Last month, Fannie Mae and Freddie Mac all but ended Interest Only Mortgage loans, so the only loans left are Amortizing Mortgages.  (Some borrowers can still get an Interest-Only style mortgage, but they are very restricted now).

If you have ever closed on a mortgage, you probably remember the large stack of paperwork you needed to sign.  A large chunk of that is the “Amortization Schedule”, which is the spreadsheet that shows month by month what the loan balance is projected to be, how much of your payment goes to interest, principal and mortgage insurance if possible.

An Amortizing Loan is simply a loan where your payment never changes, but the amount you pay in interest declines each month as the principle balance is paid down. (Here in North Carolina, the banking commission makes us use two pages of disclosures in the loan application package to explain that one sentence).

The Amortization Schedule is a useful tool for an Annual Review of your mortgage.  However, there is a major problem with the original Amortization Schedule you received at closing.  As soon as you pay as little as $1 extra in principle, the remaining months on the schedule become inaccurate.

When you pay extra principle on your mortgage, you shorten the term of your loan, effectively skipping past months on the schedule.

Here are a few ways to shorten the term of your loan, if that is something you want to do:

1. Bi-Weekly mortgage payments.  This is a separate service from your mortgage servicer that deducts half of a regular mortgage payment from your checking account every other Friday.  There are 52 Fridays each year, so this means you make 26 half payments or 13 full payments each year.  The extra payment each year shortens your loan term.  The problem with Bi-weekly mortgages is that you usually have to pay a fee of up to $400 for the privilege or sending the bank your extra payments.  It seems that they should pay you for sending in extra payments, but they don’t.  Bi-Weekly payments are handy if you get paid every other week so that you can have half your mortgage taken from each paycheck.
2. The ‘Banker’s Secret’.  A book from a few years ago explained the so-called Banker’s Secret.  What this program did was to have you pay the regular payment on the mortgage on the due date, but add in the extra principle from the next month on the Amortization Schedule.  This skips you down the schedule every month and effectively cuts your loan term in half.  The gotcha here is that as you get later on in the amortization schedule, you have larger and larger principle payments to make extra each month.  If you aren’t earning more money each year and don’t desire to put that money into home equity, the Banker’s Secret is actually a secret way for them to get more money from you faster, so that they can lend it out again and earn more interest.
3. Make One Extra Payment each year.  If you get an annual bonus or a regular tax refund, making one extra payment each year allows you to get the same benefit of the bi-weekly repayment plan without having to pay the extra fee.  This extra payment will go all towards principle, and not interest, so it will jump you pretty far down the Amortization Schedule each time you do it.  Maintain this practice for the term of the loan and you’ll reduce a 30 year loan to just over 24 years.

You can contact me for a free update of your Amortization Schedule – even if I didn’t originate your mortgage – I have some pretty good software to create an accurate update.

If you are a “Do it Yourself-er”, download a useful excel spreadsheet and plug in your own numbers.

Paying extra payments on the mortgage feels good for a lot of people.  Don’t fall into that trap of basing your financial decisions on your feelings!  If there are better uses of your money, such paying off other debts, building an emergency fund, or saving for kid’s college expenses – do that first.  Those beneficial decisions not only feel good, but are good for you.

All day, every day, conforming and FHA mortgage rates in North Carolina are changing.  Rates move in response to hundreds of factors as mortgage backed bonds are traded on Wall Street.

Among the biggest influences on mortgage rates is the threat of inflation.  When traders expect future inflation, they will sell low yielding mortgage bonds in order to protect their investors.  If inflation is tame, like it is now, mortgage bond prices will rise, and interest rates will fall.

What is inflation, exactly?  Most people think inflation means ‘stuff’ costs more.

By definition, inflation is when a currency loses its value; when what used to cost $1.00 now costs $1.10. inflation really means that a dollar buys less.

As consumers, we recognize inflation by the items we buy on a daily basis becoming more expensive.  However, it’s not that goods are more expensive — it’s that the dollars we’re using to buy them have become worth less.

