Felt the Pinch From Your Adjustable Rate Mortgage Yet? Be Ready for the Moment You Will
The Federal Reserve has taken what many believe is a temporary pause in the interest rate hikes it began back in 2003. But that won’t be much comfort to mortgage holders who signed up for adjustable rate mortgages (ARMs) set to readjust this year, particularly those who signed on for interest-only mortgages.
According to a 2005 study by Deutche Bank Global Markets Research, “resettable” debt was scheduled to approximately double in 2005, 2006 and 2007. Those are truly staggering figures – a sign that a sudden slowdown in the economy could shatter the lives of tens of thousands of American families.
Trouble seems to be accelerating. According to the Mortgage Bankers Association, the second quarter delinquency rate for ARMs, climbed 0.51 percentage points compared with the second quarter of 2005, to 2.7 percent – an increase of 23 percent in the number of borrowers in this category who are falling behind in their payments.
A January 2006 study by the Federal Reserve said that 35 percent of people with ARMs didn’t know when their rates would reset or the potential maximum they might pay on those loans. For some people who last refinanced one, two or three years ago – particularly those who went with interest-only loans - an increase based on current rates could raise the size of the payment as much as 60 percent.
Don’t want to get caught with a rate adjustment nightmare? It may happen, but at least you can prepare. Keep these questions in mind:
Do you know whether you have an ARM? It may sound silly, but if you’re not sure, check. Fixed-rate mortgages carry an interest rate that stays the same during the life of the loan. But with an ARM, the interest rate changes periodically based on your loan agreement, usually in relation to a particular financial index. Payments may go up or down depending on where that index is heading.
When’s my adjustment period? If you’ve already signed on the dotted line, dig out those mortgage documents and look for the margin. "Margin" is the percentage amount the lender adds to the index rate to get the ARM's interest rate. With most ARMs, the interest rate and monthly payment change every year, every three years, every five years or possibly longer, depending on what you agreed to. The period between one rate change and the next is called the “adjustment period.” A loan with an adjustment period of one year is called a one-year ARM, and the interest rate can change once every year. You need to ask your lender how much warning you’ll get about an approaching adjustment period and how your current payments may be affected.
Did you get an introductory rate with your loan? During the height of the mortgage boom, lenders took a cue from credit card companies by offering customers a lower rate during the first year of the ARM. When that rate goes off, it’s quite a shock. Realize that you’ll have to adjust to the possibility of significantly higher payments later on, especially if interest rates keep heading up. Make sure you understand the relationship of any introductory rate to a permanent rate.
What’s the cap? On most conventional ARMs, the lender caps the percentage increase in the interest rate. It’s very important to ask your lender – or review your loan documents - about how your rate cap works on your particular loan. Interest caps come in two versions: Periodic caps, which limit the interest rate increase from one adjustment period to the next, and Overall caps, which limit the interest-rate increase over the life of the loan. Ask whether there are any other conditions under which your monthly payment might change.
Are there restrictions on prepayment and conversion? For borrowers with lower credit scores or those who had to go to sub-prime lenders, there may be interesting language in your loan agreement restricting prepayment or converting your loan to a fixed rate whenever you want. Obviously, at some point you might need to create an escape plan, and if you got stuck with this language, figure out how much the divorce is going to cost.
Monday, October 22, 2007
Tuesday, July 24, 2007
Use your Home Equity For Debt Consolidation
Home Equity? Use it or you may lose it!
This article is for all the home-owners out there in America that are sitting on their home equity thinking it is good investment. In actuality this equity is earning absolutely no rate of return. In fact this type of financial management is as primitive as digging holes in your back yard to store your cash. If you want to get a head and build real wealth that is safe, liquid and has a decent rate of return you need to take that equity out of the home.
I have been in the financial management business for over 16 years and specialize in debt consolidation with Mortgage Wealth Creation. All to often I meet with home-owners that have paid down the balance of their mortgage at interest rates between 4-8% tax deductible interest* only to have large credit card debts that they are paying 16-21% non-taxable interest. Or the home-owner(s) have paid down their mortgage, but have absolutely no savings, no emergency nest-egg and are basically at the mercy of their next paycheck. Let’s take a look at these two situations in more detail.
