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Do you have a Real Estate question? Wondering about financing a property, personal finance, improving your credit , managing your debts, buying, selling, or real estate investment? Send your inquiry to The Mortgage Guru. |
Andre Plessis |
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Get free monthly tips on mortgages, real estate, credit cards, taxes, real estate investing, and personal finance.
June
2008
Tips on
Mortgage Interest Rates
As a general rule, inflation is bad for mortgage interest rates as it causes the dollar to lose its value. When the dollar loses its value, mortgages repayments lose value as well. After all, we all write our checks against U.S.-based bank accounts.
So, when inflation is present, mortgage rates almost have to increase in order to compensate for devaluation.
What is Debt-To-Income Ration? There are
two main kinds of DTI
The two main kinds of DTI are expressed as front and back ratio.
The first DTI, known as the front ratio, indicates the percentage of
income that goes toward housing costs, which for renters is the rent amount and
for homeowners is PITI (PITI includes mortgage principal and interest, mortgage
insurance premium [when applicable], hazard insurance premium, property taxes,
and homeowners association dues [when applicable]).
The second DTI, known as the back ratio, indicates the percentage of
income that goes toward paying all recurring debt payments, including those
covered by the first DTI, and other debts such as credit card payments, car loan
payments, student loan payments, child support payments, alimony payments, and
legal judgments.
Example:
In order to qualify for a mortgage for which the lender requires a
debt-to-income ratio of 28/36 (which is most typical):
Yearly Gross Income = $60,000 / Divided by 12 = $5,000 per month income.
$5,000 Monthly Income x .28 = $1,050 allowed for housing expense.
$5,000 Monthly Income x .36 = $1,350 allowed for housing expense plus recurring
debt (car loan, credit cards, student loans and any personal loans).
The federal funds rate is the target interest rate for banks borrowing reserves among themselves. The discount rate is the interest rate that the Fed charges banks to borrow reserves from the Federal Reserve. The Fed wants to be the lender of last resort: It wants banks to borrow from one another at the federal funds rate before borrowing from the Federal Reserve at the lower discount rate.
Here is a nightmare scenario: You crash into a high end Mercedes with a rich business executive inside. He’s hurt so badly he cannot go back to work. A jury awards him millions of dollars and you have to pay for it.
You’re wiped out financially. The court takes your savings, goes after your home, all your assets and, for decades, requires you to give up a part of your salary.
For some people such a nightmare could never happen. They have an extra insurance policy, known as umbrella or excess liability coverage, which takes care of their liability for the lawsuits and medical bills of the auto accident victim or other unfortunate incidents.
But many people with major assets either do not buy the extra coverage or do not buy enough coverage. Some people are not aware about umbrella coverage, which also pays for lawyers and other legal expenses. Still some decide that they do not want to pay for it, even though the cost is usually a fraction of the price of a typical package of home and auto insurance.
Thankfully, accidents with exorbitant lawsuits are not everyday events. When they do occur, however, the results can be pretty devastating. One individual crashed into the rear of a car on a highway. A woman and a child were critically injured. After two years of litigation, the client settled the lawsuit for more than $5 million. Thankfully thee client had $10 million in umbrella coverage. The policy paid for the settlement and all legal costs. “Without the umbrella, that individual would have been completely wiped out and his life would be a disaster.
Not everyone needs an umbrella policy, but you may be surprised at how many people should have one. We recommend you get a policy if:
 | You have quite substantial assets that could be seized by a court to pay off a judgment that exceeds your primary coverage. |
| You're a business owner. Whether you own a multimillion-dollar company make sure you're covered. |
| You have a cleaning person, nanny, gardener or other worker who is not licensed or bonded. |
If you fall into any of these categories, we urge you to call your insurance companies and get quotes for an umbrella liability insurance policy. The price is so cheap that it's well worth the money. It just doesn't make sense to take extra risks when safety can be obtained at such a small price.
February 2008
Straw Buyers
The mortgage scam known as identity theft is relatively simple, the perpetrator uses a stolen identity to buy property with no money down, then rents it to tenants until it goes into foreclosure, collecting rent but never making a mortgage payment. All you need is to buy a foreclosed property at a bargain price, have it falsely appraised with a grossly inflated value, then sell it to a straw buyer at a big profit. The straw buyer never makes a payment and the home goes into foreclosure. The process is often repeated over and over again. Many properties are sold like this dozens of times. This artificially push up prices in some neighborhoods and when those fake buyers walk away, the abandoned homes push prices down. The real victims are the genuine borrowers who buy at inflated prices and are stuck with mortgages worth more than their homes.
False appraisals are often used to fool honest borrowers.
