan, what you might do with those savings, is it worth liquidating more assets to buy the points in the first place, and to compare current rates to historical market trends.
Should you or should you not buy points? The answer is: YES. Like any question when it comes to financial planning the answer depends. Let’s take a look at this example….
If you take out a $300,000 mortgage and decide to pay one point, this translates into an up-front closing cost of $3,000. To make this example simple we’ll say paying a point up front saves $100 a month but it will take 30 months to recuperate the cost of that point. If you decide to refinance or sell the home before the 30-month mark, your money is lost. In this case, you would benefit financially by remaining in the home longer than the 30 months. Mortgage rates run in cycles.
When rates are at historical lows, it is more sensible to pay points if you plan to live in the home for an extended period of time. It is unlikely that rates will go down; hence, there will be no need to refinance. When rates are up, there is a strong likelihood that they will come down. This is no time to pay points. The chances of refinancing in the future are extremely high, and you will likely not be in the loan long enough to recuperate the cost of the points.
Fixed rate loans generally come with one of two options; the 30-Year Fixed and the 15-Year Fixed. If a borrower is planning on being in the same home for a long period of time, a 30-Year Fixed may be more attractive because it offers stability. The monthly payment will remain consistent over the life of the loan. If interest rates are at historic lows at the time the borrower is seeking to obtain financing, this is a good program to consider.
A 15-Year Fixed loan program offers the same stability, but the accelerated amortization schedule makes the monthly payment substantially higher. While the interest rate may be lower on this type of loan, the borrower must be willing to commit to a significantly higher monthly payment. Please see the free report “The Secret No One Is Talking About” available on the Mortgage Planning page of this website to find out why a 15 year loan is a losing proposition in almost every situation (yes, even if you are close to retiring).
Title is the legal documentation that bestows ownership of real property. This is to be indicated in Part II of the 1003 Uniform Residential Loan Application as “manner in which title will be held.”
The decision of how the title will be held should not be put off until the last minute since it has a great impact on future tax planning, the financial future of the borrower(s) and their respective heirs, and the choice of the lender.
It is most important for the mortgage consultant to work hand-in-hand with the borrower’s financial planner or tax consultant to assist their mutual client in order to make decisions that work best for their particular scenario.
For example, most married couples would consider holding title with Joint Tenancy. But if one spouse has a good credit history while the other has damaged credit that may prevent funding of the loan, it would be advantageous to place title in the name of the spouse with the good credit rating.
Common ways to hold title are broken down into options that fall under the categories of sole ownership or co-ownership. Many states permit the holding of title in a living trust, but some lenders do not accept those terms. There are ways around this, but this is where the financial planner and the mortgage planner can make a tremendous difference by working together.
Interest rates change constantly, but it is important to know that rates are cyclical. If rates are currently at historical lows then we know there is a strong probability rates will go up again, and vice versa. Certain economic indicators such as unemployment data, consumer price index, retail sales data, and consumer confidence all have an effect on mortgage interest rates. But the key factor to watch is the relationship between stocks and bonds.
When the economy is slow and the stock market is “bearish,” many investors move money out of stocks and into bonds and mortgage-backed securities. This causes mortgage interest rates to go down. When the economy is doing well, the stock market rallies and is considered “bullish.” Investors then have a tendency to move their money out of that safe haven of bonds and mortgage-backed securities and back into stocks. As a result, mortgage interest rates go up. It is very important to work with a Loan Consultant or Mortgage Planner that has access to real time Mortgage Backed Securities data and the knowledge to view the market in order to help you make the best decision on when to lock in your rate in the loan process.
When a borrower enters into a contract to make bi-weekly payments on their mortgage, the amortization schedule is accelerated. For example, with a 30-year amortization schedule, the borrower makes 12 payments per year. In a bi-weekly arrangement, the borrower makes 26 ‘half’ payments, which allows the loan to be paid off in 22.8 years instead of 30 years. It’s the same as making 13 monthly payments.
Does this make sense? Sounds like it does doesn’t it? Well, it’s really a horrible idea as a long term investment strategy and actually costs you money and massive wealth opportunity! Please see my “The Secret No One Is Talking About” page in the Mortgage Planning tab at the top of this website.
Pre-qualification is the first step in obtaining mortgage financing. A potential borrower answers a few questions to provide the loan consultant with a quick snapshot of the borrower’s income, existing debt, accumulated savings and whether or not there is a co-borrower. Signature(s) allow the loan consultant to run a credit report and begin to determine what loans are good candidates for this particular client. However, there are literally thousands of loan programs available. It is important for the loan professional to know the long-term financial objectives of the prospective homeowner.
Pre-approval is a written documentation that proves the borrower has full support of a lender. It means the form 1003 Uniform Residential Loan Application has been completed and reviewed by an underwriter. Based on the borrower’s income, debt ratio and savings, the underwriter will provide a dollar amount this borrower is eligible for. Now the borrower has the convenience of shopping for a home in the price range agreed upon by the lender.
