Mortgage 411 Center

As a mortgage professional who actively networks online, I have the opportunity to read many mortgage and real estate related blogs and websites.   The one thing that I noticed is that although there is a lot of information out there, it can sometimes be difficult for the average consumer to understand.  While other mortgage professionals will understand terms like LTV, PITI, PMI and FICO we often take for granted that the consumer will understand them as well. 

This is not only a problem online, but it also occurs in speaking with customers on a day to day basis.  Out of habit, mortgage loan officers tend to  rely on mortgage speak , forgetting that the customer probably has no idea what the loan officer is saying.   Here are some typical examples:

• If you purchase this home, your PITI will be $1254.76 per month.
• You will have to pay PMI on your loan since your LTV is higher than 80%.
• Because of your FICO, your interest rate is going to be 6.5%.

Allow me to translate.

PITI stands for Principal Interest Taxes and Insurance.  It is basically the amount that you will pay to the mortgage company each month.  Most online mortgage calculators where you plug in the loan amount and interest rate will only give you the amount of Principal and Interest (PI).  But the PITI is the true cost of the loan.

PMI stands for Private Mortgage Insurance.  You will have to pay this if your LTV (that’s loan to value) is greater than 80%.  For example if you are buying a $100,000 house  with a downpayment of $10,000 you would have a loan amount of $90,000 while your home is worth $100,000.  The ratio of your loan to value is $90,000/$100,000 or 90%.  PMI protects the lender in case you go into default.  It is not to be confused with homeowners insurance which you are also required to pay but which protects the homeowner in the event something were to happen to the house.

FICO stands for Fair Issac Corporation which developed the most widely used credit score.   Your lender may refer to your credit score as a FICO score, even if he uses a slightly different model.   Generally, the higher your FICO score the lower your interest rate and vice versa.

To learn more about some common mortgage terms and their meaning please view our mortgage glossary.  Before you know it, you’ll be talking like a loan officer too or at least you’ll be able to understand the mortgage process a little better.

Personally I hate it when everyone in the real estate business talks about how “It’s a great time to buy!”. Of course they are going to say that, they are trying to sell you a house or a mortgage loan, or they somehow make their money in Real Estate, what do you expect them to say? (Donald Trump are you listening? Have you ever once stated that it was NOT the time to buy???) However, I do think that those who are saying it this time, taking into account the combination of low interest rates and low home prices, may actually be right. Here’s why.

As a mortgage professional, I am seeing a large increase in the number of homeowners looking to refinance their mortgage loan. They have all heard about the current low interest rates and want to take advantage of them. Right now, I have enough refinances to keep me busy for the foreseeable future. I have no need to market to prospective homebuyers, but I am. There are a lot of great incentives to buy right now and I don’t want anyone to miss out on these opportunites. To learn why read the previous post, A New Home For the New Year - Why 2009 is the Time to Buy.

However, I am not the only mortgage professional who thinks it is time to buy. Tennessee Mortgage Professional Danny Thornton thinks it is Time to get off the fence, and shares with us the new commercial from the National Association of Realtors with the same message. I like the commercial so much I have posted it on my own website and am sharing it here as well.

My only complaint is that the commercial should have advised potential homebuyers to get preapproved for a mortgage loan, before talking to a Realtor. What good is convincing potential homebuyers to get off of the fence and buy a home only to find out they don’t qualify for a mortgage loan in the first place?

If you think 2009 is the time to buy and are ready to get off the fence and into your own home visit www.aboveallmortgage.com.

Since I have previously written about making refinancing your current mortgage a goal for the New Year, I now would like to address why those who are looking to purchase a home should do so in 2009. First, let’s be clear, the real estate market of today is a lot different than it was a few years ago, where almost anyone could get approved for a loan, regardless of credit, income, or assets. However, assuming your credit is in good shape, you have a steady income which you can document, and you have sufficient savings there is still money to lend. If you are not quite ready to buy, I will be writing next about coming up with a plan to help realize your dream of homeownership.

Why should you buy in 2009?

1) Mortgage interest rates are at an all time low and lower rates mean lower payments.

2) Home prices have dropped making homes more affordable. In some areas there are real bargains.

3) Excess inventory make this a buyer’s market, and sellers may be more willing to negotiate.

4) First time homebuyers may be eligible for a tax credit of up to $8000 on homes purchased before December 31, 2009.

5) The combination of these factors actually make buying a home now a wiser choice than at the peak of the market when there was a frenzy to outbid other potential buyers on already overpriced homes, no additional incentives to buy, and the lingering fear that the bubble would one day burst.

