Archive for April, 2007
Is now the time to refinance your ARM?
Posted by: | CommentsIs now the time to refinance your ARM?
If the interest rate on your ARM is due to adjust soon, you should consider whether it makes sense to get a new loan.
Like many home buyers, you may have chosen an adjustable-rate mortgage because the introductory interest rate kept your monthly mortgage payments affordable during your early years of homeownership. But every adjustable-rate mortgage resets sooner or later, and when yours adjusts, you might be facing a substantially higher monthly payment.
The possibility that your payment might climb even higher may prompt you to consider refinancing your adjustable-rate mortgage with a different loan product. The choice to refinance isn’t easy, but there is no need to panic or overreact to a higher payment.
Factors to consider
The difference between the reset monthly payment on your existing mortgage and the amount you would pay on a new mortgage is the most obvious factor to consider, but shouldn’t be the only factor you keep in mind. Other considerations might include the caps and adjustment periods on your current mortgage, the outlook for higher (or lower) interest rates, the cost to you in time and money to obtain a new mortgage, and how much longer you expect to own your home.
The caps and adjustment periods on an adjustable-rate mortgage can protect you against substantially higher payments even if interest rates continue to rise. It’s difficult to predict interest rates, but you can educate yourself and pay attention to financial-market news, so you can make smarter decisions.
A new mortgage can cost thousands of dollars and take many hours to research, apply for and close. If you expect to sell your home within a few years, the benefits of a new mortgage might not justify the outlay of time and money. That’s especially true if you itemize your income tax deductions since a higher mortgage payment could be partially offset by a bigger break on your taxes. (Consult a tax advisor about your situation.)
New mortgage may be advantageous
If you obtained an adjustable-rate mortgage within the past few years, your payments might not be lower on a new fixed-rate mortgage today because interest rates now are likely higher than they were when your mortgage was originated.
Moreover, if you refinanced into a new loan that wouldn’t be paid off as quickly as your existing mortgage, you would have to make more payments into the future. For example, if you had made payments for five years on a 30-year ARM, you would have 25 years of payments left to make. But if you refinanced your ARM to avoid higher payments and you chose a 30-year term, you would be making payments for an additional five years. That means lower monthly payments might not be advantageous because you might need to make a lot more of them to pay off your new loan.
A new loan might offer other benefits, however. For instance, a fixed-rate mortgage would protect you against the possibility of even higher monthly payments in the future, an advantage that’s especially important if you plan to own your home for a long time.
Adjustable rate can be advantageous as well
You also might want to refinance one type of adjustable-rate loan into another type of adjustable-rate loan that would reduce, but not eliminate your exposure to higher interest rates. A lender can help you figure out which products might accomplish this objective.
An adjustable-rate mortgage may offer a key benefit that’s simply not a function of fixed-rate products: That is, your payments could be reset lower as well as higher as interest rates fluctuate over time. An adjustable rate is always riskier than a fixed rate, but if you can shoulder that risk, you may be rewarded with lower payments in the future.
When is your mortgage payment late?
Posted by: | CommentsWhen is your mortgage payment late?
It’s important to make your mortgage payments on time. But if you’re late on a payment, you need to know what certain terms really mean.
Most homeowners know a late payment on a home loan can result in a negative item on your credit report. But when exactly is your payment deemed to be “late”?
Mortgage payments typically are due on the first day of each month, which means a payment received by the lender on the second day of the month is considered late, technically speaking.
However, most lenders offer a grace period during which borrowers can make up late payments. Grace periods are usually 15 days. That means a payment that’s received by the lender on or after the second day of the month, but still on or before the 15th day of the month, technically would be late, but could be within a grace period.
Penalties usually kick in after 15 days
Most lenders won’t assess a late fee or report a late payment to the credit bureaus until the grace period ends. That means you may be able to make technically late payments during this period without suffering the adverse consequences of a late fee or a mark on your credit report.
Once the grace period expires, though, you’ll probably receive a 15-day late notice from your lender and be assessed a late-payment penalty. If you receive such a notice, act quickly because if the lender doesn’t receive your payment within another week or so, you’ll probably get more letters and telephone calls.
