Scams with Home Loan Help
With home loan foreclosures up and consumer credit problems much more prevalent, a number of businesses have cropped up that do nothing but take advantage of homeowners that are under duress and seeking financial relief. These firms are fundamentally scam organizations. The sales pitches from these organizations can sound like a way for a home loan borrower to get out from under their troubles and their delinquent mortgage payments but often these people are in business just to take the homeowner’s money. Just plain old scam organizations preying on homeowners that have fallen behind on their mortgage payments and looking for a legitimate way out or guidance in the right direction.
The office of Housing and Urban Development has provided information on a variety of specific scams that these organizations have engaged in recently. Three scams that were highlighted include:
The foreclosure prevention specialist. With theses scams, the foreclosure specialist is far from a specialist. They are really just fake home loan counselors who charges high fees in exchange for making a few phone calls or completing some paperwork that a homeowner could easily do for himself. Often, the result is that none of the actions provided by these alleged counselors will have the outcome of saving the home from foreclosure. These scams give the homeowners a false sense of hope and delay them from seeking qualified help for their mortgage loan problems. In addition to paying unnecessary fees to the scam artist or company, the homeowner is also exposing their personal financial information to a fraudster that may lead to further financial trouble.
Some of these companies involved will even use names of government programs to try and legitimacy to the scam with the words HOPE or HOPE NOW in them. These are just more refined scam artists who are attempting to dazzle and confuse borrowers who are looking for assistance from the actual assistance that can be found for free at the 888-995-HOPE hotline.
The lease/buy back scam. In these scams a homeowner who has a mortgage that is severely past due may be deceived into signing over the deed to their home to a scam artist who tells them they will be able to remain in the house as a renter and eventually buy it back under certain terms. Usually, the terms of the buyback in this scheme are actually so hard to meet that the buy-back becomes near impossible, which ends with the homeowner getting evicted, and the lease/buy back operator walks off with most or all of the equity in the home.
The bait-and-switch: In a bait and switch scam, the homeowner is led to believe they are signing documents to bring the mortgage loan current. Instead, they are signing a number of legal looking papers that includes signing over the deed to their home. The scam artist then sells the home and the homeowner usually doesn’t know they’ve been scammed until they get an eviction notice from the new homeowner or mortgage lender.
Never sign a legal document without reading and understanding all the terms and getting professional advice from an attorney, a trusted real estate professional, or a HUD approved housing counselor.
Unfortunately, during tough economic times more of these unprofessional organizations surface to make a quick a buck of those home owners that are having mortgage payment troubles and are under duress. There are a number of for-profit companies that contact homeowners that have delinquent mortgage loans promising to negotiate with the mortgage lender. While these may be legitimate businesses, they often charge you a significant fee for information and services that the homeowner’s mortgage lender or a HUD approved housing counselor will provide free if they are contacted instead.
Homeowners in trouble don’t need to pay fees for foreclosure prevention help; it is a better decision to use the money that would be paid to these organizations to pay the mortgage instead.
The office of Housing and Urban Developments reminds borrowers that if it sounds too good to be true, it may well be a scam that will damage the borrower’s credit and cost more in the long run. Working directly with the mortgage lender, home loan servicer or a legitimate non-profit organization is the best approach for troubled borrowers.
For homeowners that are unable to make their mortgage payment, don’t ignore the problem any further. The further behind in the mortgage loan payments a borrower becomes, the harder it will be to reinstate the home loan and the more likely that they will lose the house. There is a lot valuable information available regarding foreclosure prevention or loss mitigation, be sure to check that you are working with a reputable organization or directly with your mortgage lender before going forward.
Mortgages from the Dark Side, the Rebellion has Started
The trouble in the mortgage lending industry was first revealed to me shortly after accepting my first job in finance. Upon graduating college with a finance degree I took the first finance job available. Since I had bills to pay and the job market was weak I took the first employment opportunity offered. The job was an assistant finance manager at a local finance company not far from my apartment. The company was engaged primarily in the origination and collection of personal loans and mortgages, mostly second mortgage or home equity loans. This finance company was a division of what is now the eight largest bank in the nation. Not the best job but far from the bottom.
