California Home Loan Advice and Tips

The source of funds for refinancing is the equity owned in a property. Home equity should be considered as a major savings and should be preserved as long as possible. We all know that it takes years to save the down payment for purchase of property. Making regular and excessive mortgage payments over the years coupled with appreciation of property create the equity that should be considered as a major security and savings for property owners.

Refinancing of the equity should be beneficial to owners. It should be planned to achieve specific objectives and financial gains or improvement. Borrowers should have the required equity to refinance as well as have sufficient income to service their new mortgage loans.

When refinancing, borrowers should be aware of following important factors:

Closing costs

Is applicable to various fees payable by borrower such as escrow, title, appraisal, processing, insurance, interest, lenders fees, origination or points etc. Basically borrowers would be paying similar fees to those that were paid when the property was purchased. Because of larger loan amounts in California due to higher properties values, the closing cost would be a few thousand Dollars. The cost could be either added to the loan amount or paid as out of pocket expenses by borrowers.

Buy down rates

Borrowers could pay additional fees to lenders, equivalent to 1 or 2 percent of their loan amount to significantly lower their interest rates. Depending on interest rates and market conditions, the “buy-down” could be beneficial provided borrowers are not planning to refinance in near future. Generally a “buy-down” benefits borrowers on the long term. However, a careful review would be necessary to determine if buy down would be beneficial and generate significant savings for borrowers.

Pre-pay penalties

Borrowers should make sure that refinancing of their existing loans are not subject to pre-pay-penalty. Generally the penalty is applicable only to the initial 3 years. Depending on loan amount, the penalty could be significantly high. Normally it’s calculated at 6 months of current interest at 80%. However, there can be exception to this rule. It’s recommended that borrowers contact existing lenders to find out about their penalty.

Following are some of the options that should be considered when refinancing.

Refinance, rate and term (no cash-out)

Owners may have a high Adjustable Rate Mortgage (ARM) or high interest fixed rate mortgages. Others may want to accelerate paying off their mortgage by choosing shorter terms such as 25, 20,15 years or bi-weekly payments. Switching ARM or high interest loans to lower fixed rates mortgages, could result in lower mortgage payments and higher
Equity.

Selecting shorter terms or bi-weekly payments, will accelerate paying off the principal and increase equity. Shorter-term loans will require higher mortgage payments. Borrowers should carefully consider the affordability for servicing their new mortgages thus to avoid financial hardship in future.

Special conditions, Refinance rate & term (no cash-out)

Borrowers, who have had their loans for a number of years, should keep track of interest rates especially when rates are dropping. It’s quite possible that rates may have dropped significantly since their last loan. Refinancing at the right time with low interest rates could reduce the terms of loans without increasing payments.

For example, lets assume we have a mortgage for $350,000 at fixed rate of 6.50% for 30 years for which monthly payments would be $2,214. Suppose that the borrower also makes excessive monthly payment of $185 (total $2,397). At end of the 7th year the principal balance should be $297,000. Lets refinance only the principal balance at 5.50% fixed for 15 years. Monthly payments would be $2,426.74 which is only $30 more than above-mentioned payment $2,397. Consequently, borrower has reduced the terms of loan by 8 years and a saving of $212,544 or more. .

Debt Consolidation (refinance, cash-out)

Borrowers may want to cash out to consolidate their high interest bearing accounts such as credit cards, auto loans, installment accounts, home equity or second loans etc. Others may want to pay off student loans or educational cost for family member or pay off medical bills etc. Eliminating the high interest payments versus the substantially lower interest rate would be a major savings. Paying off the debts would improve your credit rating. Also, there is always the possibility that if you had your mortgage for a number of years, chances are that refinancing could reduce monthly payments due to lower interest rates. Nevertheless, the interest for the new mortgage could be tax deductible. Combination of all these points would be a win win situation for borrowers.

Home Improvement (refinance, cash out)

Borrowers may want to cash out for purpose of home maintenance and improvement of their property before selling. Others may want to keep their properties but plans on improvement and additions. However, proper planning and good workmanship should increase value of properties, which could result in higher equity. Major improvements and additions should be made in accordance with local building codes.