30 days late: What happens and what it means
Grace period or not, payments that are 30 days late or aren’t received on or before the last business day of the month likely will be reported as “late” to the credit bureaus.
That can be tricky if the month ends on a weekend or happens to be February, the only month that has fewer than 30 days. If February 27 and 28 were a Saturday and Sunday, a payment that wasn’t received on or before February 26 could be reported as late. A “leap” year, in which February has 29 days, would add an extra day.
If, on the other hand, a month has 31 days and the last day of the month is a business day, a payment received on that day probably wouldn’t be reported as late, even though the 31st day would be one day more than the 30-day period.
Proof of receipt is recommended
Unless you send your payment by certified mail or overnight delivery to an address where a live person signs for the receipt, you may have no record of when your payment was received. Most lenders and loan servicing companies offer a pay-by-phone or automatic payment option, either of which is a good way to ensure your payment is received on time.
If you don’t know when your payments are due, whether there is a grace period, when the lender reports late payments to the credit bureaus or what methods you can use to make your payments, read your loan documents or call your lender or loan servicing company. Ask specific questions to find out what rules apply to your individual situation.
Finally, keep in mind that closed-end loans (e.g., a 30-year mortgage) differ in some respects from open-ended loans (e.g., a home equity line). If you make a payment later on an open-ended loan, you could owe more interest and a smaller amount of your payment might be applied to interest expense because the interest is calculated on the number of days between your payments.
Ask an expert: Credit card balance
Posted by: | CommentsAsk an expert: Credit card balance
Q: Will carrying a credit-card balance hurt my credit?
A: If you play your cards right, a credit-card balance can actually help improve your credit rating. The most important thing is never to be late with your payments.
A lot of factors go into determining your credit score, and your credit card balance is only one of them. Credit scores reflect everything from late payments and loan defaults to bankruptcy and foreclosure. If you are timely with your debt and loan payments, have not declared bankruptcy and have not had any collections or repossessions, then it’s unlikely that carrying a credit-card balance will have much effect on your credit rating.
On the other hand, if you have no credit, or are recovering from bad credit, a credit card could help you build good credit to offset your previous history. Even if you are not earning much of an income, you may be able to get a secured credit card. Be careful about applying for every card you can think of, since credit inquiries are a negative mark on your credit report. Most lenders are deterred if they see more than four to six credit inquiries in a six-month period.
Once you have a card, make small purchases and pay them off immediately. This will help build up your good credit. As you get more stable, you can try making larger purchases and maintaining a balance on your card. Just make sure that you meet your required minimum payment on time.
A word of caution: because the interest rate is high on credit cards, it will cost you more overall if you make only the minimum payment. For example, let’s say you have a balance of $2,000 with an interest rate of 18 percent. If you make only the minimum payment of $40 every month, you will wind up paying $4,927 in interest. Not only that, but it will take you more than 30 years to pay it off. If you double your monthly payments, you will be debt-free in less than three years, and pay $526 in interest.
Melody Yow
Credit product manager
The real estate market: What’s hot and what’s not
Posted by: | CommentsThe real estate market: What’s hot and what’s not
by Brenda Spiering LendingTree.com
It seems everywhere in the media there are references to the fact that property values across the country have dropped. But has the real estate bubble really burst? Or are many of these reports overblown?
According to the February 2007 National Association of REALTORSâ home sales report, the metro areas that experienced the most dramatic change in the median sales price of existing single-family homes, between the fourth quarter of 2005 and the fourth quarter of 2006, were the following:
Metro areas that increased in value the most in 2006
1. Atlantic City, New Jersey +25.9%
2. Salt Lake City, Utah +22.7%
3. Trenton-Ewing, New Jersey +18.9%
4. Beaumont-Port Arthur, Texas +15.1%
5. Salem, Oregon +14.9%
Metro areas that dropped in value the most in 2006
1. Sarasota-Bradenton-Venice, Florida -18%
2. Palm Bay-Melbourne-Titusville, Florida -17%
3. Cape Coral-Fort Myers, Florida -11.7%
4. Springfield, Illinois -10.4%
5. New Orleans-Metairie-Kenner, Louisiana -9.3%
At first glance, these numbers would seem to indicate that some regions have been hit hard while others are still booming. And, to some extent, this may be true. However, it’s important to understand that the stats reported are based on median home prices. That’s the middle value point where an equal number of houses have sold for more and less. While those numbers can be useful in tracking general real estate trends, they can be misleading when used to pinpoint specific peaks and valleys.
