Bill McCord's Blog

If you don’t want the lowest interest rate for as long as you own your home don’t bother reading this.

Everyone (except me) is telling you to just take a 30 year fixed mortgage.

 I’m saying that may be true for a lot of people, but is not true for the majority.

Q1. Are interest rates on 30 year fixed mortgages at all time lows? YES

Does this mean that everyone buying or refinancing should get a 30 year fixed mortgage? NO

Q2. Are interest rates on 5 and 7 year fixed rate ARM’s also at all time lows?  YES

Q3. Is the interest rate the same on all types’ of loans? NO

The rates on both 5 and 7 year ARM’s are substantially lower than the 30 year.

Q4. Is the difference worth bothering about? YES

Take a $300,000 30 year fixed mortgage at 4.0%. Payment is $1,432/m

Take a $300,000 7 year fixed ARM at 3.75%. Payment is $1,389/m. Savings after 7 years $3,162.

Take a $300,000 5 year fixed ARM at 3.5%. Payment is $1,347/m. Savings after 5 years $5,100.

Q5. If Bob and Alice are buying their first home and plan to start a family after 3 years is, it likely that the nice little 2 bed, 2 storey townhouse they get will suit them for the next 30 years? NO

Q6. Would it be smart for them to take a 5 or 7 year ARM and save thousands of dollars which will be useful when they inevitable move up to the detached house with a garden when the children come along. YES

The golden rule of mortgage selection is that one size does not fit all.

Your mortgage should be the one best suited for you at this time in your life and considering your future plans and expectations.

IF YOUR LOAN AGENT DOES NOT ASK YOU HOW LONG YOU EXPECT TO BE LIVING IN THE PROPERTY THEN THEY CANNOT ADVISE YOU WHAT WILL BE THE BEST LOAN FOR YOU.

TURNING 26 YEARS INTO 30 YEARS.

It’s not always a good idea to refinance a mortgage simply to lower the Monthly Payment.

Before you refinance a 30 year mortgage which has 26 years to go, and take a new 30 year loan, you must compare the total amount which will be paid over the life of each loan before deciding whether it makes economic sense.

The smartest way to take advantage of lower interest rates would be to calculate the amount you would have to pay each month in order to have the new loan paid off in 26 years, and then make an extra payment each month to achieve that highly desirable result.

If the new lower payment plus the extra to make it a 26 year loan is less than the amount you are currently paying then go for it. If not then you should reconsider other options before proceeding.

I cannot go into details regarding other options within a simple post such as this, but I can assure you they do exist. However the regular Loan Officer is not going to bring them to your attention. 

A recent nationwide survey asked a wide age range of Homeowners the following question:

“When is it smart to pay points to get your mortgage”?

Amazingly 83% of the respondents answered NEVER. This displays either an astounding ignorance of basic economics, or a desire to help Banks get richer.

The CORRECT ANSWER should be “When it saves me money with no extra risk“.

Put simply you pay points to get a lower Interest Rate. If you keep the loan for at least 5 years you will be showing a Profit. Every year from then on you add to that profit.

BUY IN HASTE, REPENT AT LEISURE.

John and Dave are as close to identical as is possible without actually being twins.

They both work at the same company, make the same money, had saved up the same 20% down payment for  a nice 2bed 2 bath condo in the same favourite complex for up to $250,000.

Problem was that only one unit was for sale back in April. Being good friends they agreed to spin a coin to see who got to buy 1st. John won and bought that one, and Dave waited for the next listing to come up.

That duly came up in late May and Daves offer of the same amount that John had paid was accepted.

They both got their 30 year mortgage for the same amount from the same Broker 6 weeks apart.

What’s interesting here is that for the next 30 years John will pay approximately $75/month more than Dave. This is due entirely to the drop in interst rates during the time between the 2 purchases.

Obviously John will hope to refinance to a lower rate as soon as possible but there is no guarantee that will be possible.

The most interesting part of this story is that due to the continued econonmic chaos it world wide Bond Markets mortgage interest rates are now even lower that Dave got, and are now at 40 year lows.

My message here is to pay more attention to how mortgages really work , and consider whether the 30 year fixed really is the best for you. For 90% of all buyers it is not.

If anyone would like to know how to make this decision just send me an e-mail and I’ll be happy to explain.

What’s the purpose of Credit Scores (FICO)?

To provide a Lender with an independent opinion on the probability that a possible Borrower will pay a Loan as agreed.

How is the score determined?

By looking at the history of payments on previous debts and developing a numerical SCORE which reflects that history. For example:

A score of 800 or more is EXCELLENT. Lenders compete for your business.

A score between 700 and 799 is GOOD. No major problem getting a Loan.

A score between 640 and 699 is POOR. Will pay higher interest rate for a loan.

A score below 640 is BAD. Very difficult to get a Mortgage at an acceptable rate.

NOTE. These examples relate to Mortgages. Other types of Lenders will have different score standards

What exactly is FICO?

The Credit scoring system developed by the Fair Isaac Co and used by the 3 major Credit Bureaus, EXPERIAN, EQUIFAX, and TRANS UNION. Each of these interprets the data slightly differently so produces a slightly different score.

What is MOST important in producing the score?

35% is Payment History. (Do you pay on-time, any Bankruptcies, foreclosures, debt Judgments etc?)

30% is Amount Owed. (Total amount owed as a percentage of credit available.)

15% is Length of Credit History. (Old debts are better than new debts.)

10% is New Credit. (Too much is a Negative.)