Shortly after the training concluded, I learned that there were three activities you took part in at the finance company. You sold the consumer loans, you closed loans and you collected the loans or the payment on the loans. We ate lunch and used the facilities too, but other than that we sold loans, we closed on the loans and we collected the loans. The reason we spent so much time collecting loans was that the delinquency rate at finance companies is fairly high and it is necessary to stay on top of the customer in order to make sure the client makes timely payments.
Nothing overtly wrong with these lending activities. Except, there were at least two glaring immoral deeds that we committed. One was that we spent a third of our time on the phone selling loans. Let me shed some more light on what I did. I was on the phone selling loans to your neighbors constantly. These sales calls had a strong pitch and were performed with unrelenting tenacity by myself and peers in the industry. Sure it was a fairly high interest rate since this was a consumer finance company and we did not offer the most competitive interest rates and your neighbor really didn’t need to be bogged down with more debt, but I was selling money. I sold a consumer loan, either a personal loan or second mortgage to help your neighbor buy a new car, go on a family vacation or maybe even consolidate debt.
It isn’t necessarily cocky to tell you your neighbor didn’t stand a chance. I sold the low monthly payment, hell I couldn’t sell the outrageous interest rates, I sold the neighbor how he can use this money for the vacation his wife and kids deserved, I sold an escape, a low monthly payment escape that your neighbor was entitled to. He didn’t stand a chance; he couldn’t say no. He took the loan. I wasn’t going to let home say no. Sometimes that took 10-15 phone calls until they said yes.
Once I closed the loan, which is lending speak for having the customers execute and sign the appropriate loan documents and disclosures, and some timely monthly payments were made, I picked up the phone and sold your neighbor more money. I sold the benefits of refinancing and taking out more cash on top of the existing loan so he can finish the patio and buy the new grill and eat some tasty USDA prime rib eyes. He went for it. Hey, he didn’t stand a chance, I was good at it, and we were selling money.
Sales rule number one in most businesses is that the present customers and former customers are your best candidates for additional sales, in our case that would be additional loans or larger loans to the existing accounts.
After a few years or even one or two years, I may have refinanced this customer three times and elevated his debt load significantly. Eventually, this loan and the other debts your neighbor has are killing him. He can’t make all the monthly payments. His wife is now pissed given that she can’t use her credit card at the grocery store since the credit card limit has been reduced because they can no longer make their payments on time. And after numerous sleepless nights, the neighbor finally decides to go for a fresh start and files bankruptcy.
This is a situation I witnessed every year in consumer finance and mortgage origination’s, equity extraction with first mortgages and home equity loans as well as consumers loans and excessive credit card use was letting consumers live well beyond their means. These individuals and families were making $75,000.00 ( as an example ) and when I would pull their credit report one year later they had an additional $15,000.00 in debt. That doesn’t sound crazy at first except you have to consider that these are mature workers who are not likely to be looking at large pay raises in the foreseeable future. So, Mr. & Mrs. Jones are making $75,000.00 and I add their new debt and it appears they are spending $90,000.00.
The easiest solution for them was to incur more debt with a home equity loan or mortgage refinance and keep the party going, never paying attention to the fact that they spend more than they make almost every single month of the year. And this was common.
Eventually, the music stops and these people can no longer borrow more money or consolidate what they have to a lower payment and it times to pay the piper. Their house of cards built on easy money comes to end with bankruptcy, foreclosure and other unpleasant outcomes. Some customers run to file bankruptcy to eliminate these consumer debts or create a new manageable payment plan, but most of my customers agonize for months over the thought of bankruptcy. It tears their family apart and it weighs them down terribly.
The company I work for has a position on bankruptcy that is similar to most mortgage lenders, banks and credit card companies which is that bankruptcy is evil and should be restricted. At the Dark Side Lending Company, we even attended the bankruptcy hearings. This is a very uncommon practice. Chase Bank, Chrysler Financial, Countrywide, none of these creditors would normally attend a personal bankruptcy hearing. We do, basically to shame the customer into making payments or reaffirming the debt with us.
