Monthly Archives: October 2015

Interest rate vs APR

Shopping for interest rates can be confusing at times, especially when you hear different opinions from different experts.
The most common advice? Shop interest rates. Shop and compare the APR (annual percentage rate). Shop fees. So which is it?
Let’s define both Interest Rate and Apr. – This comes from Wikipedia –
Interest Rate – “is the rate at which interest is paid by a borrower for the use of money that they borrower from a lender.”
APR – “is a finance charge expressed as an annual rate.” In simple terms, it’s the cost of your credit expressed as an annual rate.
The APR rate will usually be higher than your note rate, which is your interest rate. Why is this? Because the APR includes certain fees which are calculated into the actual rate. The problem with this is that so many people tell you to use the APR as your measuring tool when shopping with other lenders. But not every lender calculates APR the same. Each lender by law is required to send you a Truth in Lending disclosure which shows you the APR.
Keep in mind, your note rate is what is used to calculate your monthly mortgage payment, not the APR rate.
So why can comparing one lender’s APR with another be misleading or incorrect? Because some lenders can leave some fees out that aren’t mandatory. The rules are not clearly defined. Sound confusing?
So, what fees are included in the APR?
These fees are generally included :
Points – both origination and discount
Underwriting, loan processing, and document prep fees
commitment fee
attorney and or title closing fees
PMI (private mortgage insurance) or MIP for FHA (Mortgage insurance premium)
Prepaid interest – Interest that is paid from the time that you close to the end of the month. The problem here is that some lenders put 1 day or 5 days down on your good faith estimate. Even if they don’t know your closing date.
Sometimes included :
Application fee
Tax related service fee
Generally not included :
Appraisal fee
Credit report fee
Title fee
Recording fees
Conclusion : What is the overall function of the APR? It’s supposed to measure the ‘true cost’ of the loan. Its supposes to create fairness and a level playing field amongst other lenders. In my opinion, it’s why comparing the APR could be a negative thing.
Another issue about the APR is that it’s based on the length of that mortgage. If you are applying for a 30 year mortgage, it will be based on 365 months. Keeping in mind that the average person moves out of their house in 6.7 years and/or would refinance their mortgage in 4 to 7 years. Overall, it’s extremely rare that someone would keep that same mortgage for the full length.
My opinion? Use the TIL (Truth in Lending) disclosure as a helpful tool to ask questions as to why it might be higher or lower than another companies’ disclosure. How would do this? By breaking down the lenders’ true costs and compare the interest rate. I would advise learning to shop your interest rate and mortgage properly.

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Prices Now within 1 percent of Pre-crash Peak

Prices of homes purchased in August using Fannie Mae or Freddie Mac mortgage financing increased by 0.3 percent compared to July the Federal Housing Finance Agency (FHFA) said today. The agencies Home Price Index (HPI) gained 5.5 percent from August 2014. FHFA also said that the increase in July, originally reported as 0.6 percent from the previous months, has been revised down to a 0.5 percent gain.

Prices as measured by FHFA are now roughly back to the same level as in December 2006.  The HPI has regained must of the ground lost following the housing downturn and is now within 0.9 percent of its March 2007 peak.

Two of the nine census divisions, the East North Central and the Middle Atlantic, posted month-over-month losses, each down 0.4 percent.  The largest gains for the month were in the East South Central at 0.8 percent and the West North Central and South Atlantic, both up 0.7 percent.

The 12 month changes were positive in every region, led by 8.3 percent in the Mountain division, 7.4 percent in the Pacific division, and 7.3 percent in the South Atlantic.  The smallest increase was 2.2 percent in the Middle Atlantic division.

Need a Home Mortgage? Fannie Says Forget the Pay Stubs

Collecting pay stubs for a home-mortgage application has been a time-honored tradition, barring a few ill-fated years running up to the financial crisis. But if changes announced by mortgage-finance company Fannie Mae catch on, that process could go the way of the dodo.

Fannie Mae on Monday said it would allow lenders to use employment and income information from a database maintained by credit bureau Equifax to verify borrowers’ ability to handle a loan, rather than relying on the traditional documentation process of collecting physical copies of pay stubs and tax data. The move is expected to make the mortgage process easier for borrowers and lenders alike.

