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Top 5 Essential "To Do's" to Avoid Being Taking Advantage of When Signing a Mortgage Through a Broker

 

February 16, 2013  |  Loan-America.com Insights

Are you unclear about what to look out for when signing a mortgage through a brokerage firm? Over the years, many have been deceived into accepting “ultra low rate” mortgages but stung them badly with hidden junk fees and terms that cost tens of thousands over the course of their investment. Don’t fall for the tricks. Read this blog to help identify a few common tricks to look out for.

 

1) Beware of Conflicts of Interest around Commission Fees

Broker's are often provided a fee or commission by a credit provider for arranging a loan based on the products the broker provides. Since different credit providers pay different commission levels, this can influence what loan products the broker recommends to you. As such, brokers may be limited to a particular range of mortgage products that may not suit your circumstances. Even worse, due to the misalignment of incentives, brokers may try to sell you products you don’t need just to increase their own commission wage. [1] 

To avoid being a victim of these conflicts of interest and before signing anything, find out from your broker exactly what loans they offer, who pays their commissions and how their commission structure works. If they are unwilling to disclose any of this information, you should shop around for someone who will.

 

2) Use Online Tools to Make Sure your Broker’s Registered:

Use “BrokerCheck”, a free tool, to help you research the professional backgrounds of current and former FINRA-registered brokerage firms and brokers, as well as investment adviser firms and representatives. This should be one of the first resources to turn to when choosing whether to do business or continue to do business with a particular firm or individual.

Fair Isaac Corporation's MyFICO.com is another tool to reference as it can help you get a realistic estimate for a 30-year fixed mortgage rate based on your credit score.

With these two items in hand, you’ll have more peace of mind about the integrity of the professionals you deal with and the products they offer you.

 

3) Never Sign Blank Agreements and Get Things in Writing

If a mortgage broker asks you to overly exaggerate your income or sign blank or incomplete documents, this strongly resembles the behaviour and tactics used by predatory mortgage lenders and is indicative of dealing with a dishonest company. Evidence has surfaced over the years that some brokers have used similar tactic to structure mortgages to promote default, because simply giving out a product lined their pockets and met their needs more than those of the consumers.

Before signing a mortgage, get a “good faith estimate” in writing to help mitigate any surprises. This will allow you to weigh one option against another. Such an estimate or written agreement should tell you:

  • The type of loan being arranged for you
  • The amount of the loan
  • The term of the loan
  • The current interest rate, and
  • Any fees you have to pay.

 

4) Cross Compare Lender Fees

Home buyers also have to deal with title insurance companies, surveyors and inspectors, all of which have their own fees. If you’ve done some comparison shopping already and have found a better rate, ask the lender to use your preferred vendor instead of theirs.[2]

 

5) Judiciously Review the Good Faith Agreements to Avoid Junk Fees

After being pre-approved and getting a quote through a “Good Faith Agreement”, make sure you judiciously review the document to identify any inflated charges.

Most charges found on your Good Faith Statement should not be higher than 1-1.5% of the loan amount.[3] On the statement, locate the loan processing fee and make sure you are not being charged more than approximately $400.[4] The fees could include broker's fees or commissions, fees to the credit provider or lender for setting up the loan, and/or any early termination fees.[5]

Look out for excessive processing and documentation fees in the following categories:

  • Application fee
  • Underwriting fee
  • Mortgage rate lock fee
  • Loan processing fee
  • Broker rebate

If you do notice anything that resembles an application fee, lock fee, broker administration fee, or courier fees, these are most often junk fees that you should be contested. As a rule of thumb, ask which expenses go into each fee and challenge anything that seems inflated (like overly pricey charges administrative tasks).[6] Most often, by simply raising your concerns companies will consider reduce the fees significantly or eliminating them completely from the deal. This advice applies to other fees as well.

Some mortgage companies and brokers may try to mark up the interest rate you qualify from the wholesale lender that approved your loan. This tactic is called ”Yield Spread Premium” and there is a way to avoid paying it. When your mortgage company or broker provides you the written guarantee, ask to see the guarantee from the wholesale lender. If they refuse, find another broker that will show you this document.[7] Discrepancy between the two fees can cost your tens of thousands of hard earned dollars over the lifetime of the loan.

Should You Refinance Your Mortgage? Tips, Tools and Insights to Help you Decide

 

January 21, 2013  |  Loan-America.com Insights

 

If the current hype of today’s real estate market has you thinking if you can save some valuable money by refinancing your mortgage, this Loan-America blog will hone in on some key factors you need to consider before going down this track.

Though interest rates are a key consideration, a number of other factors are equally important when deciding whether to refinance. The length of time you plan to stay in your current home, the costs associated with getting the new loan, and the amount of equity you have in your home, as well as other things are good places to start.[1]

Tempted by the potential savings illustrated below in the chart? See if you can clear the following 3 hurdles to know if refinancing is right for you:

 

An Example of the Potential Significant Savings Opportunity [2]

describe the image

 

1. Do you qualify?

Prior to starting the entire process, review your credit report to make sure that you'll first qualify for lower rates.

