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CONFIRMING YOUR MORTGAGE LOAN BALANCE IS A YEARLY TASK

Have you ever wondered whether your lender has properly calculated your outstanding loan balance. All too often, we take for granted the mortgage loan balances given us by our lender, and never bother to check the figures ourselves. When we go to sell our house, the excitement of the settlement process often makes us overlook an important issue: was the loan payoff statement provided by our lender accurate?

Different lenders have different computer programs. However, at the end of each year, a mortgage lender is obligated to provide all borrowers with a statement indicating how much mortgage interest was paid during the previous year, and — if taxes were collected in escrow — how much was paid for the real estate taxes on the property.

Some lenders provide a running monthly statement, showing the old loan balance, the amount of the payment broken down into interest and principal, and the new loan balance after crediting the principal payment. Keep in mind that when you make a mortgage payment to your lender, interest is calculated first on the then-outstanding balance, and the difference goes toward reducing principal.

Let’s look at this example. You borrow $100,000 at 4 percent interest, to be amortized over thirty years. The computer — or an amortization program — tells us that the monthly payment required to fully pay off (amortize) the loan over a full 30 year period is $477.43. If we do some basic calculations, the first payment consists of $ 333.33 for interest and only $144.10 for principal. It should be noted that for the first seven years, you will be paying a lot more interest than will be credited toward the principal balance.

Thus, our example looks like this for the first two payments::

Mortgage Chart #1

Interest is always calculated on the then outstanding balance for the previous month, which is why the interest goes down (ever so slowly at first) and the principal goes up (ever so slowly).

If you did not make any extra payments over the life of your loan, these calculations can be done quickly — either by hand or preferably by using a computerized amortization program. However, if you have made a larger monthly payment, then you have to do the numbers. Let us further assume that in the third and fourth month, you decide to make a payment of $1,000, instead of the regular payment. The next two month’s calculation would look like this:

mortgage Chart#2

As can be clearly seen, if you make a larger payment every month, you will significantly reduce the length of your loan. In fact, if you make one extra monthly payment per year, you will reduce a 30 year loan down to approximately 22 years. And I recommend you spread the extra payments over the 12 month period, rather than making one lump sum at the end of the year.

confirm mortgage

If you decide to make these extra principal payments, make sure that you clearly notify your lender each time that you are making such extra payments. Write “Extra Principal, $___” on both the check and the mortgage statement which you send in to your lender.

If you do not have access to a computer, the math calculations — while easy — can be time consuming. Thus, each and every year, when you get your year end statement, you should spend a few minutes doing the calculations for the previous year, so as to confirm that the numbers are correct.

If you are having trouble reconciling your numbers with those provided by your lender, you should immediately request a payment history statement from your lender. At least once a year, your lender should be able to provide this to you — free of charge. Examine the statement carefully; make sure you have not been improperly charged late fees or other similar charges. Make sure that any extra payments you may have made during the previous year have been properly credited toward your principal balance.

Lenders and their computers are not always correct. But only you can confirm.

Position Realty
Office: 480-213-5251

THE FIVE BIGGEST MORTGAGE MISTAKES YOU CAN MAKE

For most buyers, the mortgage is the largest monthly expense they will have. Yet most borrowers will do little to no preparation, negotiation, or shopping to get the best deal. And they end up paying much more for their loans than they need to. You? You’re smarter than that, or you wouldn’t be reading this article. Here are five of the biggest mistakes that can cost you real money.

1. Believing advertised rates are what you’ll pay

Unless you have perfect or near-perfect credit, most advertised rates are out of your league. To get boasting rights on a rate that good, you have to pay part of a point (one percent of the loan amount) a point, or more to get the best rates.

Your lender will go over your credit with a fine-tooth comb to find anything to raise the rate. That includes qualifying you at the beginning of the transaction, and then running your credit again a day or two before you’re supposed to close on the home and loan. If there’s been any change in your debt-to-income ratio, goodbye low mortgage rate.

2. Not comparing lenders

Just like everyone knows two or three real estate agents or more, everyone knows a loan officer or a mortgage broker. A loan officer works for a bank or savings and loan and can only offer you loan packages that the bank has put together. A mortgage broker prequalifies you just like a loan officer, and shops your deal around to various lenders.

