survey at Best Mortgage

According to the latest news, ACORN (the Association of Community Organizations for Reform Now), has just issued the results of the impact of upcoming adjustments to adjustable rate mortgages. To refresh your memory, ACORN is the nation’s largest community organization which deals with low and moderate-income families. Their study used a sample of 275 subsidiary lenders owned by 15 of the largest lenders in the country. These lenders represent 65.5% of all residential mortgages that were originated in 2005 and 55% of the sub-prime market. Each of the lenders was asked to provide the public version of data they collected as mandated by the Home Mortgage Disclosure Act (HMDA) which includes information on the race, gender, and census tract of each applicant and whether the applicants received high-cost loans. The study examined only first conventional purchase and refinance mortgages; no government guaranteed (i.e. VA or FHA) loans. 130 metropolitan areas were examined to determine the disparities between borrowers of different race and income levels to identify those areas and groups that may pose the greatest risk of “rate shock.” ACORN noted that, while ARMs represent about 24% of all home loans nationally, in some communities and among some demographic groups they account for a much larger percentage of the mortgage pool. ARMS also make up about 75% of all sub-prime loans - a 50% increase since 1999. The report stated that “until this year there has been little recognition of the prevalence of adjustable interest rates in sub-prime loans and the danger posed by these ARMS.” The focus instead has been on predatory practices such as excessive fees, high interest rates, and balloon payments. Sub-prime loans are generally tailored for a market where people cannot obtain a conventional loan at a standard rate but Freddie Mac and Fannie Mae have estimated that at least 1/3 of sub-prime borrowers could actually have qualified for a lower cost mortgage so, it would seem that a “large number of the borrowers who have received ARMS should not have been in the sub-prime market.” The ACORN study found 32 markets where at least one out of three loans given out was high cost and thus subject to rate reset shock. In ten of these markets high cost loans represented 2/5 of the home purchase and refinance mortgages. The ten were Detroit, Michigan, Memphis, Tennessee, Jackson, Mississippi, McAllen, El Paso, Laredo, Brownsville, Texas, Springfield, Illinois, Birmingham and Alabama.
ACORN also found that minority neighborhoods are at a great risk of payment shock because of the extent of high cost loans. More than half of the high-cost refinance loans in 67 of the areas examined in the study were in minority communities and in 44 of these areas over 50% of the purchase loans were high cost. And the risk was not limited to the low income in minority areas. Upper-income minority borrowers were found to be at greater risk than white borrowers of similar income. In 12 metropolitan areas upper-income African-Americans were at least three times more likely than their white counterparts to receive high-cost refinance loans and in 15 metropolitan areas upper-income African-Americans were at least five times more likely to receive a high-cost purchase loan than upper-income whites. These areas are mostly southern or east coast (Atlanta, Baltimore, Charleston, Durham, Jackson, NYC, Washington, DC, plus Milwaukee and San Francisco). Interest rates for sub-prime ARMs are usually tied to the London Inter-Bank Offer Rate (LIBOR) with a margin of about 5.5% added on. The LIBOR has increased from 1.21% in January 2004 to 5.64% in June 2006. While many ARMs have rate caps that limit the amount that a rate can adjust on each anniversary and over the life of the loan, many sub-prime loans do not - or else have caps that allow very large increases. Even a typical 2% cap on a $150,000 loan would allow an increase in the monthly payment of $212.
Another survey, performed by Public Opinion Strategies, found that lower-income people did not think that traditional mortgages were an option for them and we also less informed about reset shock and the debt risks. Borrowers with prepayment penalties and minimum equity may be unable to refinance out of a loan that, once it readjusts, they can no longer afford. The First American Real Estate Solutions research notes that approximately 1 million households are in danger of losing their homes through foreclosure aver the next five years because they will not be able to afford new payment levels and will owe more on their homes than they can recoup through a sale or refinance. The ACORN report shows that the impact of rate reset shock may be concentrated in certain metropolitan areas and among certain demographic groups that can eventually cut the prices down.

