Category: Refinance (Page 8 of 11)

What is APR….and is it all that important?

August 26, 2016 / Tom Bonetto

There is a lot of regulation around APR and home mortgages – and anything with this much regulation must be important, right? Lenders and loan officers spend a lot of time calculating, managing, and disclosing APR. It is a big part of everyday life in the lending industry.

Candidly, APR is confusing and hard to understand. I have heard it called many things – average percentage rate, about percentage rate, approximate percentage rates…for the record it is Annual Percentage Rate, so let’s clear up some of the confusion.

Source: The Mortgage Reports

What is APR and is it all that important?

APR (annual percentage rate) is the interest rate plus the costs associated with the loan. This mysterious number is intended to give an apples to apples comparison between two different loans.

Theoretically, if the consumer compares the APR of two loans, the loan with the lowest annual percentage rate is naturally the best loan for the consumer. APR is designed to protect consumes from hidden costs, bait & switch, and deceptive marketing schemes which have been used in this industry.

Hang On A Minute – Does APR Tell the Whole Story All Of The Time?

APR is certainly helpful and an important part of the lending process. However, loans are complex and ultimately one number alone does not automatically find the best loan for a particular borrower. Please do check out the article I have attached with this post that details APR – the good and the bad. APR is a complex calculation with many variables. If these variables are not exactly the same between loans, the loans are not apples to apples comparisons.

Remember, the borrower must look at a refinance or purchase of a new home relative to their particular needs. The borrower’s debt, savings, down payment, anticipated time in a home, family, etc all play an important part in selecting the right mortgage. While APR is important, one number can’t take into account all the variations and nuances in the life of a borrower.

We Need to Help Our Customers Understand Hard Concepts!

I have said this before and it is worth repeating – lenders (such as myself) and real estate agents must educate clients on appropriate real estate and lending options. If you are a borrower – make sure you have the right professionals supporting your real estate needs. The right professionals care about your needs and take the time to do the research required to recommend the correct products.

A big thanks to my friend and colleague, Mike Nelson, for really bringing together the key pieces of APR!

Discount Points & Mortgages: Good idea or wasted money?

August 15, 2016 / Tom Bonetto

My good friend and colleague, Mike Nelson, has put together a fantastic piece on understanding the pros and cons of paying discount “points” or fees to obtain a lower interest rate. I’ll warn you, this is some real “inside baseball” type of stuff (and as Mike states, “I recommend this blog and a smart phone as you try to go to sleep…if you have insomnia”), but he does a fantastic job of highlighting the key reasons to either buy down your rate, or not.

Source – Mike Nelson’s Efficient Selling Blog

Let’s start at the beginning – with a definition. This definition comes to us from Investopedia along with an article they penned on the topic.

Discount points are a type of fee mortgage borrowers can purchase that lowers the amount of interest they will have to pay on subsequent payments. Each point generally costs 1% of the total loan amount and depending on the borrower, each point lowers your interest rate by one-eighth to one one-quarter of your interest rate. Discount points are tax deductible in the year in which they are paid.

How long the customer stays in the house or re-finances ultimately determines if a discount is worth the cost!

Most borrowers and lenders will immediately conduct a break-even analysis to determine the benefit of the discount. In Mike’s example, the $10 difference in monthly payment is recouped in 100 months, or 8.4 years. The borrower then considers how long they will live in the house – if it’s more than 8 years, the discount seems like a good deal. Do click on Mike’s link to find out more.

The average 30 year mortgage in the US is refinanced every 7 years.

So what is the conclusion?

Generally, if the borrower believes they will be in the house more than 10 years they should give strong consideration to paying the discount on the rate with cash and not financing into the mortgage. After 10 to 15 years the discounted interest rate is generally better for the borrower. Interestingly, however, the average loan is refinanced every 7 years, so take that into consideration, as well!

One other thing to factor in, are the tax ramifications to the mortgage. It’s important to consult with a financial advisor or CPA for the complete tax implications.

Work with a lender who can do the math!

If you are working with a lender that does not understand these concepts, you are working with the wrong lender! It’s the responsibility of the lender to calculate the implications of discounts and pass that on to you.

