Actually, both claims are correct but the bigger issue is whether refinancing is actually worthwhile.

According to the letter my mortgage rate would drop from 4.63 percent to 4.46 percent if I refinance. That’s right, based on the APR or annual percentage rate, my rate would fall .17 percent. Not a partial .17 percent, not a fraction of .17 percent, but a full .17 percent. That’s about 1/6th of 1 percent.

But wait, there’s more.

And, yes, monthly costs would fall. For instance with a fixed-rate, 30-year $200,000 mortgage the monthly expense for principal and interest would go from $1,028.88 to $1,008.62. That’s a savings right there of $20.26 per month or $243.12 annually.

So the lender’s letter is literally true: I would have a lower interest rate and save almost $250 a year in this example.

Mortgage Rates

Despite the accuracy of the lender’s claims — which are subject to change along with the interest rate according to the letter — the offer is unacceptable to me. Here’s why.

How much would I have to spend at closing to save $250 a year? If closing costs $3,000 for transfer taxes, legal fees, title insurance and other expenses than it would take 12 years of mortgage “savings” to get back my money.

And why are mortgage rates at anywhere near 4.46 percent attractive in today’s world? The latest figures from Freddie Mac show that a typical 30-year mortgage is priced at 3.98 percent — that’s almost a half point lower than the offered rate.

Nope, I won’t be taking the lender’s offer.

But here’s the question: Why didn’t the lender simply repeat it’s last refinancing offer — an offer I took. In that case the rate went down almost a point, I saved about $200 a month and the lender paid all closing costs except prepaid taxes and insurance.

The lender and I both benefited. I got the lower monthly payment and the lender got a crisp, new loan to re-sell at a profit in the secondary market.

In other words, everybody won.

Mortgage Prepayments

The new refi offer doesn’t work because it’s one-sided — assuming the lender actually provides the terms mentioned in the letter (remember, they’re subject to change).

If I’m going to spend more money on a loan, I certainly would not pay $3,000 in closing costs to save $250 a year. Instead, I might simply increase the monthly payment by $25. While a $200,000 loan at 4.63 percent costs $1,028.88 per month, I might instead pay $1,053.88.

That would reduce the total interest bill over the loan term by nearly $10,000 — from $170,396.80 to $160,502.20 – and shorten the mortgage term by 18 months. This approach works regardless of whether the loan is an FHA, VA, or conventional fixed-rate loan. The concept also works for fixed-rate jumbo mortgages as well.

As to the lender — hey, write me again. Let’s redo the last deal at today’s rates. You know where I live.

Caution: Refinancing with Low Mortgage Rates May Not Work is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The site, Know Your Options.com, has the usual bells and whistles for a modern site and includes sections devoted to refinancing, repayment plans, forebearance, modification, short sales, deed in lieu of foreclosure and a deed-and-lease back plan.

The site also has some useful and nicely-laid out forms such as a financial checklist and a contact log. There is, of course, lots of advice against walking away from your home, a so-called strategic default.

“Through foreclosure prevention programs, borrower outreach, underwriting guidelines and servicer engagement, Fannie Mae is taking a comprehensive approach to helping struggling borrowers,” says Jeff Hayward, a Fannie Mae senior vice president. “Identifying accurate resources and finding the right answers can be a difficult challenge for borrowers facing hardship and a flurry of disparate, incomplete and sometimes fraudulent information. Know Your Options is the company’s newest effort to reach distressed homeowners and is designed to bring the best information and guidance together in one place so that struggling borrowers can focus on finding solutions that work for their particular circumstances.”

What’s Missing

The new Fannie Mae site has some valuable information and the site itself is certainly well-designed. That said, where is the parallel site for would-be borrowers who have yet to have an encounter with lenders? Why wait until someone faces foreclosure before providing valued consumer information? Why not have warnings and red flags in place to help borrowers at the beginning of the mortgage process?

The new Wall Street Reform Act provides a perfect platform for Fannie Mae and other major players in the mortgage arena to openly tell the public that we now have such a thing as a qualified residential mortgage. In basic terms that’s a conventional, FHA or VA mortgage underwritten with a fully-documented loan application, a mortgage where prepayment penalties are limited to the first three years of a fixed-rate mortgage and banned for ARMs. A qualified residential mortgage is also a loan with fewer than 3 points and where the lender has an obligation to assure that the borrower is receiving a net tangible benefit.

