Arizona Mortgage Pro

How to gain the benefits of an "Option ARM" without the drawbacks.

2007-06-05T15:26:00.000-07:00

First, let’s go over the basics of an Option ARM (adjustable rate mortgage). Option ARMs go by many different names depending on the lender offering them, but the general idea remains the same, flexibility and extremely low monthly payment options. You’ve probably seen TV commercials or gotten mailers offering too good to be true payments if you are a homeowner (even if you aren’t). These are almost exclusively Option ARM offers. They typically offer at least three payment options; fully amortizing (principal and interest), interest only (just interest), and lowest payment (less than just interest). Generally, people use Option ARMs to control their monthly cash flow because the loans have payment options that are lower than any other type of loan. In a moment I will cover a strategy to accomplish this without the negative aspects of an Option ARM.

Without getting into the technical business of caps/margins/indexes, Option ARMs are able to offer lower payments than other loans because the lowest payment option is negatively amortizing. In other words, you are using a little bit of your equity each month to subsidize your mortgage payment and keep it artificially low for cash flow reasons. If you are knowledgeable about financial matters and have no problem with a little risk, these loans can be a great tool. In my opinion, most people not heavily investing or not in a rapidly appreciating market should avoid them.

The drawbacks of Option ARMs are possible negative amortization, higher rates than comparable conventional mortgages, tougher guidelines for loan approval, and a higher likelihood of prepayment penalties. As I write this in June 2007, the actual rate that the best qualified borrower is paying on an Option ARM is somewhere between 7-8%. Even if the start rate or teaser rate is 1% (I’ve even seen 0.95%), the rate that the borrower is actually paying on their money is over 7%. The difference between the start rate, which determines the payment, and the actual rate, which determines how much interest you pay, over 7% comes out of the equity of the home each month.

So how do we get the benefits of an Option ARM without the drawbacks? The answer is a Mortgage Reserve Fund (MRF). An MRF is simply a checking or savings account that your mortgage payment is drawn from each month. I think savings accounts work better because of the limited accessibility to the money.

The MRF is established when a borrower deposits money from the equity in their home after a refinance. The borrower then automatically pays their mortgage with the MRF each month and deposits the amount they were going to pay to the lender into the MRF account. In other words, rather than having small amounts of equity taken off the top every month by the negatively amortizing loan, the borrower is managing these equity payments themselves. The amount to start the MRF with is determined by multiplying the number of months a borrower wishes to subsidize their mortgage payment by the amount they wish to subsidize every month. For instance, if you wanted to lower your monthly payments by $200 a month for 2 years (suppose you had a child with two years left of college), you would take out $200 x 24 months ($4,800) extra during the refinance process to start your MRF.

In our example, if a borrower was refinancing $100,000 and was considering an Option ARM because it had the option of payments that were $200 lower than a conventional loan, they would simply refinance $104,800 and start a reserve fund to accomplish the same goal, but with some added benefits.

One major benefit of an MRF is that it can be matched with any loan because it happens after the loan process. Another is that it acts as a sort of buffer for your mortgage payment. If you contribute to your MRF fund a little late, it’s ok because your mortgage payment is still automatically drawn from that account and it has extra room built in. Not to mention the fact that you have money handy in the case of an emergency. Lastly, and most importantly, you are able to qualify more easily for a mortgage with lower rates and less chance of a prepayment penalty. You would not be subject to the stricter guidelines and program limitations of Option ARMs because you can choose any program you wish and turn it into something that behaves in the same way as an Option ARM.

Many people would probably argue that it isn’t smart to take equity out of your house because you have to pay interest on money that you aren’t directly using. I believe the difference is negligible because you can use a high interest savings account as you MRF (they are available over 5% currently). On a small amount of money, this difference shouldn’t make a large difference and the benefits far outweigh this drawback. The idea of paying 1% or more less in interest on your entire mortgage balance should convince you that the small amount of negative interest you are paying on the money in your MRF is insignificant.

