The Mortgage Scoop

30 vs 15 year mortgage - pros and cons

2007-10-01T14:47:00.000-07:00

With any financial investment you need to look at home ownership from both a short- and long-term perspective. Choosing a 30-year mortgage versus a 15-year mortgage can dramatically impact you financially -- for better or for worse. Based on your individual circumstances, it's important to review the key differences.

30-Year Term
The 30-year term offers you budget flexibility and the opportunity to qualify for a larger mortgage. You can also spread your mortgage payments over an extended period, offering the advantage of reduced monthly payments, e.g., on a $150,000 mortgage, your payments would amount to roughly $330 per month less than the payment for a 15-year term.

You still have the option to prepay your mortgage each month and reduce the term of a 30-year mortgage (assuming you do not have a prepayment penalty clause). However, if you incur an unexpected bill or simply have less cash flow in a given month, a 30-year term allows you the flexibility not to prepay your mortgage.

The tradeoff to having financial flexibility with the 30-year term is that you will pay a slightly higher interest rate and accumulate equity at a slower rate.

15-Year Term
The primary attraction of a 15-year term is that it allows you to pay off your mortgage within 15 years. To many homeowners, a shorter term may offer an overwhelming advantage – savings in time and capital, not to mention piece of mind. Another plus of the 15-year term is the interest rate is roughly a ¼ to 3/8% lower than the prevailing 30-year term.

However, a 15-year term does have its disadvantages. The 15-year's higher monthly payments can reduce your purchasing power. Looking again at the above example, the $330 per month (saved) in a 30-year term is roughly equivalent to $50,000 in buying power. Qualifying for an extra $50,000 could be the difference between an acceptable but ordinary home and the home of your dreams.

What are your spending habits?
Reviewing the basic differences described here, the choice between a 30-year and a 15-year term may not be entirely clear. Assuming either option is realistic given your personal budget, your choice may ultimately be based on your personal spending habits.

For those homeowners who mistake a savings plan for excess "play money," you may be better off choosing a 15-year term and creating a “forced savings plan.” On the other hand, if you are a diligent saver and usually earn a higher return on investments than your current mortgage rate, you may benefit financially by choosing the 30-year term and investing the difference.

Best of both worlds
If you are unwilling to commit to a 15-year term but would like the “forced savings” associated with the15-year term, here is a helpful hint: Most mortgage companies will allow you to set up automatic payments from your checking or savings accounts. Call your mortgage consultant and ask them to calculate the required amount beyond your normal monthly payment to payoff your mortgage in 15 years (or whatever timeframe meets your goals).

To calculate the new payment, your mortgage consultant will need a ballpark estimate of your current mortgage balance, your current interest rate and when you would like the mortgage to be paid off. When setting up the automatic payment, simply select the new payment amount. As mentioned before, if you run into a cash flow issue or can make better use of your money elsewhere, you are free to cancel the automatic deduction and revert back to your original monthly payment.

Summary
To recap, a 30-year term offers lower monthly payments, more flexible payment options and the ability to qualify for a higher mortgage. A 15-year term offers a lower interest rate, accelerated accumulation of equity and a forced savings plan. As with any financial decision, consulting your accountant/financial planner as well as your mortgage consultant will help you determine the best mortgage term for your individual goals and needs.

Mortgage paid off 17 years early without increasing mortgage payments? A look into deceptive advertising

2007-09-18T20:40:00.000-07:00

Knock 17 years off of your mortgage – really?
We receive calls from clients all the time asking about ads they heard on the radio or saw on the Internet. Some of my favorites are the ads claiming “Pay your loan off in 13 years without increasing your mortgage payment”. You think to yourself, “How can this be, I can pay my mortgage off in 13 years and not increase my monthly mortgage payments?” Of course your instincts tell you there must be a catch – and you are right.Deceptive advertising.

