Do Mortgage Payments Increase?

Mortgage Q&A: “Do mortgage payments increase?”

While this sounds like a no-brainer question, it’s actually a little more complicated than it appears.

You see, there a number of different reasons why a mortgage payment can increase, aside from the obvious interest rate change. But let’s start with the obvious and go from there.

And yes, even if you have a fixed-rate mortgage your monthly payment can increase.

While that might sound like bad news, it’s good to know what’s coming so you can prepare accordingly.

Mortgage Payments Can Increase with Interest Rate Adjustments

  • If you have an ARM your monthly payment can go up or down
  • This is possible each time it adjusts, whether every six months or annually
  • To avoid this payment surprise, simply choose a fixed-rate mortgage instead
  • FRMs are actually pricing very close to ARMs anyway so it could be in your best interest just to stick with a 15- or 30-year fixed

Here’s the easy one. If you happen to have an adjustable-rate mortgage, your mortgage rate has the ability to adjust both up or down, as determined by the interest rate caps.

It can move up or down once it initially becomes adjustable (after the initial teaser rate period ends), periodically (every year or two times a year) and throughout the life of the loan (by a certain maximum number, such as 5% up or down).

For example, if you take out a 5/1 ARM, it’s first adjustment will take place after 60 months.

At this time, it could rise fairly significantly depending on the caps in place, which might be 1-2% higher than the start rate.

So if your ARM started at 3%, it might jump to 5% at its first adjustment.

On a $300,000 loan amount, we’re talking about a monthly payment increase of nearly $350. Ouch!

Simply put, when the interest rate on your mortgage goes up, your monthly mortgage payments increase. Pretty standard stuff here.

To avoid this potential pitfall, simply go with a fixed-rate mortgage instead of an ARM and you won’t ever have to worry about it.

Or you can refinance your home loan before your first interest rate adjustment to another ARM. Or go with a fixed-rate mortgage instead.

Or simply sell your home before the adjustable period begins. Plenty of options really.

Mortgage Payments Increase When the Interest-Only Period Ends

  • Your payment can also surge higher if you have an interest-only loan
  • At that time it becomes fully-amortizing, meaning both principal and interest payments must be made
  • It’s doubly expensive because you’ve been deferring interest for years prior to that
  • This explains why these loans are a lot less popular today and considered non-QM loans

Another common reason for mortgage payments increasing is when the interest-only period ends, an issue that was common prior to the last housing crisis.

Typically, an interest-only home loan becomes fully amortized after 10 years.

In other words, after a decade you won’t be able to make just the interest-only payment.

You will have to make principal and interest payments to ensure the loan balance is actually paid down.

And guess what – the fully amortized payment will be significantly higher than the interest-only payment, especially if you deferred principal payments for a full 10 years.

Simply put, you’ll be paying the entire beginning loan balance in 20 years instead of 30, assuming the loan term was for 30 years, because interest-only payments mean the original loan amount remains untouched.

This can result in a big monthly payment increase, forcing many borrowers to refinance their mortgages.

Just hope interest rates are favorable when this time comes or you could be in for a rude awakening.

Mortgage Payments Increase When Taxes or Insurance Go Up

  • If your mortgage has an impound account your total housing payment could go up
  • An impound account results in homeowners insurance and property taxes being paid monthly
  • If those costs rise from year to year your total payment due could also increase
  • You’ll receive an escrow analysis annually letting you know if/when this may happen

Then there’s the issue of property taxes and homeowners insurance, assuming you have an impound account.

Even if you’ve got a fixed-rate mortgage, your mortgage payment can increase if the cost of property taxes and insurance rise, and they’re included in your monthly housing payment.

And guess what, these costs do tend to go up year after year, just like everything else.

A mortgage payment is often expressed using the acronym PITI, which stands for principal, interest, taxes, and insurance.

With a fixed-rate mortgage, the principal and interest amounts won’t change throughout the life of the loan. That’s the good news.

However, there are cases when both the homeowners insurance and property taxes can increase, though this only affects your mortgage payments if they are escrowed.

Keep an eye out for an annual escrow analysis which breaks down how much money you’ve got in your account, along with the projected cost of your taxes and insurance.

It may say something like “escrow account has a shortage,” and as such, your new payment will be X to cover that deficit.

You can typically elect to begin making the higher mortgage payment to cover the shortfall, or pay a lump sum to boost your escrow account reserves so your monthly payment won’t change.

Fortunately these annual payment fluctuations will probably be minor relative to an ARM’s interest rate resetting or an interest-only period ending.

Ultimately, it’s usually quite nominal because the difference is spread out over 12 months and typically not all that large to begin with.

But it’s still good to be prepared and budget accordingly as your housing payments will likely rise over time.

The takeaway here is to consider all housing costs before determining if you should buy a home, and make sure you know how much you can afford well before beginning your property search.

You’d be surprised at how the costs can pile up once you factor in the insurance, taxes, and everyday maintenance, along with the unexpected.

At the same time, mortgage payments have the ability to go down for a number of reasons as well, so it’s not all bad news.

And remember, thanks to our friend inflation, your monthly mortgage payment might seem like a drop in the bucket a decade from now, while renters may not see such relief.

Read more: When do mortgage payments start?

Source: thetruthaboutmortgage.com

What Is a Mortgagee? Hint: It’s Not a Typo

Are You a Mortgagee or Mortgagor?

It’s mortgage Q&A time! Today’s question: “What is a mortgagee?”

No, it’s not a typo. I didn’t leave an extra “e” on the word mortgage by mistake, though it may appear that way.

Despite its striking appearance, it’s actually a completely different word, somehow, simply with the mere addition of the letter E.

Don’t ask me how or why, I don’t claim to be an expert in word origins.

Seems like a good way to confuse a lot of people though, and it has probably been successful in that department for years now.

You can blame the British English language for that, or maybe American English.