This concept is fairly advanced as far as mortgages go, so feel free to contact me if you have questions regarding this topic or any other mortgage related concern. If you live in Arizona, I would be happy to help you set up an Mortgage Reserve Fund with your refinance.

Why are documented assets required when closing a mortgage loan and what are seasoned assets?

2007-05-23T11:44:00.000-07:00

With the exception of a few types of mortgages, most lenders will require borrowers to show assets along with their income documentation. Assets as they pertain to a mortgage are sometimes referred to as “reserves.” Reserves are the number of months worth of mortgage payments you have available in assets. For a simplified example, if you are applying for a mortgage that has a total PITI* payment of $1,000 a month and you have $6,000 in your checking account, you have 6 months of reserves.

If you have a strong credit profile, very few, if any, reserves are necessary. If you have a little bit weaker profile (maybe a lower credit score or high loan-to-value ratio), reserves can help you qualify for a mortgage you may not have without them. The reasoning behind reserves is that if something were to happen to the borrower along the lines of a work layoff, serious illness, or accident, the mortgage would still be paid while the unexpected situation sorts itself out.

Assets are shown in a couple of different ways. The most common is to provide bank statements for asset accounts. These assets are usually 401k, checking, savings, IRA, mutual funds, stocks, etc. All pages of the statement must be shown and occasionally more than one month. Most underwriters will accept this method of documentation for assets.

The second way to document assets is called a verification of deposit (VOD). This requires the borrower to provide the mortgage broker or lender with their bank account info (bank and account number). The broker or lender then sends a standard form to the bank where the account is held. The bank generally verifies the amount in the account, average daily balance, and two months worth of balances.

“Seasoned assets” are those that have been in an account for two months or longer (some banks require three months). The reason most banks require seasoning is so that a borrower can’t just put assets (most likely not their own) into an account for the purpose of showing reserves and then remove them. Underwriters want a true picture of a person’s financial situation when approving them for a mortgage.

Certain assets are considered at face value and others are discounted. Liquid assets such as checking, savings, and mutual funds are generally considered at face value meaning if you have $3,000 in your checking account, they will give you $3,000 worth of consideration for those assets. Other assets such as 401ks, IRAs, stocks, bonds, etc. are usually taken at about 70% of face value. The reason for this is that most retirement accounts have penalties (taxes and early liquidation), so they are not worth face value in a crisis. Also, stocks may be worth one thing today and less tomorrow, so they are not usually taken for full value.

As I mentioned before and in other articles, some mortgages either don’t require assets, or they are not verified, meaning you simply how much you have in the bank and the lender takes your word for it. Obviously, this is more risky for the lender, so it can come with higher rates. With a strong credit profile, it may not cost you anything as far as rate or costs.

As always, if you have any questions regarding asset documentation or anything else, please do not hesitate to call or email me for a quick answer.

Arizona Mortgage Pro

Mortgage Closing Costs, how much is too much?

2006-01-04T09:49:00.000-07:00

I'll attempt to give a brief overview of the confusing world of loan closing costs. I'll go over the main three categories of closing costs and what are included in each. In my next post, I'll discuss the monies due at loan closing that are not considered closing costs and why. This post refers to a purchase or refinance loan transaction, not the sale of a home, which incurs different fees.

Closing costs are broken up into three main categories, appraisal fees, lender/broker fees, and title fees. Appraisal fees are the least complicated of the three categories. On the vast majority of loans, there is only one fee for the appraisal. This fee can range based on the size of the house and the type of appraisal ordered. The standard fee for a medium sized owner occupied house in Arizona is roughly $350 right now. Houses with larger square footages require more work and therefore, have higher appraisal costs. Also, investment properties generally have higher fees because lenders require two extra forms included with the appraisal, a rent survey and income statement. The appraisal fee or fees should be in section 800 of a properly filled out Good Faith Estimate. You may pay these fees directly to the lender, but they will eventually be paid to an appraiser for services rendered.

