Mortgages. Higher Lending Charges Are Outrageous.
After you scraped together a modest deposit for your new home you may think you’re home and dry. Think again. On top of there’s the surveyors and solicitors to pay. Then the government want a slice. You’ve got to pay stamp duty at 1% of the property’s price (if the house costs more than 250,000 the rate of stamp duty increases see the information at the foot of this article). Phew! You’re lucky you’ll just make it you’ll be a homeowner at last!
Then out of the blue the mortgage lender sends you a new bill another 1,500 please Sir. They’ve called it a Higher lending Charge (HLC) and it’s charged if you borrow more than 90% of the value of the house. About 75% of all mortgage lenders charge it and 1,500 is about the average they ask for.
And guess what they money you pay won’t benefit you in any way whatsoever! Not one jot. You’re being charged for a form of protection insurance that protects the mortgage lender, not you. The HLC pays the lender if you default on your mortgage, your property has to be repossessed and the sale proceeds are less than the outstanding balance on your mortgage. In theory the HLC then pays out the shortfall to the lender but in practice many lenders carry the risk themselves so the HLC is just an extra fee to offset a higher lending risk.
But an HLC doesn’t let you off the hook! If your home is repossessed and there’s a shortfall, you still have to pay the shortfall back to your lender – they’re sure to chase you for the money.
Whilst most of the lenders who charge HLC’s will readily agree to add the charge to your mortgage, that’s little consolation. In any case this means that you’ll end up paying interest on top of the charge. Then, over a 25-year term, your HLC will have cost you closer to 2,700!
In our opinion HLC’s should have died out with the dinosaurs. If a lender is worried you’ll default, they shouldn’t have lent the money in the first place. And with all today’s hi-tec credit checks and the risk based assessments used to process your application, you’d think the lenders were doing enough to protect themselves. In any case you may also end up paying a small interest premium for a 90% plus mortgage so in practice you’re being charged twice for the same risk!
The Nationwide Building Society, who incidentally do not charge HLC’s, recently reported that during the last five years 1 billion has been charged in HLC’s by some 800,000 borrowers. It also found that just over 500,000 were first time buyers largely youngsters struggling to buy a home. We believe that HLC’s are just another money making ploy for the mortgage lenders. By the way, the Higher Lending Charge used to be called a Mortgage Indemnity Guarantee, but they are all the same – only the name is different!
We think it’s time for the Office of Fair Trading to open up the box and take a look inside in the same way as they did with credit cards. The OFT recently ordered many credit cards to reduce their charges by up to 40%. A bit of that magic would do wonders for Higher Lending Charges!
Current Stamp Duty rates on house purchases in the UK
Houses under 125,000 No Stamp Duty
Houses 125,000 to 249,995* 1%
Houses 250,000 to 499,995* 3%
Houses over 500,000 4%
*HM Inland Revenue rounds up house prices to the nearest 5. Therefore, a house sold for between 249,996 and 249,999 will be rounded up to 250,000 and they’ll charge you 3% Stamp Duty on the lot!
Information correct as from the April Budget 2006.
Mortgages. Exit Fees To Be Capped.
In the last 3 to 5 years we have seen rises of up to 450% in the exit fees charged by lenders when borrowers redeem their mortgage. But at last the Financial Services Authority (FSA) ha seen the light and is going to crackdown on these increases.
Lenders have been telling new borrowers about the exit fees currently charged, but the lender has retained the right to increase those charges at any time and without advising borrowers. This amounts to a free hand to increase these charges and many lenders have taken the opportunity gladly.
Take the Woolwich for example; they’ve increased their exit fee from what was 95 to 275. The Cheltenham & Gloucester has increased theirs from 50 to 225. The lenders have clearly been trying to penalise those of us who regularly switch their mortgage to get the best interest rates the so called rate tarts and at the same time line their coffers.
However, the FSA is now in talks with the mortgage lenders to bring them to heal. The FSA wants fees to be fully disclosed at the outset and for the disclosed exit fee to be fixed for the duration of the mortgage. The FSA hopes to have agreed a binding undertaking from the lenders by June this year.