Pre-approval allows potential homeowners to shop as cash buyers, and that means negotiating power. Sellers will take an offer from a pre-approved shopper much more seriously and may even accept a lower bid because they know the financing is in place and the deal is secure.
The IRS permits a maximum exclusion on capital gain of $250,000 for individuals and $500,000 for married couples filing a joint return who sell their home, but of course some conditions apply. For the five-year timeframe prior to the date of the sale of your primary residence, you must meet the Ownership and Use Tests the IRS provides in Publication 523, Selling Your Home . These rules ensure you you have owned the home for at least two years, and lived in the home for at least 24 months out of the last five years. Additionally, you may not have excluded a gain on your taxes from the sale of a different home within the last two years. Note that if you sell your property for less than your original purchase price, you cannot claim a capital loss.
A ‘reduced maximum exclusion’ can apply to those who must sell their home due to a change in their place of employment, health issues, or unforeseen circumstances that affect qualified individuals. In all cases, it is best to consult your tax professional or IRS guidelines if you have any questions about the taxes you may be responsible for if you sell your home.
Closing costs are expenses that cover fees associated with the transfer of property ownership, fees paid to state and local governments, and the costs of obtaining a mortgage loan. Some of these fees are negotiable, and could be paid by either the buyer or the seller. Some costs are one-time fees (non-recurring closing costs, such as title search, termite inspection, appraisal, etc.); while other fees such as homeowner’s insurance or property taxes are things you will expect to continue to pay on a regular basis as a homeowner.
As part of the loan selection process, your mortgage consultant should be giving you some idea of how much money you should have in reserve to cover your end of these costs. The Real Estate Settlement Procedures Act (RESPA) requires the lender to provide you with a Good Faith Estimate within three days of the submission of your loan application.
RESPA also states that as a home buyer, you have the legal right to request a copy of the HUD-1 Settlement Statement 24 hours before your closing is scheduled. The HUD-1 clearly defines all closing costs, including those that are to be paid by the buyer and the seller. It’s a good idea to have both of these forms before your closing so you can compare the estimated costs to the actual costs before you finalize your transaction.
Title insurance is a policy that is usually issued by a title company to protect the lender against something that might have happened in the past, rather than something that might occur in the future. In essence, an extensive search of public records is conducted by the title company to validate who has held title to the property in the past. The lender wants to know if there are any liens, judgments or easements on the property that they should be aware of.
But title insurance also guards against hidden risks or unknown factors that might cause an encumbrance at some point in the future, such as unknown heirs, forged deeds or wills, misinterpreted wills, false impersonation of the true owner of the property, deeds signed over by persons of unsound mind, or defects in the recording of past titles. Title insurance covers the cost of the title search, and any legal fees that may result from any dispute over past property ownership. It is required by the lender and paid for by the buyer.
The smart home buyer will also purchase title insurance to protect their own interests. This is a one-time premium that protects the buyer or their heirs, as long as they retain an interest in the property.
The Federal Housing Administration (FHA) program first began in 1934 in an effort to encourage home ownership despite the difficult economic times of the era. The program enables consumers who may not qualify for a standard loan to obtain the financing they need to purchase a home without income limitations. FHA loans differ from typical loans in that they are insured by the Federal Housing Administration, which is a part of the Department of Housing and Urban Development (HUD). Because this insurance reduces the lender’s risk on the loan, lenders have greater flexibility with regard to approving loans.
For example, FHA loans are not credit-score driven, so a client may be able to obtain a loan despite having had credit problems or even a bankruptcy in the past. Alternatively, if a consumer does not have a traditional credit history, it is still possible to obtain financing by documenting payment histories on items such as rent and utilities.
FHA loans also provide added flexibility when it comes to closing costs and the down payment. Many of the closing costs can be incorporated into the loan, and a down payment of less than 3.5% of the purchase price is required. The down payment may be obtained as a gift from a family member or through a down-payment assistance program. FHA loans are processed just like any other loan, and they provide a wonderful opportunity for consumers who are seeking to achieve home ownership!
There are several reasons why purchasing a home is preferable to renting one. Rent payments go directly into the pocket of a landlord, while mortgage payments result in the accumulation of equity and the eventual ownership of the property. The tax advantages of home ownership are also significant since mortgage interest is tax deductible.
Ironically, these two benefits do not always work well together! Financial planning expert and best-selling author, Douglas Andrew, has revealed some surprising misconceptions as well as some innovative strategies in his book, Missed Fortune 101 *. Andrew explains that most homeowners believe that paying down their mortgages quickly and increasing their equity is the best investment they can make. However, doing so results in a decrease in the tax benefits available since the loan is paid off sooner, causing the interest deductions to disappear as well as many other opportunities to create real wealth.
