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What Is A Hybrid Loan and How It Works

I’ll be the first to admit the real estate and mortgage industries have their very own special word salad. Various terms and words can have different meanings based upon context and the mortgage industry is no different. Enter the term ‘hybrid.’ Yes, it’s alive and well in the industry but for some it can be confusing as it relates to getting a home loan.

I’ll be the first to admit the real estate and mortgage industries have their very own special word salad. Various terms and words can have different meanings based upon context and the mortgage industry is no different. Enter the term ‘hybrid.’ Yes, it’s alive and well in the industry but for some it can be confusing as it relates to getting a home loan.

What’s a hybrid? A hybrid is a combination of one or more characteristics combined into one new entity. Automobiles have hybrids. So does food and agriculture. Pretty much any industry can boast some form of a hybrid. In the mortgage industry, hybrids also abound.

We’ve said before here in this very column that home loan terms fall into two distinct categories: fixed and adjustable. A loan is either fixed, where the interest rate never changes throughout the life of the loan. An adjustable loan is one where the monthly payment can adjust based upon previously established terms. An adjustable rate mortgage, or ARM, doesn’t change ‘willy nilly.’

There are some rules an ARM must follow. Specifically, paying attention to the basic index in which the ARM is tied.
Then there’s the margin.  The margin dictates how much the new rate can become adjustment time. And finally there are rate caps which limit how much the rate can change when it’s due for an adjustment. But we didn’t mention hybrids, did we? So if hybrids are a ‘thing’ where do they fall in the mortgage biz?

A hybrid at its very base is indeed an ARM. So why the hybrid tag? Hybrids used to be a very attractive option when rates were at relative highs. A hybrid starts out at a slightly lower rate compared to similar ARMs.

It’s called a hybrid because there is an initial period where the loan is fixed for a predetermined period. A 5/1 hybrid means the rate is fixed initially for five years and the one indicates when the adjustment can take place after the initial five year period. In this example, the rate may change, after five years, once per year. Most such loans also employ caps when limiting how much the rate can change after the five year period at each adjustment.

So why do some choose a hybrid? The initial rate will be lower compared to current market fixed rates. Further, many may know they’re likely to move before the five year term is up. Personally, I prefer the stability of a fixed. But hybrids can work well in specific, niche circumstances.

Position Realty
Office: 480-213-5251

When Do Mortgage Points Make Sense?


Right now, mortgage rates are rising fast following several years of record lows. This leaves potential homebuyers wondering how they can beat the rates, and one option is buying mortgage points. With mortgage points, you can save money, but they don’t always make sense in every situation.

Mortgage points are a fee you, as a borrower, would pay a lender to reduce your interest rate on a home loan. You’ll hear it referred to as buying down the rate.

Each point you’re buying will cost 1% of your mortgage amount. If you’re getting a $400,000 mortgage, a point would cost $4,000.

Each point will usually lower your rate by 0.25%. One point would reduce your mortgage rate from, let’s say, 6% to 5.75% for the life of your loan.

However, there’s variation in how much every point will lower the rate. How much mortgage points can reduce your interest rate depends on the loan type and the general environment for interest rates.

You can buy more than a point, or you can buy a fraction of a point.

Your points are paid when you close, and you’ll see them listed on your loan estimate document. You receive the loan estimate document after applying for a mortgage, and you’ll also see them on your closing disclosure, which you get right before you close on your loan.

There are also mortgage origination points and fees you pay to a lender for originating, reviewing, and processing your loan. These usually cost 1% of the total mortgage.

These don’t directly reduce your interest rate. Lenders might let a borrower get a loan with no origination points, but usually, that’s in exchange for other fees or a higher interest rate.

To determine when mortgage points make sense, you have to calculate what’s known as your breakeven point. This is when borrowers can recover what they spent on prepaid interest. To calculate this, you start with what you paid for the points and divide that amount by how much money you’re saving each month with the reduced rate.

Let’s say the figure you get when calculating your breakeven point is 60 months. That means you would need to stay in your home for 60 months to recover what you spent on discount points.

If you’re buying a home you plan to stay in for a long time, then the additional costs of mortgage points to lower your interest rate can make financial sense.

If you doubt you’ll stay in your home for the long term, it’s probably not right for you.

