Category: Customer Education
Mortgage and home buying secrets to give you the insider’s education
Congratulations!! You have done your homework and decided that home ownership is right for you. Many preparing buyers get anxious, frustrated, confused and possibly derailed by the whole mortgage approval and how much a Lender will qualify them for. Even worse many buyers are mislead into a loan that pre-approves them for a payment much higher than their comfort range or programs that lower the payment but needlessly increase the risk of future default! Let’s change MORTGAGE APPROVAL to PERSONAL RISK ASSESMENT to more accurately define the true goal in the process. As a buyer I’m concerned with the risk that my payment will be too high, home values may drop, I’ll be house poor, I don’t have enough reserves, I could lose my job and if something goes wrong I will lose it all. All of these risks should be concerns of the Lender as well but many times lenders do not always explain the negatives of a product. Lenders invest money and are concerned with you paying them back. Lenders are not investing in real estate, if they were, they would simply buy the home and rent it to you. Consider talking with at least one licensed local mortgage Broker to compare products available from many lenders as well as your Bank or any online offers to make sure you are getting the best rates and programs and reducing your risk!
RISK MANAGEMENT: Risk is just a fact of life. If I jump out of a plane there is risk. If the plane is on the ground I have minimal risk. Jumping out at 5,000 feet my risk of death is great, but if I use a parachute I can greatly reduce my risk. Buying life insurance does not reduce my risk of death but it will replace the loss of wages that others may depend on, greatly reducing their risk of financial hardship. Knowledge, education, training and experience can all reduce risk.
If I came to you in 2005 and wanted you to invest everything in gold at $444.74 per ounce knowing the high was $615.00 in 1980 would you borrow money to invest? What if you knew the price would be over $1,500 per ounce just 6 years later?
If you had a choice between twenty pounds of gold or a parachute and you must immediately get out of the plane, which would you choose? What are the conditions of the terms of this offer? You are at 5,000 feet and the plane is going down, which do you choose? The plane has boarded but not yet left the gate, which do you choose? The offer is the same, the answer may vary as a matter of the terms or conditions. The same is true of a mortgage, unless you understand the terms and conditions of your mortgage you may not have full disclosure and be able to make an informed decision.
The point is that risk is personal and the correct decision on payment and terms for you, is best made by you, based on the most reliable and complete information available.
TERMS MATTER: Lenders base their decision on your PITI Payment not a set loan amount! Most Mortgages are based on simple interest, it is the terms that vary! Consider ways to reduce your PITI payment that reduce payments with little or no increase in Risk!
PRINCIPAL: This is the portion that repays the loan (Buying Equity). The difference between a 30 year term and a 15 year term is the amount of minimum principal obligation per month. You can pay extra as a prepayment and reduce the unpaid balance. Consider a 30 over a 15 to buy more house.
INTEREST: A mortgage is a series of payments. The interest is calculated by multiplying the unpaid balance, times interest rate, then divide by 12 to get the interest portion due that month. A lower interest rate will lower your obligation and also accelerate principal reduction! Consider a Hybrid ARM with a risk appropriate fixed portion or points to lower rate.
TAXES: Taxes are the taxes. You can consider an area with lower taxes to reduce the payment and qualify for more house.
INSURANCE: You can shop for home insurance. Reducing the cost of your home insurance by $25 per month will buy about $5,000 more house
MORTGAGE INSURANCE:PMI or MIP are generally required with less than 20% down. Mortgage insurance protects the lender if you default and can be very expensive. Consider a single MI or a split loan to reduce or avoid monthly mortgage insurance if possible!
ASSOCIATION FEES: Condo and HOA fees are added to the PITI payment for qualifying and are generally overlooked by buyers. A $250 dollar a month condo fee will cost you almost $50,000 in purchase power. Consider if the association is really a benefit to you and avoid where possible.