Anyway, let’s stop beating up on the English language and define the darn thing, shall we.

A “mortgagee” is the entity that originates (makes) and sometimes holds the mortgage, otherwise known as the bank or the mortgage lender.

They lend money so individuals like you and I can purchase real estate without draining our bank accounts.

It could also be your loan servicer, the entity that sends you a mortgage bill each month, and perhaps an escrow analysis each year if your loan has impounds.

The mortgagee extends financing to the “mortgagor,” who is the homeowner or borrower in the transaction.

So if you’re reading this and you aren’t a bank, you are the mortgagor. It’s as simple as that.

Another way to remember this rather confusing word jumble; Who is the mortgagee? Not me!!

Mortgagor Rhymes with Borrower, Kind Of

mortgagor

  • Here’s a handy way to remember the word mortgagor
  • It kind of rhymes with the word borrower…
  • Or even the word homeowner, which is also accurate if you hold a mortgage on your property

I was trying to think of a good association so homeowners can remember which one they are, instead of having to look it up every time they come across the word.

I believe I came up with a semi-decent, not great one. Mortgagor rhymes with borrower, kind of. Right? Not really, but they look and end similar, no?

Anyway, the real property (real estate) acts as collateral for the mortgage, and the mortgagee obtains a security interest in exchange for providing financing (a home loan) to the mortgagor.

If the mortgagor doesn’t make their mortgage payments as agreed, the mortgagee has the right to take possession of the property in question, typically through a process we’ve all at least heard of called foreclosure.

Assuming that happens, the property can eventually be sold by the mortgage lender to a third party to pay off any attached liens, or mortgages.

So if you’re still not sure, you are probably the mortgagor, also known as the homeowner with a mortgage. And your lender is the mortgagee. Yippee!

What makes this particular issue even more confusing is that it’s the other way around when it comes to related words like renters and landlords.

Yep, for some reason a landlord is known as a “lessor,” whereas the renter/tenant is known as the “lessee.” In other words, it’s the exact opposite for renters than it is for homeowners.

But I suppose it makes sense that both landlord and mortgage borrower are property owners.

What About a Mortgagee Clause?

mortgagee clause

  • An important document you may come across when dealing with homeowners insurance
  • Stipulates who the lender (mortgagee) is in the event there is damage to the subject property
  • Protects the lender’s interest if/when an insurance claim is filed
  • Since they are often the majority owner of the property

You may have also heard the term “mortgagee clause” when going through the home loan process.

It refers to a document that protects the lender’s interest in the property in the event of any damage or loss.

It contains important information about the mortgagee/lender, including name, address, etc. so the homeowners insurance company knows exactly who has ownership in the event of a claim.

Remember, while you are technically the homeowner, the bank probably still has quite a bit of exposure to your property if you put down a small down payment.

For example, if you come in with just a 3% down payment, and the bank grants you a mortgage for 97% of the home’s value, they are a lot more exposed than you are.

This is why hazard insurance is required when you take out a mortgage, to protect the lender if something bad happens to the property.

Conversely, if you buy a home with cash, as opposed to taking advantage of the low mortgage rates on offer, it’s your choice to insure it or not.

But more than likely, you’ll want insurance coverage on your property regardless.

In summary:

Mortgagee: Bank or mortgage lender
Mortgagor: Borrower/homeowner (probably you!)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Fannie Mae Increasing Max DTI to 50%, Upping LTVs for ARMs

Last updated on July 17th, 2018

There’s been a lot of talk lately about mortgage lenders easing credit standards as refinance volume wanes and purchase activity remains constrained by limited inventory.

Because more and more new entrants (many so-called disruptors) have joined the fray, and there’s a smaller pool of eligible mortgage borrowers, risk appetite is expected to rise in coming months.

In fact, a Fannie Mae survey released yesterday found that the share of lenders expecting to ease credit standards over the next quarter hit new all-time highs.

Fannie Mae Increasing Max DTI to 50%

  • Fannie is making it easier for borrowers
  • To get approved for a mortgage with a high DTI ratio
  • Via their automated underwriting system
  • Which should usher in more of these types of loans

First off, we’ve got Fannie Mae’s Desktop Underwriter (DU) Version 10.1 release slated for the weekend of July 29th.

The biggest change is that this version of DU will allow debt-to-income ratios as high as 50%, up from 45% currently.

For the record, you can get approved at the moment with a DTI as high as 50%, but Fannie requires additional compensating factors to support a DTI ratio between 45-50%, such as lots of assets and an excellent credit score.

With this release, that 50% DTI will be good to go because the DU risk assessment will automatically consider “a broad range of loan characteristics and borrower credit factors.”

In plain English, this means it’ll be easier to get approved for a mortgage with a high DTI ratio, and because Fannie is greenlighting it, banks and lenders will likely ease up and follow suit, ditching overlays in the process.

ARM LTVs Going Up

  • They’re also increasing allowable LTVs on ARMs
  • Pushing the max LTV to 95% for adjustable-rate mortgages
  • Which aligns with the fixed-rate mortgage rule
  • Similar increases will apply to multi-unit properties and investment properties

Along with the DTI change, Fannie will soon permit loan-to-value ratios on adjustable-rate mortgages up to 95%. That means you only need 5% equity to get an ARM.

The rule will align LTVs on ARMs with those on fixed-rate mortgages, which are deemed lower risk, across all transaction, occupancy, and property types.

For example, someone buying a two-unit owner-occupied property is currently limited to an LTV of 75% if they elect to use an ARM to finance it.

When DU 10.1 is rolled out, this max LTV will increase to 85%, so they’ll only need to put 15% down instead of 25%.

A four-unit owner-occupied property will see the max LTV rise from 65% to 75%.

Similar increases will be seen in a variety of scenarios, meaning more borrowers will be able to, well, borrow more.

I’m assuming the 97% LTV offering from Fannie will still only permit a fixed-rate mortgage, for obvious reasons.

