Tag Archive for 'interest rate'

You are a smart shopper. Whether it's for a bad credit mortgage, an FHA loan, or a debt consolidation home equity loan, you know what to do--get online or on the phone, touch base with several lenders, and get your disclosures quickly. Once you have decided which lender you like best, it's time to apply for your mortgage. But what about that rate quote? Is it guaranteed? What are your rights when it comes to mortgage interest rate quotes?

Recent mandated changes to the Good Faith Estimate (GFE) disclosure make it easier to discern what your mortgage interest rate is and what the costs of getting that rate are. Now, you can see at a glance if your rate is locked or not--the disclosure should tell you right at the top how long the quoted rate is guaranteed. If you have not locked your rate there should be no date on the form. Interest rates are driven by financial markets and move almost like stock prices--often changing several times a day!

Once you have locked your interest rate, you should get another GFE showing what your interest rate is and how long it is guaranteed. The new GFE should also reflect any changes in the pricing of your mortgage. Recent mortgage reforms force the lender to give an accurate estimate--no baiting and switching--and differences exceeding tolerances defined by law between the last disclosure that you receive and the actual costs become the lender's responsibility. When it comes to locking, though, you still don't have an absolute guarantee. Remember:

* Your loan is not locked until you are explicitly told it is and you get it in writing. Do not assume that your rate is locked just because you called someone and left a message to lock in your rate.

* Once you lock, the clock starts. Locks can range from 7 days to six months or more, with longer locks being more expensive. If you don't close on time, or "blow the lock," you could end up with a higher rate or having to pay a fee to extend your lock. So make sure that you do your part and quickly provide everything the lender needs to close your loan.

* Sometimes you might blow a lock and it's not your fault--the seller took too long to return an addendum, the real estate agent neglected to order tests or inspections, or the lender sat on your file too long. Don't hesitate to ask whoever caused the delay to foot the bill for an extension.

* Not everyone chooses to lock their rates. If your closing is a while out, perhaps if you are buying a house under construction or the seller wants a long escrow, it may be impracticable and expensive to lock your rate. You save the fees on a rate lock (which can range from an eighth of a point to one point or even more) if you elect to float your rate. In addition, if rates drop, you benefit by not being locked in. That said, if a higher rate would jeopardize your loan approval you probably want to play it safe by locking.

When should you lock your rate? In most cases, if the rate is acceptable to you you probably want to lock it in and then get your documentation in on time to close.

Homeowners who experience financial hiccups can find themselves in a bind. Once the emergency's over -- you have a new job, your deadbeat cousin paid you back, business picked up -- you'd like to go back to being a good financial citizen and pay your bills. Unfortunately it's not just a matter of resuming your mortgage payments -- you now have a backlog of unpaid principal, interest, fees, and maybe even attorneys' charges and there is no way you can make good on it.

If you communicate with your lender and can show that you are able to pay your mortgage, you may be offered a chance to keep your home -- in mortgage lending this is called a retention option. One kind of retention option is called a claim advance. Homeowners who have an FHA loan (which required that you pay for special insurance when you got the mortgage) or any other loan that requires them to pay mortgage insurance premiums may be able to use that insurance to get themselves out of a jam.

The deal is this: If your mortgage was to go into foreclosure, your lender would probably file a claim and the mortgage insurer would have to pay it. So it may be in everyone's best interest if that doesn't happen. If you qualify, the insurer may lend you the money to bring your mortgage current, interest-free, and at terms you can repay. So if there is any doubt about your ability to make your next mortgage payment, call your lender's workout or resolution department right away -- make it easy for them to make it easy on you.

According to the New York Times, a recent study found that minority borrowers and those with less education paid higher fees for their loans. The 270 page report, which was compiled for the US Department of Housing and Urban Development (HUD), studied nearly 8,000 mortgage loans and concluded that college-educated borrowers paid over $1,000 less than those without a college education.

The study's author, former HUD economist Sarah E. Woodward, guessed that lenders quoted lower fees to better-educated borrowers because they believed that these prospective borrowers were more likely to shop around or had a better idea of what fees they should be paying for the kind of loan they were getting.

So how does this information benefit you? That's easy. By shopping online you maintain some privacy -- your quote can't be swayed by any impression of your education, race, gender, or other factors. And the fact that you are online in the first place means it's likely that you have a certain level of savvy and that you are clearly shopping; both are factors which should motivate your lenders to give you a fair and competitive quote.

