This country is about to go through a “changing of the guard” in a week and everyone is clamoring to fix our financial problems; but they each have their own ideas on how to accomplish that.
The Obama administration, which includes the newly nominated Treasury Secretary, Timothy Geithner, is working on ways to revamp the Troubled Asset Relief Program (TARP). While not much has been disclosed at this point, it seems that one priority is some kind of foreclosure prevention. Obama said he would disclose a “sweeping effort to address the foreclosure crisis so that we can keep responsible families in their homes.” At Obama’s urging, President Bush has asked Congress for the release of the remaining TARP funds so the new administration can allocate those funds shortly after the inauguration of the new president.
Meanwhile, Congress has made it clear that it may not release any additional TARP funds until some of the money is earmarked for housing. Congressman Barney Frank, who is chairman of the House Financial Services, is writing a bill that would systematically modify existing home loans and provide a government guarantee to protect investors in the event of a homeowner’s default after the loan modification.
The National Association of Home Builders is lobbying for a temporary tax cut for all home buyers who are purchasing a primary residence, which expands the existing program of offering the tax cut to first-time buyers only. A temporary tax cut is basically an interest-free loan from the government, because it will have to be paid back. This idea is not gaining much support, though. At this point, it seems that most of the legislative efforts are being spent to shore up the existing-home market, rather than the new-home market.
The National Association of Realtors (NAR) is trying to push the Treasury into taking a more active role in driving interest rates down by buying more securities backed by 30-year-fixed-rate mortgages from FannieMae and FreddieMac. In actuality, the Feds have instituted a plan to buy up to $500 Billion in mortgage-backed securities, which has lead to interest rates dropping to historic record lows. And that has lead to the current boom in refinances. However, the NAR wants more. They feel that the targeted interest rate of 4.5% isn’t arriving quickly enough and that when it does, it might not be low enough anyway.
Then there is an idea floating around that calls for the Feds to buy down the interest rates on home mortgages to help lower interest rates. It’s unclear if this would include existing or new mortgages, or both.
You might be surprised to learn that mortgage rates have declined by 1.5% since October of 2008. That means someone with a $200,000 mortgage can enjoy a savings of about $180 a month or about $2200 a year. Now THAT’S what I call an economic stimulus!
It will be interesting to see what happens after next week…
Herb
January 13, 2009
October 28, 2008
Wall Street Thrill Rides!
OMG! Another turbulent week on Wall Street!! And who knows where this week is going…
The financial market roller-coaster ride continues. Last week was full of economic data that was responsible for some wild swings. And today, the market took a huge up-swing. We'll see how long that lasts.
So I said I’d address commercial paper and here it is: Commercial Paper is the term used for short-term financing mechanisms that many large companies rely on to finance their day-to-day operations. Let’s say Company ABC is a large manufacturing firm who goes to Bank DEF and says they would like to borrow $400,000 today in order to make payroll or to buy a truckload of supplies; and that they will pay back $405,000 in three days or so. Bank DEF makes the loan and then sells this short-term I.O.U. to investors, such as money markets, mutual or pension funds, or another investor.
So what’s the big problem here? Well, after a series of events that I won’t go into here, the investors said, “FORGET IT…NOT INTERESTED!!” Since investors turned their backs on the commercial paper, banks decided not to make these short-term loans and the credit market froze up. And that sent Mr. Paulson into action. When credit tightens up that dramatically, it gets very expensive to borrow money, if it’s available at all. When Company ABC couldn’t get his short-term loan, it couldn’t make its payroll or buy the supplies it needed to stay in business. You can see that the trickle-down effect would have tremendous consequences for all of us. Hence, the emergence of the Bailout Plan created in an effort to unfreeze the credit markets.
My wife heard a program on the radio a few weeks ago that she said was the best explanation for what was going on that she’d heard. It wasn’t overly simplistic like some of the news reports had been, but it was not overly complicated either. I’ll include the link here in case anyone is interested in listening to it. http://www.thisamericanlife.org/Radio_Episode.aspx?sched=1263 You’ll find a link to listen to the full episode on the left.
So, last week started with a stock-market rally after the Government said it would start putting the $700 Billion Bailout plan into action. Specifically, the Treasury will use $250 Billion to thaw the frozen pipes of the banks. This will be accomplished by the Government buying stocks of some of the country’s largest banks. The Treasury will take $125 Billion and divide it up among banks of all sizes. The other $125 Billion will go to specific banks, mostly the largest ones. Some will get it immediately and others will need to apply for it. The banks will provide Preferred Stocks and a limit on the bank executives’ pay will be imposed. This is supposed to prevent us, the tax payer, from having to pay for luxurious vacations and other extravagancies for these executives. The theory of these stock purchases is that this money injected into the system will allow banks to borrow amongst themselves, which will flow to the consumers and businesses. The FDIC will temporarily provide unlimited coverage for all non-interest bearing accounts, which typically are those accounts where businesses park some money for expenses such as payroll. This will help boost the banks liquidity.