Weekly national mortgage survey shows that rates continue falling the 4th week, more people are refinancing their home loans and fewer people are getting adjustable-rate mortgages (just 27.2% applied for adjustable-rate mortgages last week). The 30 year fixed-rate mortgage fell 6 basis points to 6.51%. A basis point is one-hundredth of 1 percentage point. The mortgages in this week’s survey had an average total of 0.33 discount and origination points. One year ago, the mortgage index was 5.88%; four weeks ago, it was 6.89%. The 15-year fixed-rate mortgage fell 2 basis points to 6.23%. The 5/1 adjustable-rate mortgage fell 4 basis points to 6.28%. Getting a fixed-rate loan is the logical move for a lot of borrowers, because the rates on ARMs aren’t as competitive as they used to be. A year ago, the average rate on a 5/1 ARM was 5.56%, or 32 basis points lower than the 30-year fixed. This week, the 5/1 ARM is 23 basis points lower than the 30-year fixed.

Today more and more lenders are offering home equity lines of credit or second mortgage closed-end loans. These types of loans may offer a sizable amount of credit, available for use when you need and at an interest rate that is relatively low. A second or junior mortgage is a closed-end loan and provides you with a fixed amount of money repayable over a fixed period. This type of loan advances all funds at the time the loan is closed with no further advances. You might consider a traditional second mortgage loan instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.
What you must do is look carefully at the credit agreement and examine the terms and conditions including the annual percentage rate (APR), the costs you’ll pay to secure the loan and prepayment penalties. The disclosed APR will not reflect the closing costs and other fees and charges, so you will need to compare these costs among lenders, as well as the APRs. Remember that the APR for a home equity line is based on the periodic interest rate alone and it does not include points or other charges. You can compare the closed-end “note” rate with the line of credit APR and their other charges.
Let’s suppose you made up your mind to refinance. So, if you are a homeowner who was lucky enough to buy when mortgage rates were low, you may have no interest in refinancing your present loan. But perhaps you bought your home when rates were higher or perhaps you have an adjustable-rate loan and would like to obtain different terms. When can your refinancing be worthwhile? A general rule is that refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. This figure is generally accepted as a safe margin when balancing the costs of refinancing a mortgage against the savings. If you finally decided to refinance you must know that there are costs to pay for second mortgages. Those are:
1) Application Fees that are charged by your lender and which cover the initial costs of processing your loan request and checking your credit. 
2) Loan Origination Fees and Points are charged for the lender’s work in evaluating and preparing your mortgage loan. Points are prepaid finance charges imposed by the lender at closing to increase the lender’s yield beyond the stated interest rate on the mortgage note. One point equals one percent of the loan amount. For example, one point on a $65,000 loan would be $650. 
3) Other Closing Costs  are listed below with average costs:
Appraisal Fee $ 75 to $300
Survey Costs $150 to $400  
Home Inspection Fees $175 to $350  
Lender’s Attorney’s Fees $75 to $200  
Title Search & Insurance $450 to $600  
Homeowner’s Insurance $300 to $600  
Mortgage Insurance (one year + 2 months premium depending on amount and type of loan) 
4) Prepayment Penalty on your present mortgage could be the greatest deterrent to refinancing. Prepayment penalties are forbidden on VA and some other types of loans. Second mortgage loans cannot have a prepayment penalty imposed on loans refinanced by the same creditor, accounts paid by the proceeds of credit insurance, or if paid after three years. 
5) Escrowed Funds are funds sufficient to pay for taxes or insurance that is coming due shortly.
A homeowner should plan on paying an average of 3 to 6% of the outstanding principal in refinancing costs or 3 to 10% on second mortgage loans plus any prepayment penalties.
And in conclusion let’s try to answer the following question: “Since it costs money to refinance, how do I know whether or not I will end up saving money?”
Let’s try to do some calculation. To save money, you must stay in your house longer than the “break-even period” – the period over which the interest savings just cover the refinance costs. The larger the spread between the new interest rate and the rate on your existing loan, the shorter the break-even period. The more it costs to obtain the new loan, the longer the break-even period. But beware! The break-even period is not the cost of the new loan divided by the reduction in the monthly mortgage payment. The rule of thumb does not allow for the difference in how rapidly you pay off the new loan as opposed to the old one.  Let’s say that in 1992 you took out an 11% 30-year fixed rate loan, which now has a $100,000 balance and 21 years to run. You refinance into a 7% 15-year loan at a cost of $3,750.
Monthly payment on the old loan = $1019
Monthly payment on the new loan = $899
Reduction in monthly payment = $120
$3750 divided by $120 = 31 months
The rule of thumb says that you break-even in 31 months. However, because of the shorter term and lower rate on the new loan, in 31 months you would owe $7,041 less than you would have owed on the old loan. So, the rule of thumb in this case seriously overstates the break-even period. Taking account of differences in the loan balance, you would actually be ahead of the game in 12 months, as shown below:
Savings in monthly payment: $120 for 12 months = $1440
Plus lower loan balance in month 12: $2620
Equals total saving from refinance: $4060
Less refinance cost: $3750
Equals net gain: $310
Next consider the case where an 11% loan taken out in 1992 was for 15 years and now has only 6 years to run, while you plan to refinance into a 30-year loan. With the remaining term shorter on the old loan and longer on the new one, the difference in monthly payment rises to $1238. Using the rule of thumb the $3750 cost would be recovered in only 3 months. But this fails to consider the slower loan repayment on the new loan. Due to a slower repayment, you don’t actually come out ahead until 14 months out.
 
