BIDaWIZ Blog » MORTGAGES

What The New Mortgage Environment Means For You

The BIDaWIZ Team — Fri, 25 Apr 2014 19:56:59 +0000

Last summer’s rise in mortgage rates has begun to impact the lending environment. The major bellwether mortgage lenders (J.P. Morgan & Wells Fargo) reported 28% declines in mortgage origination in the first quarter of 2014 as compared to the prior quarter. Moreover, the lending market at a whole is down 58% year over year. While mortgage rates have remained stable of late, they are still at 4.5% as compared to 3.6% a year ago. This trend could hamper continued progress in the housing recovery.

Why has mortgage lending decreased?
The demand for mortgage refinancing has changed dramatically over the past few months. We believe that much of this decline is related to less individuals refinancing their homes. In comparison, loans that were used to purchase new homes were actually flat year over year. However, the environment overall has changed and new mortgage applications were down in recent weeks. It may be that the 25 year credit boom ended and now we need to get use to the new normal.

When demand falters, lender requirements ease
The lending market will become even more competitive in the coming months. There will be a lot of lenders chasing very few prime mortgage borrowers. The result will be that many sub-prime borrowers may become eligible to obtain a mortgage. Several banks have begun to accept applications from borrowers with lower credit scores and down payments than in the recent past.

What does this mean for you?
It varies by region, but generally we expect lending to continue to decrease throughout the year. It’s important to note that there has been a surge in all-cash purchases to more than 40%, which has kept housing prices rising. That may change going forward. Even so, mortgage rates are still relatively low on a historical basis, thus we don’t believe housing growth will fall off of a cliff; just more muted.

More questions? Browse answers or get help with your mortgage questions online.

The Rules For Reverse Mortgages Have Changed For The Better

The BIDaWIZ Team — Fri, 28 Feb 2014 02:03:55 +0000

Seniors that have hit hard times may be forced to make a difficult decision. Do they sell their investments to stay afloat or should they tap into their home equity? If they are considering tapping into their home equity, the rules regulating reverse mortgages have recently changed for the better. Find out if a reverse mortgage is an option you should consider.

What is a reverse mortgage?
This type of home equity loan provides the homeowner with a lump-sum cash payment or a credit line that adds to the principal of outstanding debt, but does not need to be repaid until the borrower dies or sells their home. Unlike a traditional home equity loan, in which the interest and principal payments must be paid on a monthly basis, a reverse mortgage allows the borrower to defer payment until a triggering event. It’s important to note that the existing mortgage must be fully paid off to obtain a reverse mortgage as it’s a first lien loan product. If you’re worried about taxes, reserve mortgages are only taxable to the holder if they don’t repay the mortgage.

What are the new rules?
Most of the new changes require the lender to conduct a more thorough analysis of the applicant’s income/assets. This includes a review of the applicant’s current income or assets, current employment status, credit history, the monthly payment for the mortgage (based on the highest interest rate if it’s an ARM) and their monthly debt payments (including the mortgage) compared to their monthly pre-tax income. The applicant will need a debt-to-income ratio of less than 43% to obtain a qualified mortgage. The term of the loan cannot exceed 30 years, and the points and fees paid by the borrower cannot exceed 3 percent of the total loan amount. Qualified mortgages also cannot have risky features such as an interest-only period, when the borrower pays only interest without paying down the principal.

What is the biggest drawback for getting a reverse mortgage?
One of the biggest drawbacks of a reverse mortgage is the price the borrower has to pay. This includes a large upfront payment that can be well over $5,000 to $10,000. In addition, interest rates are typically higher than for a traditional home equity loan since the borrower doesn’t pay interest until a triggering event occurs.

Does a reverse mortgage make sense for retirees?
There may be several instances in which a reverse mortgage can be very useful for a retiree with limited cash flow. Typically, it’s best used in cases when the borrowing costs are low and the market falls. This can be very attractive when considering the alternative of selling 401(K) or IRA investments and paying taxes for those sales while also bumping up your adjusted gross income.

More questions? Ask your reverse mortgage questions or find an accountant online.

Is It Risky To Use A Mortgage Broker?

