Mortgages And More

As part of the stimulus package, Congress created a refundable first-time homebuyers tax credit in hopes of helping teetering buyers take the plunge and purchase a home.  The $8000 tax credit, however, is only collectible at tax time after the purchase is made. Indeed, this is a great incentive for people who have the resources to save their down payment money.  But, for those whose income provides for them to live pay check to pay check (the vast majority), the tax credit is just a carrot that they will never reach.  

In efforts to further stimulate the economy, it was announced May 20th that the US Department of Housing and Urban Development is working on a plan that will allow FHA approved lenders to provide buyers with the tax credit cash up front. Thus, the tax credit funds will be used at closing on their home as the down payment.

Although details of the plan have yet to be revealed, the plan could be modeled after programs that are currently in place in Colorado, Missouri, New Jersey, Pennyslvania, Tennessee and Washington. These states credit "bridge loans" that allow buyers to borrow against the $8000 tax credit and then repay it with their tax refunds.

For example, if modeled after Missouri's plan, the first state to instill such initiative, borrowers can access $6,750 of the $8,000 credit for the down payments.   At closing, the borrower signs their first mortage, plus a second mortgage issued by the state.  The second mortgage is $6,750, with a $350 set-up fee.  No interest is charged if the debt is repaid by June, 2010. If the borrower does not pay off the note, it becomes a 10-year fixed rate mortgage with an interest rate one-half percentage point above that of their first mortgage.  For instance, borrowers paying 5% on their first mortgages would be charged 5.5% on the second.

 

Making Homes Affordable - That is the aim of the Obama Administration's Program. This plan is estimated to offer assistance to as many as 7 to 9 million homeowners.

So much news has been put out across the wires that it can be confusing.  As one person emailed me, “I have heard that the program will only help those who are not delinquent on their payments, yet, someone else told me it is to help those who are behind.”  Well, the truth is that the program is designed to help both.

The Making Home Affordable Program is broken down into 3 components:

1. Home Affordable Refinance Program for responsible homeowners suffering from falling home prices (decline in value)
2. A comprehensive $75 Billion Home Affordable Modification Program
3. Support Low Mortgage Rates by strengthening confidence in Fannie Mae and Freddie Mac

Each component deserves a blog of its own, but I want to get this important news out as quickly as possible. 

Home Affordable Refinance Program

This program is aimed at helping homeowners whose mortgage is higher than their property’s value. Rather than the normal 80% of the current value being financed, this program will allow up to 105% of the current value.  The current mortgage, closing costs, prepaid taxes and insurance and any discount points associated with the financing may be financed in the new mortgage, as long as the total loan amount does not exceed the 105%. 

Eligibility requirements include being current on the mortgage, living in the subject property, and having sufficient income to make the new payment. 

As in all new programs, guidelines are constantly adjusting. This program is no exception.  Since the details of this program were published by the US Treasury Dept, Fannie has already enhanced this refinance program.  I will publish the enhancements in my next blog.

Home Affordable Modification Program

The goal of this modification program is to reduce the amount homeowners owe per month in order to prevent foreclosure and to stabilize communities.  I have broken this program down into 5 parts.

1. The lender is to bring down the monthly payments so that they are no greater than 38% of the homeowner's gross income. The key here is that although the monthly payment is 38% of the homeowner’s income, the homeowner will only be charged a payment of 31% of the monthly income.
2. The US Treasury Dept. will pay the difference between the payment at 38% of the money income and the 31% of the monthly income that the homeowner pays.
3. The 31% payment is the modified payment which will be in place for 5 years.  After 5 years, there is be a gradual increase in the payment of 1%  until the payment reaching the conforming rate in place at the time of the modification.
4. To reach the target interest rate the payments will be reduced down to an interest rate of 2%.  If the debt to income is still over 31%, the term of the mortgage loan may be extended to 40 years or the lender may do a forbearance of principal at no interest until the payment is at the 31% target.  Lenders may also reduce the principal balance.
5. In the case where there is a second mortgage, second lien holders are encouraged to extinguish the second lien.

For Further Clarification here is an example:

Current Mortgage - $200,000

Gross Monthly Income - $3,500

38% of $3,500 = $1,330

31% of $3,500 = $1,085 – Maximum Monthly Payment

At 2% interest rate for 30 years, the principal and interest payment is $739.00. This leaves $346 for taxes and insurance.  Since the 38% payment is $1330, the US Treasury pays the lender $245.00 ($1,330-$1,085)

If the combined payment of principal and interest, plus taxes and insurance, and possibly mortgage insurance is greater than the $1,085 limit, the lender may provide a 40 year term, lowering the payment.  Bear in mind, too, that if you qualify at a higher rate, say 4%, you will start at 4%.