Make mortgage interest your ally not your enemy
Because of its’ deductibility factor mortgage interest is preferred interest, whereas credit card interest in non-preferred. For example let’s say you are a married couple filing a joint tax return with a combine annual income of 75,000. You and your spouse have built up credit debt of 15,000 and pay an average interest rate of 16% non-preferred interest per year. This means you will pay $160 dollars of interest per $1000 of credit debt. In this example the formula is $160 X 15 = $2,400 in interest per year, $200.00 per month. Now if we are able to consolidate this credit card debt into our mortgage at 6% the annual interest is reduced to $900 dollars per year ($60 X15) or $75 per month. Just this step alone is a savings of $125 per month, $1500 per year. Now let’s take this a step further and say we were able to deduct this interest of $900 from our income at a 33% tax bracket. Our annual income is $75,000 minus the $900 in preferred deductible interest. Our new taxable income is $74,100. This equates to an additional savings of $300 less in tax payments ($900/3). So to sum things up the annual savings from moving this debt from non-preferred interest to preferred interest is $1800 per year. If you were then able to compound this savings over a 10 to 20 year period we are talking about tens and possibly hundreds of thousands of dollars in savings.
But paying down my mortgage is safe, right? WRONG
Now let’s look at the other argument that says your home equity is a safe investment. Many home-owners think that paying down their mortgage is a forced savings plan, and when they are ready to retire they will have a nice nest egg when the home is sold. The principles of a sound and safe investment are three fold; safety, liquidity and rate of return. Let’s take a closer look to see if Home Equity meets any of these investment principles.
Is your home equity safe? Well let’s say your home is in a neighborhood that was devastated by a tornado, flood, earthquake, fire, hurricane, termites, black mold, or a failing economy. Would you rather have your home mortgaged to the hilt and your equity in a safe and insured side fund, or would you rather of had your home free and clear with no side funds. Don’t make the mistake of putting all your hard earned money under your roof.
Is your home equity liquid? Most home-owners don’t take out their equity unless the unexpected happens such as in the loss of employment, disability or some other financial crisis. Have you ever tried to get a mortgage when you were unemployed, between jobs, or unable to work? Most banks only loan money to us when we don’t really need it. It’s better to take the cash out of your home in the good times, and keep your equity in an interest bearing investment for when you need it. The banks are not going to let your payments slide for few months whether you have equity or not. By keeping your equity in a side fund you are in control of this money not the lender.
Is your equity earning a rate of return? Absolutely not. Don’t get home equity mixed up with home appreciation. For example, Neighbor A and Neighbor B each own a home valued at $200,000. Neighbor A has a mortgage of $100,000 and Neighbor B has a mortgage $150,000. If both homes appreciate at an annual rate of 5% they are now worth $210,000. Even though Neighbor A and Neighbor B had different amounts of equity, their asset value is the same. Equity has no affect on a homes appreciation.
Homeowners need to manage their equity to build wealth. For many Americans the home is your greatest asset and your greatest liability. This is why it is so important to receive professional mortgage planning advice. Thousands of dollars are lost every year because homeowners get the wrong mortgage advice or do not restructure their mortgage on a regular basis.
Mike Snider is a Mortgage Planning Professional and Branch Partner with a national mortgage bank. His company specializes in Debt Consolidation and Home Equity Wealth Creation. To get a free mortgage analysis and to learn more about Mike visit his website www.PayItAllOff.com
This article is for all the home-owners out there in America that are sitting on their home equity thinking it is good investment. In actuality this equity is earning absolutely no rate of return. In fact this type of financial management is as primitive as digging holes in your back yard to store your cash. If you want to get a head and build real wealth that is safe, liquid and has a decent rate of return you need to take that equity out of the home.
I have been in the financial management business for over 16 years and specialize in debt consolidation with Mortgage Wealth Creation. All to often I meet with home-owners that have paid down the balance of their mortgage at interest rates between 4-8% tax deductible interest* only to have large credit card debts that they are paying 16-21% non-taxable interest. Or the home-owner(s) have paid down their mortgage, but have absolutely no savings, no emergency nest-egg and are basically at the mercy of their next paycheck. Let’s take a look at these two situations in more detail.
