For the Week of June 28

Product Review: reverse mortgages

Reverse mortgages are for applicants who are a certain age. The purpose of the loan is to allow the applicant to withdrawl a calculated amount from their home equity to help pay for living expenses. The income is tax free and the home owner will never lose their home as long as they remain in their home.

tip: see reverse mortgages

FIXED RATES MORTGAGES ARE BETTER?

On the surface, adjustable (variable) rate mortgages (ARMs) look like a better deal, particularly as these loans allow buyers to afford a larger home and/or receive a lower interest rate on the amount borrowed. Compared to a fixed rate mortgage, ARMs can look pretty decent, but that is only on the surface.

ARMs At Fault -- Sort Of

Dig a little deeper and you quickly realize that ARMs are behind the current mortgage crisis. Certainly, some homeowners should never had been qualified for a mortgage in the first place given their iffy financial situation, but for many other people selecting an ARM was a problem for them too. Especially when the first wave of resets (adjustments) kicked in.

Falling Fixed-Rate 30 Year Mortgages

Some homeowners are alarmed that their new, higher mortgage payments is making it difficult for them to keep up. That $2200 monthly payment is suddenly approaching $2700, putting further strain on households already pushed to the limit. Refinancing is an option, something I will cover below.

The recent two-step drop in the benchmark Fed interest rate is a sign that the government is worried about resetting mortgages too and the impact that a rash of foreclosures would have on the economy.

Although mortgage rates don't necessarily correspond exactly to a drop in the Fed rate (instead, those rates are pegged to long-term bonds) every indication seems to show that a further drop in mortgage interest rates will still happen. How much though is not known.

Your Refinancing Window

Now is the time for all homeowners faced with the prospect of a nasty mortgage interest rate reset to consider refinancing their homes. No one knows how long this refinancing window will stay open or whether mortgage rates will drop much lower, therefore it is imperative if you are seeking relief from your current ARM to consider what it takes to qualify for a new mortgage today.

The longer you delay, the increased likelihood is that you will miss out on a special opportunity. Some homeowners may be waiting for government relief, which may or may not come, but to delay too long could mean that the refinancing window has been shut.

So, how do fixed rate mortgages trump adjustable rate mortgages? That's easy: they give consumers a predictable, stable monthly payment amount each month for the life of the loan.

Sounds reasonable, doesn't it?

More Information:

• about fixed rate mortgages
• about adjustable rate mortgages

Questionable Lending or Consumer Foolishness?

Since the beginning of 2007, news reports have been focusing on the upsurge of mortgage foreclosures with many stories slanted to cover the questionable lending practices of certain sub-prime lenders. Rarely do you read about the consumer who unwisely chose a mortgage loan option that would one day come back to bite them.

I'm not about assigning blame as there is plenty of blame to go around. However, blame looks at a problem, but does little to offer valid solutions. Instead, let's examine some ideas leading to solutions which can help you get out of your personal mortgage mess.

Do You Qualify For Refinancing?

The first step mortgage strapped consumers should take is to see if they qualify for refinancing. Unfortunately, some borrowers got into the housing market based on conditions that are no longer favorable. If you have lost your job, seen a decrease in income, or have seen other expenses increase, you may not qualify for home refinancing.

If you are behind on payments, your lender may consider foreclosing your home. On the other hand, they could end up losing big time if you were to walk away; ask your lender if they would consider offering you new refinancing home terms instead -- it is worth a shot.

Compare Your Mortgage Refinance Options

An adjustable rate mortgage may have been what got you into your current mess, therefore be cautious before choosing this option again. If you had a 3/1 adjustable rate mortgage, consider a 7/1 or 10/1 variable rate mortgage, especially if you fully expect your income to increase later on or if you plan on selling your home before an adjustment takes places.

A fixed rate mortgage is still the favorite home refi option for most homeowners and the stability of knowing that your mortgage payment never changes is comforting to many borrowers.

If a 30-year loan is too costly, consider a 40-year loan if available. You'll pay more interest over the life of the loan with the latter option, but it could hold your monthly payments down low enough to afford home refinancing. You can do another home refi in the future should your financial situation improve.

Managing Your Mortgage Loan

An important step in mortgage refinance is to be fully acquainted with the loan you are receiving. Predatory lenders have wooed unsuspecting home buyers with loans which offered low monthly payments, but tacked on negative amortization -- just as you thought you were paying down your mortgage, your overall debt burden was actually increasing! Have an accountant or an attorney review your mortgage to make sure that the loan you are getting is the loan you can afford to repay.

Consumer Savvy -- The Only Way to Be

Today's consumers must be equipped to do battle in a sea of confusing refinancing home options. Don't be victimized, but avoid being ignorant too -- home ownership should be enjoyable, not a financial misery maker.