Finally, remember this: lenders are not giving discounts because they save you money at their expense. The lenders (or at least the one’s who are doing it right) are doing sophisticated calculations determining the risk of discounting rates over the lifespan of an entire portfolio of loans. Lenders will price accordingly – just make sure you as a borrower have don the analysis to know which scenario is best for your situation!

No, You Don’t Need 20% Down….Or Even Close To It

July 12, 2016 / Tom Bonetto

Years ago, conventional wisdom said potential home buyers should make a down-payment of 20 percent.

Doing so, the logic went, would help them secure a great interest rate and make monthly mortgage payments less costly. These lower payments would help home buyers afford the expenses of home ownership — from closing costs to homeowner’s insurance to emergency funds.

But 20 percent down proved too large a hurdle for many potential homeowners as housing prices rose in the 1990s and beyond.

Today, large down-payments are nothing more than suggestions.

Source: The Mortgage Reports – Barbara Ballinger

Today, down-payment options from zero to 15% are completely reshaping the way people buy homes, especially first-time home buyers. Regardless of financial status, age, background, or nationality, home buyers are learning how to make a down-payment that suits their needs. They are no longer worried about adhering to outdated ideas about a “normal” down-payment.

There are equally good reasons for you to make a much smaller down-payment. By doing so, you retain available cash in the bank for emergencies, expenses, and other financial goals.

Conserve cash: Many say that “cash is king”. Experienced investors want to protect what they have and use the extra income to invest in other projects or the market.

Pay off debt: Many lenders advise using available cash first to pay off credit card debt. That debt is calculated at a higher interest rate than a mortgage and doesn’t offer the same tax deduction.

With debt paid off or lowered, you’re also likely to see your credit score climb. You need a minimum of between 640 and 680 to secure the most reasonable loan rates. Improve your score and hit 740, and you’ll secure an even better rate.

Tackle repairs: Having cash on hand will allow you to make essential repairs and upgrades. Few homes are so perfect that you move in without wanting to do some work.

Set aside for an emergency: Emergency funds are important to cover unforeseen repairs or other non-home related issues. If your car breaks down or furnace goes out, it’s better to have cash on hand rather than finance repairs with a credit card. That can lead to higher expenses later.

You can find the complete article here…..

What Is A Mortgage Refinance, In Simple English

July 6, 2016 / Tom Bonetto

Simply put, refinancing gives a homeowner access to a new mortgage loan which replaces its existing one. The best part is, the details of the new mortgage loan can be customized by the homeowner, including a new mortgage rate, loan length in years, and amount borrowed.

Refinances can be used to reduce a homeowner’s monthly mortgage payment; to take cash out for home improvements; and, to cancel mortgage insurance premiums, among other uses.

Source: The Mortgage Reports – Dan Green

To refinance your home means to replace your current mortgage loan with a new one. Refinances are common whether current rates are rising or falling; and you can get one here, as you are not limited to working with your current mortgage lender!

Some of the reasons homeowners do this include a desire to get a lower mortgage rate; to pay their home off more quickly; or, to use their home equity for paying credit cards or funding home improvement.

These loans typically close more quickly than a purchase mortgage loan and can require far less paperwork.

3 Types Of Refinance Mortgages

These mortgages come in three varieties — rate-and-term, cash-out, and cash-in. The refinance type that’s best for you will depend on your individual circumstance – and mortgage rates vary between the three types.

Rate-And-Term Refinance

In a rate-and-term refinance, the only terms of the new loan which differ from the original one are either the mortgage rate, the loan term, or both. The loan term is the length of the mortgage.

For example, in a rate-and-term refinance, a homeowner may refinance from a 30-year fixed rate mortgage into a 15-year fixed rate mortgage; or, may refinance from a 30-year fixed rate mortgage at 6 percent mortgage rate to a new, 30-year mortgage rate at 4 percent.

With a rate-and-term refinance, a refinancing homeowner may walk away from closing with some cash, but not more than $2,000 in cash.

“No cash out” refinance mortgages allow for closing costs to be added to the loan balance, so that the homeowner doesn’t have to pay costs out-of-pocket.

Most refinances are rate-and-term refinances — especially in a falling mortgage rate environment.

Cash-Out Refinance

In a cash-out refinance, the refinance mortgage may optionally feature a lower mortgage rate than the original home loan; or shorter loan term, such as moving from a 30-year mortgage to a 15-year mortgage.