6) Waiting for the market to reach the bottom is a bad idea. The only way to know when we’ve truly reached the bottom is when home prices start to go back up.

For those who are thinking about buying but may still be “on the fence”, you may need to ask yourself “Is It Time to Develop a Sense of Urgency?”, and consider taking advantage of these opportunities before it is too late. For those who are ready to act, the first step to purchasing your new home is to contact a mortgage professional to learn more about the loan process, find out how much you can afford, and to get pre-approved. Getting pre-approved before you start looking for homes will show that you are a serious and qualified buyer and will give you an advantage when you decide to make an offer on a home.

Visit www.aboveallmortgage.com to take the first step to becoming a homeowner in 2009.

While the main goal of this site is to provide information to consumers so that they can make informed decisions when shopping for a mortgage loan, it is also necessary to provide a bit of commentary on political issues, especially as they pertain to the mortgage and real estate industry.  By now you are probably well aware of the massive spending stimulus bill that was just signed into law.   You also may have heard that the President also has a plan to help homeowners that cannot afford to pay their mortgage.  Known as The Homeowner Affordability and Stability Plan, the White House says that it contains 4 key goals:

1. Refinancing help for four to five million homeowners who receive their mortgages through Fannie Mae or Freddie Mac
2. New incentives for lenders to modify the terms of sub-prime loans at risk of default and foreclosure
3. Steps to keep mortgage rates low for millions of middle class families looking to secure new mortgages
4. Additional reforms designed to help families stay in their homes

This plan has sparked outrage from responsible citizens who see this massive mortgage entitlement plan as unfair to homeowners who pay their bills on time, and who live within their means.  What is really outrageous about this plan however, is the rewards and incentives which are built into the program.  Yes, not only is the government (read: taxpayer) subsidizing the lower interest rates and principal reductions which will be given to borrowers under the program in order to mortgage payments more affordable, but also extra incentives such as:

 

“Pay for Success” Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive “pay for success” fees – awarded monthly as long as the borrower stays current on the loan – of up to $1,000 each year for three years. 

 Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.

 

Yes, you are reading that correctly.  The government will now pay lenders $1,000 up-front to modify a loan, despite the fact that the government is also subisidizing the interest rate and principal reductions.   This is supposed to be an incentive for lenders to participate in the program, but isn’t the fact that the government is now subsidizing any losses the lenders would be taking by modifying the loans incentive enough?  The lender also gets a $1000 a year bonus for up to three years if the borrower remains current on the loan because… Um, I really don’t know what the rationale for this is other than the fact that the government likes spending OPM (Other People’s Money).

But that’s not all.  The borrower also gets an incentive to stay current on the mortgage, in the form of a $1000 per year principal reduction on the mortgage for the next five years.  Excuse me, but what happened to the old days when the incentive to stay current on the mortgage was that you get to keep your house?  Are we actually paying people not to be deadbeats?  What’s next?  Free gas for life as long as you make your car payments on time?  Free groceries as long as you promise to feed your hungry children?  At some point aren’t we crossing the line between helping to fix the economy and just being plain old stupid?

It’s the New Year again and that means lots of promises and plans to change for the better. If you are like most Americans you are probably telling yourself that now that 2009 has arrived you will either: lose a few pounds, get back into shape, take up a new hobby, get organized, take control of your finances, or some other resolution that will probably become abandoned before Valentine’s Day. This year, why not start the New Year off right and cross one of these items off the list right now? If you have resolved to take control of your finances, then refinancing your mortgage loan may be in order, and there has never been a better time to do so then now. (If you don’t yet own a home and would like to make homeownership a goal for 2009, stay tuned. I’ll be covering that next.)

Why refinance your mortgage in the New Year? The reasons are many:

1) Mortgage interest rates are at an all time low and lower rates mean lower payments.

2) If you still have an Adjustable Rate Mortgage (ARM) you can refinance and enjoy a low fixed rate.

3) If you have equity in your home you can get cash out to use for other purposes.

4) Mortgage guidelines are tightening so you may not qualify for a loan progam when you finally do decide to refinance.

5) No one knows if home prices will continue to decline and waiting to refinance may mean losing equity and not being able to qualify in the future as well.

Visit www.aboveallmortgage.com to learn more about the loan process and to apply online. Then with that out of the way, you’ll have the rest of 2009 to work on achieving you other goals. Happy New Year!

Written by Michelle Chamberlain, Above All Financial Services

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