Truth In Lending Show | September 18, 2011 Synopsis

Posted on September 19, 2011

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Below is the synopsis of our Truth in Lending Show on September 18, 2011 on KMBZ 980 (or 98.1fm).

Download audio to listen to the Truth In Lending show. (Click on Truth In Lending Show Archives).

Listen Live on Sunday nights from 4-6pm.

September 18, 2011 – Truth In Lending Show

Where Rates ended last week:

The following rates apply for those with a credit score of 760 or more, who can put a minimum of 20% down and want to borrow at least $200,000.

30 year fixed:     Just under 4.25% and just under one point plus standard closing costs
15 year fixed:     3.65% and 0.85% of a point plus standard closing costs
5/1 ARM:     Just over 3.00% and 0.625% of a point plus standard closing costs

These are national averages and tell us where the rates ended last week. If you are paying more than the rates listed here, you are paying too much! This is a fantastic time to refinance! Speak to more than one lender about refinancing. It does not make sense to refinance if your lender is piling on hidden fees and high closing costs. Know how to figure your break even formula by going to Craig’s Corner at http://www.tilshow.com. You will see two articles on the “Break Even Period Formula”. If you still need help or you are not sure you are getting the best deal on your mortgage, call Mark or Craig at 816-222-2200.

Don’t take these low rates for granted. Rates have been trending fairly quickly this past week. Craig and Mark suggest that folks who are considering a refi should investigate the opportunity now. Look for a no-cost refi! Make sure the person you are working with is giving you sound advice and is considering your total financial picture and working hard to find you the best mortgage for your personal financial needs.

Estate Planning Advise with Sky Kurlbaum

Craig and Mark valued Shy Kurlbaum’s information so much, they want everyone to read it again! It is Important for Everyone to do Estate Planning, not JUST the Wealthy

“There is no such thing as a plan, just planning…” Sky Kurlbaum, 2011

What is a person’s “net worth” really?

People think in terms of their financial assets, like cash, IRAs, 401ks, home, etc. Yes, important. But it’s much broader and includes:

Intellectual capital (investment in education of self and family);
Spiritual capital (investment in spirituality);
Family capital (investment in family? quality time?);
Relationship capital (investment in the relationships around you);
Health capital (investment in your personal health and those around you).
Mental capital (investment in your good mental health, hobbies, fun, excitement, adrenalin rushes…)

Despite “multi-tasking”, no person can truly be “in the moment” two places at one time. Take stock of all that is important to you, and realize, time spent on one of these in lieu of another is still time well spent. Don’t feel guilt when you’re at the kid’s recital instead of the office. Both are important to you and build personal capital. Like clutter in your home, life can become full of clutter. Regularly get rid of things that take up time but do not build on one of your life’s important areas of activity.

Scuyler M.P. Kurlbaum, J.D., CPA
11040 Oakmont St.
Overland Park, KS 66210
913-334-5444
913-334-0515 (fax)
www.kurlbaumlaw.com
sky@kurlbaumlaw.com

Truth In Lending Show Questions of the Week

Ted from Leavenworth emailed us this question:

“Has anything changed recently with FHA Streamline requirements where I can use the Streamline process again on my existing FHA loan? My existing mortgage was refinanced over 2.5 years ago through the FHA Streamline process. I have remained current with my payments. My interest rate is 6.0% and I would love to get into the very low rates available. About a year ago, I was told FHA Streamline cannot be used on a mortgage that was FHA Streamline refi’ed before. Is that still the case?”

Craig’s Answer:
FHA Streamline loans require monthly mortgage insurance. Recently, the monthly mortgage insurance premium has gone up significantly. Since most FHA Loans are for a 30 year term, this long of a term will negate the benefit of refinancing for lower rates. To refi an FHA Streamline again, the sum of the monthly payment (principal + interest payment + the mortgage insurance premium) has to decrease by 5% before you are qualified for another streamline. If you’ve streamlined before, you can definitely streamline again, but you must meet the 5% decrease in monthly payment requirement. Since you are currently at 6%, you might qualify for a rate of about 4.5%. This should be good enough to meet the 5% decrease in monthly payment requirement for the FHA Streamline. Also, Mark suggests you also look at a conforming loan with lender paid PMI.

Donna from Kansas City sent in this question:

“I had decided to make an offer to buy a condo in downtown Kansas City with FHA loan, but my agent told me that he was informed by the agent of the owner of the condo that their condo association does not accept offers based on FHA loans. Can they do that?”