CREDIT SCORE: Your score may greatly impact the PITI. It can affect your interest rate, closing cost, increased mortgage insurance and reduce the programs available changing the terms offered to you! Consider a rapid re-score or other techniques to improve your score. The pricing difference with <25% down and a credit score of 679 vs. 720 is about 1.5% price hit. On a $200,000 loan that is $3,000 or a Rate increase of .25% to .375% costing $40 per month and losing about $8,000 purchase power with rates around 4.5%.
CHOOSE DON’T LOSE: You qualify with payment (PITI+) Here are 3 Scenarios.
Credit score 679, 5% down 200k 30 yr fixed loan at 4.75%, taxes of $325 per month, Ins at $70 per month, HOA of $50 per month, PMI at $150 per month. $1043.29 + $325 + $70 + $50 + $150 = $1,638.29
Credit score 720, 5% down 200k 30yr fixed loan at 4.5%, taxes $300 per month, Ins at $60 per month, No HOA, Single PMI. $1,013.37 + $300 + $60 = $1,373.37
That’s a $264 per month savings and that would buy $52,103 more home at the same monthly payment!!
Credit score 720, 5% down 200k 10-1 ARM loan at 3.875%, taxes $300 per month, Ins at $60 per month, No HOA, Single PMI. $940 + $300 + $60 = $1,300.47 If you plan to be in the home 5-7 years a 30 yr amortization with the first 10 yrs fixed adds a greater benefit without additional risk.
That’s a $338 per month savings and that would buy $71,878 more home at the same monthly payment!!
You have choices! For more detailed info please check the Norstar University section of www.PaFhaMortgage.com
By Bill Frantz at Norstar Mortgage
What Is a Condo? Condo is short for condominium. A condominium is a form of ownership where you own the interior walls of the home and the exterior is owned collectively through a HOA ( Home Owners Association) I have read some descriptions that seem to say it is the same as an apartment that you own. While it may be true that many apartment buildings have been converted to condominium ownership this represents a small portion of condo’s here in the Philadelphia, PA Metro area and leads to the confusion that there is some physical description of a condo.
Pick the Condo?
- 4,000 Square Foot Colonial
- 900 Square Foot Flat
- 1800 Square Foot Townhouse
- 200 year old Farm House
- 1100 Sq. Ft. Garden Villa
The correct answer would be “All of the above”. Really! You can have a 4,000 square foot Colonial that is part of a Condominium. The association owns the golf course, the club house and maintains all the grounds and the exterior of the homes.
If it has an HOA Fee is it a Condo? No… It could be a PUD (Planned Unit Development) A PUD differs from a condo in that you own both the interior, exterior walls and usually a small parcel of land and are responsible for the maintenance. A good way to tell is to ask about roof replacement. You are responsible… PUD. Association is responsible… Condo.
Another distinction is the home insurance. A condo will include the major fire and liability insurance as part of the association fee. You will be responsible for an HO6 policy which is like a renters policy for contents PLUS coverage for things like kitchen cabinets, flooring, appliances, bathroom and light fixtures and possibly windows and doors. Think of things that would normally be part of the home as fixtures but are inside the walls. A PUD will need a standard home insurance policy like an HO3 endorsement or similar.
A PUD and a Condo are similar in that both have common elements. Common elements are the things owned, maintained and controlled by the association; Pools, Tot lot, Common hallways, grounds, parking areas, Club house, etc. Both must also have a master insurance policy to cover the common elements. Remember that you are a member of the association as well.
Are There Risks To a Condo? Yes… lenders generally will have a different set of guidelines for a Condo than a PUD because of the increased risk. Here is a quick guide;
- 1,000,000 liability insurance
- Reserves for maintenance
- Current budget
- Investor ratio
- Ownership by Single Entity
- NO first right of refusal
- Control of Association
- Pending Lawsuits
- Delinquent Assoc. Fees
A current questionnaire will be sent to the association to complete for the lender to review and this may cost several hundred dollars in some cases. If the lender or PMI company are not satisfied they will decline the loan.
WARNING: if the Condo Association is not healthy it could prevent financing in the development. No FHA, No PMI … this would result in 20% to 25% down payments and possibly No financing so that all purchases would need to be cash. This would negatively impact your value. Always review a Condo’s info before a purchase.