Take the two hot New Jersey areas, for example. Jeffrey Otteau, president of the Otteau Valuation Group, a real estate consulting firm in the region, points out that in both Atlantic City and Trenton, a significant number of new upscale townhouses were completed and sold last year. Assuming these units sold for considerably more than the more modest housing they replaced, they would have pushed up the overall median price of homes in the region, even if the price of many homes remained relatively flat.
It’s also fair to assume the sharp drop reported in certain regions of Florida may have been due to the reverse effect. If, during 2006, enough high-end properties with over-inflated values adjusted to more realistic levels, it would have caused the median price of homes in those areas to drop significantly even if, once again, the price of more modest homes remained far more stable.
You get a better picture of the overall real estate market if you examine the nation as a whole. The National Association of REALTORSâ reports that the percentage change in the national median sales price of existing single-family homes between the fourth quarter of 2005 and the fourth quarter of 2006 was down 2.7 percent: from $225,300 to $219,300. That’s a definite drop in value, but not necessarily the kind of crash implied by a burst real estate bubble.
The big question now is what lies ahead. And while no one can predict for certain what the numbers are going to be for 2007, most real estate professionals are guardedly optimistic. David Lereah, chief economist for The National Association of REALTORSâ, says, “It appears the fourth quarter [of 2006] was the bottom for the current housing cycle.” And while he isn’t predicting a big change in the immediate future, he does expect this spring to bring “a discernable improvement in both sales and prices.”
Are you better off not paying down your mortgage?
Posted by: | CommentsAre you better off not paying down your mortgage?
Conventional wisdom says that you should pay off your mortgage as fast as you can. But in some cases, your money is better spent elsewhere.
Each year, about one in six Americans makes extra payments on their mortgage in an effort to own their home sooner. But is paying off your mortgage always a good idea?
How can paying off debt be a mistake? That’s a fair question, especially when you look at how much interest you can save through prepayments. Say you have a $200,000 mortgage at a 6 percent interest rate for 30 years and you make an extra payment of $2,000 annually. You would pay your loan off seven years faster and save more than $68,400 in interest. Those are pretty impressive numbers!
However, consider the following:
1. Mortgage interest
If you deduct mortgage interest on your tax return, your savings from paying down your mortgage might actually be considerably less. If you are taxed at 20 percent, you’re effectively paying just 4.8 percent interest on that 6 percent interest rate mortgage. Your total interest savings from paying off your mortgage early in the above example, would therefore be less than $50,000.
2. Retirement savings
You may be able to save more in the long run if you direct that extra money into a tax-deferred retirement savings plan. More than a third of American households currently do not take advantage of retirement plans sponsored by their employers, in some cases because they’re putting too much into their mortgages. If your employer matches 50 percent of your contribution, as many do, not taking full advantage of such a plan is giving up a lot of free money. For example, say you earn $35,000 and are taxed at 20 percent:
If you put $175 per month into your 401(k) account
(Instead of making an annual $2,000 mortgage prepayment)
You’d save $35 a month in tax
Plus, earn an extra $87.50 a month (if your employer adds 50 percent)
If your investments grow at 6 percent annually, in 22 years and three months (the time it would take to pay off your accelerated mortgage):
Your plan would be worth about $145,000.
3. Other debt
Even if you don’t have a 401(k) that’s topped up by your employer, or if you do have one and are already taking full advantage of it, you may still be able to save more by redirecting those extra mortgage payments. Remember, your mortgage is likely the lowest-interest-rate loan you have. If you’re carrying a balance on your credit card, you could easily be paying rates that are triple that of your home loan. Putting that extra cash toward your plastic debt will save you more than paying off your mortgage.
