LendSure Financial Services

Bank of America was one of several financial institutions to report having profits in April. And the recent increase of home refinance application as well as existing home sales, are also being pointed out as other signs the economy is moving slowly but surely towards recovery.

In the second week of April, President Obama made a statement encouraging home owners and potential buyers to take advantage of these record low interest rates. It was an argument aimed at convincing people that the stimulus plan is, in fact, working and that rather than hoard their money and wait for the crisis to pass, consumers should start taking advantage of the current conditions. So how can people start cashing in on this recent decrease in home interest rates? First, let’s take a look at the numbers.

The Real Interest Rate

In early May, the national average interest rate for a 30-year fixed home loan was 4.99, and 4.87 for a 15-year fixed. Not bad. Seeing such numbers, a potential home buyer or home owner looking to refinance might be tempted to sign up for a plan while the good times last.

But before you jump ahead with a home purchase or refinance, there a few things you should know about.  First off, any table showing average interest rates is not necessarily indicative of the rates in your area. For instance, banks have increased rates in states or areas particularly hard hit by the housing and foreclosure crisis to protect themselves from future losses, Furthermore, an interest rate advertised online is usually for the most qualified customer – you will have to complete an application before a broker would have enough information on your credit, your financial situation, and your property to realistically determine if you would qualify for a particular rate.

Rather than shopping around for the lowest advertised rate, make sure to choose a good mortgage loan origination service. The best way to secure the most beneficial deal for you is to work with an experienced broker who knows the business well. As the popular saying goes, shop the broker not the rate.

Why use a broker and not go directly to the bank?

This is a common question. Mortgage brokers are approved to send loans to a number of different banks, where if you go to a loan officer, they can only offer you products specifically from that bank. Oftentimes banks will specialize in a particular product or service niche, such as second home loans or quick underwriting turn time – so you can see how partnering with someone who is approved to offer products from a number of different banks can work to your advantage. On the other hand, loan officers can offer lower rates directly through their bank than through a third party – although this is not always the case.

Is now the time to purchase?

Decreasing home values have led to dramatic increases in home affordability, meaning, more people are now able to afford a home. In many areas, it is becoming cheaper to own a home than to rent a home. Once you add in historically low interest rates and tax credits as high as $18,000, now might very well be the time to pull the trigger and take advantage of the best buyer’s market in years.

Many people don’t bother to apply for home loans because they think they can’t qualify. This is unfortunate because there are programs out there, such as FHA and VA, where qualified borrowers can get 100% of their purchase financed. In addition, some lenders understand that you are more than just your FICO credit score and will take your credit behavior into consideration – so don’t discourage yourself from applying just because you may have had credit issues in your past.

Adjustable Rates

An adjustable rate mortgage is a loan program where payments stay fixed for a set amount of time, and then change based on the market after a specific period of time. In the past, adjustable rate mortgages made sense because they were significantly cheaper than fixed rate programs – so borrowers who knew they would not be in their home long term were able to take of lower payments during the initial fixed period. These days, adjustable rate loans are not commonly issued as fixed rate programs are the same rate or lower than adjustable rate programs.

There has been a significant amount of business recently from those who elected for adjustable rate loans in the past several years, and who have experienced or are about to experience a rate adjustment. If you are a home owner who is already in an adjustable rate program, consider taking advantage of the low fixed interest rates by securing a good 30-year fixed rate propgram. Once again, make sure to shop for a good broker.

Refinancing

Refinancing is a great way to ease the pressure of your monthly payments. With the current low interest rates, refinancing can leave you not only with lower payments, but a strong long term mortgage strategy.

When you contact your lender to refinance, make sure to do your research first. Look online for the current mortgage rates and comparable plans. Websites like e-loan.com and bankrate.com are good for this. Many lenders or mortgage brokers will also be willing to reduce or waive many of the closing costs of refinancing, so make sure to do some research on these as well.

The best advice you will get from any financial service expert, though, is that you should not go into a purchase or refinance if you don’t think your current financial situation can handle it. Adding more debt through refinancing or by taking out a home equity loan will alleviate immediate financial pressure, but it will be bad for your bank account (and potentially your credit) in the long-run. While the stimulus plan has put into effect some policies that will probably help a lot of home owners and potential buyers, it is the buyers and owners’ responsibility to take advantage of improved lending conditions in a responsible manner.

Today’s market is a buyer’s market. With home prices and mortgage rates at near record lows, those wishing to purchase a home are bound to find a great real estate deal provided they take their time and proceed carefully. If you are considering buying a home, one of the first and foremost steps will be to find a mortgage loan. A good part of the reason for the decline of the housing industry was the failure of consumers to understand the terms of their mortgage loans before signing their names on the final agreement. This is why it is necessary for people to understand the fundamentals of the various mortgage options available today. Educating yourself on the differences will help you determine which loan option is best for you.

The Basics

The two basic home loan categories are fixed rate mortgages (FRM) and adjustable rate mortgages (ARM). Traditionally, FRMs have been the most popular home financing option for U.S. home buyers. FRMs account for about 70 percent of home purchases. Fixed rate mortgages are characterized, as their name implies, by their stability. The interest rate on an FRM will remain the same throughout the entire term of the loan, without regard to any changes in the state of the housing market. The borrower can thus rely on consistent, monthly payments that are put towards both the principal loan amount and the interest.