This sounds too good to be true because it is too good to be true. Unfortunately there are some legal loopholes with mortgage advertising which allow companies to make such unbelievable claims. The statement is a true statement, but they are leaving out a very important detail - you need to make about six extra mortgage payments per year for 13 years! Note, technically speaking your monthly mortgage payment on paper is not increasing so they can say it is still the same and the advertiser gets away with this deceptive ad.

Down Under
Recently there has been a surge of advertisements making the above claims if you use a new mortgage program which is popular in Australia. Once again, many of the important details are being left out.

This program is basically a Home Equity Loan with an interest rate 1 ½ to 2% higher than current fixed rates. The program suggests the borrower sweep all of their disposable income towards the loan each month to reduce the mortgage balance and thus avoid paying some interest. In the end, all the borrower is doing is prepaying on their mortgage. A borrower could do the same thing with a current fixed rate mortgage and prepay any extra disposable income towards their mortgage. However, the rate on the fixed rate mortgage will have a lower interest rate so the mortgage will be paid off even sooner.

To help sell this program lenders are using software models to show how you can pay your mortgage off in 13 to 14 years, instead of 30 years. In most cases, the assumptions used in the computer model, such as the amount of disposable income you will be able to apply towards the mortgage, are unrealistic. On top of this, sometimes there are fess as high as $3,500 for the software program. Save your money by utilizing one of the free mortgage calculators common on the Internet to see what happens if you prepay your mortgage.

1.75% Interest Rate?
Ads claiming incredible rates like 1.75% are true statements, but typically true for only the first month. As soon as the second month of the loan the rate will start to adjust each and every month. At the time of this writing the new monthly rate would be around 7.25%. That's about 1% higher than a current fixed rate mortgage.

New Legislation to Help Protect the Consumer
September 4th of this year the Colorado Department of Real Estate, which now oversees most mortgage companies in Colorado, instituted a new disclosure called the “Colorado Tangible Net Benefit Disclosure”. One of the best parts of the disclosure is the requirement that the new mortgage needs to have a net benefit to the borrower.

Specifically the form states the mortgage company will have a duty to the consumer. “Such duty includes the duty to not recommend or induce the borrower to enter into a transaction that does not have a reasonable, tangible net benefit to the borrower, considering all of the circumstances, including the terms of a loan, the cost of a loan and the borrower's circumstances."

The form highlights several possible negatives of certain mortgage programs. Some examples are - does the new mortgage have Interest Only payments or does it have an Adjustable Rate? The borrower is required to physically initial or mark "N/A" for each possible negative. Plus, both the borrower and the mortgage company are required to acknowledge the new loan will have a net benefit to the borrower.

The disclosure is still too new to know if it will help reduce bait and switch tactics or deceptive advertising. My guess is companies will think twice before taking a person out of their fixed rate to put them in a monthly adjustable with a 1.75% teaser rate.

Ask questions and read the small print
Your home is most likely the largest purchase you will make in your lifetime. When choosing which mortgage program makes the most sense for your financial situation, take your time, read the small print and be sure to use a reputable mortgage company.

Credit Scores - How they are determined

2007-03-15T15:44:00.001-07:00

Understanding credit scores
A Credit Score, officially known as a FICO Score, uses a proprietary mathematical formula developed by Fair Isaac Company to predict an individual’s likelihood to meet his/her financial obligations. A separate FICO score is calculated for you by each of the three national credit bureaus – Experian, Equifax and Trans Union. They calculate your FICO score based on the following credit categories:

· Past payment performance (35% of total score)
Do you pay your bills on time? Consider two things: 1) Being 90 days late on a payment is considerably worse than being 30 days late. 2) The more recent the infraction, the faster your credit scores drop. According to one credit bureau, a 30-day late payment today will hurt your score more than a bankruptcy five years ago.
Tip: Always pay on time, even if the balance is only $10.00.

· Credit utilization (30% of total score)
Do you charge the maximum limit on your credit cards? If your credit balance is spread between 3-4 credit cards rather than a higher balance on 1-2 cards, you most likely will have a better credit score.
Tip: The general rule of thumb is to keep your balances below 30% of your maximum credit limit.

