With interest rates at record lows, many of us are tempted to borrow funds to either purchase or refinance a home. But would you be able to recognize a good deal from a bad one? Here are some guideposts to consider when shopping for a loan.
Avoid any lender who suggests or requires you to falsify information on your application. If you’re caught, you could be prosecuted and, if convicted, penalties range from fines to jail term. Even if the bank does not prosecute, they could require you pay the loan in full.
Do not allow yourself to be pressured into borrowing more than you need. The only reason a lender wants you to borrow more money is to increase his commission.
And, along the same line, don’t be pushed into accepting monthly payments you can’t afford. Even if you qualify for higher payments, your lifestyle may not allow you to use every spare penny to pay your loan payment.
Every lender is required to provide you with loan disclosures within three days of applying for a loan. If your lender fails to give one to you, he is breaking the law. The disclosure must include the loan’s annual percentage rate (APR) as well as an itemized list of closing costs. The APR is a formula that takes into account both the rate and the fees of each loan. It is a way for you to be able to compare loans of varying terms.
Be wary of terms that change during the course of the approval process. It is possible that rates and terms may legitimately change during the weeks of loan approval. But be sure to get an explanation from your lender. And if anything smells funny, back up and review all the paperwork again. You might even consider contacting another lender.
If your lender tells you it’s OK to sign blank forms, cancel the deal. You should NEVER sign a blank form.
And finally, if the lender refuses to give you copies of what you are being asked to sign, RUN!
Saturday, December 29, 2007
Help During Hard Times
For many of us, these are difficult economic times. Household debt is now at a record high level relative to disposable income. Unfortunately, this often leads to personal bankruptcy and/or foreclosure. But that doesn’t have to be the case. There are alternatives to declaring bankruptcy or to allowing your home to go into foreclosure.
Credit counseling is available to help you restructure your debt, curb your spending habits and manage your monthly payments. The problem is finding a credit counselor you can trust. Many unscrupulous firms market bankruptcy as a quick fix for consumers who find themselves over their heads financially, whether they just went wild with credit cards or got hit with a job loss or illness.
One place to start is with the U.S. Department of Housing and Urban Development, www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm where you will find a list of HUD-approved credit counselors. Or you can call HUD at 1-888-466-3487.
Another excellent source for qualified help is the National Foundation for Credit Counseling (NFCC). This organization was founded in 1951 and is the nation's longest serving national nonprofit network providing premier consumer counseling and education services on budgeting, credit, and debt resolution. Many of the services are free!
There are more than 1,300 community-based NFCC agency offices nationwide. These agencies are often known as Consumer Credit Counseling Service (CCCS) and can be identified by the NFCC member seal.
NFCC member offices can be reached by calling 1-800-388-2227 or you can find them on the web at http://www.debtadvice.org/. The NFCC member locator is very user friendly – just plug in your zip code and it looks up offices with all contact information within as many miles as you designate.
If you find yourself in financial difficulty, the worst thing you can do is ignore it! The sooner you face the problem, the easier it will be to get out from under the debt. These places can help; all you have to do is ask.
Credit counseling is available to help you restructure your debt, curb your spending habits and manage your monthly payments. The problem is finding a credit counselor you can trust. Many unscrupulous firms market bankruptcy as a quick fix for consumers who find themselves over their heads financially, whether they just went wild with credit cards or got hit with a job loss or illness.
One place to start is with the U.S. Department of Housing and Urban Development, www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm where you will find a list of HUD-approved credit counselors. Or you can call HUD at 1-888-466-3487.
Another excellent source for qualified help is the National Foundation for Credit Counseling (NFCC). This organization was founded in 1951 and is the nation's longest serving national nonprofit network providing premier consumer counseling and education services on budgeting, credit, and debt resolution. Many of the services are free!
There are more than 1,300 community-based NFCC agency offices nationwide. These agencies are often known as Consumer Credit Counseling Service (CCCS) and can be identified by the NFCC member seal.
NFCC member offices can be reached by calling 1-800-388-2227 or you can find them on the web at http://www.debtadvice.org/. The NFCC member locator is very user friendly – just plug in your zip code and it looks up offices with all contact information within as many miles as you designate.
