Category Archives: Real Estate and Mortgages

What To Do If Facing a Possible Foreclosure

The recession officially started December 2007 and ended June of 2009; however, many homeowners struggled to stay current on their mortgage before that time, and some still do now. Those in the financial industry have been learning how to help people either avoid or survive foreclosure of their homes, while at the same time the whole process evolved.

Throughout this recession, there have been several programs and initiatives to help homeowners stay in their homes and avoid foreclosure.  Since about 2007 they started out as ways to give incentives to banks for offering loan modifications.  The help of banks, credit unions and the Federal government has often been slow, inconsistent and confusing, and although millions have been helped to stay in their homes, several million people still lost their homes in foreclosure. Some people have been helped with lower payments, by making payments, and by obtaining less burdensome arrangements to lower late fees on payments in arrears. Federal money has also been available to help them too.

Since 2009 lenders have staffed up their hardship or modification department, and have been more flexible at helping people either stay in their homes or  dispose of them through short-sales or deeds in lieu of foreclosures. These two methods help when the home owner needs to sell or transfer the deed back to the lender, because they have no or negative equity–even a modification isn’t enough or they don’t qualify for one.  The peak of people being helped was in 2010, but the percentage of short sales and deeds in lieu of foreclosure increased. In addition, more government cash has been made available within the last year or two. HUD has an updated report of the trends through mid-2012.

What have we learned about helping people:

  • Contact your lender and certified HUD counseling agency in your area, and don’t pay anyone for help or you will get ripped off. Keep excellent records of who you speak to, assignments, and copies of everything.
  • Don’t give up until it is over, even if you have been turned down for modification or short sale already, and you are still in your home. Lenders, the government and your situation may have changed, so it never hurts to try all over again and again. I have seen people turned down numerous times for short sales, modifications and refinance at lower rate and payment, and later they were granted what they were seeking.
  • When it is over, it is not the end of the world. If  you have to foreclose, do a short sale or deed in lieu, and move to a rental; it is hard but it is not the end.  There are even ‘cash for keys’ programs to help you move and to make rent deposits. After a few years of improving credit, paying off debt and saving money you will recover and end up with a home again- if you want to and it makes financial sense.
  • Don’t move unless you are forced to because you have reached the end of the foreclosure process and you get a sheriff sale notice. I have seen many people move out too early and end up worse off in the long run. In the meantime, stay in your home, keep it in good shape, and pay homeowner’s insurance. Try to pay the second mortgage and real estate taxes if you can. Since you will not be paying a mortgage or rent, you may have extra money.  Use that to pay off other debts and for necessary things that you couldn’t afford before, such as car repairs or tires- not on vacations and unnecessary things. Housing counselors disagree on accumulating savings versus paying off other debt, so talk to a HUD counselor in your area.
  • Learn throughout the process. Even though you may not have brought this upon yourself, perhaps because it was caused by unemployment or an uninsured health problem–still use this experience for character building; also become great at personal finances and take classes such as Dave Ramsey Financial Peace University. When life improves, having learned to be excellent at personal finances and more focused on what is truly important, you will be better positioned to design a plan for your next chapter of life while avoiding some of the same problems.
  • You are not your stuff. Hold your head high. Focus on what is really important, such as family, faith, friends, and integrity. Pray throughout the process for help, direction, financial miracles, and wisdom.

Lastly, if you live in one of the severe housing crisis states like Florida or Nevada, there is even more help. Ohio, where I live, is one of the states hit hard by this crisis, and additional monies have been appropriated here. If you live in Ohio, read more about it in a recent Columbus Dispatch article. Your local HUD office will tell you about the latest programs in your state.

Underwater mortgage: Financial relief options for struggling borrowers

Property owners whose mortgage outstanding balances is more than their property’s value are already aware that refinance is a distant dream for them. This is because in order to refinance an underwater mortgage or in that case any mortgage, lenders look for at least 20% home equity in the borrower’s property. However, home mortgage borrowers shouldn’t lose hope since there are several federal debt relief programs that can resolve their financial problems.

What are the federal mortgage relief programs?

Under the ‘Making Home Affordable Program’, underwater mortgage borrowers can now refinance their loans as per the modified debt relief programs.