The purpose of the remaining $450 Billion of the plan is to buy some of the worst assets, i.e. sub-prime mortgages, which will allow the banks to remove them from their balance sheet. This would help their balance sheet so they could attract money. Now, those assets do have value but no one knows how to price them given the condition of the housing market. What would you pay for a house no one wants today? The Treasury and White House are working on a formula to buy these assets. They plan on holding them until the market turns and then sell them to investors at a profit. (They do not plan to make a profit on the Preferred Stocks they are purchasing from the banks as part of the $250 Billion Rescue Plan). I wonder if the remaining funds in the plan is enough to cover the bad loans that are still outstanding.
The Government’s new TARP Program may also be set to expand. TARP (Troubled Asset Relief Program) was launched to act as a secondary market for troubled mortgages, but it may be expanded to cover bad credit card debt and bad auto loans as well. Hmmmm. I’m not sure how I feel about that…
The financial market roller-coaster ride continues. Last week was full of economic data that was responsible for some wild swings. And today, the market took a huge up-swing. We'll see how long that lasts.
So I said I’d address commercial paper and here it is: Commercial Paper is the term used for short-term financing mechanisms that many large companies rely on to finance their day-to-day operations. Let’s say Company ABC is a large manufacturing firm who goes to Bank DEF and says they would like to borrow $400,000 today in order to make payroll or to buy a truckload of supplies; and that they will pay back $405,000 in three days or so. Bank DEF makes the loan and then sells this short-term I.O.U. to investors, such as money markets, mutual or pension funds, or another investor.
So what’s the big problem here? Well, after a series of events that I won’t go into here, the investors said, “FORGET IT…NOT INTERESTED!!” Since investors turned their backs on the commercial paper, banks decided not to make these short-term loans and the credit market froze up. And that sent Mr. Paulson into action. When credit tightens up that dramatically, it gets very expensive to borrow money, if it’s available at all. When Company ABC couldn’t get his short-term loan, it couldn’t make its payroll or buy the supplies it needed to stay in business. You can see that the trickle-down effect would have tremendous consequences for all of us. Hence, the emergence of the Bailout Plan created in an effort to unfreeze the credit markets.
My wife heard a program on the radio a few weeks ago that she said was the best explanation for what was going on that she’d heard. It wasn’t overly simplistic like some of the news reports had been, but it was not overly complicated either. I’ll include the link here in case anyone is interested in listening to it. http://www.thisamericanlife.org/Radio_Episode.aspx?sched=1263 You’ll find a link to listen to the full episode on the left.
So, last week started with a stock-market rally after the Government said it would start putting the $700 Billion Bailout plan into action. Specifically, the Treasury will use $250 Billion to thaw the frozen pipes of the banks. This will be accomplished by the Government buying stocks of some of the country’s largest banks. The Treasury will take $125 Billion and divide it up among banks of all sizes. The other $125 Billion will go to specific banks, mostly the largest ones. Some will get it immediately and others will need to apply for it. The banks will provide Preferred Stocks and a limit on the bank executives’ pay will be imposed. This is supposed to prevent us, the tax payer, from having to pay for luxurious vacations and other extravagancies for these executives. The theory of these stock purchases is that this money injected into the system will allow banks to borrow amongst themselves, which will flow to the consumers and businesses. The FDIC will temporarily provide unlimited coverage for all non-interest bearing accounts, which typically are those accounts where businesses park some money for expenses such as payroll. This will help boost the banks liquidity.
The purpose of the remaining $450 Billion of the plan is to buy some of the worst assets, i.e. sub-prime mortgages, which will allow the banks to remove them from their balance sheet. This would help their balance sheet so they could attract money. Now, those assets do have value but no one knows how to price them given the condition of the housing market. What would you pay for a house no one wants today? The Treasury and White House are working on a formula to buy these assets. They plan on holding them until the market turns and then sell them to investors at a profit. (They do not plan to make a profit on the Preferred Stocks they are purchasing from the banks as part of the $250 Billion Rescue Plan). I wonder if the remaining funds in the plan is enough to cover the bad loans that are still outstanding.
The Government’s new TARP Program may also be set to expand. TARP (Troubled Asset Relief Program) was launched to act as a secondary market for troubled mortgages, but it may be expanded to cover bad credit card debt and bad auto loans as well. Hmmmm. I’m not sure how I feel about that…
October 15, 2008
IS IT WORKING YET?
