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.

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.