However, the defining characteristic of a cash-out mortgage is an increase in the amount that’s borrowed.

With a cash-out refinance, the loan balance of the new mortgage exceeds than the original mortgage balance by five percent or more.

Because the homeowners only owes the original amount to the bank, the “extra” amount is paid as cash at closing, or, in the case of a debt consolidation refinance, directed to creditors such as credit card companies and student loan administrators.

Cash-out mortgages can also be used to consolidate first and second mortgages when the second mortgage was not taken at the time of purchase.

Cash-out mortgages represent more risk to a bank than a rate-and-term refinance mortgage and, as such, carry more strict approval standards.

For example, a cash-out refinance may be limited to a lower loan size as compared to a rate-and-term refinance; or, may require higher credit scores at the time of application.

Most mortgage lenders will limit the amount of “cash out” in a cash-out refinance mortgage to $250,000.

Cash-In Refinance

Cash-in refinance mortgages are the opposite of the cash-out refinance.

With a cash-in refinance, a refinancing homeowner brings cash to closing in order to pay down the loan balance and the amount owed to the bank.

The cash-in mortgage refinance may result in a lower mortgage rate, a shorter loan term, or both.

There are several reasons why homeowners opt for cash-in refinance mortgages.

The most common reason to do a cash-in refinance to get access to lower mortgage rates which are only available at lower loan-to-values. Refinance mortgage rates are often lower at 75% LTV, for example, as compared to 80% LTV.

Another common reason to cash-in refinance is to cancel mortgage insurance premium (MIP) payments. When you pay down your loan to 80% LTV or lower on a conventional loan, your mortgage insurance premiums are no longer due.

For more, see Dan’s full article here….

Why Non-Prime Loans Are Safer Than You Think

June 21, 2016 / Tom Bonetto

The need for non-prime products is growing, as conforming loan rules have tightened. Working with a lender that can only provide standard QM products will limit a legitimate and legal funding resource for many customers.

When non-prime (or non-QM) lending returned to the market again a few years back, it wasn’t welcomed back with open arms. Many critics were concerned that these products were the same as the sub-prime loans that led to the housing crisis and were afraid that history would repeat itself. In fact, sub-prime and non-QM are quite different. New regulations have helped to ease non-QM loans back into the market.

A Few Non-QM Options

Bank Statement Loans – utilize bank statements for income qualification, not tax returns
Asset Depletion Loans – utilizes assets, such as stock portfolios or retirement funds, for income qualification
Debt Service Coverage – allows investors to utilize expected rents as income with no need for tax returns or debt-to-income restrictions

Some non-prime products are misunderstood and are much maligned. Yes, it is true that the financial crash was caused by non-prime products – you can decide if it was the government, or borrowers, or the banks or a combination of all three. I am frequently asked if these products are legal and are these loans “above the table”.

The answer is a resounding “yes”. These products are certainly legal and they are certainly above the board. For starters, a reputable lender and reputable mortgage loan officer is not going to put their license at risk and knowingly originate a bad loan. I understand there are exceptions to this, but if you ask questions and spend time working with the loan officer you will know if you are working with a LO who has your best interest in mind.

Second, these products still have regulation attached, they have to be underwritten, and they have to fulfill certain requirements of ability to repay, down-payment structure, no prepayment penalties, and FICO scores. These features are different than the days of old. I have attached the article above to provide additional information. Make sure you take time to give it a read.

Source: Why Non-Prime Loans Are Safer Than You Think

A bank statement loan or a loan on a non-warrantable condo are examples of “non-prime” products. A bank statement loan, among other things, can support the private business owner who has significant expense associated with their business and can still satisfy credit and ability to repay. These are individuals who will not qualify under the conventional guidelines of Fannie/Freddie but still have the ability to service a mortgage on time.

Naturally, there are other characteristics of non-prime products which ensure an appropriate level of risk. Interest rates are typically higher than QM products. Required down payments, Loan to Value, and FICO scores usually are more restrictive as well.

Make sure your loan officer has the expertise, products, and processing staff to support your borrower needs. Feel free to call, text, or e-mail me any questions. I am happy to help if I can.