Unless you were on a deserted island in the middle of the Pacific Ocean last week, I’m sure you’re aware of what transpired in the stock market last week. Just when you might have thought it had hit bottom and it was safe to come out again, another drop occurred. I would daily proclaim that it just couldn’t go any lower, and then it would! It’s estimated that in the past year, $8.4 trillion in wealth has been lost. That’s a lot of zeros! Evidently, an unprecedented $2.4 trillion was lost just last week. It’s said to be the worst week in Wall Street history.
Why all the fear? The credit markets have frozen. These are the markets that fuel our economic engine. And these markets froze despite all of the actions by the world banks. This in turn generated all kinds of negative news regarding unemployment, durable goods, consumer spending and factory orders. The world economy is in a credit crunch, as well, because other countries hold some toxic mortgages in their investment portfolios.
But there was a little good news, too. This should force interest rates down. And the price of oil is dropping. Oil prices of $140/barrel are ridiculous and not warranted, as far as I’m concerned. The speculators are being driven out of the market, and it seems a more realistic price of $45-$65/barrel is coming back. (At the time of this writing, the price is around $75/barrel.).
The present administration and Mr. Paulson are working to put the new Bailout Plan into action. But rather than purchasing mortgage assets right now, they are taking steps to inject more cash into the banks through purchases of capital, which will quickly provide money for the banks. The Federal Funds rate has been cut by half a percentage point to a ten-year low of 1.5%. Some will argue that this low rate was partly responsible for the sub-prime frenzy in the first place; banks were allowed to borrow money cheaply and then turn around and lend them to riskier borrowers at much higher rates. While some are betting on another quarter-percent drop by the end of the month, others are fearful that this will cause the dollar to devaluate even further. The central banks of other countries are getting in the act, too, and are cutting their key interest rates.
The FDIC has increased its deposit insurance to $250,000 in an effort to stop the run on the banks that was occurring. Psychologically at least, that step seems to have calmed things down a bit.
Despite the uncertainty in the markets today, something needed to be done in an attempt to fix them. No one knows for sure what the outcome will be; but one can only hope that these efforts will help battle a world-wide recession. The roller-coaster ride isn’t over yet, though. Corporate-earnings reports are due to be released soon.
Watch for my next blog about the Federal Reserve and commercial “paper”. And as that famous ‘70’s poster used to proclaim…
HANG IN THERE, BABY!!
Herb
Why all the fear? The credit markets have frozen. These are the markets that fuel our economic engine. And these markets froze despite all of the actions by the world banks. This in turn generated all kinds of negative news regarding unemployment, durable goods, consumer spending and factory orders. The world economy is in a credit crunch, as well, because other countries hold some toxic mortgages in their investment portfolios.
But there was a little good news, too. This should force interest rates down. And the price of oil is dropping. Oil prices of $140/barrel are ridiculous and not warranted, as far as I’m concerned. The speculators are being driven out of the market, and it seems a more realistic price of $45-$65/barrel is coming back. (At the time of this writing, the price is around $75/barrel.).
The present administration and Mr. Paulson are working to put the new Bailout Plan into action. But rather than purchasing mortgage assets right now, they are taking steps to inject more cash into the banks through purchases of capital, which will quickly provide money for the banks. The Federal Funds rate has been cut by half a percentage point to a ten-year low of 1.5%. Some will argue that this low rate was partly responsible for the sub-prime frenzy in the first place; banks were allowed to borrow money cheaply and then turn around and lend them to riskier borrowers at much higher rates. While some are betting on another quarter-percent drop by the end of the month, others are fearful that this will cause the dollar to devaluate even further. The central banks of other countries are getting in the act, too, and are cutting their key interest rates.
The FDIC has increased its deposit insurance to $250,000 in an effort to stop the run on the banks that was occurring. Psychologically at least, that step seems to have calmed things down a bit.
Despite the uncertainty in the markets today, something needed to be done in an attempt to fix them. No one knows for sure what the outcome will be; but one can only hope that these efforts will help battle a world-wide recession. The roller-coaster ride isn’t over yet, though. Corporate-earnings reports are due to be released soon.
Watch for my next blog about the Federal Reserve and commercial “paper”. And as that famous ‘70’s poster used to proclaim…
HANG IN THERE, BABY!!
Herb
September 19, 2008
CONTROLLING THE 800-POUND GORILLA
Could you have written a better piece of drama or fiction than what has occurred in the past two weeks?
Could you ever, with credibility, have predicted the chaos in the U.S. financial markets which has resulted in the erosion of trillions (yes, trillions) of dollars? Fannie Mae & Freddie Mac being taken over by the Feds? Collapses of banks and big brokerage houses? Even money market accounts dipping below face value???? UNBELIEVABLE!!! I have stated for years that the bubble in the dot-com market and the sub-prime housing financial markets would burst. I just didn’t know when.