Can I Have a Dog? You have the right to review the Association rules and regulations as part of your Agreement of Sale. READ THEM!! You will have to live by them. You may not be able to have a dog or it’s size may be limited. You may only be able to paint your front door red. You may not be able to place a grill outside or a table. You may not be able to put a flower pot on the front steps or porch. You may not be able to park a car or truck with any writing on it… company pickup with the name on the door.
Rules can be good as it keeps the development at a certain standard but sometimes it can also prevent your enjoyment of your home. Make sure you are comfortable with the rules before you buy. Associations all vary… some are very loose and others very tight so please read the rules.
A cape, townhouse, flat or garden villa are styles of homes, a Condo or PUD are a variation of ownership and have no physical description.
For more info checkout the website www.PaFhaMortgage.com
By Bill Frantz
What is the rule of 72?
Simply it is a quick approximation of how long at a rate of return it will take to double your money.
How’s it work?
Divide 72 by a number: Rate or years, 6% will take 12 yrs to double or 12% will take 6 yrs to double
If you had $100 dollars and you double your money well it just doesn’t seem life altering.
What if you had a penny and doubled it every day for 30 days?
$10.7 MILLION… Crazy isn’t it! But true. At 15% it takes 4.75 years to double once. Apply that to the Penny and it would take 30 x 4.75 = 142.5 years. I wish you a long life but frankly I don’t want to wait that long so I will need some leverage.
How does leverage help double my money?
$250,000 x 5% = $12,500
$25,000 x 50% = $12,500
72/50= 1.44 years… This is your 10% down payment leveraged with a mortgage to control an asset that appreciates 5%. Over time Real Estate appreciates around 5%. Yes Real Estate Values have ups and downs so timing is important but with Values approaching record lows we are seeing huge upside potential for future growth.
Combine low values with low rates and the tax breaks for interest and property tax deductions it is cheaper to own than rent! Rents are also on the rise and we are seeing positive cash flows on even single unit investment properties.
Don’t get left behind…
By Bill Frantz www.PaFhaMortgage.com
TWO MILLION DOLLARS!!
Did you know that the median income in the US is about $50,000 dollars a year. If you worked for 40 years that is 2 million dollars that will pass through your hands.
So… Who stole your money? It’s not what you make but what you keep that is important! Take a look at your pay check and review the deductions. Whats missing between your gross and your net? 15%, 30%, or even higher!
What can You do about it? When you purchase a home the property taxes and mortgage interest are tax deductable. You make $50,000 minus $12,000 (int & tax) = $38,000 that you now pay income taxes on instead of $50,000.
I want my money NOW? It’s great to get a tax refund but in reality a refund is nothing more than a loan of your money to the IRS for free. Remember that W4 form you filled out when you started your job. Update it with your current info and you will lower your withholding taxes and get a bigger net pay check.
What to do with your new wealth? Put it to work. Invest in You! Most people work for their money, wealthy people make their money work for them. Look at your debt, 12% credit card, 6% car loan. Paying ahead on revolving and installment debt is like investing at that interest rate!
Pay yourself first! 401K and IRA’s will not only build wealth but you get another tax deduction. Also consider a Roth IRA where you use after tax money to invest upfront but at the end it’s all tax free!
Who else is taking your Money? Do a budget audit. Yes you have a budget, it’s what you spend your money on. Know where your money goes. Track it for a week or better for a month. $5 in debit fees, $125 fast food, $30 morning coffee, $250 dinners out, newspapers, magazines, your food shopping. You decide if your getting your monies worth for the small things and habits that we all fall into. Review and update any insurance, car, life, disability and any other policies you may have and look for lazy dollars!
Life is like a hole in your pocket that the change keeps falling out. Fix the hole and a few adjustments on spending as well as watching the back door with taxes and looking for opportunities to make your money work just a little harder will keep everyone else from stealing your millions!
