Real Estate Info

A Farewell to ARMs:

Refinance Before Adjustable Rate Mortgages Reset

By Nick Alameddin
Loanisland

    Since June of 2004, the Federal Reserve has systematically increased the federal funds rate, causing short-term interest rates to follow suit. As a result, consumers with Adjustable Rate Mortgages (ARMs) tied to volatile short-term rate indices, such as the LIBOR, are finding themselves at the mercy of the Federal Reserve’s war on inflation.

“Higher interest rates function as a tax on people who hold variable debt,” says Daniel Gross, reporter for The New York Times, a “truism that is particularly apparent to homeowners holding adjustable rate mortgages.” In his article, Gross cites Mark Zandi, chief economist at Moody’s Economy.com, who estimates that nearly $2 trillion in ARMs are due to reset by the end of calendar year 2008. This could potentially increase the total interest payments of ARM holders by an estimated $50 billion in 2009, compared to today. For many of these borrowers, reset minimum monthly payments could increase upwards of 50% to even 100% of what they’re paying now – if they haven’t already. And the worst may not even be over!

According to Ben Bernanke, the Federal Reserve’s chairman, the real estate market is experiencing a “substantial correction”. This, economists say, is the result of the Fed’s attempt to engineer a “soft landing” by systematically increasing interest rates to control inflation without fueling a recession. Fed officials believe that they are making strong progress towards this difficult goal. However, even moderate economic growth will give the Fed room to increase short-term rates further, according to David Leonhardt of The New York Times. This means more bad news for ARMs holders with life-caps at 10% or more, and even worse news for the estimated 70% of Option ARM borrowers who chose the minimum or negative payment options of their mortgages and are now actually accruing (and compounding) a larger balance than what they originally borrowed.

If you or someone you know has an ARM, however, all is not completely lost. There is still time to take advantage of alternative loan programs, such as intermediate fixed-rate and tiered-rate loans, that can effectively limit one’s liability before rates increase again. These programs enable borrowers to stabilize their finances and know exactly what their monthly payments will be over the next few years while the Fed does its best to stifle inflation. Remember, the Fed has a habit of overcorrecting the market before changing policies, which means rates could still increase even after their goal of a soft landing has been reached.

If you do foresee a sustained period of paying an interest rate that is significantly higher than what you want or are able to pay, see your mortgage professional today. Don’t be a casualty of the Fed’s war against inflation. Ask about intermediate fixed-rate or tiered-rate products to hold you over until the Fed flips the script and rates finally begin to decrease.

An experienced and resourceful loan professional will have access to a variety of loan programs including 3, 5 , or 7-year fixed-rate products as well as tiered-rate programs to counter fully-indexed ARMs and Option ARMs. A 5-year fixed rate mortgage, for instance, converts to an adjustable at the end of that fixed tenure. Taking out such a loan, with no prepayment penalty, may make a lot of sense right now because it will provide some interest rate relief in today's market, while buying the consumer time to refinance once rates begin to decrease.

Tiered-rate products, on the other hand, are essentially fixed-rate loans that act like adjustable rate loans but offer the security of a built-in cap. In fact, these loans actually adjust in your favor, saving you money in the first years of the loan before reaching their final fixed rate. Various types of these tiered-rate products exist, and each offer different money-saving options. See your mortgage professional for the one that’s right for you. Just be sure, however, that he or she caps you out at a rate that’s lower than your current interest rate to receive the full benefit of these products. Finally, confirm that your mortgage professional will be keeping abreast of market conditions and will be ready to refinance you once rates do decrease, saving you even more.

Refinance Your Mortgage for Rate and Payment Reductions

By Loan Nick Alameddin, EVP

Loanisland

One of the biggest reasons homeowners refinance their mortgage is to obtain a lower interest rate and lower monthly payments. By refinancing, the borrower pays off their existing mortgage and replaces it with a new one. This can often be accomplished with a no-points no-fees loan program, which essentially means at “no cost” to the borrower.

In the no-points no-fees scenario, the mortgage consultant uses rebate monies paid by the lender to pay off non-recurring closing costs for the borrower. These are “one time” fees such as escrow or attorney fees, title insurance, document preparation, tax service, flood certification, processing and underwriting fees, etc. The borrower is still responsible for recurring fees such as interim insurance, property taxes or insurance policy payments.

Refinancing typically occurs when mortgage interest rates drop significantly, but borrowers with recently improved credit scores (from paying off credit card debt, making mortgage payments on time, etc.) are often candidates for better interest rates as well. If you haven’t checked your credit score in a while, it’s a good time to call a mortgage consultant.

