A LITTLE FAQ ABOUT LOANS, LENDERS AND LOAN PRODUCTS

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Ok... school is in... LOL

The first thing I want to say is that for some folks, using their VA benefits is a good thing and for some folks, using their VA benefits is not only NOT fiscally prudent; it could even be financially irresponsible. Over the past 15 months, Lori and I have closed well over 75 transactions of our own and mentored and have been involved in another 60 transactions with protégés. Of that number, perhaps as many as 2/5^th were veterans, active duty or retired or simply discharged from their particular branch of service. Of that 2/5^th, less than a dozen or so used their VA benefits. The cost of money today is so inexpensive that there is little reason and almost NO advantage to a vet to use his or her VA benefit. There are numerous optional loan platforms that emulate the benefits of a VA loan without causing the buyer to toss away thousands of dollars in a VA funding fee.

Suffice for now to say that Lori & I have been in this industry nearly two decades. The VA loan platform is one that we are extremely proficient with and since I too am retired USAF, we tend to draw a huge number of vets to our web site who ultimately secure our services to procure their home, help with arranging home inspections, termite inspections and... oh yes... sorting out what type of loan makes the best sense for that particular eClient.

So, Let's Chat...

QUESTION: There are a million mortgage calculators online, and they all differ from one another. The simplest ones just ask for the amount of the loan, any down-payment, and number of years. However, there are some that have blanks that require specific information such as Tax Rate and Insurance. I have no idea what to plug in, for those items. Can you help me with this?

Correct; there are literally millions of mortgage calculators on the internet today. Quite frankly, over the years, Lori & I have played with hundreds of them, searching for what we feel are some of the best and least confusing. We have found that nearly all of the mortgage calculators, found on lender sites, are very confusing. Some, quite honestly, are actually weighted so that eConsumers conclude that the Lender who provided a particular mortgage calculator, appears to offer the best mortgage deal on the Internet or even the planet. In our opinion, this is unfortunate and very confusing and can tend to be a bit misleading.

As for how to divine what figures to use for Tax Rate and Insurance, let’s first discuss Tax Rate. Here’s a good rule of thumb we have arrived at after reading hundreds, perhaps thousands of Arizona Public Reports; if you use a figure of somewhere between $10.00 and $13.00 per $100 of property value (not purchase price), you will come really close to the actual tax rate. Property values, as we discuss in this article can be researched at http://www.maricopa.gov/Assessor/. Tax Rate calculations are extremely complex computations. If you would like to know more about how a municipality actually establishes the tax rate, call the county recorder in the county you wish to live and ask to speak to a clerk of the County Tax Assessor’s office. They are very happy to educate the consumers with the math… but… make sure that, if you have a full head of hair when you begin, you’re not going to be disappointed if some if it is missing after the tax rate calculation class concludes.

Insurance is a bit trickier, only because there are several variables that play into the actual insurance rate a buyer will be charged. Two of the most important variables are derived from the C.L.U.E. (Comprehensive Loss Underwriters Exchange). C.L.U.E. is a database that all insurance companies use to assess the risk factor for insuring a particular piece of real or personal property based on both the real or personal property and the individual wishing to be insured. The first assessment is conducted around the real or personal property. The next assessment is conducted around the credit score of the individual and the individual’s history of filing insurance claims. The C.L.U.E. retains a five year history for the majority of all insured individuals and their widgets. Learn more about C.L.U.E. at http://www.choicetrust.com/. Many factors play a vital roll in providing the information insurance companies require to tender a firm-fixed quote for a homeowner's insurance policy. Even in the early quotes, the figures are truly speculative numbers and could vary a few hundred dollars up or down in the final analysis, and the final analysis can only be determined once you have settled on a particular home in a particular geographic area and on a particular price and on a particular amount to finance.

Back to mortgage calculators; Lori & I actually favor mortgage calculators that have been put up on the web by college students. These are truly unbiased mortgage calculators that offer honest unbiased results. Some are very complex and some are very simple. In the following paragraphs we have provided links to three of our favorites, one of which we keep on our web site in a secure location, offered to eClients that have selected us as their Realtor Representatives. They were all developed by college students, one in Japan, the other in Pakistan.

QUESTION: Some calculators have fields for loan components called “points”. What the heck are these things, and do I need to worry about them?

POINTS – Perhaps lead the pack of some of the most confusing parts of the loan package. So what is this thing called “points”? Points are often confused with “origination fees”. The two serve completely different rolls in the loan process.

