After weeks of meetings between Treasury Department officials, mortgage lenders, and Wall Street firms, the Bush administration today announced that an agreement has been made to "freeze" interest rates for up to five years on certain subprime adjustable rate mortgages.
According to the New York Times, the goal of the President's plan is to convert as many subprime ARMs as possible into "more sustainable loans." However, the freeze applies only to borrowers who:
Took out their loan between January 2005 and July 2007 and whose rates are set to increase between January of 2008 and July of 2010;
Have less than 3% equity in their homes;
Are current on their payments (or no more than 60 days behind);
Are able to handle their current lower rate, but will not be to handle a higher payment.
Analysts estimate that the plan will help between 240,000 to 250,000 borrowers.
The freeze is a voluntary agreement on the part of lenders, so no legislation is required for this plan. Analysts note, however, that congressional approval would be necessary in order to increase current FHA loan limits.
To find out more contact Walt at Walt@WaltSchulz.com.
Thursday, December 6, 2007
Wednesday, December 5, 2007
Don’t Pay Points, Please!
By Barry Habib Contributing Editor to CNBC.com
So you’re in the market for a mortgage. After hearing about all the options and products, your head is probably spinning. If that weren’t enough, after you pick your mortgage you then have to decide whether to pay points, and how many.
What is a point anyway? Points are prepaid interest. One point equals one percent of the mortgage amount. One point on a $200,000 mortgage is $2,000.
People are often tempted to pay points because it will reduce their interest rate. And why not? If it saves you money in the long run, then it must be good. But in the real world, it usually doesn’t work out that way.
Let’s look at an example: You take on a $200,000 mortgage with a 30-year fixed-rate. Your lender offers 8 percent with no points, or 7.75 percent with one point, or 7.50 percent with two points, and so on.
Generally one point equals a quarter of a percentage point. It’s not a hard and fast rule, but it usually works out that way.
The 8-percent/zero point option equates to a monthly mortgage payment of $1,467.
The 7.75-percent/one point option equates to a $1,433 monthly payment, but with $2,000 paid up front.
So your choice is: save $2,000 now, or save $34 each month going forward.
It’s quite natural for you to make a few quick math calculations: $2,000 divided by $34 equals roughly 59. So 59 months (nearly five years) from now, the point you paid will pay for itself.
This is probably how some mortgage bankers will explain it to you. In turn, you might respond by saying: I plan to live here more than five years so the point makes sense. That can be a big mistake. Worse yet, it’s the kind of mistake that goes unnoticed. The simple calculation is flawed; that’s the whole problem. This is one case where simplicity isn’t good.
Here’s why. The question really boils down to how you can best use that $2,000. You can pay a point, you can invest it, you can pay down other debt, or you can put it toward a bigger down payment on your house. If you plow it into the down payment, now you have a mortgage balance of $198,000. This changes the original choice you were faced with above. Now the choice is:
The 8-percent/zero point option gets a monthly mortgage payment of $1,452 with the lower starting balance.
The 7.75-percent/one point option equates to a $1,433 monthly payment, but with $2,000 paid up front.
So now your choice is: put the $2,000 toward the down payment, or pay the point and save $19 each month going forward. Now when you do the quick math: you will divide $2,000 by $19 and come up with about 105 months or nearly nine years. This isn’t quite the no-brainer the previous decision was.
The average family changes residences about every nine years, according to the National Association of Realtors. And first-time homebuyers move frequently. The Mortgage Bankers Association says the typical homeowner refinances once in nine years. All this brings us to the average life of a mortgage, which is less than five years. So more often than not, borrowers will find themselves with a new mortgage before one point pays off.
The case for avoiding points is even more compelling when you refinance a mortgage. That’s because the tax treatment is less favorable. The points paid on a first mortgage when you purchase a home are fully deductible on your federal taxes that year. That’s one of the selling points of points to begin with. But on a refinance, you must amortize those points over the life of the loan. This leaves you with slim pickings at best, on the tax benefit side of the equation. On a refinancing with $3,000 of points paid, you get to deduct just $100 per year on a 30-year loan.
Lenders love to take your point money. But you should keep it and put it toward a sure thing, like cutting your loan size.
So you’re in the market for a mortgage. After hearing about all the options and products, your head is probably spinning. If that weren’t enough, after you pick your mortgage you then have to decide whether to pay points, and how many.
What is a point anyway? Points are prepaid interest. One point equals one percent of the mortgage amount. One point on a $200,000 mortgage is $2,000.
People are often tempted to pay points because it will reduce their interest rate. And why not? If it saves you money in the long run, then it must be good. But in the real world, it usually doesn’t work out that way.
Let’s look at an example: You take on a $200,000 mortgage with a 30-year fixed-rate. Your lender offers 8 percent with no points, or 7.75 percent with one point, or 7.50 percent with two points, and so on.
Generally one point equals a quarter of a percentage point. It’s not a hard and fast rule, but it usually works out that way.
The 8-percent/zero point option equates to a monthly mortgage payment of $1,467.
The 7.75-percent/one point option equates to a $1,433 monthly payment, but with $2,000 paid up front.
So your choice is: save $2,000 now, or save $34 each month going forward.
It’s quite natural for you to make a few quick math calculations: $2,000 divided by $34 equals roughly 59. So 59 months (nearly five years) from now, the point you paid will pay for itself.
