Adjustable Rate Mortgages May Not Be For The Weak At Heart
January 8, 2008
©Vishy Dadsetan
I heard the news about another interest rate hike and thought it was about time to look into refinancing my mortgage. I contacted my mortgage company first.
“I am interested in a fixed mortgage rate.” I said.
“May I ask why that is?” The broker asked politely.
“I don’t want to deal with the risk of rising interest rates. At my age, I cannot afford the risk.”
“Looking at your last ten years of history, you have done pretty well with the adjustable rate. In fact, you had paid less in interest than most people with a fixed loan. May I suggest that we look at some adjustable rates, which are even less than the rate you’re paying and with caps you don’t have to worry about the interest rate hikes. I think we can save you a few hundred dollars off your monthly payment.”
At this point the broker took a breather so that I can say, “No thank you. I am only interested in a fixed rate mortgages.”
“I don’t understand. Are you not interested in saving money?” He asked before launching into a lecture that had a mix of economy 101, budgeting 1, a dash of fortune telling and a healthy and totally unrealistic optimism of future trend in interest rates.
When he was done I explained to him that I recall the 18%-19% interest on mortgage loans in the early 1980’s that he seemed too young to remember. I pointed out that on a $100,000 loan, the 18% interest is $1,500 per month on the mortgage interest alone. If you have a $200,000 loan the interest alone would be a back-breaking payment of $3,000 per month.
I knew he thought I am out of my mind thinking about an 18% mortgage interest rate in today’s environment. At the end we ended the phone conversation without any resolution. The gap in understanding wasn’t about fixed rate mortgages vs adjustable rate mortgages (ARM). The gap was in age, experience, expectation, hopes and fears; a gap too wide to bridge.
To understand this gap, let’s look at the adjustable rate mortgages. This type of mortgage loan is usually lower than the fixed rate and the lower rate means lower payment that in turn means easier qualification.
When lenders are considering your mortgage loan application, they look at what percentage of your income is available for repaying their loan. With an income of $5,000 per month, a $2,000 loan payment is 40% of your income and a $1,000 payment is 20% of your income. The closer you get to $1,000 or 20% of your income, the easier it is to qualify for the loan. This easier qualification appeals to younger people who are just starting and those with income limitation.
Adjustable mortgage rates appeal to young people with an innate optimism, hopes of increased income and the high possibility of moving to a different home in a short period of time. They need to look at what they can afford to pay and cannot worry too much about the distant future. To them anything is better than renting which is absolute waste of money.
There are also those older individuals who have suffered from some set back in life and do not enjoy a high credit score or do not have a very high income. Since a poor credit score increases the interest rate a bank offers to potential borrowers, a fixed rate may be too high for these individuals to consider.
Let’s take a look at some terms that help you understand ARM better.
Margin - This is the lender’ s markup and where they make their profits. The margin is added to the index rate to determine your total interest rate.
ARM Indexes - These are benchmarks that lenders use to determine how much the mortgage should be adjusted. The more stable the index is the more stable your adjustable loan remains. Consider both the index and the margin when you are shopping around.
Adjustment Period - Refers to the holding period in which your interest rate will not change. You will come across ARM figures like 5-1 that means your mortgage interest remains the same for five years and then it will adjust every year.
Interest Rate Caps - This is the maximum interest a lender can charge you.
Periodic caps - The lenders may limit how much they can increase your loan within an adjustment period. Not all ARMs have periodic rate caps.
Overall caps- Mortgage lenders may also limit how much the interest rate can increase over the life of the loan. Overall caps have been required by law since 1987.
Payment Caps - The maximum amount your monthly payment can increase at each adjustment.
Negative Amortization - In most cases a portion of your payment goes toward paying down the principal and reducing your total debt. But when the payment is not enough to even cover the interest due, the unpaid amount is added back to the loan and your total mortgage loan obligation is increased. In short, if this continues you may owe more than you started with.
Negative amortization is the possible downside of the payment cap that keeps monthly payments from covering the cost of interest.
As you compare lenders, loans and rates remember Henry Moore who said, “What’s important is finding out what works for you.”
Home Equity Line of Credit - Second Mortgage
January 7, 2008
2006 is now history and 2007 is in the making. Many Americans once again face the issues of spending more than they earn and once again those who own their own home find out why owning a home is called, “Great American Dream.”