As an alternative, Andrew suggests that homeowners obtain a fixed-rate, long-term mortgage. Rather than putting down a large down payment or paying extra principal, he recommends placing these funds in a carefully chosen investment vehicle that will earn a higher rate of return. By using the tax benefits of the interest deductions and the compounding of interest on the investment account, homeowners have the potential to earn a higher rate of return. In addition, should an emergency need for cash arise, the investment account will be much more liquid than the equity of the home.
* Missed Fortune 101 is available in local bookstores and through Amazon.com.
Deciding whether to move is no easy task. There are many financial and emotional factors to consider prior to taking that next step. However, once the decision has been made, the benefits soon become apparent.
According to the best-selling author of Remodel or Move *, Dan Fritschen, there are several reasons why people choose to move. Perhaps the size of their family has grown and their existing home has become a little too cozy. As children mature, being close to good schools becomes much more important. Job changes can also lead to a desire to move, especially when a commute increases dramatically.
In addition, there are idiosyncrasies that are unique to a particular home and its neighborhood. Is the floor plan in the existing home desirable? While remodeling can help to correct certain issues a homeowner may encounter, a bad floor plan can be insurmountable. Is the yard big enough to accommodate the family pets and a garden? Neighborhoods also vary widely. If a person prefers a neighborhood where the residents are social and kids are out playing during the day, then they would not be happy in a subdivision that is quiet and reserved.
While moving into a new home is no small task, the benefits of finding the right one are well worth the effort.
*Remodel or Move is available in local bookstores and through Amazon.com. Visit www.remodelormove.com to learn more!
Chances are you know someone who is facing the challenges of divorce. Going through this process can be emotionally and financially difficult. Failing to address important credit issues, however, will only make things worse. Remember, a divorce decree does not absolve credit contracts or relieve responsibility for any and all debt incurred during the marriage. The following is a proactive plan to maintain healthy credit both during and after a divorce.
Know Your Credit.Obtain copies of credit reports from all three bureaus right away (Experian®, Equifax, and TransUnion®).
Organize The Facts. Make a list of ALL open accounts and create a spreadsheet with creditors’ contact info, account number, type of account, balance, monthly payment, and the name of the vested spouse.
Take Action. Sell or refinance secured credit assets (e.g. car, house, etc.) if possible, ensuring that loans are either paid in full or that only the vested spouse’s name remains attached to the account. Immediately close any unsecured accounts (e.g. credit cards, etc.) with no balance. For those accounts with a balance, have them frozen to ensure no future charges can be made.
A Few More Tips. Only a creditor can change the terms of a credit contract. A judge may order one spouse to pay off a joint account, but both parties are still responsible in the eyes of the creditor if the debt is unpaid. If possible, pay off these accounts quickly to help maintain good credit. However, if one party is ordered to pay off the debt of an open joint account, that party should be sure that the title reflects this change to avoid paying for something he or she no longer owns.
In theory, finding the right mortgage should be a fairly simple process, especially since there are fewer product options to choose from these days than there have been in the past. However, obtaining the right mortgage is a complex financial decision no matter how many products there are to choose from.
At a minimum, home buyers should consider the following questions before putting any mortgage into place: How long do you anticipate living in your new home? Do you foresee any changes over the next few years, such as expanding your family or having children go off to college? Do you anticipate any adjustments in income due to promotions, relocations, retirement, inheritance, or pensions? Are you expecting a change with regard to your investments? When it comes to investment strategies, are you conservative, aggressive, or somewhere in between?
As a mortgage professional, it’s my job to match clients with the mortgage product that best serves their changing goals and needs. I take pride in helping each and every client succeed.
This may come as a shock to many borrowers, but it’s absolutely true. Mortgage interest rates are not set by the Federal Reserve and, contrary to popular belief, mortgage rates are not directly tied to the yields of US Treasury bills, bonds, or notes – including the 10-year Treasury Note. That’s right. Despite what you might hear in the media, mortgage interest rates are actually set by lending institutions, and are based solely on the performance of mortgage-backed securities.
For years now, the media and inexperienced loan officers everywhere have suggested that the 10-year Treasury Note, a government-backed security, is directly tied to mortgage interest rates, that the two are separated by a specific interval – which is simply not true. The graph on this page, which shows interest rates for 30-year fixed-rate mortgages and the yield for the 10-year Treasury Note for 13 months, clearly demonstrates this fact.
At a quick glance, yes, it’s easy to see why the mistake is made. As you can see, for 11 out of the 13 months recorded in the graph, the yield of the 10-year Treasury Note and interest rates for 30-year fixed-rate mortgages did follow a somewhat similar long-term path, despite obvious short-term divergences. However, take a closer look at the drastic change that occurs from January through March 2008. What’s interesting about this graph is that, during this period, the Federal Reserve had cut interest rates six times, from September 2007, to March 2008, and yet mortgage rates were actually higher in March 2008 than they were a year before. Not only does this demonstrate that the yield of the 10-year Treasury Note is not pegged to mortgage interest rates, it also reveals that mortgage interest rates are not set by the Fed either.