The question most asked is, “But why should I go back into a 30-year loan?”

There are two schools of thought on this subject, and the mortgage consultant should work hand-in-hand with the borrower’s financial planner to determine what works best for their mutual client.

One option is to take the route of the “same payment” refinance, and actually pay off the loan faster and save money on interest fees in the long-run. If refinancing results in a lower monthly payment, the borrower can still continue making the same payment they made in the original loan, and the extra money will be applied to the principal balance.

For example: Let’s say you have 25 years remaining in your current loan, and you refinance back to a 30-year loan with a slightly lower interest rate, resulting in a payment reduction of $200 per month. (Note: This is just an example. The actual amount could vary.) You could then take that extra $200 per month and apply it toward the principal on the new loan. At this rate, the loan will be paid off in 22 years and 4 months, which is 2 years and 8 months less than the original loan.

On the other hand, if the borrower’s financial planner is a proponent of best-selling author and investment guru Douglas Andrew’s philosophies (see Missed Fortune), he or she may suggest investing the extra money in a side-fund that could earn a better rate of return and grow to the amount of the mortgage (and beyond) in even less time. This method provides excellent liquidity, but having more direct access to this money may be too tempting for some homeowners.

Regardless of the reason for the refinance, the mortgage consultant will need to know what the existing loan scenario entails, review the homeowner’s long-term goals, and provide a comprehensive spreadsheet that compares and contrasts the various loan programs available.

Bear in mind, refinancing to obtain a lower interest payment could also result in a lower deduction at tax time. The homeowner’s mortgage consultant and financial planner should work hand-in-hand with their mutual client’s best interest in mind.

Call today for a free consultation (858)455-6700

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Perhaps You Should Remodel Instead!

Each year, millions of Americans move into the home of their dreams. As time goes by, families expand, kids grow older, and suddenly that home isn't quite so perfect anymore. Or perhaps you still love your home, but you really want a gourmet kitchen and a larger master bedroom. Should you start looking for a new house? Or would it be better to stay where you are and remodel instead?

Both options involve a significant investment of time and money, so it's important to take your time and make an informed decision. You'll also want to be sure to consider both the financial and the emotional sides of the equation. Let's begin by examining the financial factors involved.

Moving: A good local real estate agent should be able to assist you with estimates on these numbers.

· How much will it cost to purchase a home that will meet your needs?

· How much could you sell your existing home for? Don't forget to subtract the agent's commission from this total.

· What will it cost to move? According to real estate consultant and best-selling author of Remodel or Move, Dan Fritschen, a typical move costs 10% of the value of your home.

· How much will your property taxes increase as a result of the move?

Remodeling:

· What projects do you want to have done and how much will they cost? An architect or general contractor will be able to assist you with these figures.

· How much will the improvements add to the value of your home, also known as the "payback"? A local real estate agent can assist with this as well.

If the decision about whether to renovate or move were purely a financial one, then it would be quite easy to look at the numbers and come to the right conclusion. However, there are also emotional factors that come into play, and they have a value as well. Let's consider some examples.

Reasons you may want to move:

· If you relocate to a new neighborhood, your children could attend superior schools.

· You would like to reduce your commute or have better access to local amenities, such as restaurants and shopping.

· You're not particularly fond of your current neighborhood.

· Your yard is too small, and you cannot expand it.

Reasons you may want to stay and remodel:

· You're happy with your location. It's convenient, you love your neighbors, and the schools are either excellent or are not a factor.

· You love the layout of your home.

· All you need is a little more space, and your home will be perfect.

Of course only you know what is truly important for your happiness, so try to use these questions as a starting point. Create a list of the pros and cons of each scenario and leave it someplace accessible, so that you and your spouse can add to it as you think of additional factors. You may also want to consider attending open houses and visiting new housing developments to see what is available and how your home compares.

Once you've completed your list and your financial assessment, it's time to draw some conclusions. Are the numbers and the emotional factors pointing you in a clear direction? If you're still feeling unsure and would like some additional assistance, you may want to read Dan Fritschen's book, Remodel or Move, or visit his website at www.remodelormove.com. Both contain a calculator that will assist you with the difficult task of quantifying the ramifications of your decision. In addition, you can learn tips to assist you with the next step, after you've determined what it will be.

If you choose to remodel, then you'll need to have a clear idea of what you want to accomplish before finalizing any details with the contractor or architect. One of the most expensive things you can do is change the project midstream.