The program is known as Home Affordable Refinance Program (HARP). It was introduced in 2009. This program was initiated with the objective to help borrowers refinance their loans whose mortgages are more than what their house is actually worth in the market. In this case, people with mortgage loan that is more than 125% of their home’s value will not qualify for HARP.

However, the government amended the eligibility criteria and so; it removed the loan-to-value cap as a determinant in qualifying people for HARP. Recently, the Federal Housing Finance Agency announced a slew of modifications that are as follows:

  • Underwater mortgage borrowers are exempted from conducting fresh home appraisals if the estimation is made by either Fannie Mae or Freddie Mac.
  • Borrowers who opt for short-term mortgage refinance can now enjoy waiver of risk-based fees while closing the process.
  • The mortgage relief programs have been extended till 31st December, 2013 from the erstwhile deadline of 30th June, 2012.

HARP – Eligibility criteria

Those mortgage borrowers who meet the set eligibility criteria will be allowed to refinance their home loans under HARP. According to the HARP rules, eligible homeowners are permitted to refinance their loans by about 105-125% of their home’s value.

However, there are some limitations for people to qualify for HARP. Here is the basic outline of the eligibility criteria:

  1.  Underwater mortgage loans should be owned by the mortgage regulators – Fannie Mae or Freddie Mac. Struggling mortgage borrowers can visit the Making Home Affordable Website in order evaluate the amount of refinance loan that will be most suitable for them by using the lookup tools or calculators available there. Lenders will analyze the payment history, credit scores and existing loan agreements as per the lending rules created by the government, before they refinance home mortgage loans.
  2. In order to qualify for the HARP, properties of the underwater mortgage borrowers should not be in the pre-foreclosure phase. Moreover, delinquent payments of atleast a year will disqualify the borrowers, as per the HARP guidelines.

Due to these stringent eligibility requirements, a good number of mortgage borrowers could not take optimal advantage of HARP. However, if borrowers can save around $300-400 in a month as mortgage payment, then it can be a better choice than losing one’s home altogether.

On the contrary, many homeowners have their mortgage loans underwater who have missed several payment deadlines as well. For such borrowers, the government has another relief plan which is known as Home Affordable Modification Program (HAMP).

Hence, struggling mortgage borrowers who would like opt for the HAMP will have to demonstrate their financial hardship to the lenders. Moreover, the mortgage loans should also be owned by the Fannie Mae or Freddie Mac and any other mortgage regulators approved by the US Treasury, so as to qualify for the HAMP.

Lenders who process HAMP applications are entitled to a governmental incentive of about $1,500. It is the lender who has the final say in approving HAMP applications of the borrowers.

This article was written by J. H. Holmes. Author of several excellent articles  on financial problems, loans, insurance frauds, mortgages and many more financial topics.

How to Drop Expensive PMI from Mortgage

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Private Mortgage Insurance (PMI) is expensive insurance that protects the lender, not you, if you foreclose, but you have to pay for it. It is required if you put less than 20% down when you purchase a new home unless you can prove that your total equity is equal to or exceeds 20% (22% FHA).

The insurance isn’t cheap. The borrower will have to pay .50% to 1.50% on the amount financed, but it is tax deductible if you make less than a certain amount. The premium will vary depending on the amount borrowed and the term; it also depends on whether the loan is FHA. So if you finance a $150,000 mortgage and your PMI costs 1%, then your monthly premium is $150 per month, or $1,800 per year.

If you rent for as long as possible and save to put down 20%, then you will not have to pay PMI, but even if you put less down, you don’t have to pay PMI forever. When you make mortgage payments, some of your payment goes to principal, and maybe your home will appreciate in value.

When your equity equals or tops 20%, then you can drop PMI. If you have a conventional mortgage, you need to get a certified appraisal. Go to BankRate to see the 9 steps to drop it. I understand that if the loan is FHA, the PMI automatically drops once you have 78% equity, but this only takes into consideration your loan terms and the payment you make, including extra amounts but not appreciation.

It is kind of a hassle to drop PMI, but the monthly savings are worth it.

Life After Foreclosure, Other Personal Finance Headlines

Interesting articles worth checking out: Homeowners qualifying for new mortgage after short sale. Auto purchasing and the various fine print costly add-ons. Estate planning: Naming a trustee for your trust, and living wills. Roth IRA escape hatch, for those that already converted, but now regret it.