Why Foreclosure Prevention Is Not Enough is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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But there’s one charge that military borrowers can’t escape — the VA Funding Fee.

The VA Funding Fee is a set fee applied to every purchase loan or refinance. The proceeds go directly to the VA and help cover losses on the few loans that go into default. In essence, the Funding Fee helps keep the VA Loan Guaranty program afloat. The fee changes slightly depending on the down payment amount, whether the borrower has a prior VA loan and the nature of the borrower’s service. There are exemptions for borrowers with service-connected disabilities and for qualifying surviving spouses. This is a closing cost that’s unavoidable for almost every VA borrower. You can’t negotiate or sweet talk your way out of paying it.

Fee Schedules

For home purchases, regular military members pay slightly lower Funding Fees than Reservists and National Guard members. Here’s a look at the fees on purchase loans for regular military:

The percentages shift slightly for members of the Reserves and the National Guard:

Funding Fee Sources

Veterans aren’t required to come up with the Funding Fee from their own pocket. Borrowers can roll the cost into their loan amount, which adds a few dollars onto their monthly mortgage payment. For example, the 2.5 percent funding fee on a $200,000 mortgage comes out to $5,000. On a fixed-rate loan at 30 years and 6 percent, rolling in the funding fee adds an additional $30 per month.

Veterans refinancing their loans must also pay a Funding Fee. The VA has two major refinancing programs, the Interest Rate Reduction Refinancing Loan, better known as the VA Streamline, and a VA cash-out refinancing. For the no-frills Streamline, veterans are required to pay a 0.5 percent Funding Fee (that’s one-half of 1 percent). Veterans who want a cash-out refinance pay a little more than their Streamline counterparts. The current fee for a first refinance is 2.15 percent of the loan amount for regular military and 2.4 percent for Reserves and National Guard members. The fee jumps to 3.3 percent for both demographics for each subsequent refinance.

____________________

About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, including Bigger Pockets, Mortgages Unzipped and Scotsman Guide. A former newspaper and magazine writer, he is also content director for a leading VA lender.

How The VA Funding Fee Really Works is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Since the program began in 1934 the government has insured more than 37 million mortgages under Federal Housing Administration (FHA). Today you can get 30-year and 15-year loans insured under the FHA program. These loans can be fixed-rate or adjustable. In addition, the FHA also insures reverse mortgages.

The FHA does not insure all loans. Instead it only insures mortgages which meet its standards. If it’s an FHA mortgage you can be certain that the loan features little down (3.5 percent plus closing costs), forbids prepayment penalties and does not contain those infamous “gotcha” clauses found in toxic mortgages.

Insurance Premiums

FHA interest rates are established in the marketplace and not by federal regulation. The government guarantees the loan’s repayment to a lender, an incentive that greatly benefits borrowers because lenders will finance a home with little down if a borrower is backed by FHA insurance.

To obtain an FHA-insured loan under what is generally known as the FHA 203(b) program, one must pay FHA insurance. At this time, the upfront insurance fee is generally equal to 1.00 percent of the amount borrowed PLUS an annual fee equal to 1.15 percent of the loan amount for those who buy with less than 5 percent down.

In other words, if you borrow $150,000 there’s an upfront FHA mortgage insurance premium (known as an MIP) of $1,500. This fee can be financed with the mortgage, meaning you do not have to pay it in cash at closing. Instead, the upfront MIP is added to the loan amount.

In addition to the upfront MIP there’s also an annual MIP equal to .115 percent of the remaining mortgage balance. If you owe $150,000 then the monthly fee will be equal to $150,000 x .115 divided by 12 or $143.75. Since the loan balance falls a little with each mortgage payment, so does the monthly MIP cost.

Canceling FHA Mortgage Insurance

Generally the FHA MIP is automatically canceled after 15 years or if the loan-to-value (LTV) ratio of the mortgage falls to 78 percent of the original debt. The MIP cannot be canceled in less than five years.