Anyway, to calculate your refinancing you need to take to consideration such points as the time value of money, taxes and differences in the cost of mortgage insurance between the old and new mortgage. Various calculators are available online (e.g.: www.interest.com).

The mortgage loan closing is a serious process that requires high attention, time and strict sequence of actions. Once your application for a mortgage loan has been approved and you have received a commitment letter from the lender, the final step before you can call the house your own is the closing, or settlement, of the purchase transaction and mortgage loan. Even though you have signed purchase agreement and your loan request has been approved, you have no rights to the property, including access, until the legal title to the property is transferred to you and loan is closed. At closing, you will sign the mortgage loan documents, funds will be collected and the closing agent will record the necessary instruments to give you legal ownership of the property. Settlement of a mortgage loan is a legal process and the procedures and requirements will vary according to state and local laws.
As soon as you receive firm approval from the lender who is making your mortgage loan, you should confirm the actual date of loan closing. An estimated closing date was probably specified in the sale contract, but a firm date needs to be set by you, the seller of the property and your lender. The settlement date also shows correct time to assemble all of the required documentation. If repairs or maintenance on the property are a part of the lender’s commitment, there must be time to complete them. The real estate agents involved in the sale transaction and the lender are often the best people to coordinate the closing arrangements. Most lenders require at last 3 to 5 days advance notice of the closing date in order to prepare the loan documents and get them to the closing agent.
There are standard documents required for a loan closing:
Title Insurance Policy - Every lender requires title insurance. The title policy proves that the seller of the property is the legal owner and that there are no claims against the property. The title company offers both a lender’s policy and an owner’s policy. You will have to pay for a lender’s policy and it is advisable for you to have an owner’s policy as well.
Homeowner’s Insurance - The lender will require you to have homeowners insurance on the property to make sure the policy covers the value of the property in case it’s destroyed by fire or storm. You must pay for the policy and have it at closing.
Termite Inspection and Certification - In many areas of the country, the property must be inspected for termites and the inspection is required in the purchase contract. In some parts of the country, this may be called a “wood infestation” report.
Survey or Plot Plan - Your lender may require a survey of the property, showing the property boundaries and the location of the improvements.
Water and Sewer Certification - If the property is not served by public water and sewer facilities, you will need local government certification of the private water source and sanitary sewer facility. Properties with well and septic water sources are usually governed by county codes and standards.
Flood Insurance - If the lender determines that the property is located within a defined flood plain, you will have to have a flood insurance policy.
Certificate of Occupancy or Building Code Compliance Letter - If your home is new, you will have to have a Certificate of Occupancy. This document is usually obtained from the city or county before you can close the loan and move in. Many local governments require an inspection of a home to assure that the property conforms to local building codes. If a house doesn’t conform to some code it requires repairs or replacement the elements.