If you don’t stay in the home for long enough, you will ultimately lose money.

At the same time, as you consider whether or not mortgage points are right for you, you should consider your down payment. You could be better off putting money towards a more significant down payment than points. If you make a larger down payment, you might be able to secure a lower interest rate. Plus, if you make a down payment of at least 20%, you can avoid the added cost of PMI.

Bigger down payments mean you’re lowering your loan-to-value ratio or the size of your mortgage in comparison to the value of your home.

The takeaway is not to assume that buying mortgage points is always the right option. You need to consider how long you will stay in the home and your breakeven point.

Seller Concessions:
In today’s market, sellers are offer large concessions to get their properties sold and as your realtor, we can help you lower your interest rate by having the seller pay for all or a portion of the rate buy-down. Give us a call today to find out how you can save thousands over the life of your loan.

Position Realty
Office: 480-213-5251

Four Things That Will Hurt Your Credit Scores


Credit scores are simply a numerical reflection of your current credit and payment patterns. Typically, the higher the score the better the credit. Building solid credit, especially at a young age, is relatively easy to do. Open up a credit account and pay it back on time. Conversely there are things that will lower your credit scores. Here are four of them.

The first and foremost is your payment patterns. Scores will drop precipitously when payments are late. Not late if your payment is due on the 15th and you pay on the 17th, but more than 30 days past the due date. That’s when scores will drop the most and the quickest. Avoiding these late pays will help scores but making payments more than 30 days past the due dates certainly will. They’ll fall even further if a payment is made more than 60 and 90 days late.

The next way your scores can falter looks at the outstanding balances compared to credit lines. If for example a credit card has a $5,000 limit and the balance is say $4,500, scores will fall and your overall credit profile will be damaged. Going over the credit line will cause scores to fall even more.  Scores will improve when the balances are kept near one-third of credit lines. For a $10,000 limit then the scores will rise if the balances are approximately $3,000-$4,000. Interestingly, keeping balances at zero won’t actually help scores. The scoring system looks at payment history and if there are no balances there won’t be any payments to observe.

A bankruptcy filing, be it Chapte 13 or 11, will of course hurt scores. Lenders can work around a bankruptcy if it can be shown the bankruptcy was out of the borrower’s control. A situation where there is a divorce and there are disputed credit accounts is perhaps one example. Another would be a death or extended illness in the family.

Finally, credit inquiries can negatively impact scores. There are two types of inquiries, a hard and a soft inquiry. A soft inquiry is when a credit card company takes a peek at your credit profile to see if they want to extend a credit offer. These have no impact as they’re not initiated by you. A hard inquiry however is a different story. A hard inquiry is a direct request by you for a new account. An isolated hard inquiry won’t hurt credit but several such inquiries within a shortened period of time will.

Position Realty
Office: 480-213-5251

Can You Use Home Equity to Buy Another Property?


When you have equity in your home, you can tap into that and, if you’re strategic, use it as a way to build long-term wealth.

There are a lot of ways you can capture equity to build wealth. For example, you can pay off higher-interest debt or make home improvements that ultimately increase the value of your house. You can start a business or you can even invest in the stock market where returns might be significantly more than the interest you pay on your loan.

Another question people commonly have is whether or not they can use their home’s equity to purchase another property, which we discuss below.

Can You Use a Home Equity Loan to Buy a House?

In short, yes. You can use a home equity loan to buy a house, but that doesn’t mean it’s always the right decision in every situation. Using home equity can be a way to buy a second home or an investment property with caveats.

A home equity loan is a second mortgage, giving you a way to access the equity you’ve built in your home. Home equity refers to the difference between what you owe and what your home is worth.

The Upsides

If you’re thinking about using your home’s equity to buy another house, there’s a distinction you need to first make. Are you buying a second home or an investment?

If you’re planning to buy an investment property, using a home equity loan can give you more liquidity and make it less expensive. Benefits of using equity to buy an investment property include:

• You can put more toward your down payment. A home equity loan is something you receive as a lump sum payment so that cash can go directly toward a down payment. You’ll be a more competitive buyer, which is essential in the current market, and you’ll get lower interest rates and monthly payments.

• It can be harder to finance a second property because there are more stringent down payment requirements, so a home equity loan can be a more affordable solution and also one that’s more convenient.