FHA Refunds

When the FHA was first established it was designed to be a mutual insurance program. This means that borrowers — the equivalent of policyholders in a private mutual insurance company — would benefit when the program made a profit. In the case of the FHA, the way this was done was to pay borrowers a refund after their loan was paid off (perhaps when the home was sold).

The FHA’s First 25 Years

Unfortunately, the FHA refund program was ended with loans originated after December 8, 2004. The government now pockets any profit from the program.

If you have a loan originated prior to December 8, 2004 you can see if you qualify for a refund WITHOUT any cost or charge by going to the FHA refund page. You’ll need your loan case number to use the system. This should be available on your closing papers from settlement.

FHA Loan Limits

Historically the amount you can borrow with FHA financing has been less than the amount available with a conventional loan. At the end of 2008, however, the system was changed. Now there are at least three sets of FHA loan limits — a basic loan limit, a loan limit for “high cost” areas in the continental U.S. and a third loan limit for properties in Alaska, Hawaii, Guam and the Virgin Islands.

There are different FHA loan limits for single-family, duplex, triplex or four-unit properties. The loan limit increases with the number of units.

Under the FHA program you can buy a property with up to four units, but you MUST live in one of the units to qualify for financing. Pure investment financing under the FHA program is currently prohibited.

To make matters more complicated the FHA loan limit can differ even within a state. This happens because the limit is based on the county where you live. Also, the FHA loan limits can change, typically at the end of the year.

It sounds complicated but actually the system is fairly straight-forward. Just check the latest FHA loan limits and look at the chart for your county.

Reverse Mortgages

The FHA insures most reverse mortgages originated in the US. Because the reverse mortgage program has had recent losses, borrowers should see if the program is available and how much cash can be raised from financing your home. Be certain to get independent advice from an attorney who specializes in “elder law” or a fee-only financial adviser BEFORE signing up for any reverse mortgage program.

Be aware that the FHA reverse loan limit is different than the limit for properties under the 203(b) program.

Buy & Repair Loans

In addition to the 203(b) program, the FHA also has a 203(k) plan for residential purchasers (but not for investors). Under 203(k) you can get financing to buy a home and to also make repairs and improvements. This program has a number of standards and requirements which differ from the 203(b) plan so speak with lenders for specifics.

How Much Can You Borrow?

Lenders qualify borrowers in part on the basis of their income. In general terms, under the FHA program no more than 31 percent of your gross (pre-tax) monthly income can be used for housing costs such as mortgage principal, mortgage interest, property taxes and property insurance (PITI). As much as 43 percent of your income can be used for PITI plus recurring bills such as credit card payments, auto loans, etc. These numbers are sometimes expressed as 31/43.

Let’s imagine that you have two household members with a combined income of $90,000 annually or $7,500 per month before taxes. Under general FHA rules, the buyers would be allowed to spend as much as $2,325 on housing costs (PITI) and as much as $3,225 for all regular monthly debt.

Higher ratios are available with energy efficient FHA loans (33/45) and under the government’s HAMP mortgage modification program (31/55).

Streamline Refiancing

Under new streamline refinancing rules established in November 2009, HUD will refinance FHA loans under the following basic conditions:

• The borrower has made the last six payments in full and on time.
• For mortgages with less than a 12 month payment history, the borrower must have made all mortgage payments within the month due.
• For mortgages outstanding more than a year, the borrower is allowed no more than one 30-day late payment in the preceding 12 months and has made all mortgage payments within the month due for the three months prior to the date of loan application.
• The refinancing must result in a reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens) or allow the borrower to move from an adjustable rate mortgage (ARM) to a fixed rate mortgage or reduce the loan term. In other words, there must be a net tangible benefit.
• If subordinate financing such as a second mortgage or home equity loan remains in place, the maximum combined loan-to-value (CLYV) ratio is 125 percent. For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property. For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value.

As always, speak with lenders for specifics.

Shop Around

Most residential borrowers will be insured under what’s known as the FHA 203(b) plan. Every FHA 203(b) loan has the same terms (length, no prepayment penalty, etc.) as every other FHA 203(b) loan. What may not be the same is the cost: Different lenders can and will change different combinations of interest and points so it pays to shop around and compare rates. One of the best ways to compare loan offers is to ask lenders to provide a quote with “par” interest — the rate with zero points.