It’ll also get easier to borrow if you’re self-employed, with Fannie’s newest version of DU more likely to require just one year of personal and business tax returns.

That should mean less headaches and paperwork, and potentially more approvals if two years of documentation don’t paint your business in as favorable a light.

Finally, Fannie will ease up on borrowers with disputed credit tradelines so that if DU approves the file, no more action will be necessary.

Less Redundancy, More Approved Loans

  • It looks like Fannie wants to make the home loan process easier
  • With less overlap and actual reliance on the automated system
  • Instead of still requiring paperwork on top of an automated decision
  • Hopefully this will speed up things up and reduce the paperwork burden on mortgages

In summary, it sounds like Fannie will be relying more upon its computer (algorithm) to do the underwriting going forward so that redundant documentation and scrutiny won’t be required.

If you think about it, why should you have to further explain stuff that’s already been taken into account and factored into the automated approval?

These changes, along with other recent enhancements, like more forgiving student loan payment calculations, should make it easier for more folks to get mortgages.

And it could just be the tip of the iceberg. We already discussed the idea of 10% down being the new normal, and the coming removal of tax liens and civil judgments from credit reports might bring even more borrowers into the game.

For the record, Fannie performed an analysis to see what approvals would look like without those derogatory accounts on credit reports and found that the impact would be “small,” and said lenders can remain confident in DU.

Still, cleaner credit reports might result in hundreds of thousands of newly-eligible mortgage borrowers out there.

And altogether, these underwriting changes may affect millions of prospective buyers and those looking to refinance.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Don’t Swipe Your Credit Card Before You Apply for a Mortgage

Posted on April 29th, 2021

Large Credit Card Purchases Really Can Tank Your Credit Score

  • While missed payments are arguably the worst offense
  • Even racking up a lot of debt can lower your credit score significantly
  • So it’s best to put the spending on hold a few months before applying for a home loan
  • That way there won’t be any unwelcome surprises when it comes time to pull your credit

You’ve probably heard at some point that making large purchases with your credit card(s) before applying for a mortgage is a no-no.

In fact, you may have read that on this very site, since I’ve warned about it on numerous occasions in multiple posts because it’s such a common problem.

You might be aware of this issue, but shrugged it off, thinking what’s a few points, right?

You already have excellent credit so it doesn’t matter if you purchase a new $5,000 couch with your AmEx card for the new digs ahead of time.

Well, think again. It really does matter, and it can do serious damage to your credit score.

I’m not just talking about 5-10 points. I’m talking enough movement to potentially take you out of the running for a mortgage altogether, or at minimum raise your mortgage rate.

My Credit Score Got Rocked After Maxing Out a Credit Card

my score

  • I maxed out one of my credit cards a few years ago
  • And my excellent credit score dropped about 50 points seemingly overnight
  • That’s enough to raise your mortgage rate depending on how low your scores drop
  • Or worse, disqualify you from obtaining a mortgage altogether if your credit wasn’t great to begin with

Let’s take a look at a very real example; my credit score back in 2016. Yes, I’m using my own credit score to illustrate this very real problem.

Fortunately, I didn’t apply for a mortgage during this period so it wasn’t an issue for me.

Instead, it was a moral blow as I saw my near-perfect credit score drop from over 800 to the mid-750 range, which incidentally is still excellent credit.

But for those who followed my path and did apply for a home loan, it could have spelled serious, serious trouble.

For most of that year, my credit score had been stuck in a range from the low 800s to around 820. This was good because it meant I wouldn’t have any issues qualifying for a mortgage based on credit score alone.

Not only that, but I would have received the most favorable rates and avoided as many mortgage pricing adjustments as possible.

Once you get your credit scores above 760 there aren’t many pricing adjustments (if any) to worry about, so you don’t need perfection.

However, when the holidays hit I started making a lot of purchases on my credit card. There was a promotion with Discover and Apple Pay that offered 23% cash back on all purchases so I hit it hard.

I basically maxed out my Discover card, which had a pretty dismal credit limit (maybe only $5,000 or so) because Discover is a pretty conservative lender.

When all was said and done, I think I had 1% available credit on the card, otherwise known as 99% utilization.

This is not a good idea, especially before applying for a mortgage because it will literally tank your credit score, even if you pay off the balance in full by your due date.

The problem is that the credit bureaus will take a snapshot of your credit balances on a certain date and then compute your credit score based on that information.

Chances are TransUnion flagged this maxed out credit card and docked my score accordingly, basically assuming I was going down a bad path by making a ton of charges in a short span of time.

This is usually a signal that a consumer is in trouble financially, assuming the behavior continues. And the bureaus basically sent out an SOS to new lenders to proceed with caution.

In the matter of a couple months, my credit score fell nearly 50 points. From peak to trough, it fell a total of 65 points.

I went from having stellar credit to having very good credit. Still, my score was below 760, which could cost you on a mortgage.

Tip: If you must swipe, consider spreading the purchases across several credit cards to keep utilization rates on a per-card basis low. This may be less damaging than maxing out a single card.

The Good News Is I Bounced Back Pretty Quickly!

  • Thankfully my maxed out credit card was a short-lived event
  • My credit score bounced back fairly quickly once I paid off the credit card debt
  • So you can resolve it rather easily, assuming you have time to do so
  • But the takeaway is not to chance it because you might not always have time!

Now the good news. Once I paid my credit card bill in full, and the bureaus took note of the new $0 balance (this isn’t immediate), my credit score shot up to its highest point in the past 12 months.

My 758 credit score went all the way up to 826, not too far from the perfect credit score of 850. It was also the highest it had been since Credit Karma began keeping track of it a couple of years earlier.

So despite the big hit early in 2016, I wound up in even better shape than I had been to begin with.

This was great in hindsight, but had I applied for a mortgage at any time during that 30-45 day window, I could have jeopardized the entire thing.

