Subprime Mortgage Lending – Expanded Guidance
In June 2007 the federal financial regulatory agencies together issued a Statement on Subprime Mortgage Lending. This statement contained references to an earlier document issued by the Comptroller Office’s for Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision. The latter document, the 2001 Expanded Guidance for Subprime Lending, is recommended unequivocally by the agencies as the defining document to which lenders should turn to find the criteria for considering a borrower “subprime”.
Even in the late 1990s, subprime lending was becoming more and more of a problem. The 2001 Expanded Guidance was an expansion of earlier statements about this issue. The agencies’ focus was the responsible use of subprime lending to assist subprime consumers to win back their credit ratings. Regaining lost credit would enable these people to enhance their financial situations. At the same time, the agencies stressed that lenders who assume a greater risk by lending to subprime individuals must also show evidence of ability to maintain their duty of upholding the public’s trust in financial matters. It is the lender’s responsibility to assess most carefully whether or not the borrower is likely to be able to repay the debt incurred. Painstaking effort is required to create strict rules of underwriting to assist in such assessment. Only when controls like this exist will both borrower and lender enjoy minimized risk of loss.
This Expanded Guidance clearly defined for the first time the criteria used to decide whether a potential borrower will be classified as “prime” or “subprime.” It states that at least one of these issues will characterize a borrower as subprime when the person applies for a loan:
· Low credit score
· Bad credit history, including
· collection accounts
· repossessions
· late payments of invoices
· bankruptcy
· debts that have been written off as uncollectable, called “charge-offs”
· high ratio of debt to income
· decreased ability to pay off the loan.
Further, the document describes these attributes of the subprime borrower:
· has a Fair Isaac Corporation (FICO) credit score of less than 660;
· has collection activity, liens, charge-offs, or judgments within the past two years;
· within the past year, has had two late payments;
· within the past two years, has made a payment that was more than 60 days late;
· has a ratio of debt to income of at least 50%;
· has declared bankruptcy in the past five years;
· has been assigned a score by another credit rating service that would equate to a FICO score of 660.
All lenders use these standards to identify subprime borrowers. Bear in mind that even if you have a FICO score that is better than 660, you will still be considered a subprime borrower if you possess a single one of the attributes listed above.
Expanded Guidance offers a clear definition of lending practices to be considered “predatory.” The agencies in no way insinuate that predatory lending practices characterize all subprime lenders. In fact, it is their belief that benefits for both the borrower and the lender come from using subprime loans that are administered properly. Nonetheless, the public should be made aware that predatory lending practices do exist, and that borrowing at subprime may leave them vulnerable to such practices. In predatory lending, the exchange between borrower and lender is very unequal: the lender gets the borrower’s money and the borrower gets not much of anything!
Most predatory lending practices fall into three categories.
· Many car loans and housing mortgages are made based on assets pledged by the borrower as collateral, rather than on the borrower’s actual ability to fulfill the debt.
· “Loan flipping” occurs when a lender coerces or talks a borrower into refinancing a mortgage, at no advantage to the homeowner, but at great advantage to the lender, who may collect sizeable fees for the transaction.
· Failing to reveal to the borrower all the hidden fees and costs of a loan, and concealing information or providing fraudulent information to the borrower.
· Very often, these practices are perpetrated on vulnerable borrowers, like the elderly, minority homeowners, or low-income families. In many cases, these people would actually have qualified for a mortgage at prime rates; but they are at a disadvantage because of their lack of knowledge.
If you are thinking of borrowing at subprime for a mortgage, you should familiarize yourself with the 2001 Expanded Guidance for Subprime Lending. It is available on the Internet, and is definitely worthwhile reading. It laid a fine foundation for further definition of the responsibilities of subprime lenders and the needs and rights of subprime borrowers.
