With 30-year interest rates well below 5 percent, and 15-year interest rates between 4 percent and 4.5 percent, it's time to start seriously thinking about refinancing your mortgage.
But before you high-tail it to the nearest mortgage lender and fill out a mortgage application, there are eight things you should do:
1. Check out the interest rate you have on your current loan. When interest rates dip, the natural inclination is to start filling out loan applications left and right. But too many times, homeowners are focused solely on the new interest rate instead of how much they'll save by refinancing. While you may get water cooler-bragging rights, you should refinance only if it's going to save you money.
2. Find out how much your home is really worth. There's no way to sugarcoat it: Home values have sunk around the country an average of about 20 percent in the past year. In some places, such as Las Vegas, Miami, Phoenix and the San Francisco Bay Area, the decline has been twice as steep. It's vital to assess whether your home still has any equity (the difference between what you owe and what the home is worth) or if you are "underwater" with your mortgage (meaning that you owe more to your lender than the property is worth. Whether you have equity will determine what kind of refinance is open to you.
3. If you're underwater with your mortgage, assess how far underwater you are. While federal requirements have changed with regard to refinancing loans owned or serviced by Fannie Mae, Freddie Mac or FHA, if your loan is more than 105 percent of the value of the property, you may not be able to refinance without bringing cash to the table. (You may still be eligible for a loan modification, however.)
4. Get a copy of your credit history and credit score. Since the credit crisis began, lenders have raised the credit scores required to get approved for the best loan programs and best interest rates. The best place to go for a copy of your credit history and credit score is AnnualCreditReport.com. It's the only place where the three credit reporting bureaus provide a free copy of your credit history each year, plus you can pay $7.95 for a copy of your credit score. Choose the Equifax credit score, since it's the one closest to the score used by most lenders. (You can also go to MyFico.com, and purchase your credit history and FICO score for $15.95. You may also find their online community to be helpful in terms of suggestions on how to raise your credit score.)
5. Start identifying potential lenders. Shopping around for a loan takes a little more planning and effort than it used to, as lenders have jacked up the fees they charge to underwrite and process the loan. Your best bet is to talk to a national lender, a credit union (if you belong to one or can join one), a local mortgage broker (call your real estate agent if you don't know one and ask for several recommendations), and perhaps an online lender.
6. Find out if your second lender will subordinate to your first lender. If you have a first and a second mortgage (also known as a home equity loan), find out whether the second lender will subordinate to the new first lender. That will allow you to refinance your first mortgage, while leaving your second loan in place. Many second lenders will not agree to this, and if yours doesn't, you may not be able to refinance at all unless you pay off the second loan. One possibility is to refinance your first mortgage with the lender who owns your second loan.
7. Focus on the big picture, not just the interest rate. While the interest rate you'd get is important, it's also important to calculate how much you'd pay in fees, and how long it will take to pay yourself back the cost of the refinance with your monthly savings. For example, if you're going to save only $50 per month, and it costs you $5,000 to refinance, it'll take you 100 months -- or more than eight years -- to pay back the cost of doing the loan. You won't start saving until well into the eighth year of paying down the mortgage. So, unless you're cutting the term of the mortgage significantly (going from a 30-year to a 15-year), or you're able to pay off the costs in a relatively short period of time (say, less than a year or 18 months), it may not pay to refinance.
8. Get your paperwork together ahead of time. Before the housing crisis, you could almost do a refinance over the phone. In fact, you could call the loan officer you worked with regularly and put in your order for a refinance. You could do a no-cost refinance without providing much in the way of proof of earnings, or account statements or copies of tax returns. The forms would be delivered to your home, and then you'd sign them and send them in. Today, you've got to have your paperwork in order before you can refinance. Gather your W-2, a current paycheck, copies of your last two federal and state tax returns, copies of your bank accounts, retirement accounts, and other assets. Then call the lender.
Friday, April 24, 2009
Seller financing a risky proposition? What happens if buyer declares bankruptcy?
Question: I am thinking of providing owner financing to a potential buyer of one of my homes. This would be a second home for my buyer and he would use it as his vacation home. What would happen to that second home if he were to declare bankruptcy or if he loses his primary residence in a foreclosure?
Answer: We think you're asking the wrong question. The real question you should ask is this: What will happen to the property you sell this person should he stop making his payments to you?