How To Apply

In recent years the loan application process has been greatly simplified, however proper information from borrowers is still required. The FHA — to its credit — demands fully-documented loan applications. This may sound intimidating, however it’s not a big deal. Just take these steps:

• At least three months BEFORE you finance or refinance real estate get a copy of your credit report. The reason to do this is to check and see if there’s any information on your credit report which is factually incorrect or out-of-date (most negative items can stay on a credit report for seven years, 10 years for a bankruptcy). You can get a free credit report with no strings attached by going to AnnualCreditReport.com.
• Get your paperwork in order. Have in hand your last three pay stubs, your last three tax returns, and statements for all savings and checking account, mutual funds, retirement accounts, credit cards, student loans, car loans, etc. Make a file and stick the paperwork in it. You want to show ALL income and you must show ALL debts. When in doubt add it to the file.
• Ask some questions: Do you expect to receive “bonus” income now or in the future? Do you expect to receive “overtime” income now or in the future Will “other” income in addition to your salary continue at current levels? If you own your home and use it as a prime residence, what’s the estimated fair market value? What’s the value of all financing now secured by your current home if you’re refinancing?

Seller Contributions

Because it’s tough to sell home these days in many markets, some owners are willing to pay some or even all buyer closing costs. FHA rules allow so-called “seller contributions” of as much as 6 percent of the purchase price at this writing to help offset closing costs, depending on the amount you put down. A seller contribution may be used to offset various closing costs however you must always provide your downpayment in cash. Speak with your real estate broker and FHA lender for specifics because HUD wants to limit seller contributions to 3 percent.

Gifts

Gifts are allowed under the FHA program and gifts may be used to cover some or all of the downpayment. A “gift letter” from the donor will be required. This is a letter which says the money given is really a gift and that no repayment or interest will be sought. Speak with lenders for specifics.

Important Points

___ You do NOT need a co-borrower to apply for a mortgage. However, the additional income represented by a co-borrower may allow you to obtain a bigger mortgage.

___ If you own rental property, lenders will generally add back the depreciation deducted each year on “improvements” such as a house, but not stoves, clothes washers, etc.

___ You are NOT required to disclose the receipt of alimony, child support payments or separate maintenance to a lender. However, disclosure of the additional income represented by such payments may allow you to borrow a larger amount.

___ In addition to the minimum down payment, you may and are likely to have other closing costs as well. Such additional costs can include prepaid expenses, points, mortgage insurance premiums paid in cash, non-realty expenses, taxes, title insurance, transfer fees, settlement charges and miscellaneous costs. Always obtain a Good Faith Estimate from any lender who offers you financing. This government-mandated form outlines the loan-related costs you will be required to pay at closing.

FHA Mortgage Basics is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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“We have made terrific progress since April 6 in helping families with trial modifications by ramping up our capacity through hiring people, adding office space and investing in technology,” says Charlie Scharf, head of Retail Financial Services at JPMorgan Chase & Co. “We also clearly understand that many more families are anxious about their homes and need to hear from us as quickly as possible. We are committed to do whatever is necessary to help homeowners who qualify for these programs.”

The Making Home Affordable Program

Chase says it first determines whether struggling homeowners qualify for this program and already has approved 87,100 trial modifications and that 44,100 of these customers have made their first modified payment.

Notice that barely 50 percent of the trial modification borrowers have made even one payment under the trial programs. This may mean that a huge number of borrowers recently qualified and so the figures do not reflect their first payment, or — perhaps — a large number of borrowers in the trial program have not made any payments.

For borrowers facing financial hardship, the program seeks to reduce mortgage payments for principal, interest, property taxes and hazard insurance to 31 percent of their gross income, usually by reducing the interest rate or extending the
length of the loan.

Chase also says that for borrowers facing financial hardship, the program seeks to reduce mortgage payments for principal, interest, property taxes and hazard insurance to 31 percent of their gross income, usually by reducing the interest rate or extending the length of the loan.

Chase’s Modification Program

This program is used for loans that do not qualify for the Making Home Affordable Program. Chase has approved 50,900 trial modifications, and 9,500 of them have already made their first modified payment.

Both workout programs require the borrower to make three modified payments in full and on time and to submit additional documentation, including income verification, so that the modifications can become permanent.