Make mortgage interest your ally not your enemy
Because of its’ deductibility factor mortgage interest is preferred interest, whereas credit card interest in non-preferred. For example let’s say you are a married couple filing a joint tax return with a combine annual income of 75,000. You and your spouse have built up credit debt of 15,000 and pay an average interest rate of 16% non-preferred interest per year. This means you will pay $160 dollars of interest per $1000 of credit debt. In this example the formula is $160 X 15 = $2,400 in interest per year, $200.00 per month. Now if we are able to consolidate this credit card debt into our mortgage at 6% the annual interest is reduced to $900 dollars per year ($60 X15) or $75 per month. Just this step alone is a savings of $125 per month, $1500 per year. Now let’s take this a step further and say we were able to deduct this interest of $900 from our income at a 33% tax bracket. Our annual income is $75,000 minus the $900 in preferred deductible interest. Our new taxable income is $74,100. This equates to an additional savings of $300 less in tax payments ($900/3). So to sum things up the annual savings from moving this debt from non-preferred interest to preferred interest is $1800 per year. If you were then able to compound this savings over a 10 to 20 year period we are talking about tens and possibly hundreds of thousands of dollars in savings.
But paying down my mortgage is safe, right? WRONG
Now let’s look at the other argument that says your home equity is a safe investment. Many home-owners think that paying down their mortgage is a forced savings plan, and when they are ready to retire they will have a nice nest egg when the home is sold. The principles of a sound and safe investment are three fold; safety, liquidity and rate of return. Let’s take a closer look to see if Home Equity meets any of these investment principles.
Is your home equity safe? Well let’s say your home is in a neighborhood that was devastated by a tornado, flood, earthquake, fire, hurricane, termites, black mold, or a failing economy. Would you rather have your home mortgaged to the hilt and your equity in a safe and insured side fund, or would you rather of had your home free and clear with no side funds. Don’t make the mistake of putting all your hard earned money under your roof.
Is your home equity liquid? Most home-owners don’t take out their equity unless the unexpected happens such as in the loss of employment, disability or some other financial crisis. Have you ever tried to get a mortgage when you were unemployed, between jobs, or unable to work? Most banks only loan money to us when we don’t really need it. It’s better to take the cash out of your home in the good times, and keep your equity in an interest bearing investment for when you need it. The banks are not going to let your payments slide for few months whether you have equity or not. By keeping your equity in a side fund you are in control of this money not the lender.
Is your equity earning a rate of return? Absolutely not. Don’t get home equity mixed up with home appreciation. For example, Neighbor A and Neighbor B each own a home valued at $200,000. Neighbor A has a mortgage of $100,000 and Neighbor B has a mortgage $150,000. If both homes appreciate at an annual rate of 5% they are now worth $210,000. Even though Neighbor A and Neighbor B had different amounts of equity, their asset value is the same. Equity has no affect on a homes appreciation.
Homeowners need to manage their equity to build wealth. For many Americans the home is your greatest asset and your greatest liability. This is why it is so important to receive professional mortgage planning advice. Thousands of dollars are lost every year because homeowners get the wrong mortgage advice or do not restructure their mortgage on a regular basis.
Mike Snider is a Mortgage Planning Professional and Branch Partner with a national mortgage bank. His company specializes in Debt Consolidation and Home Equity Wealth Creation. To get a free mortgage analysis and to learn more about Mike visit his website www.PayItAllOff.com
Thursday, July 12, 2007
Check out this article for Debt Consolidation with less than perfect credit
Read this article. If you have less than perfect credit and need a debt consolidation loan FHA may be the answer. FHA will do a mortgage up to 95% of loan to value on cash-out refinances with excellent fixed mortgage rates. Email me for details mike.snider@PayItAllOff.com
FHA Comes to the Rescue Of the Credit-Challenged
By Kenneth R. HarneySaturday, March 17, 2007; Page F01
With the subprime mortgage industry in free fall, where do home buyers with less-than-perfect credit turn for financing?
The news reports are grim. Dozens of subprime lenders closed their doors or cut back sharply on new mortgage offerings. Lenders are also severely tightening the underwriting standards that got them into trouble. As a result, many people who would have been approved for loans months ago now find all the doors closed.
