Not a Good Option

January 16, 2007 by 7 Comments

Yesterday, one of my clients asked me about Pay Option ARMs.   These loans are Mpj034192600001_1 probably the most heavily advertised products promoted on the radio.   I cringe every time I hear the announcer boast about the low start rates of anywhere from 1 – 3%.  Pay Option ARMs are marketed by many different names, such as pick-a-payment or cash flow ARMs.   

A newer Option ARM program features a fixed period for the minimum payment and a fixed rate for a five year term.    Every month, when the mortgage payment is due, the borrower has the choice of what kind of payment they would like to make typically based on four different selections. 

Here’s an example of what a fixed period Option ARM could look like.

Option 1:  Minimum Payment–an interest only payment at 3% under the note rate available for the first five years of the loan (NEGATIVE AMORTIZATION).

Option 2:  Interest Only–an interest only payment based on the note rate available for the first 10 years of the loan term.

Option 3:  30 Year or 40 Year Fixed–A full principle and interest payment amortized over either a 30 or 40 year term.

Option 4:  15 Year Fixed–A full principle and interest payment over a 15 year term.

Sounds great, right?  Wrong.  I know a lot of lenders offer this product.  And, at least this option ARM offers a controlled minimum payment for a five year term.  However, how many people are going to make a principle and interest payment when they receive their mortgage coupon? 

Negative Amortization (deferred interest is the nicer term) is the difference between your note rate payment (the actual payment due) and the minimum payment (the low teaser rate).   In this case, every time you opt to make the lower payment, the difference is tacked on to your mortgage balance.   There are ceilings in place that will prevent all of your equity from being gobbled up from your mortgage called “negative amortization cap”.   This loan particular program (option ARMs vary from lender to lender, and this is just one that we could offer, if I don’t persuade you otherwise) features a cap of 115%.    This means that once you’ve made minimum payments long enough to increase your original mortgage balance by 15%, your loan terms will change and you no longer have the minimum payment available as one of your options (this is referred to as “recasting”).

Option ARMs can also impact your credit scores for the worse.   Credit scoring modules give more favorable scores when balances are decreasing and worsen if balances are shown above the credit limit.   If your original mortgage is $200,000 and due to negative amortization, the current balance is $215,000 (for example) your credit scores will be dinged as it appears to the scoring system that you’ve extended beyond over your credit limit on your mortgage.

These loans may work for seasoned investors who do not plan on utilizing the minimum payment option unless, perhaps, they have a rental without a tenant.     However, the majority of homeowners who have Option ARMs don’t fully understand how this animal works or that they are trading equity for lower payments until it sneaks up on them.  It’s not a program that I recommend for my clients when there are so many better programs available that won’t jeopardize home equity.

Filed Under: Adjustable Rate Mortgage (ARM), Credit Scores and Reporting, Mortgage

How to Pick a Lender

January 10, 2007 by 1 Comment

Picking your mortgage professional is not as easy as selecting a good cantaloupe or watermelon atJ0400581  the market.   As tempting as it may be, I certainly wouldn’t recommend thumping a Loan Officer on the head to see if there’s anything in between the ears or smelling them to see if their fresh!  So how does a potential buyer decide who they should use for possibly the financing one of their largest investments in their lifetime?

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Filed Under: Financial Planning, Mortgage

The “R” Word

January 4, 2007 by 2 Comments

Resolutions.  I was not going to post New Years resolutions since they are everywhere.J0309664_1..however, I can’t pass up this opportunity.  Beyond the perennial lose 10 pounds, start excising, or stop smoking; here are a few goals to consider for your financial health.   I plan on revisiting these goals more indepth on future blogs…so I’ll try to be brief for now.

  1. Have an emergency fund established with at least 3 months of living expenses in an accessible account.   You can also use a HELOC for an emergency fund account IF you have the discipline to leave it alone.   A HELOC can be an excellent tool and should be applied for before you have an emergency situation (loss of employment, medical, or a tree landing on your house from sweet Mother Nature) and may not be able to obtain one.   In the event of an emergency, do you have your finances organized?   A recent article I read from the Financial Planning Association recommends having copies of all your pertinent financial documents in a binder that you can find quickly in the event you need to evacuate your home.

  1. Know your score, or at least what is being reported on your credit history currently.  Credit scores are not only used for determining what mortgage programs and rates you qualify for.   They also impact insurance, credit card rates and auto loans to name a few.  In addition, reviewing your credit will help determine if you credit is being used without your knowledge (identity theft).   You can visit www.annualcreditreport.com for a free credit report.   This is provided by the “big 3 bureaus” and it may not provide your score without paying an additional fee.  As you are allowed one report from each bureau annually, I would recommend that you pull your report from one bureau every four months to keep a constant monitor on your credit activity.  There may be simple ways to improve your credit score that you can determine once you have the information available.