In the last three months, there have been more than 1.9 million visits to Chase’s www.chase.com/myhome website, according to the company. The site provides information to help struggling homeowners, including downloadable applications for mortgage modifications.

Chase OKs 138,000 Trial Mortgage Modifications is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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That’s a big jump for a seven-day period, but let’s have some context here: Last year at this time the same loan was priced at 6.09 percent.

“Thirty-year fixed-rate mortgage rates caught up to the recent rise in long-term bond yields this week to reach a 25-week high,” said Frank Nothaft, Freddie Mac vice president and chief economist.

“Yet, there are signs that the housing market may be moderating. Housing affordability rose in April to the second highest reading since January 1971 when records began, according the National Association of Realtors?,?? (NAR). As a result, pending existing home sales rose for the third consecutive month by 6.7 percent in April and represented the largest monthly increase since October 2001. Three of the four regions experienced increases, led by a 33 percent jump in the Northeast, the NAR reported.”

Affordability

Of course affordability is up. If the price of corn goes from $10 for five ears to $5 for five ears you can buy more corn — but do you really want to buy more?

As to sales, a huge percentage of sales are not everyday transactions between buyers and sellers, they are now transactions which involve the purchase of lender-owned properties, typically at discount.

Negative Interest Rates

Despite the big increase this week, the point remains that mortgage rates are ridiculously low. A year ago no one would have thought they could get 5 percent financing, now you can and such rates are characterized as “high” in some quarters.

You’re kidding. These are the rates of a lifetime. it’s possible that rates may again go into the 4 percent range and in theory it’s possible that they could go even lower — during the Great Depression U.S. securities were actually priced with negative interest levels. As Forbes magazine has reported, “T-bills got so popular that for brief periods between 1938 and 1941 they carried negative interest rates.” (See: “A Brief History of Stock Fads,” September 14, 1992)

In other words, you gave the government $100 and a year later maybe you got back $99. Why would people make such an investment? Because the banks were so iffy at the time that it was safer to lose a little with the government than with banks that paid interest — but might close.

We are now into the traditional home buying season. Whether you want to buy or refinance, now is a very good time to speak with lenders and brokers. Look into fixed-rate loans, forget about adjustables. If rates do go down again, and if they go down enough, then consider refinancing with a “no cost” closing — there’s a cost in the form of a rate somewhat above market level but not in the sense of a lot of cash (or maybe any cash) needed at closing.

Are Low Mortgage Rates Over? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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To start, we’re talking about help from Fannie Mae and Freddie Mac. Between the two of them they own or guarantee some 30 million mortgages. In addition, a number of private-sector lenders will also adopt the Obama plan. While we are talking about a huge number of loans it’s important to say that not all loans will be covered — INCLUDING millions of mortgages held by Fannie Mae, Freddie Mac, etc.

The Obama plan has two elements: modifications for those facing foreclosure and refinancing for those with loans which are unaffordable. We’ll look at foreclosure help with this posting and at refinancing in a separate posting.

Modifications

Millions of homes are being lost to foreclosure. The numbers are gruesome. RealtyTrac.com reports that 2,330,483 homes received foreclosure notices in 2008. That’s a huge number, up 81 percent over 2007 and 225 over 2006.

The recent foreclosure numbers understate the real problem. Why? Because for the past few months Fannie Mae, Freddie Mac, some private lenders and many states have had foreclosure moratoriums — they are simply not foreclosing. If those moratoriums (moratoria?) were not in place, the foreclosure stats would be far higher.

For those facing foreclosure the deal works like this: Your lender must agree to lower your monthly housing costs to not more than 38 percent of your gross monthly income. This can be done by lowering the interest rate, extending the loan term or reducing the debt. Since no lender will reduce the principal amount if possible, the real changes will be in the form of lower rates, a long loan term or both.

31 Percent

Once the lender gets housing costs — principal, interest, property taxes and property insurance in most cases — down to 38 percent, borrowers will then be obligated to pay 31 percent of their gross monthly income (the income before taxes) for housing costs.

And what about the 7 percent difference between 38 percent and 31 percent? The government will pay that money directly to the lender. In the end, the borrower is paying 31 percent of his or her gross income and the lender is receiving the equivalent of 38 percent.