For those potential borrowers that are unsure or have poor credit, refinancing may not be their best route, since a bad credit score can often translate into higher refinancing rates. In fact, most industry experts believe you’ll need a credit score of at least 720 to get the best rate and some argue that "for every 20 point drop in credit from 740, you pay higher in closing cost, interest rate, or both - almost by 2 percent or more...”. This can completely negate any marginal savings accrued over time from securing a lower interest rate.[3]

That said, even if you don’t have the best credit, some experts argue that borrowers aren't powerless in the process. To help improve one’s chances at securing a good refinance deal, one should start with shifting assets to one’s mortgage lender, cleaning up outstanding bad credit and understanding the new government programs.[4]

Other helpful hints at potentially improving your credit score in the short run include paying part of your credit card balances, generally maintaining a balance less than 30 percent of the available credit on your card, and checking for errors and reconciling them prior to an application.[5]

 

2. What are the associated costs?

If credit isn’t an issue, the next thing you want to consider when thinking of whether or not to refinance your mortgage, assess the kinds of costs involved and compare this against how long you plan on being in the home for. This is critically important because closing costs typically total about 1% of your new mortgage's principal, and amy amount to thousands of dollars, covering such things as home appraisals and lawyer's fees. According to the Federal Reserve, “it is not unusual to pay 3 percent to 6 percent of your outstanding principal in refinancing fees," including but not limited to application fees, loan origination fees, appraisal fees, and more. "These expenses are in addition to any prepayment penalties or other costs [you would incur] for paying off any mortgages you might have." A prepayment penalty "is a fee that lenders might charge if you pay off your mortgage loan early, including for refinancing," according to the Federal Reserve.[6]

You want to know what these costs will add up to in order to calculate your break-even point if you were to refinance.

Costs can vary and there are several ways lenders work these fees into refinancing deals, including:

1) Upfront charges. The traditional way of paying for closing costs, which involves simply paying with a certified check.[7]

2) "Rolled-in" closing costs. With this option, the bank adds all closing costs to your new loan's balance rather than making you pay upfront. Consumers won't spend any money out of pocket, but will pay slightly higher mortgage bills each month throughout the loan's lifetime.[8]

3) No- or low-cost refinancings. These deals often don't charge any closing fees, but they carry higher interest rates, which compensates the lender for including your new loan's closing costs.[9]

As a rule of thumb, generally If you plan to possibly move out in three years or less, a refinancing deal may not make sense for your circumstances simply because replacing an existing 30-year loan with a new 30-year loan may take months of lower-cost loan payments to make up all the upfront costs involved in the refinancing process. That is precisely why it is crucial to determine in advance how long you plan to stay in the home to then assess if the cost involved in refinancing are worth securing the lower interest rate.[10]

 

3. Do you have any equity?

After determining the costs involved and your credit-worthiness, borrowers need to assess how much equity they have in their homes. Surveying banks across the US, it appears that most banks will require 20% equity in order to refinance a mortgage. Though we’ve found some examples where it may still be possible to refinance without that much equity, we’ve found that you'll likely get the best deal if you have at least 20% equity.

Some good news -- for victims of the sub-prime mortgage scandal or borrowers with loans backed by government-controlled mortgage companies Fannie Mae and Freddie Mac the Obama administration has pushed for making it easier to refinance, even if borrowers don't have any equity in their homes or strong credit. For example, changes taking effect this year will allow borrowers who owe more than 125% of their home's value to refinance to lower, more affordable rates under the government's Home Affordable Refinance Program, or HARP.[11]

 

Some Potential Downsides:

If after clearing these three major hurdles, you still feel refinancing is right for you, consider the following:

1. It’s a time consuming process. Given the favourably low interest rates and hot refinancing market, mortgage transaction pipelines appear clogged, which means it now takes the nation's biggest mortgage lenders more than 70 days to complete a refinance, on average, according to the consulting firm Accenture, up from 45 days a year ago. Some big lenders routinely advise borrowers that their refinance can take as long as 90 days.[12] Be prepared to wait for this period.

2. You’re often starting from scratch. Refinancing can extend the term of the loan as new borrowers are effectively starting from scratch on new 30-year loans. One way to mitigate this is to consider opting for a shorter loan period, which may result in marginally higher mortgage fees. For example, some people are refinancing from a 30-year to a 15-year loan if they already have already built some equity into the home and have a number of years of payments under their belts.

See below for an example of the possible savings one can gain over the life of their loan.

loan comparison 2
  

3. You could consider alternatives to “Refinancing”, such as “Recasts” or “Re-Amortization”

If you may not want to go down the refinance route, you should look into the possibility of modifying your loan terms via either the “recast” or re-amortization” routes.[13] Either of these rare options basically entail modifying your existing loan down to a lower interest rate, but without the hefty upfront costs and the hassles of refinancing.