Fannie announced other changes it said could broaden mortgage access for some borrowers. The mortgage giant will ease the lender process for granting loans to borrowers who don’t have a credit score, a key issue for advocates for certain minority groups that are less likely to have traditional credit histories. Likewise, Fannie in mid-2016 also will require lenders to begin collecting “trended” credit data from Equifax and TransUnion, which includes longer-term borrower credit histories.

Fannie Mae and competitor Freddie Mac don’t make loans. They buy them from lenders, wrap them into securities and provide guarantees to make lenders whole if the loans default.

Mortgage lenders since the financial crisis have relied on government-backed programs for most loans, making Fannie’s and Freddie’s requirements especially important in deciding what borrowers are able to get a mortgage.

Certain minority groups have had an especially hard time getting loans in recent years, in part because those groups also tend to have lower incomes or less money for a down payment but also because they sometimes don’t have traditional credit histories.

In August, Fannie rolled out a new program that let lenders count income from nonborrowers within a household, such as extended family members, toward qualifying for a loan.

But for more than a year, some advocates and industry groups also have pushed the Federal Housing Finance Agency, which regulates Fannie and Freddie, to allow the companies to use alternative credit-score models that take into account utility or rent payments.

When seeing if a loan qualifies for backing by Fannie or Freddie, lenders usually put borrowers’ data into an automated system that tells them if a borrower qualifies. But applicants who don’t have a credit score calculated by Fair Isaac Corp. typically require the lender to determine their eligibility manually, a more time-intensive process that lenders also feel could open them up to liability issues down the line.

Fannie Mae officials on Monday said that in 2016 they would begin to allow lenders to evaluate borrowers without a score through the automated process. Borrowers that have a traditional score calculated by Fair Isaac will still need to meet the 620 minimum, on a scale of 300 to 850.

As for the trended credit data, for now, Fannie isn’t saying what it will be used for. The extended data will let Fannie see if borrowers, for example, are paying off their credit card bill every month or instead are making a minimum payment and letting their balances increase. In the future, a borrower making the full payment could be treated as the safer bet.

Mortgage Rates Quietly Holding Near Lows

Mortgage rates may be higher or lower than the previous day right at the outset or they may move higher or lower in the middle of the day if the underlying bond market moves enough in either direction.  Today, the opening levels were just where they needed to be to ensure no change.  While bond markets did move a bit, we never saw anything quite strong or weak enough to result in lenders changing rate sheets.

Most lenders continue to quote conventional 30yr fixed rates in the 3.75% to 3.875% range.  Any changes from yesterday would be seen in the form of microscopic adjustments to the upfront cost/credit (as opposed to the “note rate” itself).  Apart from October 2nd, today’s rates sheets are right in line with the recent run of 5-month lows.

Should Retirees Pay Off Mortgages

Conventional wisdom holds that retirees should not enter their golden years still holding a mortgage. However, Diahann Lassus, president and chief investment officer of wealth-management firm Lassus Wherley, claims “that’s not a one-size-fits-all answer today, because there are many other factors you have to think about.”

Thanks to today’s low interest rates and reasonable long-term returns from investments, it may make more sense for retirees to carry a mortgage for a longer than usual period, she noted. Trouble is, many people are “obsessed” with paying their mortgage off. Either way, there are two parts to any such decision: the math and the emotion.

If you’re considering paying off a mortgage “because it’s really bothering you that it’s hanging over your head, you really want to start thinking about a longer time frame than tomorrow,” said Lassus. She recommends thinking 10 or even 15 years out but still making extra payments each year. However, don’t take money out of 401(k) plans and the like to help pay down your mortgage, she cautioned, “because it will benefit you more for the long term to build those retirement accounts.”

Conversely, carrying a mortgage into retirement offers a lot of financial positives — especially if you have a very low interest rate. “What you can do is invest those dollars [and] your earnings could be significantly higher, which means you’re using someone else’s money to earn more so that you’re able to build your retirement assets over time,” said Lassus. “And that tax deduction makes it even more cost-effective.”

In the end, act only after you’ve looked at the math in terms of investment returns vs. mortgage costs, she said. “But you also have to be able to sleep at night.”