On a wider front, borrowers should always remember to take into account all the charges and money saving offers when working out which mortgage is cheapest for them.
To illustrate this point, let’s say you wanted a 2-year fixed rate mortgage and were attracted by the offers from the Northern Rock and the Halifax.
Northern Rock currently charges an interest rate of 4.19% plus a 1.5% arrangement fee and an exit fee of 250. Halifax’s interest rate is 4.39% with an arrangement fee of 499 and exit fee of 175. Within Halifax’s package there’s also a free valuation and free conveyancing that typically could save around 750. So which mortgage deal is the cheapest?
Taking a 25 year repayment mortgage for 100,000 and costing it over the first two years with redemption at the end of the second year, The Northern Rock comes out at 14,671. The Halifax comes out at 807 cheaper at 13,864. And this saving doesn’t take into account the extra 750 valuation and legal savings offered by the Halifax. Therefore, assessed on this basis, the 4.39% headline rate offered by the Halifax is in fact the cheaper deal.
Another issue that will affect the true cost of your mortgage is whether the interest is charged on a daily, monthly or annual basis. On an otherwise like for like basis, annually calculated interest will always work out more expensive because for 11 months of the year, you are charged interest on money you have already repaid.
The best advice is to read all the small print! And remember that the lenders use all sorts of words to describe charges – application, arrangement, reservation, booking, completion and early redemption are all words to described charges or fees. Keep your eyes skinned!
Mortgage Terms and Definitions
The mortgage process can be a little confusing if you aren’t familiar with the terms used in the process. To help you out, here is a list of terms with corresponding mortgage definitions.
Broker: An independent mortgage professional that oversees the entire home loan process.
Lender: The business entity providing and funding the home loan.
Processor: Prepares your loan for underwriting. The processor makes certain your income is properly documented and verified, the appraisal is being performed, and title and escrow are opened.
Escrow: Works with title to certify payoff demands for all existing liens. Escrow is an independent group which disburses monies to all parties in the loan transaction and ensures full payment.
Underwriters: Make the decision to approve or deny the loan. Hired by the lender, their job is to review all aspects of the loan based on the lender’s approval guidelines.
Automated Underwriting: A computer generated loan approval. This automated process only takes minutes and is the quickest path to approval.
ARM: Adjustable Rate Mortgage. An ARM has a fixed rate for a specified amount of time. After the initial term, the loan becomes adjustable and the rate can fluctuate depending on market conditions. ARM payments are initially lower than fixed rate payments. This is an excellent option for people with damaged credit, those who plan to sell their homes short term or who simply want to save money on their monthly payment.
DTI: Debt to Income Ratio or your total monthly debt in relation to your gross monthly income. For example if you have 2,500 in total monthly debts with a total income of 5,000, your DTI is 50%. The higher the DTI, the higher the lender’s risk and 50% is typically the maximum allowable DTI.
Equity — The amount of vested or owned interest in your property. Subtract the total balance owed on the property from the appraised value to determine your equity.
FICO Scores: Most lenders use the FICO scoring system to qualify borrowers. The FICO score is a number assigned from each of the three main credit repositories (Experian, Trans-Union, and Equifax). This number is calculated based on your complete credit profile and takes into account late payments, balances on trade lines, inquiries for additional credit, judgments, bankruptcies, total debt, length of credit history, and more. The lower the FICO score, the higher the lender’s risk.
LTV: Loan to Value Ratio. For example: a loan amount of 75,000 on a home valued at 100,000 equals an LTV of 75%. Your equity would equal 25,000, or 25%. The higher the LTV ratio, the higher the lender’s risk.
Stated Income: Your own statement of income on the application versus income that can be independently verified. Use of stated income is an excellent option for self-employed individuals or those with hard to prove income.
Getting a mortgage for a home purchase can be stressful. If you understand the lingo being used, you will find it less so.
Mortgage Shopping Tips
When shopping for a mortgage loan, every lender will have different rates, fees and points for each loan program. When shopping for a mortgage loan, it is important to understand the three components of a Rate and Fee Quote: (1) Premium Rates (2) Lender Fees and (3) Discount Points.