Mark’s Answer:
Yes the can do that if the Condo is NOT FHA approved. If the Condo Board does want to go through the FHA Approval process, you cannot purchase the condo with an FHA Loan. So, you can either save more money in order to qualify for a conventional loan or you can look for Condo’s that have been approved for an FHA purchase.

Craig’s Case Study – When NOT to Pre-Pay Your Loan

If you are a younger couple in the ‘starting out’ phase of home ownership, or perhaps just recovering from a divorce or a bankruptcy, and you believe this is the best time for you to purchase a home, it is NOT a good mortgage plan for you to pay off the principal ahead of time. That means, no 15, 20 or 25 year term loan, and NO additional payments to principal if you are in a 30 year term loan.

Here’s why: Right now we are experiencing a period where you can borrow money for a home at historically low rates. These are the lowest borrowing costs in history! The interest rates on your mortgage are still tax deductible. Use this time to get a 30 year loan at low rates. Do not consider paying down the principal. Instead, use that extra money to build up your savings and build wealth by investing your savings in sensible, secure investments, such as your 401k, IRA or a well structured mutual fund, or contribute to a 529 for your kids.

Interest rates will go up and you will benefit from this low rate mortgage well into the future. That means the interest rates on CD’s will eventually go up as well. If you’ve used all your extra cash to pay down the principal balance on your mortgage, which is at a very low fixed rate, you won’t have that cash available to invest in CD’s at higher interest rates, or in other wise investments.

Breaking Down Your Mortgage Options

Mark and Craig strongly suggest that you meet with a Certified Mortgage Planner to help you identify the very best mortgage product for your individual financial situation. Here are some of the options you may want to discuss with your trusted mortgage advisor:

1. Conventional Loans

  • These are loans that are NON-government backed loans b. They are offered with fixed or adjustable terms

2. Government Loans

  • These loans are insured or guaranteed by the US government
  1. FHA – Use if you have bad credit or can only put a very small amount for a down payment
  2. VA – If you are a veteran you can purchase a home with no down payment.

3. Various types of Loans

1. Fixed Rate Loans – Use if your credit is pretty good and you can afford to put 20% down; or, you can put less cash down and pay PMI

  • These loans provide for the regular payment of principal and interest for loan terms from 10 to 40 years.
  • The most common are for 15, 20 and 30 years – Only use a 15 year if your 401k, retirement savings, and/or your kids 529 are all well-funded and you can afford to apply more to your principal balance.
  • The principal and interest payment does not change for the entire term of the loan

2. Adjustable Rate Loans (ARMS) – Use if you know you are not going to be in your home very long (i.e. you expect to be transferred, you plan to downsize when the kids go off to college in 5-7 years, etc.)

  • The interest rate for an adjustable-rate loan is the sum of an “index” that can and will move plus a “margin” that stays the same for the life of the loan.
  • The index is a rate set by market forces.
  • ARM’S usually offer lower initial interest rates and lower principal and interest payments than most fixed rate mortgages.
  • However, payments will adjust up or down at times specified in your loan documents and can result in significant payment increases.
  • The most common adjustable rate loans provide for interest rates fixed for the initial 1, 3, 5, 7 or 10 years.

3. Balloon Mortgages

  • In some respects, a balloon loan looks very much like a 30-year fixed-rate mortgage (FRM). The payments are calculated in exactly the same way.
  • In both cases, the payment is the amount required to pay off the mortgage in full over 30 years.
  • Where the two instruments differ is that, after a specified period, generally 5 or 7 years, the outstanding balance (the “balloon”) has to be repaid in full.
  •  If you are 90% sure that you will be leaving the home in less than 5 to 7 years, which will before the end of the period, than a balloon mortgage would be a good option for you. If you are NOT sure you will be leaving the home in less than 5 to 7 years, a balloon mortgage would not be worth the greater risk.

4. HELOC – Used when home owner needs cash and can tap into the equity in their home. These are often for short-term needs.

  • The borrower is not advanced the entire sum up front, but uses a line of credit to borrow a sum or sums of money that totals no more than the credit limit, similar to a credit card.
  • HELOC funds can be borrowed during the “draw period” (typically 5 to 25 years).
  • Repayment is of the amount drawn plus interest.
  • A HELOC may have a minimum monthly payment requirement (often “interest only”); however, the debtor may make a repayment of any amount so long as it is greater than the minimum payment (but less than the total outstanding).
  • The full principal amount is due at the end of the draw period, either as a lump-sum balloon payment or according to a loan amortization schedule.
  • Another important difference from a conventional loan is that the interest rate on a HELOC is variable. The interest rate is generally based on an index, such as the prime rate. This means that the interest rate can change over time.
  • Homeowners shopping for a HELOC must be aware that not all lenders calculate the margin the same way. The margin is the difference between the prime rate and the interest rate the borrower will actually pay.