By Bill Frantz www.PaFhaMortgage.com
Mortgage Prepayment is always a hot topic! On TV, in Magazines and on the internet I am constantly being hit with the latest and greatest “debt free” Guru’s product or strategy that makes me cringe when they say “How to pay off all debt including your mortgage in 5 years”. It is an absolute that you will pay less interest on a 15 year loan vs. a 30 yr. There is absolutely the sense that owning something and not having a payment makes sense and feels good! Prepaying a loan is good just look at the interest savings! Being debt free is fantastic. Here’s why I cringe… They take a position as an advisor without giving you both sides of the facts. If you chose option 1 and saved $100 dollars you would be happy. If you later found out there was an option 2 that you could have saved you $300 but they didn’t tell you how do you now feel about option 1? What if it wasn’t $300 but $30,000! Let’s break it down and you decide which option is best for you.
Is all Debt the same? NO… You may have secured or unsecured debt. Unsecured debt is your word that you will pay. A secured debt will have collateral like a car, boat or your home. A car and a home loan may not be the same. Two questions you need to answer. Is the interest deductable? Does the secured item appreciate over time? The general answer for these questions would be “No” for a car and “Yes” for a home.
Is all debt Bad? NO… You need to understand your debt and understand if it is a good debt or a bad debt and how it impacts you personally! If you are unable to pay off your credit card in full each month that should be a warning sign that you may be developing bad debt. Your home will appreciate over time and you may also get a tax deduction.
Is Appreciation the same if I have a Mortgage? NO…The rate of appreciation may be the same but a financing creates leverages your return on investment.
HOUSE 1 is bought cash for $100,000 and appreciates at 2% per year for 5 yrs and now has a value of $110,408 or a 10.4% return on investment.
HOUSE 2 is bought for $100,000 with $20,000 down and the balanced financed. Appreciation is the same 2% but what changes is your return on investment. $10,408/$20,000= 52% return!! This is leverage.
Why should I have a mortgage on HOUSE 2? Bingo! This is the real question behind Mortgage Prepayment! If I have the cash why would I have a mortgage? Great question but let me ask, What was the LOI on your money? LOI stands for “Loss Of Interest”. Where did you get the money? You would need to pull from a 401K $142,857 minus 30% (10% penalty and 20% taxes) to net $100,000 to buy the home cash. Ouch! it may be wiser if possible to take a loan from your 401K to get minimum down and pay the loan back to yourself and use OPM for the rest. Unless it was cash in your closet you will not earn any future interest! $80,000 invested for 5 years with a 3% return would be $92,741. That’s a $12,741 LOI. At 5% it would be a $22,102 LOI. You need to determine if it is cheaper to borrow your money or cheaper to use the Lenders money. OPM- Other People’s Money. Think of home equity as a bank account. If you had $100,000 in a 30 yr CD at 2% would that be a good deal?
What about the mortgage payment on HOUSE 2? If you borrowed $80,000 and you are in the 20% tax bracket the net interest paid in 5 years would be $19,234. Remember the LOI if you invested at 5% would be $22,102 money. It would be cheaper to have a mortgage! Money you either put in as a down payment or a prepayment is like investing at the after tax rate of your mortgage!
What if I take a 15 Yr loan instead of a 30 yr to save interest? NO… Mortgages are simple interest. Take a look at the 1st payment of an $80,000 15yr vs. a 30yr loan.
15 Year Loan at 5%: $632.63 total with $333.33 interest and $299.30 principal.
30 Tear Loan at 5%: $429.45 total with $333.33 interest and $96.12 principal.
The interest is calculated on the unpaid principle balance times your interest rate divided by 12. The amortization calculates the amount of principle needed to pay the loan in a set term. On a fixed payment loan a prepayment will shorten the term forcing a re-amortization of the loan. The rate is the rate. A 15 year loan will have a lower start rate than a 30 year because the Lenders risk is reduced. A lower interest rate makes less sense to prepay. Nothing is absoulute and there seems to be exceptions to most financing rules which is my issue with gross generalizations. A 15 year might make sense because your credit score forces you into a higher risk group and the interest rate will be much higher on the 30 yr vs. a 15yr. This is more a factor regarding loan selection resulting from pricing overlays than prepayment and should be considered with a loan professional or accountant.