Whether you talk to a loan officer or a mortgage broker, you’re going to have to share personal financial information in order to get a realistic rate. Reputable brokers will show you what certain banks and credit unions quoted and you can pick the loan you like best.

If you’d rather do your own shopping, consider talking to a local bank, a national bank, a credit union, and a savings and loan, but remember, unless you give them personal information and permission to run your credit, it’s just talk.

3. Not paying attention to terms

Advertised rates even for those with perfect credit aren’t what you will actually pay. The true cost of the loan is the APR or annual percentage rate, which includes fees from the lender.

Understanding loan terms is harder than shopping for a new mattress. There are so many ways lenders can inch up the fees. A loan origination fee is also called a processing fee. It pays the loan officer or mortgage broker, so this fee can vary widely. You may pay one lender more for an appraisal than another might charge you.

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One lender may charge more for pulling your credit than another. It’s all in your good faith estimate, which you don’t get until you’ve applied for the loan.

All terms are negotiable, so don’t be afraid to ask what a particular fee is for and can it be reduced or eliminated.

4. Waiting for a better rate

It’s great to have bragging rights on a low rate, but you don’t want to lose the home of your dreams over a quarter of a point in interest.

There’s a big picture here you could be missing. No matter what your interest rate is, you’re going to pay thousands of dollars in interest up front before you make any serious gain in equity. If you go all the way to the end of your loan’s term, you’ll pay so much interest that you could have bought the same home two or three times.

Instead of focusing on the percentage rate, work on how quickly you can build equity. Make one extra payment a year. Pay $25, $100, or $500 extra per month and you’ll more than offset the rate you’re paying.

Down the road, if rates drop through the floor, you can refinance, but even that’s not an ideal solution. You’ll pay loan origination fees, title search fees, appraisal fees and so on — enough to equal the closing costs you paid the first time around.

And don’t forget, you’ll start the amortization schedule all over again — with most of your payments going to interest instead of principal.

5. Choosing the wrong type of loan

Many families were hurt post-9/11 when lenders opened the spigots and gave a loan to almost anyone who could sign the paperwork. Suckers bought homes that were too expensive using balloon loans with low teaser rates.

The type of loan you choose should depend on current market conditions and how long you plan to stay in your home, not how much home you want to buy.

Current market conditions favor fixed rates, because rates are rising from all-time lows. Yes, they cost more than hybrid loans or adjustable rate loans, but the base amount is fixed and doesn’t change. Only your taxes and hazard insurance will cost you more over the years.

If you get an adjustable rate mortgage, you are at the mercy of market conditions. While there’s a cap on how high your interest rate can go, it’s still a risk.

If you plan to stay in your home five years or more, get a fixed-rate mortgage. If you plan to sell your home sooner, you’re taking a risk. It takes most borrowers five years just to earn back their original closing costs in equity.

Once you’ve narrowed your choice of lenders, ask them on the same day to give you a quote. If you wait even one day, rates may have changed, so you’re no longer comparing apples to apples.

Position Realty
Office: 480-213-5251

THE MORTGAGE TRICK THAT COULD SAVE YOU $100,000 OR MORE

Should you switch to a 15-year mortgage? If paying off your house is a priority, you’ve obviously considered it. “One of the biggest benefits of a 15-year mortgage term is the ability to quickly pay off your home loan,” said Money Crashers. “This option is perfect if you plan to stay put and don’t want to pay your mortgage for a lengthy period of time.”

But even if you’re not planning to live in your home forever, a 15-year mortgage can be a great way to go because of the money saved. And we’re not talking about pennies. We’re talking hundreds of thousands of dollars.

“The 30-year fixed mortgage is practically an American archetype, the apple pie of financial instruments. It is the path that generations of Americans have taken to first-time home ownership. According to the Mortgage Bankers Association, 86% of people applying for purchase mortgages in February 2015 opted for 30-year loans,” said Investopedia. “But many of those buyers might have been better served if they had opted instead for a 15-year fixed-rate mortgage, the 30-year’s younger, and less popular, sibling. A shorter-term loan means a higher monthly payment, which makes the 15-year mortgage seem less affordable. But, in fact, the shorter term actually makes the loan cheaper on several fronts.”