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But here's some potentially helpful news: There is a mortgage source that is actually expanding its business nationwide for credit-impaired and first-time home purchasers. That source is the golden oldie of the mortgage arena, the Federal Housing Administration, which recently has seen a doubling of customers refinancing out of private, subprime loans into its insured mortgage programs.
There's good reason: The FHA doesn't have problems with Wall Street investors who now see subprime mortgage bonds as toxic. FHA's bonds, by contrast, are gilt-edged and backed by the federal government so there's no shortage of mortgage money.
Equally important: FHA-insured loans are more consumer-friendly than subprime and come with interest rates roughly 3 percentage points below directly comparable subprime mortgages.
There are drawbacks, of course. FHA mortgage maximums top out just under $363,000. In high-cost markets, an FHA loan will let you buy only a modest starter home. Yet in more typical markets, the FHA's limit does not pose a problem. And the FHA's maximum loan amounts are likely to increase: Bipartisan legislation to raise the loan ceiling to the full Fannie Mae-Freddie Mac limit -- currently $417,000 -- is expected to be introduced in Congress soon, and appears to have support for passage this year.
Another drawback for some borrowers is FHA's down-payment requirement. Unlike many subprime mortgage programs, FHA does not allow consumers to buy a house without putting something into the deal. Down payments generally are 3 percent, although the forthcoming legislation is expected to lower that threshold.
Still more differences between FHA mortgages and subprime: You can't just "state" your income and get a loan with no documentation. You have to show proof that you earn what you say, and can truly afford the house you want to buy. The FHA has never offered "payment option" plans that allow borrowers to send in almost nothing every month while adding to their principal debt through what's known as negative amortization.
The FHA is not known for razzle-dazzle, so don't look for controversial "2/28" or "3/27" adjustable-rate plans that feature low payments in the first two or three years followed by sharply higher payments later. Many subprime users of 2/28 adjustables, who made no down payments, figuring they would refinance before the first reset date, now face higher costs and negative equity positions in soft housing markets.
Some of those borrowers are in serious default or heading for foreclosure. Others are bailing out of subprime 2/28s and refinancing with the FHA. Unlike private competitors, the FHA does not set rates on the basis of FICO credit scores. It underwrites loans using what it calls a "total scorecard" that examines an applicant's full credit history, employment, and nontraditional credit patterns such as rent and utility payments. It does not disqualify anyone automatically because of a bankruptcy, and it emphasizes a holistic "compensating factors" approach to credit decision-making.
If the FHA is so wonderful, why has the private subprime market boomed while the FHA's share of the market has withered, at least until recently? Part of the reason is the FHA itself. During the 1980s and '90s, the FHA developed a reputation for bureaucratic red tape, slow processing and excessive rules on mandatory repairs of properties before sale.
The FHA also did not forge ties with the fast-growing mortgage brokerage industry, which now originates nearly two-thirds of all new home loans. Instead, Wall Street seized the initiative and vacuumed up billions of dollars of broker-originated subprime loans through wholesale lenders, paying fat fees to keep the production lines rolling.
Many of those mortgages carried terms that credit-impaired applicants found hard to resist: No money down, no asset or income verification, debt-to-income ratios in excess of 50 percent, negative amortization up to 125 percent of the home's value, interest-only and other reduced-payment concepts.
Those easy-money, no-questions-asked loans for people with bad credit habits are now the dodo birds of the mortgage market. Don't expect to find them at your local broker's office. Meanwhile, the FHA is cutting out the red tape and speeding up processing; it's eager to expand its business to credit-worthy borrowers who are willing to put a little of their money into home purchases.
It's worth a look.
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.
FHA Comes to the Rescue Of the Credit-Challenged
By Kenneth R. HarneySaturday, March 17, 2007; Page F01
With the subprime mortgage industry in free fall, where do home buyers with less-than-perfect credit turn for financing?
The news reports are grim. Dozens of subprime lenders closed their doors or cut back sharply on new mortgage offerings. Lenders are also severely tightening the underwriting standards that got them into trouble. As a result, many people who would have been approved for loans months ago now find all the doors closed.
