Basically, points are up front fees (which I call investment) paid by the borrower to obtain a better interest rate on their loan. One point is equal to 1% of the loan amount. For example, on a $400,000 loan, if you paid a point investment, it would equate to $4000 in costs. Typically paying a point versus not paying a point will lower your interest rate. The key in determining if you should buy down the interest rate (pay points/costs) is how long you will be in the loan and to compare current interest rates to historical market trends.

Let’s take my example a little further. Let’s say paying $4000 on a $400,000 loan over not paying a point (saving $4000 in costs) would save you $50 per month (remember paying the points will get you a lower interest rate thus saving you on your monthly payment). What this means is that it would take you 80 months to recoup your $4000. What you do is divide the savings per month ($50) into what it cost ($4000) you to get that savings. If you decide to refinance or sell you home within 80 months then your money is lost. In this scenario, you would benefit from paying the points if you were to stay in the house for 80  months or longer.

Can I pay more than 1 point investment. Of course, the more you invest in buying odwn the interest rate, the lower that rate will be. Typically, rates are quoted with 1 point or no points..but you have the option to go for it and pay more than 1 point.

It is also important to take a look at where rates are from a historical perspective. If rates are at a all time low (like they are today), and you plan to be in the house for an extended period of time, it makes more sense to pay points and take advantage of the SUPER low rates. If it’s unlikely that rates will go down in the near future, then there will be no need to refinance…one and done!

On the opposite side, if rates are high, and there is a good chance rates will drop down, then paying points may not be in your best interest. The reason why is if rates drop, chances are you will refinance again and you will not have been in your current loan long enough to re-coup the points paid on your current loan.

Another consideration is tax deductibility. Let’s remember I am not an accountant and you should refer to them for advice as well. On a purchase, interest from both your points paid and your mortgage are tax deductible up front. For refinances, however, points are not deductible up front. Instead the deductions are spread out over the term of the loan, making points more costly in comparison.

Ultimately, there is a lot to consider when it comes to points and whether or not they are a worthwhile investment. An experienced mortgage professional will work with you to determine the best course of action based on your SPECIFIC needs. You should always request a loan comparison to see if paying or not paying is best for you. If you would like more information please contact me or your local lender.

Choosing a home mortgage loan is no small task. As one of your largest financial investments, this is an important decision that deserves full attention. Here’s what you need to know…Continue reading

What do you do?

Well the best approach is to call your mortgage professional that did your past loan, or if you do not have a mortgage then you ask your family and friends for a referral. This in itself could be a challenge due to the exodus of many loan officers from the business due to the “easy pickens” days are over. All that are left are those mortgage professionals that are grounded from years of experience (not so bad). Once you hook up with a professional then you are in good shape to get the best mortgage program and rate possible. Why?

For those that do not have a mortgage source to go to, they will call around and get mortgage rate quotes. This is backwards for a couple of reasons.

First, you may get a quote that you really like, go with it and then find out that the loan officer that quoted the “really nice” rate can not perform or the quote will not work in the time frame needed (I just got a random call today asking if I could refer a mortgage attorney due to failure to perform within the rate lock commitment..basically the customer lost their rate and now that rate does not exist).

Second, calling around and getting quotes does not work in today’s multiple rate sheet environment. What do I mean? Due to the volatility in the market, lenders price rates in the morning, then depending on how the market is performing (the mortgage backed securities..I’ll save this for a different blog post) you can get a mortgage rate re-price. So what? Well if you call my competitor at 10:00 a.m. and then call me at 2:00 p.m. and the market has improved to warrant a mortgage re-price, I will beat out my competitor just due to the improvement in the market.

You need to be able to compare apples with apples. In May, rates changed about every 4 hours. This makes it very challenging to shop for rates.

Back to my earlier point. Find a mortgage professional first, one that is established, has weathered the storm and understands the market, then stick with that professional. You will in the long run end up with the best program and rate.

If you want to follow mortgage rates on a daily basis, follow me on twitter were I give daily updates to how the mortgage market is performing.

As you can see, you will want to work with a mortgage professional with experience to ensure that you get a smooth transaction.

The other factor is how much of a home loan can you afford. You may want to put down as little as possible, but the loan amount that you are left with may not make sense from a monthly obligation stand point.

While it might be tempting to borrow whatever amount of money your lender is willing to give you, it is important to think carefully about how much you’ll actually need to borrow in order to purchase a new home. From the down payment to property taxes to insurance to interest rates, there are many factors to consider when making this important home loan decision.

Contrary to popular belief, there is no standard formula for accurately calculating the specific dollar amount you should borrow when purchasing a new home. Many web sites offer calculators to help with deciding what amount you should, borrow, but the variables vary greatly from one site to another. Another rule of thumb suggests that you should never borrow more than 2 1/2 to 3 times your gross annual income, or that 28%, 32% or even 40% is the maximum amount of debt you should ever take on (your total housing payment divided by your gross monthly income).