With this example, the principal and interest payment will remain fixed for 5 years.  At the end of the 60^th  month, the rate will gradually increase in 1% increments until the interest rate is at the current conforming rate which today is 5%.

Although, this program’s goal to help struggling homeowners, anyone can apply through their current lender.  A word of caution, though:  Just because the program can help you and just because you qualify, does not mean that you lender is a participant in the Affordable Loan Modification program.  In order for the lender to receive TARP money (Bailout Money) the lender must participate in this program.

An important point to remember is that this is a NO COST TO THE BORROWER modification.  In addition, the homeowner does not need to be late to apply.  Let me repeat.  Although the program is aimed at helping those behind in their payments, those who are making their payments, but struggling to do so, may qualify.  

Ok, I know this is a lot to digest, so if you have any questions, you can always give me a call or shoot me an email at tsublette@mortgagecrafters.net.  Your first step in helping yourself is to call your lender.  I would be happy to hear how your lender responds.

My Gosh!  My head is in a whirlwind!  First came the Economic Stimulus Plan for 2009; and right behind it came the Homeowner Affordability and Stability Plan.  Is help on its way?  I think so.  The news for homeowners and soon-to-be homeowners is promising.  So, get your documents ready because now is the time to either refinance or purchase a home.

 

 Here is what the Economic Stimulus Plan has to offer for the soon to be homeowner:

The $787 Billion stimulus bill is made up of tax cuts and spending programs aimed at, just as the name of the name of the plan implies, stimulating the US economy. One of the major benefits of the plan is a tax credit for new homebuyers. According to the plan, first-time homebuyers who purchase homes from the start of the year until the end of November 2009 may be eligible for a tax credit of $8,000 or 10% of the value of the home, whichever is lower. Therefore, if the home you purchase is valued at least $80,000 you will eligible for the $8,000 tax credit.  If the home is valued less than $80,000, the tax credit will be 10% of the value of the home.

 

The $8,000 tax credit is a true tax credit. It's a dollar-for-dollar tax reduction, rather than a reduction in a tax liability. In other words, the $8,000 is not subtracted from your income before taxes are applied. Instead, the tax credit is deducted from taxes due.  So, if you were to owe $8,000 in income taxes and would qualify for the $8,000 tax credit, you would owe nothing.

 Even more amazing, the tax credit is refundable, which means you can receive a check for the credit even if you have little income tax liability. For example, if you owe $4,000 in income tax, the $8,000 tax credit will be applied to the amount owed... and you will receive a check for the remaining $4,000!

The tax credit starts phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000.

 

The tax credit is applicable to any home that will be used as a principle residence. Qualifying "homes" include single-family detached homes, as well as attached homes such as townhouses and condominiums. In addition, manufactured homes and houseboats used for principle residence also qualify. The only catch is that buyers will have to repay the credit if they sell their homes within three years.

 

The Homeowner Affordability and Stability Plan is twofold:

 

This plan includes two initiatives to help struggling homeowners. One is a refinancing program for homeowners with less than 20% equity in their homes, or who owe more than their home is worth. The second program attempts to lower monthly payments for homeowners at risk of losing their home. Many of the plan's details are still being worked out and will not be announced until March 4. Here is an overview of the plan's main components.

 

Refinancing Initiative

 

For those whose homes are in an “upside down” position, meaning the mortgage balance is more than the current property value, refinancing the mortgage may be possible. This initiative is open to homeowners who have conforming loans which are guaranteed by Fannie Mae and Freddie Mac, and who owe up to 5% more than their home is worth.

 

According to the plan, "responsible" homeowners, those that have been making their payments, but are struggling to do so, can refinance their mortgage into a 30- or 15-year, fixed-rate loan based on current market rates. The refinanced loan, however, cannot include prepayment penalties or balloon payments. For many families, this low-cost refinancing may help reduce their mortgage payments by up to thousands of dollars per year.

 

As with the rest of the plan, details about this initiative will be released at a future date--including what, if any, credit score requirements will be included.

 

Stability Initiative

 

The stability initiative aims at providing help to individual families, as well as entire neighborhoods, by helping reduce foreclosures and stabilize home prices. Remember that a foreclosure in the neighborhood affects everyone – prices go down, property values are reduced.

 

This plan is intended to help homeowners who are struggling to afford their mortgage payments, but cannot sell their homes because prices have fallen significantly. The goal of this initiative is simple: "reduce the amount homeowners owe per month to affordable levels." To accomplish this, lenders are encouraged to lower homeowners' payments to 31% of their income by lowering their interest rate to as low as 2% or by extending the terms of the loan. In addition, lenders can also lower the principal owed by the borrower, with the Treasury Department sharing in the costs.