Home equity line of credit is like a huge credit card that allows you to borrow against the equity of your home. This means two things. First, your home should be worth more than the amount of loan borrowed against it and the second, this type of loan should be considered even more carefully than the a credit card debt.
The home equity line of credit contract uses your home as collateral for the loan, which means you risk losing your home if the term of the home equity line of credit is not met.
There are other risks that a person in a financial jam may not consider, for example a large final payment also known as a balloon payment. Optimists of the world believe that miracles can come in play and somehow the need for a balloon payment will be satisfied. I like to take steps when I can to make sure that the higher powers can help me. This is why I would suggest that you also look at a second mortgage as well.
Let’s look at a basic difference between home equity line of credit and second mortgage.
Home equity line of credit allows you to keep borrowing and paying from your account through out the term of the contract. It is just like a revolving credit. You can also pay the minimum payment and no one will bother you. Chances are that by the end of the loan term, you owe the bank the maximum you could borrow, the full amount of home equity line of credit and then you have to make decisions, much later in life and perhaps with fewer resources.
On the other hand, a second mortgage has a fixed time frame. At the end of the period and assuming that you have kept up with the payment schedule, you will have finished with the loan and you will not need to find alternatives and come up with new plans. It is done and finished.
Double Home Mortgage Payments Trap
January 7, 2008
© My Personal Finance
It was on a Thursday afternoon that I received a call from my real estate broker. He had the unpleasant task to let me know that the buyer needed a few days extension on the escrow to obtain a mortgage loan to complete the purchase of my old home. This was less than five days before the scheduled close of the escrow and the buyer wanted about two weeks extension.
This seemed like a minor difficulty. However, what that broker did not know was that I was in escrow to buy another house and I needed the funds from the sale of the first house to complete the purchase of the second.
I had to call my wife to discuss the options, none of them seemed promising.
Some of the questions we had to deal with were:
- Was there anything the buyer was not telling us that impacted his ability to obtain a mortgage loan?
- How could we close the escrow on our new home without the funds available from the sale of our old home?
- How could we handle two mortgage payments if by some stroke of luck or Karma, we did buy the new home and still had not sold the first home?
- Could we afford to handle two mortgage payments and for how long?
- Would we be forced into renting our old home and how would that impact the later sale?
You can imagine the emotional roller coaster ride we were on. It all ended well with minimal emotional scarring but the following lessons may help you.
- Get enough information about the buyer to confirm both their intent to buy and their ability to buy. Making an offer and even entering escrow does not indicate either. Ask any seasoned mortgage broker and they can tell you dozens of stories about how many things could go wrong with escrow.
- Think about a back up plan even if it is to walk away. Luck and karma are good but I also like good planning.
- Schedule enough time between the closing date of the house you are selling and the one you are buying. This is called staggered closing as opposed to simultaneous closing. The disadvantage of staggered closing is the cost. If the time between closings is too long, you may end up moving twice and renting a place in the middle.
- Ask for enough earnest money deposit so that the buyer of your home has enough to lose for not fulfilling his/her contractual obligation. This was a major factor that helped me. The buyer did not want to lose several thousand dollars for a few days of extension. On the other hand, place as little earnest money deposit as you can on the home you intend to buy. I know it doesn’t seem fair and sometimes, it may not even be possible. But this is a world of negotiations.
- Line up “bridge†financing just in case you end up with two mortgage payments. One mortgage on the house not sold and the other for the one just purchased.
Mortgage Refinancing and Lower Interest Rate Myth
January 7, 2008
© Vishy Dadsetan
One of the main reasons folks refinance their mortgage is to take advantage of lower interest rates. Let’s take a look at this carefully.
For a $100,000 fixed thirty year loan, the monthly payment would go down about $63 if you went from a 6% loan to a 5% loan. Assuming that you would continue with the same loan without interruption for thirty years, the projected savings would be around $22,582 if you refinanced.
Does anyone stay in the same house with the same mortgage for 30 years?
Based on a government survey that I have to admit is about 14 years old, an average American moves 11.7 times in a lifetime. This would reduce the chances of staying in one home for thirty years very slim. I have moved 14 times so far. How many times have you moved in your lifetime?
The real question is how long are you expected to stay were you are? I leave that up to you to answer. I would mention that if you stayed in the same home for 5 years, the projected savings for the same loan I mentioned before drops down to around $3,780.