Did the Government do the right things at the right times? That question will be argued for weeks. I am definitely not one for governmental intervention. American Business has always risen to the challenge and cured its ills. It is very creative and resilient. Something did need to be done in this case, though; we are the leaders in the world economy! As such a leader, we needed to stabilize the markets and bring back confidence. We cannot afford a run on the world financial markets; we have too much foreign money in our markets to allow such a run. Not taking drastic measures could result in disastrous repercussions.
I do not believe that the Fed’s reacted in a timely fashion and may not have done all the right things at the right time, but they are now moving in the right direction. There has been a lot of patchwork mending going on; and they have been putting out fires one at a time as they spring up. They may have reacted too slow, or may have over or under reacted in different arenas.
We are in uncharted waters like NEVER before; and we are all Monday morning quarterbacks at this juncture. Will this cost the American tax payer? You bet it will! But it will be far less now than if nothing had been done. The cost of doing nothing would have been tremendous!
As the Market has been recovering yesterday and today (9/18 & 9/19), common sense has been prevailing. American businesses cannot operate with such wild fluctuations as those that had been occurring. Panic had set in and knee jerk reactions were becoming the norm. I had a financially-astute client who is in his twenties, call me and ask if he should cash in his 401K. My reply to him was, ”Are you serious? You’d be looking at a 10% penalty and State & Federal taxes, which would probably result in an overall loss of about 40 to 50%. AND YOU’RE STILL FORTY-PLUS YEARS AWAY FROM USING THEM!!!” Several clients have worried that their mortgage company was going away and wondering if they need to refinance quickly with someone with more financial stability. First of all, “financial stability” may be a relative term for a while. Secondly, and foremost, your mortgage will not be called and isn’t going anywhere. It could get bought up by someone else, but you will still keep your note rate and all the original terms will remain the same. You will just mail your payment to a different address.
My advice? Keep on doing what you’re doing. Be prudent. Adjust your portfolio risk if you’re really nervous or can’t sleep well. There is nothing wrong with being a bit conservative right now. But burying your money in coffee cans in the backyard is not the answer.
Six months to a year from now, with the benefit of hindsight, we can evaluate what went on. More than likely we will kick ourselves for missing a good buying opportunity somewhere. But I think economists will debate this event for many, many years. Hopefully, we’ve learned a lesson here.
Could you ever, with credibility, have predicted the chaos in the U.S. financial markets which has resulted in the erosion of trillions (yes, trillions) of dollars? Fannie Mae & Freddie Mac being taken over by the Feds? Collapses of banks and big brokerage houses? Even money market accounts dipping below face value???? UNBELIEVABLE!!! I have stated for years that the bubble in the dot-com market and the sub-prime housing financial markets would burst. I just didn’t know when.
Did the Government do the right things at the right times? That question will be argued for weeks. I am definitely not one for governmental intervention. American Business has always risen to the challenge and cured its ills. It is very creative and resilient. Something did need to be done in this case, though; we are the leaders in the world economy! As such a leader, we needed to stabilize the markets and bring back confidence. We cannot afford a run on the world financial markets; we have too much foreign money in our markets to allow such a run. Not taking drastic measures could result in disastrous repercussions.
I do not believe that the Fed’s reacted in a timely fashion and may not have done all the right things at the right time, but they are now moving in the right direction. There has been a lot of patchwork mending going on; and they have been putting out fires one at a time as they spring up. They may have reacted too slow, or may have over or under reacted in different arenas.
We are in uncharted waters like NEVER before; and we are all Monday morning quarterbacks at this juncture. Will this cost the American tax payer? You bet it will! But it will be far less now than if nothing had been done. The cost of doing nothing would have been tremendous!
As the Market has been recovering yesterday and today (9/18 & 9/19), common sense has been prevailing. American businesses cannot operate with such wild fluctuations as those that had been occurring. Panic had set in and knee jerk reactions were becoming the norm. I had a financially-astute client who is in his twenties, call me and ask if he should cash in his 401K. My reply to him was, ”Are you serious? You’d be looking at a 10% penalty and State & Federal taxes, which would probably result in an overall loss of about 40 to 50%. AND YOU’RE STILL FORTY-PLUS YEARS AWAY FROM USING THEM!!!” Several clients have worried that their mortgage company was going away and wondering if they need to refinance quickly with someone with more financial stability. First of all, “financial stability” may be a relative term for a while. Secondly, and foremost, your mortgage will not be called and isn’t going anywhere. It could get bought up by someone else, but you will still keep your note rate and all the original terms will remain the same. You will just mail your payment to a different address.
My advice? Keep on doing what you’re doing. Be prudent. Adjust your portfolio risk if you’re really nervous or can’t sleep well. There is nothing wrong with being a bit conservative right now. But burying your money in coffee cans in the backyard is not the answer.