10% is Type of Credit. (Credit Cards, Store Cards, Mortgages etc.)

Where can I learn more?

www.MyFico.com is the Public information site for the Fair Isaac Company.

BEWARE of Credit Repair/fixing SCAMS. Anyone who wants money up front should is probably a SCAM.

Potential home buyers, or anyone thinking of refinancing are finding that their credit scores are vastly more important now than in the boom years. However, they seldom know the effect of even one “minor”  bad credit event.

For example:

Tom has a barely o.k. 68O FICO score but makes a 30 day late mortgage payment. It will take 9 months for his score to get back to that level assuming no more late payments.

Dick has an good 720 Fico and makes a 30 day late payment. It will take 2 ½ years to get back.

Harry has a very good 780 FICO but after a 30 day late pay it will take 3 years for him to get back to that level.

The financial costs of  lower credit range from being unable to get any loan, to paying a higher interest rate and higher fees for anything below 720, finding it virtually impossible to get any loan below 640.

The moral is of course to pay your bills on time at all times.

NOTE: Getting and maintaining good credit is a greatly misunderstood process with mountains of free but inaccurate advice. I can strongly recommend Ken Strey kstrey@creditlinei2.org for pretty much anything related to your credit.

Here’s a question from a client who has just had an offer accepted on a bank owned (REO)  property.

Question.

Hi Bill, I was talking to a friend about REO and wanted to get your expertise on the matter.  She mentioned recently there were news about how bank were approving foreclosure while owners were doing a refi and other things, so at the end of the day even the bank didn’t own title to the property.  The loan is sold off to multiple lenders and Title is unclear.  Have you heard about it?

My Answer.

Hi Lisa,   As with many things described as “News” in ourMass Media this is just another Urban Legend. In this case one that shows absolutely no knowledge of reality. What it is talking about is a mixture of different situations based on rumours and hearsay, in all cases relating to either Short Sales, or loan modifications, usually from the 29 States where “mortgage” law is different than in California.

It has nothing to do with REO properties which by definition are fully owned by a Bank. There is no other “Owner”. Title is in the name of the Bank and will be delivered by them to the new owner as in any other purchase. An owners Title Insurance  policy will, as always, be paid for by the current owner (the Bank) and given to the new owner through Escrow. There is nothing different today than when you bought your house.

New questions are allways welcome at bmccord@rwnetwork.com

From: Lisa Ly

Sent: Thursday, December 23, 2010 8:11 AM

To: bmccord@rwnetwork.com

Subject: REO Question

There’s been a lot of babble in the media about the possibility of a Federal halt to ALL foreclosures. Being the MASS Media there seems to be 100% agreement that this would be catastrophic for the crippled Economy, and disasterously expensive for the poor Banks.

The reasons stated are that it will slow down the recovery which needs lots more honest decent folks to lose their homes.

I beg to differ.

I suspect that a moritorium would actually result in Banks putting more effort into Loan Modifications and, where not feasible, Short Sales, which cost 20% less than foreclosures but need a small element of intelligence. These options are both far less traumatic and would get the bad loans reseolved quicker.

Anyone care to guess why the Banks aren’t doing this already?

Given that the Banks caused this situation with their stupid lending practices, is it too much to ask that they give us a little help in digging out of it.

The new FICO® 8 Score is fast becoming the new standard. It has already been adopted by over 3,000 banks and other financial institutions.

But is it good news or bad news for you as a consumer?

Their are multiple small changes but the two I see as the most significant are:

1. Multiple late payments will now carry a heavier penalty than in the past. These are the 30, 60, 90 day lates that show up under “Derogatory” accounts.

2. The penalties for using too much of any credit are increased. If you have any type of credit with a maximum amount available your score will be lowered if you owe  more than 30% of the total maximum allowed. This can be your VISA or Sears card, or a Home Equity Line of Credit. NOTE.

 This applies even if it is a company credit card in your name.

The result of these changes can mean your credit score can be lowered even if you never had a late payment in your life. Too much credit availability is a no-no. This will apply most frequently when applying for a mortgage, when the bank will assume your total debt to be the maximum amount of money you can get at with just your signature.

Here’s one more example of a Bank pretending to do something positive about loans to defaulting Sub-Prime borrowers, while actually increasing their payments.

While 90% of mortgage lenders resist  handing out any type of loan modifications, despite being advised and even pressured by the government to do so, Bank of America claims it is now taking the lead. The initial B of A model seeks to conditionally (read: unlikely) cut up to 30% off the principal of 45,000 home mortgages nationally. Note: This is not the same as a reduced payment.

This program is very limited in breadth and scope. It applies only to those homeowners with negative amortizing ARM’s.  The principal reduction program will not be available to underwater homeowners with fixed rate mortgages or ARMs with amortized payment schedules. B of A claims their goal is to reduce homeowners’ monthly payments to an amount equal to 31% of their household income – the parameter set by the federal government two years ago, in 2008, based on long-standing fundamentals of mortgage lending.

In practise this program will apply only a few of the loans B of A inherited when it took over Countyrywide; specifically (negative amortization loans), where the Borrower is at least 60 days late!!

A more important problem is that the proposed modifications will usually result in a HIGHER MONTHLY PAYMENT for people already unable to make the current minimal payment.

For a delailed analysis of this Public Relations Excercise check http://blog.firsttuesdayjournal.com/2010/04/lenders-attempt-to-lock-homeowners-into-paying-underwater-homes/