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Fixed and Adjustable Rate Mortgage Basics

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With mortgage rates at some of the lowest levels in decades, many borrowers are considering whether a fixed rate or adjustable rate mortgage is better suited for their needs. We are going to walk you through the two main mortgage options that you can select from, along with the core benefits and some of the negatives associated with each.

Fixed Rate Mortgages

With a fixed rate mortgage, your interest rate and monthly payments remain the same throughout the term of the loan:

  • There is no risk of your monthly mortgage payments changing at any point during the course of the loan. This means as long as there are no drastic changes to your lifestyle, you should always be in a position to pay the mortgage amount comfortably.
  • A fixed interest rate is typically higher than whatever the going adjustable interest rate is since you are offered more stability.
  • Throughout the term of your mortgage, there is no change to the amount applied to principal versus interest, it always takes the same course as per the amortization schedule.
  • If interest rates go down you don’t have the opportunity to take advantage of this move as you may with an adjustable rate mortgage.

Adjustable Rate Mortgages

With adjustable rate mortgages, your payment amount is determined by the initial mortgage rate fixed for a 3, 5, 7 or 10 year term, which presents some interesting pros and cons:

  • With a adjustable rate mortgage, there is the potential that you can pay much less than you would with a fixed rate mortgage, but if interest rates go up, you could also pay much more as you do not have a guaranteed future rate once your “fixed rate” period is complete.
  • You don’t have a guaranteed monthly payment amount, and you may have to tighten the purse strings on other spending when interest rates rise.
  • Adjustable rate mortgages can allow you to pay down your mortgage with more money applied to principal depending upon what interest rates are doing at any given time.
  • In order to be eligible for a adjustable rate mortgage, you may need be approved to pay a monthly payment amount higher than what you’d pay based on the interest rate at the time in a fixed rate loan. The regulations can vary by lender or state, but this ensures that your mortgage can always be paid.

Still have questions about whether an adjustable rate or fixed rate mortgage is best for your needs? We can help walk you through any questions you have to find the loan that best fits your needs.

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What Are Closing Costs?

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When you’re ready to purchase home, it’s necessary to have some cash assets ready to cover the expenses that cannot be added to your mortgage. A portion of these expenses that you’ll need to pay in cash are the closing costs. While many first time home buyers may expect from watching real estate shows that they can convince the seller to cover the out-of-pocket costs, this is not always the case. It’s essential that all buyers have a general understanding of what the various closing costs are so they can be prepared. Typically, it’s a good idea for buyers to save at least 3% to 6% of the purchase price of a home for closing. Below, we’ve outlined some of the typical closing costs you’ll be responsible for paying only once, when you close on your house.

Non-Recurring Closing Costs

Non-recurring closing costs are those that you will pay once when you close upon your home, but you will not have to worry about them again until you choose to make another purchase.

Non-recurring closing costs can include the following:

  • Home inspection – This is one of the first closing costs you will have to pay as a buyer. If you make an offer on a home conditional upon a satisfying inspection, you typically have under a week from the offer date to have it completed. This is a cost you as a buyer have to pay even if you choose to withdraw your offer because you’re not happy with the results of an inspection.
  • Title insurance – This is insurance that compensates for any losses that are a result of a defective title or liens on the property that should have been revealed at the time of purchases. Losses covered include any legal fees paid to rectify related issues. Title insurance can be taken in lieu of a title search which is much more pricey and in many cases, unnecessary. A real estate lawyer will advise buyers if a title search is needed rather than title insurance.
  • Appraisal fee – Before a mortgage lender will provide you a loan, they complete a property appraisal to ensure that your home is worth at least as much as they’re going to lend you. Often today this can be completed without surveying the property as banks can look at recent valuations in the area online, but a fee does still apply and the cost can vary depending upon the appraisal method used.
  • Attorney fees – Your attorney is the one that processes all of the necessary paperwork, registers the deed, deals with the seller’s lawyer, processes information for the bank, and makes sure all necessary money gets to the appropriate bodies. For all this, a real estate lawyer charges a flat fee for his or her services.
  • Escrow fees – Some mortgage lenders may require that you put the costs related to the mortgage payment, property taxes and utilities into an account to be paid by them on a monthly basis. This helps them ensure that their investment is protected because payments are made. At closing, you may be required to deposit escrow fees for one or more months of expenses.
  • Land transfer fees – Most cities or counties (or both) require that you pay a fee to ‘transfer’ the land from the seller to the buyer. The specific costs and requirements vary greatly across the country but typically apply.
  • Various administrative fees – As a buyer you may need to pay the fees to record the sale, fees for document preparation, and any charges that surface from the need to use wire transfer or a courier to get the transaction completed.