The savings is substantial:

“Imagine a $300,000 loan, available at 4% for 30 years or at 3.25% for 15 years,” they said. “The combined effect of the faster amortization and the lower interest rate means that borrowing the money for just 15 years would cost $79,441, compared to $215,609 over 30 years, or nearly two-thirds less.”

A woman holding a house with cash and keys on a silver platter.

According to The Mortgage Reports, going with a 15-year mortgage translates to a reduction in “the amount of mortgage interest paid over the loan’s life by $44,000 per $100,000 borrowed as compared to a 30-year loan. For loans at the conforming loan limit of $417,000, then, a homeowner would save $183,000 by using a 15-year mortgage to finance the home instead of using a 30-year one.”

That’s a lot of money. But it’s that higher monthly payment that is often the sticking point for many borrowers. The monthly payment on a 15-year loan will cost more than one that’s double in length for obvious reasons—you’re paying off more money in less time. But the two loan terms do not offer an apples-to-apples comparison because the interest rates for 15-year mortgages tend to be lower.

House-Sold-for-Happy-Family

“15-year-loans are less risky for banks than 30-year loans, and because the money banks use to make shorter-term loans costs them less than the money they use to make longer-term loans, consumers pay a lower interest rate on a 15-year-mortgage — anywhere from a quarter of a percent to a full percent (or point) less,” said Investopedia. “And the government-supported agencies that finance most mortgages impose additional fees, called loan level price adjustments, which make 30-year mortgages more expensive.”

The monthly payment on the 30-yer mortgage referenced above is $1,432. On the 15-year loan, it comes out to $2,108. That steep increase is often a deterrent for borrowers – especially those who are more concerned with their current monthly input and output than potential long-term savings.

Doing it on your own

Of course, a 15-year mortgage isn’t the only way to pay your house off sooner. Making additional principal payments can eat away at your balance without tying you to a higher monthly payment. Even one extra payment per year can make a big difference.

“Making an extra mortgage payment each year (totaling 13 payments in a 12-month period) could reduce a 30-year mortgage loan to approximately 22 years,” said Nationwide.

“The most budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you’ll have paid the equivalent of an extra payment by the end of the year.”

Overpaying also offers a shorter path to an equity position, so when you are ready to sell, you have more equity in your home and are in a greater buying position. And if you do get into a situation where you need cash you can always pull the equity out of your home.

Position Realty
Office: 480-213-5251

APPLYING FOR A MORTGAGE? KNOW YOUR NUMBERS

When you buy a home, it’s all about the numbers. Your mortgage rate is based on your credit scores, debt-to-income, and how much of a down payment you can afford.

Know your credit scores: Your credit scores can fall between 300 and 850. Lenders use these numbers, which are compiled by three credit bureaus and Fair Isaac to give them a quick snapshot of your credit-worthiness.

Lenders are still in a low-risk mood and are requiring fairly high credit scores from borrowers. To qualify for the best mortgage interest rates, such as a benchmark 30-year fixed rate, your credit scores must be approximately 720 or more. To find out what your credit scores are, visit www.annualcreditreport.com, the site where you can get free copies of your credit report and scores.

Know your income–to-debt ratios: To qualify you, lenders use two ratios — income to mortgage debt and income to total debt.

To qualify for a 30-year fixed rate conforming loan that is federally insured (FHA), your income to mortgage debt can be no higher than 29% of your gross annual income. If you make $5000 gross income per month, your house payment, including principal, interest, hazard insurance and property taxes, should be no larger than $1,450.00.

If you’re carrying credit card debt, student loans, or pay child support, your monthly debt service must be counted. To get the income to total debt ratio, multiply your monthly income by 41%. If you gross $5000 per month, your total debt -including your house payment – can be no larger than $2050.00. That means to qualify for a $1450.00 house payment, your other debt payments can be no higher than $600 per month.

