What are the most common Home Equity mistakes?
- Not knowing if your loan has a pre-payment penalty clause. If you are getting a “NO FEE” home-equity loan, chances are there’s a hefty pre-payment penalty included. You’ll want to avoid such a loan if you are planning to sell or refinance in the next three to five years.
- Getting a home-equity loan from your local bank without shopping around. Many consumers get their equity line from the bank with which they have their checking account. By all means, consider your bank, but shop around before making a commitment.
- Getting too large a credit line. When you get too large a credit line, you can be turned down for other loans because some lenders calculate your payments based upon the available credit — not the used credit. Even when your equity line has a zero balance, having a large equity line indicates a large potential payment, which can make it difficult to qualify for other loans.
- Not understanding the difference between an equity loan and an equity line. An equity loan is closed — i.e., you get all your money up front and make fixed payments until it is paid in full. An equity line is open — i.e., you can get numerous advances for various amounts as you desire. Most equity lines are accessed through a checkbook or a credit card. For both equity loans and lines, you can only be charged interest on the outstanding principal balance. Use an equity loan when you need all the money up front — e.g., for home improvements, debt consolidation, etc. Use an equity line when you have a periodic need for money, or need the money for a future event — e.g., children’s college tuition in the future.
- Not checking the lifecap on your equity line. Many credit lines have lifecaps of 18 percent. Be prepared to make payments at the highest potential rate.
- Not getting a good-faith estimate or initial loan estimate of closing costs. Within three business days after the broker or lender receives your loan application, you must receive a written statement of fees associated with the transaction. This is both the law and the best way to determine what you’ll pay for your loan. You should not be expected to pay fees which are substantially different from those contained in your GFE or loan estimate.
- Assuming that your home-equity loan is fully tax-deductible. In some instances, your home-equity loan is NOT tax deductible. Do not depend on your mortgage company for information regarding this matter — check with an accountant or CPA.
- Getting a home-equity line of credit when you plan to refinance your first mortgage in the near future. Many mortgage companies look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage. If you plan on refinancing your first, check with your mortgage company to find out if getting a second will cause your refinance to be turned down.
- Getting a home-equity line to pay off your credit cards when your spending is out of control! When you pay off your credit cards with an equity line, don’t continue to abuse your credit cards. If you can’t manage the plastic, tear it up!
What are the most common Refinancing mistakes?
- Refinancing with your existing lender without shopping around. Your existing lender may not have the best programs. There is a general misconception that it is easier to work with your current lender. In most cases, your current lender will require the same documentation as other companies. Even if you have made all your mortgage payments on time, your existing lender will still have to verify assets, liabilities, employment, etc. all over again.
- Pulling cash out of your credit line before you refinance your first mortgage. Many lenders have cash-out seasoning requirements. This means that if you pull cash out of your credit line for anything other than home improvements, they will consider the refinance to be a cash-out transaction. This usually results in stricter requirements and can, in some cases, break the deal!
- Getting a second mortgage before you refinance your first mortgage. Many mortgage companies look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage. If you plan on refinancing your first loan, check with your mortgage company to find out if getting a second will cause your refinance transaction to be turned down.
- Not doing a break-even analysis. Determine the total cost of the transaction, and then calculate how much you will save every month. Divide the total cost by the monthly savings to find the number of months you will have to stay in the property to break even.
Example: if your transaction costs $2000 and you save $50/month, you break even in 2000/50 = 40 months.* In this case you’d refinance if you planned to stay in your home for at least 40 months. *Note: This is a simplified break-even analysis. If you are refinancing considering switching from an adjustable to a fixed loan, or from a 30-year loan to a 15-year loan, the analysis becomes much more complex.
- Not getting a written good-faith estimate or initial loan estimate of closing costs. Within three business days after the broker or lender receives your loan application, you must receive a written statement of fees associated with the transaction. This is both the law and the best way to determine what you’ll pay for your loan. You should not be expected to pay fees which are substantially different from those contained in your GFE or loan estimate.
- Using the county tax-assessor’s value as the market value of your home. Mortgage companies do not use the county tax-assessor’s value to determine whether they will make the loan. They use a market-value appraisal which may be very different from the assessed value.
