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Timing the Market?
Buyers always ask is now the best time to buy one of the Phoenix homes? With today's low home prices, many homebuyers are asking that question. Obviously, there are a number of incentives, such as Homebuyer Tax Credit, that make this a very good time to buy. But some consumers may still be wondering if they should wait or if now is the best time to take the plunge.
One way to determine whether the time may be right for you to buy a home is to start looking at the rents in your community. When a full mortgage payment (including principal, interest, taxes and insurance) begins to equal or fall lower than rental rates, the market is typically near the bottom ? and that means you'll likely begin to see housing prices begin to stabilize or even head back up. In many parts of the country, we have already seen this occur.
The reality is, no one can time the market perfectly and find the exact bottom. But even if you don't, it's okay. Interest rates are at their lowest in decades, home prices are extremely low, and the government is offering a Homebuyer Tax Credit ? and this combination yields the greatest increase to home affordability in years.
What's Your Rate?
When it comes to buying a home, consumers can no longer shop for a mortgage based simply on lowest interest rate quotes. Today's home buyer needs good advice from an experienced, educated mortgage professional who has the consumer's best interest in mind.
For consumers, this means beware of anyone who quotes you an interest rate over the phone or the Internet without asking anything about you, your family, your finances or your lifestyle. Besides market conditions, your mortgage rate is based on a long list of criteria that are unique to your individual financial situation.
Look at the list below of 26 different criteria that affect your mortgage rate. How can anyone quote you an interest rate you can trust without a thorough knowledge of your unique financial situation?
(1) Loan Amount (2) LTV (3) CLTV (4) Credit Score (5) Credit History (6) Escrow Preference
(7) Closing Date (8) Loan Type (9) Property Type (10) Occupancy Type (11) Residency
(12) Available Assets (13) Asset Seasoning (14) Co-borrowers (15) Debt Ratio (16) Housing Ratio
(17) Improvements Needed (18) Employment Type (19) Employment History (20) Documentation Type
(21) Paying Points (22) Length of Loan (23) Relocation (24) Seller Contributions (25) Gifts (26) Cash-out
Give Rob a call. He'll analyze your individual needs and offer you a combination of loan programs and interest rates that makes the most sense for you and your family.
Mortgage Interest Rate Myths
 This may come as a shock to many borrowers, but it's absolutely true. Mortgage interest rates are not set by the Federal Reserve and, contrary to popular belief, mortgage rates are not directly tied to the yields of US Treasury bills, bonds, or notes ? including the 10-year Treasury Note. That's right. Despite what you might hear in the media, mortgage interest rates are actually set by lending institutions, and are based solely on the performance of mortgage-backed securities.
For years now, the media and inexperienced loan officers everywhere have suggested that the 10-year Treasury Note, a government-backed security, is directly tied to mortgage interest rates, that the two are separated by a specific interval ? which is simply not true. The graph on this page, which shows interest rates for 30-year fixed-rate mortgages and the yield for the 10-year Treasury Note for 13 months, clearly demonstrates this fact.
At a quick glance, yes, it's easy to see why the mistake is made. As you can see, for 11 out of the 13 months recorded in the graph, the yield of the 10-year Treasury Note and interest rates for 30-year fixed-rate mortgages did follow a somewhat similar long-term path, despite obvious short-term divergences. However, take a closer look at the drastic change that occurs from January through March 2008. What's interesting about this graph is that, during this period, the Federal Reserve had cut interest rates six times, from September 2007, to March 2008, and yet mortgage rates were actually higher in March 2008 than they were a year before. Not only does this demonstrate that the yield of the 10-year Treasury Note is not pegged to mortgage interest rates, it also reveals that mortgage interest rates are not set by the Fed either.
Stop being misled. If you or someone you know is thinking about buying or refinancing a home, give us a call. We'll give the facts you need to make a truly informed decision.
Waiting To Buy Could Cost You Thousands of $$$
Real estate experts across the nation agree on one very important element of the housing industry --- many buyers who have adopted a "wait and see" attitude before buying a home could be sacrificing thousands of dollars.
Let's look at one typical family's situation. The Nelsons lease a nice two-bedroom condo for $1,450 per month. They'd like to buy a home in a better school district, but think they should wait until interest rates hit rock-bottom and appreciation rates in their city improve.
By continuing to rent, they'll spend $17,400 on housing over the next twelve months, but they won't have any home equity or tax deductions to show for it. If they invest that same amount of money in a $195,000 home, however, they'll earn at least $2,000 in equity at the end of year one --- even if their home doesn't appreciate one penny in value. Plus, they'll be able to claim tax deductions for mortgage interest and property taxes of nearly $15,000.
How might the Nelsons fare after five years? Renting will put them in the hole $87,000, while owning a home will boost the family's wealth by a bare minimum of $24,000. If the home they buy appreciates at just 3 percent each year --- well below the government's most recent national average --- they'll gain an extra $31,000 in equity.