 

Home Mortgage News, for Those Struggling with Payments

I’ve talked to several people who have been having difficulty staying current on their mortgage, some just over the past year, and others that have been struggling for several years that have qualified for help recently, and they are able to stay in their homes.  Some have even been turned down for loan modifications and short-sales in the past, and things looked very dark. It seems as if some lenders are trying to help borrowers more than ever now. The help includes:

  • Loan modification temporarily lowering of monthly payment
  • Second mortgage forgiveness
  • Interest rate reduction to 1% for veterans
  • Refinancing with their current lender even though they might not normally qualify
  • Settlement to compensate people for unfair treatment due to bad foreclosure processing, but the deadline to apply is 9/30.

I encourage you to call a qualified HUD counselor and contact your lender talking to their mortgage hardship department. Lastly pray for a financial miracle, I’ve seen plenty.

Wrongful Foreclosure Compensation Deadline Approaching

If you’re one of the millions of people who’ve faced losing your home through a wrongful foreclosure, you might get help, but you must act quickly. Homes that were foreclosed on in 2009 and 2010 should find out about the free Independent Foreclosure Review (IFR) process. The IFR process is by the Office of the Comptroller of the Currency and the Federal Reserve, will award financial assistance to borrowers who were foreclosed on because of inaccuracies and oversights.

According to the Independent Foreclosure Review website, borrowers are eligible for independent foreclosure review if: (1) the property securing the loan was the borrower’s primary residence; (2) the mortgage was in the foreclosure process at any time between January 1, 2009 and December 31, 2010; and (3) the mortgage was serviced by one of 27 IFR approved servicers. These servicers include: America’s Servicing Co.; Aurora Loan Services; BAC Home Loans Servicing; Bank of America; Beneficial; Chase; Citibank; CitiFinancial; CitiMortgage; Countrywide; EMC; EverBank/EverHome Mortgage Company; Financial Freedom; GMAC Mortgage; HFC; HSBC; IndyMac Mortgage Services; MetLife Bank; National City Mortgage; PNC Mortgage; Sovereign Bank; SunTrust Mortgage; U.S. Bank; Wachovia Mortgage; Washington Mutual (WaMu); Wells Fargo Bank, N.A.; and Wilshire Credit Corporation.

A small fraction of people have applied for this, and with the application deadline extended to September 30, 2012, it is important that potential claimants look into receiving compensation or other support, as soon as possible. This may apply to people who were foreclosed on – even when they were abiding by the terms of their mortgage or their modification agreement, or were protected by bankruptcy.

The Independent Foreclosure Review process may provide compensation in the form of a lump sum payment, a loan modification, a suspended foreclosure, or even a corrected credit report.

To find out more about the Independent Foreclosure Review process, visit the website https://independentforeclosurereview.com/.

Lender Reduced Interest Rate to 1% for Veteran

I just spoke to a good friend and veteran in Columbus Ohio that has a mortgage with JP Morgan Chase for 30 years at just over 6%. Chase lowered their interest rate to 1% for 3 years, which made their monthly payment drop by about $400. They were told that this was a special program for people who had been in the military, and had applied for a loan modification in the past. The letter they received was a godsend, allowing them a little extra in their budget to save and re-pay other debt. The letter said the payment reduction amount is taxable, which indicates to that this amounts to forgiven interest, but they should consult their tax preparer to be sure.

The benefit this couple received is probably part of the settlement reached with the Federal government and 49 state Attorneys General, Bank of America, J.P. Morgan Chase, Ally, Citi, or Wells Fargo in February to provide relief to servicemembers and veterans. From the Whitehouse’s website, the lenders will

  • conduct a review of every servicemember foreclosed upon since 2006 and provide any who were wrongly foreclosed upon with compensation equal to a minimum of lost equity, plus interest and $116,785;
  • refund to servicemembers money lost because they were wrongfully denied the opportunity to reduce their mortgage payments through lower interest rates;
  • provide relief for servicemembers who are forced to sell their homes for less than the amount they owe on their mortgage due to a Permanent Change in Station;
  • pay $10 million dollars into the Veterans Affairs fund that guarantees loans on favorable terms for veterans; and
  • extend certain foreclosure protections afforded under the Servicemember Civil Relief Act to servicemembers serving in harm’s way.