· Credit history (15% of total score)
How long have you had credit? The longer your credit history the better. Newly opened accounts (credit cards, loans, etc.) with high balances may reduce your score.
Tip: Avoid opening a lot of new accounts, even if you pay them in full every month.

· Inquiries (10 % of total score)
Do you authorize anyone to inquire on your credit history? Applying for new credit may lower your credit score. However, multiple inquires for the same types of credit (like a mortgage) within a 14-day period are viewed as only one inquiry.
Tip: Decide which financial institution you plan to go with and then let only them run your credit report.

· Types of credit in use (10% of total score)
Do you accept every offer for credit? Loans from high-risk finance companies can impact your scores more harshly than a loan from a bank or mortgage company.
Tip: Revolving debt is less favorable compared to installment loans.

Tips to Prevent Identity Theft

2007-03-15T15:40:00.001-07:00

Your personal credit scores are the most influential factors used to determine the rates you pay for mortgages, consumer loans and even some types of insurance. As a result of identity theft and the reporting of inaccurate information, it is imperative that individuals review and correctly maintain their credit information.

Understanding credit reporting
The Fair Credit Reporting Act (FCRA) states that any business that requests your credit file must have a “legitimate business need” and a “permissible purpose,” or written permission from you to obtain your credit file. Examples of who can access your credit files include:

· Credit grantors
· Collection agencies
· Insurance companies
· Employers

Most creditors report your payment history to at least one of three national credit bureaus - Experian, Equifax and Trans Union. Companies can pull reports from these credit bureaus to receive a summary of your credit history. The types of information on those reports include:

· Identifying information (name variances, SS#, etc.)
· Employment information (typically reported by credit grantors for demographic purposes only, not credit decisions)
· Credit information (payment history, etc.)
· Public record information (tax liens, judgments, etc.)
· Inquiries (from car dealerships, credit card companies, etc.)

Protecting your credit score – and your identity
Criminals are becoming increasingly sophisticated at obtaining personal and credit information to assume others’ identities for financial gain. “Identity theft,” as this occurrence is known, is one of the fastest growing crimes in America and affects an estimated 500,000 to 700,000 individuals and their credit each year. To minimize the risk of someone “stealing” your identity and the hassle of restoring your credit identity, you are encouraged to do the following:

· Carry only the cards (credit and ID) that you need to have with you; file others in a safe place at home.
· Sign your credit cards immediately.
· Do not carry your social security card with you. Keep it in a secure, safe place.
· Do not attach a pin number or social security number to any cards you carry with you.
· Do not attach or write a pin number or social security number on anything you are going to discard (e.g. a receipt).
· Shred any document that contains your credit card number before you discard it.
· Check receipts to ensure you received your own and not someone else's.
· Alert your card issuer if you do not receive your statements. Someone could have taken them from your mailbox and could be using your credit card number.
· Do not give personal information or account numbers to anyone until you have confirmed the identity of the person requesting the information and verified that you need to provide them with the information.
· Check your credit frequently (via a credit information service) or subscribe to one of the online credit watch services to monitor your credit for unusual/unexpected activity, such as new account openings or changes to your address.

Finding and maintaining your individual report
Responsibility for your credit lies with you – it is important to obtain credit reports frequently to monitor and respond to any unexpected account activity that takes place. You may order your own credit report directly from each of the credit bureaus for a nominal fee. Consider using one of the following services:

For individual reports and services:
Equifax Credit Information Services
P.O. Box 740241
Atlanta, GA 30374
1-800-685-1111 or http://www.econcumser.equifax.com/

Trans Union
P.O. Box 390
Springfield, PA 19064
1-800-888-4213 or http://www.tuc.com/

Experian
P.O. Box 9600
Allen, TX 75013
1-800-311-4769 or www.experian.com

For 3-in-1 reports and services
TrueCredit
1-800-493-2392 or http://www.truecredit.com/