Six months to a year from now, with the benefit of hindsight, we can evaluate what went on. More than likely we will kick ourselves for missing a good buying opportunity somewhere. But I think economists will debate this event for many, many years. Hopefully, we’ve learned a lesson here.
July 24, 2008
DON'T WORRY. BE HAPPY!
Numerous mortgage banks--gone. Bear Sterns--gone. Some investment banks--gone.
Next …..G.M.???? GMAC (General Motors Acceptance Corp.)??? Washington Mutual???? Countrywide???
Fannie Mae & Freddy Mac soon to go out???? (Very doubtful. The Feds say they’ll help).
We’ve had several calls this week with concerns about their current mortgage. Will I be forced into getting a new loan if my servicer goes out of business? How do I protect my loan? Does my loan get forgiven?
Answer:
1. No, you do not lose your loan nor will you be forced into refinancing.
The worst thing that will happen if your lender or servicer (the people you make your payments to) goes out of business is that your loan will be sold and you’ll make your payments to a new lender or servicer.
2. No need to “protect” your loan. It’s ok. You may experience a little confusion in the beginning but it will all sort out. If your loan is sold, you’ll receive a letter or two with information about what’s going on and who you’ll be making your payments to.
As I stated about 6 months or so ago, the mortgage industry still has several issues to work through. This is not a six-month fix. It took a few years to create this mess, but I think it will heal soon. It started when borrowers in large numbers began defaulting on their mortgages. That wave worked its way through the lenders and is now washing over the Mortgage Insurance companies, Investment Banks and the Secondary Markets. Some will not survive, but some will. Lending parameters will be over-corrected and swing too far toward the conservative side before settling somewhere in the middle. Yes, things will be a little rough for a while, but relatively speaking, we will return to normal.
Residential mortgages are still being made. There is good demand for them in the marketplace because they provide a very safe haven for many investors. Don’t let statistics scare you when all the talk is about the amount of foreclosures doubling or being at an all time high. Remember: even if foreclosures are at an all time high at 3% to 5%, that still means that 97% to 95% of the mortgages out there are not in default. In fact, Sunday’s Oregonian stated that foreclosures in Oregon during the first quarter of 2008 were only at 0.09%. Not bad!
Don’t Worry. Be Happy!
Next …..G.M.???? GMAC (General Motors Acceptance Corp.)??? Washington Mutual???? Countrywide???
Fannie Mae & Freddy Mac soon to go out???? (Very doubtful. The Feds say they’ll help).
We’ve had several calls this week with concerns about their current mortgage. Will I be forced into getting a new loan if my servicer goes out of business? How do I protect my loan? Does my loan get forgiven?
Answer:
1. No, you do not lose your loan nor will you be forced into refinancing.
The worst thing that will happen if your lender or servicer (the people you make your payments to) goes out of business is that your loan will be sold and you’ll make your payments to a new lender or servicer.
2. No need to “protect” your loan. It’s ok. You may experience a little confusion in the beginning but it will all sort out. If your loan is sold, you’ll receive a letter or two with information about what’s going on and who you’ll be making your payments to.
As I stated about 6 months or so ago, the mortgage industry still has several issues to work through. This is not a six-month fix. It took a few years to create this mess, but I think it will heal soon. It started when borrowers in large numbers began defaulting on their mortgages. That wave worked its way through the lenders and is now washing over the Mortgage Insurance companies, Investment Banks and the Secondary Markets. Some will not survive, but some will. Lending parameters will be over-corrected and swing too far toward the conservative side before settling somewhere in the middle. Yes, things will be a little rough for a while, but relatively speaking, we will return to normal.
Residential mortgages are still being made. There is good demand for them in the marketplace because they provide a very safe haven for many investors. Don’t let statistics scare you when all the talk is about the amount of foreclosures doubling or being at an all time high. Remember: even if foreclosures are at an all time high at 3% to 5%, that still means that 97% to 95% of the mortgages out there are not in default. In fact, Sunday’s Oregonian stated that foreclosures in Oregon during the first quarter of 2008 were only at 0.09%. Not bad!
Now, if you’re in trouble on your loan, do something immediately. DO NOT WAIT! Lenders are much more willing to help in the beginning of a problem rather than working with someone who is 3-4 months in arrears on their payments. But if you’re making your payments on time…..
Don’t Worry. Be Happy!
June 27, 2008
TO 2nd OR NOT TO 2nd.....
Well, it’s been a couple of months since I wrote anything. Thankfully, we had a flurry of business during that time. It’s important to remember that despite all the attention the mortgage industry has been getting lately, life does still go on. People are still moving or wanting to refinance their homes. And we’re still here to help.
I’ve been getting quite a number of inquiries recently from people who are interested in second mortgages and lines of credit. So I decided to give a brief dissertation about the ABC’s of L.O.C.’s and second mortgages.