The BIDaWIZ Team — Fri, 06 Dec 2013 20:00:30 +0000

Mortgage rates have continued to rise with the average yield on a 30-year loan jumping to 4.46% from 4.29% in the prior week. Prospective buyers may want to consider making a purchase sooner rather than later as rates have continued to rise and there’s now more evidence to suggest that the Federal Reserve may reduce its bond purchasing program in the near future. Given this backdrop, should prospective buyers that are seeking a mortgage, consider using a broker or go straight to a bank?

What are mortgage brokers?
Similar to a real estate broker, a mortgage broker is a middleman between the borrower and the lender. These brokers will work directly with lenders such as banks and other mortgage originators to find loans for their clients. However, they do not lend money directly to their clients and now only about 10% of the origination market is controlled by brokers. About 10 years ago, brokers were involved with most of the loan origination transactions that were executed in the market, but tighter regulations have pushed many brokers aside.

What are the benefits of using a mortgage broker?
The greatest benefit by far is the convenience that brokers can offer their clients. They work with many different direct lenders and can offer their clients a variety of mortgage options. This can save the borrower time by not having to research different lenders and they also won’t need to worry about handling the paperwork. In addition, the best brokers in the market may be able to obtain favorable rates from certain lenders that they have long-term relationships with.

What are the drawbacks of using a mortgage broker?
While the SAFE Mortgage Licensing Act of 2008 has helped to mitigate predatory brokers from selling loans, there are still some out there that continue to practice. Simply stated, not all brokers act in the best interests of their clients. Thus, it’s up to the borrower to make sure their broker is qualified. We recommend working with brokers that have a strong track record of helping their clients as well as ones that ask their clients a lot of questions.

In addition, it may now be hurtful for borrowers to use a broker if they want to work with a specific lender. There are certain mortgages that may not be issued through brokers as it can cut into the lender’s margins. If the borrower already knows of a specific group of lenders that they’d like to work with, a broker may not be their best option.

Lastly, it’s not free to use a broker. Most brokers charge a fee of 1-2% of the loan amount. For instance, on a $500,00 mortgage, it can cost you $5,000 to $10,000 to use the broker. However, some of this cost may be offset by the favorable deal terms and time that a broker saves the lender.

What should I do?
The most conservative approach is likely to work directly with the lender. However, if you want many options, then a mortgage broker may be a better solution for you. Either way, it doesn’t hurt to comparison shop with the rates and terms offered by both lenders and brokers.

More questions? Browse answers or get help with your mortgage questions online.

Reverse Mortgages May Provide Retirees With Financial Relief

The BIDaWIZ Team — Thu, 22 Aug 2013 13:42:46 +0000

As life expectancy rates continue to rise, some seniors have been forced to make some difficult financial decisions. Do they sell some of their investments or do they tap into their home equity? Reverse mortgages may be attractive to retirees facing this dilemma. However, these mortgage mechanisms aren’t without their own risks.

How do reverse mortgages work?
Homeowners who are at least 62 years old can borrow against the equity in their home. They are provided with a lump-sum cash payment or a credit line that adds to the principal of outstanding debt, but does not need to be repaid until they die or sell their home. Unlike a traditional home equity loan, in which the interest and principal payments must be paid on a monthly basis, a reverse mortgage allows the borrower to defer payment until a triggering event. This includes failure to pay property taxes or homeowner’s insurance premiums.

Applying for a reverse mortgage?
There are no credit or income requirements since the borrower will effectively repay the loan after a triggering event. However, the amount of the lump sum payment will be determined by the appraised value of the home as well as the age of the borrower. As you might expect, a higher appraised value means that the borrower will receive more cash upfront. The younger the borrower, the lower the lump-sum payment will be since they will hold the funds for awhile which is less favorable for the lender.

What is the main drawback?
A reverse mortgage can be pricey. Specifically, the borrower may pay an upfront fee of 5% of the loan amount. In addition, interest rates are typically higher than for a traditional home equity loan since the borrower doesn’t pay interest until a triggering event occurs. However, the market is continuing to evolve with the launch of a new lower fee product called a HECM saver.

More questions? Ask your reverse mortgage questions or find an accountant online.