More Information:

• about managing your mortgage
• paying down your mortgage FAST!

Your Credit Score and Mortgage Qualifying

The Federal Reserve Bank interest rate cuts over the past year opend a window for consumers who need to refinance their homes. With hundreds of thousands of adjustable-rate mortgages expected to reset in 2009-2010, the timing of this cut is on the mark for credit-worthy consumers.

The Lowest Mortgage Rate In Four Years

The new rate, at 3.25% will eventually filter down to mortgages, indeed the trend has already started. According to Bankrate, the average rate for a 30-year fixed mortgage now stands at 4.86%, the lowest it has been since March 2004.

The Fed's Emergency Action

The Fed's rate cut has been called an "emergency action" as the federal government looks at ways to stem the current mortgage financing crisis. With so many homeowners holding low-rate adjustable mortgages expected to reset at much higher rates over the next few months, politicians are seeing a crisis in the making.

When 2007 began, the subprime mortgage mess unfolded resulting in a higher number of loan defaults leading to a surge in home foreclosures. The U.S. Congress encouraged the relaxing of qualifying standards in the early part of this decade by expanding home ownership to lower-income consumers. Barely able to make mortgage payments many at-risk homeowners weren't able to meet their higher monthly payments which began to reset in 2006 for some.

Qualifying For Refinancing In 2009

Despite the good news of a rate drop, not every homeowner will qualify for refinancing. Mortgage companies have tightened up lending requirements and are insisting that the following standards be met before lending money:

Consumers must have good credit. Those homeowners who have already defaulted on their loans are not eligible to refinance and many who are behind on their payments and approaching foreclosure will also be left out. A good to excellent credit score is what most mortgage companies are now requiring.

Adequate documentation is required. Those "no-doc" or no documentation loans from just a few years ago have disappeared. Today, consumers must show proof of income, show job stability and they may have to show their federal tax returns dating back as many as the past three years.

Refinance Now or Lose Out

Some homeowners are likely to want to wait and refinance when rates drop further in order to gain the best rate possible. This could be a mistake for two reasons:

1. There is no guarantee that rates will drop much further, and
2. Mortgage rates are already below historical averages.

Any delay on seeking refinancing could close that window for some consumers. If your financial picture is stable right now, what will it be later this year? Industry experts are advising consumers needing to refinance their loans to act while they can, before the refinancing window closes for good.

More Information:

• about refinancing
• view mortgage interest rates
• run some calculations

Your Credit Score and Mortgage Qualifying

Your credit score is one of the most important numbers you need to know, perhaps having more influence over you than even your social security number does. Your credit score determines if you qualify for lending (including a home loan) and what your interest rate will be for your loans. Unlike your stable social security number, your credit score can fluctuate, depending on what you do as a consumer.

Your Score and Who Has It

Three major credit reporting bureaus track your credit history and assign a score based on what they know about you. Experian, TransUnion and Equifax are private companies, but are widely regarded as authorities in consumer credit.

The information they have about you in your personal report isn't always accurate which can impact your score. Therefore, Congress has stipulated that every U.S. consumer is entitled to one free copy of his credit report from each company annually. This move allows you to obtain your credit report and make the necessary corrections, if needed. You'll still have to pay a few dollars to get your score, but you need to have it.

3 Credit Reporting Companies, 3 Scores

Your scores won't be the same with each credit reporting company and you won't necessarily know which company's score was used to qualify you unless you ask. Some states requires full disclosure of this information to you, so ask.

Your scores are calculated similarly by all three companies with the higher scores resulting in easier loan approval and lower interest rates.

5 Parts, 1 Score

Each credit reporting company calculates your credit score (a/k/a FICO score) to include five areas with added weight given to certain criteria over others:

1. Payment History -- 35%
2. Amount Owed -- 30%
3. Length of Credit History -- 15%
4. New Credit -- 10%
5. Types of Credit Used -- 10%

If you have paid your bills on time and your outstanding balances are reasonable for your income level, then 65% of the score is weighted to these two criteria. Less weight, 35%, is given to the remaining three criteria, but they are still important considerations and can move you up or down a notch spelling the difference between approval and rejection as well as monthly payment amounts.

The Difference Between Good and Bad Credit

Ultimately, the difference between a consumer with good credit and the one with bad credit can be seen in two areas:

1. The interest rate you will be charged for loans, and
2. whether you will be lent money in the first place.

Not sure if you will qualify for that mortgage when you do your home shopping this spring? Then, go ahead and order your credit reports right now, obtain your credit scores, work on fixing credit report mistakes, and taking the steps necessary to get your credit house in order.

The pay off for you could be a new home with a competitive mortgage interest rate, something many consumers will miss if they aren't on top of their credit.