Adjustable Mortgage Rates For Beginners
Adjustable rate mortgage are popular for the reason that they allow you to afford bigger mortgages. For instance if you know that your income would be rising in the future, and you have accordingly planned to sell your house in say, another five years, adjustable rate mortgages may be a good financial option, for you. This is where adjustable rate mortgages have gained popularity of fixed rate mortgages, where the amount to be repaid as interest remains ‘fixed’, as the name suggests, irrespective of market conditions. In case of a fixed rate mortgage, even in the case of fluctuation in interest rates, you need to pay only the amount, agreed upon in the beginning. It is not so in the case of a adjustable rate mortgage, where your interest rate will be adjusted, based on the fluctuations in the interest rates. One stands to gain if the interest rate were to drop.
If the interest rates were to fall, you need not go in for refinance, as your payments will be automatically be recalculated, based on the lower rates of interest. Similarly if the interest rates were to go up, your repayments can also go up significantly, during the life of the loan. This can happen even with caps in place. This is where one needs to be careful while going in for adjustable rate mortgages.
The rate is usually decided by something known as ‘money market index’. Depending on the fluctuation of the index, you can end up paying more or less. The rate for an adjustable rate mortgage usually begins lower than fixed rate mortgages, available at the same time. The rates are dependent upon the prevalent economic conditions. You can find out more about the rate adjustments, in the beginning itself, by going through the terms of the loan.
Mortgage loans have enabled higher purchasing power. People can now for instance, realize their dream of owning houses, right in the beginnings of their career. It would not have been possible without mortgage loans. When it comes to mortgages adjustable mortgage rates are perhaps the more preferred choice among people. With almost every lender proclaiming to offer low adjustable mortgage rates today, you are bound to be confused, while making a decision.
The thing with low adjustable mortgage rates is that even though they are ‘low’, you still have to pay them. Although they may be low to begin with, with the fluctuations in the market or economic conditions, they could suddenly go up, with you end up feeling sorry, for having falling to the bait. One has often heard of lenders offering rates that are even lower than the sum of the index. Such rates are known as discounted rates. They come with a catch though, in that they are often combined with a large initial loan fees and with much higher interest rates, after the discount expires. This is one reason why it makes sense to make a prudent decision while going in for low adjustable rate mortgages today.
It is therefore important that you decide on the correct low initial rate, based on your ability to repay the same. You should be careful enough to consider, whether you will be able to afford payments, after the discount expires and the rate is adjusted. Remember for one thing, with low adjustable mortgages, your low initial payment, will not probably remain low, for long. You can be in for what is known as a ‘payment shock’, when the mortgage payment rises very sharply at the first adjustment, itself.
Adjustable mortgage rates today are perhaps one reason for the booming real estate business. People are literally bombarded with advertisements proclaiming the lowest adjustable mortgage rates, through literally every kind of media available.
Adjustable rate mortgages mostly come with a ‘cap’, which decides the maximum amount a rate can change at one given point of time. The maximum amount can vary from the original rate over the life of the loan. This is where adjustable rate mortgages are considered a risky proposition. Market conditions are never so easily predictable, more so, over a long period of time. With repayment terms increasingly getting longer, sometimes, even as long as 30 years, as in the case of housing loans, one can never be sure , what will happen down the line. Therefore it is necessary; you take into consideration several factors before going in for adjustable rate mortgages.
Several lenders also offer something known as ‘conversion option’. This option allows you to convert your adjustable rate mortgage to a fixed rate mortgage, during a future point of time. Check whether your lender offers this option because it is a good thing to go in for, in case interest rates begin to rise.
Low Mortgage Rates – Part 1
Low mortgage rates have been instrumental in realizing the dreams of a home of millions around the world. One reason for the real estate boom could be attributed to low mortgage rates. With increasing competition among banks and other financial institutions, loans are literally being pushed down the consumer’s throat. People are buying homes at a young age and are willing to splurge like never before. There are plenty of players in the market who are wooing potential customers with offers, which till now, weren’t even heard of. From ‘low interest rates’ to increased time span for repayment of loans, customers are virtually being bombarded with promotional material, left, right and center.