• A home equity loan is secured with collateral, which is your current home. As a result, you get the benefit of lower interest rates.

If you’re buying an investment property, using your home equity can be a good wealth-building strategy. If you’re buying a second home, you have to consider that it’s not going to bring in income like an investment. That means that you’re going to be tying your home up in a loan and then taking on another loan, so you need to be in a solid financial position to make this work.

The Downsides

The downsides of using equity to buy an investment property do exist. These include:

• You’re swapping an asset for a debt. You’re taking the part of your home that you own, and then you’re putting it into a loan. Ultimately, no matter the specifics, you will have higher debt, so is that what you want?

• You’re vulnerable to housing market shifts, even more so when you own two properties instead of one. You’re doubling your risk if something happens in the housing market. For example, if the value of either of your properties goes down, you might owe more on your home equity loan and your mortgage, overextending you.

• If you were to default on your loan, you could lose both properties.

• You might end up having three mortgages but only two homes. Most home equity loans are second mortgages, so you have to combine this with the loan you’ll need for your second home, meaning three mortgages.

• Another downside you’ll have to weigh is the fact that interest payments on your home equity loan will probably not be tax-deductible because of 2018 changes in tax codes.

The big takeaway here is that, yes, using home equity to buy a second home is an option and sometimes a very good one. At the same time, there are risks and it’s not always the right decision, so you need to go over the details in your specific situation carefully.

Position Realty
Office: 480-213-5251

How Lenders Set Mortgage Rates

Ever wonder how mortgage lenders set interest rates for their loan programs each and every business day? Wonder why some lenders quote the exact same rate for the exact same program? Maybe why one lender is lower than others? Here’s some insight on how mortgage lenders set their rates each day.

First, note that mortgage lenders set their rates on the same basic set of indices. There are some exceptions, primarily mortgage lenders who issue their own loan programs that intend to keep the loans internally and collect interest on the loan rather than selling the note.

Adjustable rate mortgages and fixed rate mortgages are priced a bit differently. An adjustable rate mortgage, or ARM, is tied to a specific, universally tradeable index, such as the 1-Year Constant Maturity Treasury. Each morning, the “secondary” departments of these mortgage companies look up the current price of an ARM index and then add a margin to it. If, for example, the index came in at 1.75% and the margin was set at 2.00%, the new rate for that specific program would come in at 3.75% and stay there until the next adjustment.

Fixed rate mortgages, at least for most of them, are set in another manner but also use a specific index. Currently, the index used for most fixed rate conforming loans is the Universal Mortgage Backed Security, or UMBS. This is the index lenders use when setting fixed mortgage rates scheduled to be sold to either Fannie Mae or Freddie Mac.

Okay, so if most lenders use the same index when setting fixed rates, why are they sometimes different? That can depend upon different factors. Lenders compete for mortgage business in different ways, but they all want to compete based upon a competitive rate. The rate doesn’t always have to be the lowest rate but should be in the ballpark.

Maybe a customer has a long-lasting banking relationship with a bank and also has quite of bit of cash sitting in different checking and savings accounts. That customer might be offered an extremely competitive rate based upon loyalty of the customer as well as the amount of assets the bank holds. The rate in this instance doesn’t have to be the lowest because the borrower is focused more on trust and relationships than the rock-bottom rate.

On the flip side, for mortgage companies that don’t have such an established relationship, rates take on a more serious note. A mortgage company with less media exposure compared to established banks might need to entice a potential borrower with some very competitive mortgage rates. But again, they set their prices on the same set of indices.

Sometimes a mortgage lender has taken an aggressive approach and priced their loans very low and suddenly their pipeline is full. They’re overbooked and overworked. Their marketing campaign is working but now their loan processing times have slowed to a crawl. It’s not unheard of for a mortgage company to raise rates temporarily to turn off the spigot. It happens. Lenders certainly want to make a profit, otherwise the mortgage market would dry up, but they want to be smart about it.

Position Realty
Office: 480-213-5251

Forbearance: Homeowners Need To Tread Lightly

Unemployment numbers keep climbing with the latest figures showing another weekly uptick this time by nearly 3 million. The consequences are many and the real estate and mortgage industries are no stranger. At the same time, the term “forbearance” has entered the stage. If someone is unemployed and they’re looking at how they’re going to make the mortgage payments down the road, the ol’ savings account will take a big hit as homeowners look for ways to satisfy the mortgage company without losing the home. One of these ways to take a mortgage payment pause is with a forbearance agreement. But homeowners need to be fully aware of the impact of such an agreement.