For someone with a lower starting score, they could have knocked themselves out of eligibility, or at minimum been forced to take on a higher mortgage rate as a result.

Don’t Make the Same Mistake I Did If There’s Even a Tiny Chance You’ll Apply for a Mortgage Soon

  • If there’s any chance you’ll purchase a home or refinance an existing mortgage in the near future
  • Put all your credit cards away and avoid any unnecessary purchases
  • It’s just not worth the aggravation or the possibility of a higher mortgage rate and/or denied application
  • Just be patient and you can go back to spending once your home loan funds

The moral of the story is to heed the warnings of avoiding large purchases before taking out a mortgage. It’s no joke.

For the record, the same can be said of spending your cash because you’re depleting your assets if you make large cash purchases.

And you may need more money than anticipated for the down payment, reserves, and closing costs.

This is especially true nowadays with many homes going for above-asking.

Make sure you set aside lots of money in a verifiable account (like a checking or savings account) several months before you begin making bids or inquiring about a refinance.

Also note that the more outstanding debt you have on your credit card(s), the higher your debt-to-income ratio (DTI) will be.

And this just happens to be one of the main reasons why mortgages get declined.

So racking up credit card debt can hurt you in two different ways at the same time if you’re not careful.

In other words, practice frugality before and during the mortgage application process and until the loan is funded.

Those purchases can wait and you’ll be better for it.

After all, mortgages can stick with you for decades – you’d hate for one ill-timed purchase to haunt you for years to come.

Interestingly, once you get your mortgage, you might be able to pay it with a credit card, not that it’s necessarily a good idea either.

Read more: 10 Things You Should Do Before Applying for a Mortgage

Source: thetruthaboutmortgage.com

Most Consumers Only Obtain One Mortgage Quote

one

Here’s a shocker. Only about 40 percent of borrowers obtain more than one mortgage quote, according to a survey conducted by Harris Interactive and mortgage comparison service LendingTree.

Despite this, more than nine in 10 borrowers understand that mortgage rates vary among mortgage lenders, which explains why only three in 10 felt “very confident” they received the best deal on their mortgage.

Borrowers Know Mortgage Rates Aren’t All the Same

  • The survey found that the majority of borrowers
  • Only took the time to get a single mortgage rate quote
  • Even though they know lender rates vary
  • Which explains why they didn’t feel confident they were getting the best deal

So we know most homeowners don’t bother obtaining more than one quote, and that they don’t feel great about it.

But why aren’t they shopping if they have a bad feeling about it all? There’s got to be a good reason, right? Well, of course there is.

Why Aren’t Homeowners Shopping Around?

  • They aren’t quite sure the lender they spoke to is “the one”
  • Yet they aren’t taking the time to see what else is out there
  • One reason is time, or lack thereof
  • Another big reason is the complicated nature of mortgages in general

Borrowers aren’t putting in the time to shop for a mortgage because of the time-sensitiveness associated, and also because of all the complicated terminology.

In other words, they’re often pressed for time either because they have a certain close of escrow date, or they need to refinance ASAP for one reason or another.

And if I had to guess, some of that urgency might come from the one mortgage lender they manage to speak to, who convinces them to “act fast” to avoid missing out on whatever it is they’re selling.

Most Put In the Equivalent of One Working Day

  • For such a major financial decision
  • Consumers sure aren’t putting in much time
  • With most dedicating the equivalent of just one work day
  • Shopping for their home loan

But for such a big decision, it’s rather startling that nearly three-quarters of borrowers only spend the equivalent of one working day or less shopping for their home loan.

LendingTree noted that one in 10 borrowers only spent the amount of time it takes to brush their teeth to research their mortgage options. That’s frightening, but at least they’re brushing their teeth.

Roughly a quarter of those surveyed said they recognized that they could save more than $100 on their monthly mortgage payment by reducing their mortgage rate by one percent, yet they don’t seem willing to put in the work.

Interestingly, women were twice as likely as men to say they were not involved with shopping their purchase mortgage or refinance loan.

Nearly All Americans Comparison Shop for Everything Else

  • 96% of Americans comparison shop
  • When it comes to a new TV, car, or even a pair of shoes
  • Yet the numbers drop off considerably when it comes to a mortgage
  • Consider that the savings associated with a cheaper home loan will stay with you a lot longer and probably be a lot more sizeable

The study noted that 96 percent of all Americans compare prices when shopping for just about anything – make sure that includes the mortgage for goodness sake!

Sure, it’s painful, time consuming, and no one wants to be badgered by pushy salespeople, especially if they aren’t comfortable with all the terminology, let alone numbers.

But even a little bit of work can pay off big. There are other studies that prove you can save thousands of dollars simply by gathering an additional mortgage quote or two. Might as well just dive in and do it right the first time.

After all, if you’re saving money month after month for year after year, you’ll probably feel pretty good for a long, long time too. You probably won’t get the same feeling clipping a coupon or getting a one-time discount.

In short, be sure to contact loan officers at neighborhood banks along with a couple of mortgage brokers so you’re aware of all your loan options.  Also consider local credit unions and online mortgage lenders, both of which may offer lower rates than the competition.

Read more: What mortgage rate can I expect?

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Can You Pay the Mortgage with Bitcoin?

Mortgage Q&A: “Can you pay the mortgage with bitcoin?”

First off, I apologize for writing an article about bitcoin. I know it’s all the rage right now and I’m just adding to the hype, but it’s newfound relevancy warrants this post, maybe.

U.S. Mortgage Lenders Accept U.S. Dollars

  • At the moment U.S. dollars are the only form of payment
  • Accepted by U.S. mortgage lenders
  • Any so-called bitcoin payment option
  • Will likely be through an intermediary service that converts bitcoin to USD

As far as I know, all U.S. mortgage servicers only accept U.S. dollars for mortgage payments. So the simple answer would be no, you can’t use your bitcoin to pay the mortgage.