To see how your numbers stack up in the wait-or-buy-now debate, please call me about the financing options that best fit your needs.
How Does Inflation Impact Interest Rates?
 If you've seen the news lately, you know that inflation is a very serious issue that will likely be on the rise as the year proceeds.
But What Does This Really Mean to You?
The bottom line is that as inflation increases, home loan rates will rise too. That's because lenders know that a rise in inflation actually diminishes the value of the money they receive over the life of a loan, as the money they receive for payment simply won't go as far.
So when lenders see changes in inflation or even anticipate a rise, they increase their interest rates to make up for the loss in future buying power that will happen as a result of inflation.
What Should You Do?
Work with a home loan professional who pays close attention to what's going on with inflation?not only with the reports that come out, but also with the concerns that legislators and lenders express. After all, lenders may raise rates to protect their money as soon as they feel the tide turning.
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Want to take advantage of today's super low home prices?
Contact Sam at 480-213-1799 or via email at Sam@SamElam.com |
High Credit Score = Low Mortgage Rate
 Credit scoring was developed in the 1960s as a means to determine whether or not consumers were likely to repay their loans. The score ranges from 350 to 850 with a higher score being extremely favorable. Essentially, a high credit score translates into lower interest rates for the borrower.
There are five factors that comprise the credit score. Payment history accounts for 35% of the score; outstanding credit balances have a 30% impact; credit history makes up 15%, type of credit factors at 10%; and inquiries influence the score by 10%. This gives the lender a snapshot of an individual's sense of financial responsibility and ability to pay back loans.
There are many quick tricks to improve the credit score, and I can provide borrowers with more information on this subject. If necessary, I guide them to a reliable resource for credit remediation. If a borrower has to pay a higher interest rate to close a loan, the tarnished credit rating will begin to improve once mortgage payments are made on time and in full. If that is the case, my team and I will be on the watch to alert the borrower when an opportunity arises to refinance and get a lower interest rate.
What Are Points and When Should You Pay Them?
 Points are up-front fees paid to obtain a better interest rate on a loan. One point equals one percent of the loan amount. A lower interest rate may result in a lower monthly payment, but it is important to consider how long you intend to be in the loan, and to compare current rates to historical market trends.
If you take out a $300,000 mortgage and decide to pay one point, this translates into an up-front closing cost of $3,000. Paying a point up front saves $100 a month but it will take 30 months to recuperate the cost of that point. If you decide to refinance or sell the home before the 30-month mark, your money is lost. In this case, you would benefit financially by remaining in the home longer than the 30 months.
Rates run in cycles. When rates are at historical lows, it is sensible to pay points if you plan to live in the home for an extended period of time. It is unlikely that rates will go down; hence, there will be no need to refinance.
When rates are up, there is a strong likelihood that they will come down. This is no time to pay points. The chances of refinancing in the future are extremely high, and you will likely not be in the loan long enough to recuperate the cost of the points.
Qualifying for a Home Loan
 Consumers who have been limited by their credit score in the past should ask a mortgage professional for a credit review. When it comes to credit, a lot can change in just a few months. Borrowers may be pleasantly surprised by what they can now afford to purchase or refinance in today´s real estate market. More importantly, consumers may find that the information that appears on their credit report is incorrect - or even worse, that they've been a victim of identity theft. If these or other credit problems do exist, an experienced mortgage professional can provide the information and tools needed to reduce or repair these issues.
Remember, many lenders are now using automated underwriting, and the mortgage application process has been streamlined. If a consumer has reasonably good credit, he or she may be required to provide little or no documentation beyond one bank statement and the most recent pay stub. In some cases, these requirements may even be waived completely.
If the borrower can't provide documentation at all, mortgages now exist that offer stated income and stated asset processing styles. If the borrower is uncomfortable with stating income and assets, a no documentation loan may be the program to pursue. All this loan requires is basic personal information, very good credit, and the necessary down payment. Some lenders still allow No Doc loans with as little as 25% down!
The Home Equity Line of Credit
 Home equity lines of credit have become increasingly popular, and there are many types of loan programs available in this genre. This type of credit line is not meant for day-to-day expenses as a credit card would be, however, many consumers use their home as collateral to obtain an equity line of credit to pay for higher ticket items such as educational expenses or home improvements.
Borrowers may want to compare the advantages of a traditional second mortgage over an equity line of credit. But they should not compare these programs based on the Annual Percentage Rate (APR) alone. The APR in an equity line of credit is based only on the periodic interest rate, and does not include other charges such as points, maintenance fees or transaction fees. Conversely, a second Trust Deed takes all points, fees, and other charges into account when calculating the APR.