A forbearance is a formal agreement between the lender and the borrower. Borrowers can’t decide to take a mortgage payment holiday on their own. Doing so would start the foreclosure clock ticking. And lenders are loathe to foreclose. It’s the very last thing on their list when trying to work with struggling homeowners. Lenders have employees whose sole job is to provide workout solutions for those having problems making the mortgage payment.

A forbearance agreement can be arranged if the borrowers meet certain standards such as documenting their situation as well as the lender seeing there is light at the end of the financial tunnel. If both can be met, a forbearance may be an option. Such an agreement will allow the borrowers to suspend the monthly mortgage payment for a specific period. Yet with a forbearance, the payments don’t go away, they payments accrue during the forbearance period. If the mortgage payment is $2,500 and the agreed upon period is for six months, that means at the end of six months, not only will payments resume but there’s a $15,000 bill that comes due. That’s the tough part. If someone is having difficulty paying $2,500 where will the $15,000 come from? There are other options such as a Loan Modification that can help and recent changes to agency guidelines may arrange for the past due amounts be added back to the existing mortgage.

Another major consideration with a forbearance agreement is the hit credit reports and credit scores take. On the credit report, late payments will be listed. Late payments on a mortgage does most of the damage to credit scores. Further, if a forbearance agreement is executed, that too will be listed on the credit report. While the borrowers get a breather on making the monthly payment, the credit report will list the forbearance filing. And, at the same time, many lenders who see a forbearance listed on a credit report won’t approve a new loan, be it for a purchase or a refinance for up to a year. Or even longer, it’s entirely up to the lender.

Deciding whether or not to ask for a forbearance agreement should be made alongside your loan officer or financial professional. There are consequences of such a filing that many may not know about. Yes, there is a payment reprieve and foreclosure is avoided, but the filing will negatively impact a credit report. There can be other options available for struggling homeowners. This isn’t something to do on your own volition. There’s a lot more help out there than you might think.

Mortgage Scams Are On The Rise! Watch Before It’s Too Late!!

Closing on a new home can be one of your most memorable life moments. It’s the final and one of the most critical stages in the home-buying journey, but with the exchange of key paperwork and a sizable down payment, it can also be a stressful experience, especially for first-time homebuyers.

The FBI has reported that scammers are increasingly taking advantage of homebuyers during the closing process. Through a sophisticated phishing scam, they attempt to divert your closing costs and down payment into a fraudulent account by confirming or suggesting last-minute changes to your wiring instructions. In fact, reports of these attempts have risen 1,100 percent between 2015 and 2017, and in 2017 alone, there was an estimated loss of nearly $1 billion in real estate transaction costs.

While it’s easy to think you may not fall for this kind of scam, these schemes are complex and often appear as legitimate conversations with your real estate or settlement agent. The ultimate cost to victims could be the loss of their life savings.

Here’s what you should know and how to avoid it happening to you.

How it works

Scammers are increasingly targeting real estate professionals, seeking to comprise their email in order to monitor email correspondences with clients and identify upcoming real estate transactions. During the closing process, scammers send spoofed emails to homebuyers – posing as the real estate agent, settlement agent, legal representative or another trusted individuals – with false instructions for wiring closing funds.

How to avoid a mortgage phishing scam

  • Identify two trusted individuals to confirm the closing process and payment instructions. Ahead of your mortgage closing, discuss in person, or by phone, the closing process and money transfer protocols with these trusted individuals (realtor, settlement agent, etc.). Be cautious about exchanging any details about your closing over email. You may want to use this opportunity to also create a code phrase, known only by these trusted parties, if you need a secure way to confirm their identities in the future.
  • Write down their names and contact information. Use the Bureau’s Mortgage Closing Checklist to list these individuals and their primary phone numbers.
  • Before wiring money, always confirm instructions with your trusted representatives. Never follow instructions contained in an email. Verify the closing instructions, including the account name and number, with your trusted representatives either in person or by using the phone number you previously agreed to.
  • Avoid using phone numbers or links in an email. Again, scammers can closely replicate the email address, phone number and format of an exchange from your agents. Avoid clicking on any links or downloading attachments without first confirming with your trusted representatives.
  • Do NOT email financial information. Email is never a secure way to send financial information.
  • Be mindful of phone conversations. It may be difficult to identify whether a phone call is fraudulent or legitimate. Scammers may call and ask you to verify your personal or financial information. When in doubt, always refer back to your trusted professionals to confirm whether it’s legitimate.

