In life, often buying a home is the biggest monetary investment a person will ever make. In most cases, especially in the United States, the homeowner does not have the money to purchase a home upfront, so uses a special type of loan called a mortgage. There are many types of mortgages, but, today, the Adjustable Rate Mortgage and the Fixed Rate Mortgage are the two most common kinds.
Mortgages are actually nothing new and date back many hundreds of years. However, over time, the rights of the homeowner has been increased and made stronger. In the times of Kings, the person who held the mortgage was, for all intensive purposes, the homeowner and had full control over the property until the mortgage was repaid. However, today, the bank is not considered the homeowner and can only take possession of the home if the loan holder does not pay, with even this not being a process without some judicial oversight.
Another change that has occurred recently is the types of mortgages used. The Fixed Rate Mortgage was, traditionally the primary type of home mortgage for many years, but today there are a number of other loan devices, of which the Adjustable Rate Mortgage is becoming more and more popular.
Fixed Rate Mortgages are much easier to understand than other types of loans. The loan holder has a fixed time that they must repay the loan by, usually 15 years or 30 years, and a fixed interest rate for this entire time. So, if you get a 30 year fixed rate mortgage at 6.5%, you will know that each mortgage payment for the next thirty years will be at the same rate.
Fixed Rate Mortgages offer a number of advantages, mainly that your interest rate can not usually be raised, well at least providing you make the payments. This makes it very easy to plan payments, while also protecting your investment against inflation and higher interest rates.
The Adjustable Rate Mortgage(ARM) is much new by comparison to fixed rate mortgages, first becoming popular in the early nineties. Adjustable Rate Mortgages are mortgages that have an interest rate that is adjusted every few years. The period of when the interest rate increases varies, but it is often every two or three years.
When an adjustable rate mortgage reaches its adjustment rate, the loan holder will change the interest rate to reflect the current market. Most ARMs are restricted to only raise one point(1%) each adjustment, but this is not always the case. It is possible for the interest rate to go down, such has been the case for many recently, but this is not something that should be counted on.
It is also possible that the interest rate will not raise the entire 1%, or whatever the limit is, but again this should not be counted on. In addition to having a limit of how much the interest rate can change with each adjustment, there is also usually a limit on how high the interest rate can raise over the course of the entire loan. For instance, there might be a 8% adjustment allowed over the entire course of the mortgage.
Since understanding how and ARM works can be a little difficult, it is often easier to look at an example adjustable rate mortgage and see how it works.
Take a 2 Year ARM that starts with an interest rate of 4.75%, which can be adjusted by 1% each period.
For the first two years of the mortgage, the interest rate will be at 4.75%. Then, after two years, the interest rate will be reevaluated and the current market will be taken into account. It will then be raised or lowered, keeping within the 1% limit, so for this example, lets assume it raises by the entire amount.
For the next two years, the interest rate will be 5.75%, which will again be reevaluated in 2 years.
There are a couple of advantages to using an ARM, but it is not always the best choice. The main advantage is that the introductory interest rate is usually lower than that of a fixed interest rate. So, the first few years will be lower, allowing the homeowner to put some extra money towards the principal of the loan or simply saving some money. Many people go with an ARM with the intention of paying their home down more rapidly or refinancing when the rates equal that of a standard fixed rate mortgage.
The ARM, and several variants, were one of the most abused loans during the recent real estate bubble bust, which resulted in many foreclosures.
There were a number of details that make an ARM subprime. One of the main factors was there was often no limit on how much the rate could increase, especially if the person missed a payment, which often forfeited many of their rights.
This lack of a ceiling on increases, especially when the homeowner had missed a payment, caused these subprime ARMs to rapidly increase. It was also not uncommon for people to get sucked into negative amortization ARMs, which basically mean the person was not paying all the interest on their loan, which was being tacked onto the end of the mortgage. As a result, each month the person would end up owing more on their loan.
For someone with less than perfect credit, it is often not possible to get a good rate on a Fixed Rate Mortgage, so an Adjustable Rate Mortgage might be the only option. ARMs also sometimes offer such a low initial interest rate that the there are literally hundreds of dollars in differences for the first few years. However, an Adjustable Rate Mortgage is not always the best choice.
It is important to always find out how much an ARM can increase each period and how much it can increase over the course of a loan. ARMs that have no limits, or with unrealistic limits, are most likely subprime, so this is an important consideration.
