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Mortgage Loan Solutions


Finding the ideal mortgage loan for your situation is much more than obtaining a rate quote. I suggest taking a different approach from the typical lender/broker -- instead, focus on the use of your mortgage within your financial blueprint. In other words, pinpoint exactly what you want to accomplish with your mortgage as it relates to your financial goals and current financial situation.

Many different types of loans are available with various time lengths: Fixed Rate, FHA, VA, Adjustable Rate, and Home Equity Line of Credit -- many with a payment option of Interest Only for a initial specified period. Note: effective October 1, 2009, income verification is required on all new loans as mandated by the Fed.

Since the fourth quarter of 2007, lenders have tightened loan requirements by increasing credit score qualifications and lowering loan to value percentages. Most lenders now employ a maximum loan to value for conventional loans at 85-90%. Furthermore, the vast majority of lenders have decided to eliminate Alt A, Sub-Prime and Negative Amortization loans due to (1) the increased risk of foreclosure and (2) no secondary market for these products.

Special note: In past years, a credit score of 680 was considered good enough to qualify for the best lending rate -- no longer! Starting in April 2009, mortgages purchased from banks and brokers by Fannie Mae and Freddie Mac have increased fees (0.25-0.75%) in the majority of cases. For example, borrowers with less than 30% equity will pay more for a 30-year conventional loan if their credit score is less than 700; borrowers with less than 15% equity will pay more even with flawless credit. In many cases, theses extra fees make make loans, especially cash-out refinances, cost prohibitive -- this is especially frustrating for consumers since some banks received TARP I monies.

 RealtyTrac

Four Mortgage Uses

When individuals obtain a loan, they satisfy at least one or more of the following mortgage uses: (1) affordability, (2) flexibility, (3) debt consolidation and (4) building wealth for financial security. Lets review each use.

Affordability -- Everyone is familiar with this concept. Borrowers desire the lowest payment, whether it be a fixed rate, an adjustable rate or an interest only option. Important lender factors to consider include credit score, loan to value, current earnings, future cash flow savings and how long the borrowers intend to own the property. The best choice for the exact type of loan depends on what borrowers specifically want to accomplish with their mortgage.

Flexibility -- This use appeals to borrowers who want their mortgage payment to fluctuate with their monthly earnings or to have leeway for unexpected emergencies. In essence, borrowers desire monthly control over their mortgage payment by having the ability to select various monthly payment choices  -- such as interest only, regular P&I or an accelerated payment. Self-employed, commissioned earners and seasonal workers are ideal for this concept due to their inconsistency of stable monthly earnings -- they like the idea of paying a lower mortgage payment when income is lower and can choose a higher payment when their monthly income is higher.

Debt Consolidation -- This scenario is for refinances only and appeals to borrowers who want to convert credit card debt, other high interest debt and their current mortgage debt into one lower payment. Often the equity appreciation in property presents a cash out situation where borrowers can pay off the entire non-mortgage debt and have a "clean slate"; at the very least, a sizable portion of credit card can be eliminated with the remaining balance paid off by future cash flow savings from their mortgage.

              The Credit Card Dilemma
                Average household has $12,000 in credit card debt.
                2% minimum payment on $12,000 @ 18% with no future charges takes over 51 YEARS to pay off!

Credit card debt is bad debt (high interest rates, no tax advantages). In contrast, good debt has lower rates and tax benefits in property that appreciates in value. An important concept: if you must have debt -- and most us must have debt -- then hold debt in an appreciating asset or at least in an asset that has the potential to appreciate in value over time.

Building Wealth for Financial Security -- mortgages can be an effective tool in the pursuit of financial independence. In today's economy and standard of living, it is challenging for people to have available investment money after monthly expenses. As an example, a family of four with $100,000 in annual gross income would seem to be in good shape -- lets take a look:

                        Taxes:                $30,000
                        PITI:                    30,000
                        Automobile:           6,000
                        Credit Cards:         9,000
                        Total Expenses:  $74,000        Balance: $26,000 or
$2,166/month

                                   Other monthly expenses?   Utilities                     250
                                                                            Telephone & Cell     200
                                                                            Auto Insur. & Gas    450
                                                                            Food & Clothing      700
                                                                            Child Care             1,000
                                                                            Cable & Internet       100
                                                                            Net Income         
  -$533/month

                    What about...Retirement?    College Fund?    Restaurants?    Entertainment?

The Problem? Cash Flow!