 

An important part is that homeowners who are current on their mortgages but are struggling can still apply for this program. As such, this is one of the few programs designed to help homeowners who may face delinquency soon, but are current at the moment.

 

This initiative also includes a number of additional elements and incentives, including an extra incentive for borrowers to keep paying on time. The initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.

 It is important to note that both the refinance initiative and the stabilization initiative are for owner occupancy residences only.  Neither plan is for investment property.   My Comments 

In a nutshell, we should all have hope of a recovery.  This recession has been hard on all Americans.  I truly believe that the first step out of this recession is the stabilization of the housing market.  We would be silly not to take advantage of these soon to be available programs.  March 4^th is just a few days away, so pay close attention to news broadcasts and to my blog.  I will keep you posted as to what steps to take.  In the meantime, gather your documents together – 30 days of paystubs, the last 2 years of W-2’s, and 2 months of bank statements (all pages).  If self-employed, you will need the last 2 years of tax returns (all pages). 

Granted, these plans will not help everyone.  But, for the majority, those who did not buy more than they could afford, they are a lifeline.  Grab onto and do your part to get this economy moving again.  

Predatory lending has been a huge issue this past year and a half.  Laws are in place now, and more are on the way to prevent predatory lending.  However, the best way the consumer can protect oneself is by learning the vocabulary of the mortgage industry. 

I will be presenting to you a series of blogs pertaining to the mortgage vocabulary used frequently by the financial institutions. I will address each word or phrase in layman's terms.  This post is dedicated to explaining "Adjustable Rate Mortgage". 

By definition, an adjustable interest rate is an interest rate that is subject to change, depending on how the mortgage is structured.  The rate can move up, or it can move down.  Well, that sounds simple enough.  Wrong!  We need a lot more explanation to understand adjustable rate mortgages.  We need to know how the rate changes, why it may change, and what safeguards should be in place to protect us, the consumer.

The interest rate is determined by the addition of the margin and the index - two new terms. The margin is the spread between the rate and the index.  The margin is the only figure in our calculation which remains constant.  The index is what the interest rate is tied to. In other words, wherever the index goes, the interest rate will follow.  The index could be prime rate, the treasury bill, the federal discount rate, the libor, the 11th District Cost of Funds, etc.  The name of the index is not as important as knowing what the index represents and its history. For instance, prime rate today is at 3.25%.  Last year, the rate was 7.25%.  Now compare the value of prime rate to that of the 11th District Cost of Funds, which today is 3.155, and last year was 4.172.  When prime rate was high (7.25%), the 11th District Cost of Funds was 3 points less.  This is an example of how one index can move slower than another.  If opting for an adjustable rate mortgage, it is in the consumer's best interest to ask the mortgage broker how the index has performed in the past.

The margin, as stated previously, is the difference between the interest rate and the index.  The margin can range from 1.00% to 3.75% or higher.  

Example:  Index  =  3.155

          +  Margin =  2.50

    Interest Rate  =  5.655

Whether the adjustable rate mortgage is a 1 year ARM, 2 year, 3 year, 5 year, etc., the interest rate is determined the exact same way at each change.

The following is a list of common types of adjustable rate mortgages:

1/1 = Fixed for 1 year, then adjusts every year thereafter.

3/1 = Fixed for 3 years, then adjusts every year thereafter.

5/1 = Fixed for 5 years, then adjusts every year thereafter.

3/6 = Fixed for 3 years, then adjusts every 6 months thereafter.

If electing an adjustable rate, to further protect yourself, be sure the mortgage has payment caps in place.  Caps limit the adjustmentof the rate.  A 2% payment cap means that no matter what the result of the addition of the index and the margin,  the interest rate can not exceed the current rate by more than 2%.  Likewise, the interest rate cannot decrease any more than 2% at each change date.

In addition to payment caps, watch for lifetime caps.  Lifetime caps prohibit the lender from increasing or decreasing the interest rate beyond the lifetime cap specified for the life of the loan.  A 5% lifetime cap says if the beginning interest rate is 7%, the maximum interest rate that can ever be charged is no more than 12%, and the lowest rate is 2%.

Personally, I believe FHA has the best adjustable rate mortgage.  The payment cap is 1% and the lifetime cap is 5%.  The index is the 1 year Treasury Bill which currently is at .44%.  FHA offers a 1 Year ARM, 3/1 ARM, and a 5/1 ARM.  For explanation purposes, let's take a look at the 3/1 ARM.