There will always be those who try to profit from the misfortunes of others and the current housing market woes are no exception. There are many scams and pit falls that a new home owner can fall into, especially one that is having trouble making their monthly mortgage payments. One such scam, which has grown explosively over the last few years, comes in the guise of Loan Modification Companies.
When someone is behind on their mortgage payments or having trouble making each payment, it often causes them to want to look for an easy fix, so they drop their defenses a little bit. This is exactly what a loan modification company counts on, as they specifically target those in foreclosure or who are struggling to make each mortgage payment.
The loan modification scam usually starts with a letter, a dishonest website, or a call from a telemarketer, which promises that the company can help refinance the mortgage and secure the homeowner a much lower interest rate. These individuals, who are usually nothing more than snake-oil telemarketers who are adept at social engineering, pray upon the fears and troubles of those facing foreclosure, promising to speak with the mortgage holder and negotiate better turns.
However, before they will do any work, they require a large upfront payment. Often, the telemarketers will encourage the homeowner to stop paying their mortgage payments and instead pay the loan modification company, with the promise that they will be able to get the mortgage refinanced.
What loan modification companies won’t tell you, however, is that they can not stop foreclosure and have no direct association with any reputable lenders. Instead, they take the homeowners money, usually at the expense of paying their actual mortgage, only to cut off communication once they have conned enough money from the homeowner.
It is easy to ask how this is possible and much of it has to do with the mind state of those that are facing foreclosure, who are searching for anything that might help them save their home and credit.
However, the companies also operate in a manner that avoids much regulation, by changing their names frequently and setting up dummy corporations. There are hundreds of websites developed by these loan modification hucksters, which are designed to generate leads for their telemarketers.
Usually, by the time people start reporting these companies to the Better Business Bureau or other regulatory agencies, the loan modification company has already moved on.
Today, loan modification firms are more prevalent and profitable than ever, praying off of the large number of foreclosures.
One of the biggest warning signs of a loan modification firm is that they require money up front, before doing any work. This is common amongst most credit fixing scams, so should immediately raise warning flags. Also, if they suggest not paying your mortgage, this is also an indication that they are not operating in your best interests.
It is also very important to research the companies and keep in mind if you can’t find any information on sites like the Better Business Bureau, they could very well be trying to scam you.
This is not to say that all organizations that help fix credit or prevent foreclosure are bad, with there being a number of not-for-profit organizations and several government programs that are designed to do just this. However, it is extremely important to research the company and use good judgment, rather than letting the fear tactics of these scam artist work against you.
A Lock-In is the term used to describe when a lender promises to offer a specific interest rate and loan terms for an extended period of time. With the rapid fluctuation in the housing market and interests rates that can vary multiple times everyday, getting your lender to offer a lock-in can be a very important tool when shopping for a mortgage, but there are also some situations when a lock-in could end up working against you.
People use Lock-Ins, or rate locks, because from the time you apply for a loan to the time you are approved can sometime stretch on for weeks. During this time, interest rates could go up, so if you do not have a rate commitment from the lender, there is nothing keeping them from changing the terms of the loan to a higher interest rate.
Since the way lenders handle rate lock-ins can vary, it is very important to bring up the subject before applying for a mortgage and find out the lenders policies.
Sometimes. This can vary depending on the lender, with some mortgage lenders requiring a lock-in fee to guarantee your interest rate. If the interest rate and points are extremely competitive, than it may be worthwhile to pay this fee. However, most lock-in fees are non-refundable, so it can be a little risky and another added expense, which seem to pile up when you are purchasing a home.
It is important to consider is your credit rating, because if you are unsure whether you will qualify for the loan, it might not be worth using the money. Also, since mortgage brokers are often not working with your best interests in mind, these charges can often simply add a nice bonus to the mortgage brokers pocket.
If you do pay a lock-in fee, make sure that you get it in writing, which is really good advice even if you do not pay anything for the rate-lock.
This can vary, but most Lock-Ins are for 30 or 60 days. It is a good idea to ask how long the lender takes to approve loans and consider the housing market. If it looks like it may take awhile to find a home or get approved, it is a good idea to ask for a longer lock-in.
When the lock-in expires, it is sometimes possible to just re-extend it if the market has not changed. However, the lender is under no obligation to do so and if interests rates have gone up, they will not typically re-extend the lock-in.
If the interest rates go down and you have already requested a lock-in, it can create some problems, as the lender may not want to lower the rate. In the case of a very large drop in interest rates, it is a good idea to put you foot down and demand an increase, although to start with, you should simply ask them if they can.