But I have heard of third-party companies offering the service in the past, perhaps working as an intermediary between bitcoin holders and loan servicers.

At that point though, you have to question what the benefit of such a service would be. If anything, it might just cost you money in conversion fees and so on.

I’ve also heard of individuals buying real estate with bitcoin, but that’s a different story because it’s an agreement between buyer and seller, and it’s effectively a cash-alternative transaction.

In other words, they’re probably buying a property outright with bitcoin as opposed to cash. No financing is taking place, nor is there any mortgage to speak of.

Why Would Mortgage Lenders Accept Bitcoin?

  • You have to ask why they’d accept bitcoin
  • Which is known to be a very volatile “currency”
  • With high transaction costs
  • There has to be an incentive for the lender

Another way of looking at it is why would mortgage lenders accept any type of non-USD currency for payment?

First off, it would require a currency conversion into the currency related to the mortgage, which would be USD.

And after all is said and done, you wouldn’t really be paying with bitcoin anymore. You’d be converting your bitcoins to USD, then sending them onto the lender.

In that case, you could effectively pay your mortgage with bitcoin, but it would be a manual, indirect process.

There are bitcoin wallets that allow bitcoin holders to sell their holdings, in part or in whole, and then withdraw the funds to their bank accounts.

After doing so, the bitcoin holder would have U.S. dollars to use toward paying their mortgage.

The only way a lender would probably be willing to accept bitcoins directly is if they saw some overwhelming value in the currency (if it’s a currency).

And even then, it would be pretty doubtful given the infrastructure that would need to be in place, along with whatever compliance stuff would need to happen.

The Same Reason They Won’t Accept Gold or Tesla Stock

  • Mortgage lenders don’t accept gold or silver
  • Nor do they allow you to pay with stock
  • Ultimately they want USD, which the mortgage note is based on
  • How you pay might be an option as long as it’s converted to USD first

As for the valuation issue, what would it be worth when it was applied to the mortgage? The bitcoin market is 24/7, nonstop action.

It’s also pretty unpredictable, not to mention the many exchanges that value bitcoin differently at the exact same time. So it’d be really hard to nail down a value everyone agrees upon, at least at this juncture.

All that adds up to a lot of unnecessary cost and risk a lender just won’t want anything to do with.

This is the same reason why you can’t send your mortgage lender bars of gold to pay the mortgage, or shoot them over a few shares of Amazon or Tesla stock every month to meet your obligations.

Paying the mortgage in bitcoin would also complicate matters if and when you needed to document your payment history for a subsequent mortgage or refinance. Anonymity isn’t favored here.

When it comes down to it, the lender is going to want to be paid in USD because there’s no second guessing its value. And there’s no currency conversion to worry about. However, that doesn’t mean you can’t pay the mortgage with a credit card.

There are services that allow that because the transactions involve USD and typically involve a two-step process whereby you charge the desired amount with the payment processor, then they cut a check to the lender on your behalf in USD.

Maybe there will come a time when this changes, but I doubt it’ll happen anytime soon. In the meantime, individuals are always free to sell investments and withdraw the cash proceeds and use them as they wish.

Soon You’ll Be Able to Pay Rent with Bitcoin

ManageGo

  • A new company called ManageGo
  • Will allow you to pay rent with bitcoin
  • But as mentioned it converts crypto currency to dollars first
  • So it’s really just a conversion process

A company by the name of ManageGo is launching bitcoin rental payments soon. In fact, they’re even going to allow tenants to pay rent in Ethereum and Litecoin.

But really, it’s just going to convert the rental payments to US dollars first, and then deposit them in landlords’ bank accounts.

Tenants will apparently get an “instant conversion rate” that displays the exact amount in USD that needs to be sent to their landlord to cover the rent.

And the landlord probably won’t care how they pay because by the time they get the money, it’ll be in USD.

To that end, it sounds more like it’s facilitating the conversion of bitcoin to USD, not landlords truly accepting bitcoin. Is that truly accepting bitcoin? I don’t know.

I think if and when mortgage lenders and landlords eventually accept actual bitcoin for payment, it could be a cost-saver and a quicker transaction, as opposed to sending a check or ACH.

Source: thetruthaboutmortgage.com

When Will the Next Housing Market Crash Take Place?

I’ve noticed a trend lately. Everyone’s a real estate expert.

It seems the most recent crisis and recovery has turned just about every single person into a guru on all things to do with home buying and selling.

I suppose part of it has to do with the fact that the massive housing bubble that formed a decade ago swept the nation and was front page news.

It also directly affected millions of Americans, many who serially refinanced their mortgages, then found themselves underwater, then eventually short sold, were foreclosed upon, or held on for the ride back up to new heights.

It’s a common conversation piece these days to talk about your local housing market.

Thanks to greater access to information, folks are scouring Redfin and Zillow and coming up with theories about what that home should sell for, or what they should have listed it for.

Neighbors are getting upset when nearby listings are not to their liking for one reason or another. What were they thinking?!

A New Housing Bubble Mentality

  • Real estate is red-hot again thanks to limited supply and intense demand
  • It can feel like an ominous sign that we’re headed down a dark road again
  • But that alone isn’t reason enough for the housing market to crash again
  • There have to be clear catalysts and financial stress for another major downturn

All of this chatter portends some kind of new bubble mentality in my mind, though it seems everyone is just basing their hypotheses on the most recent housing bust, instead of perhaps considering a longer timeline.

One could look at the recent run-up in home prices as yet another bubble, less than a decade since home prices bottomed around 2012.

After all, many housing markets have now surged well beyond their previous lofty levels seen about 15 years ago when home prices peaked.

For example, Denver area home prices are about 86% higher than they were in 2006. And back then, everyone felt home prices were completely out of control.

In other words, home prices were haywire, and are now nearly double that.

Meanwhile, the typical U.S. home is currently valued around $273,000, per Zillow, which is about 27% higher than the peak of $215,000 seen in early 2007.