This brings us to the second question. What is the mortgage refinancing cost?
Those who have gone through at least one mortgage refinancing know that there could be dozens of costs including but not limited to the loan itself, the inspection process of the home, a clean escrow and title search, etc.
When you ask your potential mortgage company about costs, write them down and at the end ask them if there is any other costs that was not covered in your conversation. Then review the written documents related to truth in lending. Also remember to count any payment that is paid out of the funds in the escrow as cost even though you do not write a check for it directly.
After this type of review chances are that you will pay a few thousands dollars for your mortgage refinance. Once you have that number, you can make a judgment whether or not to refinance.
To make things a little more interesting, at 30% tax bracket and the deductible interest on your loan that projected savings $3,780 I mentioned gets closer to $2,646.
And if you have been in your home for only 3 years, the refinance process resets the clock on a 30 year loan to zero, which means on the basis of staying in your home for thirty years, you are now going to pay an additional $12,883 because of your mortgage refinance.
As you look at these numbers you may notice that refinance based on lower interest rates loses its luster quickly. I don’t mean to say that no one ever should use mortgage refinance as a tool. I am agreeing with what Mark Twain said, “Get your facts first, and then you can distort them as much as you please.”
Technorati Tags: Mortgage Refinancing.
Low Cost Alternatives To Pay Day Loans
January 7, 2008
What alternatives do you have instead of payday loans?
Contact your credit union or small loan company, find out if your company offer any short term assistance. I know it could be hard to tell friends and family members about your financial hardship but swallow your pride a little bit and ask them for help. Just make sure that you don’t swallow your pride too much by not paying them on time.
If you are borrowing to pay other debts or other bills, why not just ask your creditors for more time to pay your bills? Find out what they will charge for that service including late charges and additional finance charge or a higher interest rate.
Debt Management Plans Offer Relief
January 7, 2008
I like what William F. Halsey said about problems. “All problems become smaller if you don’t dodge them, but confront them.”
This statement does not mean that you have to deal with problems alone. One way to deal with overwhelming debt is to enroll in a debt management plan offered though some credit counseling organizations. Once a credit counseling organization steps in, you just send one check to them and they in turn will pay off the credit card bills according to a prearranged schedule.
Your debt counselor also takes care of all the communications with the credit card companies for you.
How does a Payday Loan work?
January 7, 2008
The old economy created the idea of living paycheck to paycheck. As if that wasn’t bad enough, in today’s economy many don’t even get to the next paycheck. So, the potential borrower writes a personal check payable to the lender for the amount she wishes to borrow plus a fee.
The lender cashes the check and keeps the fee of course. Ideally this type of loan will get the borrower room to breathe and she can pay off the loan when she gets paid.
Lets take a look at an example. Ms. Susan Borrower needs $200 and the cost is $30. She writes a check for $230 and the payday lender agrees to hold the check until your next payday that is usually 14 days away.
After 14 days, depending on the particular plan, Ms. Borrower takes $230.00 in cash to the lender and takes back the personal check she wrote. Or, she can roll-over the check by paying a fee to extend the loan for another two weeks. Each time she rolls-over the check, she will pay a fee that in this example was $30. In theory, if she rolls-over the check for one year, she ends up paying $30 for 26 times or $780 for borrowing $200.
Higher Credit Score and Student Credit Cards
January 7, 2008
These are some tips to help you build and maintain “credit worthiness.â€
Pay your college credit cards on time. On time means before the due date. You see, even one day late, is late and you don’t want to appear tardy to those who want to lend you money. They translate it to irresponsible.
Don’t go overboard and over your credit limit. Staying below your credit card limit demonstrates your ability to manage your money. You come across as reliable. Try to keep your account balances less than 50% of your available credit.
Less is better. Think of this as a love relationship. You find the one you love and really nourish that relationship. If you have too many relationships, they will remain on the shallow end. In life, you will need depth.
Limit the number of credit cards you acquire or even apply for. How would you feel if your girl friend or boy friend started asking others for dates? Just asking someone else for a date indicates some kind of a problem, doesn’t it? Excessive credit inquiries over a short time are interpreted as you having financial problems.
Try to pay your balance in full each month or at least make sure you send more than the minimum payment required.