Reducing Fees for FHA Borrowers Seeking to Refinance: FHA will cut its fees for refinancing loans already insured by the FHA. An estimated 2-3 million borrowers could be eligible for this savings, providing the typical FHA borrower with the opportunity to save about a thousand dollars a year through refinancing than they could have under today’s fee structure.

This is very brief information, servicemembers and their dependents who have or have had a mortgage with Bank of America, J.P. Morgan Chase, Ally, Citi, or Wells Fargo and want to read about all of the benefits (this is just a summary of some of them), should look into this further:

  • Call the Justice Department at 800-896-7743, they have information to determine if you are victims and the settlement requires those individuals to be contacted
  • Military legal assistance office locator at http://legalassistance.law.af.mil and click on the Legal Services Locator
  • Justice Department’s enforcement of the SCRA and the other laws protecting servicemembers is available at www.servicemembers.gov
  • Whitehouse fact sheet

When to Pay off Your Mortgage

There is quite a bit of miss-information when it comes to whether someone should pay-off their mortgage. On one hand it is wise to have as a goal to someday have a mortgage free home, especially as one enters the retirement years, and minimizing of cash flow and simplification are goals. Many people wonder if it makes financial sense to payoff one’s mortgage instead of using those dollars to invest.

Dave Ramsey and other financial experts advise people to payoff the mortgage after one has: 1) repaid all other debt 2) fully funded emergency savings with 6 months of expenses (or 12 – 18 months if self-employed) and 3) putting enough money into accounts for retirement and college education. This is great advise for the masses, these experts are trying to convey with a simple message that people can strive for. Debt elimination is always good, as it is always nice to not be under the burden that we feel when we are shackled with debt. Simple messages are good for public communicators, because people are often looking for loopholes for their ‘special’ circumstances, and then lose sight of goals and lessen their chances of overall success.

That said, does it ever make sense to direct money that would be going into savings and/or investments instead of house mortgage repayment?  If someone is not investing (bad idea) and just putting the money into a savings account that today is earning less than 1%, they would be better off to pay off the house. This is because even with today’s low mortgage rates of less than 4%, their savings would still be earning less interest than they would be paying. If someone is investing, and earning a rate of return that exceeds the mortgage on their home, then it is a maybe. Maybe because it would depend upon how they are investing, and the interest rate of their mortgage net of tax-deductions, since most people are able to deduct the interest on their mortgage. The interest rate calculation may require careful analysis with the help of one’s tax preparer. Lastly, the invest or pay-off question depends upon how much money someone has to invest, either as a lump sum or a monthly amount. Meaning the analysis would be easier if someone had $100,000 in investments, and the mortgage was $100,000, but the calculation would be more difficult if someone didn’t have that lump sum, but merely an additional monthly amount to apply to principle. In this case there is no rule of thumb and careful analysis would reveal the most appropriate solution.

New Short-Sale Rules

Source: Kenneth Harvey LA Times

A real estate short-sale occurs when someone sells their home for less than they owe the bank. People considering them are trying to get out of a mortgage payment they can’t afford, usually caused by unemployment, health care bills, divorce, or over use of debt related to these circumstances or not.  Sometimes the bank considers the sale as paid and full, and doesn’t seek to recover their loss through collections or legal means. The lender could change their mind and seek to recover their loss later, only time will tell. Forgiven debt may have tax ramifications, so sellers should talk to their tax advisor.

Lenders have been slow to respond to short-sale offers by qualified lenders, and often the deal falls apart, and the seller is back to where they started. The foreclose process continues, and either their financial situation improves, or the bank comes through with a loan modification: lower mortgage amount or interest rate in an effort to keep people in their home. There is federal funds to help with this, but it requires a cooperative lender.

To help speed the short-sale process, and if the loan is a Fannie Mae or Freddie Mac, short-sale requests to lenders will have about a 30-day response turnaround, and a final decision in not more than 60 days. This change is being imposed by the Federal Housing Finance Agency.

If you are in a financial situation where you are trying move on to more affordable housing, and don’t want to do the more drastic ways to dump your house like foreclosure or bankruptcy, this might be a solution for you. It is a win for the lender too when ever they can secure a new mortgage with a qualified buyer, instead of selling it in a sheriff sale for much less, add to that the risk of many months of vacancy, no maintenance, and thieves prey on the plumbing and appliances.