  1. Create or review your Will.  I had a pretty cheesy will until I married last year.   My husband and I spent quite a bit of time with an attorney to make sure we have everything set up as we wish it to be instead of letting the government have it.   You would be surprised how easy, with home values, a retirement account, etc. that your net worth can grow.  Whether you have children or not, a will is a must.   After you have a will, it’s a good idea to have your information organized for your loved ones.   A great website to check out is www.readyornot.biz.

  1. Get a mortgage check-up.   If your mortgage has an adjustable rate (ARM), if you are paying private mortgage insurance (PMI) or if you have two mortgages on your home, this could be a great time to review your current scenario to see if you can reduce your monthly payments.   There is no sense in paying more than you need to, unless you plan on selling the home soon.   An Annual Mortgage Review is more in-depth than checking out your mortgage to current rates and products.

  1. Eliminate credit card debts.  It is too easy to fall into credit card debt.  Banks do not want you to ever pay them off with all the interest they earn.   Start with paying additional towards your smaller debts and then work toward the next one.  This is a slow process, but worth it.  It is boggling how much the interest can mount up on these types of loans with no tax benefit to you.  Improving  monthly cash flow reduces stress and allows you to eventually save for more important life items such as retirement and college.

I know this is a few days past New Years…however, it’s always relevant.   I wish you and yours a very happy, healthy and prosperous New Year.   Cheers!

Filed Under: Credit Scores and Reporting, Debt Restructuring, Financial Planning, Identity Theft, Interest Rates, Mortgage

Credit Unions, Banks and Brokers…OH MY!!!

January 2, 2007 by 2 Comments

Recently I found myself drawn into a blog on Rain City Guide.  The topic that got my attention is Wiz authored by Jillayne Schlicke titled “Hot or Not” which featured various tips for first time homebuyers from an USA Today article.   The specific “hot” tip that forced me off of the sidelines and onto the paying field (it was New Years weekend…football…etc.) was: 

"Hot:  The author also suggests comparing rates and fees from three different lending sources: a mortgage broker, a banker and a credit union". 

After a few friendly banters back and forth debating our points, I realized what my real issue was…it’s not the institution, it is the person.   I do believe that a broker is going to offer a consumer more products and rates from many different sources than a bank or credit union…and I’ll still stick by my guns to say a “licensed originator” (banks and credit union loan officers do not have to pass background test and exams and be licensed) is probably better suited to serve a consumers mortgage needs.   Credit unions and banks typically just offer their products and rates.  If a bank loan originator elects to "broker" and not use a bank product, they are often paid a lower commission.   Brokers typically work many different banks (For example, the Broker I work for, Mortgage Master, works with over 80 different lenders, banks, etc.) and all of their products and rates.   

My recommendation is that a consumer should, instead of going to a bank, credit union and mortgage broker for rate and fees, consider these three options:

1)      Referral from a family member, co-worker or friend who has just bought or refinanced their home.

2)      Recommendation from their Realtor and, ask the Realtor why they prefer the lender over others.

3)      Recommendation from their CPA or CFP for the lender they endorse.

If a consumer does not yet have a Realtor, CPA or CFP, then I would recommend they ask a friend, family member and a co-worker for their lender.   

The whole idea of rate shopping is misleading and a potential for disaster for home buyers or people who want to refinance. A rate shopper really needs to be educated before picking up the phone, going to the internet, or picking up the "liars list" in the newspaper.  It really does come down to the individual providing you the quote, their ethics and expertise…how do you measure (or “shop”) for that? 

A mortgage is one of the largest investments most people will make in their lifetimes.  I cannot imagine allowing anyone providing me advice unless they could demonstrate they are competent, dedicated, educated and equipped with the latest mortgage programs available.   

Does licensing or an earned designation prove this?   I think it’s a step in the right direction.   I am one of the few loan originators in the fine State of Washington (grey, rainy and windy today) who has taken the steps to become a Certified Mortgage Planning Specialist (CMPS) and who is looking forward to having brokers become licensed…it’s just too bad the licensing does not apply across the board to EVERYONE originating any type of mortgage loan.   Alas, it’s only for Mortgage Brokers (Countrywide, Washington Mutual, Wells Fargo, Chase Manhattan are just a few of the loan officers who will not have to pass the test).    I predict that once the testing takes place (estimated mid 2007) you will see a shift of loan originators who use to work for brokers, leaping to mortgage banks to either avoid the test and background test, or because they could not pass the states requirements.

The true test of mortgage broker licensing will not be known to us until we actually take the exam late this year.    Measuring the ethics of anyone, let alone a loan originator, can be a tricky task…I guess that’s where I keep coming back to getting a referral from resources you trust. 