If you decide to move, then there are low-cost improvements you can make to your existing home that will help it to sell more quickly. The kitchen and the bathrooms provide the biggest return on investment in this area.

Whether you decide to remodel or buy a new home, it's important to ensure that you have proper financing in place prior to moving forward. If you decide to purchase a home, a mortgage originator will help you to determine how much you can afford, as well as which loan package works best with your overall financial plan. In the case of remodeling, you should meet with a mortgage professional before any construction takes place. Otherwise you may severely limit the type of financing options available to you.

Additional Resources:

Remodel or Move?: Make the Right Decision, by Dan Fritschen

Subprime mortgages have now been credited for bankrupting well over 110 lenders and seriously damaging operations at many major mortgage firms. They've reportedly wiped out 5 hedge funds, tens of thousands of jobs, and have led to millions of foreclosures with millions more on the way. And, as if that weren't enough, subprime mortgages are also blamed for massive volatility in the stock, bond, credit, futures, and real estate markets here in the US and around the globe. Some say losses in the mortgage securities market alone could reach hundreds of billions of dollars this year.

This means that, for any Americans looking to buy, sell, or refinance a home, they are confronting a very different market from the one that existed just 6-12 months ago.

How did this happen?
The recent real estate boom was fueled by a period of record home appreciation and historically low interest rates. Banks, in order to compete, loosened guidelines and began offering more funding to more borrowers through riskier, non-conforming or "exotic" mortgages.

These ideal lending conditions persisted for several years, supported by high demand, historical real estate data, home prices, and massive trading volume/profits on mortgage-backed securities and other financial instruments on Wall Street.

Then, in 2006, a slowdown in real estate led to a deterioration of home values, an increase in inventories, and ultimately to today's tightening of credit guidelines, leaving many investors unable to sell or refinance out of their existing positions. Many Americans who had tapped into their equity were suddenly tapped-out and overextended as home values fell. Foreclosures followed in record numbers and a re-valuation of mortgage bonds and other financial instruments created the credit/liquidity domino effect we're now experiencing.

Unfortunately, it's going to get a lot worse before it gets better. According to the latest estimates, over 2 million subprime and Alt-A adjustable rate mortgage (ARM) holders will face payment increases of up to 30%-100% when their loans reset in the next 2 to 18 months. These loans make up less than 40% of the total mortgage market, but the negative effects, as we have seen, of increased foreclosure activity can have a ripple effect throughout the industry and around the globe.

What does this mean to you and your mortgage?

Sellers: If you're planning on selling your home, be prepared for an even smaller pool of qualified buyers. While some experts predict a settling of this credit crisis over the coming year, tightened credit guidelines and diminishing mortgage products could knock out as many as 15%-30% of potential qualified buyers. Now is not the time to sit and wait for the best possible price. Have a serious talk with your real estate agent. Having experienced buying/selling transactions in your area, he or she can help you price your home accordingly. He or she can also help ensure that your buyers are pre-approved and stay pre-approved throughout the entire transaction.

Buyers: Get pre-approved by your mortgage professional. While there are a lot of great deals out there, getting credit is becoming tougher and tougher, and it's taking longer and longer to complete a transaction. Remember, what you qualify for today could change tomorrow in a volatile market. For those looking to refinance, keep this in mind. There is no time to delay! Communicate with your lender. Don't do anything that could negatively affect your credit, and make sure you get all your documentation in on time.

ARMs Borrowers: If your ARM is scheduled to reset in the next 2-18 months, you need to schedule an appointment with a mortgage professional right away. Whether your ARM is subprime, Alt-A, or even if you have a pre-payment penalty, don't let a default or foreclosure situation sneak up on you. Did you know that your monthly payments can increase anywhere from 30% to 100% once your loan resets? At the very least, give yourself the peace of mind of knowing what your adjusted payment will be.

Borrowers with less-than-perfect credit: Each week it seems lenders are shedding more and more mortgage products. Many lenders have stopped offering No-Doc loans and are reducing all forms of Stated-Income loans. While it might be challenging, borrowers with credit issues need to see a loan expert. Often they have credit repair resources and other strategies to help you reach your financial goals.

Finally, there's an important concept to embrace: all markets, while cyclical in nature, are self-correcting, be it credit, real estate, stocks, or bonds. For the last 6 or 7 years, real estate was booming and riding high. The correction we're experiencing now – while it seems harsh and could get much worse – is, in a sense, "natural" and directly related to the extremely loose guidelines and perhaps overzealous lending and leveraging during the boom cycle.