McCormick Ranch Mortgage Advice

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Renting vs. Buying - Which is Best for You?
If you are currently renting, you need to know about the possible advantages of home ownership.

Compare the cost of owning and renting the same home. This is simple enough to do. Just take the monthly mortgage and other housing costs and compare it with the cost of renting that same property. Remember to figure the tax savings by taking the cost of the mortgage payment plus property taxes and multiplying that by your tax rate. This will give you a fairly good idea of your tax savings each month. Subtract those savings from your monthly housing costs if you were buying and compare that with the rental rate. If they are very close in monthly expense it is usually a good value to buy.

This can also be a good way to compare the current housing market. It will tell you if the current housing is a fair value, over priced or under priced. Remember, in some very desirable areas it will almost always cost more to buy then to rent. If the additional expense is more then 20 to 30% you should be cautious. Be particularly cautious if you plan on moving again in the next 3 to 5 years.

The Advantages of Home Ownership

It should cost you less to own a home then to rent. There is a fairly simple calculation that will tell you this:

Take your monthly rent multiplied by 200 = purchase price of home

($___________rent per month X 200 = $_________________ )

Example: $900 X 200 = $180,000

In this example, the payment on a $180,000 home would be comparable to a $900 monthly rental payment.

In addition to the current cost of rent vs. purchase, you must also take into consideration the future cost. As a renter you are exposed to future rent increases. It is reasonable to expect an annual increase of 4% per year to your rent.

There are many advantages to home ownership. The value of a home usually increases during the years that you are paying your loan down. This increase in equity is building up the wealth you accumulate in your home. Even without this expected increase in value, paying on a mortgage over 30 years can guarantee that you will own your home free and clear.

Would Refinancing Be Worth It?

Refinancing can be worth while, but it does not make good financial sense for everyone. A general rule is that refinancing becomes worth your while if the current interest rate on your mortgage is at least two percentage points higher than the prevailing market rate. This figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings.

There are other considerations, too. Such as how long you plan to stay in the house. Most sources say it takes at least three years to realize fully the savings from a lower interest rate, given the costs of the refinancing. (Depending on your loan amount and the particular circumstances, however, you might choose to refinance a loan that is only 1.5 percentage points higher then the current rate. You may even find you could recoup the refinancing costs in a shorter time.)

Refinancing Can be a Good Idea for Homeowners Who:

Want to take advantage of lower rates. This is a good idea only if you intend to stay in the house long enough to make the additional fees worthwhile.
• Have an adjustable rate mortgage (ARM) and want a fixed-rate loan, to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan.
• Want to convert to an ARM with a lower interest rate or more protective features (such as a better rate and payment caps) than the ARM they currently have.
• Want to build up equity more quickly by converting to a loan with a shorter term.
• Want to draw on the equity built up in their house to get cash for a major purchase or for their children's education.
If you decide that refinancing is not worth the costs, ask your lender whether you may be able to obtain all or some of the new terms you want by agreeing to a modification of your existing loan.

What Are The Costs of Refinancing?

The fees described below are the charges that you'll most likely encounter in refinancing.

Title Search and Title Insurance
This charge will cover the cost of examining the public record to confirm ownership of the property. It also covers the cost of a policy, usually issued by a title insurance company, that insures the policy holder in a specific amount for any loss caused by discrepancies in the title to the property. Be sure to ask the company carrying the present policy if it can re-issue your policy at a re-issue rate. You could save up to 70 percent of what it would cost you for a new policy.

Lender's Attorney's Review Fees
The lender will usually charge you for fees paid to the lawyer or company that conducts the closing for the lender. Settlements are conducted by lending institutions, title insurance companies, escrow companies, real estate brokers, and attorneys for the buyer and seller. In most situations, the person conducting the settlement is providing a service to the lender. You may want to retain your own attorney to represent you at all stages of the transaction, including settlement.

Loan Origination Fees and Discount Points
The origination fee is charged for the lender's work in evaluating and preparing your mortgage loan. Discount points are prepaid finance charges imposed by the lender at closing to increase the lender's yield beyond the stated interest rate on the mortgage note. One point equals one percent of the loan amount. For example, one point on a $100,000 loan would be $1,000. In some cases, the points you pay can be financed by adding them to the loan amount. The total number of points a lender charges will depend on market conditions and the interest rate to be charged.

Appraisal Fee
This fee pays for an appraisal which is a supportable and defensible estimate or opinion of the value of the property.