If you provide financing to this buyer, will he put down a substantial down payment? If he does, a large down payment should give you some comfort. If he puts down little or no money, you might be better off renting the home to him, and perhaps arrange to sell it to him in the future when his finances are more stable. Evicting a tenant from a lease is easier in most states than going through a foreclosure.
If you sell the home to him and he has financial difficulties with his primary residence, his financial difficulties most likely would spill over onto the vacation home. Homeowners are likely to stop paying the mortgage on a second home before putting their primary residence in jeopardy.
In a bankruptcy, you might find that you still have to foreclose against this buyer if he stopped paying on the loan you gave him for the purchase of the property.
If you suspect that your buyer is in financial stress, why would you want to sell him your home? If he merely loses his primary residence in a foreclosure, that fact alone should not affect his ownership of the vacation home. The key is whether he pays you the money he owes and whether you have enough of a cushion in the transaction to weather the storm should he stop making his payments to you.
Before you proceed with the sale of the home to this buyer, make sure you have obtained a copy of his credit report and understand his financial situation. Once you do, make sure you hire an attorney to advise you on structuring the sale to this buyer.
One option might be to sell it to him and take back a mortgage. But another option might be to sell him the home by using an installment contract for deed, otherwise known as a sale of the property over time where you retain legal title to the home.
Another issue you might face is whether you currently have a loan on this property and whether you intend to pay off this loan.
If you're financing your buyer's purchase of the property but you still have an existing loan that you're not planning to pay off, this could cause a huge problem for you down the line.
Aside from running afoul of your current lender's requirements, you'll have lost control over the asset. If the buyer fails to make any payments that are due, you'll have to continue to make the payments to your lender. If you don't, you'll harm your credit and your lender could foreclose on the home you sold to this person.
For more details about how to protect yourself, please talk to a local real estate attorney.
Answer: We think you're asking the wrong question. The real question you should ask is this: What will happen to the property you sell this person should he stop making his payments to you?
If you provide financing to this buyer, will he put down a substantial down payment? If he does, a large down payment should give you some comfort. If he puts down little or no money, you might be better off renting the home to him, and perhaps arrange to sell it to him in the future when his finances are more stable. Evicting a tenant from a lease is easier in most states than going through a foreclosure.
If you sell the home to him and he has financial difficulties with his primary residence, his financial difficulties most likely would spill over onto the vacation home. Homeowners are likely to stop paying the mortgage on a second home before putting their primary residence in jeopardy.
In a bankruptcy, you might find that you still have to foreclose against this buyer if he stopped paying on the loan you gave him for the purchase of the property.
If you suspect that your buyer is in financial stress, why would you want to sell him your home? If he merely loses his primary residence in a foreclosure, that fact alone should not affect his ownership of the vacation home. The key is whether he pays you the money he owes and whether you have enough of a cushion in the transaction to weather the storm should he stop making his payments to you.
Before you proceed with the sale of the home to this buyer, make sure you have obtained a copy of his credit report and understand his financial situation. Once you do, make sure you hire an attorney to advise you on structuring the sale to this buyer.
One option might be to sell it to him and take back a mortgage. But another option might be to sell him the home by using an installment contract for deed, otherwise known as a sale of the property over time where you retain legal title to the home.
Another issue you might face is whether you currently have a loan on this property and whether you intend to pay off this loan.
If you're financing your buyer's purchase of the property but you still have an existing loan that you're not planning to pay off, this could cause a huge problem for you down the line.
Aside from running afoul of your current lender's requirements, you'll have lost control over the asset. If the buyer fails to make any payments that are due, you'll have to continue to make the payments to your lender. If you don't, you'll harm your credit and your lender could foreclose on the home you sold to this person.
For more details about how to protect yourself, please talk to a local real estate attorney.
Thursday, April 23, 2009
What's Your Score?
How is it that you can apply for a mortgage, credit card, or car loan over the phone and be approved or declined in a matter of seconds? For speedy access to credit - and the mountain of credit card "preapprovals" you get in the mail each month - you can thank an invention called the FICO score.
Your FICO score is the most common type of personal credit score, used in some form by most lending institutions. The FICO score tells lenders in a very simple way how likely you are to repay your debts on time. Ranging from 300 to 850, your FICO score is calculated according to a formula developed by the Fair Isaac Corporation (hence the acronym "FICO").