Other Documentation - Additional documentation required for closing will be set out in the commitment letter from the lender and will depend upon terms of the sale and peculiarities of the property.
Within 24 hours prior to the actual closing, your and your real estate agent should make a final inspection of the property to make sure any required repairs have been completed, all property described in the sale contract, such as kitchen appliances, carpeting and draperies are present and that no recent fire or storm damage has occurred. In most cases, the lender will make a similar inspection before closing.
The loan closing procedure very often requires you to be represented by an attorney. Even if it is not obligatory by law you may want to have an attorney to review the closing documents. Some lenders will close the loan in their offices, some will use title or escrow companies and some will send their instructions and documents to their attorney or yours to conduct the closing. As soon as you receive your commitment letter from the lender, you should determine who is responsible for closing arrangements. The closing is usually conducted by a closing agent who may be an employee of the lender or it may be an attorney representing you or the lender. It’s not obligatory for the lender and the seller or their representatives to be at the actual closing. The closing agent will make sure that all necessary papers are signed and recorded and that funds are properly accounted for when the closing is completed. You typically need to come to the closing with a certified check for the closing costs, including the balance of the down payment, homeowners’ insurance policy and proof of payment if it has not been delivered earlier.
Here’s a brief description of law documents which can help you understand their significance:
Settlement Statement HUD-1:  1) The form is required by Federal law and is prepared by the closing agent. It provides the details of the sale transaction including the sale price, amount of financing, loan fees and charges and real estate taxes. It must be signed by both the buyer and the seller and becomes a part of the lender’s permanent loan file. 2) Some of your charges on the HUD-1 may have already been paid, such as credit report and appraisal fees. They will be noted as P.O.C. (paid outside the closing). 3) If your loan is greater than 80% of the value of the property, you will probably have to pay for mortgage insurance that protects the lender in case you default. 4) In addition to your monthly payments on the loan, most lenders will require you to maintain an “escrow”, an account for real estate taxes and insurance. Current law permits a lender to collect 1/6th (2 months) of the estimated annual real estate taxes and insurance payments at closing.
Truth-in-Lending Statement is also required by Federal law. You were given an initial TIL shortly after you completed the loan application. If no changes have taken place since that time, the lender doesn’t provide one at closing.
The Mortgage Note is the legal evidence of your indebtedness and your formal promise to repay the debt. It sets out terms of the loan and recites the penalties the lender can take if you fail your payments on time.
The Mortgage or Deed of Trust is a sort of security instrument that gives the lender a claim against your house if you fail to fulfill the terms of the mortgage note. It gives the lender the right to take the property by foreclosure if you default on the loan.
P.S. There will probably be a number of other documents you will be asked to sign at closing. Some are lender or Federal law requirement. These instruments should not be taken lightly. Some may lead to criminal penalties for false information. When everything has been signed and the closing agent is satisfied you become the owner and are given the keys to the property.

There are 2 ways to pull money out of your home without selling it: home equity loans, home equity lines of credit or HELOCs.