At today's pricing, the interest rate is 4.625%.  This rate is fixed for 3 years.  At the beginning of the 4th year (change date), if all things remained the same (Index = .44 and Margin = 2.25%), the rate would be 2.69%.  However, remember the 1% payment cap (up or down).  At the change date, the interest rate could only decrease to 3.625%, and, as a safeguard, could only increase to 5.625%.

Added to our list of terminology associated with an adjustable rate mortgage is payment rate and negative amortization.  It most cases, the payment rate and the interest rate are synonymous.  However, a payment rate may not always be the same as the interest rate. 

As most often, if things sound to be true, be skeptical.  If offered a payment rate of 1%, know that 1% is not the interest rate, and that there is a monetary difference between the payment you are paying and what, according to the terms of the mortgage note, you should be paying (the true interest rate). 

Example:  1% payment rate, 5% interest rate

On a $100,000 mortgage, the principal and interest payment is $321.64; however, the 5% interest rate payment is $536.82.  What happens to the different between what you are paying ($321.64) and what the interest rate dictates ($536.82)?  The difference of $215.18 is added to the principal balance of the loan. Over a 12 month period, $2582.16 is added to the principal balance.  This is called negative amortization.  Each month that you all pay the minimum payment rate, the negative amortization will accrue.  Ultimately, you will owe more than you started with and you will have negative equity in your property.  We all complain abut the interest charged by credit card companies so that we cannot see day light.  Well, this is far worse.  We are talking about your home and shelter. 

Bottomline is be very careful when selecting any mortgage, but especially one with an adjustable rate. As we have seen throughout the country, no one has a crystal ball.  No one can predict where property values are going or where rates and indices be will in the future.  Know from the get-go what you are up against.  Learn the vocabulary and ask questions.  Educate yourself to protect yourself.

 

 

 

 

 

                                                                                                                                         2008-12-15

Dear Homeowner,

Welcome to my blog. 

Recently reported, out of the 400,000 homeowners in America struggling with their mortgages, only a few, in comparison, have actually been helped.  Congressmen and women have been pressuring the US Treasury to come to the aide of the homeowners, and are preparing new legislation as I write this article.  Financing programs have been initiated, but are they enough to help?

The Federal Housing Administration introduced the FHA Secure loan last year for non-FHA insured mortgages which are currently adjustable rate.  The adjustment of the rate must be the cause of the unaffordability of the mortgage payment.  This program has helped many remain in the homes, but what about those with fixed rates, and those who have government loans, such as FHA? 

October 1, 2008, FHA announced the Hope for Homeowners Program (H4H).  Thus far, the lenders have been resistant to the program, citing they would rather absorb the cost of foreclosure proceedings than the loss received by reducing the mortgage balance to 90% of the current property value.  FHA has even increased the maximum loan to 96.5% of the value, but the lenders remain reluctant.  So, what recourse does the homeowner have?

For those with non-FHA adjustable rate mortgages, the FHA Secure may be the answer.  Another option is the short refinance.  This one is a bit tricky, though, because not only does one have to qualify for the new FHA mortgage, but the current lender must agree to reduced the payoff of the current mortgage.  However, this is not impossible.  And for those with good credit and a good mortgage payment history, this is certaininly an option worth looking into.

For the delinquent homeowner, a loan modification is many times the best alternative to losing your home.  On December 12, 2008, the Federal Housing Finance Agency (the agency who scooped up Fannie Mae and Freddie Mac), announced a streamlined modification program making modification of a mortgage much simpler, thus encouraging lenders to modify more mortgages.  In order to qualify, the homeowner must have at least three (3) late payments.  Although, the Streamline Modification Program is primarily for Fannie Mae and Freddie Mac mortgages, the US Treasury is encouraging all mortgage servicers to participate in the program.

In some cases, a home cannot be saved for various reasons.  When this is the case, a short sale may be the answer.  With a short sale the home is sold for less than the balance onthe mortgage.  The remainder is essentially forgiven if the home was a primary residence. This type of sale enables the homeowner to back away gracefully from the liability.

So, where do  you begin to save your home?  The first step is to call your current lender and ask for a workout program. If you are not delinquent on your payments, your lender is most likely not going to be receptive to your request.  It appears that only the "squeaky wheel" gets attention. 

If your lender is not willing to help you, your next step is to contact me either by phone or email, or just simply go to the following link and complete the application to see what program works for you. This can be faxed to me at 321-821-1847.  www.realestateloans.com/1003.pdf

I have been helping people finance homes for over a quarter of a century, and I will not stand by and watch these same people lose their homes.  It's not fair, it's not right, and it's not moral.  If I cannot help you save your home, I'll be honest with you, and I'll steer you in the right direction.

Respectfully yours,

Trish Sublette, Mortgage Consultant

MortgageCrafters, Inc.

(321)543-4517