Monday, September
6 2010
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Monday, September
6 2010
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Announcing a new acquisition!!
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What's New at Forte for the year 2007 January 2007 - The Ins and Outs of Mortgages and Refinancing By Forte News Department There was a time when mortgages were a fairly straight
forward instrument. There were 30-year,
fixed rate mortgage and nothing else.
Today, however, there are more than 200 different types of mortgages,
including those with adjustable-rates, according to a recent Journal of Financial Planning article
written by George Collis, CFP®, According to Collis, financial planners must now view
mortgage fact-finding, analysis, and recommendations as a central aspect of
comprehensive financial planning, not as an afterthought. “Mortgage options have direct implications
for cash flow, risk management, asset accumulation, retirement, and legacy
planning,” Collis wrote earlier this year. And part of the fact-finding includes helping those seeking
a mortgage or refinancing to navigate the tricky shoals of applying for and
securing the best possible terms, according to David Reed, author of “Mortgages
101,” and “Mortgage Confidential.”
Here, according to a recent release, is what Reed and other planners say
homeowners and would-be homeowners need to know about mortgages and
refinancing: To get the best deal on a mortgage, planners recommend
working with a lending officer who understands your needs. Spend time getting clear on the difference
between features and benefits; choose the loan that offers you 1) the greatest
benefit for you, 2) at this time, and 3) in these circumstances. Be very clear about that, and be prepared to
ask for options that address your agenda, not the loan officer’s. If the lending officer can’t address your
questions and needs, find another lending officer. Don’t wait until rates are 2 percentage points below your
current rate before you refinance.
While the “2 percent rule” seems to have been around forever, Reed
suggests that it simply doesn’t make sense.
To determine whether or not a refinance is worth your while, consider
both the new monthly payment and the associated closing costs that will
accompany the new loan, he says. You do
this by taking the difference between the current payment and the projected new
payment, and dividing the closing costs (exclusive of amounts to fund the new
escrows) by the monthly savings. If you
plan to hold the mortgage for more months than that number, you’re ahead by
refinancing. A more refined analysis
will use the after-tax cost of the monthly payments instead of the nominal
costs. There are, of course, many
factors beyond the loan interest rate that should be considered when making a
decision to refinance. Often, the most
significant factor is cash flow. Cash-out refinancing can cost you more than you think. Typically, a homeowner might refinance their
current mortgage and pay off their credit cards, car loans, or other
debts. But Reed suggests that doing so
only works on paper. To be sure, the
homeowner has gotten rid of their car payment.
But what was once a four- or five-year note is now stretched out over 30
years. The bottom line is this:
Consider a cash-out deal only if you were going to refinance your mortgage
anyway because of the lower rates available.
Don’t do it because some loan officer showed you how much lower your
payments would be if you consolidated your bills, unless short-term cash flow
is one of your concerns going into the refinance conversation. For the purpose of tax deduction of mortgage
interest expense, IRS classifies two types of mortgage: acquisition and home
equity. Converting an acquisition
mortgage into a refinance changes the classification and that may impact what
amount of interest can be deducted. Page 2/ Mortgages Reed also recommends learning what the mortgage lingo
means. Know, for instance, the
difference between loan prequalification, pre-approval, and approved with
conditions. A loan prequalification, or
“prequal,” letter simply states that you’ve had a discussion with a loan
officer. Pre-approval letters are
issued after credit approval has been obtained either from an automated
underwriting system (AUS) or from a human underwriter. This is a pre-approval because a full
approval is not issued until a full loan package is submitted for review—which
includes an acceptable property appraisal and a ratified contract. Some realtors will accept a prequalification
letter, while others want a pre-approval letter. Know the difference between “clear to close”
and funded. When all the conditions
have been signed off on, everything is in order, the property has been
evaluated, and your loan papers have been printed, you’re clear to close. Your new home isn’t officially yours,
however, until your loan has been funded, and the deed has been recorded. Typically, the funds aren’t wired to the
borrower. They are wired to the closing
agent, who brings the funds to the closing where they are then given to the
seller upon completion of the signing.
Of note, the terms are not universal.
In some states the language would be as follows: When all “prior to” conditions have been met
the loan is characterized as “clear to close.”
That means the closing department can draw loan documents and transmit
them to the title company for the closing. Lastly, ask your lender about your loan’s “yield
spread”. Yield spread is a commission
paid to the loan officer by the lender, and it can amount to thousands of
dollars. Knowing that the loan officer
stands to receive a large yield spread will give you more room to negotiate
lower closing costs such as origination fees and document preparation
fees. These fees, called “junk fees”,
often provide tremendously high margins, and therefore may be negotiated if the
loan officer is getting paid elsewhere. December
2006— This column is produced by the Financial Planning Association, the
membership organization for the financial planning community, and is provided
by David W. Henion, a local member of FPA | ||||||||||||||
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