Adjustable rate mortgages became especially popular during the rise of the housing market in this past decade because they offer a low interest rate for a set period of time (such as 3, 5, or 7 years), after which they ‘adjust’ up to another rate (usually higher) and may continue to adjust until an interest rate maximum is reached. Unlike an FRM’s steady interest rates, the interest rates of an ARM are determined by specific market indexes that change with the motions of the prevailing market. While ARMs provided temporary savings and affordability to many homebuyers, they led to many financial problems after the real estate bubble burst and borrowers were unable to refinance out of their loans after their loans adjusted to a higher payment.

The intervals at which the interest rate of an adjustable rate mortgage will change are disclosed in the original loan contract. Basically, if the market index increases from one adjustment period to the next, the interest rate will increase as well, and thus too the monthly payment. By the same token, if the market rate decreases, the interest rate may decrease and the monthly payments may be lowered, depending on the loan. There are usually limits, or “caps”, established during the beginning of the mortgage loan origination process that determine how much an interest rate can change from one adjustment period to the next.

Under the two basic mortgage categories of ARM and FRM, there are a variety of loan types, some of which combine aspects of the two main mortgage types. Below are basic outlines of some of the most common loan variations.

Government Backed Mortgage Loans

The Federal Housing Administration (FHA) loan falls under the fixed rate mortgage loan category. It was specifically designed with first time home buyers in mind, especially those with middle to low incomes. Because FHA loans are guaranteed by the federal government, they can be easier to qualify for than traditional fixed rate mortgage loans. FHA loans usually require lower down payments (about 3 percent), and offer low interest rates as well. Both people looking to buy a single family home or a multi-family home have the FHA loan option available to them, provided the home will be owner occupied.

Another federally backed mortgage program are VA (Veteran’s Administration) loans. VA loans are available to those who have served in any branch of the U.S. military or to the surviving spouse of an active service member. Veterans can often obtain VA loans very easily, and this program requires little or no down payment. The main qualification for a VA loan is that applicants need to prove that they have the means to make the monthly loan payments on time.

The last government backed mortgage loan type we will touch on is the USDA Rural Development Guaranteed Housing Loan. This loan is designed for low to moderate income borrowers who wish to buy a home in an area considered as Rural Development eligible. No payment is required and the qualification process is much more lenient than in regular home loans, so that borrowers with medium to poor credit can have the means to finance their purchase.

Balloon Mortgages

Balloon mortgages are structured in a similar way as FRMs, except the loan terms only last for about five to seven years, after which the entire sum of the loan becomes due – rather than being amortized over the entire life of the loan. This is why they are referred to as balloon mortgages, because of the large final payment requirement where owners must then pay the outstanding loan either out of pocket or by refinancing their house, depending on the specifics of the loan

Option ARMs

Option ARMs differ from regular ARMs in that they do not have adjustment caps. Option ARMs have an interest rate that changes every month – borrowers have the ‘option’ to pay different amounts, such as the fully amortized payment, the interest only payment, or a negative amortization payment (when the payment is less than the interest accrued on the loan, causing the loan balance to increase slightly). Option ARMs were originally designed for borrowers with wide fluctuations in their pay, such as salespeople paid on commission – they could pay the full payment some months, and the minimum payment other months as needed. However, most borrowers in an Option ARM will pay only the minimum, which results in a loan that increases over time, often by a considerable amount.

Interest Only

For a predetermined period of time, borrowers with an interest only mortgage are allowed to pay only the interest of their loan, without paying towards the principal amount. This results in a lower mortgage payment for the duration of the interest only period, but it also means that the principal balance is not reduced during this time. Once the interest only period ends, payments naturally increase since they now include the loan principal, and in fact end up much higher since the principal now has to be paid in less time. The longer the interest only period, the higher the monthly mortgage bill will be after the adjustment.

The collapse of the housing industry was a devastating blow the nation’s overall economic recession. The road to national economic recovery must include the restoration of the housing market. This will not be an easy task. In January of this year, construction of new homes and applications for future projects reached record lows, as building activity declined everywhere in the country.

Economists are hoping that the path to recovery for the housing industry will start with the implementation of the government’s proposed bailout plan. The Obama administration has set aside $74 billion for the Homeowner Affordability and Stability Plan, which is aimed at curtailing foreclosures in order to stop the housing industry’s downward slide. The Plan is broken up into 2 main components, the first of which is the Home Affordable Modification Plan, which provides a set of incentives to encourage lenders to lower monthly mortgage payments so that homeowners are better able to afford their homes and can thus avoid defaulting on their loans.  The second part of the Plan is known as the Home Affordable Refinance Plan, which involves helping owners who are “underwater” (i.e. owe more than their house is worth) refinance. Underwater mortgages are typically impossible to refinance, but the housing bailout plan will try to do just that for 4 to 5 million families throughout the country.