If you plan to sell your property in near future, make sure the major improvements and additions are undertaken when the real estate market is strong and sales prices are moving higher. Also avoid excessive improvements compared to other properties in the neighborhood. For short terms refinancing, an ARM loan with no penalty may be beneficial.

With all these factors to consider knowning when to Refinance is something a dedicated mortgage professional can help you with. American Financial Services has been serving California borrowers since 1989. We have many combined years of knowledge and expertise, and we work closely with you to protect and serve the interest of our clientele the “property owners.” To find out more about AFS, simply contact us today for a free consultation of your financial situation, we would welcome the opportunity to serve you. Try our free consultation with no obligation, you will be pleasantly surprised and impressed with our professionalism and integrity.

Borrowers should be knowledgeable about mortgage rates, loan programs and various options available to reduce the life of their loans thus to significantly save thousand of dollars in interest payments. There is no doubt that low fixed rate loans are far more secure and beneficial versus volatile loan programs such as Adjustable mortgages, Pay-Options etc. It’s recommended that initially based on affordability factor, borrowers should be concerned in choosing the type and terms of mortgage loans with lowest payment obligation to avoid unanticipated financial difficulties such as late-payments, notice of defaults, foreclosures etc. Making regular payments on time would be a big relief for homeowners while improving their credit ratings. Subsequently, borrowers should be very much concerned to plan affordable ways to reduce the life of their loan thus to achieve significant savings. It should be noted that all loan programs including those with pre-pay penalty, allow borrowers to make excessive payments at any time toward principal reduction.

The most popular method to reduce life of loans is the fixed rate “Bi-Weekly” (BW) payment. This method requires borrowers to make a total of 26 BW payments during each calendar year, which results in making one extra payment per year. The excessive payments over the years will generate significant interest savings as explained under Bi-Weekly mortgage. Other options are the fixed rate loans with shorter terms such as 25, 20 and 15 years which can generate significant savings in interest as explained below under the chart.

The purpose of this article is to review these options for fixed rate conventional loans as well as to demonstrate that there are other simpler, safer and affordable options to achieve significant savings while committed to lowest monthly payment obligation (LMPO).

30 years fixed rate mortgages

The low fixed rate mortgage for 30 years is one of the most popular and affordable loan programs because of lower fixed payments during the life of loans. For example, lets assume we have a conventional loan for $350,000, fixed for 30 years @ 6.50% interest rate. The fixed monthly payment would be $2,214 during the life of loan. Lets consider the $2,214 as the LMPO. The only problem with the fixed rate 30 years loans is the slow pace of principal reduction (PR) during the early years. Although PR will gradually increase as loan ages, nevertheless borrowers should always be concerned with how to accelerate the principal pay-off thus to significantly save interest while increasing their equity.

Bi-weekly mortgage payments

This method requires borrowers to make a mortgage payment every 14 days, which is referred to as Bi-Weekly (BW). The BW payments will not improve the interest rate. It only accelerates the principal reduction by splitting regular monthly payments into BW. For example, the BW payments for $350,000 fixed for 30 years @ 6.50%, would be $1,106 every two weeks. Hence because of the BW payments, total interest saving during the life of loan would be about $104,166 versus the same loan amortized in 30 years.

The BW payments are an effective way to make significant savings. However the problem is the commitment to make BW payments. Life is full of surprises and unanticipated events such as illness, accidents, lay-offs etc. that could lead to financial hardship to keep up with the BW payments.

Our Recommendation

American Financial Services has been working with borrowers to help them save thousands of dollars since 1989. In our example, our recommendation to avoid the commitment to Bi-Weekly payements would be to make the above-mentioned $2,214 plus voluntarily excessive payments of $184.50. Therefore total payments would be $2,398.50. This will result in total interest savings of approximately $103,100 due to the extra payment of $184.50 per month. The result is same as Bi-Weekly payments except for $1,066. However, notice that payments are made on monthly basis rather than Bi-Weekly. Should borrower face any unanticipated difficulty, the excessive payments can be discontinued for a while and then resumed. We know life can throw unexpected expenses at you, that is why our loan consultants works closely to find a solution that meets your needs. Our loan consultants can help you with your individual financial needs, simply contact us for more detailed solutions. Next we will discuss the huge saving borrowers can obtian with refinancing and short term mortages.