If you find yourself in financial difficulty, the worst thing you can do is ignore it! The sooner you face the problem, the easier it will be to get out from under the debt. These places can help; all you have to do is ask.
The Anatomy of an ARM
It’s all over the financial news – interest rates are the lowest they’ve been in a decade. Because rates are extremely low, more people are thinking about becoming homeowners, and existing homeowners are thinking about refinancing. So for those of you considering delving into the complex world of home loans, here’s a primer on one of the most confusing loans out there – the Adjustable Rate Mortgage, or ARM.
ARM’s were designed in the 1970’s to help those who might not qualify for more traditional, fixed rate loans. As the years went by, ARM’s got “twisted” until today we have a myriad of loan products with a multitude of features.
However, all ARM’s have one thing in common – the interest rate “adjusts” rather than stays “fixed” over the life of the loan. So whatever ARM rate your loan agent quotes you, one thing is certain – it will change as the loan matures. How often the ARM rate changes is up to the bank. Some adjust monthly, some yearly. But how much it changes is a function of its index.
An index, in lending terms, is that interest rate a lender chooses as a baseline for your loan. In simple terms, it is the wholesale rate the lender pays for money. As the cost of money constantly changes, so too does the baseline interest rate used to calculate your loan payments. This is the component of your loan that “adjusts”. Lenders use different indices. These indices vary in both rate and stability. Some, like the 11th District Cost of Funds, are quite stable, i.e. they move very slowly and in small increments. Some, like the T-Bill Rate, move rapidly. Ask what index your loan is tied to, what that index’s rate is, and how often and how widely it fluctuates.
The next most important factor affecting your loan rate is the margin. To continue the retail analogy, this is the lender’s profit margin. There is no magic formula for this number. It is simply what the lender feels he needs (or can get) to make lending profitable. It is the combination of the index rate (wholesale cost) and the margin (profit) which determines your loan’s interest rate (retail cost).
Points and fees are the final pieces needed to understand the loan puzzle. Like margins, they are added on as a source of additional profit for the lender. The higher the margin, the lower the points. For example, a lender might offer a loan with a margin of 2.5 and 1 point, or the same loan with a margin of 2.75 and ½ point. Each point equals 1% of the loan amount.
Fees are also variable. Some lenders charge a separate fee for each service they provide – appraisal, documents drawing, underwriting, etc. Others charge a single flat fee for all these services. What matters is the total cost.
One last note…most lenders allow for a variety of payment plans on ARM’s. You can chose to pay the fully amortized 30 year rate or the fully amortized 15 year rate. You may decide to pay only the interest. Some lenders even allow you to pay a reduced payment. This usually results in “negative amortization” where the monthly payment is insufficient to cover even the interest due, so the balance is added back on to the loan principal. This will result in a larger loan balance.
When you are trying to compare ARM’s, be sure to ask about the index, margin, and points and fees. Lending is filled with confusing jargon. Don’t allow a loan agent, using a few unfamiliar terms to arm twist you into getting a lousy loan!
ARM’s were designed in the 1970’s to help those who might not qualify for more traditional, fixed rate loans. As the years went by, ARM’s got “twisted” until today we have a myriad of loan products with a multitude of features.
However, all ARM’s have one thing in common – the interest rate “adjusts” rather than stays “fixed” over the life of the loan. So whatever ARM rate your loan agent quotes you, one thing is certain – it will change as the loan matures. How often the ARM rate changes is up to the bank. Some adjust monthly, some yearly. But how much it changes is a function of its index.
An index, in lending terms, is that interest rate a lender chooses as a baseline for your loan. In simple terms, it is the wholesale rate the lender pays for money. As the cost of money constantly changes, so too does the baseline interest rate used to calculate your loan payments. This is the component of your loan that “adjusts”. Lenders use different indices. These indices vary in both rate and stability. Some, like the 11th District Cost of Funds, are quite stable, i.e. they move very slowly and in small increments. Some, like the T-Bill Rate, move rapidly. Ask what index your loan is tied to, what that index’s rate is, and how often and how widely it fluctuates.