The second category of closing costs consists of lender/broker fees. These are also contained in section 800 of a properly filled out Good Faith Estimate. There are many different lender/broker fees that could be found in this section. If you are paying any points on a loan, they will be in this section. Also, broker fees, credit report fees, loan origination, escrow waiver fees, tax service fees, processing fees, underwriting fees, etc. The basic point of this section of the Good Faith Estimate is to encompass any fees being charged by the broker or lender in a loan transaction (with the exception of the appraisal fee, which also resides in section 800).

The third category of closing costs includes any fees associated with the title company. These fees are included in section 1100 & 1200 on a Good Faith Estimate. They are the fees required by the title insurance agency for the various jobs they perform in closing your loan. Usually, the largest sum of the title fees is for title insurance. The title company researches the history of the title on a property and insures that it provides accurate information to all parties. Another large chunk of the title fees is for the closing or escrow fee. This is the fee charged by a title company to prepare the closing documents for signing, go over the closing documents with the borrower, notarize them, and make sure they are accurate. There may also be other fees included in the title section for smaller items such as endorsements (don't ask), release and tracking fees, recording fees, notary fees, etc.

Those are the main closing costs associated with the vast majority of loans (I haven't seen any others, but that doesn't mean they don't exist). There are other items contained on a Good Faith Estimate, but they are not actually considered "closing costs." I will go over those items in my next post.

I am always available to answer questions on closing costs and/or other mortgage related items. If you have received a Good Faith Estimate from a lender and would like to make sure you are not being over-charged, I will be happy to look it over for you. You can contact me by following the links on the left side of this blog or email me at jmoran@azmortgagepro.com or call me at 602-476-7323.

Conforming Loan Limits Rise Again

2005-12-01T11:06:00.000-07:00

The limits for loans that qualify as conforming have risen again on the heels of rising home prices. The new limit for a 1 unit property is $417,000, effective immediately.

Credit basics

2005-11-10T11:02:00.000-07:00

Credit reports and agencies remain one of life's largest mysteries to most of the population. Hopefully, I can clear up a little bit of the fog that surrounds them here.

What is a credit report? Credit reports are generated by credit reporting agencies. These agencies collect information about a person regarding debts, public records, and credit inquiries. There are three main agencies (Transunion, Equifax, and Experian), which I will discuss at greater length in a minute.

Credit reports contain valuable information for anyone looking to determine how credit worthy or employable a person is. The basic personal information listed is as follows; name, social security number, most recent addresses, and birthdate. The debts are broken out into a separate section and contain the name of the creditor, the account number, the highest limit available, the current balance, the current monthly payment, the term, and most importantly, payment history. The "term" refers to the agreed upon length of time the debt is to be repaid. Credit card terms are referred to as revolving because they have no set timeframe for repayment. The public records section of a credit report lists things such as judgments, property liens, and bankruptcies. The final section of a credit report contains the recent inquiries received by the credit agencies.

What is a credit score? Credit scores are a basic measurement of a person's creditworthiness. They weren't always a part of credit reports. In the past, people were forced to read through an entire report and subjectively decide how credit worthy a person was. The change to the credit score system has made the process of obtaining financing and employment much more efficient (that is not to say it doesn't have it's own flaws).

Credit scores were developed by a company called Fair Isaac Company (FICO) and FICO scores remain the most common measure of a person's ability to repay debt. FICO scores range from 350-850, with the average score being somewhere in the 680 range. Credit scores under 620 are most likely relegated the "subprime" sector (see my June 13th post for more on that). Generally, if you have a score over 780, you are in the highest possible credit bracket as far as lenders are concerned. In the mortgage industry (possibly in others too, though I don't have the experience there), the middle credit score of the three major credit reporting agencies is considered the representative score. In other words, the high and low scores are thrown out and the middle is used to determine creditworthiness. This is to prevent a mistake or flaw in one agency's reporting to irreparably damage a person's ability to obtain credit.