As mentioned above, you may be forced to borrow the maximum due to the amount of saving you have available to put towards the down payment. What you must do in this case is determine if the home loan that you end up with by putting the least amount down is affordable. There are lots of lenders that will provide you with the loan with the least amount down, but you are the one who has to make the payment, and therefore that really becomes the important question. What if you only have the minimum amount of money for a down payment (which is 3.5% on an FHA loan, in most cases), and the payment is not comfortable. Then you need to either seek out a gift from a relative, determine if the city has a down payment assistance program or continue to save for a larger down payment and less of a home loan.

The best advise I can give you is to speak with a mortgage professional and get yourself pre-approved (not pre-qualified) for a home loan. By getting pre-approved for a mortgage, you not only increase your chance of finding the perfect house for your needs, you also become a “cash buyer”, instantly increasing your bargaining power.

As a mortgage professional, I see my role differently than a traditional loan officer. While my job is to match you with the best mortgage available for your specific needs, I feel that it is also my duty to make sure it is the most responsible home loan as well.

Whether you choose to work with me or not, be aware. A lender will often offer you the maximum amount of money that you qualify for, whether you actually need the full amount of not. Because of this, it is vital that you sit down with a mortgage professional who you can trust to figure out your complete financial picture.

Understand, I have worked for direct lenders (big banks) and as a mortgage broker. You can find professional loan officers in both environments.

But the topic of this article is why use a mortgage broker, therefore let me continue.

A mortgage broker is an independent real estate financing professional who specializes in the origination of residential mortgage loans. Mortgage brokers normally pass the actual funding and servicing of loans on to wholesale lending sources. A mortgage broker is also an independent contractor working with (on average) as many as 20 lenders at one time. By combining professional expertise with direct access to hundreds of loan products, your broker provides the most efficient way to obtain financing tailored to your specific financial goals.

In the volatile home lending market, mortgage brokers can serve as safeguards, offering their clients security, safety, and peace of mind. One of the broker’s most important functions is escorting your loan application through the entire process, constantly patrolling the transactions looking for possible breakdowns. A professional mortgage broker can wade through the mountains of rate data and program options, researching current market conditions to find the most accurate and up-to-date information about cost effective options.

There are literally thousands of variables that can affect the outcome of your mortgage transaction. That’s why you need a mortgage broker to act as a liaison between the title and escrow companies, real estate agent, lender, appraiser, credit agency, the underwriters, the processors and any other services which may affect your transaction.

A mortgage broker also:

• Discusses and expain financing program options
• Provide detailed spreadsheets on the total costs of the transaction
• Explains all associated costs to the loan application
• Explains the loan process from application to closing
• Provides you with a good faith estimate of costs and fees
• Communicated with you in a timely manner througout the entire process
• Coordinates the final closing of your transaction

As you can see, when you are preparing to take on your biggest investment, your mortgage, you need a professional handling all the steps to ensure a smooth transaction.

To start with, the lender will need personal information to verify employment for you and your co-borrower (if there is one). This will include work address, phone number,and contact person who can verify your employment. They will also need information regarding all your debts and assets.

In order to expedite the paperwork process, start gathering the following items:

• Most recent pay stubs for the last month or 30 days.
• W2′s from the last two years.
• Signed copies of your last two years tax returns, including all schedules that were filed.
• If you are self employed, a year to date profit and loss statement.
• Most recent bank statements (all pages) for two months.
• Most recent bank statements from any retirement and investment accounts for two months
• If divorced, the divorce decree
• If paying alimony or child support, the divorce decree

You may want to get a copy of your credit report to see were you stand. The costs associated with getting your mortgage rate can depend on your fico score (score given to you by the credit reporting agencies based on your credit habits). Knowing this in advance can help determine if you will be able to qualify for a loan or if you need to fix items on the credit report. An experienced mortgage professional can help you with this.

Upon knowing your credit status and having gathered the information above, you are in a position to get pre-approved (see my post under Home Finance Tips “Pre-qualification or Pre Approval?”). You will need to find a mortgage professional (see my post under Home Finance Tips “Shopping For Rates Loan Officer in Ventura County”) who will help you with this process. Upon getting pre-approved you are ready to work with a Realtor to help locate property to show you. Ask your lender, family members, or work mates for a recommendation for a Realtor. If the Realtor has done their job then they will be in a position to be referred to you.

As always work with a mortgage professional to make this process a smooth transaction.

Let’s start with what is the difference.

Pre-qualification is the starting point in your search for mortgage financing. A quick snapshot is taken which includes income, existing debt, savings, length of employment, etc. All of these factors will be analyzed to determine your loan eligibility. This is usually done by the loan officer. You are therefore a the mercy of their experience and best judgement. But the truth of the matter is that most quality Realtors will not even except a pre-qualification when presented with the offer. And if they do, they will want to know who the loan officer is and their experience.

Pre-approval is WRITTEN documentation that shows you have the support of a lender who is willing to finance you. It means that not only have you collected all the pertinent information mentioned above, and backed it up with documentation, but you have also run the credit report and had an underwriter (someone who approves or denies the loan) review the loan application. Based on you income, debt ratio and savings, the underwriter provides the dollar amount you are eligible to borrow. Now you can shop around for a house that fits into your loan approval. Most importantly you will be able to make an offer with confidence and the Realtor will know you have a serious approved buyer. If you do not  have a pre-approval, most Realtors will not accept your offer. Why, the last thing they want to do is tie up their clients home (the seller) for 30-60 days and then have it fall out of escrow only to start the marketing process over.