Is Renting Or Buying Cheaper Now That Rates Are Rising?

The BIDaWIZ Team — Fri, 14 Jun 2013 22:13:24 +0000

The recent rise in mortgage rates and home prices have some potential buyers thinking about renting. Specifically, rates have risen substantially over the past six months or to nearly 4% for a 30 year mortgage. Housing prices are also on the uptick with a 10% year over year increase or more in most markets. Still, does the rise justify the fact that some buyers are thinking about renting instead?

Is buying still cheaper?
Without question it is cheaper to buy a home than to rent. While rates and housing prices have risen lately, potential buyers need to be cognizant of the fact that the increase is based on all-time lows. In many respects, mortgages and homes that were dirt cheap are still very cheap or a good value from an historical perspective. If we quantify it, the 50 basis point rise in mortgage rates translates to less than a $80 to $90 after-tax monthly increase in mortgage payments for a $300,000 mortgage. Yes, every dollar counts, but this is certainly still affordable for most buyers.

When will renting be cheaper?
It’s very difficult to say without reviewing each individual market and mortgage rate separately. Remember, there are two major variables: mortgage rates and home prices, which can vary by market. However, in most cases and based on historical standards, when mortgage rates rise to high single digit or low double digit levels, renting is typically cheaper. Markets that were hit very hard by the housing bust such as Detroit and parts of Ohio will likely be in the, “buying is cheaper,” mode for quite some time.

Your financial condition is most relevant
Market conditions are a factor to consider when purchasing a home. However, your personal financial condition should play a greater role in determining whether or not you should be a buyer or renter. It’s very easy to be talked into purchasing a home because rates and prices are low. However, if you can’t afford a home then there shouldn’t a discussion.

When will rates and prices rise considerably?
We believe that much of the future lies in the Federal Reserve’s monetary policy. They may be trying to gauge the market’s reaction to their recent commentary to determine whether they will begin to reduce repurchases. However, we believe that the window for ultra-low mortgage rates is beginning to close as positive economic data and strong signs of a housing rebound continue to capture the attention of market participants and regulators. This is not to say that the time for buying a home or refinancing has passed. On a historic basis, mortgage rates are still very low and many homes are still selling at reasonable valuations. If you currently have a 5-7% mortgage, refinancing can still make a lot of sense. The general rule is to seriously consider refinancing if your mortgage rate is 1% or more than the current market rate.

More questions? Browse answers or learn if you should rent or buy a home.

Should You Refinance or Buy Now Since Mortgage Rates Are Rising?

The BIDaWIZ Team — Thu, 30 May 2013 19:55:34 +0000

Mortgage rates are now on the rise again as was the case six months ago. The difference this time is that average rates on a 30 year mortgage have jumped 25 basis points to 3.99% as compared to a 10 basis point increase to 3.52% in December (source: Bankrate weekly surveys). In addition, the market appears to have moved in response to the Federal Reserve Chairman’s recent comments about pulling back on its historic easy money monetary policy. What should you do with this recent rise in rates?

Why are rates rising?
Most of the recent rise should be attributed to Fed Chairman Ben Bernanke’s comments indicated that the government may reduce its ongoing $85 billion mortgage-backed security repurchase program. The intent of the program was to keep rates low and provide incentives for home buying. In many respects, the goals outlined in the program have started to positively impact the housing market. Recent data has shown that pending home sales have risen substantially or over 10% or higher year over year in many cities across the country. The other reason for rising rates may be in response to investors moving their assets out of bonds and into equities over future concerns in bond values. Please note that bond prices and interest rates are inversely related.

Will rates continue to rise?
We believe that much of the future lies in the Federal Reserve’s monetary policy. They may be trying to gauge the market’s reaction to their recent commentary to determine whether they will begin to reduce repurchases. However, we believe that the window for ultra-low mortgage rates is beginning to close as positive economic data and strong signs of a housing rebound continue to capture the attention of market participants and regulators. This is not to say that the time for buying a home or refinancing has passed. On a historic basis, mortgage rates are still very low and many homes are still selling at reasonable valuations. If you currently have a 5-7% mortgage, refinancing can still make a lot of sense. The general rule is to seriously consider refinancing if your mortgage rate is 1% or more than the current market rate.