Prepayment Penalty
A prepayment penalty on your present mortgage could be the greatest determent to refinancing. The practice of charging money for an early pay-off of the existing mortgage loan varies be state, type of lender, and type of loan. Prepayment penalties are forbidden on various loans including loans from federally chartered credit unions, FHA and VA loans, and some other home-purchase loans. The mortgage documents for your existing loan will state if there is a penalty for prepayment. In some loans, you may be charged interest for the full month in which your prepay your loan.

Depending on the type of loan you have and other factors, another major expense you might face is the fee for a VA loan guarantee, FHA mortgage insurance, or private mortgage insurance. There are a few other closing costs in addition to these.

In conclusion, a homeowner should plan on paying an average of 3 to 6 percent of the outstanding principal in refinancing costs, plus any prepayment penalties and costs of paying off any second mortgage that may exist. One way of saving on some of these costs is to check first with the lender who holds your current mortgage. The lender may be willing to waive some of them, especially if the work relating to the mortgage closing is still current. This could include the fees for the title search, surveys, inspections, and so on.

How Large A Mortgage Can I Get?

That depends upon your income and the cost of your new house. Lenders use certain guidelines to determine the mortgage amount they will lend any one home buyer. The two guidelines used are housing expenses and long term debt. Lenders generally say that housing expenses (including mortgage payments, insurance, taxes and special assessments) should not exceed 25 percent to 28 percent of the homeowner's gross monthly income. For Federal Housing Administration (FHA) loans, this figure is not to exceed 29 percent of the home buyer's gross monthly income. With loan guaranteed by the Department of Veteran's Affairs (VA), lenders measure prospective home buyers with "Residual Income," or the monthly income minus expenses. The remainder is then measured against geographical and family size data to qualify the borrower.
* FHA Loans
  o Housing expenses = 29% of gross monthly income
  o Housing Expenses Plus Long-Term Debt = 41% of gross monthly income
* VA Loans
  o Housing Expenses Plus Long-Term Debt = 41% of gross monthly income
  o Residual Income = Varies by location and family size
* Conventional Loans
  o Housing Expenses = 25% - 28% of gross monthly income
  o Housing Expenses Plus Long-Term Debt = 33% - 36% of gross monthly income

Lenders usually define long-term debt as monthly expenses extending more than 10 months into the future. These expenses should not exceed 33 percent to 36 percent of the homeowner's gross monthly income.Your lender will compute these figures for you when you discuss the mortgage you want.

What Types Of Loans Are Available?

Although you may see many different types advertised, they all belong to two families: mortgages that carry fixed interest rates, and those whose rates change during the course of the loan, on a periodic schedule mutually agreed upon by you and your lender. This article does, however, discuss some new loans who are really "cousins" to each family - convertible mortgages.

Fixed Rate Mortgages

You are probably familiar with a fixed-rate mortgage. Your parents more than likely had one, as did their parent before them. The major advantage of fixed rate mortgages is that they present predictable housing costs for the life of the loan. Some fixed-rate mortgages you will probably hear about are:

* 30-year fixed-rate mortgages
* 15-year fixed-rate mortgages
* "Convertible" mortgages
When people thought of a mortgage 10 to 50 years ago, they thought of a 30-year fixed-rate mortgage. This traditional favorite is not the only choice nowadays because volatile financial times created a whole new range of selections. However, the 30-year fixed-rate mortgage may still be the best mortgage for your circumstances. It offers the lowest monthly payments of fixed-rate loans, while providing for a never- changing monthly payment schedule. Some lenders offer 20,25, and even 40-year term mortgages as well. Remember, the longer the term of the loan, the more total interest you will pay.

The 15-year fixed-rate mortgage allows homeowners to own their homes free and clear in half the time and for less than half the total interest costs of the traditional 30-year loan. The loan's term is shortened by the 10 percent to 15 percent higher monthly payments. Some home buyers prefer this mortgage because it allows them to own their home before their children start college. Others prefer it because they will own their home free and clear before retirement and probable declines in income.

Mortgages That Change

Some newer mortgages afford home buyers some the best qualities of the fixed-rate and adjustable rate mortgages. One new type of loan, often called a Two-Step or Premier Mortgage, gives homeowners the predictability of a fixed- rate and adjustable rate mortgage for a certain time, most often seven or 10 years, and then the interest rate is adjusted to fit market conditions at that time. The main advantage associated with this type of loan is that home buyers often get a slightly lower than market rate to begin with. The main disadvantage is that they may see their interest rate go up by as much as six percentage points at the end of the seven-year period. The lender may also reserve the option to call the loan due with 30 days notice at that time, making this loan similar to a balloon mortgage in some cases.