5. Second Mortgage

  • A home can have multiple loans or liens against it. The loan which is registered with county or city registry first is called the first mortgage or first position trust deed. The lien registered second is called the second mortgage
  • Second mortgages are called subordinate because, if the loan goes into default, the first mortgage gets paid off first, before the second mortgage. Therefore, second mortgages are riskier for lenders and generally come with a higher interest rate than first mortgages.
  • In most cases, a second mortgage takes the form of a home equity loan and the two are synonymous, from a financial standpoint. The difference in terminology is that a mortgage traditionally refers to the legal lien instrument, rather than the debt itself.
  • The term length of a second mortgage varies. Terms can last up to 30 years on second mortgages; however repayment may be required in as little as one year depending on the loan structure.
  • Generally, when considering the application for a second mortgage, lenders will look for the following:
  1. Significant equity in the first mortgage
  2. Low debt-to-income ratio
  3. High credit score
  4. Solid employment history
  •  A second lien holder can foreclose when a homeowner stops making payments to the second mortgage holder, even if there is no equity in the house. The second lien holder can foreclose even if the homeowner is making payments to their first mortgage holder. When a second lien holder forecloses, they do so subject to the first lien. The second lien holder may purchases the primary (first lien) mortgage (which may still be in good standing), but they are not required to do so. Regardless, if the second mortgage holder forecloses, this will result in the homeowner losing their home to foreclosure.

6. 203K – Used for community and neighborhood revitalization programs; to help keep people in homes when neighborhoods and communities are at risk.

  • This is the FHA’s primary program for the rehabilitation and repair of single family properties. Basically it is a home improvement loan.
  • This program can be used to accomplish rehabilitation and/or improvement of existing one-to-four unit dwellings in three ways:
  1. To purchase a dwelling and the land on which the dwelling is located and rehabilitate it.
  2. To purchase a dwelling on another site, move it to a new foundation on the mortgaged property and rehabilitate it
  3. To refinance an existing home with an existing mortgage and then rehab the home

7. HARP – HARP is the Homeowner Affordability Refinance Program being offered for those homeowners who do not otherwise qualify to refinance their current home loan.

  • If your current loan is owned by either Freddie Mac or Fannie Mae you might be eligible to refinance your home with HARP funds.
  • This loan will refinance your 1st mortgage only (if you have a 1st and 2nd mortgage, the 2nd mortgage will remain as it is). It will finance up to 105% of the current value of your home.
  • This loan is for those who:
  1. Are under water – owe more than the house is worth
  2. Have an interest rate higher than prevailing interest rates
  3. Have an ARM (adjustable rate mortgage) that has re-set or will re-set shortly
  4. Want to refinance, but because your house loan to value ratio is now above 80%, will be required to pay mortgage insurance, making the refinance transaction not worth the closing costs. NO MI is required for HARP loans)
  5. Are not eligible to refinance due to a decrease in monthly income (job layoffs, shorter hours, etc). However, you will need to show that you can carry the new monthly

8. Reverse Mortgages – Consider this if you need to live off the equity in your home; or if you don’t want to pull from your retirement funds.

  • A Reverse Mortgage converts the equity in your home into cash. You can receive up-front cash or income for life.
  • With a Reverse Mortgage you can:
  1. Pay off your existing mortgage
  2. Realize up-front cash
  3. Realize income for life
  4. Obtain an income-producing line of credit
  • Eligibility Requirements:
  1. You must be 62 years of age
  2. You must have substantial equity in your home
  3. If you meet these two tests you qualify!
  • Additional Benefits of a Reverse Mortgage:
  1. No mortgage payments for as long as you live in your home
  2. You keep the title to your home just like you would with any other mortgage type
  3. The loan is not repaid until the last spouse permanently moves out
  4. Repayment can never exceed the value of your home
  5. You may use a Reverse Mortgage to buy a new home
  • Types of Reverse Mortgages
  1. Fixed- Standard – fixes your interest rate for life and provides the greatest amount of cash.
  2. Fixed “Saver” – New program as of 2011 and eliminates the costly up-front FHA mortgage insurance premium.
  3. Adjustable Standard – Provides up-front cash plus a line-of-credit option
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