There I am, the man who may be the most responsible for driving this family into bankruptcy because of my sales skills and the incredible marketing support of Dark Side Lending. Boy was I ashamed. I see this family in bankruptcy court and my heart falls into stomach. I can recall all the sales calls I made to them over the past couple of years. Not a few sales calls, but sales calls every other month, every year. Telling them how great it would be to take another loan.
I wake the next morning and do this all over again. Over sell the loans, close on the new loans and collect the payments one way or another. It got to the point where I took a shower before I went to work and I took a shower when I get home to clean the filth of the industry off of me. A practice I repeated at various lending institutions I worked at for the next twenty years.
These families, your neighbors, which are struggling with payments for a whole host of reasons one of which is because I sold home loans they could not afford. Sure they had responsibility. But, I can not emphasize enough, I am good at my job. I can sell loans. You don’t stand a chance, you try to say no but I’ll get you eventually. And it wasn’t just me. Lenders whether they are mortgage lenders, banks or credit card companies across the nation market and advertise in the mail, on the phone, on the Internet on prime time TV and late night TV. You can’t escape the marketing muscle of the Dark Side of Lending.
One day when I was watching the Bears play with my dad and we had a discussion on consumer debts and bankruptcy. At this time, one of the bankruptcy reforms bills was working it way through congress. During this discourse I told him that bankruptcy statues exist because of me. After he laughed for quite some time, he asked for a little elucidation on that statement. I explained that consumers file bankruptcy because of sales men, or finance managers like me who shove these loans down the consumers’ throat and bankruptcy is a necessary evil to even the field against the marketing muscle of the Dark Side of Lending. I assure you the force on the Dark Side is strong.
Why do we have bankruptcy reform to make it harder for the consumer to escape the likes of me, it’s simple. The banks fill the congressional coffers with cash. Oh yeah, the other side of the story is that somehow congress thought bankruptcy reform was good for the nation and the American people. Wow. How is that possible?
Ever since that time, if a friend or a friend of friend asks me about filing bankruptcy and the impact on their credit, etc…my reply is always the same, file and file often. Stick it to the lenders. Run the credit card up and file bankruptcy. It’s your duty as a citizen to make up for all the misdeeds performed by consumer finance companies, mortgage lenders and credit card companies by wiping out the debt and handing a loss to the lenders and bankers.
This was a start of long career working with the Dark Side of Lending. This was just the beginning.
Getting a Mortgage for Home Improvements
If you are sitting in your home pondering a major expansion in the kitchen, finishing the basement, or completing key repairs of the home, a new mortgage is one potential source of funding for such a project. Of course, there are many sources of funding for these undertakings. Cash on hand, credit cards, or even personal loans can be used to help pay for work on your property.
The key advantage of mortgage funds is that the rate you pay on a mortgage is almost always the lowest rate for consumer borrowing. In addition, the interest paid on mortgage debt is generally tax deductible (seek the advice of your financial planner or tax advisor). Furthermore, if a borrower is to take a mortgage to extract equity or cash out of the property, one of the best uses for this cash is improvements that help increase or secure the value of that property.
The three main choices for getting cash out of your property for home improvements are: a cash out refinance, a second mortgage ( including a home equity loan and a home equity line of credit ) and specialty mortgages such as the FHA sponsored 203K loan and FNMA and FHLMC home loans that are periodically introduced to assist with home improvement financing. Since the 203K loans are a seldom used product and specialty loans come in and out of favor, these home loan types will not be covered.
Before discussing the various home loan options it is important how a mortgage lender determines the equity in your home. The equity in your home is the difference between the value or price of the house and the amount of mortgage loans you owe against it. A house that is valued at $200,000.00 with an existing first mortgage balance of $145,000.00 has $55,000.00 in available equity. Though this may seem like a fair amount of equity, a mortgage lender will provide a new home loan for only a percentage of the homes total value not all of the value. If a homeowner in this scenario were to obtain a cash out refinance for 85% loan to value, the amount of money obtained would be approximately $25,000.00. This is calculated by taking 85% of the home’s value or $170,000.00 and then subtracting the existing first mortgage balance to arrive at a lendable equity figure of $25,000.00.