Lenders offer this type of loan in part because research indicates that many home buyers remain in the home for seven to 10 years before moving. For this type of home buyer, the Two-Step loan presents an excellent way of getting a fixed-rate loan at a better than market price for a fixed period of time.

Another type of mortgage that is becoming popular is a Lender Buydown, where the home buyer gets an initially discounted rate and gradually increases to an agreed-upon fixed rate over a matter of three years. For example: When the market rate is 10 percent, the fixed rate for the mortgage is set at about 10.5 percent, but the home buyer makes monthly payments based on a first year rate of 8.5 percent. The second year the rate goes up to 9.5 percent, and for the third year through the remaining life of the loan, the rate is calculated at 10.5 percent. A second type of lender buy-down, called a Compressed Buydown, works the same way, but with the interest rate changing every six months instead of on a yearly basis.

The Lender Buydown gives consumers the advantage of lower initial monthly payments for the first two years of the loan when extra money may be needed for furnishings and, secondly, the advantage of knowing that, although the interest rate does change during the first three years of the loan, the interest is fixed from the third year on.

Convertible mortgages offer today's home buyer the option to change the loan's interest rate after some period of time or some specified movement in interest rates.

Convertible fixed-rate mortgages are often referred to as the Reduction Option Loan (ROLE) or, in some locations, the Reducing Interest Loan (RIL), or Mortgage (RIM). This type of loan offers homeowners the option of getting a loan, under the right conditions, can be adjusted to a lower interest rate with a payment of $100 or $200 or so and a small loan amount-based fee, sometimes as little as one-fourth of a percentage point. These conditions usually are a prescribed movement in rates-typically two percent below the initial- during a set time limit-between months 13 and 59, for example.

On a 30-year fixed-rate mortgage with a reduction option, the home buyer pays an extra one-fourth to three-eighths of a percentage point in the interest rate on the mortgage plus a quarter to three-eighths of 1 percent of the loan amount (points) at the time of closing. This allows the homeowners to adjust the interest rate on the loan without having to go through a refinancing, which could cost up to 5 percent or 6 percent of the loan amount, if the rates are right during the prescribed time limit.

On an $80,000 loan, this means that you could reduce the interest rate on your loan from, say, 10.5 percent to 8.5 percent, and take advantage of the low rates for the rest of the loan term for $150 instead of up to $4,800 , if the rates dropped to that point during your "window of opportunity" - months 13 through 59. Some homeowners may find the ROL a good "insurance policy" against the high costs of refinancing. Others may want the flexibility that refinancing offers - namely the ability to draw on built-up equity- that is not available with ROLs. The decision is up to you.

Convertible Adjustable Rate Mortgages (CARMs) are another loan product on today's market. It works like any other ARM, but it offers homeowners a distinct advantage-it allows them to turn their ARM into a fixed-rate mortgage after a set period (usually during the second through fifth years of the loan).

A product developed by the Federal National Mortgage Association (Fannie Mae-FNMA), which buys mortgages from lenders, allows the homeowner to convert an ARM to either a 15 or 30 year fixed-rate mortgage for a fee of 1 percent of the original loan plus $250, as compared to the 3 percent to 6 percent costs of refinancing. Say, for instance, that you got your convertible ARM at an initial interest rate of 10.0 percent, and after a year or so, rates had dropped to 8.0 percent. For the smaller conversion fee, you could adjust your mortgage to either a 15 or 30 year fixed-rate loan at a new rate that would be about one-half percent higher than the going market rate, or 8.5 percent. There are other variations on this loan available from lenders across the country. Home buyers who want the low initial rate of an ARM, and the option and peace of mind of a fixed mortgage should rates drop, can now have it both ways.

Adjustable Rate Mortgages

Adjustable Rate Mortgages (ARMs) have become one of the most popular and effective tools for helping some prospective home buyers achieve their dream of home ownership. Developed during a time of high interest rates that kept many people out of the housing market, the ARM offers lower initial rates by sharing the future risk of higher rates between borrower and lender.

There are several things to compare when looking at different ARM products. If you are thinking about getting an adjustable rate mortgage, make sure you inform yourself on how they adjust and what it is based on.

One of the best things to use for a good comparison is the start rate. A low start rate is always nice to have. Just make sure you are looking at the whole picture because that nice low rate wont stay there for very long. They usually adjust every 6 months or every year.