What everybody wants, of course, is a high score - the higher the better. With higher scores come lower interest rates. How do you get a higher FICO score? First, you need to know the factors that influence your score. In order, they are:
* How you pay your bills (35 percent of your score). How consistently have you made your payments on time? If you've paid bills late, how many times were you late? How late were you? How much money did you owe? Have you ever had a debt in collection? What was the size of the debt? Have you ever filed for bankruptcy?
* Your total outstanding debt (30 percent). Outstanding debt is debt of all kinds, including mortgages, car loans, credit cards, home-equity lines of credit, and any other loans that are reported to a credit agency. Another important factor here is how much unused but available credit you have on your credit cards. The absolute amount of available credit you have is less important than how close you are to maxing out the credit you've been granted. The highest scores go to people who use credit sparingly and keep their balances low.
* The length of your credit history (15 percent). The longer you've had and used credit, the higher your score. You get even more points if you have established long-term credit with the same lenders - a reason why you might not want to close long-term credit cards, even if you don't use them very much.
* Mix of credit types (10 percent). Your score is higher if you have a variety of fixed-payment loans and revolving credit.
* Recent applications for credit (10 percent). A number of applications for credit over a short period of time raises a red flag for lenders, as it is often a sign that a person is in a cash flow problem. The FICO formula takes points away for this. Multiple applications for a specific type of credit in a concentrated time frame - when you're rate shopping for a mortgage, for example - don't count against your credit score.
What doesn't have an effect on your credit score? Demographic data like your age, sex, race, education, marital status, and how long you've held your job or lived in your current home. Perhaps surprisingly, your income and whether you've ever been turned down for credit also have no bearing on your credit score.
How to Raise Your Score
Just as there are things you can do that will lower your credit score, there are also things you can do to raise it, including:
* Pay your bills on time.
* Make more than the minimum payments, especially toward credit card accounts with balances close to your credit limit.
* Transfer a portion of the balances you have on cards that are nearly maxed out to cards where you are well below the limit.
* Challenge any inaccuracies on your credit reports. You're entitled to a free credit report every year. Check it at least that often to guard against mistakes.
Your FICO score is the most common type of personal credit score, used in some form by most lending institutions. The FICO score tells lenders in a very simple way how likely you are to repay your debts on time. Ranging from 300 to 850, your FICO score is calculated according to a formula developed by the Fair Isaac Corporation (hence the acronym "FICO").
What everybody wants, of course, is a high score - the higher the better. With higher scores come lower interest rates. How do you get a higher FICO score? First, you need to know the factors that influence your score. In order, they are:
* How you pay your bills (35 percent of your score). How consistently have you made your payments on time? If you've paid bills late, how many times were you late? How late were you? How much money did you owe? Have you ever had a debt in collection? What was the size of the debt? Have you ever filed for bankruptcy?
* Your total outstanding debt (30 percent). Outstanding debt is debt of all kinds, including mortgages, car loans, credit cards, home-equity lines of credit, and any other loans that are reported to a credit agency. Another important factor here is how much unused but available credit you have on your credit cards. The absolute amount of available credit you have is less important than how close you are to maxing out the credit you've been granted. The highest scores go to people who use credit sparingly and keep their balances low.
* The length of your credit history (15 percent). The longer you've had and used credit, the higher your score. You get even more points if you have established long-term credit with the same lenders - a reason why you might not want to close long-term credit cards, even if you don't use them very much.
* Mix of credit types (10 percent). Your score is higher if you have a variety of fixed-payment loans and revolving credit.
* Recent applications for credit (10 percent). A number of applications for credit over a short period of time raises a red flag for lenders, as it is often a sign that a person is in a cash flow problem. The FICO formula takes points away for this. Multiple applications for a specific type of credit in a concentrated time frame - when you're rate shopping for a mortgage, for example - don't count against your credit score.
What doesn't have an effect on your credit score? Demographic data like your age, sex, race, education, marital status, and how long you've held your job or lived in your current home. Perhaps surprisingly, your income and whether you've ever been turned down for credit also have no bearing on your credit score.
How to Raise Your Score
Just as there are things you can do that will lower your credit score, there are also things you can do to raise it, including:
* Pay your bills on time.
* Make more than the minimum payments, especially toward credit card accounts with balances close to your credit limit.
* Transfer a portion of the balances you have on cards that are nearly maxed out to cards where you are well below the limit.
* Challenge any inaccuracies on your credit reports. You're entitled to a free credit report every year. Check it at least that often to guard against mistakes.
Subscribe to:
Comments (Atom)