4. Insurance coverage
You may also be better off using that extra money to buy better health insurance or disability coverage, since medical bills and loss of income due to accident or illness are a factor in most personal bankruptcies and mortgage defaults. If you have children, saving for their education with a 529 college savings plan is also worth considering.
5. Peace of mind
If prepaying your mortgage is often not the best financial decision, why do so many Americans do it? Probably because there’s something deeply satisfying about owning a home free and clear. And that’s a benefit that can’t be ignored. If you’d be happier, and believe your life would be less stressful if you paid down your mortgage, then it could be the right choice for you. Achieving peace of mind can be worth the extra couple of hundred dollars a year you may be able to save by redirecting those mortgage prepayments.
Just make sure you understand the difference between bad debt and good debt. The former, such as credit card debt carries a high interest rate and does nothing to help build up your net worth. Good debt, on the other hand, carries a reasonable rate and is used to purchase something that is likely to go up in value, such as your home. In most cases, your mortgage is good debt, and you may just end up further ahead if you’re not in such a hurry to pay it off.
Check with your accountant or financial advisor to see which course of action makes the most sense for your particular situation.
Should you refinance your mortgage?
Posted by: | CommentsShould you refinance your mortgage?
Use our list of questions to see if you can benefit from mortgage refinancing.
The average U.S. homeowner refinances his or her mortgage every four years. Sometimes it’s to take advantage of lower interest rates, but there are many other reasons to refinance. Are any of them right for you? Find out by seeing if you can answer “yes” to one or more of the following questions.
Are interest rates rising?
If you have an adjustable-rate mortgage (ARM) and expect interest rates to rise, you may want to switch to a fixed-rate loan. By locking in the interest rate, you won’t have to worry about your payments climbing in the future. On the other hand, if rates are rising and you have a fixed-rate mortgage, you’re in good shape. You may still have other reasons to refinance, but obtaining a lower rate isn’t one of them.
Is your monthly payment straining your budget?
You may want to consider refinancing to lower your monthly payment.
Even if rates are the same as when you obtained your current mortgage, you may want to refinance to extend the term of your loan if you’re having difficulty meeting your monthly payments. For example, assume you have a $200,000 mortgage at 6 percent for 30 years and have been paying $1,200 a month for seven years. Refinancing to a new 30-year loan at the same rate would lower your monthly payment to $1,075.
Is your ARM causing stress?
Perhaps you were attracted to an adjustable-rate mortgage because the initial rate and payments were lower than a fixed-rate loan. However, many ARMs are adjusted annually. That means if interest rates go up so too will your monthly payments. If you aren’t comfortable with this variance and would prefer the peace of mind of a consistent payment, consider refinancing to a fixed-rate loan or to another ARM with more favorable rate caps (limits on how much the interest rate can increase).
Has your credit rating improved?
When you applied for your mortgage, perhaps you had little credit history or maybe even a blemish or two on your borrowing record. Your credit score was a big factor when your lender determined the interest rate on your mortgage. If you had a low or mediocre score that has since improved, you may now be eligible for a better rate if you refinance.
Have you recently begun to earn a higher income?
Refinancing isn’t always about lowering your monthly payment. Maybe you’ve received a salary increase at work, or your spouse has recently returned to the workforce after staying home to raise a family. You may want to put that extra income towards your mortgage. Converting to a 15- instead of a 30-year amortization, for example, will pay it off much faster and save you tens of thousands of dollars in interest payments.
Has your home equity climbed above 20 percent?
If you obtained your mortgage with a down payment of less than 20 percent, chances are you incurred Private Mortgage Insurance. However, if rising house prices have increased the value of your house, your home equity may now exceed 20 percent. If this is the case, you have several options. First, you can ask your lender to cancel your PMI. To do this, you’ll need to get an appraisal to prove that your home’s value has increased and that you have exceeded 20 percent equity. However, if you can’t persuade your lender to drop the mortgage insurance, you might want to consider the refinancing. If your new mortgage is for at least 80 percent of your home’s appraised value, you’ll avoid paying PMI and could save $100 a month or more.