For specific credit problems
National Foundation for Consumer Counseling, a non-profit organization that assists consumers in dealing with their credit problems.
1-800-388-CCCS (2227), or http://www.nfc.org/

1% Rates and the Easter Bunny

2006-06-05T15:43:00.000-07:00

You see the ads “Interest rates as low as 1%”. Almost every mortgage company has access to these programs; the difference is in how they are explained to you. These programs seldom make financial sense and should be avoided. Worse yet, they usually have prepayment penalties costing thousands of dollars if you sell or refinance your home within three years.

What’s the catch? Although the minimum required payment is fixed, the interest rate can change “behind” the scenes every month. Often times the minimum fixed payment does not cover the minimum interest due. This is similar to your credit card statement that says you may skip a payment. The interest owed for that month is then added to your current balance so you are now paying interest on interest. In other words, your principal balance actually increases over time and you may owe more than your original loan amount.

Bi Weekly Payments - Yes or No?

2006-06-05T14:49:00.000-07:00

As your personal mortgage advisor, I would like share some advice with you regarding biweekly mortgage payments. Recently, you may have received offers to convert your loan to a biweekly mortgage. These offers usually state biweekly payments can save you thousands of dollars and reduce the life of your mortgage.

Although this may sound great, there usually is a catch. Unfortunately, most banks will charge a one time fee of $400.00 and monthly service fees around $12.00.

However, you can achieve the same goal without having to pay any bank fees by simply prepaying your mortgage each month or in lump sums. As a rule of thumb, any extra amount you apply towards your monthly mortgage payment will reduce your principal mortgage balance and in turn reduce the life of your loan. If you have a particular goal in mind please call and I will calculate the amount you need to prepay.

As a valued client, my goal is to help assist you make sound financial mortgage decisions. On a quarterly basis you will receive additional informative letters addressing various mortgage questions. Please feel free to call me with any questions, comments or suggestions for future topics.

Do you know your FICO scores?

2006-06-05T14:40:00.000-07:00

A FICO score is a summary rating of your overall credit and is the most influential factor used to determine the interest rate you pay for a mortgage. Most creditors report your payment history to at least one of three national credit bureaus - Experian, Equifax and Trans Union. Therefore, you have three separate FICO scores and they may change every day based on your credit history and current debts. As a result of identity theft and the reporting of inaccurate information, it is imperative that you review your credit report at least twice. Often times I pull a client’s credit report only to find inaccuracies which adversely affect his/her FICO scores. The good news is the inaccuracies can be cheaply and easily corrected. However, this process can take several months. Please call me if you or anyone you know has any questions.

Interest Only Mortgages – Get the Facts First

2006-06-05T14:17:00.000-07:00

You see the ads “Interest rates as low as 1%”. Lured by these misleading promises consumers took out record numbers of Interest Only mortgages the past few years. Lately there has been a lot of negative press regarding Interest Only programs which further blurs the line between whether or not an Interest Only mortgage is right for you. This article addresses the “small print” and explains the different types of Interest Only mortgages so you will be armed with facts to know what questions to ask and make an informed decision.

Interest Only Example
As the name implies, with an Interest Only program you are only required to pay interest each month. A 6% rate on a $250,000 loan gives you an Interest Only payment of $1,250 compared to a Principal and Interest payment of $1,498.88. In this example, the difference of $248.88 is a fairly substantial amount. We will refer to this example throughout this article.

Fixed Payment vs Fixed Rate Interest Only
Before discussing the pros and cons of Interest Only programs, we first need to review some basics. Interest Only programs can be either a Fixed Payment Interest Only or a Fixed Rate Interest Only.

Fixed Payment Interest Only
You hear advertisements daily for Interest Only Fixed payment programs with appealing names like “Freedom Payments”, “Flexible Options” and “Smart Payments” with claims of amazingly low rates from 1% to 2%. Almost every mortgage banker/broker has access to these programs; the difference is in how they are explained to you. These programs seldom make sense and should be avoided in most cases.