It’s also nearly 70% higher than the typical home price of $162,000 back in early 2012, when home prices more or less bottomed.

So if want to look at home prices alone, you could start to worry (though you also have to factor in inflation which will naturally raise prices over time).

But they say bubbles are financially driven, and we’ve yet to see a return to shoddy underwriting.

I will say that there’s been a recent return of near-zero down financing, with many lenders taking Fannie and Freddie’s 97% LTV program a step further by throwing a grant on top of it.

This means borrowers can buy homes today with just 1% down payment, and even that tiny contribution can be gifted from someone else.

So things might be getting a little murky, especially if you consider the increase in prices over the past four or five years.

One could also argue that affordability is being supported by artificially low mortgage rates, which history tells us won’t be around forever.

There’s also a general sense of greed in the air, along with a feeling amongst homeowners that they’re getting richer and richer by the day.

That type of attitude sometimes breeds complacency and unnecessary risk-taking.

But When Will Home Prices Crash Again?!

real estate cycle

  • If you believe in cycles, which seem to be pretty evident in real estate and elsewhere
  • We will see another housing crash at some point relatively soon
  • There appears to be an 18-year cycle that has been observed for the past 200 years
  • This means the next home price peak (and then bust) might begin in 2024

All of those recent home price gains might make one wonder when the next housing market crash will take place.

After all, home prices can only go up for so long before they drop again, right?

Well, the answer to that age-old question might not be as elusive as you think.

The real estate market apparently moves in cycles that some economists think can be predicted to a relatively high degree.

While not a perfect science, there seems to be “a steady 18-year rhythm” that has been observed since around the year 1800.

Yes, for over 200 years we’ve seen the real estate market follow a familiar boom and bust path, and there’s really no reason to think that will stop now.

It puts the next home price peak around the year 2024, followed by perhaps a recession in 2026 and a march down from there.

How much home prices will fall is an entirely different question, but given how much they’ve risen (and can rise still), it could be a long, long way down.

And we might not have super low mortgage rates at our disposal to save us this time, which is a scary thought.

You’ll Never Get Back Into the Housing Market…

  • There are four main phases in a real estate cycle
  • A recovery period and an expansion period
  • Followed by hypersupply and an eventual downturn
  • Don’t believe the hype that if you don’t buy today, you’ll never get the chance!

Another housing bust in inevitable, despite folks telling us we’ll never get back in again if we sell our home today, or don’t buy one tomorrow.

There are four phases to this predictable cycle, including a recovery phase, which we’ve clearly experienced, followed by an expansion phase, where new inventory is created to satisfy demand. This is happening now.

At the moment, home builders are ratcheting up supply to meet the intense demand in the market, with some 45 million expected to hit the average first-time home buyer age this decade.

The problem is like anything else in life, when demand is hot, producers have a tendency to overdo it, creating more supply than is necessary.

That brings us to the next phase, a hypersupply period where builders overshoot the mark and wind up with too much new construction, at which point prices plummet and a recession sets in.

The good news (for existing homeowners) is that according to this theory, we won’t see another home price peak until around 2024.

That means another three years of appreciation, give or take, or at least no major losses for the real estate market as a whole.

So even if you purchased a home recently and spent more than you would have liked, it could very well look cheap relative to prices a few years down the line.

The bad news is that the real estate market is destined to stall again in just three short years, meaning the upside is going to diminish quite a bit over the next few years.

This might be especially true in some markets that are already priced a little bit ahead of themselves, which may be running out of room to go much higher.

But perhaps more important is the fact that home prices tend to move higher and higher over time, even if they do experience temporary booms and busts.

So if you don’t attempt to time the market you can profit handsomely over the long term, assuming you can afford the underlying mortgage.

And remember, there’s more to homeownership than just the investment.

Source: thetruthaboutmortgage.com

Are Mortgages Simple Interest and Compounded Monthly?

Last updated on June 13th, 2019

People seem to be fascinated with how mortgages are calculated and paid off, but when it comes down to it, there’s nothing too mind-blowing happening.

Each month, a portion of principal and interest are paid off as mortgage payments are made. Over time, the loan balance is reduced, as is the total amount of interest due.

Mortgages Are Simple Interest

  • Simple interest means it’s not compounded
  • So you don’t pay interest on top of interest
  • What you owe in interest is pre-determined on a home loan
  • And paid over the life of the loan

Here in the United States, mortgages use simple interest, meaning it is not compounded. So there is no interest paid on interest that is added onto the outstanding mortgage balance each month.

Conversely, think of an everyday saving account that offers you compounding interest. If you have a balance of $1,000 and an interest rate of 1%, you’d actually earn more than 1% in the first year because that earned interest is compounded either daily or monthly.

Put another way, you earn interest on your interest each day or month, which allows your money to grow more quickly.

Mortgages don’t do that because the total amount of interest due is already calculated beforehand and can be displayed via an mortgage amortization schedule.

For example, a $300,000 mortgage set at 4% on a 30-year fixed mortgage will have total interest due of $215,610 over the life of the loan. We know this beforehand because mortgages are amortized.

Each month, the combined principal and interest payment will be exactly the same, but the composition of the payment will change.

In month one, you’ll pay $432.25 in principal and $1,000 in interest for a total of $1,432.25.

In month 360, you’ll pay the same $1,432.25, but only about $5 of that amount will go toward interest because the outstanding loan balance will be so small at that time.

At no point would you pay interest on top of interest.

Extra Payments Compound Principal

  • If you make extra mortgage payments
  • Your principal payment can compound
  • In the sense that a lower outstanding balance
  • Will lower each subsequent interest payment

However, if you paid an extra $100 each month on top of your required mortgage payment, the principal portion would start compounding.

In month one, you’d pay $1,532.25, with $1,000 going toward interest and $532.25 going toward the principal balance.