If the lender refuses to honor the lower rate, you can simply walk away, although this can be hard if you have poor credit.
Before you request an interest rate lock-in, it is a good idea to do some market research, paying close attention to interest rate trends. This will allow you to better analyze the mortgage interest rate and determine if it is a good deal. It is also important to spend some time talking with other lenders and exploring the housing market.
The current economic situation leaves much to be desired. Unemployment is up around the country and due to the bank bailout, we are facing a very large deficit, which has questionable returns. This and many other factors lead many to be very wary of what is to come, so it can be hard to find a silver lining. However, for those who are prepared to buy a home, now is a very good time, as home prices are at a historic low and the government is offering a tax credit for first time home buyers.
There are several reasons that house prices are so low, but it has a lot to do with the high rate of foreclosures. Over the last 10 years, the subprime mortgage market exploded.
Subprime mortgages are mortgages that have higher interest rates and less favorable terms than traditional mortgages.
Subprime mortgages have historically been a tool used by people who have less than perfect credit and would not be able to get a standard mortgage. One of the most popular subprime mortgage was the Adjustable Rate mortgage, which had a low initial rate that increases periodically. Not all Adjustable rate mortgages(ARMs) are bad, but subprime ARMs can have an interest rate that increases freuquently and exponentially raises the monthly mortgage payment.
Those who receive a subprime mortgage are still usually vetted by the lender, with credit checks and income checks to verify that the individual will be able to pay for the mortgage. However, over the last few years, many lenders stopped vetting loan applicants and instead approving pretty much anyone for a home loan.
Lenders stopped vetting mortgage applicants, because mortgages became a very popular investment tool. Investors would buy up a group of mortgages and then bundle them into a large group. They would then sell the mortgages to investors, many of who were overseas, as a high return investment. Since the bundled mortgages were subprime, they had a much higher than normal return rate.
The first investor, who financed the initial mortgages, would not be keeping the mortgages, so there was no incentive for the investor to vet applicants. Instead, as soon as they had enough mortgages in their bundle, they would sell them and be someone else’s problem. This resulted in many people who should not have had a mortgage ended up with a subprime mortgage.
One of the reasons that real estate became so popular as an investment tool was because of rapidly increasing home prices. Homes would often appreciate more than 25% a year towards the end, which gave the impression that even if the person defaulted on their loan, the home could still be sold for a profit.
This went on for some time, with home prices rapidly increasing, artificially inflated by the large number of subprime mortgages. However, this could not go on for ever and eventually those who received these subprime loans, were no longer able to pay for them, spurring a increase in foreclosures.
While the current housing market has brought much sorrow to many homeowners, there is a silver lining for some. With the vast number of foreclosures and empty homes, it is possible to buy a historically low prices. This large number of foreclosures has also driven the prices down on other homes. Further, interest rates are at an all time low.
Of course, lenders are now being much more careful in who they offer mortgages to, but for those with good credit and money for a down payment, it is possible to purchase a new home for much less than even a year ago. The federal government is also offering a tax credit for first time home buyers, which is up to $8,000 and does not need to be repaid, so for many, now is a good time to buy a home.
Many assert that housing prices were artificially inflated in the first place and the prices we see today are simple the real market value of the home, and in many ways this is correct.
One of the most important parts of buying a home is obtaining a mortgage. Since most people do not have the money to buy a home outright, they must instead rely upon a lender to loan them the money to purchase the home. As a result, once the mortgage is obtained, the rest is often downhill, although waiting for your offer on a home to be accepted can be very nerve racking. Since a mortgage represents such a long term commitment and investment, which for many is the biggest investment of their life, it is not a decision that should be taken lightly. Instead, it is important to spend some time shopping around and find the best deal.
Typically, one of the first decisions is whether to go to a mortgage broker or a mortgage banker to get your home loan. A mortgage broker is sort of like a middleman, who acts as a go between for banks and people looking for a mortgage. Mortgage bankers, on the other hand, represent actual banks that offer mortgages. Both mortgage brokers and mortgage bankers have disadvantages and advantages, which vary depending on your situation.
Even just twenty years ago, the mortgage industry was dominated by banks. When it came time to get a mortgage, most people went to the bank where they had their checking account and asked for a loan. This slowly changed as other companies and investors began looking at the high returns offered by the mortgage industry and decided to enter into the business of backing home loans.