Most of the loans available are mortgage loans, where you mortgage something, till such time you repay the entire amount, which consists of the principal and the interest. Interest rates fluctuate depending on market conditions. It is also not uniform across geographical areas, varying from place to place. Increasing competition has meant that banks and financial institutions wooing potential customer’s with never before rates, which in turn means, better purchasing power. What is more, you have a choice of repayment options, in terms of money as well as time. You can pay a particular amount as interest over a period of time, which could be 5 years, 10 years, even 30 years and so on and so forth. With such flexibility available in repayment options, increasingly people are going in for these mortgage loans, lured by the so called ‘lowest interest rates’.
Mortgages have become increasingly popular propositions, thanks to the constant wooing of customers, virtually through every available media by financial institutions, lenders and brokers. Most of their ad copies scream about the ‘lowest interest rates’, to make their offer attractive. Many aspiring executives, just starting out on their career are able to afford purchasing, palatial houses, thanks to the advent of ‘lowest mortgage rates’. Mortgage rates vary across places. They may also vary from one lender to another. It is advisable that you compare low mortgage rates, before taking a final decision. You can get comprehensive information on the best mortgages at the lowest interest rates, on the internet. Whether it is lowest first mortgage rates, lowest fixed mortgage rates, lowest interest only mortgage rates, lowest commercial mortgage rates, lowest second mortgage rates, you can get all the possible information online.
You can search for the current mortgage interest rates from online lenders and brokers. Most of these lenders update their rates on a daily basis. Various ‘loan calculators’ are also available to determine a loan amount and mortgage payment. Using them you can find out about what’s right for you. Most of the online mortgage calculators are also easy to use. All you need to do is to fill out the relevant data and leave the rest to the calculator. The mortgage rates would be then displayed on the screen in a matter of minutes, if not less. Not only this , you can surf through the net for information on mortgage rates, points, rate locks, closing costs, to mention only a few. Alternately you can always get in touch with your very own personal financial advisor for details. It makes sense to sit and discuss with your financial advisor, rather than cutting a sorry figure later on. Ask your lender for a detailed prospectus and go through it. Find out about the repayment terms and any other added tax benefits. Check who is offering what. Once you have done a comparative analysis, there is no stopping you. You can now go ahead and live in that dream home of yours. Seeking information from all possible sources enables you to ‘talk the talk’ with potential lenders.
One thing that you should remember while going for mortgage loans with low interest rates is , even though the interest rates are low, you still have to repay it. And along with the interest, you have to repay the principal also! Therefore you should carefully consider all every aspect of your purchase decision. You can also consult your friends or colleagues, who may have availed of these loans in the past. They are suitably placed to advice you honestly on a particular loan.
Adjustable mortgage rates: the risks involved – Part 1
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Adjustable rate mortgages are attractive to buyers because they are always lower than the current fixed mortgage rate and thus will create a lower house payment. They are inherently risky because of the potential for your house payment to balloon up to a point where it becomes a significant financial strain. The question then is: When is the risk worth the initial savings? Here is my take on the answer to that question:
First consider the history of rising and falling interest rates over the last few decades. You will notice a gradual rise and fall. This pattern will continue, as interest rates will never be a solid, stable number.
When interest rates are fairly low, history tells us that they are most likely to go up. Interest rate are fairly low now, and have been showing a slow increase over the last year or so. In today’s economy I would assess ARM’s as being a very poor strategy. The statistics say that you will be the looser in the end. For now, a fixed rate mortgage offers you the most protection from an upward trend in rising interest rates.
When interest rates are fairly high, (and they can get extremely high, with the record set in the late 70’s and early 80’s of over 18%), history tells us that they are likely to fall. If you think (and yes, it is a guessing game) that interest rates are peeking then by all means buy into an ARM. If your guess is correct you can always refinance when rates fall by two or three percent and easily recoup your refinance charges in a fairly short period of time.