An “origination fee” is an amount of money, charged by a mortgage company, to the buyer as part of the lender’s cost of doing business. However… what most consumers do not know is that the “origination fee” is a totally negotiable charge, assuming the buyer has relatively good credit. It has been our experience that buyers with FICO scores in the high 600s or higher can usually shop, with great success, for lenders who will charge minimal or NO origination fee in their loan process. Our suggestion would be to stand your ground. Assuming that all of the other terms of the proposed loan are acceptable, make it clear to the loan officer, that if he/she does not alter their costs of the “origination fee” you will simply take your business elsewhere. If you are currently searching for a couple of lenders, check out Coldwell Banker Mortgage, Rosemarie Cox (602) 565-6948 and/or Pacific Funding Group, Mark Schmidt (800) 245-6722.

Points, often called Discount Points, are the amount of money a buyer will pay to control the interest rate on his mortgage. The “point” is calculated against the amount of money that will be financed, I.E. your mortgage amount. So, if you’re going to make a purchase of $350,000 with a 20% down payment, your mortgage amount will be $280,000. Therefore one point (1%) would be calculated to be $2,800. There are numerous formulas bandied about on the Internet about how these fees benefit or hinder a borrower’s loan. In short, if you spend one point of your loan amount, you can affect your interest rate by about 1/8^th of a percent.

This means, if the consumer is quoted an annual interest rate of say... 6.5% but wants to reduce that rate (I.E. buy it down) to 6.0% by paying money at the time of closing to do so, the consumer would have to part with about $11,000. For some buyers this is a good idea, particularly if they are going to stay in their home or not refinance the home for many years. But keep in mind too, that another barometer to making such a decision is how long it will take to recapture the $11,000. By reducing the annual interest rate by 1/2 a percent, the payment reduction on a $280,000 loan is about $90 per month. That means that it will take about 10.18 years to recapture the interest savings. Not a bad scenario, and often a $90 reduction in the monthly payment can mean adding a little more tile in the house, or the cost of some appliances or any number of additional accoutrements or creature features that the buyer may want to add to the loan.

Here are a few thumbnail guidelines to help you decide if the return on this type of investment is warranted.

It may not be wise to spend money on Discount Points if:

• you plan on selling your home in less than 3 to 4 years
• you plan on refinancing your home in less than 5 years
• you are applying for an ARM type mortgage
• you are applying for an Interest Only loan product

It may be wise to spend money on Discount Points if:

• you do not plan on selling your home in the next 5 years
• you do not plan on refinancing within the next 5 years
• your purchase is for investment and/or rental purposes

These are suggestions and not items to be thought of as “Set in stone”, but they are a good sound foundation for developing your loan strategy.

CLICK HERE for a very simple mortgage calculator, just plug in the numbers. Be sure to enter NO commas. The interest rate will accept a dot, for example 6.5 but do not include a % sign. This is by far one of the simplest mortgage calculators we have found and is GREAT for calculating VA loans because it does not automatically include MIP (Mortgage Insurance Premium). This calculator does not produce an amortization schedule but the next mortgage calculator does.

CLICK HERE to use a more sophisticated mortgage calculator. Again, only use numbers and no commas and too, the interest rate can be calculated using a decimal point in the rate, but again... DO NOT use the % sign. This calculator can produce an amortization that can be produced in HTML or Plain Text. In the " Monthly Principal Prepayment Amount " window, DO NOT enter any values and the same is true for the " Annual Principal Prepayment Amount (Enter B here for Bi-weekly Loans) " and " One-Time Prepayment Amount, to be paid before payment (month #) ".

CLICK HERE for an interesting mortgage calculator created by Hugh Chou. This is a mortgage calculator that compiles a maximum monthly payment that Hugh feels is appropriate for a home buyer. Keep in mind that Hugh built these calculators as a college project although now I believe he works in the financial industry.

There are many factors to consider when searching for a home loan, not only the total monthly payment, but also total loan costs. You asked about "Points". As we mentioned, this can be a confusing term. Often consumers believe that there MUST be points associated with ALL loans. As we explained above, that could not be further from the truth.

When considering a new construction home, remember, that in almost 100% of loans that are configured by a builder's lender, the builder's lender will add... at a minimum 1% to the loan cost (sometimes, incorrectly, referred to as a POINT). This fee is really an "Origination Fee". In our opinion, consumers with GREAT credit scores, also referred to as the "FICO" (Fair, Isaac and Company Inc) score, should not be subjected to these fees. Unfortunately, when builders offer incentive packages to the consumer, those incentive packages are tied directly to the requirement that the consumer utilize the builder's lender to secure financing for the purchase.