"No Cost" credit reports You have seen them listed everywhere and it is one of the most prevalent types of email you don't want to receive. So what's the catch? If you order your credit report on any website that promises to pull your credit and give you a score and you don't have to pay for it, they will almost always sell your information to solicitors. Prepare yourself for the barrage. As far as I am aware (disclaimer), if you go directly to the three credit bureaus and pay them for your report, your info will not be sold to third parties.

Who are the three credit reporting agencies and how can I get in touch with them? As discussed above, the three major credit reporting agencies are Transunion, Equifax, and Experian. You will notice that there are links to each agency's website. If you would like to get a copy of your report to check for accuracy, these are the sources I would recommend. The $30 you spend to get the info straight from the source may save you hours of headaches from solicitors.

Those are the basics of credit reports. I will write another article in the future discussing late payments, inquiries, "good" debt, and other in depth issues concerning credit.

Conforming Loan Limit Increase for Mortgages

2005-11-07T10:34:00.000-07:00

Recently, several lenders (though not all just yet) have increased their conforming loan limits to $400,000, up from $359,650. This change will likely spread to all lenders in the near future, but it is available now.

Conforming loan limit refers to the highest loan amount available without crossing into the "jumbo" loan category. Conforming rates are generally the lowest fixed rates available. This increase is probably a reaction to the rapidly rising cost of real estate.

Arizona Mortgage Pro

The Prime Rate Continues to Rise

2005-07-04T11:17:00.000-07:00

The Prime Rate (as published in the Wall Street Journal) is up another .25% to 6.25%. This marks the 10th straight quarter point increase since June '03.

How residential appraisal values are determined

2005-06-23T11:16:00.000-07:00

I hear the following statement at least five times a day, "My neighbor's house is listed for X and mine's bigger, so my house must be worth Y." Replace X and Y with values that make sense in your neighborhood and you've probably heard it too. For this reason, I am going to go over the basics of how a residential appraiser finds value (FYI-this is not how income producing properties are appraised, but that's another subject for another blog).

Residential appraisals are based on three or more closely comparable sales. A common mistake borrowers make is comparing their home with a home that is listed for sale on the market. Just because someone lists a home for $1,000,000, doesn't mean that's what its worth or that someone would pay that amount for it. This is the first inconsistency with the statement above. Appraisers will check the recent sales in a neighborhood (usually they try to stay within one mile if possible). Pending sales may be an optional addition to an appraisal for a little extra support, but they cannot be used a true comp unless they are closed and ownership has changed hands.

Another common mistake people will make in trying to determine their own home value is ignoring comps that are lower. An appraiser can't simply ignore comparable sales that are lower than the target value, they have to take into account any home that is similar to the subject property. Its easy to search through recent sales and pick and choose a home here or there that would support a home's higher value, but the underwriters who approve loans have access to the same recent sales list. If you ignore comps, the underwriter will throw out or cut the value on an appraisal, making it virtually useless. Appraisers who do this repeatedly will get themselves blackballed from lenders and probably out of business shortly thereafter.

Now we know what appraisers use to determine value, how do they come up with the exact figure? An appraiser will line up the subject property and the three closest comparable sales and adjust them for positive and negative attributes. For instance, if the subject property has more square footage than one of the comps, that property will be adjusted downward. Other attributes that may cause increases and decreases in the home comparisons are # of bedrooms, # of bathrooms, lot location, views, lot size, garage size, upgrades to kitchen and baths, fireplaces, and on and on. Many of these items are quantifiable such as number of bedrooms and bathrooms. Others are more subjective like views and lot location. After putting all of these variables together for each comparable property versus the subject property, the appraiser comes up with adjusted values for the comps based on the sales price plus or minus the adjustments. It is then just a matter of averaging the values and coming up with a final value figure.

So you can see, the time the appraiser is actually inspecting the property is only a fraction of the time spent on each appraisal. Also, the value is not affected in any way by the listed sales price of homes in your neighborhood. The appraiser I use whenever possible in the Phoenix area is Appraisal-Tek (Trust-Experience-Knowledge). If you are in need of an appraisal, I highly recommend you look them up here:

www.appraisaltek.com

Please feel free to contact me with any questions or comments you may have on this post, blog, or real estate related issues:

Arizona Mortgage Pro

What does "subprime" mean when it comes to mortgages?