Filed Under: Interest Rates, Legislation, Mortgage, Weblogs

A Christmas Present from Congress for Homebuyers

December 20, 2006 by Leave a Comment

Xmas1969 If lawmakers get their way, Private Mortgage Insurance (PMI) will become tax-deductible for home loans originated after January 1, 2007. PMI is a requirement for most home loans in which borrowers make a down payment of less than 20%.

The bill has already been passed by Congress and awaits the President’s signature before it becomes law.

While the new deduction is restricted to homebuyers whose annual household income does not exceed $100,000, the legislation could impact nearly 50% of all homebuyers, according to a SMR Research study of homes financed in 2005.

Up until now, many homebuyers have used "piggyback" loans in order to avoid paying PMI. A piggyback loan is where the homebuyer obtains two mortgages, a first mortgage for 80% of the purchase price, and a second mortgage for the remaining funds required, outside of the down payment.

Since many homebuyers have chosen a Home Equity Line of Credit (HELOC) as their second mortgage, their required monthly payments have increased significantly as a result of the actions of the Federal Reserve. Today, many homebuyers with a HELOC are now paying more than they would have if they had chosen PMI with their original mortgage.

What does this legislation mean to you?

Under the law, homebuyers will have more financing options available that offer greater tax deductibility and lower monthly payments. This means a homebuyer could potentially afford a more desirable home! In addition, homebuyers could qualify for traditional mortgages rather than the more expensive options they were forced to pursue in the past.

The new law, should President Bush allow it, would apply to home purchases and restructuring of acquistion mortgages (no cash out refinances) only.   The bottom line is it is always great to have more options for home buyers.

UPDATE:  Sure enough…President Bush just signed this new law to be in effect from January 1, 2007 –  December 31, 2007.   I’ll post more information as I find it. 

Filed Under: Legislation, Mortgage

You’ve Got To Start Somewhere

November 28, 2006 by 1 Comment

I have been meaning to do this (create my own blog) for quite a while now.  Sadly, it has taken all of the recent bad press about others in the mortgage industry for me to get off my duff and a "snow day" in Seattle (when most everything else grinds to a halt).    

I am a Certified Mortgage Planning Specialist.  I have been in the mortgage, title and escrow fields for over twenty years and have been amazed at what I have seen.  I love my career.  There is nothing more rewarding for me than to see how much owning a home can impact a family’s quality of life.   

It is equally amazing to me that up until recently, Loan Originators (aka Loan Officer, Mortgage Consultant, Mortgage Planner, Loan Specialist… to name a few) have been one of the few individuals without any requirements in our great state of Washington, to handle a family’s largest investment, their mortgage.   Thankfully, this is all about to change.   In fact just yesterday, I completed my on-line application with the Department of Finance to become a Licensed Loan Officer.   Amazing, isn’t it?   Up until now, only Realtors, Escrow Officers and Appraisers have been licensed (for the most part)…but the person advising you of the best mortgage and devising financial strategies for your future could have absolutely no training whatsoever or even be a known felon!

Governor Gregoire signed House Bill 2340 which will regulate all Loan Originators (UNLESS they are employed by a bank, such as Washington Mutual, Countrywide or Wells Fargo) providing residential mortgage loans in Washington State.    Here are the basic requirements effective January 1, 2007:

  1. All Loan Originators will need to pass a basic compliance skills examination (this will not be available until mid 2007.  Until then, we are just required to obtain our license and then we get to keep the license assuming we pass the test in 2007).
  2. Continuing Education courses will be required on an annual basis.
  3. Background checks will be required prior to licensing.  Persons with felonies may be allowed to practice if their felony was prior to seven years ago.   

This is, like my first blog, at least somewhere to start.  It is definitely overdue.   Many consumers and real estate professionals that I have talked to are often shocked to learn that there has been no regulation of mortgage originators (for the most part) in our state.    It will be interesting to see how this will all evolve.   As I mentioned earlier, I completed my application (all nine pages) yesterday.   The questions that were presented blew me away–most were based on "have you ever committed a felony, fraud, caused a company to lose their bond…as well as wanting a 10 year employment history".  I had the joy of being fingerprinted just last month (I’ve got sweaty hands).  The real change in our system, after the background checks are complete, will be seeing how many loan originators will or will not pass the exam.   

It’s not entirely the loan originator’s fault for not being educated.   Most mortgage companies do not offer training.  There are many courses and presentations available on line and "live".  Currently, in most cases, it’s up to the loan originator to be motivated and passionate enough about their field to take these steps.   Effective January 1, 2007, unless they work a big bank, it will be mandatory if the loan officer wants to continue their practice in Washington State.

Filed Under: Financial Planning, Legislation, Mortgage
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