One addition situation that would put an ARM into a favorable position is when you plan to live in a home for a short period of time. If you plan to buy, remodel, then flip the home (sell it for a profit), then an ARM is a good choice. The payments will add to the profitability or net gain when you do resell the home.
In general, ARM’s are just short of a gimmick, designed to lure the purchasing public into a situation that can be quite risky, depending upon the current economic climate and tends. So while there are times when an ARM makes sense, for my money, a fixed rate is usually a better choice.
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Explaining the concept of the reverse mortgage – Part 1
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What is a Reverse Mortgage?
A reverse mortgage is a new type of mortgage loan that works just the opposite of your typical mortgage loan. Instead of you
paying the mortgage company, the loan company pays you. This is a new concept to consider if you are at least 62 years old
and own your home. If you are needing money for medical bills, home improvements, or other reasons. This type of mortgage
can give you the cash you need without you having to make monthly payments to pay them back. If you plan on living in the
home for the duration of the loan, you do not have to make payments or you will not be forced to move. You are paid in cash
the equity value of your home to do with as you see fit and you don’t have to worry about making more monthly payments
that you really cannot afford.
With the reverse mortgage, you will not lose your home because you didn’t make a monthly payment on it. However you or
the co-signer must continue to live in it. You will be paid the equity value instead of you paying the mortgage company. You
have a choice on how you wish to be paid your reverse mortgage loan. You can be paid cash all in a lump sum , you can be
paid on a monthly basis receiving a payment each month, you can be paid through an account where you decide when and
how much you will be paid in any given time, or you can choose a combination of any or all of the mentioned options. You
have the control over your equity cash and how much you will receive and how you will spend it.
There are several advantages of the reverse mortgage and they are: You do not need to make monthly payments (instead,
you receive them) and you do not have to have an income to apply for a reverse mortgage. They are also tax free and should
not affect your Social Security or Medicare benefits. Who can’t use a tax break?
There are three types of reverse mortgages but you may or may not qualify for all of them. They are single-purpose, HECMs,
and proprietary mortgages.
The amount you will owe on a reverse mortgage will increase over time and there will be interest charged on the balance of
the loan. There will also very likely be charges such as closing costs before you receive the loan and possibly fees during the
term of the loan. Your debt will increase and your home equity will decrease.
The loan is required to be paid back after the last borrower dies, sells the home, or doesn’t live there anymore. You are required
to continue
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Mortgages: What You Need to Know
Product Description
How is this book different from other books on this topic? Most people in the country follow what the mass media and industry norm prescribes without slowing down and seeing how that advice will impact their financial lives both short and long term. Mortgages: What You Need to Know questions the traditional thought process of the type of mortgage you should have. More importantly we break down each part of the mortgage process beginning months before you actually apply for a mortgage. In addition we provide the reader with questions to better arm them to speak with a qualified mortgage planner as well as forms to use for their annual review. Yes we advocate that every individual review their mortgage on its anniversary. Let s face it, Life happens! Circumstances can and do change each year. One spouse may have stopped working or went back to work. You may have gotten injured or possibly laid off and ran up some debt? Credit scores may have improved opening up better programs that might not have been available when you took out your current mortgage. Maybe you want to make improvements to your home? You have to pay for college? A Mortgage Check-Up (form provided) can also help prevent identity theft through a credit check. Chapter Sixteen details why this is so important and how to benefit.
Mortgages: What You Need to Know
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Four Things To Watch For When You Get A Home Equity Line Of Credit
Home equity loans are a great way to get the cash you may need – for just about any reason. It could also be enough money to fulfill some of your dreams, too, if you have lived there for some time. Many people are tapping into their home equity in order to do some things they have always wanted to do. Still, though, there are some traps along the way that can be costly to those who are not watching. Here are four things to watch for when you get your home equity line of credit.