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Should You Spend The Full Mortgage Amount You’re Approved For?

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When you’ve gotten a pre-approval from your mortgage lender, you’re ready to start shopping for a home. While your pre-approval tells you how much the bank thinks you can afford, many first time buyers in particular wonder if they should actually spend as much as they’ve been approved for.

The first thing to note is that a bank takes your Gross Debt Ratio and Total Debt Ratio into consideration when determining how much money they will lend you.

Theoretically, you can afford to spend what you’ve been pre-approved for, but there are some other things you should think about when determining if you want to spend it all.

Determining How Much of Your Mortgage Approval Amount to Spend

While you may be tempted to spend your full pre-approval amount to get the best home available to you, there are some other things that you should consider when you take a look at your total expenses:

1. Would you need to make cutbacks? – Even if your full mortgage amount is under 40% in your total debt ratio, there are many other expenses not calculated by the bank. Take a look at all of your other fixed and variable expenses and determine if you’d need to make cutbacks to live comfortably with that mortgage amount. Remember, your expenses can include things like your grocery bill, the cost of children’s activities, and eating out.

2. Are you willing to change your lifestyle? – If you would need to make cutbacks to spend the full mortgage amount, take a look at what you would be willing to give up, if anything. For some, it may be worth the sacrifice to get a “better” home. For others, it may be preferable to spend less on the home and maintain status quo in other aspects of life.

3. Are your expenses likely to change? – Remember, your pre-approval amount is based on your current income level and debts. It might be affordable today, but if you have intentions to leave your job or take on new expenses, the affordability may change quickly.

Once you’ve considered all of the above factors, it’s up to you to determine how much you’re comfortable spending. Don’t feel pressure to spend it all, but if that number is a comfortable one, then getting shopping for a property of that value!

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High Cost Area Loan Limits Set to Expire September 30, 2011

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Temporary loan limits were enacted as part of the economic stimulus package in 2008 to help homeowners in high-cost areas that were unable to get loans for more than $417,000 under the standard conforming loan limits regardless of their payment history, credit and income. Homeowners in areas such San Francisco, New York and Los Angeles routinely faced higher priced homes, which meant they were required to bring in substantially larger down payments when purchasing their home.

From EFannieMae.com:

For loans originated on or before September 30, 2011, the “temporary” high-cost area loan limits will apply and will be the same as the 2010 high-cost area loan limits, up to a maximum of $729,750 for a 1-unit property in the continental U.S. Loans originated on or after October 1, 2011, will use the “permanent” high-cost area loan limits established by FHFA under a formula of 115% of the 2010 median home price, up to a maximum of $625,500 for a 1-unit property in the continental U.S.

High-cost area loan limits gave prospective home owners the ability to finance up to $729,750 on their new home, which brought relief to many that would have otherwise not have been able to purchase a home.

These temporary conforming loan limits are set to expire on September 30, 2011. Upon expiration (October 1, 2011), these high-cost areas will be subject to standard conforming borrowing loan limits as shown below.

From EFannieMae.com:

Maximum Original Principal Balance for 2011
Units Contiguous States, District of Columbia, and Puerto Rico Alaska, Guam, Hawaii, and the U.S. Virgin Islands
1 $417,000 $625,500
2 $533,850 $800,775
3 $645,300 $967,950
4 $801,950 $1,202,925

If you live in a high-cost area, remember that regardless of where rates are, you may have trouble getting the loan size you need. Be sure to speak with us regarding your options as far in advance of the expiration as possible. We can help you understand the options you have so that you can make an informed decision before these higher loan amounts are no longer available.