With mortgage bonds, the holder of that bond will get the principle and interest back with dollars that can’t buy as much anymore.  If an investor expects this, they would want more interest paid to compensate them.

Mortgage rates move opposite of bond prices, as inflation takes hold, mortgage rates rise as the bond prices fall.

Lately, inflation has been exceptionally low. The Federal Reserve acknowledged as much in its last statement to the markets, and available data backs that position.  This, after predictions that inflation would be “runaway” in 2010.

There is not much threat of inflation right now in the economy, so for a while at least, you can expect rates to stay lower, until the traders start to fear inflation in the future – when that happens, rates could shoot higher.

Many home owners in Charlotte and North Carolina are discovering it’s a great time to refinance their home loan.  With the unusually low rates of the past few weeks, we’ve helped homeowners:

• Shorten their mortgage term to 10 or 15 years without increasing their payment
• Save several hundred dollars each month in interest
• Convert from interest only loans to amortizing loans without increasing their payments
• Pay off credit cards, car loans, second mortgages and lower payments overall by several hundred dollars

Should you look into refinancing?  Yes, if:

• If you are employed, or have been self-employed for more than 2 years
• have an interest rate over 5.75% on any loan
• Have an Adjustable Rate or an interest only loan
• There is equity in your house and you have better uses for that wealth – like paying for education, paying off other debts, or re-building retirement accounts

What are the pitfalls?

Number one:  Appraisals. Since the HVCC, or Home Valuation Code of Conduct was forced on consumers last year, appraisers have been reducing home values across the country with impunity.  This ill-conceived regulation is the biggest roadblock – for some, just a speed bump, but for others, a dead end.  Unfortunately, the only way to find out a true appraisal value is with the actual appraisal that your lender orders for you.

As a safety valve, we recently started offering an AVM or Automated Valuation service on our branch website.  This $29.95 service will give you an educated guess if your house will appraise adequately for refinancing.  If you get an AVM here, and then refinance your mortgage with us, we will refund the cost of the AVM at closing.

Number Two: Credit Score. If you don’t have a 740 or higher middle credit score, you can expect to get a slightly higher rate than other with high scores.  Fannie Mae started charging borrowers higher fees for lower credit scores.  If you call, we can get you a free copy of your report and will tell you how much impact, if any, the score has on your rate.

If you don’t ask, the answer is no.  If you own a house, and have a rate higher than 5.5% right now, you owe it to yourself to look into refinancing now while rates are this low.

Today, in its first meeting in 5 weeks, the Federal Open Market Committee voted 9-to-1 to leave the Fed Funds Rate unchanged.

The Fed Fund Rate remains within its target range of 0.000-0.250 percent.

In its press release, the FOMC said that, since April, “the economic recovery is proceeding” and that the jobs market “is improving gradually”. Business spending “has risen significantly”, too, with the exception of commercial real estate.

Today’s statement is the 8th straight press release in which the Fed shows optimism for the U.S. economy, dating back to June 2009. Since that time, the Fed has terminated all of the programs it created to support the economy through the economic crisis.

And, although the Fed’s statement acknowledged economic growth, it did highlight lingering threats, too.

1. Employers are still reluctant to hire new workers
2. European debt concerns could spill-over to the U.S.
3. Bank lending is contracting

Also, as expected, the Fed re-affirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period”, citing that “inflation has trended lower” recently.

Mortgage market reaction has been positive thus far. Mortgage rates in North Carolina are slightly improved post-FOMC.

The FOMC’s next scheduled meeting is August 10, 2010.

For some folks, it’s not as easy as simply paying down the balances on a few credit cards to improve their score to where they need it to be.

Sometimes, a person needs professional help to get credit scores back to where they should be.  If you have some of the following on your report, you may want to consider using a credit repair company:

• Charge-Offs
• Old Collection Accounts
• Defaulted Student Loans
• Judgments & Tax Liens
• Foreclosures
• Bankruptcies (Discharged or Dismissed)
• Repossessions
• Late Payments*

*Late payments within the last 12 months usually can’t be repaired – you just need some time to pass without any more late payments.

