1.
What should I know before financing my new home?
For most people, buying a home will be the biggest investment of their life. The process is amazingly complex and demands a considerable planning and preparation before starting your course. Take a look at some ordinary tasks you will and issues you will have to address as you proceed. Though certainly not all inclusive, our list of caveats will help your home buying experience more efficient and less cumbersome.
1. Don’t begin your home search before getting pre-approved with a lender. Your chances for success in having your offer accepted will dramatically increase if you have been pre-approved before the offer is made. As a potential buyer you will be asking the seller to take his property of the market for several weeks while your loan is “in process”. Remember, you will most likely be a complete stranger to the seller and multiple offers will be coming in. From the seller’s prospective, all potential buyers are competing for his property. Who do you think the seller will be more likely to consider seriously, a buyer who is:
Neither pre-qualified nor pre-approved. Here the buyer is quite literally shopping blind. He has done little research to determine what price house he can actually afford and usually does not know about the lending options which may be available to him. How serious a buyer would you consider this person to be?
Pre-qualified. In this instance, the buyer has met with a lending professional (broker or lender) to determine how much house he can buy and whether the proposed purchase is appropriate for his needs . The buyer financial records have been scrutinized and credit history reviewed so that the lender can issue a letter suggesting a loan amount the buyer can handle.
Pre-approved. Documentation of this buyer’s
financial records, including income, expenses, assets, liabilities and credit
have all been verified by the lender.
Consequently, much of the loan process has already been completed. If your property’s valuation checks out and
title insurance can be obtained the deal is all but guaranteed to close
quickly! The buyer shows up with a
pre-approval certificate demonstrating that he has done his lending diligence
and has been just about as thorough as he could be in determining his ability
to buy the desired property.
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2. What about refinancing my existing property?
There are some very specific premises that you must consider when refinancing your existing mortgage. Read through these items for added confidence that you are making the prudent choice when you refinance.
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3. Tell me about lines of credit and home equity loans?
Effective rate = rate x (1 - tax bracket)
Example: The rate of the home-equity line is 7.50% percent. Your tax bracket is 30%. Your effective rate is: .0750 x (1 - .3) = .0750 x .7 = .063 = 6.3%
If your credit card is higher than 6.3%, the equity loan is cheaper.
9. Check with your lender before you apply for a home equity line or loan. Combined loan amounts (i.e., the first loan plus the second) are of great concern when refinancing the first mortgage. If you plan on refinancing your first loan, be sure to find out if getting a home equity loan or line will cause the refinance of your first mortgage to be denied.
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4.
When should we refinance?
Since every situation is different and no two homeowners are in the exact same situation, the answer to the question "Should I refinance?" is complex. Even the conventional wisdom of refinancing only when you can save 2% on your mortgage is not really true. There are four favorite reasons to refinance:
· Refinancing to save money
· Refinancing to convert an adjustable rate loan to a fixed rate loan
· Refinancing to consolidate debts and replace high-interest loans with a low-rate mortgage
· Refinancing to pay of a balloon payment provision
Most often, people refinance to save money. How do you accomplish this through refinancing?
The following calculation is more appropriate than the rule of 2% if you are refinancing to save money on your monthly payments:
Another reason people often refinance is to convert their adjustable loan to a fixed loan. By doing so they obtain the stability and the security of a fixed loan. When rates are low, homeowners refinance to lock in low rates. When rates are high, homeowners prefer adjustable loans to obtain lower payments.
A third reason why homeowners refinance is to consolidate debts and replace high-interest loans with a low-rate mortgage. You may wish to consolidate second mortgages, credit lines, student loans, credit cards, etc. In many cases, debt consolidation results in tax savings, since consumer loans are not tax deductible, while a mortgage loan is tax deductible.
Should you find yourself stuck with a loan with a balloon provision, but with no conversion option -- you are forced to refinance. In this case it is best to refinance a few months before the balloon comes due.
Whatever you choose to do, consulting with a seasoned mortgage professional can often save you time and money. Make a few phone calls, check out a few web sites, crunch on a few calculators and spend some time to understand the options available to you.
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5. What are points and must I pay them? Tell me about Zero Point/ Zero Fee loans?
Points are the portion of the costs of a new loan and are usually represented as either an Origination Fee or Discount Fee. Each “point” is equal to 1% of the loan amount. So, if your estimate calls for you to pay 1 Point (Pt.) on a $150,000 loan, what that means is that you will pay $1,500 in points
The best way to decide whether you should pay points or not is to perform a break-even analysis. This is done as follows:
If none of the above makes sense, use this simple rule of thumb: If you plan to stay in the house for less than 3 years, do not pay points. If you plan to stay in the house for more than 5 years, pay 1 to 2 points. If you plan to stay in the house for between 3 and 5 years, it does not make a significant difference whether you pay points or not!
You have a 30-year fixed loan at 7.5%. A loan officer calls you up and says they can refinance you to a rate of 7.0% with no points and no fees whatsoever.
What a dream come true! No appraisal fees, no title fees and not even any junk fees! Is this a deal too good to pass up? How can a bank and broker do this? Doesn't someone have to pay? Whose money is being used to pay these closing costs?
The way this works is based on rebate pricing, sometimes also known as yield-spread pricing, and sometimes known as a service-release premium. The basic idea is that you pay a higher rate in exchange for cash up front, which is then used to pay the closing costs. You will pay a higher monthly payment––so the money is really coming from future payments that you will make. You rate may be substantially higher than if you had paid 1 point or more, but your closing costs will be covered by the “rebate” pricing.