This is probably how some mortgage bankers will explain it to you. In turn, you might respond by saying: I plan to live here more than five years so the point makes sense. That can be a big mistake. Worse yet, it’s the kind of mistake that goes unnoticed. The simple calculation is flawed; that’s the whole problem. This is one case where simplicity isn’t good.
Here’s why. The question really boils down to how you can best use that $2,000. You can pay a point, you can invest it, you can pay down other debt, or you can put it toward a bigger down payment on your house. If you plow it into the down payment, now you have a mortgage balance of $198,000. This changes the original choice you were faced with above. Now the choice is:
The 8-percent/zero point option gets a monthly mortgage payment of $1,452 with the lower starting balance.
The 7.75-percent/one point option equates to a $1,433 monthly payment, but with $2,000 paid up front.
So now your choice is: put the $2,000 toward the down payment, or pay the point and save $19 each month going forward. Now when you do the quick math: you will divide $2,000 by $19 and come up with about 105 months or nearly nine years. This isn’t quite the no-brainer the previous decision was.
The average family changes residences about every nine years, according to the National Association of Realtors. And first-time homebuyers move frequently. The Mortgage Bankers Association says the typical homeowner refinances once in nine years. All this brings us to the average life of a mortgage, which is less than five years. So more often than not, borrowers will find themselves with a new mortgage before one point pays off.
The case for avoiding points is even more compelling when you refinance a mortgage. That’s because the tax treatment is less favorable. The points paid on a first mortgage when you purchase a home are fully deductible on your federal taxes that year. That’s one of the selling points of points to begin with. But on a refinance, you must amortize those points over the life of the loan. This leaves you with slim pickings at best, on the tax benefit side of the equation. On a refinancing with $3,000 of points paid, you get to deduct just $100 per year on a 30-year loan.
Lenders love to take your point money. But you should keep it and put it toward a sure thing, like cutting your loan size.
Monday, December 3, 2007
Annual Mortgage Reviews Bring Borrowers Closer to Achieving Financial Goals
Yearly reviews are a great way to keep on track with your financial goals. You’re probably already meeting with your financial advisor and other asset manager for quarterly or annual reviews, and you should do the same with your Mortgage Planner as well. An annual mortgage check-up is an ideal way to make sure your mortgage is still having the maximum positive impact on your overall financial plan.
A lot can happen in one year. The market can take turns that can open up new opportunities, such as reduced interest rates, new loan products or changes in home values. Furthermore, your personal and financial situation could be mildly to radically different than it was just 12 months prior. Perhaps one or more of the income earners got a raise or lost a job. Maybe you received an inheritance. Even a minor, one-year change in one of your kids’ college plans could impact your financial situation in a way that would benefit from an adjustment in your mortgage strategy.
Periodic reviews serve several purposes. First, they establish a consistent path toward achieving your financial goals. Secondly, they ensure that you stay on track with your goals. Sometimes plans need minor adjustments, but without the knowledge that comes from a thorough evaluation, those minor adjustments may go unnoticed. Often, by the time an adjustment becomes apparent, you may have already lost valuable time and/or resources that could have been spared with a few minor modifications along the way. Finally, periodic reviews help to keep you accountable toward your commitment to achieve your objectives. Without accountability, it’s very easy to let your savings and investment actions fall by the wayside, especially when unexpected expenses arise. Knowing that you’ll be discussing your action steps will help to keep you committed to your goals.
Consider scheduling a periodic review with your Mortgage Planner in conjunction with your asset manager’s review. In addition to saving time, you’ll also gain the advantage of your own personal management team for your financial asset-building program.
Remember that getting clarity on your financial situation is never a waste of time. If you find that your current financing is more desirable than the financing that is available in today’s market, you’ll know that your Mortgage Planner did a great job advising you last time. If you find that your changing circumstances have dictated that a new loan will better suit your new situation, your Mortgage Planner can bring you one step closer to achieving your financial goals.
A lot can happen in one year. The market can take turns that can open up new opportunities, such as reduced interest rates, new loan products or changes in home values. Furthermore, your personal and financial situation could be mildly to radically different than it was just 12 months prior. Perhaps one or more of the income earners got a raise or lost a job. Maybe you received an inheritance. Even a minor, one-year change in one of your kids’ college plans could impact your financial situation in a way that would benefit from an adjustment in your mortgage strategy.
Periodic reviews serve several purposes. First, they establish a consistent path toward achieving your financial goals. Secondly, they ensure that you stay on track with your goals. Sometimes plans need minor adjustments, but without the knowledge that comes from a thorough evaluation, those minor adjustments may go unnoticed. Often, by the time an adjustment becomes apparent, you may have already lost valuable time and/or resources that could have been spared with a few minor modifications along the way. Finally, periodic reviews help to keep you accountable toward your commitment to achieve your objectives. Without accountability, it’s very easy to let your savings and investment actions fall by the wayside, especially when unexpected expenses arise. Knowing that you’ll be discussing your action steps will help to keep you committed to your goals.
Consider scheduling a periodic review with your Mortgage Planner in conjunction with your asset manager’s review. In addition to saving time, you’ll also gain the advantage of your own personal management team for your financial asset-building program.
Remember that getting clarity on your financial situation is never a waste of time. If you find that your current financing is more desirable than the financing that is available in today’s market, you’ll know that your Mortgage Planner did a great job advising you last time. If you find that your changing circumstances have dictated that a new loan will better suit your new situation, your Mortgage Planner can bring you one step closer to achieving your financial goals.
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