A Premium Rate offer is any interest rate above the market rate (referred to as the Par Rate). While the Par Rate changes constantly during the day, most lenders will commit to a specific Par Rate early in the day. If the Par Rate is 6.00%, the lender will only earn revenue if they offer you a rate above Par (for example, 6.25%).
Lender fees are charged for services performed directly by the lender, which may include Processing Fees, Underwriting Fees, Origination Fees, etc. These fees are charged to offset the cost of processing, closing, and funding your mortgage loan.
Discount Points often represent the largest fees associated with your mortgage loan as one point equals 1% of your loan amount. If you are applying for a loan amount of 350,000 and pay 2 Discount Points, the Discount Point Fee would be 7,000. Borrowers may use Discount Points to obtain rates below the Par Rate. For example, if the Par Rate is 6.00%, a 5.75% rate would indicate that the Borrower will have to pay Discount Points.
Factors to Consider
Every lender provides multiple combinations of Rates, Fees, and Points across a variety of different programs. All of these choices can become overwhelming when trying to decide between different programs, rates, and fee packages. To limit the possibilities, it is often helpful to answer a few key questions:
How long do you expect to have this loan? Consider the probability of relocation, moving, or refinancing when determining your timeframe. Think in terms of 5 and 10 years.
Do you have the available cash to pay additional fees now to lower the interest charges later? Be sure that paying upfront fees is the best use of your money. For example, paying higher fees or points for a lower rate may not be a good use of cash while carrying high credit card balances.
If you expect to have the mortgage a long time, paying points to reduce the rate makes economic sense because you are going to enjoy the lower rate for a long time. If your time horizon is short, avoid points and pay the higher rate because you won’t be paying it for long.
If you plan to have your loan for 5 years, paying 1 Discount Point on a 350,000 loan will cost you 3,500 upfront while saving you 88 a month. After 40 months of savings, you have recovered your upfront cost and will benefit from the lower rate. If you stay in the loan for 10 years, you will have created an additional 7,060 in interest savings over the life of your loan. Just like interest, points are 100% tax deductible in the year you pay them.
The second factor is your opportunity cost. What could you do with the money if you didn’t use it to pay points? Even if you expect to be in your house a long time, there could be other uses for your money that take precedence over the long-run savings from a lower interest rate. A useful way to pull these factors together is to look at the payment of points as an investment that yields a return that rises the longer you stay in your house.
Mortgage Rescue Scams Are On The Rise
One type of mortgage rescue scam involves a predatory real estate investor stealing the equity a victim has built up in their home. Typically, the scammer will tell the victim they want to help save the home from foreclosure. This real estate investor will tell the victim he or she will buy the house personally, or will arrange to have another investor purchase the house.
The scammer promises to lease the house back to the victim for a period of 12 to 24 months to allow the victim to recover financially, repair their credit, find a better job, etc. They say that after the victim is economically healthy they will sell the house back at the end of the lease.
The real estate investor will often also attempt to sell credit repair services, mortgage broker services, and job placement services to the victim as part of the scam. Eventually, the scammer will force the victim out of their home and then sell the house, keeping the equity for themselves.
Government officials are seeing more of this type of criminal scam as mortgage rates increase and increasing numbers of homeowners are facing higher mortgage payments.
The scammers often use company names reflective of church affiliations. Often they use connections through social organizations or churches to meet victims.
Another type of mortgage rescue scam is a lease back transaction built on a series of lies. The scammer has no intention that the victim will be able to avoid losing the home. The scammer leases the house back to the victim with lease payments as high, or higher than the mortgage payments the victim was failing to make in the first place.
The scammer will often fail to provide the promised credit repair services, mortgage broker services, or job placement services that would be needed to put the victim in a position to repurchase the property at the end of the lease. As soon as a lease payment is missed the scammer will move to have the homeowner evicted.
Once the homeowner is evicted, the scammer will sell the house, pay off the underlying mortgage, and keep the equity. The victim end up with ruined credit and any mortgage obligations not satisfied by the sale of the home in the scam transaction.