If you are thinking of buying a home, you MUST at the very least get a pre-qualification to know what you are qualified for and know what your payments will be. After obtaining the pre-qualification, then next step is to get pre-approved to let everyone know that you are a serious buyer. As a side note, you as the buyer must be comfortable with the mortgage payments on the new loan. One of the reasons for the current state of the housing market is that people were caught up in the housing craze and ended up buying to much house. The bottom line is you are the one who is making the mortgage payment and you are the only one who knows what your comfort zone is.

What does it cost to get pre-approved? Pre-approval is FREE. You absolutely have nothing to lose and everything to gain.

So if you are in the market for a home, whether it be your first, second, or an investment property, seek out a mortgage professional to help guide you through the process and advise you or what you can qualify for. For information on choosing a mortgage professional, see “Shopping For Rates Loan Officer Ventura County” in Home Finance Tips in my category list.

With that being said:

1. If it seems too good to be true, it probably is. Mortgage money and interest rates all come from the same places, and if something sounds really unbelievable, then you better ask a few more questions. Is there a prepayment penalty, are there extra fees, what is the length of the lock-in.  Many quotes that are given are for the shortest lock (meaning 7 or 15 days). In reality, you will not get your application turned around in that amount of time, therefore you would need to lock in for a greater length. Locking in for a longer period costs you more in points. Also if fees are minimal, is it built into a higher interest rate?

2. You get what you pay for. If you are looking for the cheapest deal out there, understand that you are placing a hugely important process in the hands of the lowest bidder. Best case, expect very little advice, experience and personal service. Worst case, you may not close at all. Some times it is too late and yo find out that you can not close (especially with all the changes in the mortgage guidelines) and now when you go out to find another rate and source the rates have increased. Or course if you want the cheapest rate, head out to the Internet..yikes! The stories about last minute changes, increase in rate and fees or worse yet, not closing on time are usually Internet transactions. Ask any competent Realtor and they will suggest (demand) that you speak with a local experienced lender. This is the largest financial transaction you will more than likely be involved in, don’t risk it.

3. Compare apples with apples. First, make sure you are comparing quotes from the same day. Second, review lender fees and points against another lender fees and points. What I mean is that if you look at the bottom line, some lenders may skimp on the third party fees in hopes that it makes them look less expensive.

4. Understand that interest rates and closing costs go hand and hand. This means that you can have any interest rate you want, but you will pay more in points. On the other hand, you can have less fees, discounted points or no costs at all but you will have a higher interest rate. One strategy is not better than the other. It depends on your current situation and long-term goals. A professional loan officer will guide you through this process.

5. Finally, you must understand that interest rates and points can and do change daily and even hourly. If you are comparing lenders, this is a moving target on an hourly basis. For example, if comparing two lenders, you must get a quote from each of them on the same day and at the same hour to be exact. You must also know the length of the lock as well to compare the tow lenders. As mentioned above, one could quote a 15 day rate and another a more realistic 45 day lock.

Bottom line, ask the right questions, determine which lenders are competent and will provide the service that is required on a transaction as big as this and then if choosing between two compare on the same day.

This can be answered many ways. Let me give you my thoughts.

First and foremost, make sure you end up working with someone competent. This will more than likely be the biggest investment in your life and is far too important to put in the hands of someone who is not capable of advising you properly and troubleshooting the issues. So first, how can you tell if you are working with the right person?

Ask these simple questions, which your lender must get right!

1. What are mortgage interest rates based on? Answer-Mortgage backed securities (MBS), not the 10 year treasury. Although the 10 year treasury can trend in the same direction of MBS, but it can move completely in the opposite direction. Make sure you are working with a lender that has their eyes fixed on the right indicator.

2. What does it mean when Bernanke and the Fed “change rates”, and what impact does it have on mortgage interest rates? Answer-Typically when the Fed moves rates, they adjust the Feds Fund Rate or the Discount Rate. These are SHORT term rates that impact home equity lines, auto lines, credit cards and so on. On the day that they make a move, long term rates (mortgage rates) may even go the other direction. Other times it can be priced into the rates ahead of the move and you will not see much difference on the day of the move.

3. Does the lender have access to live, real time mortgage bond quotes? Answer-You should know the answer to his by reading #1. If your lender is not tied into a real time quote during the day, then how will you be able to make informed decisions when there is an intra-day price change? In today’s volitale environment, we have seen rates priced in the morning, only to change not once but twice during the day. You may be working with someone that is reading yesterday’s news. Would you work with a stockbroker who based your investments on yesterday’s paper?

Yes, finding a rate that works for you is important, but you need someone that will also orchestrate the transaction for you. There is a lot that is involved with purchasing or refinancing a home. Most importantly, work with someone that understands the market, has experience in navigating the real estate/mortgage world, and who you can trust. Trust is so important when you put the biggest investment of your life in the hands of someone. Most of can get a feel if someone has their best interest in mind, not their own. Look for testimonials as well.