- Signing your loan documents without reviewing them. Whenever possible, review in advance the documents you’ll be signing. (Even though some specifics of your transaction may not be known early in the transaction, the documents you’ll sign are standard forms and are available for review.) It’s unlikely that you’ll have sufficient time to read all the documents during the closing appointment.
- Not providing documents to your mortgage company in a timely manner. When your mortgage company asks you for additional documents, provide them immediately. They are doing what’s necessary to get your loan approved and closed. Delays in providing documents can be costly.
What are points?
A point equals one percent of the loan. Points are usually paid at closing. If your loan amount is $100,000…then one point would equal $1,000…one percent. Discount Points are fees paid by the buyer to the lender to reduce the loan’s interest rate. If you plan to keep the residence for five or more years, it may be worthwhile to pay discount points to reduce your monthly payment and achieve greater savings over the life of the mortgage. The number of discount points required to buy down your interest rate will vary based on loan type. Consult Royal United Mortgage LLC for details on your specific transaction. Generally speaking, points are tax deductible when you are buying a primary residence, however we recommend you consult your tax advisor for information on limitations to tax deductibility.
What is an APR?
The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. Typically the APR is found next to the rate.
|30-year fixed||8%||1 point||8.107% APR|
The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan. The APR is designed to measure the “true cost of a loan.” It creates a level playing field for lenders.
What is PMI? Can I get rid of the PMI on my loan?
PMI or Private Mortgage Insurance is often required when you buy a house with less than 20% down. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. This insurance protection is provided by private mortgage-insurance companies. It enables lenders to accept lower down payments than they would normally accept. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender’s losses in the unfortunate event of foreclosure. Therefore, without mortgage insurance, you might not be able to buy a home without a 20% down payment. The cost of PMI increases as your down payment decreases. Example: The cost of PMI on a 10% down payment is less than the cost of PMI on a 5% down payment. Your PMI premium is normally added to your monthly mortgage payment. The decision on when to cancel the private insurance coverage does not depend solely on the degree of your equity in the home. The final say on terminating a private mortgage-insurance policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, in most cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. Some lenders may require that you pay PMI for one or two years before you may apply to remove it. To cancel the PMI on your loan, contact your lender. In most cases, an appraisal will be required to determine the value of your property. You will probably also be required to pay for the cost of this appraisal. Another way of canceling the PMI on your loan is to refinance and to get a new loan without PMI. Get a free mortgage quote today or call us at 1-888-ROYAL-65 (1-888-769-2565) to find out more about “No PMI” Loans.
Can my loan be sold?
Your loan can be sold at any time. There is a secondary mortgage market in which lenders frequently buy and sell pools of mortgages. This secondary mortgage market results in lower rates for consumers. A lender buying your loan assumes all terms and conditions of the original loan. As a result, the only thing that changes when a loan is sold is to whom you mail your payment. If your loan has been sold, your existing lender will notify you that your loan has been sold, who your new lender is, and where you should send your payments from now on.
What is the difference between pre-qualifying and pre-approval?
A pre-qualification is normally issued by a loan officer, who, after interviewing you, determines the dollar value of a loan you may be approved for. However, loan officers do not make the final approval, so a pre-qualification is not a commitment to lend. Pre-approval is a step above pre-qualification. Pre-approval involves verifying your credit, down payment, employment history, etc. Your loan application is submitted to an underwriter and a decision is made regarding your loan application. Getting your loan pre-approved allows you to close quickly.
Why do mortgage rates change?
To understand why mortgage rates change, we must first ask the more general question, “Why do interest rates change?” It is important to realize that there is not one interest rate, but many interest rates!
- Prime rate: The rate offered to a bank’s best customers.
- Treasury bill rates: Treasury bills are short-term debt instruments used by the US Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each Treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).
- Treasury Notes: Intermediate-term debt instruments used by the US Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.
- Treasury Bonds: Long-debt instruments used by the US Government to finance its debt. Treasury bonds come in 30-year denominations.
- Federal Funds Rate: Rates banks charge each other for overnight loans.
- Federal Discount Rate: Rate New York Fed charges to member banks.