There are many other variations on this scam. Sometimes the scammer will purchase the house from the victim below market price. The loan application may claim that the scammer intends to occupy the house when, in fact, there is already an agreement to lease the house back to the seller which is not disclosed to the lender. This lie helps insure that the loan will be approved and will give the scammer a better interest rate on the mortgage than if it had been an investment loan.
Sometimes the scammer will use an investor to purchase the house with a mortgage loan at below market value. The investor, who is often another victim, will then immediately quit claim the house to the scammer, often for a fee being paid by the scammer. The investors loan application will often claim the property is to be owner occupied when there is a lease agreement already in place with the seller. The existence of the lease will not be disclosed to the lender.
Scammers find vulnerable people through marketing, public records, or personal networks. Marketing includes direct mailings, radio and TV ads, or simpler approaches such as posting fliers. Public records may be found at county recorders offices where notices of trustee sales are available to the public.
Personal networks often include churches or community organizations. Professional networks can be used to locate victims when the scammer is also a real estate agent, mortgage broker, loan officer, attorney, or appraiser with inside information about the victims vulnerable financial position and pending foreclosure.
If you know people involved in these types of scams, call the Department of Financial Institutions Enforcement Unit with details.
Mortgage Refinancing for investment
Are you caught in the vicious cycle of debt? Even if you have, be assured that it is common phenomena these days and there are definitely ways to get out of it. The traditional moneylenders have metamorphosed into banks, brokerage firms plus individual brokers. These agencies can lure you into further debts or help you depending upon your needs as well awareness of how the system works. Mortgage refinancing is one such method that promises a way out of debt.
In fact, Mortgage refinancing is not only the end to a means but means to yield further profits. It usually works for -
a) Miscellaneous debt
b) And high expenditures.
Mortgage refinancing for investment is a very upcoming phenomenon. You should be very well acquainted with the norms and regulations of mortgage refinancing, if you are planning for an investment. You can gain from the equity on you mortgage refinancing for investment.
If you are planning to have mortgage refinancing for investment, you must know that it would help in:
a) Raising the monthly payment sum for loans
b) Lowering rate of interest on loans
c) Getting the equity on the mortgage loans
The professional brokers and marketers have through information about the trend of the mortgage refinancing. It would help to gain higher revenues from your investments if plan the mortgage refinancing. Some of the most important factors that would influence your revenue are:
a) Your financial records and account indirectly influences the rate of interest. The mortgage refinancing firms tend to give clients with better financial history benefits on mortgage interest. You can enjoy lower rate of interest on the mortgage refinancing amount. Whereas individuals with bad credit history and insecure financial prospects are usually allotted higher rate of interest on the mortgage. Thus, leading to a loss from the benefits on earnings form refinancing for investment.
b) A study of the market would reveal the different mortgage refinancing quotes and rates. Even if your target were solely to refinance your mortgage getting just any rate of interest would lead to loss of valuable money. Try to get the mortgage refinancing at the period when the rate of interest goes down. You can save a lot of money by paying lower premiums to the bank. Besides, the money saved from the transaction could be deposited in your savings account. You can invest the money on further purchase of bonds and equity. The excess amount can be utilized to repay the mortgage loans, educational loans, health insurance premiums, auto loans and travel insurance.
c) Finally, the tenure of mortgage refinancing would predict the rate of interest. Compare the various mortgage refinancing quotes before signing the contract. Always discuss the possibilities of an extended tenure. There are some companies that have lower rate of interest on a longer term length. Whereas most of the firms increase the rate of interest after a certain gap of time. Thus, lowering your earnings from the mortgage refinancing for investment.
Mortgage Refinancing Below 500 FICO
If you have been turned down for a mortgage refinance, especially a cash out or debt consolidation refinance, because your lender says your credit score is under 500, there are a variety of new options and strategies available which can help you get the cash you need now to pay off your credit card debts, collection accounts, and other derogatory or poor credit accounts and improve your FICO credit score to the point where you can qualify for a low interest, fixed rate loan.