Keys

Some important points:

• The modifications can last five years or longer — most will last only five years.
• There is a three-month trial period. Fail to make full and timely payments during the trial period and you’re out.
• The new interest rate can be as little as 2 percent. This won’t happen.
• There are no modification fees or charges for the borrower
• Each year you make your payments in full and on time your mortgage principal will be reduced by $1,000. This benefit lasts for as long as five years. The beauty of this credit is that when you sell you owe less to the lender. This is pure profit to the borrower.
• “Every potentially eligible borrower,” says the government, “who calls or writes in to their servicer in reference to a modification must be screened for hardship. This screen must ascertain whether the borrower has had a change in circumstances that causes financial hardship, or is facing a recent or imminent increase in the payment that is likely to create a financial hardship (payment shock). If the borrower reports a material change in circumstances, the servicer must ask about current income and assets, and current expenses as well as the specific circumstances relating to the claimed financial hardship. Each of these elements shall be verified through documentation.” Important: Borrowers with hardships qualify under the program — you do not actually have to be facing foreclosure.
• The home must be an owner occupied, single family 1-4 unit property (including condominium, cooperative, and manufactured home affixed to a foundation and treated as real property under state law).
• The home must be a primary residence (verified with tax return, credit report, and other documentation such as a utility bill). No investor properties, vacant homes or condemned homes qualify.
• Borrowers in bankruptcy are NOT automatically eliminated from consideration for a modification.
• Borrowers in active litigation regarding the mortgage loan can qualify for a modification without waiving their legal rights.
• If there are two loans on the property both lenders will have to agree to a modification. In many cases this will not happen.?,?
• Under the taking clause of the Fifth Amendment the government cannot force mortgage investors to modify their loans without “just compensation.” That means lender participation in this program is voluntary and some lenders will not volunteer. This is important because millions of loans have been sold to create mortgage-backed securities. It is the owners of those loans who actually own individual mortgages. In many cases Fannie Mae and Freddie Mac guarantee such securities but they no longer own the mortgages.

What does it all mean?

Unlike the FHASecure program and the original Hope for Homeowners effort, both of which were total flops under the Bush Administration, the Obama plan uses government money to save homes from foreclosure. Not all homes and not all borrowers will benefit, but large numbers of people who were getting zero federal help prior to 2009 will have their homes saved under this program.

For details and specifics, contact your lender. Your monthly mortgage bill or payment book will have lender contact information. In addition, local real estate attorneys, community housing organizations and state attorneys general can also provide assistance.

Facing Foreclosure? How The Obama Plan Can Help is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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So you might think: Foreclosure. That will never happen to me. No way. But lurking in millions of mailboxes each month is a financial time bomb, a threat to homeownership never before seen in this country.

For the past few years the nation has been flooded with forms of financing which allow buyers to purchase homes that were once unaffordable. The essential deal is this: You buy now, pay less than you should each month and then within five years sell at a big profit or refinance.

Truth is, it’s been a great ride. Many people have followed the formula and made a ton of money. But like musical chairs, you just know that a bunch of people will be caught in the wrong place at the wrong time.

In a growing number of metropolitan areas, the wrong time is now. Just look at what’s happened to home prices during the past few years.

Okay, so why are falling metro prices a problem? If you’re not selling and you’re not refinancing, who cares?

Falling prices are not an instant problem for those with fixed-rate loans. But for millions of borrowers with the latest forms of low-ball financing, falling prices can be financially lethal.

Imagine that you bought a property a few years ago. Since values were going up it made sense to buy the biggest home you could afford and to buy that big house you got a $400,000 interest-only loan at 5.6 percent, a mortgage amount that covered 100% of the purchase price.

For the first years the loan was wonderful: Monthly payments were $1,867 plus taxes and insurance. But after five years the loan automatically converted to a one-year ARM. The 1-year rate that was originally at 3.60 percent rose to 5.45 percent. Combine the index with a 2.0 percent “margin” and your new rate for the loan would be 7.45 percent.