2005-06-13T15:01:00.000-07:00

The term subprime refers to any loan which would not fall into the category of an A or A- ("prime" mortgages). A and A- (A- refers to just outside the scope of the best credit situation) loans are basically for those people who have good or excellent credit, no judgments or liens, and gainful employment for the past two years (not in all situations, but usually). The loans that are pruchased on the secondary market by mortgage giants Fannie Mae & Freddie Mac are generally referred to as A paper. These are usually the best rates available and most often the ones you will see advertised online, in print, and on tv.

However, not everyone fits into the neat little credit situation that A paper requires. These loan are referred to as subprime or B, C, & D paper. This is where people with bruised or bad credit will likely find themselves getting a loan. The terms are generally a little worse and many of the loans do contain prepayment penalties. That doesn't mean that these loans can't be beneficial. For someone who has had extenuating circumstances, a subprime loan can offer them a period of time to stay in their home and repair their credit. This is also the main reason most subprime loans contain short terms. Most subprime loans will be a 2 year ARM with the thinking that a borrower will use those two years to clean up the issues that forced them to obtain a subprime mortgage. Life can really throw some unfortunate situations at people, so sometimes these loans are really necessary after bankruptcy, job loss or medical problems. Certain banks specialize in this type of lending and most reputable brokers or bankers will have a wide range of programs to suit any credit situation and help any borrower that walks through the door. Click the links on the left to find one (shameless plug).

Second mortgages as a way to avoid private mortgage insurance

2005-05-30T13:46:00.000-07:00

If you have less than 20% to put down or have less than 20% equity in your house, you have probably heard of the idea of two mortgages on your home. For those who have not, here's a simple explanation of why they are such popular options.

Let me begin by explaining the idea behind private mortgage insurance (PMI). Foreclosures may result in a bank selling a property for less than 100% of the value, sometimes as low as 80%. For this reason, if a bank has more than 80% of the value of a home borrowed on the property, it wants some sort of protection for the rest of the capital invested. That's where PMI comes in. It's insurance for the bank on the money they have invested above 80% loan-to-value (LTV). Therefore, the only benefit that a borrower receives from PMI is that they were able to get into a property for less than the formerly typical 20% down payment. One important note on PMI is that it is not tax deductible.

Some creative minds came up with the idea that borrowers could have one mortgage for 80% and take out a second mortgage for the rest of down payment they were unable to come up with. For example, if a borrower had 10% to put down, meaning they need 90% worth of mortgages, they could take out a first mortgage for 80% and a second mortgage for 10%. This would mean that the first mortgage could be at a low rate and avoid PMI (its still within the 80% threshold) and the second mortgage would be at a little higher rate, also without PMI. This mortgage situation is commonly referred to as an 80/10/10. A loan with zero down is generally called an 80/20 (80%LTV first mortgage and 20% LTV second mortgage). Another common option is an 80/15/5 (80% first mortgage, 15% second mortgage, and 5% down payment from the borrower). This type of loan situation, two mortgages for a purchase or refinance, is generally referred to as a piggyback loan because the second mortgage "piggybacks" the first mortgage.

Why can the bank offer the second mortgage without PMI? Because the second loan is at a higher rate, it is basically self-insuring, meaning that the bank is making enough extra money on these loans to cover the losses it may incur on an occasional foreclosure for less than the bank has invested.

The benefits of a piggyback mortgage are that the payment is usually lower than a loan with PMI and more of a borrower's monthly expenses are tax deductible because the interest on the second loan is usually tax deductible (check with your accountant to make sure this applies to your specific situation). Another benefit may be that a borrower who pays extra on their mortgage each month is able to pay down the principal on the second mortgage (because the rate is higher) faster and keep paying the minimum on the first mortgage with a lower rate.