The next most important factor affecting your loan rate is the margin. To continue the retail analogy, this is the lender’s profit margin. There is no magic formula for this number. It is simply what the lender feels he needs (or can get) to make lending profitable. It is the combination of the index rate (wholesale cost) and the margin (profit) which determines your loan’s interest rate (retail cost).
Points and fees are the final pieces needed to understand the loan puzzle. Like margins, they are added on as a source of additional profit for the lender. The higher the margin, the lower the points. For example, a lender might offer a loan with a margin of 2.5 and 1 point, or the same loan with a margin of 2.75 and ½ point. Each point equals 1% of the loan amount.
Fees are also variable. Some lenders charge a separate fee for each service they provide – appraisal, documents drawing, underwriting, etc. Others charge a single flat fee for all these services. What matters is the total cost.
One last note…most lenders allow for a variety of payment plans on ARM’s. You can chose to pay the fully amortized 30 year rate or the fully amortized 15 year rate. You may decide to pay only the interest. Some lenders even allow you to pay a reduced payment. This usually results in “negative amortization” where the monthly payment is insufficient to cover even the interest due, so the balance is added back on to the loan principal. This will result in a larger loan balance.
When you are trying to compare ARM’s, be sure to ask about the index, margin, and points and fees. Lending is filled with confusing jargon. Don’t allow a loan agent, using a few unfamiliar terms to arm twist you into getting a lousy loan!
Do Realtors Have Ethics?
Any English majors who are reading this are leaping to their feet and yelling “oxymoron!” (the combining of incongruous or contradictory terms). A favorite example when I was in school was “military intelligence”. Many people would add “real estate ethics” to the top of their oxymoron list. But believe it or not, real estate agents are ruled by ethical guidelines. Whether or not we follow these rules is another matter.
Anyone who has a license to sell real estate in California is regulated by the Department of Real Estate (DRE). But just because you hold a license does not mean you are a Realtor®. This title denotes membership in the California and National Associations of Realtors®. Membership in these associations means that you are bound by their rules as well as all DRE regulations.
So exactly what kinds of rules are we talking about? The most basic deals with who is required to be licensed. You do not need a license to buy or sell your own property. But the moment you perform any real estate act for another for compensation (property management, holding open houses, etc.) a license is required. And not just any license…you must either have a broker’s license or have a salesperson’s license and work for a broker.
Once a client-agent relationship is formed, that agent owes his client an obligation of absolute fidelity to the client’s interests. This includes the obligation to provide the client with material facts in order to make informed decisions about the sale or purchase of a home.
One example of this rule which has been very much in the industry news of late concerns “pocket listings”. When a broker takes a listing, the owner can chose to not have the home listed in the Multiple Listing Service. If she chooses, the owner can go a step further and allow only that broker to sell the home. No other broker will be allowed to show or sell the property.
If the broker gets the correct signatures from the client on the appropriate forms, this is legal. But in my opinion, it is rarely in the best interests of the client, because this type of listing, which limits the marketing and competition for the home, seldom brings the seller the highest and best offer on her property. This places the broker at odds with his fiduciary duty, the most basic obligation a broker has to his client.
As a real estate consumer, you have the right to demand that your representative not only have the legal qualifications to represent you, but the ethics to represent your best interests.
Anyone who has a license to sell real estate in California is regulated by the Department of Real Estate (DRE). But just because you hold a license does not mean you are a Realtor®. This title denotes membership in the California and National Associations of Realtors®. Membership in these associations means that you are bound by their rules as well as all DRE regulations.
So exactly what kinds of rules are we talking about? The most basic deals with who is required to be licensed. You do not need a license to buy or sell your own property. But the moment you perform any real estate act for another for compensation (property management, holding open houses, etc.) a license is required. And not just any license…you must either have a broker’s license or have a salesperson’s license and work for a broker.
Once a client-agent relationship is formed, that agent owes his client an obligation of absolute fidelity to the client’s interests. This includes the obligation to provide the client with material facts in order to make informed decisions about the sale or purchase of a home.