More questions? Browse answers or ask your mortgage refinancing questions online.

What Should I Know When Negotiating a Mortgage?

The BIDaWIZ Team — Fri, 10 May 2013 21:57:53 +0000

The housing market has certainly heated up throughout the country and particularly in parts of Florida, Arizona, California and Las Vegas. It is still below historical levels in terms of the home affordability ratio (median income price to media family income). We expect further upside in the coming months and throughout 2014. With that said, there are many homebuyers working through the details of their mortgage application. It’s important to know how to negotiate with your lender.

Shop Around
Don’t be afraid to shop around and apply for a mortgage with more than one lender. The credit reporting bureaus will not penalize you for multiple inquiries as they factor in home purchases to their model. After applying, review the Good Faith Estimate (GFE) in detail. If there is a significant disparity in estimates among lenders, then request an explanation from the lender. In addition, don’t just compare the total closing cost estimate – review the detailed costs behind each estimate. The highest ticket items are usually the loan origination fee (~1% of loan amount), the “points” to reduce the overall loan interest rate and finally the funds put into escrow for property taxes and insurance. Please note that property taxes will vary by city and state, but you can still do the math yourself to double check the lender. You can also try to negotiate the title insurance and ask for a reissue rate and see what other lenders quote you at. The home insurance too is subject to estimates, so try to negotiate that one as well. Lender fees in general should be negotiated as much as possible as those are the most discretionary expenses on the GFE.

Beware of predatory lender practices
Some lenders blatantly provide low Good Faith Estimates to persuade the buyer to move forward with the mortgage. Then, at closing when the actual cost is known, it’s hard for the buyer to back out. So, if the estimate sounds too good to be true, then that is probably the case. Generally speaking, closing costs run about 3% to 5% of the loan amount. In simple terms, this means that if you are applying for a $300,000 loan, then a 5% closing cost estimate is equivalent to $15,000. A closing cost estimate in the 1% range should definitely start to raise a red flag.

More questions? Ask your mortgage questions online.

Can You Still Obtain A Mortgage After A Short Sale?

The BIDaWIZ Team — Wed, 16 Jan 2013 15:00:59 +0000

Many homeowners are still underwater on the properties that they purchased 5 to 7 years ago. They may be able to meet mortgage payments, but they could have a home with a $250,000 mortgage that is now worth $125,000. Should an owner that wants to move out, consider a short sale? If so, what are the consequences to their credit and taxes?

Are there any tax consequences from a short sale?
We have some recent good news. The Mortgage Relief Act of 2007 was extended through 2013 as part of the fiscal deal reach by Congress this year. This means that borrowers can exclude up to $2 million of forgiven debt without any tax consequences. That’s the good news, but the question is do you want to do a short sale in the first place?

Should you still consider a short sale?
There’s no question that a short sale will likely have a negative impact on your credit report and your score could drop 80 to 160 points. If you can get the lender to report the short sale as a “paid” as opposed to “settled,” then this can help your cause. However, most lenders will likely report the short sale as settled, which will have negative consequences to you. Rebuilding bad credit takes time and can be a significant inconvenience.

You should at least explore keeping the home to avoid a short sale
Find out what the sale prices are for similar homes in your area. Is there any uptick in home prices in your neighborhood? It may make a lot of sense to sit tight until your home value bounces. Also, if can you afford the current mortgage payments, that’s further reason to stick it out a bit longer.

If I short sale my home, will future lenders review my credit score?
There is a big misconception with regards to the terms “credit score” and “credit report.” This is largely due to advertisements on TV and other media, which solicit consumers to check your credit score for free. The credit score is actually a metric that lenders don’t even look at and they each have their own scoring system. Rather, they review your credit report to get a sense of your credit history — ability to make payments on time, average loan balances, creditworthiness of borrower etc. Having a short sale listed as settled on your credit report will have a far greater impact on your ability to obtain a future mortgage, then a 100 point ding to your credit score as reported by the bureaus. The credit score can be helpful in gaining a general sense of the borrower, but that’s it.