Know your down payment: For most loans, your credit scores affect down payment requirements. If you have a high credit score, you can get an FHA-guaranteed loan with only 3.5% down, but if your scores are low, you may be required to put as much as 10% down. . FHA loans with less than 20 percent down require mortgage insurance that will not be discharged unless the home is refinanced or sold.

Conventional loans are sold by banks as securities to Fannie Mae and Freddie Mac, with the best rates only available to consumers with 20 percent down. You can obtain both FHA or conventional loans with less money down, but expect to pay a mortgage insurance premium, which reduces the risk for the lender.

Where your down payment originates also makes a difference to lenders. If you have saved the money yourself, or it comes from a recent real estate transaction, lenders tend to be more relaxed than if your parents are giving you the money as a gift.

All these numbers have to dovetail and make sense to the lender, so you can comfortably afford the home you want to buy.

Dodd-Frank Act Explained For Real Estate Investors

Some real estate investors and lenders have been sounding the alarm on the upcoming Dodd-Frank changes to seller financing, but most investors will have little to worry over.

As of January 10, 2014, the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd-Frank) went into full effect. The bill was actually signed into law by President Obama in 2010, and since then there has been plenty of buzz around investor circles about its impact and what the Dodd-Frank Act really means. Some real estate investors are worried about some of their seller financing practices and ultimately their assets.

The nearly nine-hundred page bill was drafted, in part, to try and address the many shortcomings of the financial industry, and relevant here is how it modifies mortgage lending practices (including seller-financiers) to try and protect borrowers in the wake of the last housing and financial collapse. Here’s what you will need to know to be in compliance, if you make any mortgage loans or do any seller-financing.

Dodd-Frank Act Explained For Real Estate Investors

Residential and Owner Occupied Only – First and foremost, the new law only applies to homebuyers who intend to occupy the home. If you sell strictly to other investors, the remainder of this article is purely informational and does not apply to you. Similarly, the new law does not apply to commercial deals.

Category 1 – Dodd-Frank distinguishes between individuals, trusts or estates who sell to only one owner-occupant buyer per 1 year and those who sell to more than one buyer per year. For purpose of this article, “Category 1” refers to circumstances where the seller (individual, trust, or estate only) finances one property per year to an owner-occupant. Category 1 does not apply to LLC’s, partnerships, corporations or other legal entities.

Under Category 1, the following applies:

  • Balloon payments are allowed
  • No proof of ability to pay is required
  • Note must be fixed for first (5) years, then may adjust no more than 2 points per year with a cap at no more than 6 points above the original rate (the original rate must be based on prime or an index such as T-bill or something similar).

Category 2 – This category references any individual, trust, or estate who sells to more than one owner-occupant buyer per year, but no more than three (3). It also refers to any LLC, corporation, partnership or other legal entity that sells to 1-3 owner-occupant buyers. To be clear, all legal entities are subject to the law in the same way as an individual seller who sells more than 1 property per year. Sellers in this category must abide by the following:

  • No balloon payments allowed
  • Must determine and show proof of buyer’s ability to pay
  • Allowed to do up to 3 transactions without becoming a MLO (mortgage loan originator) or hiring one (an MLO is the shiny new term for a licensed loan officer).
  • Note must be fixed for first (5) years, then may adjust no more than 2 points per year with a cap at no more than 6 points above the original rate (again, the original rate must be based on the prime rate or a an index like a T-bill or something similar).

Category 3 – For sellers who make more than three home loans (including seller-financed transactions) in one year, the new law requires MLO status or mandates that an MLO be hired to complete all transactions. Sellers in this category, whether individual or legal entities, follow all of the same rules as Category 2 sellers otherwise.

The law does not apply to commercial, multi-family properties with 5 or more units, or vacant lots/land, even if the buyer intends to occupy it as a residence.

Investors who take the time to understand the new changes know there is no need for panic and may, for the most part, continue to operate as they have been. The thing to keep in mind, which has always been the case for scrupulous investors, is professional and fair treatment at all times. Dodd-Frank is simply another approach to consumer protection. Investors can protect themselves and the consumer by simply knowing and following the new rules.