What to do if it happens to you

  • Contact your bank or wire-transfer company immediately. Ask for a wire recall. Reporting the error as soon as possible can increase the likelihood that you’ll be able to recover your money.
  • File a complaint with the FBI. Contact the FBI’s Internet Crime Complaint Center at www.ic3.gov .

While it can be easy to think you’ll never fall for a scam of this nature, the reality is that it’s becoming more and more common, and the results can be disastrous for eager homeowners. By being mindful and taking a few important steps ahead of your closing, you can protect yourself and your loved ones.

To learn more about the closing process, including how to prepare for your closing and common pitfalls to avoid, check out our Mortgage Closing Checklist . For information and resources for the each stage of the home-buying journey, visit the Bureau’s Buying a House tool.

If You Have the Option of Putting More Money Down, Should You?

With the exception of the VA and USDA programs, along with certain down payment assistance programs, most every residential loan program does indeed require some sort of a down payment. Many borrowers want to come to the closing table with as little cash as possible and as the down payment amount is the largest chunk of change needed, the lowest down payment is often the request. A conventional loan can ask for a down payment of just 5.0 percent with certain first time buyers loans asking for a 3.0 percent down payment. FHA loans need a minimum down payment of just 3.5 percent of the sales price. But if you have more money to put into the transaction, should you?

Many times, this additional cash comes from the sale of a previous residence but of course it doesn’t have to. While conventional loans do have low down payment options, with a down payment of less than 20 percent of the sales price, private mortgage insurance will be required. Making a down payment of 20 percent or more eliminates the need for PMI. A larger down payment obviously results in a lower monthly payment which is another factor to consider.

Making a large down payment will also affect liquidity. A down payment is instant equity in a real estate transaction, the only way to get the money back is either through the sale of the property or an equity loan of some sort. Putting more money down often means tapping into a retirement account such as an IRA or pulling funds from any investment or savings account. When those funds are removed, interest is lost. A larger than required down payment could also mean the funds would be put to use in a better way such as paying down consumer debt or paying off student loans, for example.

Considering an existing mortgage, loan programs today allow you to pay the loan down. Perhaps retirement is soon coming into the picture and paying down a mortgage is a solid financial plan. One thing to note however is that with a loan carrying a fixed interest rate, the payment will not change, just the loan amount will be lowered. With an adjustable rate loan however, the monthly payments will change as the loan amounts are reduced.

Coming in with a large down payment is a personal financial decision and for most that means it’s time for a talk with a financial planner and your loan officer. There are multiple considerations when paying extra on a mortgage or coming to the settlement table with a larger-then-required down payment which means seeking advice from a professional.

Position Realty
Office: 480-213-5251

How Lenders Evaluate the Self-Employed Borrower

One of the primary factors when issuing a loan approval is to make sure the borrowers can afford the new mortgage payment along with other monthly credit obligations. This is accomplished by comparing monthly payments with monthly income.

For someone who receives a pay check on the 1st and 15th it’s relatively easy to figure out how much money someone makes. But for those who are self-employed and make money when their clients pay their bills, it’s not so easy. Lenders do have a method to properly calculate qualifying monthly income for the self-employed, they just take a few extra steps.

These borrowers must show proof they’ve been self-employed for at least two years. For those who receive a regular pay check from their employers, they too must demonstrate they’ve been in the workforce and receiving a regular pay check for at least two years. This is one of the reasons lenders ask for the last two years of W2 forms.

But self-employed folk don’t have W2s, they have 1099s sent to them by their clients. Self-employed borrowers can demonstrate they’ve been at it for at least two years with copies of their federal income tax returns. Borrowers will submit these returns and also sign a form called the IRS 4506-T. The 4506-T is an authorization form that allows the lender to independently receive copies of tax transcripts for the last two years. Upon receipt, the lender compares the returns provided by the borrowers with the information provided directly by the IRS.