Mortgage refinances are one of the most common methods for obtaining cash for home improvements. Refinance transactions are often 50% or more of all the loans originated across the nation every week with a great deal of variation depending on the level of mortgage rates. A measurable percentage of these refinance transactions are to extract cash from the property. This cash is used for an assortment of purposes; most mortgage lenders will tell you almost legal purpose is acceptable for a cash out refinance.
Fannie Mae and Freddie Mac do not establish rules on the home improvements a borrower may or may not finance with a new mortgage loan. Therefore an existing homeowner can obtain a cash out refinance to finish the basement, do repairs or add a new room to the structure. There are no limitations on the minimum amount or maximum amount of financing that needs to be spent on repairs. If a borrower obtains a cash out refinance to pay for home improvements the main consideration of the mortgage lender is the condition the property is in as well as what the funds will be used for.
Standard conventional home loans are made based on the existing condition of the property. This approach results in a standard new home loan qualifying based on the as is value of the property not the as-completed value. Deferred maintenance is the term mortgage lenders use to describe a property that is in disrepair. Minor deferred maintenance does not often raise any red flags. Significant deferred maintenance will usually have to be addressed by the appraiser when they inspect your property. The appraiser will generally attribute a dollar value to the amount of deferred maintenance.
If a property is presently in disrepair the mortgage lender will not a grant a conventional loan. If the property is going to have a significant structural change the mortgage lender may also be concerned about approving the home loan. Questions may arise as to who is performing the work as well as how and when it will be completed. Oddly, even though the mortgage lender based the decision on the home loan on the existing property condition and value if a new mortgage loan is going to impact the lenders collateral significantly, they will want to make sure precautions are taken such as a licensed contractor is performing the work. The improvements should be performed by contractors who are licensed, registered, or certified or have the highest level of certification required.
Other than the limitations on the loan to value for a cash out refinance the structural changes that may be performed, a mortgage refinance is straight forward and the guidelines are the same as they are for a purchase regarding credit, income and debt ratios.
Home equity loans and second mortgages are also an option and are considered interchangeable terms. These loans are mortgages you get after you already have a mortgage loan on your property. There two distinct different types of home equity loans or second mortgages, the home equity line of credit and the home equity loan.
The home equity loan is generally a fixed rate loan that taken out for a predetermined amount and is disbursed to you at one time. The home equity line of credit is also a predetermined sum of money but instead of getting the money all at once you are given a checkbook to access the available balance of the loan. Most all home equity lines of credit are based on a variable or adjustable rate.
These loans will have similar qualifying standards as first mortgages. The borrower’s income, debt ratios, credit and the amount of the loan relative to the property value or loan to value will be evaluated. When measuring the loan to value for a home equity loan the mortgage lender will add the first mortgage amount plus the propose second mortgage amount and divide that figure by the home’s value to come with a ratio called the CLTV or combined loan to value. If a homeowner has a home valued at $200,000.00 with a first mortgage of $125,000 and requests a home equity loan of $30,000.00 the original loan to value is 63% and the combined loan to value will add the home equity loan and would be 78%.
One of the main disadvantages of home equity loan is the mortgage rate on these home loan products is higher than the mortgage rates found on first mortgages. A second mortgage home loan is considered to be a more risky loan for a mortgage lender or bank. The mortgage lender charges a higher mortgage rate over a home loan that is in first position.
Aside from acquiring the loan you may need, make sure you pay attention to the increased expenses of home remodeling. Get at least three quotes and stay within a budget. Taking cash out of your property for home improvements is generally one of the best uses of the equity, often the cost of home improvements do increase the value of your home on a dollar for dollar basis.
There is an ample supply of mortgage lenders that will offer home improvement loans available. It is up to the homeowner to decide which one is the most suitable for their needs and budget. The first step should be to find out as much as possible about potential mortgage refinancing, home equity loans and the mortgage lenders. Utilize the mortgage calculators to help determine debt ratios, loan to values and monthly mortgage payments. Closely consider important factors such as mortgage rates, and closing costs. Shop and compare home loans carefully before making a long term commitment.