Position Realty
Office: 480-213-5251

How Interest Rates Affect Your Mortgage Payment

National average 30-year fixed rate mortgage interest rates have been under five percent for over five years. They should stay low forever, right?

Economists predict that the soaring economy, improved job outlook and ebullient consumer confidence will cause the Federal Reserve to start raising overnight borrowing rates to banks. Mortgage interest rates will become volatile, and things can change quickly for consumers.

To illustrate changing mortgage interest rates and their impact on your monthly payment, consider what a difference even a small dip and rise in interest rates means to you.

In December 2014, the median-priced home in the U.S. was $209,500, according to the National Association of REALTORS®. If you purchased this home for $200,000 and with 20 percent down and a benchmark fixed-rate mortgage with the December national average commitment rate of 3.86 percent (Freddie Mac), your payment would be $751.01 a month.

You’ll make 360 total payments of $270, 362.59, with $110,362.59 in interest over the term of the loan.

The same home with the same loan on February 5 would be very different. The national average commitment rate is 3.59 percent, your payment is 726.53 and your total payments add up to $261,552.16 and 101,552.16 in interest.

The difference isn’t much — just under $25 a month and $8,810 in round numbers.

But what if interest rates go up as economists predict? The January 2015 outlook by Kiplinger’s predicts that interest rates could go as high as 4.9 percent. What would your monthly payments look like then?

Your monthly payment would be $849.16, for a total of $305,698.59, and interest payments of $145,698.59, a difference of $122.63 monthly and $44,146.43 in interest by the end of the loan.

If you’re interested in buying a home, mortgage rates are unlikely to stay low much longer.

Position Realty
Office: 480-213-5251

Mortgage Rates Remain Near 2013 Lows

Average fixed-rate mortgages are holding near historical lows, but did inch higher this week amid a stronger employment report, Freddie Mac reports in its weekly mortgage market survey.

The economy added 257,000 new jobs in January, following additional increases in December (329,000) and November (423,000).

Despite this week’s uptick in rates, fixed-rate mortgages remain near lows from May 23, 2013, Freddie Mac reports.

Freddie Mac reports the following national averages with mortgage rates for the week ending Feb. 12:

  • 30-year fixed-rate mortgages: averaged 3.69 percent, with an average 0.6 point up from last week’s 3.59 percent average. A year ago, 30-year rates averaged 4.28 percent.
  • 15-year fixed-rate mortgages: averaged 2.99 percent, with an average 0.6 point, rising from last week’s 2.92 percent average. Last year at this time, 15-year rates averaged 3.33 percent.
  • 5-year hybrid adjustable-rate mortgages: averaged 2.97 percent, with an average 0.5 point, up from last week’s 2.82 percent average. A year ago, 5-year ARMs averaged 3.05 percent.
  • 1-year ARMs: averaged 2.42 percent, with an average 0.4 point, also up from last week’s 2.39 percent average. Last year at this time, 1-year ARMs averaged 2.55 percent.

Position Realty
Office: 480-213-5251

How to Use Your Retirement Funds for Real Estate

In this articles, we will examine how one can use the tax-deferred money in their retirement plans to take advantage of real estate investing opportunities. This article explains how you can use your 401(k) funds to diversify your portfolio mix into real property.

The 401(k) Plan

First, it is important to understand some basic features of a 401(k) program. The 401(k) is a subsection of the Profit Sharing Plan section of the Internal Revenue Code. It allows for employee deferrals on a pre-tax basis. Employers may make this type of plan available to their employees by adopting an acceptable format forsuch a plan. There are limits of how much an employee can contribute. Adoption of such a plan also permits the employer to match employee contributions and to make profit sharing contributions (at the employer’s discretion).

An individual employee may contribute up to about 20% of annual compensation, to a maximum of $9,500 per year. Employers may make matching contributions (such as 25 cents on the dollar) up to 8% of total compensation for each employee. Sometimes profit sharing contributions may also be made and, under certain circumstances, one may have a combined package of 401(k), match and profit sharing/money purchase up to $30,000 in a given year. All of this is variable, and one rule does not apply for all cases.