What other factors should I consider? How does the mortgage fit into your overall money picture? Ask yourself WHY? Here are some common answers:
- I want to own my home
- I don’t want to pay all that interest
- I don’t want a mortgage when I retire
- I want to have security
- I want to build equity so I can borrow it for children’s education
- I want to build equity so I can do a reverse mortgage
Savings are good. Investments are better! Prepaying a loan is saving and using Leverage, OPM and maximizing tax advantages will provide a better overall return by investing in yourself!
Would you choose a or b? You own a home with a value of $400,000.
- a. Home free and clear
- b. $300,000 invested at 5%, $100,000 mortgage at 6%
Let’s assume you are retired and the $300,000 is your 401K and the taxable interest income monthly of $1,250 is offset my your mortgage interest (P&I $599) and tax deduction vs Free and clear who live on SS income only because they wanted to prepay the mortgage and couldn’t afford to invest in the 401K and are now thinking about a Reverse mortgage because they can’t make ends meet. You decide.
By Bill Frantz
How can a Debit Card hurt my credit score?
To be fair let me say that a Debit Card will not directly impact your credit score. That’s the point! A Debit Card will not impact your credit score. First lets take a look at the Debit Card.
- Easy Access
- Track Spending
- Secured by Pin #
- Easy Access
- Possible Fees
- Secured by Pin #
If I’m robbed and a thief steals my cash I am aware of it but there are thieves that will steal your debit information and clean out your account while the card is still safe in your pocket. Debit Cards should be protected as if they are cash and you should NEVER share your Pin #. This is not about the Pros and Cons of Debit Cards and their use is really a personal preference.
Being in the Mortgage industry I see a lot of credit reports and I am alarmed recently at the number of people that do not meet current standards for Lenders/PMI Companies. There are 2 things the Lenders are looking at. The first is your FICO credit score. Second it is your trade-lines in your credit profile that drives your score. Many Lenders/PMI Companies have credit overlays that want to see 3 to 4 open and active trade-lines or accounts for the last 12 months. Many people have either shut down or don’t use their credit enough to to keep their credit profile healthy because they rely soley on their Debit Card. You could have an 800 credit score and have an unhealthy profile! It’s like having a spare tire with NO air. Looks great in the trunk until that dark rainy night on the side of the road when reality strikes.
A profile may look like this:
- Car loan 9 months old
- Switched card B, for card C ,for better rate 6 months ago
- Keep card A for emergency haven’t used in 2 yrs
- Have a current Mortgage 3 yrs old
This profile has 4 accounts but only the Mortgage would count as an open and active trade-line. It is a good idea to pull your credit report at least every 1-2 years and make sure to keep your profile healthy and this will give you a FICO score you can depend on.
For more info on credit scores checkout this post:
“How Credit Really Works”
By Bill Frantz
Mary was moving to PA and looking for her dream home. Mary had a friend that recommended a PA Realtor that Mary decided to use. Like many buyers Mary loved to look at all the homes and pictures on the Internet.
Mary’s new Realtor seemed nice enough and was sending a few homes but Mary was seeing so much online that the new Realtor wasn’t sending and she didn’t want to miss a thing. When asked why these other homes were missing the Realtor explained that the criteria that Mary had given him as a “Must Have” in the home, such as the “fireplace”, “2 car garage” and “finished basement” were missing from these other homes so they were filtered out. They agreed that he should adjust to loosen the search for more results. Mary continued to search and a few weeks later came upon a home she just had to see. Mary called the Realtor and stated that she wanted to look at this home. The Realtor was going out of town for the weekend and told Mary he would call first thing next week to arrange the showing. Mary agreed but after viewing it several more times online she just had to see it now!