Shorter term mortgages 25, 20, 15 years

Many borrowers choose shorter terms fixed rate mortgages to quickly pay-off their loans thus to achieve significant savings in interest. Shorter terms require higher monthly payments during the life of loan. Obviously, if borrowers can financially handle the higher payments for duration of the loans, then they should select the appropriate short-term mortgage to pay-off their loans earlier while increasing their equity.

It’s interesting to review the following chart which demonstrate the interest savings of short-term mortgages versus the 30 years fixed rate loan. For realistic comparison, all rates are the current interest rates at par value effective 08/10/07 for a conventional loan of $350,000: -

N O T E: Blue bars show the total interest payable during the life of each term/rate

Borrowers should be absolutely sure that they could make the higher mortgage payments as shown above. This is a long-term commitment plus the ever-increasing property tax, insurance, HOA and other fees.

On the other hand, assume that a borrower chooses a 30 years fixed rate mortgage for which payment would be $2,155. However, this borrower also decides to make voluntary excessive payment of $775 for a total payment of $2,930 per month. This will result in paying off the loan in 15.6 years (187 months), versus the original term of 30 years. Total savings in interest versus the 30 years term would be approximately $227,743. The difference versus the 15 years term would be approximately $21,600. This difference is due to lower interest rates applicable to 15 years fixed rate mortgages. This difference can be made up by couple of lump sum payments during the life of loan. The same scenario and savings will be applicable to other shorter terms of 20 or 25 years.

Based on above recommendation, legally and financially, the borrower is committed only to paying $2,155 and not the $2,930. Should this borrower faces financial difficulties, he or she can always reduce or discontinue the excessive payments of $775 for a while and then resume the additional payment as well as make up for any shortfalls.

The question arises as to which way is more realistic and safer? Do borrowers have to commit to higher payments for duration of the loan? It’s an important choice for borrowers. Realistically, it’s a matter of Income, budgeting and discipline for borrowers.

Other recommendations

Lets assume we have a fixed 30 years loan $350,000 @ 6.25%, for which the regular monthly payments are $2,155. However, the borrower has been making voluntary excessive payments of $185 per month. After 7 years, the principal balance would be $295,844. During the 7 years, borrower has received gift money, tax refund or inheritance money. Lets say that lump sum payments amounting to $10,344 were made toward principal reduction. Therefore the loan balance at end of 7th year is $285,500. Consider that interest rate at the end of 7th year have dropped to 5.750% for a 20 years fixed mortgage.

Knowledgeable borrowers should take advantage of market conditions by refinancing the loan balance $285,000, say for a 20 years fixed rate @5.750% for which the regular payments would be $2,001 per month. Notice that payment from $2,155 dropped to $2,001 (minus $154). Nevertheless the borrower continues to make the previous payments of $2,155. This will result in paying off the loan in 15.32 years or 184 months or a total interest savings approximately $135,920 versus the original term of 30 years while reducing the pay-off period by 8 or 9 years.

This example clearly demonstrates that making regular and/or lump sum excessive payments and refinancing at the right time, could save hundreds of thousands of dollars. Call it creative financing. Implementing various factors at right time could lead to significant saving. Every regular or lump sum voluntary excessive payment, no matter how small, will save thousand of $$$ over years.

Fixed Rate loans

With a fixed rate loan, monthly payments for principal and interest (PI) will never change for the life of loan. Payments for property tax and hazard insurance (TI) are subject to nominal changes due to tax assessor evaluation of the property and increased insurance premiums. The Home Owners Association (HOA) fees could be subject to periodic increases. Fixed rate loans are available with terms of 40, 30, 25, 20, 15 and 10 years.

Borrowers could shorten the life of their loan by making bi-weekly payments. The bi-weekly payments could shorten the life of a 30 years loan by as much as 6 years or more.

The most attractive aspect of fixed rate loans is that the PI and most probably, PITI as well, will remain as a constant number. Normally for homeowners the largest part of cost of living is the PITI, which could be as high as 35.0% to 40.0% of gross income. Imagine that during the life of loan, devaluation of currency, increased cost of living, inflation, recession and other adverse economical conditions, will not affect a major part of cost of living because of the fixed rate payments.