This wouldn’t provide any extra benefit in the first month because you’d simply be paying $100 extra to get $100 more off your principal balance.

However, in month two the total interest due would be calculated based on an outstanding balance that is $100 lower. And because payments don’t change on a mortgage, even more money would go toward the principal balance.

The second payment would be $998.23 in interest and $534.02 in principal.

Meanwhile, those making the standard monthly payment with no extra amount paid would pay $998.56 in interest and $433.69 in principal.

That’s more than a $100 difference, $100.33 to be exact. And over time, this gap will widen. In month 60, the principal payment would be $121.70 higher on the loan where you’re paying an extra $100 per month.

So the benefit of paying extra increases more and more over the life of the loan and eventually allows the mortgage to be repaid early.

Are Mortgages Compounded Monthly?

  • Most mortgages don’t compound interest
  • But they are calculated monthly
  • Meaning the interest due for the month prior
  • Will be the same whether you pay early or late within the grace period

As noted, traditional mortgages don’t compound interest, so there is no compounding monthly or otherwise.

However, they are calculated monthly, meaning you can figure out the total amount of interest due by multiplying the outstanding loan amount by the interest rate and dividing by 12.

Using our example from above, $300,000 multiplied by 4% and divided by 12 months would be $1,000. That represents the interest portion of the payment only. The $432.15 in principal is the remaining portion, and it lowers the outstanding balance to $299,567.75.

In month two, the same equation is used, this time multiplying $299,567.75 by 4% and dividing by 12 months. That yields total interest of $998.56.

And because the monthly payment is fixed and does not change, that must mean the principal portion of the payment rises. Sure enough, it’s a slightly higher $433.69.

In other words, the interest due for the prior month is calculated on a monthly, not daily basis. This means it doesn’t matter when you pay your mortgage, as long as it is within the grace period.

Generally, mortgage lenders allow you to pay the prior month’s mortgage payment by the 15th of the month with no penalty, even if the payment is technically due on the first of the month.

Because interest isn’t accrued daily, but rather monthly, it doesn’t matter if you pay on the first or the 15th. As long as the payment is made on time, the same amount of interest will be due, and the same amount of principal will be paid off.

To complicate matters, because the mortgage industry does that really well, there are so-called “simple interest mortgages” that calculate interest on a daily basis. Instead of calculating the amount of interest due by dividing by 12 (months), you divide by days (365) instead.

These types of mortgages are not the norm, but if you happen to have one, the day you pay your mortgage will matter because interest is calculated every single day, even on leap years.

That could make paying even a day later more expensive. But as mentioned, most mortgages are calculated monthly so it shouldn’t be an issue for many people.

Tip: HELOCs are calculated daily as opposed to monthly because the outstanding balance can fluctuate as new draws are taken or paid back.

Neg Ams Are the Only Mortgages That Compound Interest

  • There is one exception to the rule
  • A negative amortization loan such as the option ARM
  • It can compound interest if you make the minimum payment option
  • Which is less than the total amount of interest due each month

To tie up some loose ends, there is one type of mortgage that compounds interest, and it too isn’t very common these days.

The once very popular option arm, or pick-a-pay mortgage, which features negative amortization, allows for compounding interest.

It does so because borrowers are allowed to pay less than the total amount of interest due for the month, which adds any shortfall to the outstanding loan balance.

This means the borrower pays interest on top of interest in subsequent months if they don’t pay the full amount of interest due. The banks are happy to let it ride, but the borrower is the one who pays for the convenience.

Again, these mortgages are pretty much a thing of the past, but it’s one good example of a mortgage with compounding interest.

In summary, for most individuals their mortgage will be simple interest that is calculated monthly. That means no new interest will be added to the loan balance and all calculations will be made on a monthly basis, so paying early or late in the month should have no effect, as long as payment is received by the due date (or within the grace period).

(photo: Jayel Aheram)

Source: thetruthaboutmortgage.com

The Problem With Mortgage Rate Surveys

Every week, mortgage financier Freddie Mac comes out with a mortgage rate survey, which reveals the average interest rate (and points) charged by lenders for popular types of home loans.

About 125 lenders from across the nation, including thrifts, mortgage lenders, credit unions and commercial banks, take part in the survey that dates back to 1971.

The survey data is collected from Monday to Wednesday, and the results are posted on Freddie Mac’s website on Thursday of each week.

Come Thursday morning, the media goes nuts with the data in the report, known as the Primary Mortgage Market Survey (PMMS).

And just minutes after its release, you’ll see startling headlines like, “mortgage rates fall again,” or “mortgage rates climb higher.”

Mortgage Rate Surveys Use Old Data

  • The biggest flaw with the survey is that the rates are delayed
  • Because mortgage rates aren’t static
  • They are constantly in flux, both daily and intraday changes can take place
  • So you’re really just getting yesterday’s news at best

Unfortunately, whatever the message may be for a given week, it’s often old news by the time the media gets their grubby hands on it.

You see, mortgage rates can and will change daily, and sometimes swing dramatically, depending on what’s going on that week.

Lately, there have been plenty of swings thanks to all the uncertainty regarding the direction of the economy.

So a mortgage rate quote (yes, they’re just quotes in the survey) given to a handful of borrowers on Monday may be completely different by Thursday.

Sure, it could be exactly the same too, but chances are it won’t be. And the direction of rates often highlighted in news reports may be completely wrong as well.

Imagine opening up a newspaper on Thursday morning and viewing stock quotes from a few days earlier. That wouldn’t do you much good, would it? Especially if you had to act on it.

Assumptions Aplenty

  • Like all other rates you see advertised or surveyed
  • They make a series of assumptions
  • Such as a 20% down payment or a 740 credit score
  • Which may or may not actually apply to you

Okay, so the data isn’t as timely as the media might make it appear, even if it’s “weighted” and “averaged” and “algorithmically adjusted.”

Yes, I’m making up phrases here, but the point is the data is only as good as the day it is released, at least for the purposes of a prospective borrower shopping rates.