The interest on Fixed Payment Interest Only programs usually changes every 1 to 3 months with minimum fixed payments that may be fixed from 1 – 5 years. Note the payment is fixed, but the interest rate is not fixed. In addition, they usually have prepayment penalties costing thousands of dollars if you sell or refinance your home within three years.

As the saying goes “there are no free lunches.” Although the interest rate changes every month, you have the “option” to pay the minimum fixed payment. When you receive your monthly mortgage statement, there are four payment options. Most people choose the minimum required payment.

Here is the catch. Often times the minimum payment does not even cover the interest. This is similar to your credit card statement that says you may skip a payment. You still owe the interest for that month which is then applied to your current balance so you are now paying interest on interest. In other words, your principal balance actually increases. Since there are very few exceptions when a Fixed Payment Interest Only program makes financial sense, we will not be reviewing the pros of these programs and instead we will focus on the Fixed Rate Interest Only programs.

Fixed Rate Interest Only
The most common Fixed Rate Interest Only programs are the 3/1, 5/1, 7/1 and 10/1 Adjustable Rate Mortgages (ARMs). The initial rate is fixed for the first 3-10 years respectively and cannot change during the initial period you choose. Therefore, if you think you will refinance or sell your home before the rate changes, from your stand point you have a fixed rate mortgage. Since you are taking some of the risk, the interest rate is typically a 1/4% to a 5/8% lower than the current 30 year fixed rates.

Cases when a Fixed Rate Interest Only Makes Sense
The top two reasons to consider Fixed Rate Interest Only programs are cash flow flexibility and more buying power. Cash flexibility is appealing if your income fluctuates from month to month, for example if you are commissioned or self employed. Since most Interest Only options allow you to prepay towards principal at anytime, you have the flexibility to make principal payments when your cash flow permits.

The second reason is increased buying power. Using the example at the beginning of this article, the Interest Only payment gives you an extra $50,000 in buying power. In other words, the Interest Only program allows you to borrow $300,000 and have the same payments as a Principal & Interest payment on a $250,000 mortgage. With the extra $50,000 in buying power, you may gain a needed 4th bedroom and the dream kitchen you always wanted.

Other reasons to choose an Interest Only program include better investment choices for the principal, an expected pay increase in the future, you already have significant equity, you are retired or retiring, or your household income decreased due to a divorce or illness.

Possible Negatives of an Interest Only
Besides never reducing the principal balance, there are other factors to seriously consider when deciding if an Interest Only program is right for you. An issue could arise if you put very little money down and unexpectedly need to sell your home after one or two years. If you did not apply any money to the principal mortgage balance and your home has not appreciated in value, you could find yourself “upside down” in equity and need to bring thousands of dollars to the closing table. Fortunately, most real estate markets have had sufficient appreciation over the past few years to cover any costs associated with selling a home, i.e. realtor commissions.

In general, the Interest Only rate will be 1/8% higher than the equivalent Principal & Interest rate. If you intend to pay principal each month and do not need the flexibility, you may as well go with a standard Principal and Interest program and take advantage of the lower rate.

Borrowers may have good intentions of applying money to the principal or diligently investing the difference, but what actually occurs may be less optimistic. If you are disciplined with your money and have a good savings history, the Interest Only may work for you. If on the other hand your saving skills are lacking, you may be better off with Principal and Interest payments which will act like a forced savings account by building up equity in your home.

Summary
The correct Interest Only program may enable better cash flow flexibility and allow you to afford a larger home or a better location. Before deciding if an Interest Only option is the best option, you need to consider your saving habits and review your future financial picture. Even more important, after deciding if an Interest Only mortgage is best for you, the biggest decision is choosing the most appropriate Interest Only program. A knowledgeable mortgage consultant can assist you with the pros and cons so you can make an informed and sound financial de