One example of this rule which has been very much in the industry news of late concerns “pocket listings”. When a broker takes a listing, the owner can chose to not have the home listed in the Multiple Listing Service. If she chooses, the owner can go a step further and allow only that broker to sell the home. No other broker will be allowed to show or sell the property.
If the broker gets the correct signatures from the client on the appropriate forms, this is legal. But in my opinion, it is rarely in the best interests of the client, because this type of listing, which limits the marketing and competition for the home, seldom brings the seller the highest and best offer on her property. This places the broker at odds with his fiduciary duty, the most basic obligation a broker has to his client.
As a real estate consumer, you have the right to demand that your representative not only have the legal qualifications to represent you, but the ethics to represent your best interests.
Friday, December 28, 2007
Beware of Mortgage Tree Lending
San Jose Better Business Bureau is warning borrowers not to do business with a company called Mortgage Tree Lending. The company claims to be from San Jose but they are actually located in Canada. This company steals money from clients through a classic advance-fee scam. Preying on desperate borrowers, the company promises to "secure" a loan if the borrower sends a "Loan Insurance Premium". The premium, typically 10 to 20 percent of the amount the client wishes to borrow, is sent to an address in Ontario, Canada. Needless to say, the loan never comes through and the funds are never returned.
Legitimate lenders often charge fees for processing, appraisal, etc. but these fees are usually deducted from the loan amount. But honest lenders do not guarantee loan before all investigations are completed, and they do not require up-front payment for this approval. These advance fee loan scams are illegal in both the US and Canada. Below are some signs that the “Lender” is a scammer:
Pressures you to act immediately.
Guarantee loans, even if you have bad credit, no credit or a bankruptcy
Refuses to provide its street address location.
Demands that you wire money, rather than use a credit card or check, before you have a loan offer confirmed in writing.
Written communications contains typos and grammatical errors.
When you telephone, no one is ever "in"; your calls are not returned, or the voicemail box is always "full".
If you think you have fallen prey to lending scam, call your Better Business Bureau to file a complaint.
Legitimate lenders often charge fees for processing, appraisal, etc. but these fees are usually deducted from the loan amount. But honest lenders do not guarantee loan before all investigations are completed, and they do not require up-front payment for this approval. These advance fee loan scams are illegal in both the US and Canada. Below are some signs that the “Lender” is a scammer:
Pressures you to act immediately.
Guarantee loans, even if you have bad credit, no credit or a bankruptcy
Refuses to provide its street address location.
Demands that you wire money, rather than use a credit card or check, before you have a loan offer confirmed in writing.
Written communications contains typos and grammatical errors.
When you telephone, no one is ever "in"; your calls are not returned, or the voicemail box is always "full".
If you think you have fallen prey to lending scam, call your Better Business Bureau to file a complaint.
Changes in Tax Code
On December 20, 2007, President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648). Section 7 of this law addresses changes to the capital gains rules governing the sale of a principal residence after the death of one spouse. The capital gains rules state that married, joint-filing sellers of houses can exclude up to $500,000 of gain, and single-filing sellers can exclude up to $250,000 of gain on the sale of their home, provided they've used the property as a principal residence for a cumulative two of the previous five years.
HR 3648 addresses the issue of what happens if a spouse dies and the home is sold. Can the surviving spouse exclude $500,000 or only $250,000? Prior to the passage of this bill, the answer was, if the surviving spouse sold the home in the year of the spouse's death, they could exclude $500,000. HR 3648 extends this time limit to two years from the date of death.
Talk to your tax preparer to help assess whether or not HR 3648 affects you. Be sure they look at Section 7 which specifically addresses this issue.
HR 3648 addresses the issue of what happens if a spouse dies and the home is sold. Can the surviving spouse exclude $500,000 or only $250,000? Prior to the passage of this bill, the answer was, if the surviving spouse sold the home in the year of the spouse's death, they could exclude $500,000. HR 3648 extends this time limit to two years from the date of death.
Talk to your tax preparer to help assess whether or not HR 3648 affects you. Be sure they look at Section 7 which specifically addresses this issue.
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