Q. What is Private Mortgage Insurance and why do I need It?
A. PMI is an acronym for private mortgage insurance also referred to as simply mortgage insurance. PMI is a type of insurance that covers the lender on the event you default on the loan. It is generally required on loans that have high LTV’s or low down payments. Mortgage lenders will normally require private mortgage insurance on home loans that have a loan to value greater than 80%. The loan to value or LTV is measured by taking the loan amount divided by the property value or for a purchase it can also be measured by taking 100% minus the percentage of the down payment. For example a home loan purchase with 10% down payment has a loan to value of 90% or a home loan that is for $75,000.00 on a home that is appraised at $100,000.00 has a 75% loan to value.
The private mortgage insurance covers the mortgage lender but will have top be paid by the home loan borrower as part of their monthly mortgage payment. Private mortgage insurance was established to help home buyers that had less than 20% for down payment. The insurance company absorbs a portion of mortgage lenders losses in the case of default and foreclosure for those home loans with private mortgage insurance that have less than 20% down. Without the added insurance, the mortgage lender would not make the home loan unless the down payment was at 20% or greater.
The private mortgage insurance cost is a reflection of the mortgage loan amount, the type of mortgage loan and the loan to value. The higher the loan amount is relative to the home’s value or the LTV, the greater the private mortgage insurance cost will be. This may seem fairly obvious, the less equity in the home the more the risk to the mortgage lender and therefore the higher the insurance costs.
Higher private mortgage insurance costs due to larger loan amounts is not necessarily a measure of risk but simply a higher cost since private mortgage insurance is priced as a percentage of the mortgage loan amount.
The mortgage loan type can change the private mortgage insurance costs since some home loans have a slightly higher risk of default. The best example for this is adjustable rate mortgages. A higher loan to value, low down payment, adjustable rate mortgage is more risky than a 30 year fixed rate mortgage loan and therefore has a higher private mortgage insurance cost.
Two avoid private mortgage insurance you have to have a 20% equity in the property. Either 20% or more for a down payment on a purchase or for a refinance, the loan to value can not exceed 80%. Stated another way, the new home loan can not exceed 80% of the property value for either an existing mortgage refinance or home purchase.
Some mortgage lenders allow customers to put down less than 20% to avoid PMI by taking two mortgage loans. This is accomplished by obtaining a first mortgage for 80% of the property’s value and a second mortgage loan for 10% of the property’s value. This is commonly referred to as 80-10-10 loan since the first mortgage is for 80% loan to value, the second represents 10% loan to value and the third 10 represents 10% down payment from the borrower. At one point mortgage lenders also allowed 80/20’s in which the borrower obtained two mortgage loans that together were 100% of the value of the home. The 80/20 is pretty much extinct and the 80-10-10 is very difficult to find.
Mortgage insurance is usually set up as addition to the monthly mortgage payment. A standard monthly mortgage payment includes principal and interest as well as taxes and insurance. The insurance usually refers to the homeowners insurance. A loan with private mortgage insurance will have added insurance charge for the private mortgage insurance costs. A change in private mortgage pricing in the past five years set up to alleviate the tax differences between the tax deductible costs of private mortgage insurance and the interest on second mortgages is something called lender paid PMI.
In these situations the mortgage lender covers the cost of the private mortgage insurance and there is no added costs at the home loan closing or added to the monthly mortgage payment. However, the mortgage lender absorbs this added cost by raising the mortgage rate on the home loan to compensate their costs for the private mortgage insurance. This increase in the mortgage rate to cover additional costs is the same technique used in no point / no closing costs mortgage loans in which the mortgage lender raises the mortgage rate to absorb the mortgage loans’ closing costs.
The 40 Year Mortgage
In the past several years the mortgage market has seen a slew of new home loan products come and go. One mortgage loan product that was first lobbed into the fray by sub prime lenders was a 40-year term mortgage. Now that sub prime is tapering off, this term is being used on mainstream loan products. The advantage of the 40-year term mortgage is to make the monthly payments smaller and housing more affordable. While 40-year mortgages increase affordability by reducing the mortgage payment, the reduction is very modest.