Borrowers will also be asked to provide a year-to-date profit and loss statement. To calculate qualifying income, the lender will average the two years of self-employed income plus the year-to-date amount. The result is the qualifying income lenders use when evaluating a loan application for someone who is self-employed.

When reviewing the year-over-year income, the lender also wants to see some stability. If year one the income shown on the tax returns is $60,000 and in year two the income is $70,000, the lenders will average these two amounts along with year-to-date totals. On the other hand, if the income is $70,000 in year one and $60,000 in year two, that can be a red flag. In this example the income dropped by more than 10% in one year.

Is the business doing okay? Does the P&L also show declining income? In this instance, the lender will want an explanation for the declining income. If there is too much of a decline, the lender can make the determination the income is not likely to continue into the future. The continuation guideline is typically for at least three years.

Note, it’s a judgment call by the lender because no one can see that far into the future but if the person has been self-employed for the minimum amount of time and the business has demonstrated not just stability but growth, the lender can reasonably determine the business and the income that goes along with it will continue.

Lenders understand that self-employed income will be received at different times during the month. That’s why an average is used. And, more importantly, it’s not how much the business is bringing in this month or last or even this year. If you’re self-employed, keep this in mind. And if you’re not sure about your qualifying income, it’s time for a phone call to your loan officer.

Position Realty
Office: 480-213-5251

Self-Employed? What to Know About Buying a Home

Jammie pants and slippers. Dog curled up at your feet. Your favorite TV show playing in the background. Sound like a quality weekend day? Not so fast. For a growing number of Americans, it’s what a regular ‘ole workday looks like.

We’re not necessarily talking about a work-from-home scenario (although this is another growing workforce trend). And it goes beyond having flexibility to work from wherever you want (and wear whatever you want!). It’s self-employment, and it’s on the rise. FreshBooks’ second annual Self-Employment Report found that, “Some 27 million Americans will leave full-time jobs from now through 2020, bringing the total number of self-employed to 42 million,” said the New York Post. “The report defines self-employed professionals as those whose primary income is from independent client-based work.

But self-employment can also make it difficult to buy a home. “Lenders are primarily concerned that all applicants, including self-employed workers, have the ability to consistently repay the mortgage,” said U.S. News & World Report. “They’ll need to see that your income is high enough to pay for the mortgage and likely to continue, and that you have a good track record of repaying your debts.”

These tips can help you get yourself in a better position.

What do you need to show?

Showing two years of steady income is a basic requirement for just about any mortgage, but those who have an employer other than themselves may have more flexibility. Other factors, such as income, savings, down payment, and debt-to-income ratio can make that two-year rule less critical.

Those who are self-employed, however, will want to show as much income history as possible. “Mortgage lenders typically require self-employed individuals to show two years’ worth of self-employment income to prove that they have a steady revenue stream,” said The Motley Fool. In addition, “You’ll have to provide tax returns from the last two years, and you may also have to provide a list of your existing debts and assets. Business owners may have to provide profit and loss statements from the last couple of years.”

How to treat business expenses

Adding to the challenge is the fact that lenders are going to be looking at your income after deductions. “Self-employed workers also might write off a significant portion of their income as a business expense, minimizing the size of the mortgage they’re able to obtain,” said U.S. News. “Because mortgage underwriters typically look at income after expenses, your taxable income may be too small to qualify for the mortgage you want.”

Managing your debt-to-income ratio

“Most mortgage lenders will not give you a loan if that ratio is greater than 43%—that is, if more than 43% of your income is going toward paying off debt each month,” said The Motley Fool. That debt-to-income level is key in any mortgage approval scenario, but takes on added importance when everything is under a self-employment microscope.

“It’s important to make sure you keep your debts down to a manageable level. They should never exceed 43% of your income, and it’s best if you can keep your obligations under 36%,” they said.

How’s your credit score?

Credit scores are even more important if you’re trying to prove you’re worthy of being approved for a mortgage. “Even if you’ve been wildly successful after striking out on your own, having a lousy credit score will hinder your chances of getting a good rate on a mortgage,” said Bankrate. They recommend checking your credit before you start applying, which will give you an opportunity to pay down debts or spot errors on your report that could be dragging your score down.

Position Realty
Office: 480-213-5251

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