Mary called the Listing office and was promptly connected to a Realtor. Mary said she was driving in from out of town and would like to see this home that she found online. The anxious Realtor also offered to show Mary several other homes in the area at the same time. They agreed to meet Saturday morning. Mary didn’t hit it off with anxious Realtor and quickly looked at the homes without much conversation.
Mary loved the home and excitily called her Realtor first thing Monday to have him write an offer. “That’s a problem” the Realtor stated. Mary was confused as they had reviewed the PA Consumer Notice and she had even signed a Buyer Agency contract.
The Realtor explained the PA rules of procuring cause and that Mary’s actions created a situation where “anxious Realtor” may be entitled to the commission offered by the Listing office and that if she wished him to continue representing her that Mary would need to pay for his services directly because the listing commission would only pay one cooperating agent commission and that would be “anxious Realtor”. Procuring cause may kick in anytime a potential purchaser physically enters a property for sale, an open house or even new construction. If not accompanied by your agent the commission may go to the Agent present.
What if “anxious Realtor” is also the Listing Agent and now becomes a Dual Agent. Who represents Mary?
This is how Mary lost her Buyer Agent. CHOOSE DON’T LOSE
For more info checkout these resources:
By Bill Frantz
The Federal Housing Administration or FHA as they are commonly known will delver another blow to potential home buyers on April 18 2011.
Per Mortgagee Letter 11-10 issued on Feb. 14th 2011: The Annual Mortgage Insurance Premiums are increasing on loans that do not have a valid FHA case number prior to the date. FHA will also cancel case numbers issued prior to April 18th 2011 that have not met certain criteria in the last 6 months and this includes new construction.
How bad is the increase? 27.7% in your monthly MIP
If you are taking out an FHA loan for $200,000 your annual MIP cost will will increase $500.00 per year or $41.67 per month!!
The only way to truly see the bottom is in the rear view mirror! The market needs to turn upwards before the bottom is defined. When you see the upturn you have already missed the bottom. If you were waiting to Refinance you may have already missed your opportunity but in a Purchase rate it’s just one factor in home affordability. A 1% hike in rates could erode your purchasing power by $10,000 for the same monthly payment! “OUCH”. Another factor is that seller assist will quickly disappear when Real Estate finds firm footing further reducing buying options and increasing out of pocket expense. “OUCH”. Again the bottom is defined by an upturn which means Home prices will also be rising. “OUCH”. Market Bottom is also local as it starts in small ways as certain neighborhoods and areas turn upward long before the bigger picture grows enough to show up on the Evening News! In the Greater Philadelphia Metro Area this is the BOTTOM! Home affordability is such that in many cases it’s cheaper to buy than rent… Waiting can be a very expensive price to pay!
By Bill Frantz
Can you stay in the house while a short sale is being worked out with your lender?
Yes! Actually, your lender usually prefers you stay in the house, even if you are not paying the mortgage.
Why Does The Lender Want You Stay?
If you stay in the house, you are protecting the house, which means you are protecting the lender’s investment.
Here’s how you help the lender by staying in the house:
- You are keeping the heat on, thereby protecting the house from freezing pipes and water damage.
- You are keeping the house ventilated, thereby reducing risk of mold.
- By occupying the house you are reducing the risk of vandalism.
- By keeping the lawn mowed you are keeping the county inspectors from attaching penalties against the house that eventually your lender may have to pay.
- You are maintaining the house as a home, rather than leaving it as an abandoned property.
All your simple actions of staying in the house help protect the lender from additional losses. Some lenders stipulate that you MUST stay in the house to qualify for the short sale.
Sounds Unlikely The Lender Will Want You To Stay In The House?
One easy way to find out is to call your lender and ask. You must get transferred out of the collections department to a department that is set up to help you avoid foreclosure. These departments have a variety of names; Home Retention Dept., Foreclosure Workout Dept., Short Sale Dept., or Loss Mitigation Dept.
Ask them the same question: Can I stay in the house during the short sale, even if I’m not making mortgage payments?
You may be pleasantly surprised by their answer.
You should also confirm your decision with an attorney.
By Dave Halpern
Found at: www.activerain.com