Home Loan

Simple Real Estate Definitions: Refinance

A mortgage is a contract between a bank and borrower, defining the terms by which a home loan must be repaid.

The paperwork, signed by both parties, includes provisions for things like:

• The interest rate
• The length of the loan
• The amount of money to be borrowed

But, like all loans, a mortgage loan can be paid off at any time. So, when market interest rates fall, homeowners will often exercise their right to an “early payoff” by securing a new loan that pays off the old one.

This process is most commonly known as a refinance.

A refinance is the changing of the loan terms against a property, often for a better interest rate or a lower monthly payment. When the refinance process is complete, the original lender’s loan is paid in full using the money from the new lender’s loan and the former’s relationship is officially terminated.

There’s no rule against how many times a person can refinance, nor is there an easy way to determine whether or not a refinance makes sense. In general, if you can reduce your monthly payment while limiting your closing costs, to refinance is a smart decision.

However, there are other reasons to refinance, too, including:

1. To convert from an ARM into a fixed rate mortgage (or vice versa)
2. To extract equity for paying off third-party debts or for cash
3. To extend a loan from 15 years to 30 year for payment relief

Because there are fewer third-parties involved with a refinance, it’s often simpler and less expensive than a comparable purchase transaction. The paperwork stack is often smaller, too.

Home Loan

Conforming Fixed Rate Mortgages Are Now Priced Better Tan Comparable ARMs

It’s the age-old question for home buyers in need of a mortgage:

1. Get low mortgage payments for better cash flow
2. Get long-term payment stability for better budget planning

But because of government intervention and lingering questions about the economy, fixed-rate mortgages are now pricing cheaper than their adjustable-rate counterparts.

Based on today’s mortgage market, therefore, home buyers can get both.

Versus a comparable 5-year ARM, conforming fixed-mortgage rates are priced roughly 0.250 percent lower and have been over the past 19 days. The quarter-percent difference equates to $33 saved per month on a $200,000 home loan.

Mortgage markets are ever-changing so rates we can’t know if this pricing anomaly will last. But, while it does, the decision to choose Fixed over ARM is a lot simpler.

(Image Courtesy: Bankrate.com)

Home Loan

Word of the Day – Modify

It seems as if every news item surrounding the housing market entrenches the word modify. Therefore, what does modify mean. According to Dictionary.com Unabridged (v1.1) the word modify is defined as:

1. to change somewhat the form or qualities of; alter partially; amend: to modify a contract.
2. to reduce or lessen in degree or extent; moderate; soften; to modify one’s demands.

Every piece of legislation has been modified in the last 24 hours to buoy the housing industry and frustrated homeowners on the brink of foreclosures. Let’s take a look at some of the prominent headlines.

• HOPE for Homeowners Program of the Home Economic Recovery Act 2008, which became effective October 1st has had minimal participation. It was noted that only 42 applications out of the 400,000 the program was targeted were received in the first 2 weeks. Accordingly, the program is in the process of being modified to be more friendly to banks to want to move forward. NY Times, Nov. 12, 2008
• Henry Paulson announced today that the $700 Billion TARP Program was being modified to be more accommodating to the changing needs of the financial market. Paulson stated “Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending. But other strategies I will outline will help to alleviate the pressure of illiquid assets.” CNBC, Nov 12, 2008
• Streamlined Modification Program was announced yesterday by the Federal Housing Finance Agency in conjunction with the efforts of major banks. The objective is for servicers to take a proactive approach to assisting homeowners who are in risk of losing their homes. The main purpose of the program is to create a managable housing payment no greater than 38% of total debt to income. MarketWatch, Nov. 11, 2008
• The Department of Housing and Urban Development today New Mortgage Rules to curb costs and provide greater clarity of fees. Not only is the Good Faith Estimate and the HUD-1 Settlement Statement getting a modified look, but also a 10% cap on the adjustment of certain fees from the initial estimate. The new rules go into affect January 1, 2010. HUD No. 08-175

With all of the changes throughout the legislation landscape, you must wonder if the consumer is really being serviced. It is tough enough for professionals to absorb and comprehend the impacts of all the changes. Does Congress and Capitol Hill honestly believe that consumers have a clue on how they can initiate and benefit from all of the legal modifications?

Home Loan

Streamlined Modifications – Will it Help?

The Federal Housing Finance Agency (FHFA) announced today that a major program designed to simplify and streamline loan modifications for struggling homeowners to prevent foreclosures had been established. The collaboration between Fannie Mae (FNM), Freddie Mac (FRM), Federal Home Loan Banks, HOPE NOW (and it’s 27 service partners), Department of Treasury, Federal Housing Administration and FHFA would be implemented by December 15th.

Who will be eligible?

1. Owner Occupied Primary Residences ONLY
2. Three or more missed payments (90 day late)
3. Has NOT Filed for Bankruptcy
4. Loan is FNM, FRM or Portfolio with Participating Investors
5. Certify economic hardship/change in financial circumstances
6. DID NOT Purposely Default to Obtain Modification

The primary objective of the new program is to make mortgage payments affordable to those who can qualify. The allowable housing debt ratio for the program is 38%. This can be achieved by the reduction in interest rate, extending the term (30 years to 40 years) and restructuring the principle balance payment structure…or any combination.

It must be noted that the main difference between the new program and the HOPE for Homeownership provision in the Home Economic Recovery Act 2008 is that it is not intended for principal balances to be forgiven. This should be more appealing to lenders; however, less incentive to homeowners that have negative equity.

Therefore, who will really benefit from the streamline modification program?