Undeniably, the monthly mortgage payment on a 40 year term loan versus that of a 30 year term will be lower and subsequently allow some borrowers who would not normally qualify for a home loan be able to afford one. However, the effect of extending the term of a mortgage payment is smaller the longer the initial term is set at. This means that a change from 20-year term to a 30-year term can have a sizeable percentage change in the monthly mortgage payment. The change from a 30-year term to a 40-year term is not nearly the equivalent drop in relative payment amounts. For example, a 20-year mortgage for $250,000.00 at 6.0% has a principal and interest payment of $1791.08. If this same mortgage loan is placed on a 30 year term the payment drops to $1498.88 or 16%. This same mortgage loan amortized on a 40 year term would have a payment of $1375.53, a reduction $123.35 or only 8%.
Furthermore, the total payments on a 30-year term mortgage for $250,000.00 at 6% would be $535,595.47. The added 10 years on the same home loan amortized over 40 years yields a total payback of $660,256.37. The additional monthly payments add $120,660.90 in total charges for just a 6% reduction in the monthly mortgage payment.
Lastly, we have to factor in different interest mortgage rates. As a rule, mortgage loans do not last more than three to five years. Homeowners generally refinance or sell their homes long before their home loan term is due. Even though the average home loan does not last anywhere near their original terms, mortgage lenders will charge a higher mortgage rate for the longer term home loans. Fifteen-year term mortgages are usually about 1/4% lower in rate than a comparable 30-year tem mortgage. The extension to 40 year leads to roughly the same increase of about a 1/4 % from a comparable 30-year term. Having already calculated that the value of the 40-year term is fairly small, what limited monthly savings did exist is partially eroded with the higher mortgage rate.
The 40-year mortgage has a practical purpose of allowing a small segment of borrowers the ability to afford a larger home loan. The disadvantage of significantly larger repayment and a slow down in equity build up, almost completely erases the benefit this mortgage loan would have for most all borrowers. Before choosing the term on a home loan, whether it is for 15, 30 or 40 year term, home loan applicants should carefully review their budget and check the monthly payment on different mortgage loan terms with the appropriate mortgage rate. The mortgage calculator is a helpful tool for quickly comparing the different costs, the different monthly mortgage payments, the mortgage rates and the total costs over the expected life of the home loan.
Mortgage Loans and Loan to Value
LTV, or loan to value, is only one of the factors mortgage lenders use to evaluate or underwrite a home loan. LTV is expressed as a percentage or ratio. The ratio is calculated by dividing the mortgage loan amount by the value of the property. An example of this ratio is if someone was obtaining a $200,000 mortgage loan for a property that is valued at $400,000, the LTV of this transaction is 50%. Mortgage lenders use the loan to value ratio as a significant measure of risk in making a mortgage loan decisions.
The LTV is a very important consideration for the mortgage lender and the mortgage applicant for several different reasons and its risk measure will change with the home loan type and request. As a simple tool to measure risk, the higher the loan to value on a home loan, the riskier the home loan is perceived to be. Loan to value is essentially measuring the amount of equity in a property. This equity is a result of either the down payment amount, a larger down payment would equal more equity, or a reduced balance on a existing mortgage loan for a refinance request or an increase in property value.
Loan to values therefore measure the amount of equity in a property. The greater the equity, whether it be with a large down payment or appreciation when you already own the property, the more committed to the property a borrower generally will be and the larger the cushion there is to absorb losses by the mortgage lender should a borrower default on their home loan. Not only our borrowers more committed when there is more equity in the property, but the lenders loan balance has a greater level of protection should a borrower default. Certainly, 100% loan to value home loan transactions are defaulting at a higher rate than lower loan to value home loan transactions are.