 

Bank of America New Plan for Foreclosing Homes

The Wall Street Journal reported that BofA is initially offering in New York, Arizona and Nevada homeowners who are having difficulty making mortgage payments, to lease their home back to them, at market rates, in exchange for transferring the deed to the bank using a ‘deed-in-lieu of foreclosure.’

This could be a win for the banks, who usually receive no payments during the foreclosure process which can take from 6 to 18 months for the legal process to complete. Often this period of time is even longer when you consider homeowners apply and re-apply for loan modifications, and the homes don’t even go into this long foreclosure process until all modification options have been exhausted. There are even instances of the banks being slow to start the foreclosure process and homeowners are able to live rent-free for many years, before the process ends in a sheriff sale when the homeowner has to find a new place to live. Banks choosing to offer this program at least get cash flow, and a homeowner that will probably maintain the property better than when it goes vacant for many months. Unoccupied homes lose value through vacancy entropy; leaks don’t get noticed for example, copper plumbing, air conditioners and appliances are often stolen.

This is a win for the homeowner too, who wants to stay in a house or condo instead of renting an apartment, pay rent that is affordable, don’t want to move out of their children’s school district until they graduate to the next level.

Mortgage Settlement Possibly Forthcoming

Housing and Urban Development and some state officials are negotiating a settlement in the ballpark of $25 billion, with the 5 largest mortgage providers: J.P. Morgan Chase, Bank of America, Citigroup, Ally Financial, and Wells Fargo that could benefit some homeowners with troubled mortgages, the Wall Street Journal reported yesterday.

Some homeowners could benefit by having the principle of their mortgage decreased, interest rates reduced, and other alternatives including cash.

First Time Home Buyer Tips

Step 1: Get Your Financial House in Order

Before you even think about the purchase of a home, look at your entire financial plan. The purchase of a house affects not only the amount of money you currently have in savings and investments (if you use some of it as a down-payment), but the payments, maintenance, utilities, and costs to furnish and insure will affect your budget each month. Home buying decisions will affect your ability to reach your other financial goals, more than any other large purchase that you make. Before embarking on the road to a big financial decision, it is key to get your financial house in order. The decision to purchase a home should not be made in a vacuum: it should take into consideration all of your financial goals and responsibilities. It is important to have savings for down-payment, funds left over afterwards for emergencies, and to pay off as much other debt as possible first.

Step 2: Examine Financial Aspects of Home Purchases: The following is a list of the most common areas for consideration when purchasing your home. Make sure you discuss these with your realtor or buyers agent.

  1. Insurance: Ask your insurance agent the approximate cost to insure the homes you are considering buying.
  2. Utilities: If you are renting now, your budget for utilities will likely go up. Your utility usage will depend on: the costs for utilities in your area, the size of the home, the age of the furnace, the type of heating, and the level of insulation in the home. Be conscious of these expenses while looking at homes, and if you find a home you like, the listing should provide the budgets for gas, electric, or heating oil.
  3. Payments: How much are you currently paying for your house or apartment? It is usually less than you will pay for a new house payment. Use internet loan calculators to determine approximate monthly mortgage payments. Avoid the temptation to spend more than you can really afford for a home, assuming that your income will increase over time. If you want to be in excellent financial condition, buy a home a few notches below your current income level. In most instances, the loan interest will be deducible; however, do not use this as an incentive to over buy. If you can keep your total housing costs, mortgage payment and utilities, within 20% to 30% of your take home income, you will have a lot of room for other expenses.
  4. Inspection: Prior to buying a home, the buyer should hire an excellent home inspector to go over the home with a fine-tooth comb. Arrange to be there during the inspection.
  5. Maintenance: If this is your first home, talk to other homeowners, friends, and family to help you estimate the cost of maintaining the prospective home.
  6. Repairs: Estimate the cost for future repairs such as roof replacement, outdoor painting, concrete repair, basement repair or finishing, and major mechanical replacement. Work with friends, family, contractors, and the inspector to help you estimate future repair costs.
  7. Real Estate Taxes: Make sure that you know what real-estate tax costs will be in the areas that you are considering. They can vary quite a bit, they can go up very quickly, and they may make a big impact on your budget so do your homework prior to making your final decision.
  8. Commuting Costs: If your commute will be longer as a result of moving, estimate the additional cost of fuel and maintenance for your car.
  9. Homeowners Association and Condominium Fees can be high in some areas. Make sure that you know all the fees before buying.
  10. Real estate agents and buyer’s agent: Real estate agents represent the seller, not the buyer. Some people recommend hiring an agent who works for you, not the seller. However, I have had excellent experience working with a real estate agent for many years. Whoever you decide to work with, make sure that you know all the services they will provide for you.
  11. Comparables: Get prices on other homes. Real estate agents call them “comps.”. Knowing the price of other homes in a neighborhood will help you avoid paying too much. Remember the old real estate advice that it’s better to buy the least expensive home in great neighborhood.  Also consider whether any changes you want to make to the home would render it incomparable with the neighborhood.