After five years not only does the rate go up, the mortgage bill now includes the expense of monthly principal payments to reduce the loan balance. The monthly cost for principal and interest? It’s now $2,943. Taxes and insurance are again extra. < !- http://www.fanniemae.com/tools/libor/2006.jhtml __ http://www.fanniemae.com/tools/libor/2001.jhtml-->

“Those low-payment loans that looked so good a few years ago are going into their second phase,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com. “Each day more and more borrowers are finding that the low ‘start’ payment is gone and that steeper, fully-amortizing payments have now kicked in. At the same time, homes that were once easy to sell are now tough to market. It’s a brutal combination and what we’re seeing is likely to get worse.”

The instant solution to high monthly costs is to sell the property. During the past five years many areas have seen huge price increases. The odds are good in most markets that a seller with several years of ownership at this can readily sell, often with a significant profit.

But as the market evolves the odds may become less attractive. Not all markets have seen double-digit growth. In such areas price stagnation or actual declines can lead to huge inventory increases. To sell in down markets homes owners will be forced to offer not only price discounts but other incentives such as “seller contributions” to help buyers at closing, new carpets, new kitchens, moving allowances, etc.

But selling also may not be an option. Not only can a sale in a down market produce a bankrupting loss, but losses on the sale of a personal residence are not tax deductible.

What can you do to avoid being a foreclosure statistic, to not get caught in the impossible position of loan costs that are too high and market values that are too low?

“Act now,” says RealtyTrac’s Saccacio. “Don’t wait for the hammer to fall. If you see a mortgage problem looming in the next year or so, refinance to a long-term, fixed-rate loan before your credit report shows any late or missed payments. Take a careful look at traditional loans with liberal qualification standards such as FHA or VA financing. Speak with your lender about a loan modification and see if your adjustable-rate mortgage has a conversion feature, a right to switch to a fixed-rate within the first few years of the loan term. Because a conversion is a loan modification and not new financing, conversion can be quick and cheap.”

If you find a situation where the property cannot be reasonably refinanced, if unaffordable monthly costs are certain, then it makes sense to sell now and move to a less-expensive home with reduced debt, lower monthly costs and fixed-rate financing. Moving is a way to avoid foreclosure and dodge bankruptcy — two events no property owner should experience.

————————

Published originally by RealtyTrac.com during September 2006 and posted with permission.

Will You Become A Foreclosure Statistic? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Varan is the president of GoIn Realty, a brokerage based in Woodridge, IL, just outside Chicago which deals in bulk sales and foreclosed properties.

Varan is a bulk real estate purchaser and what’s known as a “third party buyer.” As a wholesale real estate purchaser he buys homes by the bunch from lenders who want to get rid of REOs — real estate owned by lenders, insurers and investors which did not sell at foreclosure auctions. Varan is also believed to be the largest “third party buyer” in Chicago, meaning that Varan bids at foreclosure auctions, looking for discounts and bargains.

Varan started in real estate as an agent in 1982 and within a year made his first REO purchase — a HUD foreclosure property. By 1986 he had his first successful auction bid.

Varan explains that before 2002 he rarely was in the market to buy, however since then he has purchased more than 1,500 properties, typically 250 to 300 units per year.

Varan is the king of foreclosures in the Chicago area, and at first it might seem as though he fits the mold of no-money-down buyers hawked in get-rich-quick seminars. But Varan has been in the real estate business for a quarter of a century, has more than 50 employees, evaluates thousands of properties every month and requires substantial amounts of investor capital to underwrite his purchases. Why does Varan need large amounts of financing? One reason is to buy properties for cash, but Varan also has other costs such as property protection, insurance, property taxes and losses — that’s right, not every property is a winner and most produce only marginal profits. If you’re a real estate investor with insufficient capital then a single weak purchase can doom your entire enterprise.

This year Varan expects to make fewer bids.

“Although I’m always buying, this year I am holding back on purchasing marginal deals to see what happens to the market,” says Varan. “We are still buying, but on track for about 175-200 units for the year. I always need to adjust my pricing based on what the market is doing. I purchase on a scavenger basis and 90 percent of my inventory is sold to investors on an as-is basis who then repair the property and market it on a retail basis.”

As RealtyTrac.com has reported, foreclosures for the second quarter of 2008 were up 121 percent over the same period a year ago . These numbers are central to understanding turmoil in the mortgage marketplace — and change in the new world of loan servicing.