First, you may be wondering why the number 500 is such a big deal. A FICO credit score is a number from 300 to 850 which is meant to represent your reliability as a borrower, and takes into account how much credit has been extended to you, how much money you owe and whether or not you pay it on time. Banks like to tell us that 99% of people in the US have credit scores of 500 or higher, and use this as an excuse not to even bother lending to people with credit scores under the magic 500 FICO score. As far as theyre concerned, since only 1% of the population has a FICO below 500, they simply dont have the time to design programs to help these people buy or refinance homes.
Weve worked with dozens of people who have come to us with FICO scores below 500 over the years, and every one of them says the same thing. I just need help right now, and everyone I talk to keeps saying NO. This is because until very recently, it was extremely difficult to get a loan if your credit score was 499 or less, and even today, only a few mortgage lenders, whether theyre banks or brokers, have the time or attention required to focus on the needs of what they think are a few unfortunate people. So until very recently, if your credit score was under 500, the only chance you had at refinancing or obtaining a home loan was if you went to a hard money lender.
If youve ever come across these individuals, you might not have been able to tell the difference between hard money or private mortgage lenders and a loan shark, and while that comparison is not entirely fair, it is to a certain extent accurate. Hard money lenders are small investors who lend only against the hard equity in your home, generally not more than 60% or 70% of the property value, the loans are generally short term, very high interest rate (12% to 15% or more), command huge upfront fees and closing costs, often up to 10% of the loan amount, and rarely if ever do they report your timely payments to your credit bureaus, making it harder to improve your credit. Why would anyone borrow money from a lender like this? In the past and even today, banks and other mortgage lenders have said no to sub 500 credit score mortgages or home loan refinances, and sometimes you just need the money that badly.
Many people have touted the benefits of credit repair services to prospective borrowers with scores under 500. The proposal often reads like this, first, give them a thousand pounds out of your pocket to fix your credit, which they will accomplish in six months, and then once your scores are over 500, they get a loan done for you. Of course never mind that 1,000 is a lot of money for most people with 700 credit scores, and very often a heck of a lot for an individual seeking a mortgage refinance to consolidate debts. Add to that the fact that conventional credit repair takes too long for most people to wait without the extra cash to pay off bills that you get with a refinance, and you can see that credit repair by itself is not a very efficient proposition if what you really need is a refinance loan today. Thats not to say credit repair doesnt work, its just that it doesnt work very well for most people who are under 500 FICO seeking a debt consolidation, refinance or home purchase loan.
Over the years weve taken a harder look at the numbers, and it turns out that the banks and credit reporting agencies may have drastically underestimated the number of people in this country whose credit ratings are actually under 500 FICO. There are literally millions of people nationwide who fit into this category, and we have spoken with our share. What do we know? That most people with credit scores below 500 are hardworking, honest people whose credit is suffering from the realities of living and working in America today. As tight as our budgets are stretched in this country today, it only takes a very short term disability or unemployment to severely damage our credit scores. And some of us might have gotten in a little over our heads when we were younger, but in the years since weve been trying to get back on the road to good credit, and were sick of getting charged sky high interest rates every time we get a new credit card, apply for a car loan, or get denied for a bank loan and wind up calling on the aforementioned hard money private mortgage lenders. We knew the banks had missed something. Our friends below 500 were not only more numerous than they had previously estimated, they were also more than some credit score, they were good people.
So we developed a strategy which we are sharing in the hopes that other borrowers under 500 can reap some of the benefits that our own clients have. Weve helped borrowers with no money in the bank, 50,000 of bad debt, and sky high monthly payments driving them into the poor house get out of debt, get some money in their pockets and eventually achieve major financial improvement in a very short amount of time.
And how does it work? First, there are a few major, institutional lenders which have programs that allow us to arrange and refinance real mortgage loans at competitive interest rates for borrowers with credit scores under 500. These are real, federally and state regulated lenders, not private investor groups who will take your last pound and send you on your way. Ask your mortgage broker about these programs, and if he doesnt know what youre talking about, get a new broker.