First of all, Lines of Credit are sometimes referred to as L.O.C.’s, ELOC’s (Equity Lines of Credit), or HELOC’s (Home Equity Lines of Credit). These are all fancy names for a type of second mortgage. They are usually adjustable rate instruments. Like a first mortgage ARM, they will have an index, i.e.: The Wall Street Prime. To this, a margin is added. This can range from 0%to 5% and depends on factors such as your credit score, loan amount and appraised value. The Margin is what is added to the Index to determine your interest rate. So, for example, if the “prime” rate is 5.00% and your margin is 1.00%, then your rate for the month is 6.00%. Generally, your rate can change monthly and fluctuates according to what’s happening with the particular index. Most programs of this type will allow you to pay “Interest Only” for the first 5 or 10 years. After that period, you will then be required to repay the principal over the remaining life of the loan--usually 10 years.
Your Line of Credit will work like your revolving credit card. In other words, let’s assume that you have opened a HELOC with a $40,000 credit line. You may elect to withdraw $40,000 all at once or just a portion at a time. As you pay back the principle, you are opening the amount of available credit, i.e.: you can withdraw $25,000 and you will have $15,000 left that will be available for access later ($40,000-$25,000=$15,000). If you paid back $3000, your line would then have $18,000 available ($15,000 + $3,000= $18,000). Some programs will allow you to “Fix” the rate for the portions you have withdrawn. This may also affect the amount of available funds you may draw against your line.
Keep in mind that most of these Lines of Credit are a portfolio product, which means they are not sold to secondary investors; so the terms and conditions may vary greatly. PLEASE BE SURE YOU FULLY UNDERSTAND THE TERMS of your particular loan.
Besides Lines of Credits, another option for a second mortgage would be a Fixed Rate Fixed Term loan. These are very similar to your fixed rate first mortgage. You will have a fixed interest rate and a fixed payment over a fixed number of years. Most of these seconds do not allow you to take out portions at a time. You’ll receive all of your loan proceeds at the time you close the loan. And you will not have further access to any more funds as you repay your principal balance.
Various amortization periods are usually offered with these kinds of loans and some will require a balloon payment after a certain number or years. This will affect the amount of your payment. When you borrow that same $40,000 on a fixed rate loan at an 8.00% rate of interest, you could have several payment options. I’ve shown a couple of examples:
1. A straight 10-year or 15-year amortized repayment. A payment on a 10-year loan would be $485.31 and a 15-year loan would have a payment of $382.26. This option will leave you with a zero balance at the end of the payment period.
2. A 30-year amortized repayment with a Balloon payment due at the end of 15 years. This would give you a payment of $293.51,which is lower than option one; but at the end of the 15-year period, you must pay off the total of the remaining balance, which would be $30,712.62. You may need to refinance in order to do this, or you can use your savings. Many people use this option when they know they will be staying in their home for LESS than 15 years, and will pay off the loan when they sell it. But again, PLEASE BE SURE YOU FULLY UNDERSTAND THE TERMS of your loan before you sign on the dotted line.
The payments and interest rates are EXAMPLES ONLY. There would be closing costs involved as well and that would affect your Annual Percentage Rate or APR.
All second mortgages have their pluses and minuses. They are definitely not a one-size-fits-all. You will need to evaluate your needs and then pick the program that best suits your parameters—and that will still allow you to sleep at night!
I’ve been getting quite a number of inquiries recently from people who are interested in second mortgages and lines of credit. So I decided to give a brief dissertation about the ABC’s of L.O.C.’s and second mortgages.
First of all, Lines of Credit are sometimes referred to as L.O.C.’s, ELOC’s (Equity Lines of Credit), or HELOC’s (Home Equity Lines of Credit). These are all fancy names for a type of second mortgage. They are usually adjustable rate instruments. Like a first mortgage ARM, they will have an index, i.e.: The Wall Street Prime. To this, a margin is added. This can range from 0%to 5% and depends on factors such as your credit score, loan amount and appraised value. The Margin is what is added to the Index to determine your interest rate. So, for example, if the “prime” rate is 5.00% and your margin is 1.00%, then your rate for the month is 6.00%. Generally, your rate can change monthly and fluctuates according to what’s happening with the particular index. Most programs of this type will allow you to pay “Interest Only” for the first 5 or 10 years. After that period, you will then be required to repay the principal over the remaining life of the loan--usually 10 years.
Your Line of Credit will work like your revolving credit card. In other words, let’s assume that you have opened a HELOC with a $40,000 credit line. You may elect to withdraw $40,000 all at once or just a portion at a time. As you pay back the principle, you are opening the amount of available credit, i.e.: you can withdraw $25,000 and you will have $15,000 left that will be available for access later ($40,000-$25,000=$15,000). If you paid back $3000, your line would then have $18,000 available ($15,000 + $3,000= $18,000). Some programs will allow you to “Fix” the rate for the portions you have withdrawn. This may also affect the amount of available funds you may draw against your line.