Varan was one of more than 2,000 attendees at the 2007 Five Star Default Servicing Conference, an event attracting a growing number of people and with good reason: Loan servicers have a key role to play in the foreclosure marketplace.

Loan servicers typically collect mortgage payments and pay out property tax and insurance payments. In effect, they manage the practical side of mortgage debt for investors who own such paper.

However, loan servicing becomes enormously important when borrowers have financial problems. Should the servicer work out a loan modification with the borrower or foreclose? If the property is foreclosed and does not sell at auction, then what? Should the servicer sell the property “as is” or fix-it-up to get a better price? Meantime, who protects the property, takes care of utilities, orders title work, etc?

The Five Star conference attracts loan servicers as well as an array of people who work various part of the business — big property owners, specializing brokers, lenders, lawyers, title experts, foreclosure services and wholesale buyers such as Varan. Given the growth of the foreclosure marketplace during the past few years, the Five Star is the epicenter of the loan servicing world.

Sale prices in the Chicago area as of the second quarter were actually up, says the National Association of Realtors. Its figures show that the typical home in Chicago/Naperville/Joliet was priced at $283,200, 1.7 percent above a year earlier.

More recently, however, real estate activity in the Chicago area has begun to turn.

“The market has dramatically slowed down,” says Varan. “In fact, the total number of sales for the last six months is down about 20 percent. The numbers for the most recent month have been dropping down to as low as 23 percent. Additionally, the inventory supply is now at 10 months.”

People usually lose their homes because of illness, accidents, divorce or the death of a spouse. But for Varan, there are now new factors in the marketplace: Fraud and get-rich-quick investors. “Most homes that I purchase are already vacant, and I often do not know the reason for foreclosure,” he says. “It appears, however, that many of these properties were involved in some type of fraud. The reason for this conclusion is that the previous sales prices of the properties are substantially above the area’s market price. Furthermore, the loan(s) have usually been taken out in the last year or so. The other type of property that I frequently buy at foreclosure is one that has tenants; namely, homes that were bought for investment purposes and end up having negative cash flow. While some foreclosures are caused by illness, accidents or death, in my experience, those loans do not have a great impact on the foreclosure rate of the homes that I purchase.”

Varan’s marketplace strategy is dictated by investor requirements, investors who allow him to purchase properties for cash. Most want to re-sell a property within six months.

As to Varan’s buyers, they could be people who just want a residence, but typically they’re investors who buy homes in “as is” condition, fix ‘em up and then rent or re-sell them. A look at properties for sale by Varan as of this writing shows prices that range from those requiring an initial bid of $10,000 to a commercial property priced at $3.5 million.

Looking toward the future, Varan says “buyers will continue to exercise the ‘wait and see’ approach. Consequently, values and sales will continue to decline. It will take some time for the economy to absorb the consequences of the mortgage industry overly extending itself. With the Fed’s assistance, however, including lowering rates, the mortgage market will have more liquidity, and therefore, money available to loan out.”

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Published originally by Realty Times on September 18, 2007 and posted with permission.

How To Buy 200 Foreclosures A Year is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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In the same way that Wal-Mart has forced down manufacturing costs by buying on a massive scale, the same principle would be at work with settlement providers, title insurance companies and legal services.

The real estate community promptly responded to the Martinez proposal with a reasonable alternative: Instead of just lenders offering closing services in bulk, why not other players in the private sector? More competition would be good for consumers, it was argued.

Whether you like the so-called “one package” program from Martinez or the “two package” alternative from the real estate community, the point is that massive savings would be available to the public, savings that would lower closing costs and make homes more affordable.

And so you might want to ask: Whatever happened to the idea of competitive closings? How come we’re not saving $10 billion a year? Why do closings continue to cost so much?

Just think about it. If open competition means that American consumers will save $10 billion a year, it also means that title companies, lawyers and others can no longer stiff the public. But nothing has happened in Washington, and the result is that at least six years and $60 billion have been lost.

You have to admit, a few million dollars a year for lobbyists and PAC contributions has really paid off. Though not for you, of course.

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Published originally by Realty Times on December 19, 2007 and posted with permission.

Real Estate Settlements: Public Cheated Out Of $10 Billion — Per Year! is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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