- Libor: London Interbank Offered Rates. Average London Eurodollar rates.
- 6 month CD rate: The average rate that you get when you invest in a 6-month CD.
- 11th District Cost of Funds: Rate determined by averaging a composite of other rates.
- Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly.
- Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.
Interest-rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.
This leads to a fundamental concept:
- Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).
- Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).
A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.
Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply/demand equation for mortgage rates may be different from the supply/demand equation for interest rates. This might sometimes result in mortgage rates moving differently from other rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower rates even though interest rates may have moved up!
There is an inverse relationship between bond prices and bond rates. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price at maturity — typically $1000. If the price of the bond is currently at $900 and there are 10 years left on the bond and if interest rates start moving higher, the price of the bond starts dropping. The higher interest rates will cause increased accumulation of interest over the next 5 years, such that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000.
Effect of economic data on rates
Number of arrows indicates potential effect on interest rates.
1 arrow=least effect, 5 arrows=max. effect
|Economic Event||Effect on Interest Rates||Significance of event|
|Consumer Price Index (CPI) Rises||.....||Indicates rising inflation.|
|Dollar Rises||.||Imports cost less; indicates falling inflation.|
|Durable Goods Orders Increase||...||Indicates expanding economy|
|Gross National Product Increases||.....||Indicates strong economy|
|Home Sales Increase||...||Indicates strong economy|
|Housing Starts Rise||...||Indicates strong economy|
|Industrial Production Rises||...||Indicates strong economy|
|Business Inventories Rise||...||Indicates weak economy|
|Leading Indicators (LEI) Increase||...||Indicates strong economy|
|Personal Income Rises||.||Indicates rising inflation|
|Personal Spending Rises||.||Indicates rising inflation|
|Producer Price Index Rises||.....||Indicates rising inflation|
|Retail Sales Increase||..||Indicates strong economy|
|Treasury Auction Has High Demand||.||High demand leads to lower rates|
|Unemployment Rises||.....||Indicates weak economy|
What if there is an error on my credit report?
If you see an error on your report, report it to the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly. Your loan officer may also be able to assist you.
How can I increase my FICO score?
While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.
- Pay your bills on time. Late payments and collections can have a serious impact on your score.
- Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
- Reduce your credit-card balances. If you are “maxed” out on your credit cards, this will affect your credit score negatively.
- If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.
What is a FICO score?
A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrower’s credit history into a single number. Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports. Credit scores analyze a borrower’s credit history considering numerous factors such as:
- Late payments
- The amount of time credit has been established
- The amount of credit used versus the amount of credit available
- Length of time at present residence
- Employment history
- Negative credit information such as bankruptcies, charge-offs, collections, etc.
There are really three FICO scores computed by data provided by each of the three bureaus –– Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score.
Should I Refinance?
The most common reason for refinancing is to save money. Saving money through refinancing can be achieved in several ways:
- By obtaining a lower interest rate that causes your monthly mortgage payment to be reduced — rate and term only.
- By reducing the term of the loan, thus saving money over the life of the loan. For example, refinancing from a 30-year loan to a 15-year loan might result in higher monthly payments, but the total of the payments made during the life of the loan can be reduced significantly.
- Cash out for unforeseen expenses or home improvements.
- People also refinance to convert their adjustable loan to a fixed loan. The main reason behind this type of refinance is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas adjustable loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock in low rates. When rates are high, homeowners prefer adjustable loans to obtain lower payments.
- Homeowners refinance to consolidate debts. The loans being consolidated may include second mortgages, credit lines, student loans, credit cards, etc. In many cases, debt consolidation results in tax savings, since a consumer loan is not tax deductible, while a mortgage loan is tax deductible.
The answer to the question “Should I refinance?” is a complex one, since every situation is different and no two homeowners are in the exact same situation. Sometimes, you do not have a choice –– you are forced to refinance. This happens when you have a loan with a balloon provision, but with no conversion option. In this case it is best to refinance a few months before the balloon comes due. Whatever you choose to do, consulting with a Royal United Mortgage LLC advisor can often save you time and money. Get a free mortgage quote today or call us at
1-888-769-2565 and we will help you get started.