Yet another rise in the Prime Rate

2005-05-04T14:40:00.000-07:00

As you probably know if you follow my blog, I periodically post when the Wall Street Journal updates the prime rate. As of May 3rd, the new prime rate is up to 6.00%, a 0.25% increase from the last update (March 22nd). This is the 8th straight 0.25% increase in the last 2 years.

What this might mean to any borrower who has a second mortgage that is tied to the prime rate and has some equity in their house, is that it's time to refinance. While the prime rate is still relatively low historically, if you have 20% equity in your home and still have a second mortgage that adjusts when prime does, you may want to refinance your first and second into one loan while interest rates remain low.

Mortgage documentation and the differences between stated income, full doc, and no doc home loans.

2005-04-14T15:37:00.000-07:00

You may have heard of a few of these terms in your search for a home loan. Perhaps you didn't know the options were even available. Few mortgage professionals really take the time to explain the difference between the documentation options on loans and what it means to the average borrower. Let's start with a brief description of the various terms. There are basically 4 different types of documentation levels for mortgages; Full Doc, Stated Income, No Ratio, and No Doc. I've listed them here from the lowest rates and most programs available to the highest rates and fewest programs available.

Full Doc
Fully documented loans are pretty self-explanatory. The borrower supplies all documentation for their assets and income. The income documentation generally consists of W-2s and paystubs for employees and tax returns and year-to-date profit and loss statements for self-employed borrowers. The asset documentation basically involves current statements from any monetary assets (Stocks, bonds, checking, savings, 401k, IRA, etc.). This is the highest level of documentation for mortgages and allows borrowers to receive the best possible rates and programs. It is also the most common financing option, though the margin is narrowing. We'll cover the next most prevalent level of documentation next.

Stated Income
Stated income loans are very aptly named. You basically "state" how much money you make each month and the lender doesn't do any type of verification of this figure. There are three common misconceptions with stated loans.

The first is that you are able to obtain a stated income loan without a job or with less than two years of experience in the same industry*. This is not true. Even though the lender does not verify the actual amount of income you make, they will verify that you are gainfully employed and your length of employment.

The second mistake people make is that they believe that stated income are only available to self-employed borrowers. While this was the case a few years ago (with a few exceptions), stated income loans are now available to borrowers with any type of employment status.

The third common misconception is that you are able to state any amount of income for your job. The amount of income you state must be reasonable in an underwriter's (an underwriter is the person who approves or denies a mortgage) eyes for the position you hold. While this is a very subjective thing, common sense will usually tell you if the amount is unreasonable. For example, everyone is pretty well aware of how much a public school teacher makes (not enough), so stating that you make $15,000 a month teaching fourth grade is probably not going to past an underwriter's desk for approval. Now if your position is sales or commission based, "reasonable" becomes a very tough thing to determine. Some salespeople command very high salaries or commission splits, so it's difficult for someone underwriting the loan to determine how much a person makes.

One last point on stated income loans. There are actually two different types. One is referred to as a Stated Income/Verified Asset (SIVA) loan and the other is a Stated Income/Stated Asset (SISA) loan. Just as they sound, on a SIVA loan, the underwriter will want verified assets and on the SISA loan, the assets will be "stated," just like the income. Now on to the third type of Documentation.

No Ratio
No ratio loans are the same as stated loans, except the borrower does not put any income information on the application at all. Therefore, the lender does not calculate how much debt the borrower can handle. Referred to as a debt ratio, this varies from loan program to loan program. The borrower's employment status is still verified, but no income information is asked for or given between the underwriter or the borrower. This alleviates the problem of people having to claim more than reasonable income for their position. Assets are generally verified with no ratio loan programs. The underwriter has to have something to approve the loan on, right? Wrong, which brings us to our final type of loan.

No Doc
This is the lowest level of loan documentation possible. With this type of loan, the borrower is not asked to provide any income, employment or asset information. This loan is essentially approved with only an appraisal and the borrower's credit (and of course a clean title report). No job or assets are required.