You can also think of this as negative points! For
example, a 30-year fixed loan may be available at a retail price of :
6.0% with 2 points or
6.25% with 1 point or
6.5% with 0 points or
6.75% with -1 point or
7% with -2 points
On a $200,000 loan, the loan officer can offer you 6.75% with a rebate of -1 point. A mortgage broker can use rebate pricing to pay all or a portion of your closing costs and keep the balance of the rebate as profit.
The main benefit is that you have no out-of-pocket costs. As a result, if the rates drop in the future, you could refinance again even for a small drop in rates. So if you refinanced on the zero-point/zero-fee loan to get a rate of 6.75% and if the rates drop 1/2%, you can refinance again to 6.25%. On the other hand, if you refinanced by paying 1 point and got a rate of 6.25%, it may not make sense to refinance again. Now, if the rates drop another 1/2%, a zero-point/zero-fee loan can drop your rate to 5.75%, whereas if you paid points, you may have to do a break-even analysis to decide if refinancing will save you money.
The zero-point/zero-fee loan eliminates the need to do a break-even analysis since there is no up-front expense that needs to be recovered. It also is a great way to take advantage of falling rates.
Some consumers have used zero-point/zero-fee loans on adjustable loans to refinance their adjustables every year and pay a very low teaser rate.
The main disadvantage is that you are paying a higher rate than you would be paying if you had paid points and closing costs. If you keep the loan for long enough, you will pay more––since you have higher mortgage payments. In the scenario where you plan to stay in the house for more than 5 years, and if rates never drop for you to refinance, you could wind up paying more money. If, on the other hand, you plan to stay at a property for just 2-3 years, there really is no disadvantage of a zero-point/zero-fee loan.
Since you are being paid "cash up-front” in exchange for a higher rate, it really is your own money that will be paid in the future through higher payments. Investors who fund these loans hope that you will keep the loans for long enough to recoup their up-front investment. If you refinance the loans early, both the loan servicer and the investor could lose money. Be sure to ask about a pre-payment penalty though, since some lenders expect you to keep your zero-point/zero-fee loan for 2-3 years.
Zero-point/zero-fee loans in many cases are good deals. Make sure, however, that your loan amount is not increased to pay for your closing costs. Your points should be covered by the rebate yielded by the above market interest rate you’ll be paying. If your old loan amount was $150,000, your new loan amount should also be $150,000. You may have to come up with some money at closing for recurring costs (taxes, insurance, and interest), but you would have to pay for these whether you refinanced or not.
Zero-point/zero-fee loans are especially attractive when rates are declining or when you plan to sell your house in less than 2-3 years.
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6.
What does a credit score (FICO) tell the lender about me?
A FICO score is a method of determining the likelihood that credit users will pay their bills. Fair Isaac & Co., the original developers of credit scoring, began its pioneering work in the late 1950s. Since that time, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. The Federal Trade Commission has ruled it to be acceptable that Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed.
Credit scores are calculated by assigning points for different pieces of information which best predict future credit performance based on scoring models and mathematical tables. Developing these models involves studying how millions of people have used credit. Credit-bureau models are developed from information in consumer credit-bureau reports. Score-model developers find predictive factors in the data that have proven to indicate future credit performance.
Here are some commonly asked questions about consumer credit scores.
· Does every consumer have a credit score?
· How is the credit score calculated?
· How often does the credit score change?
· How do inquiries impact a credit score?
· How can the credit score improve?
· How can I increase my score?
· What if there is an error on my credit report?
Does every consumer have a credit score?
No. There are certain situations where a credit score cannot be calculated
because one or more of the following has occurred:
·
Your credit report does not contain at least one account
·
A remark on one of your accounts references a person who is
deceased
·
The Social Security number on your credit report matches a
Social Security number in the Social Security Administration’s “Death Claim
Index”
How is the credit score calculated?
To calculate a score, numerical weights are placed on different aspects of your
credit report and a mathematical formula is used to arrive at a final credit
score. Credit Bureaus calculates your credit score based on many factors of
your credit history and payment behavior. These many factors may include, but
are not limited to:
·
How you are paying your accounts
·
How much money you currently owe
·
How long your accounts have been open
·
What different types of credit you use
·
How much credit you use compared to the amount of credit you
have available
·
How often and how recently you have applied for credit
The credit industry uses various types of credit scores to assess risk for
different types of credit. For example, a creditor may use one type of score
when assessing risk for a credit card account, and another type of score when
assessing risk for a mortgage account.
How often does the credit score change?
Credit files continually update with new information from creditors. Your
credit score is calculated based on the information contained within your
credit file at the time the credit score is calculated. Therefore, your credit
score can change every time the information in your credit file changes.
How do inquiries impact a credit score?
An inquiry is recorded on your credit report every time you, one of your
creditors, or a potential creditor obtains a copy of your credit report. A
common misperception is that every inquiry decreases your credit score a
certain number of points. This is not true. Typically, the presence of
inquiries on your credit report has only a small impact on your credit score,
while certain types of inquires have absolutely no impact on your credit score.
Inquiries have less importance than delinquencies, balances owed, and the
length of time you have used credit. Inquiries are usually more important on
your credit score if you have a limited credit history.
How can the credit score improve?
First, you should review your credit report for accuracy. If you find any
information that you believe to be incorrect you should contact the credit
bureau reporting the incorrect information and/or your creditor(s) to dispute
that information. The correction of inaccurate information on your credit
report may have a positive effect on your credit score.
Second, maintaining a good credit standing and continuing to exhibit
responsible credit behavior are the best ways to ensure you are presenting the
most positive picture of your credit worthiness. Improving your credit standing
and your credit score is not a one-time-fix; you must change how you view and
handle your credit over time.
How can I increase my score? While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.
What if there is an error on my credit report? If you see an error on your report, report it to the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly. Alternatively, your mortgage company may help you correct this problem as well.