The typical strategy is a credit improvement strategy, where the goal is to take enough cash out of your home to pay off as many of your past due, high interest, or high payment debts as possible. We recommend taking a little extra cash from closing if possible, or to use some of the savings from your lower overall payments so that you can enter stage two of the strategy, which is third party credit repair. A good quality credit repair agency should cost less than 300 pounds overall and can clean up your credit and remove a lot of delinquencies and other items which are negatively impacting your credit. Combined with all the truly harmful items which youve paid off with your debt consolidation refinance, you should be able to improve your credit score by 50, 100 points or even more. I have seen a client go from a 485 FICO and 65K in combined credit card and auto loan debt and a total monthly payment of over 2800 to a 610 credit score and a payment of 1900 per month in less than 4 months. How did that payment get so low? Once their credit score went over 600, we were able to qualify them for a new mortgage at a low interest rate, because now our friends had good credit, and paid off the few remaining debts which they had by consolidating through refinance. Before the process, their average interest rate across all debts including home, cards and cars was nearly 22%, and afterwards, the average rate was under 9%.
We hope you find this information useful in reshaping your own financial future, and hope that you tune in for the next in this series of articles.
Mortgage Refinancing Basics
Your mortgage may have a 30-year term, but not many homeowners stay with the same loan for that long. In fact, the average American refinances his or her mortgage every four years, according to the Mortgage Bankers Association. Thats because paying off your present mortgage and taking out a new one can mean big savings over several years. However, refinancing comes with a price in the short term, so its important to consider both the costs and benefits before making your decision.
Why refinance?
Here are some reasons to consider refinancing your mortgage:
1. To obtain a lower fixed rate. If you took out a fixed-rate mortgage several years ago and interest rates have since dropped, refinancing may lower your payments considerably. A 150,000 mortgage with a 30-year term and a rate of 8 percent, for example, carries a monthly payment of 1,100. The same mortgage at 6 percent will have a payment of less than 900 a month.
2. To switch to a fixed rate or an adjustable rate mortgage. Adjustable-rate mortgages (ARMs) offer lower interest rates initially, but some homeowners find the fluctuations stressful. If rates are on the way up, you might consider locking in at a fixed rate and consistent monthly payment. On the other hand, if you want to reduce your monthly payments and are comfortable with the interest rate changes of an ARM, it could save you money to refinance to an ARM.
3. To reduce your monthly payments. Refinancing for a longer term will lower the amount you have to pay each month. You will end up paying more in interest charges over the life of your loan, but if youre having difficulty making your current payments, this strategy could provide some relief.
4. To turn home equity into cash. You may want to take out a new mortgage with a larger principal, in order to turn some of your home equity into cash for a major expense. This is called cash-out refinancing. The advantage of taking out a loan secured by your home is that you can get a lower rate of interest than you can with an unsecured loan or credit card. However, if the interest rate offered for your refinanced mortgage is higher than your current rate, a home equity loan or line of credit might be a better choice.
Is refinancing right for you?
If youre refinancing in order to pay less interest, you wont usually see the savings right away. Thats because lenders typically charge fees when you take out a new mortgage, and you may also have to pay a penalty for getting out of your old one. To determine whether refinancing makes financial sense for you, consider these issues:
1. How long you plan to be in your home. If you expect to move in a year or two, you may never realize the potential savings youd get from refinancing. As a rule of thumb, the longer you plan to stay in your current home, the more sense it makes to refinance.
2. The prepayment penalty on your current mortgage. Many mortgages carry a penalty if you pay them off early. The amount varies, but it is usually a small percentage of the outstanding balance, or several months worth of interest payments.
3. The costs of the new mortgage. When you take out a new loan, your lender may charge a number of fees including application, appraisal, origination and insurance fees, plus title search, insurance and legal costs that can add up to thousands of pounds. Lenders may also charge discount points, which are paid upfront to secure a lower interest rate. As a guideline, expect fees to eat up any potential savings unless your new interest rate is at least a half a percentage point lower than your current one.
To learn more about mortgage refinancing and when it makes sense, visit http:www.lendingtree.comcecyourhomeyourmortgagemortgage-refinance.asp