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Mortgage Rate Outlook for Week of June 13, 2011

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This week there will be key economic data coming out that will shed light on the state of inflation, housing, manufacturing, retail sales and consumer sentiment. While mortgage rates have maintained their lows in the past few weeks due to consistently poor performance by leading economic indicators (this is good for mortgage rates), it is widely acknowledged that the question is not if, but when mortgage rates will be rising.

For home shoppers and those that have not yet refinanced their homes, the current mortgage rate environment is extremely favorable despite expectations that rates would have gone higher by now. For mortgage shoppers on the fence, now may be a great time to take advantage of low rates before they make an inevitable move upward in the coming days, weeks and months.

Economic Calendar For the Week of June 13, 2011

  • Monday: Lacker & Fisher from the Fed speak
  • Tuesday : Producer Price Index (PPI), Retail Sales, Business Inventories
  • Wednesday : Consumer Price Index, Housing Market Index
  • Thursday : Housing Starts, Initial Jobless Claims
  • Friday : Consumer Sentiment, Leading Economic Indicators

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Can You Change Jobs Before Closing on Your Home?

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Some of life’s biggest changes occur at the same time, even when you don’t plan it that way. It may just happen that you get a job offer that could greatly benefit your career with your closing date looming just weeks ahead. While your first instinct may be to reply with an ecstatic “YES!”; you do need to stop and think before you make that commitment because you’re about to take on a major financial investment. The choice may be right for you, but you’ve got to consider a few things first.

How Will Your Job Change Impact Your Mortgage Loan?

You need to bring your potential job change to the attention of your mortgage lender and there are a few factors they’ll look at to determine if that may compromise your ability to take on the mortgage you were previously approved for:

  • If your income level will remain the same at your new job. If it’s higher, your mortgage may not be impacted; if it’s lower, it has the potential to change what you can afford.
  • If you’ll be working in the same industry as the job(s) you’ve held before. Your mortgage lender may consider it a risky move and it could potentially compromise your mortgage.
  • If there’s going to be a probationary period at your new job that will still be in place when you close, because then the chances are much greater that you’ll lose it since there’s zero job security.
  • The length of time that you’ll be at your new job before your mortgage closing date. If you’ve switched jobs 90 days before you close on your home, then you may have enough stability on your side.
  • Whether your high ratio mortgage is insured or backed up by a program or grant. Guidelines may differ, but some programs that allow you to make a low or no down payment  on your mortgage may choose to run a credit report and revisit your file at any time. You need to tell your lender or mortgage broker about your job change, and if this other program looks into it and don’t like what they see, they could refuse to back your loan.
  • Your loan approval amount. If you’ve got a home loan that’s far less than what you can afford (according to the bank’s assessment) and are a two income household, it may be that your loan approval would not change.
  • Your debt ratios. Regardless, your lender would recalculate your Gross Debt Ratio and Total Debt Ratio based on your new income, or based on the other household income if yours for some reason cannot be used.

Keep in mind that everyone has different circumstances and there can be compensating factors, so before you decline or accept a job offer, we can help give you guidance so that you can make an informed decision.

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Home Purchase Escrow Basics: What You Need to Know

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You’ve likely heard the phrase “We’re in escrow!” before, but what does it mean? It’s always presented as though it’s positive and as though a house purchase is a done deal. Both of these things are true, but you do need to understand the process in order to be adequately prepared when the time comes.

What is Escrow?

The escrow process puts your money in the hands of a neutral third party to complete part of the necessary financial process for you to close upon your home. An escrow account is required by many lenders in order to ensure that you’re prepared to cover some of your home expenses once you take posession as this protects their investment.

What is the Escrow Process?

Typically, an escrow account is opened before you actually close upon your newly purchased home and at that time you are required to start adding funds to it. Typically, the costs you will need to place into an escrow account is the insurance, property taxes and sometimes the utilities. Here is the general escrow process:

  1. Around closing, your mortgage lender may require you to deposit the payments to cover at least one month’s worth of funding for the required expenses. Often, lenders ask for 2-3 months of payments.
  2. Your money will be protected with the third party that holds onto your money as they transfer it only to the lender for the pre-determined expenses on a set schedule.
  3. Once you take posession of the home you will be making flat rate monthly payments to cover your expenses (property taxes, insurance, utilities) and the lender will use the funds to pay the appropriate outlets directly. Many first time home buyers find this especially simple because it helps them manage their money. Typically, property taxes would be paid on a quarterly basis in a larger lump sum. Paying monthly into escrow means that smaller amounts of money are automatically removed from a home owner’s account, so the process is budget-friendly!