The only catch is that despite costing at times as little as $250 for application fees, some banks can require borrowers to provide additional sums of money to “substantially reduce the unpaid principal balance of [their existing] loan,”

That said, given the expense and paperwork involved in refinancing, it’s still worth asking considering and asking about.

 

Tips

1) Research shows the average American family moves every seven years. If you are confident that you will not be in your home more than five years an adjustable-rate mortgage may actually be the best course of action for you.[14] A careful analysis based on a projected timeline will help  calculate your break-even point (i.e. how many months it will take to recoup your closing costs), which will be a strong indicator as to whether you should refinance or not. [15]

2) As a general rule, anyone who can find a deal that will recapture the closing costs within 18 months should "just do it.”[16]

3) Another good rule of thumb is that refinance only if you can cut your mortgage rate by 0.5 percentage point or more from what you're paying.[17] The below chart illustrates what 0.5 percent off an existing mortgage can look like over a 10 year spread. Incredible!

loan comparison 3
 


Tools

• Federal Reserve Board’s Guide to Mortgage Refinancing ––> http://www.federalreserve.gov/pubs/refinancings/refinancing.pdf

• Federal Reserve Board Break-Even Calculator –> http://www.federalreserve.gov/pubs/refinancings/default.htm#breakeven 

• Compare Fixed Rate Mortgages to Adjustable Rate Mortgages– http://homes.yahoo.net/mortgage/quote/?kid=1MNR0&ywa=1

 

How Loan-America Can Help

For those who can clear the apparent inconveniences and key hurdles, today's low rates may present a once-in-a-lifetime opportunity.

 

It’s unfortunate to see how many homeowners simply ignore the benefit of refinancing and continue to pay exorbitant mortgage payments on loans with interest rates over 5%. Converting to a lower rate loan today could help homeowners save immensely over the long term. We strongly encourage you to take time to check your loan rate and determine whether it makes financial sense refinance. There are many quality mortgage brokers who will assist you in reviewing your savings at no cost to you.[18]

Loan-America is one of these organisations here to help you determine how you take advantage of these unprecedented and favorable conditions. In particular, for help with securing low interest rate mortgages in the California region or other guidance about the right products for home buyers, please call 1-888-LOAN-800 to arrange a consultation or visit us at http://www.loan-america.com/. We’re a trustworthy Californian mortgage company helping ever day consumers refinance their mortgages and make smarter real estate decisions. We look forward to helping you in 2013!

 

Further Reading

• General info about refinancing – http://financialplan.about.com/od/realestatemortgages/qt/RefinanceOrNot.htm

• Refinancing’s hidden costs – http://realestate.msn.com//article.aspx?cp-documentid=30846683

• Christian Science Monitor’s thoughts on refinancing – http://www.csmonitor.com/Business/2012/0926/Time-to-refinance-your-mortgage-Rates-hit-historic-lows

 


[16] http://homes.yahoo.com/news/pros-and-cons-of-refinancing-20121109.html, interviews with Lou Barnes, a mortgage banker in Boulder, Colo.

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US Mortgage Rates at All Time Low – Great News for Consumers

September 14, 2012  |  Loan-America.com Insights

In today’s US real estate market, mortgage rates are hovering near record lows, some claiming these to be the lowest in nearly a century, which bode well for prospective new buyers or re-mortgaging consumers.[1] 

The mortgage rates for the week ending Sept.13, 2012 include the following:

-  30-year FRM averaged 3.55 percent this week, unchanged from last week. Last year at this time, the 30-year FRM average was 4.09 percent.[2]

-  15-year FRM this week averaged 2.85 percent, down slightly from last week's average of 2.86 percent. One year ago, the 15-year FRM averaged 3.30 percent. [3]

Mortgage Rates 30 year

Factors contributing to keeping US Treasury bond yields low and, in turn, interest rates at unprecedentedly low levels include turmoil in world economy, investor concern with the European debt and bond markets, and a shaky economic recovery back in the US.

In addition, just yesterday, the Fed announced a new policy – “quantitative easing” – meant to stimulate the economy through a round of bond purchases targeting the mortgage market. This entails the central bank purchasing $85 billion in bonds per month through the rest of the year, and then $40 billion per month indefinitely until the economy requires less support.[4] The policy is intended to continue driving interests rates even lower to help support lending, borrowing and spending.[5] The Fed also supported their policy with strong language claiming they would extend plans to maintain interest rates at ultra-low levels through into mid 2015, and continue supporting the economy “for a considerable time after the economic recovery strengthens.”[6]

What does this mean for consumers and prospective buyers? Well, consumers should look to take advantage of the low rates by getting into the market or re-mortgaging their current deal to lock in at a lower fixed rate as soon as possible.

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