I know what you are thinking, why doesn't everyone do the no doc loan? It seems like a very simple transaction, and it truly is, but it is very limiting as far as loan programs and the rates are not nearly as competitive as the other types of financing. No doc loans are usually best for borrowers with a whole lot of equity in their house (35% or more) or borrowers without any other choice (between jobs, newly self-employed, etc.).

I am always available should you have any questions on documentation or any other aspect of mortgages. You can find my contact information here

*There are some exceptions to the two year employment rule, such as full time students taking jobs immediately out of school.

Why is a loan payoff almost always higher than the current balance?

2005-04-14T15:30:00.000-07:00

Taken from the mortgage FAQs on Arizona Mortgage Pro

The interest on a home mortgage is paid in arrears. This means that you pay interest for each month with the next mortgage payment (meaning you pay the interest for January with the payment on February 1). Therefore, whenever you pay off your loan, you will owe a certain amount of interest to your old bank from the last payment up until the closing. This amount will vary depending on the interest rate of the loan you are paying off and the day you close your new loan or sell your house. A good guess is to add about 75% of your monthly payment on the old loan to the current principal balance of that loan. This should give you a good cushion and be close to the final figure for your payoff amount. The other side of interest in arrears is that when you close on a new loan, you "skip" a payment, meaning that the first of the month passes one time without you paying a mortgage payment. The truth is that between the higher payoff and interest per diem or "prepaid interest" on your new loan, you have already paid those 30 days of interest.

Prime Rate up 0.25% again

2005-03-23T14:36:00.000-07:00

The Prime Rate as publicized in the Wall Street Journal was up 0.25% yesterday to 5.75%, marking the 7th straight rise in the past 2 years. This rate is generally used in the mortgage industry as the index for adjustable rate second mortgages. i will do my best to keep this blog updated with the current rate as reflected in the WSJ.

Interest Only Loans, why are they so popular?

2005-01-04T13:08:00.000-07:00

First let's cover the basics of an interest only mortgage. As the name suggests, you are only required to pay the interest on your loan each month. Interest only loans only behave this way for a fixed period of time (usually, but not always, 5 years). Example: You have a 6% interest only loan for $150,000. Your yearly interest is $9,000 ($150,000 x 6%). Your monthly payment would be $750 ($9,000 yearly interest divided by 12 months). After 5 years of payments, you would still owe $150,000 because you were literally paying "interest only." No part of your monthly payment was going towards principal.

Why choose an interest only loan? First of all, the same payment buys a more valuable house with an interest only loan than it does with a fully amortized (meaning the loan will be paid off over time) loan. By owning a more valuable home, appreciation will be magnified. Or, an interest only mortgage could provide a lower payment for a house of the same value when compared to fully amortized loans. This allows people to pay less monthly and use the extra money for savings, investing, etc. These points are especially important to a real estate investor, but also important to the average homeowner as they become increasingly financially savvy.

Sounds great, why wouldn't I choose an interest only loan? Interest only loans can be more complicated or risky than conventional fully amortized loans, which scares many people. Many times, interest only loans are adjustable rate mortgages and sometimes the fixed portion of the ARM and the fixed period of interest only can be different lengths. Also, when you have an interest only loan for 5 years, you still owe the exact same amount after five years. This can be disheartening to a lot of people. The general rule of thumb is similar to that of ARMs. If you plan on being in your home for an extended period of time (6-7 years and beyond), you may want to go with a fixed product and lock in a low rate for the life of the loan rather than an interest only product. This is not, however, set in stone. Extenuating circumstances may make an interest only loan your best choice, even though you plan on being in your home long term. Example: You cannot afford fully amortized payments on the house of your dreams, but you expect to have a pay increase in a few years. Interest only loans would allow you to get into the house today and refinance in the future with your increased income. It is best to consult a mortgage professional if you are unsure about choosing an interest only mortgage.