Step 3: Choose between New or Existing Homes.  Many home buyers choose new homes because the price may be close to an existing home and because older homes require more maintenance. However if you purchase a new home, it may not have the features that existing homes may have, such as added patios or decks, installed draperies or blinds, security systems, lawn sprinkler systems, seasoned landscaping, finished basement, and simple things like hooks and shelves. These extras can make an existing home a great buy, especially if you are just starting out or if money is tight. Building a new home can be a hassle (especially if you are inexperienced with the many questions you need to ask) and the wait to build can be long.

In addition, some buyers choose new homes because of financing options, without fully understanding all of the details, and then find themselves in a situation where the mortgage payment increases more quickly than they planned.  Any changes or upgrades to a new home floor plan will raise your costs dramatically. Existing homes sometimes have more character, established neighborhoods and schools; however, they may need more repairs or have undesirable floor plans. Many homebuyers choose new homes because they dislike making repairs of any kind, then find themselves installing blinds or shelves each weekend. We have loved living in an older home and currently love a home we built. Both have required different kinds of projects and expenses. Think through your decision, perhaps journaling the pros and cons of different homes or builders you visit to help you decide between a new or an existing home.

Step 4: Financing Your Home.  There are two types of conventional mortgage rates: fixed and variable. If you choose a variable rate, make sure you know all the variables and conditions. If you have a variable rate loan and interest rates go up, you can usually convert to a fixed rate loan. However, if you convert when interest rates are rising, your rate will usually be higher than what it would have been if you had started with a fixed rate loan. Discuss your options with your banker and realtor.

There are also other types of financing plans, such as interest only loans. Interest only loans are appealing to many people because it may help them afford the payments on a much larger house. It is also appealing to people who are only planning to live in a house for a few years. Interest only loans are popular when homes are appreciating rapidly, as they were up until recently.  In many parts of the country home values are not appreciating as much or depreciating significantly, therefore interest only loans should be approached cautiously.

Most people choose a 15- or 30-year mortgage. Monthly payments will be higher for a 15-year loan, but you will be able to pay it off obviously sooner than a 30-year mortgage and you’ll save a lot in interest. The interest expense for 30-year mortgages is higher in the long run, but these loans are usually more affordable in the monthly budget and generally allow you to take an extra 15 years of interest deductions, assuming you do not pay off the loan early. 15 year mortgage are the best way to go if you can afford to.

Step 5:  Closing

  1. Home Purchase Negotiation and Closing is very important. Your realtor can help you with this. When interviewing potential realtors, discuss their depth of knowledge and experience in this area.     
  2. Always use an attorney to review the documents you are signing, especially at closing. There are just too many things to sign, and it helps to have someone else paying attention to what you’re signing, considering the risk of agreeing to something—in writing!—unawares. Send all the documents to the attorney before closing for prior review, or ask your attorney to attend the closing with you. 
  3. Do not be ‘House Poor’: As a rule of thumb, your home budget (including mortgage, escrow, condo or homeowner’s association fees, etc.) should not exceed one-fourth of your monthly budgeted expenses. Bigger houses are more expensive to furnish, maintain, landscape, and heat and cool, taking a bigger bite out of your overall budget. Many people may encourage you to buy as much home as you can now, or will soon be able to afford. Perhaps they have reminded you that you have a successful job and besides you can always cut back on eating out or going on vacations. The approximate mortgage amount you have been given will make things tight, but you really love that house. Now stop and take a deep breath. Is this mortgage amount within the comfortable range you have determined after reviewing your financial plan? If you own a home that cost less than what you can afford, then your financial life will be much less stressful. Often, the greatest source of financial setback, causing people to use up their savings and go into debt, is unexpected expenses. Living below your means with a comfortable mortgage payment will help you plan for your future and the unexpected setbacks of life.