With Credit Repair Companies, just like Mortgage Companies, there are good ones and bad ones.  Ask a trusted adviser, or a mortgage professional for a recommendation, Google the company for feedback, and check with the BBB to get the right company to assist you.

I got two funny phone calls today from Charlotte Real Estate Agents, both asking about down payments.  Since the mortgage crisis started three years ago, the biggest mis-information in the media has been concerning down-payments, with most news articles saying you need 25% or more for a down payment.

The first call went like this:

Caller: “Hi, I have a client who needs 100% financing?”

Me: “Are you a Real Estate Agent, and is your Client a Veteran, or buying a Rural Property?”

Caller: “I am a Realtor, and no, my Client is not a veteran and wants to buy a house in Charlotte”

Me: “Uh, sorry to break the news to you, but, you don’t have a ‘Client’, you have a renter that is saving money for a down payment”.

Next call, 10 minutes later:

Caller: “Hey, I have some clients looking to buy a home with a Jumbo Mortgage.  The  Seller works for a bank and told us the North Carolina passed a law that made it illegal to do a Jumbo Mortgage with less than 20% down.”

Me:  “Well, then, tell the seller to call the cops on me – I just closed a Jumbo loan last week without 20% down.”

Two extremes ends of the market, but both Real Estate Agents were fed bad information that was causing them to pass on bad advice.  Here is a basic guide to minimum down payments:

0% Down:  VA Loans are available for qualified Veterans through Guaranteed VA Loans.  In Charlotte, you can borrow up to $417,000 with no money down.

USDA Rural Housing Loans are available in qualified areas and for borrowers earning less than the maximum income amounts.

3.5% Down:  FHA Insured Mortgages are available for loans up to $303,750 in the Charlotte area, and in the outlying areas, they may be capped at $271,050.

5% Down:  With Private Mortgage Insurance (PMI), you can put as little as 5% down with a mortgage amount up to $417,000.  With only 5% down, you will have some type of Mortgage Insurance.

10% Down:  For loans up to $417,000, you can put down 10% and have Mortgage Insurance available.  Some highly qualified borrowers, buying highly qualified house, may be able to get a second mortgage or home equity line of credit and avoid PMI.  Second Mortgages are much more complicated than PMI, so they aren’t nearly the sure thing they were a few years ago.  However, they will save most home buyers money, so they are worth looking into.

For Homes prices above $438,000, buyers can avoid Jumbo Mortgages and keep the down payment to 10% if they can qualify for a second mortgage.  We do this by getting a FNMA maximum mortgage of 417,000 and a second mortgage for 10% with a 10% down payment.

At higher home prices, while not a law, you may need up to 20% down.  Jumbo mortgages are limited to 80% of the home’s appraised value.  Second mortgages can make up some of the gap, but jumbo mortgage lenders will not allow higher than 80% Loan to Value, and PMI is not available on Jumbo loans.

When you are buying a house, your down payment is the most critical financial decision you will make.  Knowing the minimum required down payment is a good place to start your home shopping

I’ve been saying for years – Mortgage debt along with other savings is far better than no debt with no savings. In other words, build up your savings and form the habit of saving money, then pay off your mortgage.  apparently, the Wall Street Journal thinks so also:

By JANE J. KIM And JEFF D. OPDYKE

It would be the height of foolishness to load up on debt now, right?

Just look at the news these days. Homeowners are being foreclosed on at a record clip. Governments around the world are lurching toward insolvency. Job growth in the U.S. remains feeble at best. And at the center of the global economic storm are bad loans, which promise to weigh on consumers, businesses and governments for years if not decades to come.

And yet—and yet!—the cold clarity of financial analysis points to an inescapable conclusion: There has never been a better time for people to borrow money, whether to buy financial assets or boost cash reserves.

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For sophisticated, disciplined investors who have lived and invested within their means—and perhaps decried the bailouts being lavished on those who haven’t—this is your time to take advantage. Not only are interest rates just about as low as they can get, but future inflation could erode the paper value of loans, making debt even cheaper over the long run.The first step involves making peace with the idea of taking on new debt at this perilous moment in global economic history.