What Is The Interest Rate?
Probably one of the most important things that you need to watch for is the interest rate on the home equity line of credit (HELOC). This will mean that you need to watch the market some and be a little patient. Wait until you see that the interest rate is good. The interest rate may be near that of a first mortgage, but will often be a little higher.
Besides the interest rate, though, there will also be what is called a margin. This is an interest rate that is added to the prime rate, and it remains on it for the life of the loan. This figure is variable with each lender, and they often will not reveal it unless they are asked. You need to ask, because this could, in some cases literally double the interest you will be required to pay.
Is There A Guaranteed Conversion – If Necessary?
Because a home equity line of credit is an adjustable rate loan, you will want to have the protection of being able to convert – if necessary. This means that if the prime rate becomes high, that you will be able to convert your now high interest loan to a fixed rate loan. Oftentimes, adjustable rate loans have no caps on the interest rates, or very limited control over the caps. Currently, there are only about two states that put a cap on it – of about 16 to 18%!
What Charges Apply?
A home equity loan can come with quite a few charges – or just a couple of them. It really is up to the lender and what they think they might be able to get away with. Many home equity lines of credit do not have any closing costs now, so look around to find one that does not.
Other charges may include a charge per check that you write. Another is a charge that will be given you if after a certain period of time you have not withdrawn any more money – often referred to as an inactivity fee. Then there may be an annual fee, or a monthly fee for participation in the program.
How Is It To Be Paid For – Amortized?
Another thing that you must look into is to find out how the home equity line of credit
loan is to become amortized. You need to know how long is the draw period – the time that you have to withdraw the funds as you need them, and when you start paying on the principal of the loan. Some HELOC’s require a balloon payment for the full amount at the end of the draw period. This would require that you refinance the loan. Other plans require that you start making payments that will fully amortize the amount you borrowed, but the time period to do so may vary.
As you can see, there are many different features given by different lenders. You want to make sure that you get several quotes when you go to apply for your home equity line of credit. Then carefully evaluate and compare them in order to find the features you like and that will fit your particular need for your equity.
Everything You Need To Know About HELOCs (Home Equity Lines Of Credit)
A HELOC (home equity line of credit) works somewhat similar to a credit card, but it is secured and protected by the equity in your home – equity equals the market value of your home minus the balance owed on your mortgage. Whatever the size of your home equity credit line, you pay interest only on the amount you use. For example, if your HELOC’s maximum is $50,000, you can borrow $5,000 or $10,000, only pay interest on what you borrow, repay that amount and borrow again as long as you don’t exceed that maximum limit.
Keep reading for 5 great tips that will help you hunt down the best home equity line of credit deal for both you and your family.
1. Use a HELOC for ongoing expenses, instead of one-time major expenses.
A Home Equity Line of Credit is great for paying college expenses or covering a multiyear home renovation because you can dip in only as you need it. You may also want to have one in place for emergencies if, say, you lose your job or get in an accident. If you’re borrowing for one major expense, you’re probably better off with a fixed-rate home-equity loan.
2. Look for a low permanent rate.
Teaser rates can go as low as 5.25% or even better, but will jump later. Remember, they’re designed to get you in the door. All HELOCs charge a variable rate based on the prime interest rate, plus or minus a profit margin. So, save money by looking for interest incentives. For example, a bank may take off a quarter point if you do your banking there and another quarter if you sign up for automatic payments.
3. Don’t borrow more than 80% of your equity.
Borrowing more will stick you with a higher interest rate. Plus you’ll leave yourself open to having your hard-earned home equity wiped out by a modest decline in real estate prices. Plus, simply stated, the more money you borrow, the greater your longer term risk in being capable of repaying the entire amount.