ARMs can be an excellent choice of financing under certain conditions, such as rising income expectations, high interest rates, and short-term home ownership. Because payments and interest rates can increase, either steadily or irregularly, home buyers considering this kind of mortgage need their income to keep up with all possible rate and/or payment changes. Each ARM has four basic components:

* Initial interest rate, which is typically one to three percentage points lower than that of most fixed-rate mortgages. Lower interest rates also make ARMs somewhat easier to qualify for. The initial interest rate is tied to certain economic indicators that dictate in part what the monthly payments will be.
* Adjustment interval, the time between changes in the interest rate and/or monthly payment will be.
* Index, against which lenders measure the difference between what they are making on their investment in the mortgage and what they could be making on other types of investments. The most popular index is based on the rate of return on a one- year Treasury bill (also called T-bill).
* Margin, the additional amount the lender adds to the index to establish the adjusted interest rate on an ARM. The margin is usually 1.5 percent to 2.5 percent.
It is the index plus the margin that will determine what the interest rate will eventually be.

Comparing Rates

When you call around to different mortgage lenders, you might find one lender quoting you an interest rate of 7% for a 30 year fixed rate, while another lender quotes you a rate of 6.75%. If you automatically jump at the lower rate of the two, it could end up costing a lot more money.

Remember, an interest rate quote always goes along with points to be paid on the loan. A lender can quote you varying interest rates, and almost always the lower rate has the higher points.

Points are charged by the lender as a way to pay for the expense and work associated with obtaining you a mortgage loan. When comparing rates it is always important to also calculate the points involved.

One way to do this is to calculate the difference between the payment for the 7% loan and the 6.75% loan. Now you know how much you would save each month if you took the lower interest rate.

Next, compare the points. A point is 1% of the loan amount. So if your loan is $100,000 one point would be $1,000. Lets say the interest rate of 7% is for a one point loan or $1,000. Maybe the points for the 6.75% loan are 1.50% or $1500. You will then be paying $500 more in points for the lower rate. If the difference in payment is $33.23 per month, how long will it take to make up for paying the extra $500? If you divide $500 (the difference in the cost of the points) by $33.23 (the monthly savings) you will get 15.05. It will take 15 months to break even. After 15 months you will actually be saving money. If you plan on keeping this house for a long period of time and staying in this mortgage you will be saving a lot of money over the life of the loan. After the first 15 months you will save $398.76 per year if you take the lower interest rate.

Also consider the tax benefits. Points paid on the purchase of a home are tax deductible. You can claim them as an itemized expense on schedule A of IRS form 1040.

If you have the cash, and will live in the home for a long period of time, you will want the lowest interest rate you can get. Paying the extra points required to get the lower interest rate can be a good idea if you work out the cost and the months of lower payments required to make this cost up.

If you are strapped for cash and can come up with the down payment and minimal closing costs there wont be a lot of money to pay points. If you plan on living in the home a short period of time, paying less in closing costs and a little more each month makes good sense.

If someone quotes you a no point loan, dont automatically think you are getting a deal. This is also true of a no point - no fee loan, where you do not pay any fees at all for the loan. Remember the rates/points tradeoff. You dont get something for nothing. A no point loan may make sense if you have very little funds available for closing costs. You will also find that homeowners who refinance over and over again like to have a no point loan. This way they can refinance into another interest rate whenever rates decline and not be concerned with the added expense of paying points to do this. They still will not be receiving the best rate available, but it can still work to their advantage if they think rates will be going even lower and will want to refinance again, or will not be staying in this home that much longer anyway.

One way to evaluate rates, however, is by examining the Annual Percentage Rate (APR). The APR can help you compare different types of mortgages. It indicates the "effective rate of interest" paid per year. The figure includes discount points and other charges and spreads them out over the life of the loan.

By law, the APR must always be disclosed to you within three days after applying for a loan. The APR is the effective interest rate for loans that are repaid over their full term. The APR calculation assumes you will be keeping your loan for its full term. However, most people sell or refinance their loan within 6 to 12 years. If a $100,000 loan were repaid after 6 years rather then the usual 30, the effective interest rate would be 8.66%; not the 8.32% APR you would be quoted. A fairly accurate way to estimate the APR for comparison is:

Effective interest rate = quoted rate + (number of points / 6) If you plan to stay only 4 to 6 years, divide the points by 4. If you plan to stay for 1 to 3 years, divide the points by the number of years.

While the APR provides you with a common point for comparison, look at the whole product before deciding which mortgage to get. Pick the one with the rate, payment schedule and other terms that suit your situation best.

To compare costs when shopping for loans ask lenders to quote a rate based on the same points (a one-point loan is good for comparison). That way you can generally see which lender has the better rate. Dont forget to compare the APR also, to ensure the lender with the better rate/point quote isnt adding on additional fees. Always ask a lender whose loan you are considering to provide you with an estimated breakdown of closing costs. That way you can compare more accurately.