One thing you read about in connection with subprime and other loans is to beware of prepayment penalties. Maybe it's the word 'penalty' that makes this feature seem sinister. However, lenders don't expect something for nothing -- by agreeing to refrain from retiring your mortgage for a certain number of years you make lending to you a safer investment for the lender -- and there can be substantial rewards involved.

For example, you may be offered a lower rate. Or a discount on the loan fees. To determine if accepting a prepayment penalty is a smart move, consider the following:

1. The type of penalty. Prepayment penalties come in two forms, "hard" or "soft." "Hard" prepays are assessed whenever the loan is paid off before the penalty period expires -- this means if the property is sold, if you refinance, or sometimes even if you make a substantial principal reduction (lump sum payment), often anything exceeding twenty percent of the original balance. "Soft" prepayment penalties come into play only in the event of a refinance or substantial repayment -- if you sell the home you don't have to pay it. So if you think you might sell within the penalty period you wouldn't want to have a hard prepayment penalty but a soft one would be okay.

2. The terms of your loan. Many subprime loans involve a period in which the rate is fixed, then the mortgage converts to an adjustable rate mortgage. Bad credit ARM terms might not be favorable so you should avoid a prepayment penalty period that exceed the fixed rate part of the loan. For example, if the rate is fixed for the first two years of the mortgage, don't take on a 3-year prepayment penalty.

3. The size of the reward. If taking on a prepayment penalty gets you a lower rate, a mortgage calculator can show you the difference in monthly payment and how much you would save during the time you expect to keep your mortgage. If the lender offers you a few hundred dollars in exchange for a 5 year prepayment penalty it's probably not enough.

Like most mortgage loan products and features, prepayment penalties are not inherently good or evil. They can save you money when taken at the right time and for the right reasons.

What's the Truth about Bad Credit Mortgage Lending?

Here's a taste of what elected officials and the media are saying in the wake of the mortgage crisis, which first became apparent when sub-prime loans began to go bad: "Sub-prime or bad credit mortgages are evil!" "Borrowers were unable to understand (read: too stupid to figure out) what they were signing." "Home buyers were given attractive rates and then after 2 or 3 years the horrible lenders pulled the rug out from under them." "This must be stopped!"

Consider the Purpose of a Bad Credit Mortgage

Okay, so what are our leaders really saying? That it was BAD for lenders to give a decent starting interest rate to borrowers with credit blemishes? Think about it. Borrowers had two to three YEARS to clean up their credit and refinance before their rates increased. And if they didn't do it with that much time (you can get an FHA loan 2 years after a bankruptcy or 3 years after a foreclosure if you can show that you've cleaned up your act) then it seems a bit unfair to blame the lender who did after all give these buyers a chance. Subprime loans aren't meant to be a way of life; they are supposed to be a way to rebuild credit and get a home while doing it. By taking these loans away, our legislators make it harder for those who are motivated to turn their credit history around and make a housing investment to do so. And most of the people with those loans did successfully pay them -- why hurt those who are after all in the majority?

It's also unfair to the rest of sub-prime, bad credit, or Alt-A borrowers to say that the government has to protect them from themselves. Kind of insulting, like if you had a financial setback it must mean that you're stupid, greedy, or lazy. But now the government wants to add even more pages to your loan packages. Not a problem except that it increases paperwork and expense in an already burdensome process.

Make a Sub-prime or Bad Credit Mortgage Work for You

You probably don't need your hand held while getting a sub-prime mortgage. However, by following these guidelines you may be able to take advantage of a great real estate investment while prices are lower:

1. Work with a federally regulated lender. One big problem associated with bad credit mortgages is that about half of the lenders aren't subject to federal regulation or scrutiny. A reputable lender is your first defense against being ripped off.

2. Shop for your mortgage and read your documents thoroughly. Make sure that if you have a prepayment penalty it isn't longer than the fixed rate period of your loan -- you don't want to be stuck with a high rate when your loan begins adjusting. By checking with several lenders you can be more certain of getting a fair deal because subprime loans are underwritten and priced differently from traditional mortgages. It pays to have a number of lenders look at your application and see what they can come up with.

3. Use your time wisely. If you have two years to clean up your credit before a rate increase make sure you start immediately. Pay your bills on time, close any open collections, and take care of judgments or tax liens. If you don't have the discipline and the means to get this done then home ownership is probably not a good idea for you yet.

4. Try FHA first. If you are borderline-bad you might be able to squeak into an FHA program. Even if you can't, get the guidelines for approval so you know what you will have to do to be approved when you are able to refinance out of your bad credit home loan.

5. Ask for advice. That's what this blog is for -- we're here to help you with your bad credit mortgage questions.