It would be sensible to consider not using the Builder’s Lender if the total incentive package hovers around the $5,000 mark. Some of our clients have had a GREAT deal of success using non-builder lenders, wherein our clients have given up as much as $5,000 in incentives from the builder and... even after doing so, have secured a much more favorable loan program and sometimes even lower monthly payments, with similar or lower closing costs, than they would have if they had used the builder's lender.

Another typical lender explanation for an Origination Point is: "An origination fee is the amount charged for services performed for handling the initial application and processing of the loan". Hog wash! While it is true that some loans should be burdened with such a fee, such as loans granted to buyers with less than perfect credit. The amount of effort and research that goes into locating an investor who is willing to purchase the loan from the lender can be intense. In our opinion, level of effort and perhaps even ‘arm twisting’ should be compensated. But if the consumer/borrower has a good to great FICO score, again in our opinion, there should be NO Origination Point... NONE... NADA... ZIP... ZILCH... got the picture? Why should a lender, granting a loan to a buyer with good to great credit, make profits on two transactions? The first transaction is between you and the lender. The next/second transaction for the lender is between the lender and his investor, the entity who will purchase the loan from the lender. Remember, if you keep your credit in good condition, you have a boat load of strength and negotiating power as you shop for your loan.

Another item to pay attention to are the ever swampy quagmire of Lender Fees... Ok... I know... so what does that all mean... ?... LOL Ok... Lender's fees are fees that offset the cost of producing the loan. Different companies may refer to them by different names, such as, processing fees, broker fees, tax service fees or underwriting fees; or you may have heard these fees referred to as Junk Fees. Most lenders are very sensible and fair about these fees. Obviously all businesses are in business to make a profit. Lender Fees are one of the vehicles that generate profits for lenders. Years ago I wrote an article for an On-Line Real Estate Forum, about Predatory Lending. CLICK HERE if you would like to read that article, but keep in mind that the figures in the article are very outdated, however the nefarious activities I write about are, unfortunately, still very much a part of the lending arena. I think that article will explain what you do not want to see in your lender.

I could write hours about the loan and lending process because the entire process is so interesting and is very involved. Here are a couple of more nuggets for you to ponder.

QUESTION: Is there a difference between APR and Interest rate?

You bet! The APR (Annual Percentage Rate) reflects the cost of your mortgage loan as a yearly rate. It also incorporates the cost to obtain the loan, such as discount fees and loan origination fee. The interest rate is the actual note rate.

When you finally get to the closing table, you will be presented with a TIL (Truth In Lending) statement. You will undoubtedly ask: "Why is the Annual Percentage Rate (APR) on the Truth-in-Lending Disclosure higher than the rate shown on my mortgage note?" Here is a simple explanation:

The rate reflected on the APR shows the cost of your mortgage loan as a yearly rate. This rate is generally higher than the rate stated on your mortgage note because, in addition to the interest rate, APR includes other costs such as origination fee, loan discount points, pre-paid interest, and mortgage insurance. The APR allows you to compare, in addition to the interest rate, the total cost of financing your loan, among various lenders.

CLICK HERE for an example of several loan scenarios in a spread sheet provided by one of our most reliable lenders to one of our past eClients. As you can see, the buyer was purchasing a home for $189,000 (that’s not going to happen again any time soon! LOL) and was pondering a VA loan VS. a conventional loan. This purchase was for an "as yet to be built" new construction home. If the buyer chose to NOT use the builder's lender, he would have given up $4,500 in incentives from the builder. This particular buyer had his own closing cost money and was able to put up to 5% down on the principal. All scenarios in the spread sheet are fixed rate loans, there are no ARMs (Adjustable Rate Mortgages), although to opt in for an ARM provided an even lower monthly payment for our buyer. The loan identified at the far right as an 80/20 is called a HELOC. This particular type of loan has been most attractive to our vets because it can be nearly 100% tax deductible and... as you can see... this type of loan produces a very low PITI (Principal Interest Tax and Insurance) payment. And... as you can see, if our buyer’s target ceiling were a $1,500 PITI monthly payment, he could actually increase his purchase well above $200,000 while still keeping his monthly payment well under $1,500. There is one catch to being able to take advantage of a HELOC, the buyer must have GREAT credit... the good news is... YOU DO!

Well... now that I have totally confused you...

Bye for now... and we'll be in touch in a couple of weeks. Lori and I trust that you are enjoying your FREE subscription to your CLUB membership.