It isn’t an easy concept to embrace. While the inflation scenario seems likely over the long term, there is a small but growing chance that the global economy could suffer from the opposite problem, deflation. Japan could be the template for the kinds of problems facing the U.S. and other advanced economies: years of tepid growth and falling asset values and prices.

That would make new debt more expensive over time, not less so. It would also mean that the job market is headed for a longer slump than even the direst estimates now suggest.

Then again, the moments that seem the bleakest often turn out to be inflection points. Alan Greenspan has famously said that the worst of loans are made at the best of times. The opposite holds true as well.

Most important, “there’s nothing inherently wrong with leverage,” or borrowed money, says Christopher Jones, a New York financial planner working with high-net-worth clients. For people with the capacity to take on debt, who understand it and can tolerate the risk, “now is an ideal time to leverage cheap dollars to buy into areas that can produce much higher returns over the longer term,” he says.

Mr. Jones is advising clients who can afford to pay cash for a home to take out a mortgage instead and invest the funds in a diversified portfolio. “If you look at where the market is now and where it could be five to 10 years from now, the return potential is significant,” he says. Ideally, investors would want to borrow at rates below 5% and invest the money in a well-diversified portfolio aiming to return 8% a year over 10 to 15 years.

“You don’t want to be borrowing money and going to Vegas with it,” Mr. Jones says.

Investing the Proceeds

Wealthier investors who already have built up considerable equity in their homes might even consider—gasp—a cash-out refinance. Yes, this sort of behavior is what got so many people in trouble during the housing bubble. And, yes, leveraging a home to the hilt can be dangerous because if home prices continue to slide, you could owe more on the house than it is worth.

But people who have a potentially profitable use for that money—preferably an investment—could come out ahead using this strategy. A borrower who takes out a mortgage at 4.5% is essentially borrowing money for free on an after-tax, after-inflation basis, assuming he or she is in the 33% marginal tax bracket and inflation returns to its long-term average 3% or more, says Greg McBride, a senior financial analyst at Bankrate.com. “That’s probably the best example of how those who are well positioned can utilize the low-rate environment and leverage up their financial return prospects,” he says.

If that hypothetical investor were to take out a $400,000 loan at 4.5%, he would come out ahead if his portfolio makes more than 3.015% a year after taxes, says Terry Siman, a wealth adviser in Spring House, Pa. If you assume 2% a year is lost to taxes, such as capital gains, dividends and interest income, then the portfolio needs to return 5.015% annually to break even. “Anything better than that and you’re in a winning situation,” says Mr. Siman.

Skip Fiore is a Waretown, N.J., director of a digital print-manufacturing company nearing retirement who is looking to rebuild a nest egg devastated by the stock-market collapse. He has no mortgage on his $1 million home, so he is in the process of taking out a $300,000 mortgage at a fixed rate of 4.75%, and plans to use the money to invest in his portfolio. “Fundamentally, it was cheap money,” he says. “And it was cheap money that could be used to supplement a depressed retirement portfolio.”

The risk, of course, is that the investment returns will be lower than the new mortgage interest rate. Investing in bonds probably wouldn’t make sense, says Mr. Jones, the financial planner, because Treasurys or high-quality corporate bonds aren’t yielding enough to offset the cost of carrying the debt.

Also, investors who are borrowing against their home can’t invest the money in municipal bonds and get both an interest-tax deduction for the home-equity loan and the tax-free income from the municipal bonds. “There’s no double dipping,” says Mr. Siman, who is working with Mr. Fiore to rebuild his nest egg.

Mr. Jones suggests using home-equity money only in a well-diversified equity portfolio split among U.S. and international markets.

Within the U.S. portion, he suggests buying equal amounts of U.S. large growth, U.S. large value, U.S. small growth and U.S. small-value and real-estate investment trusts. On the international side, he suggests equal helpings of large growth, large value, small growth, small value and emerging markets.

Marc Schindler, a certified financial planner in Bellaire, Texas, is encouraging clients to consider “pulling equity from their home with the idea they can invest and generate better returns.”