One of the main advantages of having your bank finance your mortgage is that they will often take not only your credit rating into account, but also your personal history with the bank. This is especially true of credit unions, which sometimes have a much more personal loan approval process. Mortgages offered by banks are also more likely to be less risky and offer a very competitive rate. They are also typically able to move much more quickly than other lenders to approve or deny a loan. In addition, the fees associated with a mortgage from a bank are often lower, as they will hold the loan for its length, making their money this way.
However, while many banks will take into account your history with them, they also tend to have higher standards, especially in todays market. Gone are the days where mortgage lenders rely primarily on personal feelings, with most instead having a set mathematical formula that the borrower must meet. This means that often, a bank will only offer a mortgage to those with a very high credit score. Since the bank makes a great deal of money from other investments, they can afford to be much more picky.
It is a good idea to spend some time building up your reputation with your bank, such as by taking out a small line of credit and keeping it well maintained.
Mortgage brokers, on the other hand, typically have several mortgage lenders they work with. This could be an actual brick and mortar bank, but is often simply a group of investors that buys and bundles mortgages and then sells them to other investors.
As a result, the person that initially funds the mortgage is not the same person that holds it in a years time. This can cause some problems, as has been seen in the latest housing market crisis, where the initial lender lacks the incentive to ensure the person has good credit, because they know they will only hold the mortgage for a few months. This can be a bad thing, but it also means that those with lower credit, often have a much better chance of getting a loan from a mortgage lender. Of course, as a consequence of the current housing market, most lenders have become much more strict in their lending.
Since a mortgage broker is simply a middleman, they often have access to multiple lenders and can often offer much more competitive rates and has more options. However, a mortgage broker gets paid by commission and gets a fee based off the total loan amount. This fee is many times greater than that of a bank and also, since they are personally motivated by commission, mortgage brokers do not always have your best interests at heart.
As with any financial decision, it is a good idea to explore all of your options. Many people start with their bank, as this banks can usually move very fast and have a personal relationship, which can often mean a greater chance of approval. By starting with your bank, you can also get a feel of current interest rates, so when you contact a mortgage broker, you have a way to measure what type of deal they are offering you.
One of the most significant pieces of legislation to address unfair lending practices and consumer rights is the Fair and Accurate Credit Transactions Act of 2003. The Fair and Accurate Credit Transactions Act address identity theft, as well as allowing the consumer to receive a free copy of their credit report from each of the credit reporting agencies every year.
When you apply for a mortgage, one of the first things the mortgage lender will do is look at your credit report. Credit reports contain information about how you have used and are using your credit lines. They contain information like your payment history, delinquent payments, and outstanding debt. Mortgage lenders use this information to help decide how much of a risk you would be to offer a loan to.
Credit reports are nothing new and have been used by businesses for thousands of years. In concept, using a credit reporting system makes sense, as it allows businesses to more easily analyze risk. However, in the past a great deal of personal information, such as race and religion, was included in credit reports and this information was often used to discriminate against a prospective borrower. There have been many pieces of legislation to address this issue and keep the lending industry more honest, although its success is debatable.
The information contained in a credit report is maintained by one of three credit reporting agencies. Businesses report information to these agencies, who then compile a report that can be used by mortgage lenders and others who offer credit lines.
Up until very recently, there were a number of hurdles that made it difficult and costly for a consumer to view their credit report. It is very easy for an error to end up on your credit report and without being able to easily and inexpensively check, many consumers were penalized for these mistakes when they applied for a mortgage or loan.
The Fair and Accurate Credit Transactions Act addressed this issue and requires that each of the three credit reporting agencies provide consumers with one free copy of their credit report every year. However, in some states, the credit reporting agencies have fought this law by making it more difficult and complicated to receive these reports.
Another big part of the Fair and Accurate Credit Transactions Act is aimed at preventing identity theft. Under the Fair and Accurate Credit Transactions Act, consumers who think they might be about to be the victim of identity theft can place a fraud alert on their credit report, ensuring that potential creditors are more diligent in checking ones identity and providing some recourse if identity theft occurs. It also set up some red flag rules, which were to be developed by the credit industry to help detect fraud, although these have not been fully implemented.
The Fair and Accurate Credit Transactions Act also sets up some rights for those who have been the victim of identity theft. The credit reporting agencies are now required to block cases of identity theft from being visible on credit reports, providing the consumer has provided sufficient evidence of the identity theft. The credit industry is also required to be more corporative when investigating identity theft.
The law also requires that credit card merchants print no more than the last five digits of a credit card on a receipt.
The effectiveness of this law and others that address the credit and mortgage industry are highly debatable and many institutions deliberately try to find ways to get around these law.