Do you need to consolidate debt?
If you have built up considerable equity in your home, but you’re mired in other debt, consider cash-out refinancing. That involves getting a new mortgage for a larger amount than you currently owe. For example, if your home is worth $285,000 and your outstanding principal is currently at $185,000, you have $100,000 in equity. By refinancing to a new mortgage with a principal of $215,000, you can free up $30,000 to pay down high-interest credit card or other debt. You’ll save money if your new mortgage has a lower rate than the other loans, and you’ll have the added convenience of only having to make a single monthly payment.
Do you need money for a major expense?
Cash-out refinancing isn’t just for consolidating debt. In recent years, rising house prices may have resulted in your building thousands of dollars worth of equity in your home. Tapping into this equity could enable you to undertake some major home improvements, or to free up money for your children’s education.
Remember, refinancing doesn’t come without a price: closing costs will eat into your savings at first, so the longer you plan to stay in your home, the more you’ll benefit. Before considering refinancing, use the LendingTree refinance calculator to help determine your break-even point.
Freddie Mac® announces tougher underwriting rules
Posted by: | CommentsFreddie Mac® announces tougher underwriting rules
by Brenda Spiering LendingTree.com
For years, Freddie Mac® has helped put families into homes they can afford. Now, it’s taking steps to help keep them there. The company that serves as one of the nation’s largest buyers of home mortgages has announced it’s going to tighten its subprime underwriting standards (rules covering loans to those with impaired or poor credit). Its goal is to help protect borrowers from potential mortgage payment shock.
Payment shock is any sudden increase in required payment. It can occur if an adjustable rate mortgage (ARM) offers a low introductory “teaser” rate and then resets at a much higher monthly payment once the initial period has elapsed. It can also happen as a result of a jump in interest rates. If rates increase substantially at each adjustment, those who can’t afford the resulting higher monthly payment may end up defaulting on their loan.
Due to the large number of subprime ARMs that were made available during the recent housing boom, foreclosures are becoming increasingly common. So to help prevent homeowners from getting into this situation, Freddie Mac is going to start requiring borrowers applying for subprime ARMs to qualify at the fully indexed and amortizing rate, including the cost of taxes and insurance. That means those applying will have to qualify not just for the initial monthly payment being offered, but also for the potential maximum monthly payment they could end up having to cover in the future.
In order to better verify that borrowers have the necessary income to afford the home they’re buying, Freddie Mac is also going to stop buying loans that don’t require income or asset documentation and will restrict “stated income, stated asset” loans to borrowers with income that’s very hard to verify (such as the self-employed).
Senator Chris Dodd, Chairman of the Banking, Housing and Urban Affairs Committee calls Freddie Mac’s new rules, “a responsible standard that ensures borrowers will have the ability to repay their loans, thereby protecting their home equity.” But while the new regulations may protect future borrowers, there’s some concern about the impact they may have on those who already have a subprime ARM.
What should you do if you have a mortgage that’s about to reset and you’re worried you won’t be able to afford the higher payments?
Consider refinancing now. Freddie Mac’s new rules only apply to mortgages that originate on or after September 1, 2007. If you currently have a subprime ARM loan and are concerned you may no longer qualify to refinance under the stricter guidelines, you may be wise to do so now before they go into effect.
What should you do if you have poor credit and would like to buy a home in the future?
Your best bet is to start taking the necessary steps to improve your credit rating. This includes paying your bills on time and paying down outstanding debt. Not only will you benefit from an improved credit report, but the good news is that by the time you’re ready to buy, you’ll likely also have a wider choice of mortgage products to choose from. Along with tightening lending standards, Freddie Mac is also developing new hybrid ARMs designed to limit payment shock by reducing adjustable rate margins and lengthening both fixed-rate terms and reset periods.
Together with its new regulations, Freddie Mac’s new mortgage products are a definite step in the right direction towards protecting home buyers from predatory lending practices and helping them obtain homes they can afford to keep.