4. Shop at your home bank first.
Your mortgage lender may offer you a discount since you’re already a customer. They also have most of your records on file already, which means the application process is typically easier and faster. You should still get quotes from at least two other lenders, though, starting with a credit union or local bank. The convenience advantages of staying with your existing lender do not necessarily outweigh other better deals in the mortgage market.
5. Stay away from balloon HELOCs.
Home Equity Lines of Credit have a set term, typically 10 years, where you must repay both interest and principal on what you borrow. However watch out for balloon HELOCs that offer seemingly low-priced, interest-only payments. Your monthly payments will be lower, but you’ll wind up owing the entire remaining principal in a lump sum once the line of credit case comes due. In the worst case of such a scenario, if you can’t repay or refinance, you may have to sell your home.
Aarp Reverse Mortgage Counseling – What you Can Expect
Reverse mortgages have really started to become popular among senior homeowners today. They are helping to supplement the incomes of retirees all over and the trend is only going to continue to grow in the coming years.
To help protect people in applying for a reverse mortgage, the government requires every applicant to take a credit counseling class before any loan can be processed. One of the best ways to get this required counseling is through AARP. Here’s a look at what you can expect with AARP reverse mortgage counseling.
With nearly 80% of all seniors being a member of AARP, there is little wonder why AARP reverse mortgage counseling is by far and away the most popular. It’s also offered free of charge to any current member.
You may be thinking that reverse mortgage credit counseling is just a waste of time and more government red tape to go through, but the truth is that this type of counseling can not only help you understand more about reverse mortgages, but also help you make the right decision in moving forward.
AARP will go through all the details about a reverse mortgage and how the loan process works. They will go over all of your options that pertain to your individual situation so you know if you’re making the best choice. You may even discover through this process that a reverse mortgage loan isn’t the best option for you.
The counselor will discuss all the benefit options with you, as well as how this type of loan may affect other benefits you are receiving currently.
You’ll have a better understanding of taxes and your estate through AARP reverse mortgage counseling and how it can affect your heirs in the future.
AARP is not your only option when it comes to reverse mortgage counseling. There are many other services available, but with that said, you won’t go wrong with AARP for this type of loan counseling. When finished you will know you are making the right decision in applying for a reverse mortgage.
Home Equity Loans vs Home Equity Line Of Credit – Which Option Should You Choose?
Tapping into your home equity loans qualifies you for low rates with the potential benefit of tax write offs. Lenders have developed a number of financing solutions for you, each with their own pros and cons. Home equity loans provide low rates with some closing costs. On the other hand, a home equity line of credit waives closing costs and application fees for flexible lending amounts at slightly higher rates.
Benefits Of A Home Equity Loan
For those wanting to borrow a large amount for several years, a home equity loan provides the cheapest financing. By paying closing costs, you can lock in a low fixed or adjustable rate. You also can select terms that help you get you a reasonable monthly payment.
Home equity loans usually don’t have any limit balances, early payment, or annual fees. Structured like a regular mortgages, interest is primarily paid at the beginning of the loan period.
Benefits Of A Home Equity Line Of Credit
With a home equity line of credit you can borrow amounts when you need to with an issued credit card. With a predetermined credit limit, you have flexibility of when you can draw on funds. So you can pay off the balance one month, and then borrow a thousand the next.
Interest is only paid on the amount you borrow. Usually, the minimum payment is only the interest charged for that month. Most lenders also offer the option of converting your line of credit into a second mortgage when you are ready to make regular payments.
A line of credit doesn’t usually have any application fees. But there may be fees for carry a minimum balance or closing the account early.
Choosing The Right Equity Financing
Home equity loans are designed for large lump sum payments, used to pay off credit card debt or pay for a remodel project. Terms extend for several years to make the loan payments manageable.
Home equity line of credit is best for short term financing. Interest payments can be kept to a minimum by paying off balances early. Opening a line of credit also gives you the option of available credit without having to pay large applications fees.
No matter which type of financing you settle on, make sure you compare several lenders to get the best deal on rates and fees.