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How have real estate prices in your neighborhood changed this year? Check our maps and data.
Select a county... Anne Arundel, MD Calvert County, MD Charles County, MD Frederick County, MD Howard County, MD Montgomery County, MD Prince George's County, MD D.C. Arlington/Alexandria, VA Fairfax County, VA Loudoun County, VA Prince William County, VA Condos
Search Property Values and Recent Sales
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But here's some potentially helpful news: There is a mortgage source that is actually expanding its business nationwide for credit-impaired and first-time home purchasers. That source is the golden oldie of the mortgage arena, the Federal Housing Administration, which recently has seen a doubling of customers refinancing out of private, subprime loans into its insured mortgage programs.
There's good reason: The FHA doesn't have problems with Wall Street investors who now see subprime mortgage bonds as toxic. FHA's bonds, by contrast, are gilt-edged and backed by the federal government so there's no shortage of mortgage money.
Equally important: FHA-insured loans are more consumer-friendly than subprime and come with interest rates roughly 3 percentage points below directly comparable subprime mortgages.
There are drawbacks, of course. FHA mortgage maximums top out just under $363,000. In high-cost markets, an FHA loan will let you buy only a modest starter home. Yet in more typical markets, the FHA's limit does not pose a problem. And the FHA's maximum loan amounts are likely to increase: Bipartisan legislation to raise the loan ceiling to the full Fannie Mae-Freddie Mac limit -- currently $417,000 -- is expected to be introduced in Congress soon, and appears to have support for passage this year.
Another drawback for some borrowers is FHA's down-payment requirement. Unlike many subprime mortgage programs, FHA does not allow consumers to buy a house without putting something into the deal. Down payments generally are 3 percent, although the forthcoming legislation is expected to lower that threshold.
Still more differences between FHA mortgages and subprime: You can't just "state" your income and get a loan with no documentation. You have to show proof that you earn what you say, and can truly afford the house you want to buy. The FHA has never offered "payment option" plans that allow borrowers to send in almost nothing every month while adding to their principal debt through what's known as negative amortization.
The FHA is not known for razzle-dazzle, so don't look for controversial "2/28" or "3/27" adjustable-rate plans that feature low payments in the first two or three years followed by sharply higher payments later. Many subprime users of 2/28 adjustables, who made no down payments, figuring they would refinance before the first reset date, now face higher costs and negative equity positions in soft housing markets.
Some of those borrowers are in serious default or heading for foreclosure. Others are bailing out of subprime 2/28s and refinancing with the FHA. Unlike private competitors, the FHA does not set rates on the basis of FICO credit scores. It underwrites loans using what it calls a "total scorecard" that examines an applicant's full credit history, employment, and nontraditional credit patterns such as rent and utility payments. It does not disqualify anyone automatically because of a bankruptcy, and it emphasizes a holistic "compensating factors" approach to credit decision-making.
If the FHA is so wonderful, why has the private subprime market boomed while the FHA's share of the market has withered, at least until recently? Part of the reason is the FHA itself. During the 1980s and '90s, the FHA developed a reputation for bureaucratic red tape, slow processing and excessive rules on mandatory repairs of properties before sale.
The FHA also did not forge ties with the fast-growing mortgage brokerage industry, which now originates nearly two-thirds of all new home loans. Instead, Wall Street seized the initiative and vacuumed up billions of dollars of broker-originated subprime loans through wholesale lenders, paying fat fees to keep the production lines rolling.
Many of those mortgages carried terms that credit-impaired applicants found hard to resist: No money down, no asset or income verification, debt-to-income ratios in excess of 50 percent, negative amortization up to 125 percent of the home's value, interest-only and other reduced-payment concepts.
Those easy-money, no-questions-asked loans for people with bad credit habits are now the dodo birds of the mortgage market. Don't expect to find them at your local broker's office. Meanwhile, the FHA is cutting out the red tape and speeding up processing; it's eager to expand its business to credit-worthy borrowers who are willing to put a little of their money into home purchases.
It's worth a look.
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.
Hi this everyone this is Mike Snider. I specialized in helping home-owners consolidate debt. Check out my website at www.PayItAllOff.com.
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