Rate of return is a big key when looking at leverage vs. mortgage payments.  Also consider the advantage of Liquidity and the Safety of Principle in your Mortgage Plan.

FHA mortgages are very popular with first time home buyers in Charlotte and thorughout the Carolina’s because of the low fixed rates, low down payments, and easier qualifying.

Starting sometime later this year, the monthly cost to carry an FHA-insured mortgage is expected to rise.

In a near-unanimous vote, the House of Representatives gave the FHA power to raise the monthly mortgage insurance premiums it charges to its borrowers.

Currently, monthly mortgage insurance premiums are 0.55% of the unpaid loan balance, divided by 12.  The recently approved Federal Housing Administration Reform Act provides for an increase in monthly premium of up to 1.55 percent, among other details of the bill.

Despite the ability to charge 1.55 percent, FHA officials say an increase to 0.90 percent would be sufficient to self-insure its loans.

In everyday terms, assuming a $200,000 mortgage, the math to a homeowner looks as follows:

• Current Premium (0.55%) : $91.67 monthly mortgage insurance premium
• Expected Increase (0.90%) : $150.00 monthly mortgage insurance premium
• Maximum Increase (1.55%) : $258.33 monthly mortgage insurance premium

Because higher monthly insurance premiums are expected to pad the FHA coffers sufficiently, the FHA has said it plans to reduce its upfront mortgage insurance premium paid at closing from 2.25 percent down to 1.000 percent.

On the same $200,000 mortgage, a move like that would reduces closing costs by $2,500.

The bill awaits companion legislation in Senate and final approval into law, but considering the House’s lopsided vote Thursday, it could happen rather quickly.  If you’re planning to buy or refinance a home using an FHA mortgage, you may find that waiting to take the next step could be a costly one, long-term.

From a home affordability standpoint, higher Up-Front Mortgage Insurance results in a lower payment, so it’s easier for most home buyers to qualify currently.  The new, higher monthly mortgage insurance will result in higher Debt to come ratios for buyers, and make houses less affordable.

Last week’s jobs report, and the continuing financial woes in Europe, are keeping mortgage rates low in Charlotte and throughout the US.

On Friday, after the weak Employment Report, mortgage rates fell to their lowest level on 2010.

When rates eventually go back up, it will happen quick.  It could be this weeks $70 Billion in new treasury debt, so some surprise news from Wall Street that causes it, but something will cause rates to jump and they will jump quickly.  Rates always fall slowly, and rise quickly.

The issues in Europe won’t end this week, so we may see low interest rates all summer.

However, if you are still sitting on the fence about refinancing or buying, (I know you are out there – less than half of the mortgages over 6% have refinanced in the past year) don’t wait too long to get started.  Missed opportunity brings regrets.

Home Loans are not difficult to get – if you meet the basic criteria.  Commercial loans and business loans continue to be tough to get.  Every lender in the country will look at your credit score, documented income, and your savings.  If those things meet the criteria, refinancing or buying a home now is pretty simple when you work with a mortgage professional.

Mortgage markets worsened last week as concerned of a global debt crisis lessened and stock markets rebounded. The gains in stocks came at the expense of bonds — including mortgage bonds.

Conforming and FHA mortgage rates rose in North Carolina for the first time in 5 weeks, pulling mortgage pricing off its best levels of the year.

This week, mortgage rates are likely to rise some more, but still remain at the ‘historically low’ level that every mortgage marketer is screaming about.

The big deal this week in the monthly Jobs Report.  This comes out the first friday of every month and is usually a big contributor to volatile rates – and usually makes rates worse after periods of low rates.

In April, an estimated 290,000 jobs were created and, in May, economists think more than a half-million people re-entered the workforce.  This is good for the economy, of course, but can drag on mortgage rates.  If job growth even comes close to the 500,000 marker, mortgage rates could zoom higher.

Mortgage rates moved higher last week but are still very low. If you’ve been thinking about refinancing your mortgage, you haven’t missed the window – but don’t wait for rates to get lower – they most likely won’t.