Valley housing increase continues unabated

2004-12-28T15:16:00.000-07:00

Valley housing permits continue rapid increase - 2004-11-30 - The Business Journal of Phoenix

Housing permits and sales for existing homes in 2004 are up considerably from 2003. According to the article in the link above from The Business Journal, housing permits are up 29% from this time last year and home resales are up 26%. Also of note, the average price of a new home in Metro Phoenix is $238,651, up from $213,478 last year at the same time. That's a 12% increase in 12 months! The difference in resale of homes from 2003 to 2004 was even higher, up 18% to $174,000.

Those numbers are staggering and the outlook continues to be positive with California housing prices rising and more and more people finding the sun and relatively lower prices of Phoenix inviting.

A Short Guide to Shopping Interest Rates Online

2004-12-21T08:53:00.000-07:00

Many of you may or may not have some experience with comparing interest rates and brokers online. A few words of caution when doing this.

1. Make sure that any lenders you receive rate and fee quotes from are basing their loan quotes on the same loan amount and/or situation. To get the most accurate quote, you should really make a couple of calls.
2. Rates can change by the hour, so if you are comparing a quote from one site on Monday to a quote from another site on Friday, you are comparing apples to oranges. Try to set aside a block of time one day to do some rate shopping for the most accurate results.
3. If you do receive a Good Faith Estimate, be sure to ignore the insurance and tax figures because these factors are not dependent on the financing you choose (i.e. your property taxes are x amount no matter who your mortgage company is and your homeowner's insurance is determined by you).
4. On a purchase you should also ignore the title figures because these are determined by the title company that was most likely chosen by the seller (not always the case, but definitely the norm). If you have title, insurance, and tax figures on a Good Faith Estimate, they are simply for you to get a rough estimate of your closing figures, not for comparison purposes.

To summarize: In order to the best results when interest rate shopping, obtain Good Faith Estimates for your unique situation from a number of different lenders (on the same day) and then compare only the lender charges (section 800) and the rates. If you are planning to be in your home long term, you are looking for the lowest rate. If you are planning on being in your home short term, you are looking for the lowest upfront fees.

Arizona Mortgage Rates

Recent rate and loan limit changes

2004-12-20T10:25:00.000-07:00

Conforming loan limits have just recently been moved up to $359,650. The limit will be in effect for any loans funded after Jan. 1, 2004. Up until then, the limit is $333,700. Conforming loans are those that are bought by Fannie Mae and Freddie Mac. They are generally the lowest interest rates for 30 year Fixed, 15 year Fixed, and 3, 5 or 7 Year ARMs.

Also, the Prime rate recently rose to 5.25%, up from 5.00%. The Prime Rate is published in the Wall Street Journal and is the basis for many consumer and business loans, especially Home Equity Lines of Credit.

Arizona Mortgage Pro

Welcome!

2004-12-20T09:48:00.000-07:00

Hello and welcome to the Arizona Mortgage Pro blog. From time to time I will be posting information and thoughts from the perspective of a loan officer on the lending industry in general and specifically home mortgages in Arizona. Please feel free to leave any questions or comments and I will do my best to respond.

Some quick information about my background. I attended the University of Wisconsin for my education and soon found that my International Relations degree wasn't very helpful in the real world. Shortly thereafter, I moved to New York, NY and began my real estate career. After spending some time in that market, I moved to Chicago, IL for a change of pace and a cost of living decrease (anyone who lives/has lived in Manhattan can sympathize with my decision). While I enjoyed living there and still love Chicago, I really wanted to move somewhere that had a bit more of a resort/vacation feel to it and I knew how hot the real estate market was in Arizona, so I eventually moved here to Scottsdale, AZ. The weather is terrific and I was right about the real estate.

If you have any questions about mortgages or real estate in Arizona, I would be happy to answer them. Here's my contact info:

John Moran
President/Owner
RateChase Mortgage
6615 E Kelton Ln
Scottsdale, AZ 85254
Direct: 602-476-7323
www.azmortgagepro.com

Thanks and I hope you enjoy my blog and find it informative.