February 2008
Credit
Restoration
Credit restoration efforts are ones that the Federal Trade Commission and others advise a cautious approach.
Credit repair should be approached very carefully as it has been found in numerous cases to be linked with fraud, according to the FTC. Some fraudsters convince consumers that they can help them remove truthful, negative information from their credit report, or establish a new credit record. They simply can't.
The commission also advises borrowers to be wary of "advance-fee loan scams, in which consumers pay a fee for a 'guaranteed' loan or credit card but do not receive the promised loan or credit card.
By law, credit repair companies cannot require people to pay until they have completed the services they have promised.
The Credit Repair Organizations Act (CROA) "prohibits a variety of false and misleading statements, as well as fraud by credit repair organizations," according to the FTC.
In addition to being prohibited from receiving payment before any promised service is "fully performed," credit repair companies must offer services under a written contract, "which must include a detailed description of the services and contract performance time frame. They must provide the consumer with a separate written disclosure statement describing the consumer's rights before entering into the agreement. Consumers can sue to recover the greater of the amount paid or actual damages, punitive damages, costs, and attorney's fees for violations of the CROA. The states and the FTC may also enforce the CROA," the commission said.
Warning signs that a credit repair or restoration company may be a "scam" are the following, according to a commission report on the topic:
* Companies who advise borrowers to dispute all information in their credit reports or take any action that seems illegal, like creating a new credit identity.
* Companies who do not tell borrowers their legal rights and what they can do for themselves for free.
* Companies who want borrowers to pay for credit repair services before they provide any services.
* Companies who suggest that borrowers do not contact a credit reporting company directly.
* Companies that suggest borrowers try to invent a "new" credit identity - and then, a new credit report - by applying for an Employer Identification Number to use instead of their Social Security numbers.
The FTC warns that people who "follow illegal advice and commit fraud ... may be subject to prosecution."
Cash-Out Refinance Share Falls in 4Quarter
In the fourth quarter of 2007, 81% of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5% higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review. The revised share for the third quarter of 2007 was 86%. "Home-value declines coupled with tougher underwriting standards at many lenders contributed to a decline in the amount of home equity cashed out as part of a conventional loan refinance during the fourth quarter. Homeowners continue using their home as a cash cow as opposed to building wealth.
January 2008
Mistake To Avoid: Being Underinsured
Make sure your home is not underinsured. If you have lived in your home for at least 3 to 5 years it's probably worth much more today. But if you haven't updated your homeowners' insurance you may be in trouble. You could lose a lot if a disaster strikes. Ask your insurance provider to reassess your home's replacement cost and adjust your coverage accordingly.
Mistake To Avoid: Overpaying Your Mortgage
Should you refinance your mortgage? Whenever interest rates drop, the appeal of refinancing your mortgage grows. But it's important to know the real costs, and potential savings, before making a move. If rates go down 1 to 2% it maybe a good idea to refinance and find out when your break even point will be. It's about just about saving money, but where you can invest the money you save by refinancing your existing mortgage.
Saving for
College is Easier Than You Think
The average debt a college senior graduated with in 2006. Perhaps a few thousand? Try $19,000. That's the average! Almost 8% of graduating seniors in 2004 had $40,000 or more in student loans. College costs have risen by more than 50% since 1990, but federal aid hasn't kept up. You're probably thinking that there has to be a better way. Well there is!
Secured
Cards Help Build Credit
Negative credit items will automatically come off your report after seven years; a bankruptcy will stop being reported to the credit bureaus after 10 years and a foreclosure after 12 years. Your report should be cleaning itself after many years. A secured card, is an excellent way to rebuild your credit. Just make sure that you do not select a card that has excessive fees. As for getting a secured card, you can visit www.cardtrak.com, click on “Search Cards” and then on “Secured Cards.” You will get a list of cards available including each one’s terms. Read them very carefully.
Helpful Calculators
Underinsuring Your
Home Could Cost You a Lot a home
Even with the recent drop in home prices, if you lived in the same house
for 5 to 10 years, it's likely to be worth 50 to 100 percent more than you
paid for it. But if you haven't updated your homeowners insurance and
disaster strikes, you could lose those gains.
Ask your insurer to reassess the home's replacement cost and adjust coverage accordingly. Buy an inflation-guard endorsement. Make sure the policy would pay to rebuild to the current housing code in the area.
Federal Funds Rate
When the Fed cuts rates, they are cutting the federal funds rate, which is an overnight lending rate that banks charge each other. That rate is important because it influences the amount of interest we consumers pay for various types of debt, such as credit cards, home equity lines of credit, mortgages, student loans and auto loans.
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