If you are an employer, you can design the features of the plan and provide the investment alternatives for yourself and your employees. If you are an employee (not defined as an employer), you are permitted to operate your deferrals and investments as established by your employer. If some of the features we discuss here are not available to you as an employee, you may wish to discuss them with your employer to determine whether they can be adopted by your 401(k) plan. If your present plan does not permit the flexibility we are about to discuss, remember any plan may be amended and restated to make such capabilities available.

How to Use the 401(k) for Real Estate and Notes

After all this, how can the funds in your 401(k) plan be used for real estate transactions? Once you have found out that your 401(k) plan funds can be used for real self direction, and the trustee of the plan also permits such transactions, the rules are simple:

You can purchase assets into your plan which are not prohibited. Real estate is not prohibited. You may not deal with yourself or members of your family (other than siblings).

All Transactions Must Be Arm’s Length

This means that you can purchase mortgages with your plan assets. This means you may purchase real property in your plan for income purposes. While debt-financed properties may be subject to unrelated business income taxes, in almost all investment cases we are aware of this has not applied.

How It Works

How does it work? First, you find the property or note. These are self-directed plans, and no one is going to give you a list of real property to chose from. It’s all up to you. Remember, you take all of the risks and receive all the benefits. Neither the employer or the plan trustee has any obligation to you in a properly designed plan. Second, you request that the administrator of the plan ask the trustee of the plan to purchase the asset you have selected for your benefit in your plan. All this is performed through written documents. Third, the security interest in the asset you have asked to be purchased is perfected for the benefit of your plan account. Income and expenses are allocated to your account.

How Often Can You Do This?

As often as you like. Some people like to buy distressed properties, fix them up, and then sell them. Others buy discounted notes. Some purchase income streams. There are as many options as one can think of, provided you follow the rules.

Typically, employers will use the completely self-directed option for compliance with 404(c) of the code for self trusteeship safe harbor. Some combine the complete self direction along with a number of mutual fund choices, making complete self direction available on a non-discriminatory basis to all employees. There is a cost associated with this.

As can be imagined, the process of purchasing notes and real property is a labor intensive process; the process of purchasing mutual funds in a daily valuation environment is almost fully automated. Your 401(k) administrator can provide you with the costs. If your administrator doesn’t handle complete self direction, there are some that will. It’s up to you, as an employer or employee to ask. You may be surprised at the answer.

Position Realty
Office: 480-213-5251

How To Pay Off Your Mortgage Faster

42% of Americans Say Their Mortgage Is The Debt They Most Want to Eliminate

A mortgage is often the largest debt that one undertakes and as a result, many homeowners look to pay it off as soon as they can. In addition to reducing overall debt, paying off your mortgage early enables you to purchase a second home or investment property. Try one of these strategies to reduce your mortgage principal.

  • Make bi-weekly mortgage payments
    Bi-weekly payments involve 26 half payments each year instead of the standard 12 full payments. By making 13 full payments each year, you’ll pay down the principal sooner and reduce the amount of interest you’ll pay over the long run.
  • Increase your mortgage payment
    You can also increase the amount you pay towards the principal of the payment each month. Most people have higher incomes a few years into their mortgage than they did when they first took it out. Keeping your payment on par with your increases in income will help reduce your mortgage amount significantly and may also reduce the amount of your monthly payment over time.
  • Make additional payments
    If bi-weekly payments or increase your monthly mortgage payment are not feasible, try to make extra payments when you can. If you have extra money at the end of the year, put it toward your principal.
  • Refinance with a shorter-term mortgage
    If you have a 30-year mortgage, you can refinance the loan for 10, 15, or 20 years. While the payments will be higher each month, you’ll be able to pay the loan off much sooner.

1 in 3 homeowners own their home free and clear.

If you’re considering paying off your mortgage early, consider the following:

  • Do you have the cash available to pay down the debt? If you’re accumulated 6 months in emergency reserves and have paid off other loans and credit cards, your mortgage should be the next debt you target.
  • Will you have enough cash to save for retirement and other financial goals?
  • How long do you plan to stay in the home? It may make more sense to keep your money liquid and not tied up in a home you might sell in a few years.

Position Realty
Office: 480-213-5251

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