Keep in mind that most of these Lines of Credit are a portfolio product, which means they are not sold to secondary investors; so the terms and conditions may vary greatly. PLEASE BE SURE YOU FULLY UNDERSTAND THE TERMS of your particular loan.
Besides Lines of Credits, another option for a second mortgage would be a Fixed Rate Fixed Term loan. These are very similar to your fixed rate first mortgage. You will have a fixed interest rate and a fixed payment over a fixed number of years. Most of these seconds do not allow you to take out portions at a time. You’ll receive all of your loan proceeds at the time you close the loan. And you will not have further access to any more funds as you repay your principal balance.
Various amortization periods are usually offered with these kinds of loans and some will require a balloon payment after a certain number or years. This will affect the amount of your payment. When you borrow that same $40,000 on a fixed rate loan at an 8.00% rate of interest, you could have several payment options. I’ve shown a couple of examples:
1. A straight 10-year or 15-year amortized repayment. A payment on a 10-year loan would be $485.31 and a 15-year loan would have a payment of $382.26. This option will leave you with a zero balance at the end of the payment period.
2. A 30-year amortized repayment with a Balloon payment due at the end of 15 years. This would give you a payment of $293.51,which is lower than option one; but at the end of the 15-year period, you must pay off the total of the remaining balance, which would be $30,712.62. You may need to refinance in order to do this, or you can use your savings. Many people use this option when they know they will be staying in their home for LESS than 15 years, and will pay off the loan when they sell it. But again, PLEASE BE SURE YOU FULLY UNDERSTAND THE TERMS of your loan before you sign on the dotted line.
The payments and interest rates are EXAMPLES ONLY. There would be closing costs involved as well and that would affect your Annual Percentage Rate or APR.
All second mortgages have their pluses and minuses. They are definitely not a one-size-fits-all. You will need to evaluate your needs and then pick the program that best suits your parameters—and that will still allow you to sleep at night!
April 14, 2008
HAPPY ANNIVERSARY TO ME!!!
I have been doing business in the real estate industry for 30 years as of April 15th! That realization came to me a few days ago and it sort of startled me that it had been so long. I know one thing for sure. I have a lot less hair now when compared to when I started! I was a Real Estate Broker during the first six years dealing in residential and small commercial properties; and since then I’ve been working in mortgages. It was then and always will be my goal to do my best job for my customers. This is especially important since 99% of my business comes from referrals.
I know that one of my recent blogs touched on the subject of finding a good mortgage broker, and I thought now might be a good time to go into more detail.
DO NOT respond to phone call or e-mail solicitations!
I’ve heard a lot of war stories from people that started the loan process with one of these solicitors. Some borrowers even completed the process. Most did not have a good experience. Don’t be fooled by solicitors from big name institutions, either. Even the “big boys” hire or contract out for what I call “broiler room” services. Most of these callers are script-readers who are just trying to generate leads for someone else. I know this because I get at least two or three calls and e-mails each week from someone trying to get me to purchase these leads.
DO get a referral from someone you trust.
You should have someone in your sphere of existence that has gotten a mortgage in their lifetime. Whether the experience was good or bad, they can steer you towards or away from someone. A good mortgage broker relies heavily on referral business. If we do the job right, hopefully our client tells one or two people about the positive experience. If we screw it up, you can be sure at least ten people will hear about it!
DO listen for options.
These days, it are only a very few cases that there is only one option when getting a home mortgage. If you aren’t offered more than one plan, ask if there are alternatives. Is a first mortgage plus a second better than a larger mortgage with mortgage insurance? Is it better to get a Line of Credit or to just refinance my existing mortgage? Should I pull cash out of a refinance or not? Is it cost effective for me to refinance, and if so, what is my break-even time frame? There is no such thing as one size fits all in the mortgage industry!
DO look for a Good Faith Estimate.
INSIST on knowing what the mortgage is going to cost you before you commit to anything. A good broker will provide you with a GFE. I always bring that form out first and go over it with the borrowers even before we go over the application. Even though the numbers on this form are only estimates, they should give you a general idea of what to expect at closing. Be wary of low-ball estimates. You really don’t want to find out at closing time that you need a lot more money than you thought you did—especially if the moving van is coming the next day! A good mortgage broker will know approximately what it costs to close the loan; and he has hopefully estimated a little high to make sure you won’t be surprised in the end. Which leads me to the next point…
DO find a mortgage broker with experience.