Refinancing

Mortgage rates have reached near-record lows in the past few months. This could result in more manageable payments for those homeowners who are trapped by the falling price of their homes. Despite being current on their monthly payments, many homeowners still find themselves underwater. Up until now, people whose mortgages were backed by Fannie Mae or Freddie Mac were required to have a minimum level of equity in their homes before they could refinance. With the Obama administration’s housing plan, however, the option to refinance is open to people who owe up to 105% of their home’s current value.

The administration has made a point of the fact that homeowners don’t have to be delinquent on their mortgage payments to qualify for the new refinance plan. White House analysts estimate that about 5 million homeowners with mortgages backed by Fannie Mae and Freddie Mac will be eligible. If you are wondering whether you fall in this eligible category, contact a mortgage company familiar with these programs to determine if you are eligible to refinance and lower your payments.

Incentives for Lenders and Borrowers

As part of the stimulus plan, loan servicing companies will be paid for every eligible loan modification an up-front fee of $1000. So-called “pay-for-success” fees will also be awarded, provided borrowers maintain do not become delinquent on their loans. These pay-for-success fees go up to $1000 a year for up to three years. In addition, the housing stimulus offers $500 to lenders and $1,500 to loan holders if they modify the loan before borrowers default on their payments to encourage lenders to help out borrowers who are doing their best to pay on time, .

For borrowers, making on-time payments will result in annual balance-reduction payments that go towards the reduction of the loan’s total principal amount. As long as homeowners maintain a current status on their mortgages, they can receive up to $1000 per year for five years.

The Federal Insurance Fund

The Obama administration and the Federal Deposit Insurance Corporation have planed an insurance fund that would reward mortgage holders for modified loans when there is a decline in the home price index. This fund is meant to promote loan modifications that lower mortgage payments and enable homeowners to stay current on their loan.

Institute Consistent Loan Modification Guidelines

Inconsistent and unethical loan modification practices have contributed to some of the devastation experienced in the housing industry, as borrowers struggling to make their payments were fooled by mortgage modification scams where con artists took their money and never did anything to improve their situation. In order to prevent future financial malpractices, the U.S. Treasury is set to develop uniform loan modification guidelines that will apply throughout the entire mortgage industry. All financial institutions receiving bailout money will be required to abide by these guidelines. The White House will partner with federal and state regulators to ensure that these standardized practices are implemented. The guidelines will apply to all loans backed and/or guaranteed by federal government institutions as well as by Fannie Mae and Freddie Mac.

With the real estate industry continuing on a downward spiral, more and more homeowners who took on risky adjustable rate mortgages before the bubble burst are now facing the possibility of foreclosure because they can’t make their loan payments on time.

If you’re having trouble making on-time mortgage payments and think you might be at risk of foreclosing, know that you do have some options. Simply speak with your lender about your financial dilemma and they will be happy to discuss the problem and the options available.

Lenders do not benefit from foreclosures and would rather avoid them as much as possible. They might be able to give you a forbearance or a grace period for you to make late payments. It is important that you have this conversation with your lender early on, at the earliest signs of financial difficulty - not when you find yourself already at the foreclosure stage.

The best policy is always to avoid foreclosure before it becomes a possibility. Here are a few steps that you can take to minimize your chances of having you home foreclosed.

Cut Down Your Budget

Take some time to sit down and evaluate your budget. With the failing economy adding to the pressure of the real estate crisis, now more than ever people are seeing the importance of cutting back on excess spending. See which expenses you can eliminate from your budget to help you increase your income. Reevaluate your spending priorities to determine where money can be saved.

Pay on Time

When reevaluating your expenses, make sure that you place your mortgage payment at the top of the priority list. Making on-time payments should become the most important financial item on your budget.

Partial Payments

Some banks will negotiate a partial payment program with you in the event that you become unable to make a full payment. Try for this option only if you feel it is necessary. Banks have the right to refuse, but it doesn’t hurt to try.

Refinancing

If you have equity remaining on your house, refinancing your home can be a great way to reduce your monthly mortgage payments. Be careful when you chose to take this option, however. Work with a broker that you trust and make sure you understand all the paperwork before you sign it. If you are not careful, you could end up in a worse situation than before.

Also, be aware of scam artists. The incidence of phony counseling agencies offering mortgage services has been rising in recent years. These companies will try to charge you an unnecessary fees for doing things that you may be able to do yourself.

Loan Modifications

Go to your lender and ask if they would be willing to modify your loan agreement. Often, lenders will prefer to do a mortgage loan modification than potentially lose money on a foreclosed property.

Seek Counseling

You do not need to pay for counseling. There are non-profit organizations dedicated to helping people who find themselves at risk of foreclosing. A good place to check for such services is the National Foundation for Credit Counseling. These non-profit groups are federally supervised. If anyone comes to you offering credit counseling for a fee, make sure to say no to them.

If you’re going to seek help from a property loss mitigation specialist, make sure that they have the credentials and the track record to prove their trustworthiness.

Sell

Though you might not wish to sell your home, it might be the best option. A pre-foreclosure sale is much more desirable than the plunge your credit will take if your property is taken by the banks and sold at auction. It is important that you take action before your property is foreclosed. Make sure that you have a place set aside where you can live for a while before you’re back on your feet.