If you are applying for a mortgage to purchase a home, the loan to value is measure of how much money has to be placed as a down payment to buy the property. In order for the mortgage lender to determine the value aspect of the loan to value ratio they will look at the lower of the purchase price, or appraised value of a home, when you are purchasing a new house. If the home appraises for an amount greater than the purchase price, this may make the transaction more desirable for you the borrower, but the mortgage lender will now use the lower sales price figure to determine the mortgage loan underwriting evaluation. Because of this, the mortgage lender will not have to worry about lending more money than the actual property is worth or lending more than you would be willing to purchase the property for or got caught in an over inflated purchase transaction.
The importance of the amount down payment for the borrower can’t be disregarded either. An important item to remember, when a property is purchased, the total down payment you make will have to come from your source of money, borrowed funds are unacceptable. If your down payment is less than 20%, you will need private mortgage insurance (PMI). This is insurance you pay to protect the mortgage lender if you don’t repay your home loan in full. With mortgage insurance coverage an extra premium or fee is included within your monthly mortgage payments. The type of home loan you receive, the insurance company as well as the home’s LTV determines the exact premium amount for the private mortgage insurance. Higher loan to value loans or home loans with smaller down payments will have a higher mortgage insurance payment, adjustable rate mortgages will also have a larger mortgage insurance cost.
When an existing home owner is refinancing their home, the appraised value is what will be used to find the value part of the loan to value equation. The biggest component in calculating your home’s appraisal value is by analyzing past sales of comparable homes that are within one mile of your property and were sold within the past year. Houses for sales or listings do not count towards this amount because they are not finalized sales and their prices can either rise or drop.
Mortgage refinances fall into two categories, cash out refinances and rate and term refinances. A cash out mortgage refinance is when you take out funds with the new home loan for anything other than paying off the existing mortgage and closing costs. A rate and term refinance is for paying off just the mortgages and closing costs. In these cases, the new home loan is changing either with a new mortgage rate or a new loan term. When you have to combine a first and second mortgages within a mortgage refinance transaction, you will want to remember than the second mortgage loan needs to have been open for at least twelve months. If your second loan is not “seasoned” long enough, the mortgage lender will consider the consolidation of the two mortgages as cash out refinance loan, thus you are subject to all LTV guidelines and their associated mortgage rate adjustments.
With all mortgage refinance transaction, you will find that the ratio used with the loan amount to appraised value is will be a big determinant of the home loan approval. This is especially true if the borrower wishes to cash out within the transaction. The typical rule for cash out transaction is a maximum amount of 90% of the appraised value for the entire loan amount, which also includes any cash out. And a 90% cash out refinance is the absolute high end of the approval range, meaning the mortgage lender considers this loan the riskiest loan is less likely to approve such a request.
When your LTV is over 75%, you will usually experience a minimum .125%, or 1/8th of a point, increase within the mortgage rate for every 5% in the LTV. An example of this would be when a person takes 85% cash out mortgage loan; their mortgage rate would generally be .25%, or 1/4th of a point, higher than with a 75% cash out mortgage with established mortgage rates. The main reason for the mortgage rate increase is the increased risk factor on the home loan, there is now less equity in the property.
If you require more than 90% cash out rate, there are lenders that will supply this to you. However, the mortgage rates are generally significantly higher than standard rates with the exception of FHA loans. FHA loans allow 85% cash out LTVs without a significant impact on the mortgage rate.
The lower the ratio between the loan amount to the appraised value, the loan to value, the more likely a mortgage lender will accept the risk of the home loan. The risk considerations will be different in owner occupant versus non-owner or rental situations. Loan to values will be more significant in cash out transactions versus rate and term refinance loan requests. As you compare mortgage lender costs and qualification requirements you will see how loan to value can play a key role in the final outcome.
Mortgage calculators are a great tool to evaluate the loan to value on a home loan. www.selectcalculators.com offers a wide assortment of mortgage calculators to help determine LTV and evaluate home loan products and mortgage rates.
Risky Home Mortgages
Mortgages with risky terms or ones based on dicey credit standards are mortgages that can cause you problems. High risks mortgages may have an appropriate use in the mortgage marketplace for those borrowers who do not meet conforming guidelines. Borrowers who exhibit the needs of a high risk loan commonly needed a mortgage loan due to slow credit, extremely high loan amounts relative the homes value, or loans to speculate on real estate. In an earlier period, high risk loans were introduced to serve just this market segment. High risk loans were designed to relax the requirements for credit standards, little to no down payments and excessive debt ratios. Sub prime loans are the typical loan type we think of regarding high risk lending. As of recent, these loans have morphed and have now been used for a variety of purposes and sold to borrowers who don’t fall into a category of needing a home loan used for high risk transactions.