There really is no good substitute for time spent in the trenches. A broker needs to be in the business long enough to know the markets and the products; and this may take more than a year or two. While mortgages are not terribly difficult to understand, they are not simple transactions either. For most people, they are the largest transactions of their lives. Using the guy that was pumping your gas or taking your dinner order last week may not be the way to go. I realize that everyone has to start somewhere, and if you’re willing to work with someone new, make sure they have an experienced broker somewhere behind them. Interview the broker and satisfy yourself with his or her experience. If you aren’t happy, don’t be embarrassed to move on.
DO keep yourself informed during the process.
A good broker will correspond with you at least two or three times during the process of the loan, and it will probably be more. You should have been provided with his phone number and/or e-mail address, and you should expect a quick response time to your calls or mail. If you don’t understand something, ASK! If your broker slips into “Bankenese”, ask him to explain it in plain English.
DO your best to detect honesty and integrity in your broker.
You need to feel that you are being told the truth and that the broker has your best interests in mind. Do you want a reference? Ask for one. And then watch the broker for any “tells” (a term from my poker-playing son). If he’s good, he won’t mind giving you a reference or two. Don’t fall for false promises. Go with your gut. If you’re feeling funny about the whole thing, run-don’t walk-out of the office.
REMEMBER!! You get to choose your mortgage broker, banker, or originator. Don’t let anyone tell you that you have to go to a particular place to get your mortgage. You are in charge, so make sure you exercise your right to work with whomever you want.
I know that one of my recent blogs touched on the subject of finding a good mortgage broker, and I thought now might be a good time to go into more detail.
DO NOT respond to phone call or e-mail solicitations!
I’ve heard a lot of war stories from people that started the loan process with one of these solicitors. Some borrowers even completed the process. Most did not have a good experience. Don’t be fooled by solicitors from big name institutions, either. Even the “big boys” hire or contract out for what I call “broiler room” services. Most of these callers are script-readers who are just trying to generate leads for someone else. I know this because I get at least two or three calls and e-mails each week from someone trying to get me to purchase these leads.
DO get a referral from someone you trust.
You should have someone in your sphere of existence that has gotten a mortgage in their lifetime. Whether the experience was good or bad, they can steer you towards or away from someone. A good mortgage broker relies heavily on referral business. If we do the job right, hopefully our client tells one or two people about the positive experience. If we screw it up, you can be sure at least ten people will hear about it!
DO listen for options.
These days, it are only a very few cases that there is only one option when getting a home mortgage. If you aren’t offered more than one plan, ask if there are alternatives. Is a first mortgage plus a second better than a larger mortgage with mortgage insurance? Is it better to get a Line of Credit or to just refinance my existing mortgage? Should I pull cash out of a refinance or not? Is it cost effective for me to refinance, and if so, what is my break-even time frame? There is no such thing as one size fits all in the mortgage industry!
DO look for a Good Faith Estimate.
INSIST on knowing what the mortgage is going to cost you before you commit to anything. A good broker will provide you with a GFE. I always bring that form out first and go over it with the borrowers even before we go over the application. Even though the numbers on this form are only estimates, they should give you a general idea of what to expect at closing. Be wary of low-ball estimates. You really don’t want to find out at closing time that you need a lot more money than you thought you did—especially if the moving van is coming the next day! A good mortgage broker will know approximately what it costs to close the loan; and he has hopefully estimated a little high to make sure you won’t be surprised in the end. Which leads me to the next point…
DO find a mortgage broker with experience.
There really is no good substitute for time spent in the trenches. A broker needs to be in the business long enough to know the markets and the products; and this may take more than a year or two. While mortgages are not terribly difficult to understand, they are not simple transactions either. For most people, they are the largest transactions of their lives. Using the guy that was pumping your gas or taking your dinner order last week may not be the way to go. I realize that everyone has to start somewhere, and if you’re willing to work with someone new, make sure they have an experienced broker somewhere behind them. Interview the broker and satisfy yourself with his or her experience. If you aren’t happy, don’t be embarrassed to move on.
DO keep yourself informed during the process.
A good broker will correspond with you at least two or three times during the process of the loan, and it will probably be more. You should have been provided with his phone number and/or e-mail address, and you should expect a quick response time to your calls or mail. If you don’t understand something, ASK! If your broker slips into “Bankenese”, ask him to explain it in plain English.
DO your best to detect honesty and integrity in your broker.
You need to feel that you are being told the truth and that the broker has your best interests in mind. Do you want a reference? Ask for one. And then watch the broker for any “tells” (a term from my poker-playing son). If he’s good, he won’t mind giving you a reference or two. Don’t fall for false promises. Go with your gut. If you’re feeling funny about the whole thing, run-don’t walk-out of the office.
REMEMBER!! You get to choose your mortgage broker, banker, or originator. Don’t let anyone tell you that you have to go to a particular place to get your mortgage. You are in charge, so make sure you exercise your right to work with whomever you want.
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