Mortgage Backers Struggling

An article in The Wall Street Journal today 11/15/11 about the Federal Housing Administration or FHA “Loan Backer’s Cash Runs Low” states that an audit being released today that FHA has close to a 50% chance of running out of money and require a tax-payer bailout. This follows the 10/23/11 news that PMI group the third largest mortgage insurer was taken over by Arizona regulators, and is no longer selling new business. MGIC the largest of these insurers reported larger losses than expected last month. Old Republic International Group, another of the insurers of mortgages was also restricted to selling new business recently.

Private Mortgage Insurers protects lenders if a borrower defaults, and the home is sold for less than the outstanding loan amount.

Refinancing Mortgage Questions

Should I refinance our mortgage to get a lower interest rate? The old rule of thumb was if you are going to stay in your home for a few years, and interest rates drop more than your current rate by 1%, then it will be worth your while to refinance. Meaning since there are closing costs, it may take a few years to make up those costs, with the new lower payment. Ask your mortgage lender to run this analysis for you. You can run them yourself too with the wonderful calculators at DinkyTown.

I have heard about low closing costs mortgages? The last few years many lenders offer mortgages without any fees. They waive some of the costs, such as points and various other fees like the title insurance and inspection costs. They might still have an application fee, which in my experience averages about $500 – $250. These are really nice, because as long as you can lower your interest and thus your payment, and there is not a big fee to overcome, then you can justify refinancing even if staying in your home for a short period of time. Keep in mind, the lender has to make up for the fees they usually charge, so they charge a little higher interest, probably about .25 more.

What else should I think about before choosing to refinance? Make sure that you get quotes of all costs from a few good lenders prior to making your decision. Have the lender run full cost calculations of the options you are considering before you choose. Secondly, compare that analysis to a calculation of the all costs of your current mortgage from now until completion, that way you can see the true net total costs. Lastly, don’t just pick another 30 year mortgage. For example if you are 50 and have 22 years left on your mortgage, don’t just go with another 30 year term or you will be paying until you are 80. Try to always shorten your mortgage to 20 years, 15 years  (as Dave Ramsey always suggests), or less.

Is it easy to refinance? If you have a great credit rating, low other debt and overall good debt to income ratios, then it will be okay, if not expect a longer more difficult process. Real estate people I talk to say the mortgage process is much slower now than ever, so be prepared for a long time to process the paper work.

Is there any benefit to staying with the lender I already have my mortgage with? Some lenders will offer existing clients a low-cost and low rate mortgage and may even not have as stringent underwriting, this is a plus considering my comments above. However it is my experience the interest rate is a little higher than the most competitive rates available.

What type of mortgage should I choose? Most financial experts recommend only going with a fixed mortgage, avoiding adjustable rate and interest only mortgages. Most mortgages today are for 15 or 30 years, 15 years is better for building equity more quickly in your home and paying much less interest compared to a thirty year mortgage. However, the term with many banks can be for 22 years for example if you have been paying 8 years already on your 30 year mortgage. The same applies if you have a 15 year mortgage and only 9 years left, you can finance it for 9 years, or any number of remainder years. In any case be sure to run the numbers, looking at total costs including closing costs and points, comparing it to your existing mortgage, before finalizing your decision. 

Are there other costs and things to be mindful of? There are many, so talk to your professional advisor prior to jumping in. A couple of things I think you want to be mindful of are escrow and the new paperwork you will sign. Sometimes the escrow account used for real estate taxes and insurance may have to be adjusted, this could result in requiring of up front cash (or could be added to your mortgage), and/or monies paid out. If you receive money, don’t spend it, put it in savings, pay off debt or maybe better yet, use it pay on the principle of your new mortgage. Also due to the mortgage crisis, I have heard some new mortgage documents have wording in them that may be more restrictive to the borrower. As with all contracts that you sign, be sure to always have an attorney read everything prior to signing.