On top of that, the rates in the survey assume the world of you, the borrower.

The rates are based on first-lien (first mortgage) prime (great credit) conventional (non-government) conforming mortgages (small loan amounts) with a loan-to-value ratio of 80% (big down payment).

In other words, if you’re not putting down 20%, the rate in the survey isn’t for you. And if your credit score isn’t tip-top, you should also ignore the rates in the survey unless you want to be disappointed.

If you’ve got a jumbo loan, again, don’t bother reading the survey if you’re curious what rate you’ll actually receive.

Are the Mortgage Rate Surveys a Waste of Time?

  • Averages and old data don’t sound very useful
  • But the weekly mortgage rate surveys do have some value
  • In measuring interest rates over time for research and perspective
  • However for rate shopping they’re probably not all that helpful

I know I sound overly negative about the survey, but back in the day, I used to report on it just like every other major media outlet.

I stopped after I realized it wasn’t adding much value, not to mention the fact that 1000 other news outlets wrote about the very same stuff every Thursday morning.

The surveys aren’t inherently bad, they’re just not a very effective tool for borrowers shopping rates. If anything, they’re good to measure interest rates over time.

And a researcher may use the data to explain something that happened in the past, or to attempt to predict something that may happen in the future.

But for mortgage rate shopping, the Freddie survey (or any of the many, many other surveys out there) won’t do you much good. If anything, it could just frustrate you (and your loan officer) when the numbers don’t match up.

Zillow launched a weekly mortgage rate update a while back that is released every Tuesday.

They actually note that theirs isn’t a survey and the rates aren’t “marketing rates,” but rather are based on custom mortgage rate quotes submitted daily, reflecting the most recent market changes.

Again, take them with a grain of salt because there is no one-size-fits-all in mortgage lending.

So if you want the real skinny, get daily mortgage pricing from the bank or lender you’re working with.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Why You May Want to Apply for a Mortgage When Things Are Slow

Last updated on December 4th, 2019

A new working paper from the National Bureau of Economic Research reveals that it might be best to apply for a mortgage when no one else is.

The analysis, “The Time-Varying Price of Financial Intermediation in the Mortgage Market” (if you like light reading you should check it out), found that price changes on the secondary mortgage market aren’t fully passed on to consumers if volume is high.

Savings Aren’t Passed Along When Demand Is Strong

  • When demand for a certain product, such as a home loan, is particularly strong
  • There is less to no incentive for lenders to pass along associated savings
  • Similar to how retailers won’t lower prices if they’ve got plenty of buyers

The researchers refer to this cost as “intermediation,” which they define as the middleman between the borrower and the purchaser of the loan (the investor), essentially the lender.

This intermediary buys the mortgage from the borrower and then sells it to an investor. They provide the principal balance to the borrower and offer a rebate, otherwise known as a lender credit.

The rebate can cover closing costs associated with the loan so the borrower doesn’t have to pay them out of pocket.

Conversely, the borrower can take less or none of this rebate (or even a negative rebate) and instead go with a lower mortgage rate to save money over time.

In any case, there is a rebate associated with each mortgage rate on a mortgage ratesheet that spells out whether the loan will provide the borrower with funds to cover their costs, or instead cost them at closing.

What the researchers found out was that mortgage lenders were passing along less of this money to borrowers on days when mortgage applications were high.

For example, on the day before QE1 on March 24th, 2008, there were only 35,000 daily mortgage applications, which is historically quite low.

As such, there was plenty of capacity to take on new mortgages, and thus when mortgage rates moved lower most of the improved costs were sent along to borrowers.

In other words, because volume had been so low, mortgage lenders were more eager to lure in customers, so they passed along more of the rebate to prospective customers.

Your Mortgage Rate Might Be Higher If Demand Is Also High

  • Mortgage rates might be higher if demand is also elevated
  • Because lenders have limited capacity to deal with an influx of applications
  • And as noted, less incentive to lower interest rates if they’re already receiving a ton of business

When QE1 was later expanded on March 18, 2009, the number of daily applications went from 60,000 the previous day to 100,000 following the announcement. This time, the pass-through to borrowers was lower because lenders already had their hands full.

This also tells us that there are diminishing returns to monetary policy. If the Fed kept trying to stimulate the mortgage market, lenders would have to pump the brakes to ensure they had the capacity to underwrite the loans and do their job.

There also just isn’t much incentive to keep lowering prices (rates) if demand is super high. What’s the point if the phone is already ringing off the hook?

Lenders also don’t like to bring on more staff for short-lived events, especially if rates rise and demand cools off in a short period of time, which it did on several occasions over the past few years.

Mortgage rates are highly volatile, and can change from day to day and even daily.

Maybe There Could Have Been a 2% 30-Year Fixed

  • During the mortgage boom years between 2009 and 2014
  • Mortgage rates hit record lows
  • But is it possible they could have been even lower
  • Low enough that some lucky homeowners may have received 30-year fixed rates in the 2% range?

The researchers also found that the price of intermediation rose steadily from 2009 to 2014, a price increase that amounted to 30 basis points per year.

They pinned the rise on a decrease in the valuation of mortgage servicing rights, thanks to higher legal and regulatory costs, and revised capital requirements.

This, along with the sensitivity to loan volume, resulted in a total cost of roughly $135 billion to borrowers over that time period.

Put another way, when mortgage rates hit record lows, it’s possible they could have been even lower had lenders actually passed on more of the price improvements from the secondary market, which they typically do.

Instead, they kept more for themselves, either for profit and/or to address the lower value of mortgage servicing rights.

That meant borrowers could have potentially received a 30-year fixed in the high 2% range when rates bottomed, instead of say 3.25%.

So maybe, just maybe, you’re better off applying for a mortgage when no one else. Aside from perhaps getting a better deal, you might also receive more attention and close a lot quicker.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com