A mortgage is a loan that provides you with the resources to buy a home. If you aren’t educated about the types of loans that are available, some lenders may attempt to sell you a mortgage with lots of features and variations that don’t apply to your particular needs. There are many different products out there and some of them are dangerous. Make sure you know about high risk mortgages that can potentially get you in trouble. With slightly higher rates or conditions that are pushed onto the borrower, many lenders find offering these products more attractive for their overall rate of return.
Option ARM (adjustable rate mortgage) loans are probably the most dangerous type of mortgage. These loans give you a lot of flexibility when your monthly payment is due: pay a little or pay a lot. However, you can get in trouble very easily. Option ARM loans are mortgages that give a borrower a choice on how much a given payment is. This seems like a valuable feature inasmuch as you have the flexibility to respond to month to month circumstances. You can make a minimum payment, a full payment, or an interest only payment. These loans are filled with pitfalls.
First, you don’t build equity unless you make the full payments that you would make with a conventional mortgage. Given a choice between a large payment and a small payment, which one will you choose? With the smaller payments, you’ll actually owe more on your house at the end of the month than you did at the beginning, a situation of negative amortization.
Another peril of an Option ARM is that small payments will not last forever. Sooner or later the bank will want to put you back on schedule to pay the loan off, and will “recast” your loan at given intervals, or when you owe too much on the home (110% or 120%, for example) due to negative amortization. When they recast, they set the loan on track to fully amortize over its remaining life, and your minimum payment can increase sharply. If your budget can’t afford this increase, you’re in trouble.
An option ARM is almost always a bad idea. The mortgage rates on option ARM’s are initially a very low teaser mortgage rate. As soon as the introductory rate period or teaser rate is over the fully adjusted rate on this loan is as high as a 30 year fixed rate loan. Sometimes, the fully adjusted rate is distinctly higher than a 30 year fixed rate. If the introductory rate lasted a reasonable length of time, the low initial rate may have some value. The problem with the option ARM is that this teaser rate expires anywhere from one month to six months. The option ARM is clearly one of the worst loan products that were sold on a wide scale and in the category of Arms has the least favorable terms.
Interest only loans give you the ability to pay less each month because you’re not repaying principal. You can set up your own amortization schedule, that is, a schedule for paying back principal. However, you can also end up without any equity in your home – and possibly have to write a check if your home loses value and you want to sell it. Interest only loans should be used by the most disciplined of borrowers. The interest only option allows for a lower payment but, the principal has to be paid back at sometime. Delaying the repayment based on estimates of future home appreciation or the ability to refinance at a later date under more favorable terms may be a gamble that can cost you your home.
The home loan programs that have yielded some of the biggest problems this year are the no income verification loans and the various permutations of them. Alt-A, no income, no doc, and stated income are all terms to describe similar loan programs. These loan types don’t require the borrower to document their income. For the self-employed borrower who would employ aggressive techniques for write offs against their revenue stream or income, these loans filled a need. Recently, the use of low document income loans or no document income loans were used for wage earners and borrowers who had income that would have been easily verified. These mortgage loans may allow a borrower to qualify for a loan that under normal underwriting guidelines would have been impossible. The risk and cost for the borrower is now trying to figure out how to make the monthly payment on a loan based on income that they did not actually earn. Foreclosure figures on this loan type are certainly proving that not verifying income is not a free ride to homeownership.
Many of these loans have in fact opened the door for increased number of borrowers to become homeowners. Some of these home loan products may be appropriate for you. If you’re thinking of using one of these loans make sure you understand the risks. Don’t be tempted by the reassurances of a mortgage lender that profits at your risk. It may make more sense to buy a less expensive house with a fixed rate mortgage or repair your damaged credit first. Do your research and comparison shop before making the leap.