Choosing a Fixed Rate Loan
 Fixed rate loans generally come with one of two options; the 30-Year Fixed and the 15-Year Fixed. If a borrower is planning on being in the same home for a long period of time, a 30-Year Fixed may be more attractive because it offers stability. The monthly payment will remain consistent over the life of the loan. If interest rates are at historic lows at the time the borrower is seeking to obtain financing, this is a good program to consider.
A 15-Year Fixed loan program offers the same stability, but the accelerated amortization schedule makes the monthly payment substantially higher. While the interest rate may be lower on this type of loan, the borrower must be willing to commit to a higher monthly payment. If the borrower wishes to retire in 15 years and be debt-free at that time, this loan program may be more suitable to the borrower's long-term needs.
It is also possible to make pre-payments on a 30-Year loan and reduce the life of the loan, as well as the overall interest payment, without committing to the higher monthly payment of a 15-Year program. As long as there is no pre-payment penalty associated with the 30-Year mortgage, pre-payment offers the borrower the latitude to make additional payments when it is affordable. If cash flow becomes difficult, this arrangement will not put the borrower in a compromising position.
How Adjustable Rate Mortgages Work
 During the last decade, Adjustable Rate Mortgages (ARMs) have increased in popularity among consumers. These days, few homeowners (especially first-time buyers) remain in their homes for more than seven years. In this case, it often makes sense to get an adjustable rate mortgage with a lower rate, especially one with a 5-year or 7-year fixed portion, since they won't have the loan long enough to be concerned about rate fluctuation.
Adjustable Rate Mortgages have three main features: Margin, Index, and Caps. The Margin is the fixed portion of the adjustable rate and represents the return the investor gets for loaning their money. It remains the same for the duration of the loan. The Index is the variable portion. This is what makes an ARM adjustable. Margin + Index = Interest Rate.
It's important to understand that there are many different indices: The 11th District Cost of Funds (COFI), the Monthly Treasury Average (MTA), The One Year Treasury Bill, the Six Month LIBOR, etc. Each index has its own strengths and weaknesses; some are slow moving, others are more aggressive.
The third and final component of Adjustable Rate Mortgages is Caps. Caps limit how much the rate can fluctuate over time. Annual Caps limit changes to the annual rate, whereas Life Caps provide a worst case scenario over the life of the loan.
An ARM interest rate is lower because you assume the risk of interest rates going up and enjoy the benefit of rates going lower. Since the lender does not have add a risk factor into the fixed rate, you would normally pay less interest over five years. Ah, but what happens if interest rates start to climb? You may end up paying more interest than what you would have with a fixed rate loan.
Each borrower's situation is different. If you are on a fixed income, a fixed rate loan makes sense. If you are younger with a high probability of increasing income, the ARM may be your lowest cost option.
What is Negative Amortization?
 A negative amortization loan is an adjustable rate mortgage that allows the consumer to tap into home "equity" by offering several monthly payment options. Up to an additional 25% of the original loan amount is available to the borrower.
This flexibility works well for consumers who have seasonal income or want more control over their cash flow. However, the borrower must have some degree of financial discipline. Each month, the borrower will choose to make a fully amortized payment, an interest-only payment, or a low introductory rate payment.
A fully amortized payment is larger, and includes payment toward principal + interest. The interest-only payment is lower, but no part of that mortgage payment goes toward the principal. The borrower is simply keeping their head above water.
The third option is where negative amortization comes into play. If the consumer chooses to make the low introductory rate payment, the interest is not sufficiently covered for that month. The balance of interest owed is then tacked back on to the principal, thus increasing the mortgage debt.
Smart consumers can use these payment options to their advantage, but should have a full understanding of how adjustable loans work. They should also know that once the maximum loan amount has been reached, the lender will immediately increase the payment amount to the fully amortized rate.
Trigger Leads: Don't Be Exploited by the Credit Bureaus
 Certain mortgage companies will pay top dollar to know exactly who is in the market for new financing. What's more, the major credit agencies not only allow files to be flagged whenever someone applies for a home loan, they actually sell this private information as leads to the highest bidders!
For a price tag of $25 to $100, names, addresses, phone numbers, mortgage histories, and even FICO score ranges are sold by the credit bureaus to mortgage companies, which then blindly solicit business.
Unfortunately, no legislation exists to prevent credit companies from profiting from this practice. As trigger leads, consumers are simply at the mercy of any number of solicitations designed specifically to discredit the mortgage professionals they've come to know and trust.
Remember, a limited number of sources exist for lenders to obtain mortgage money, and it's unlikely that a borrower will find an unbelievably low rate without an unbelievably high cost. That's why, prior to applying for any loan program, consumers are able to opt-out of credit bureau solicitations and avoid the problem altogether.
As consumers embark on what could be the largest financial transaction of their lives, it's important to work with a mortgage professional who clearly explains all available options and provides comprehensive solutions.
Try these Mortgage Calculators to assist you with your financial planning.
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Email Sam your Phoenix real estate questions for expert advice.