It is strongly recommended that borrowers should lock their low fixed rate loans to safe guard their interest. Every attempt should be made to make excessive payments to shorten the life of their loan.

Adjustable Rate Mortgages (ARMs)

ARMs come in large varieties of loan programs, which are primarily structured based on following components: -

• Index
Are outside rates or values that are determined by financial markets on daily basis, which are subject to daily fluctuation based on markets activities.
Following are some of the major indexes used by a large number of lenders to determine the interest rates for ARMs. -
1-CD: Certificate of Deposit (CD) rate for 6 or 12 months.
2-MTA: 12 months average US treasury securities.
3-COFI: Federal Home Loan Bank’s 11th district, cost of funds.
4-LIBOR: London Inter Bank Offering Rate.

• Margin
Margin is a pre-determined fix number that is offered by lender for different ARM loan programs. It’s a fixed number for life of the loan. It could be 2.250, 2.500, 2.750 or higher.

• Interest Rate
The interest rates for all ARMs loans are determined by adding the applicable INDEX to the MARGIN. For example, assume today’s index for 12 MTA is 5.134% and the previously selected fixed margin is 2.750. Thus the interest rate for the loan would be 7. 884 %.

• Periodic Adjustment
Most ARM loans are subject to rate adjustment every 6 or 12 months. Most programs have a “cap”, which establishes the maximum rate increase that interest can go up in one period. In reality “caps” are checkpoints to prevent your payment going up too much at once. The cap or adjustments could be restricted to say 1.0% every six months or maybe 2.0% per year. Thus if rate goes up by more than two percent, borrowers are protected against excessive increases.
There is always the possibility that rates may remain unchanged for a while. If so, adjustment to interest rates may not be applicable and payments may remain unchanged for a while. On the other hand, interest rates may drop which could result in lower monthly payments.

Caps will kick in only when interest rates are moving higher. There are no restrictions when rates drop. Rates could drop by 1 or 2 points in a given year. Accordingly, monthly payments could decrease.

• Cap or the maximum ceiling
All ARM loans have a cap or maximum ceiling for the life of loans. Normally the maximum ceiling could be 6.0% plus the initial index value. For example, if the loans were tied to LIBOR index that is operating at 5.0, the maximum ceiling for life of the loan would be at 11.0%. Therefore even if the market rates exceed the 11.0% or the maximum ceiling, borrowers are protected and would not be subject to the excessive interest rates.

Depending on market conditions, interest rates may move higher until the maximum ceiling. Interest rates could remain at the cap rate for while before dropping. Under such scenario, based on the adjustment period as explained above, monthly payments could keep on decreasing thus moving away from the maximum ceiling or the cap.

• Interest only ARM

In reality the INTEREST ONLY loans are another type of ARM, with fixed interest rates during their introductory periods of 3, 5, 7 and 10 years. During these periods, payments are made on the basis of INTEREST ONLY. Hence monthly payments cover only the interest with no amortization. Consequently, there is no principal reduction and the original loan amount remains unchanged. However, borrowers are free to make excessive payments toward principal reduction. Normally these loans are subject to pre-pay penalty, which could be for initial period of 1 to 3 years.

At the end of the introductory periods, the interest rates will change over to the prevailing adjustable rates based on the above-explained Index, Margins and other factors. Following the introductory periods, the monthly payments could substantially increase due higher rates for ARM and amortization of loan during the remaining life of loan. Amortization means the original term of loan or the pay-off period i.e. 30 years. Assume that original term were for 30 years with an introductory period of 7 years. Consequently, at the end of 7th year the remaining life of loan is 23 years. This means that the original loan has to be paid-off in 23 years.

These loans could be attractive only during their introductory period. It is strongly recommended that borrowers refinance their INTEREST ONLY loans at the end of penalty period or before end of the introductory periods by switching over to lower fixed rate loan.