                    Current Situation for many Borrowers
                            earnings unlikely to significantly increase
                            monthly expenses on the rise
                            savings rate is zero or negative
                            insufficient retirement funds

                    Solution is Reallocating Debt
                          wealth building starts with cash flow
                          use mortgage as a financial tool to build wealth
                          let time and compounding generate future growth
                          future value of
a one-time $10,000 @ 10%, compounded annually:
                                                        after 15 years = $41,772
                                                        after 25 years = $108,347

Certain mortgages can immediately generate significant cash flow savings, which can then be invested to pursue specific financial goals. In the above $100,000 illustration, nothing was available for investment due to a combination of taxes, mortgage and essential living expenses; with a lower mortgage payment, either with or without cash out, it would be possible to invest for retirement. If a 401k with a company match was available, the borrowers could not only invest their cash flow, they would also generate tax savings and receive "free money" from the company match (most matches offer 50% of the first 6% of participation).

The key for this type of mortgage use: have a specific destination for the cash flow. Borrowers should have a specific investment strategy along with the discipline to implement this action for at least 1-2 years. If you don't have a workable plan for the cash flow savings, you will more than likely blow the money and become very disenchanted.

           Financial Dictionary

Financial Dictionary has definitions of over 300 financial terms. The dictionary was created to serve as financial education tool, helping anybody interested in learning about finance, money, and investing. The Financial Dictionary consists of definitions of the most popular and commonly used financial terms like loan, mortgage, financing, credit, credit card, bank, and more, including online loan and mortgage calculators.

RealtyTrac
 

Questions & Answers

How is my credit score determined? The following chart illustrates the components of a credit score. Emphasis is given to payment history and amount owed. If a borrower has no late payments and has not "maxed out" loan amounts, then that borrower is likely to have a good credit score. With most lenders, high credit scores (740+) receive preferred loan rates for conventional conforming mortgages.

Why is the "use" of a mortgage more important than just only getting a good rate? You obtain a mortgage to fit into your financial blueprint, which includes your income, assets and liabilities; other important considerations include your credit score, loan to value and how long you intend to own the property. Future financial objectives, such as retirement, college savings, etc. should also be considered. You should choose the type of loan that is customized to best fit your specific situation.

Why do you emphasize cash flow? As previously discussed, most people do not have adequate savings for retirement. Subject to certain conditions, many individuals can obtain a loan for a house, an automobile, a boat, even education; however, individuals cannot walk into a bank and say they want a loan for retirement -- the lender will ask what collateral is involved and will also review your ability to repay based on income and assets. The time to build for retirement is well before retirement, preferably when you can let the power of compounding over time work for you.

Could you give another example of the power of compounding? Assume a $9,000 401k investment ($6K plus $3K with company match) for one year only. Future Values of $9,000 @ 8% and 10%:
    @ 8% compounded annually grows to: $19,430 in 10 years; $28,550 in 15 years; $61,636 in 25 years
    @ 10% compounded annually grows to: $23,344 in 10 years; $37,595 in  15 years; $97,512 in 25 years

Contributing another $9,000 ($6K plus $3K with company match) in year two results in the following:
    @ 8% compounded annually grows to: $37,875 in 10 years; $56,031 in 15 years; $127,698 in 25 years
    @ 10% compounded annually grows to: $45,398 in 10 years; $73,881 in 15 years; $195,739 in 25 years

In many instances, borrowers can achieve financial security by reallocating debt, investing the cash flow savings for 1-2 years and allowing the power of time and compounding to work for them.

Is inadequate retirement savings a reason why the reverse mortgage concept is becoming more available for borrowers who own their primary residence? Yes. A reverse mortgage offers to a borrower, who is at least age 62, a loan up to 70% of the value without ever paying principal and interest; the loan is paid off when the property is sold or when the borrower(s) die. It appeals to retirees who have either paid off their mortgage or have sizable equity in their home, yet have little, if any, other assets. However, the borrowers are still responsible for real estate taxes, maintenance and insurance; in addition, monthly service fees of $25-35 and annual FHA insurance premiums of one-half percent of the value of the loan apply. Important! Although borrowers do not pay interest, the interest clock keeps ticking....compounding interest on interest with a variable rate!

In my opinion, this is a loan of last resort. In many cases, owners would be better off selling their home and either buying a smaller home or renting. They could then invest left over monies for supplemental income. However, for those homeowners who have little or no other assets and/or who do not want to sell their home, then a reverse mortgage may offer them a way for additional income. However, closing costs are still very expensive, 5-6% of the loan, which is two times the closing costs of a comparable conventional first mortgage. Note: effective November 1, 2008, the cap on the origination fee for reverse mortgages is $6,000 instead of 2% of the loan amount and the maximum loan amount is now $417,000.

Warning! For those who will consider a reverse mortgage, beware of financial planners who suggest that you use the proceeds from the reserve mortgage to buy an annuity. You would be then paying for two overly expensive products -- the salesperson who suggests this strategy gets two commissions for giving horrible advice! In fact, significant abuses have occurred in the reverse mortgage arena with regard to inappropriate annuity sales.

For questions, advice or quotes,  seninvest@aol.com or cindypiazza@comcast.net.
 


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