Entries Tagged 'Consumer Resources' ↓

Everyone is familiar with the term “paying points”, but do we really know what this is and the different effects it can have on a mortgage loan? Traditionally, this means paying 1 percent of the dollar of the loan amount in order to get a lower rate. This is commonly referred to as “buying down the rate”.

Here is an example. The Jones’ family purchases a home for $300,000 and puts 20% down. The loan balance is $240,000. The current rate on a 30 year fixed loan is 6.25%. Financing $240,000 for 30 years at a fixed rate of 6.25% makes a payment of $1,477 (principle and interest). Suppose the clients decide to “buy down the rate”. In this scenario, paying .00625 of the loan balance upfront ($1,500) will lower the interest rate by 1/8th of 1%. The payment is now $1,458, a decrease of $21. Quickly dividing the $1,500 by $21/month gives us a breakeven point of just under 6 years.

Translation: If you think you will stay in the house more than 6 years, it is worth paying points. This assumes you have the cash and are willing to spend it this way. Another option would be to pay 1.25% of the loan amount ($3,000) upfront to lower the rate by ¼%. This has the same payback period as the first option, but it requires twice the cash out of pocket as well as lowering your payment by twice the dollar amount on a monthly basis ($42).

The opposite of this is taking a slightly higher interest rate in order to pay your closing costs. In this scenario using the same $300,000 selling price, the client has just enough money to put 20 percent down but not the closing costs. (FYI, putting 20 percent down allows the client to avoid paying mortgage insurance. This insurance protects the lender in the case of foreclosure if the amount the lender receives from the sale of the property is less than the balance of the loan.) Anyhow, instead of 6.25% interest, the client elects to accept 6.5% interest.. In this scenario, this would allow the mortgage company to rebate roughly the amount of all of the closing costs and prepaid items to the seller as a credit on the settlement statement, thus saving precious “cash out of pocket”!

These are just a two examples of what can be done to save money or reduce the buyer’s cash investment when a home is purchased. Paying points can be a good way to reduce your monthly payments and for folks who have less cash to put into a transaction, getting the mortgage broker or the seller to pay closing costs can sometimes make the difference between making a deal or not. I recommend speaking with your mortgage professional in order to find out exactly what options are available and what makes the most sense for you.

Technorati Tags: discount points, mortgage loan, buying down the rate, paying points, closing costs

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Patrick Randles is a guest contributor to Tucson REblog and gives an insider’s view on the mortgage industry. He is a Mortgage Loan Consultant with El Conquistador Mortgage in Tucson, Arizona. Patrick can be contacted by phone (520-850-7485) or email. Feel free to post any questions for Patrick!

The Arizona Daily Star published an article today detailing an effort started in 2005 by the Federal Emergency Management Agency (FEMA) that is just now coming to fruition. The bottom line is that many areas in the Southwest US (including Pima County) that are currently designated as “safe” in terms of flood protection may be re-designated as flood plains.

How are they deciding what is a flood plain?

“Marana Mayor Ed Honea received a letter July 20 from FEMA stating that the agency had done an overview of the area and determined that various structures within the town’s limits fall under the definition of a levee.

Brann said FEMA issued similar letters to all parts of the Southwest U.S. around the same time, starting a 90-day clock, by thee end of which each jurisdiction must supply FEMA with proof of which levees have provisionally accredited levee agreements.”

I’m curious to see just what a “provisionally accredited levee agreement” means but I assume that levees have to be periodically re-certified in terms of reliability and have some sort of federal stamp of approval. Here is a link to the FEMA page of the document in question.

Will it affect me?

The article states that homeowner’s who currently have home insurance in a low risk zone (Zone X) will be grandfathered in with their current rates once (and if) their home is re-designated to be in a flood plain when the new maps come out on September 20th. The people who will feel the crunch are the new homebuyer’s to the area with a federally backed mortgage; flood-insurance is required for all federally backed mortgages in a Zone A flood plain. (Learn about different flood plain designations)

For anyone who is in the San Lucas subdivision I would suggest checking into a Zone X policy; be aware that the premium will have to be paid up front for the entire year. I called up my insurance representative and he said that if homeowners haven’t purchased flood insurance and their home is then re-designated to be in flood-plain, not only will they have to purchase a Zone A flood insurance policy but their lender will also probably require them to pay for a surveyor out of pocket to come out to their property and draw up a survey map (could cost $500-$600). Check with your lender/insurance company to be sure.

(Am I in a flood zone? <- Click here to find out!)

Technorati Tags: Arizona Daily Star, Pima County, flood plains, FEMA, Zone A flood plain

We all know about the collapse of the sub-prime market and the tidal wave effect it has had on the mortgage industry as a whole. Here is a brief synopsis. Over the last few years, Wall Street investors had fallen in love with the returns on sub-prime (lower credit ratings) mortgages. They paid a premium for these loans in large quantities. The demand of this sort of product in turn induced the lenders to lower their underwriting standards and make more of these loans.

After these portfolios started to mature, the true rates of delinquencies and losses was recognized to be higher than predicted. Aside from having homeowners who were never financially qualified, buyers were put into risky loans such as option ARMs that they did not entirely understand. At this time, the investors started buying these loans at a discounted rate instead of a premium because of the increased risk associated with these securities. The lenders would package thousands of these loans for some period of time and all of a sudden they had to pay to get rid of the loans in order to replenish their credit lines.

It gets worse - Most lenders use what are called “Warehouse” lines of credit to make their loans. As Wall Street recognized the error or their ways, the banks and investment houses that had established these credit lines with the mortgage lenders started making “margin calls”. This is a demand to pay down the line of credit in a given time frame. A mortgage lender could have a $20 million line of credit with a bank. The bank could believe that the collateral is only worth $18.5 million and require a payment of $1.5 million in the next 14 working days. And then every other creditor will want their line paid down as well so as not to be the most exposed party to one portfolio. You can see where the combination of cash expenditures spelled doom for mortgage lenders. But, these lenders did this to themselves. Unfortunately, there are also a huge bunch of folks out there that can’t sell their homes because prices have dropped and they can’t refinance because the lenders are requiring better credit and more equity.

Where are we now?

Rates are still good for people with good credit. “Piggyback” loans (2nd mortgages) are going away. This means that people with little or no money down will most likely have to pay Private Mortgage Insurance (PMI) in order to get a loan. This protects the lender if the house is foreclosed upon and the amount from the sale of the home is less than the balance on the note.

What may be coming?

This is difficult to predict. I anticipate that home prices will continue to go down for the next 12-18 months. There will be a high delinquency and foreclosure rate. Mortgage lenders will have to rethink their business models in order to protect their cash positions and stay solvent and lastly I would anticipate more government regulation in the industry in regards to educating the customer and protecting them from risky loan products and unscrupulous lenders.

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Patrick Randles is a guest contributor to Tucson REblog and gives an insider’s view on the mortgage industry. He is a Mortgage Loan Consultant with El Conquistador Mortgage in Tucson, Arizona. Patrick can be contacted by phone (520-850-7485) or email. Feel free to post any questions for Patrick!