With all the numerous factors that go into both Fixed and Adjustable loans you need to have a dedicated loan specialist working closely with you to find a solution that fits your needs, not the lenders. American Financial Services has been serving California borrowers since 1989. We have many combined years of knowledge and expertise, and we work closely with you to protect and serve the interest of our clientele the “property owners.” We would welcome the opportunity to serve you. Try our free consultation with no obligation, you will be pleasantly surprised and impressed with our professionalism and integrity.

To qualify for any mortgage loan, the loan must be under written (UW) by lenders prior to approval and funding. UW covers a comprehensive and detailed review and evaluation of the borrowers financial status thus to determine the affordability that borrowers can meet their loan obligations and other debts. At the same time, lenders are very much concerned that the properties values used as a collateral for the loan, that physically are in good conditions and appraised values are within the market comparison prices.

Whether you are purchasing or refinancing a home, you must qualify for mortgage loans. Qualification is based on applicants’ credit rating (FICO score), gross income, employment, total debts including any unsettled liens, collections etc. Ultimately applicants should meet lenders qualifying ratios, referred to as Debt-to-Income ratios (DTI). Another crucial factor of loan approval is the Appraisal report. Applicants should be aware that there are other important factors taken in to consideration for approval of mortgage loans, which are not covered in this article.

The purpose of this article is to explain only the following important under writing guidelines, which are reviewed by lenders prior to loan approval:

• Credit Rating

Lenders will pull a tri merge credit report from the 3 main credit-reporting bureaus Experian, Equifax and Transunion. Each bureau assigns a credit rating named FICO score. Generally the credit ratings are divided in to two categories of “ A paper “ and “ sub-prime “. Scores exceeding 720 are rated as excellent. Scores higher than 680 are considered good rating while scores exceeding 620 would be rated not to good. Generally scores below 620 are considered poor and would be subject to sub-prime lending guidelines. For rating purpose, only the mid FICO score is considered. The highest and lowest scores are disregarded. For loans with co-applicant(s), the lowest mid score of the applicants would be considered for rating.

Bankruptcies (BK) and mortgage lates are crucial factors in loan approval. Many lenders insist that BKs should be a minimum of two or three years old since discharged date. Also any mortgage late during past 12 or 24 months, may not be allowed.

• Gross Income

Applicants can report their income as STATED or FULL DOCS (FD). The Gross income for FD is determined based on most recent pay stubs, W2 and tax returns for last 2 years. Other incomes subject to verification with a 2 years proven track such as part time jobs, rental income, interest income etc, would be considered as part of gross income.

• Employment

Applicant’s main employment should be for a minimum of two years in the same profession. The 2 years would also apply to self-employed as well and to most of the other jobs/income referred to above under other income. A business license would be required for self-employed applicants.

• Total Debts

The tri merge credit reports, will disclose each applicant’s total debts and related monthly payments for credit cards, auto loans or leases, alimony, child support, student loans, other installment loans etc. Additionally, all unsettled liens, collection and derogatory accounts are disclosed by credit report.

Note: depending on description of derogatory accounts, many lenders may require settlement of unpaid liens, collections etc prior to funding of loans.

• Mortgage payments

Based on the loan amount, terms and interest rate, the monthly payments consisting of principal interest and (PI), are calculated. Additionally, the monthly property tax and hazard insurance (TI) are added to PI to determine applicants total monthly mortgage obligation referred to as PITI. Should there be any other fees such as Home Owner Association etc, such fees would be added to PITI to determine total primary housing expenses.

• Qualifying ratios (DTI)

The DTI ratios are divided in to two major parts: -

1- Primary housing expenses/income
The ratio is calculated by dividing the monthly PITI (including HOA etc), by total monthly gross income. This ratio should be in the range of 30.0 to 40.0%, preferably below 36.0%. Thus it’s assumed that 36.0% of gross monthly income would be used to service the primary housing expenses.

2- Total obligation/income
Add monthly PITI (+ HOA etc), to total monthly payments for all debts to determine the total monthly payments for all obligations. Divide this number by gross income to calculate the ratio for all obligations, which should not exceed 45.0%. Thus it’s assumed that 45.0% of gross monthly income would be used to cover both PITI as well as all other debts.

NOTE: Depending on the loan programs and other factors, the ratio for total obligation/income could be as high as 50. % of gross income.