Ignore the pressures that you may feel in social circumstances. You live much longer than you think and most people you now know will not be as close to you in a few years. Your debts will be with you for much longer if you are not careful. Work on some basic emotional disciplines like asking yourself if you really need something before you charge it. Or, can you repay the charge and if so how long will it take you? If it takes you longer to pay the credit card debt than it takes you to finish college, you may think about that purchase twice.
Technorati Tags: Student Credit Cards, Credit Card Offers
Bad Credit Mortgage Refinance
January 7, 2008
Once again the terms credit score, credit history and credit report enter the world of loans. Think about it like Karma that it will follow you for a long time until you own up to it and take steps to fix it.
In most cases bad handling of credit would mean rejection from would be lenders but when it comes to a mortgage loan, you have an advantage and that is a solid real estate collateral - your home.
To say that mortgage loan is not available to those with bad credit is just not true. There are loans available to people with bad credit history as long as you are persistent in your search for finding them and you are willing to pay the price. Follow the link below to see what the price is like.
$82,000 Penalty Tag For Bad Credit Mortgage
The horror stories related to bad credit mortgage loans stem from the activities of sub-prime lenders. These lenders who actively look for people with bad credit background and low credit score to lend them money at a very high cost. But that is another story.
In most cases, it is possible to find lenders who give out loans at reasonable rates and agreeable charges, to people who have a bad credit history. This is where personal research come in and this research cannot be limited to online forms. You need to call and talk to different mortgage brokers and local lenders.
In your research just be careful that you give the potential lender or broker enough details so that they understand your situation but do not include personalized information such as social security number. You don’t want to add to many inquires on your credit report that may make your situation even worse.
As you are doing research for the loan, take time to fix your credit score.
Technorati Tags: Bad Credit Mortgage
Challenge of paying off your credit card balance
January 7, 2008
© Vishy Dadsetan
I just took a quiz on a pbs.org site to check my credit card knowledge against real facts. One of the questions was, “Nearly 144 million Americans have general-purpose credit cards. Approximately how many of them pay off their bill in full each month?â€
My choices for an answer were 55, 90 and 115 million. In terms of percentages, they were asking me to guess if 38%, 63% or 80% of the credit card holders pay off their bill at the end of each month.
It was not surprising to know that only 38% of credit card holders pay off their bill and the rest are “revolvers.†These are folks who routinely carry high balance and create a lucrative business for credit card companies.
Why doesn’t everyone do this?
Simplified answers are lack of resources, lack of knowledge and poor planning. I give you one example each and hope that you visit my blog at mypersonalfinance.com/blog and share your input.
Lack of resources
The economy may or may not be getting better but many still feel the crunch of hard times including corporate downsizing. For those caught in the middle of a lay off, paying mortgage or rent takes higher priority than paying off the credit card balance. They also use their credit cards to take care of monthly shortage that increases the balance and makes it more difficult to pay off their entire credit card bill.
Lack of knowledge
It seems to be one of our characteristic not to look at problems for too long trying to find a solution and if too many problems pile up, we tend to prioritize things and only deal with what we can. Many who have high credit card balance have other things on their mind and automatically assume that they have to live with their credit card forever. The fact is with the intense competition for your credit card business, many credit card issuers offer lucrative incentive for you to transfer your credit card balance and if you call your credit card company, you may even be able to negotiate a lower term.
This knowledge is not a solution that may help you pay off your entire balance right away, but it may help you manage it better so that the day you can pay it off comes sooner.
Poor planning
Self-discipline, over optimism and stress impact our abilities to deal with situations. That new gadget, those wonder deals on ebay that seem to call to your credit card test your self-discipline. Spending the next pay raise before it is in your hand shows a healthy dose of optimism that may back fire. And let’s not forget the stress. We do strange things under stress, a visit to a local mall, a well deserved massage to soothe the nerves or going out to dinner one more time are some of the ways we increase our credit card balance.
Most of these situations can be resolved with a little planning. For example, have a list of items you want to buy and their price tag. Wait for the next pay raise to show up, go over your list and buy what is on your list.
Put new gadgets and deals on your list and let it sit for a while. Allow yourself a little cool off period before you buy anything. You may be surprised as how many things you don’t have to have and how many things you can buy for much less a little later.
Understand the stress is a part of life and plan ways to cope with them. A walk in the park is healthier for you and costs less than a walk in the mall.
May you find the ability to pay off all your debts.
Technorati Tags: transfer your credit card balance
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