A home equity loan means that you get a lump-sum check for “N” amount of money and it comes with a fixed repayment program that spells out of the interest rate, the size of the monthly payments and how long will you have to make them. Like in any fixed-rate mortgage, neither the interest rate, nor the monthly payments will change during the life of the loan, plus the interest is normally tax deductible.
A HELOC is more flexible as the interest rate here is adjustable and can change a few times during the life of the loan. You take out money as you need it and pay it back as you can. You only pay the interest of the amount that you owe. Basically, you may take money out and pay it back over and over again. If you need a large sum of money today, for example, to remodel your house or to build a garage, then this loan is what you need.
Due to the fact the interest rates go up and down all the time, it also makes sense to get a fixed-rate loan. As the survey shows, HELOC charges over 8% now against 5.1% two years ago and the rates on traditional home equity loans haven’t risen higher than 1 percentage point during the last 2 years. However, HELOC is still a nice option for those homeowners who don’t need money immediately but wants the flexibility to borrow by just writing a check or using a simple debit card linked to their credit line. Any HELOC also allows you to decide how much of the loan you can pay off each month – you pay as much or as little of the principal as you wish. You usually have to pay an annual fee of $50 to $75 and your line of credit is usually closed after 10 years. 
Now let’s go through the interest rates on home equity lines of credit and compare. The fact is that the rates doubled over the past two years. First it looked like people couldn’t resist 4%, then it turned into the “I can’t afford 8%”. Let’s say you owed $20,000 on a line of credit and could afford $300 a month to pay it back. In January 2004, when the average rate was just 4.39%, your loan would be paid off in just over six years and cost you $2,954 in interest. That same loan at today’s rate of 8.23% would take just under seven years to payoff and the interest would run $6,829. We literally borrowed hundreds of billions of dollars against our home equity lines of credit when rates were around 4% in 2002 and 2003. But rates began rising in June 2004 and HELOC debt peaked in November 2005 when rates were still under 7%. Home equity rates have been going up because of the Federal Reserve Bank has been fighting inflation. The idea is that higher rates cause people to borrow less and spend less, making it more difficult for manufacturers and service providers to raise prices. As a result, the rate banks charge their best customers for loans, the so-called “prime rate” has gone from 4% in June 2004 to 8.25% today. HELOCs have followed right along because they are closely tied to the prime rate.
The rates for Home Equity loans on July 31, 2006:
HELOC 
$30K HELOC – 7.38%
$75K HELOC – 7.44%
$75K High LTV HELOC – 7.44%
Home Equity Loan
$30K Home equity loan – 8.38%
$75K Home equity loan – 8.07%
$75K High LTV home equity loan – 8.07%

Last week mortgage market took back most of the rate decreases that were so welcome the week before. The Mortgage Bankers Association, however, recorded rate drops stretching into a second week. The Weekly Mortgage Market Survey of average contract interest rates indicated that the 30-year fixed-rate mortgages increased from 6.74% during the week of July 13 to 6.80% for the week of July 20. This was one basis point higher than the rate the week of July 6. Fees and points were down 0.1 to 0.5.
The 15-year fixed rate mortgage was up four basis points to 6.41% with fees and points unchanged at 0.4. This was still an improvement over the July 6 rates of 6.44 and 0.5 points.
The 5/1-year hybrid adjustable rate mortgage increased only slightly from 6.33% with 0.5 points to 6.36% with 0.6 points, again less than the 6.39 with 0.6 points reported two weeks ago.
The traditional 1-year adjustable rate mortgage moved up 5 basis points to 5.80; fees and points increased from 0.6 to 0.7. Again the July 6 rates were higher at 5.83% with 0.8 points.
It was also indicated that rate increases reflected a market that was still spooked by the specter of increasing inflation. The MBA’s Weekly Mortgage Applications Survey for the week ended July 21 and revealed different results. The average contract rate for 30-year fixed-rate mortgages dropped four basis points to 6.69% and points decreased from 1.13 to 1.07, including the origination fee. 15-year fixed-rate mortgages decreased from 6.38% to 6.31% and points were also down to 1.02 from 1.07. The one-year ARM was also lower by 3 basis points to 6.25% with points decreasing to 0.83 from 0.85.  Mortgage activity continues to trend down - the application volume decreased by 1.3%. Compared to the same week in 2005, however, the pace was off 28.2 percent.
Refinancing as a share of all mortgage activity was up to 35.6% compared to 35.0 the previous week and adjustable rate mortgages represented 28.6% of total applications compared to 29.0% the week before.
30 Yr fix: 6.72%  0.08%
15 Yr fix: 6.34%  0.07%
1 Yr ARM: 5.78%  0.02%
30 Yr Tres: 5.11%  0.00%
Fed Prime: 8.25%  0.25%

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