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Weekly Mortgage Outlook for June 6, 2011

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There are very few notable economic events taking place this week on the Economic Calendar that might affect rates this week. Fortunately, it looks like rates will continue to sustain their current levels based on the disappointing economic data that was released last week. This provides yet another great window for being able to take advantage of the low rates that exist today but not existing in the short term future.

Disappointing Economic Data is Good For Mortgage Rates

The big news last week affecting mortgage rates was a disappointing employment report. Analysts had expected 150,000 new jobs to be created, while data came in showing that only 54,000 new jobs were actually created. There was also a higher than expected number of jobless claims, which was yet the latest in a series of reports indicating that the overall economy is weaker than had been hoped.

While the disappointing economic data continues to paint a picture of long term weakness in the overall economy, it bodes well for help mortgage rates to sustain their existing levels and even set new lows. While there has been concern that low mortgage rates could not continue at their existing levels for much longer, the data of last week has bought more time for on the fence home buyers and homeowners considering refinancing their existing mortgage.

Economic Calendar for Week of June 6, 2011

  1. Monday: Fischer and Plosser from the Fed speak
  2. Tuesday: Lockhart from the Fed speaks, Consumer Credit
  3. Wednesday: Fed Beige Book, Hoenig from the Fed speaks
  4. Thursday: Plosser from the Fed speaks, Initial Jobless Claims
  5. Friday: Dudley from the Fed speaks

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Weak Economic Data = Great Mortgage Rates

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We end this holiday week with great news for mortgage rates and bad news for the economy as a whole as several key pieces of economic data disappointed. This morning, the Employment report showed that US employers hired significantly fewer employees than expected and the jobless rate increased to 9.1%. Earlier in the week, U.S. manufacturing growth data showed manufacturing at its weakest level since September 2009.

While these numbers are not healthy for the economy as a whole, the have played an important role in helping mortgage rates move even lower. During times of economic turmoil, investors pull away from riskier investment vehicles, such as stocks and move their money into safer vehicles such as bonds. In doing so, they help drive mortgage rates lower, as was the case this week and today.

What does this mean for potential home buyers and those looking to refinance their existing mortgage? The window to get into record low rates has been extended, which means there may be no better time than now to see how we can help you with our existing mortgage or new home purchase.

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Must Read: Mortgage Rate Update and Housing Data News

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Employment Situation Report Set to Move Mortgage Rates

On Friday morning, the Employment Situation Report or Jobs Report will be released. While not the only economic report coming out this week (see Economic Calendar below), it presents the highest risk to mortgage rates and may set a tone moving forward as to which way mortgage rates will move. The report will not only give valuable guidance on the future of mortgage rates but the broader economy as well. This may mean that now is an ideal time for homeowners or potential buyers to lock in already low mortgage rates.

Economic Calendar for Week of 5/30/2011

  • Wednesday, June 1, 2011:  ADP National Employment Report and ISM Index
  • Thursday, June 2, 2011:  Initial Jobless Claims and Productivity
  • Friday, June 3, 2011: Employment Situation Report and ISM Service Index

New Lows For Home Prices

According to the newly released March S&P / Case-Shiller National Home Price Index, national home prices hit a new low in the first quarter of 2011, reaching index levels not seen since 2002. This means that consumers that have been contemplating buying a home have one of the best opportunities in the last decade to purchase a home.

From the Standard & Poor Press Release:

The U.S. National Home Price Index declined by 4.2% in the first quarter of 2011, after having fallen 3.6% in the fourth quarter of 2010. The National Index hit a new recession low with the first quarter’s data and posted an annual decline of 5.1% versus the first quarter of 2010. Nationally, home prices are back to their mid-2002 levels.

Twelve of the 20 MSAs and the 20-City Composite also posted new index lows in March. With an index value of 138.16, the 20-City Composite fell below its earlier reported April 2009 low of 139.26. Minneapolis posted a double-digit 10.0% annual decline, the first market to be back in this territory since March 2010 when Las Vegas was down 12.0% on an annual basis.

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