In addition, every lender has a different methodology that they utilize when they review loan applications. They also don’t disclose it for competitive purposes. It’s hard to say exactly which lenders would issue you a mortgage. However, most lenders will be very risk averse if they see a recent short sale on your credit report. Specifically, it would be hard to obtain a mortgage before two years with a short sale that was reported as settled on your credit report.

More questions? Ask your mortgage questions online.

Are You Considering A Deed In Lieu Since Mortgage Relief Is Extended?

The BIDaWIZ Team — Fri, 04 Jan 2013 14:00:23 +0000

Congress came through at the 25th hour by extending the Mortgage Forgiveness Debt Relief Act of 2007 through 2013. This extension positively impacts those that are in a foreclosure, short sale or are considering a deed in lieu.

The mortgage relief act extension
The act generally allows homeowners to exclude the income realized as a result of the cancellation of debt on their mortgage. Before the act went into effect, borrowers had to pay taxes on the amount of debt that was discharged as reported on form 1099-C. For instance, a $750,000 mortgage holder in the 35% tax bracket that could only sell their home for $500,000, would ordinarily owe $87,500 in taxes for the cancellation of debt. The only way that the borrower could have avoided the tax liability would have been to declare personal bankruptcy or to claim insolvency. Thanks to the Mortgage Relief Act, borrowers can exclude up to $2 million of forgiven debt and $1 million if married filing separately on their primary residences (second homes and investment properties still do not apply).

What is a deed in lieu of foreclosure?
For those that don’t know, a deed in lieu of foreclosure provides that the debtor give their home to the lender (i.e. the “deed”) in exchange for the lender canceling the loan. In return, the lender also promises to never initiate foreclosure proceedings and to terminate any existing proceedings. This agreement is effective with a legally signed document. Before a lender agrees to a deed in lieu, they will likely require that you at least put the home on the market for 90 days.

Do I qualify for a deed in lieu of foreclosure?
You cannot execute a deed in lieu of foreclosure if you have a second or third mortgage, a home equity loan, or tax liens against your property.

What are the benefits of a deed in lieu of foreclosure?
You do not have to go through the costly and time-consuming process of a foreclosure. While you’ll still have the debt relief listed on your credit report, it’s possible that the impact to your credit could be less detrimental than a foreclosure or short sale.

More tax questions? Ask your tax questions online.

Should You Be Worried That Mortgage Rates Are Now Rising?

The BIDaWIZ Team — Thu, 20 Dec 2012 16:00:23 +0000

While 30 year mortgage rates are still down 50 to 60 basis points as compared to last year, there’s been an increase in rates over the past two weeks. According to Bankrate’s recent national survey, rates are up 10 basis points or at 3.62% as compared to 3.52% during the week of December 3rd, 2012. This is somewhat head-scratching given the Federal Reserve’s announcement to purchase up to $45 billion worth or mortgage-backed securities per month to try to keep rates low. What should you make of this recent rise in mortgage rates?

Why are rates rising?
A few months ago, we highlighted the Federal Reserve’s shift in monetary policy to purchase mortgage-backed securities each month until further notice. When the Federal Reserve first enacted this policy, mortgage rates fell further and reached all-time lows. Why all of a sudden are rates starting to rise even though the Fed’s policy hasn’t changed? We’re seeing a shift from investors out of the bond market and into equities. When this occurs, the bond value of mortgage-backed securities generally falls and rates rise. Please note that bond prices and interest rates are inversely related. Furthermore, investors appear to be expressing optimism that the housing market is beginning to rebound and lawmakers will reach an agreement regarding the long-debated fiscal cliff.

Will rates continue to rise?
We believe this is a short-term blip on the radar screen as rates also rose in the beginning of October and then fell right back to the 3.50% level. Although we are encouraged by some of the positive economic news of late and investor sentiment, we believe there’s still significant uncertainties related to the labor market, consumer sentiment and tax legislation going forward. We believe it’s highly probably that we’ll receive negative economic news again in 2013. However, it’s also important to be mindful that the window for ultra-low mortgage rates may begin to close as the trend may start to move upward if more positive economic news is announced.

More questions? Browse answers or ask your mortgage questions online.