• Appraisal reports

If you are purchasing, the appraisal must support the purchase price. If refinancing, the appraised value should support the loan-to-value. Physically, the property should be in good conditions with no defects in structural integrity, operating systems, appliance, no termite infestation etc.

Overwhelmed?

Purchasing a home for the first time or any subsequent time can be an overwhelming and intimidating process. But it doesn’t have to be. The mortgage professionals at American Financial Services want to make the home financing process as easy as possible for you. Put your trust in our strength, professionalism, and commitment to serve you, not the lenders.

We have experienced mortgage professionals with knowledge and expertise to “custom-tailor“ the most convenient and cost-effective mortgage loan to get you into your new home.

Our experts can help you:

• Determine how much you can afford.
• Choose the right loan - a Fixed Rate Mortgage for security and safety - or an Adjustable Rate Mortgage for flexibility and control - or perhaps your situation requires a Special Mortgage for unique borrowing needs.
• Get you pre-qualified before you start looking for a new home. You’ll get negotiating power and save a lot of time, too. Simply fill out our online mortgage loan application.
• Get together all the documents needed in advance. This includes tax returns, W-2’s, paycheck stubs, financial statements, etc. This will save time and stress during the application and
  approval process.

Simply fill out our online mortgage loan application and our loan consultants will contact you within 24 hours for a free evaluation and our recommendation or for faster service contact us at 1(88 350 - 4AFS, there is no obligation and you have nothing to lose.

It’s strongly recommended to have a home inspection completed whether you are selling or buying a home. Professional home inspectors who are licensed, bonded, and insured should perform the home inspection.

The purpose of home inspections is primarily to safeguard the interests of the buyers as well as to expedite closure of the deals. Buyer should know what are the physical conditions of the home they want to purchase. The following are some of the systems and areas that home inspectors will look at to determine functionality or defects in the property.

• Structural integrity, foundation, framing etc
• Roofing
• Electrical systems
• Plumbing and Sprinkler systems
• Heating & Air conditioning systems
• Termite
• Water heater, appliances
• Pools, Jacuzzi
• Hazardous substance, septic tanks
• Cosmetic conditions, floors, paint, etc

Before listing a property on the market, sellers should order a home inspection to find out if their home might contain any deficiency. Many home inspection reports are satisfactory with no defects. Nevertheless, if the report discloses deficiencies, it would be in the best interest of sellers to make the necessary repairs thus to improve the quality and marketability of their home before listing it on the market.

Many sellers may choose not to fix the deficiencies and to sale their home “as is”. There are large numbers of older homes listed for sales, which have not been upgraded for many years. Realistically, such properties could have major deficiencies and many owners of older properties are not even aware that their home may have defects. It is always in the best interest of the sellers and buyers to have the home inspection. If the inspection report discloses major problems, it may be in the best interest of buyers to cancel the deal. Otherwise, depending on the nature of disclosed defects, buyers should demand that sellers fix all defects prior to closing of the deal.

It’s strongly recommended that buyers purchase offer include a contingency for the inspection of the home. Buyers must insist on a professional inspector hired by buyers. Should there be any deficiency, the inspector will disclose any and all problems, code violations and related cost of repairs.

Should the inspection report be of major concern, it may be in the best interest of buyers to cancel the deal. Cancellation must be in writing before expiration of the contingency period. To cancel the deal, buyers should serve written notices to escrow, listing agents and sellers before expiration of the contingency period. Consequently, buyers can walk away from the deal with out any liability and escrow would refund to buyers their good will deposits.

An experienced mortgage professional can make sure buyers are fully protected and insured against any unforeseen or undisclosed defects when purchasing a new home. However, some mortgage brokers and agents will try to skip completing a home inspection to speed up the process of a home purchase, ignoring the effects it will have on the buyers and sellers if a costly repair is uncovered. American Financial Services has been protecting and helping buyers from costly and even harmful defects and repairs by insisting on home inspections before completing a new home purchase. We take pride in helping our borrowers get the best purchase offer for their needs by making sure their new home is secure and their interests are protected. For more information about home inspections or how to protect yourself when purchasing a home contact our mortgage professionals. We are here to work for you and will always work to find a solution that meets your needs.