Most home owners and home buyers have no idea what APR (Annual Percentage Rate) is. I know this because of the over 3000 borrowers I have dealt with a very large percentage have questioned it. Oddly enough most loan officers don’t fully understand APR and those who do often understand it just enough to manipulate it to make theirs look lower than someone else’s.

The APR has been a major part of the home buying process since 1974 when the current Truth In Lending (TIL) form was introduced as a result of the Truth In Lending Act (TILA). It was “supposed” to give shoppers a level shopping ground for comparing rates and closing costs. All it did in actuality is allow savvy salesmen to manipulate yet another number to confuse the borrowing public.

What the APR is supposed to be is the base interest rate plus the cost of closing calculated as a percent of the loan and spread over the life of the loan. In other words if your closing costs are $5000 on a $100,000 loan that would be 5% divided by 12 months (annualized)? would be .416% so add that to the original interest rate of 5% and now your APR should be 5.16% - sounds simple, right?

Where it gets complicated is when you start comparing different types of loans, different ways of calculating closing costs, who is paying closing costs, whether there are discount points, etc. For example on that same loan the loan officer may be showing the seller paying some or all of the closing costs so they don’t become an actual part of the buyer’s repayment. Would that make the APR 0% - technically it would. However since all fees still must be disclosed it does not. The procedure is flawed and it’s not the worst way to shop for a mortgage but it’s close.

The MOST important things about a mortgage are the following:

1. Down Payment - how much equity participation are you establishing in the beginning?
2. Loan Amount - what is the actual amount borrowed?
3. Terms of the Loan - is it fixed or adjustable? When is it due? How many payments are to be made?
4. Total of Payments - if you pay the loan off full term how much will you repay?
5. Monthly Payment (Principal and Interest) - this is where the rubber meets the road.

Closing costs and discount points can be manipulated and disguised. Interest rates can be adjustable and that’s tricky unless you understand floor, index, margin, cap, and period. That’s an entirely different post in itself. Furthermore not all “costs paid at closing” are a part of the APR. In fact unless the fee is a direct result of the loan finance it is not a part of the APR. That’s where I’ve seen a lot of TIL forms not properly completed - especially by some of the bigger lenders and banks.

If I were shopping for a mortgage today I would not look at the annual percentage rate as much as the 5 items listed above. If I like all of them and they are better than what another lender offered then I would take it.

Try this simple Excel file [download]

If this short post in any way sounds condescending it is by no means intentional. There is, however, a good cause for expedience in delivering this information in today’s volatile market. Two weeks ago I could easily offer a 4.75% interest rate on a thirty year fixed rate FHA home loan. Last week that rate was as high as 5.675% and today it started out at 5.375% but has now dropped to around 5.25% (this is not an advertisement for a rate so I am not posting an APR but I will give you the APR if you email me or call me).

Rates are going to go back up. They have been much lower for much longer than almost every professional expected and it has little to do with what the government does as to whether they stay low for much longer. In part today’s rates are artificially low because of the massive trillions of dollars they have dumped into the market but they could go higher in spite of that fact and almost certainly will go higher quickly once that investment ceases.

Here is what you must know now in order to get the good interest rates:

FHA loan rates are not going to stay low forever. Waiting for them to get back into the fours is like waiting for a volcano to erupt. Most volcanologists will tell you they rarely do.

Once they start back up if you do not have your FHA loan application already submitted you may completely lose the opportunity to get the lowest rates. It costs the lender money to lock a loan and that’s why many charge lock fees (Novation has not charged them in the past).

If you drag your feet and miss the lower lock you may actually not qualify for the same FHA loan once the rates go up because your debt-to-income ratio will increase based on the monthly mortgage incrase as a result of the higher interst rate.

The urgency is for you to get pre-qualified instead of just sitting around watching the tube hoping to save a couple more dollars. In fact play around with the calculator to the left to see how much your payment will change based on a .125% interest rate. You want to wait to see if you “may” be able to save $9 a month then by all means do so. Remember, they go up just as fast as they go down and one day soon they are going up.

Sure, there’s the old argument that people who don’t make a down payment can’t afford the home. Then there’s the realistic fact that in Georgia you can buy a HUD home for well under market value from HUD using our FHA acquisition loan and only $100 down thus saving your down payment for clean up and cosmetic rehab. In fact if there is up to $5000 in necessary repairs like the HVAC, plumbing, electrical, Sheetrock, etc., that can be paid for at closing as a part of the loan.

HUD currently has an excess of properties available in Georgia and many of them are in great condition. Some may need repairs but this program allows for up to $5000 in repairs and the FHA streamlined 203(k) allows for up to $35,000 in repairs.

You still have to qualify under HUD’s guidelines for this FHA loan but all in all this is a fantastic program.

Call me today at 678-946-0101 and let’s discuss the possibilities about you owning one of these Georgia HUD homes!

Ken Cook

Interested in borrowing from $50,000 to $5,000,000 against your asset holdings? Up to 80% of value on highly traded stocks. Interest only loans.

- Fixed rate between 2.5% and 4.5%
- Interest-Only loan payments
- No closing costs or transaction fees
- No income or credit check
- Funds may be used for any purpose
- Non-personal recourse loan
- Close in a matter of days
- Work with a Direct Lender

No origination fee on loans over $1,000,000 - no points, closing costs or lender fees.

Loans from $500,000 to $999,999 .5% origination fee.

Loans from $250,000 to $499,999 .75% origination fee.

Loans from $175,000 to $249,999 1% origination fee.

Loans from $100,000 to $174,999 1.5% origination fee.

Loans from $50,000 to $99,999 2% origination fee.

Any of the 50 states and US territories. Call 678-946-0101 for more information. Cannot be secured with hard assets such as real estate. All loans have a 3 year lockout period.

Recently the question has arisen, “What is the difference between Margin Loans and Securities Based Lending?”

Here are a few of the differences-
Margin loans can only go up to 50% of the value of the stocks - we are able to go to 80%.
Margin loans are not allowed to lend on stocks valued at less than $10.00 per share - we offer the loan on any price share.
Margin loans rates are typically ?5-8% ARM’s - We are between 2.5 - 4.5% fixed rate.
Margin loans are FULL-recourse - ours are NON-recourse with no personal liability.
The “call” on margin loans is set at 80% of the stock value and they have one day to cure ? our “call” is set at 80% of the loan (approximately 60% of the stock value) and we offer 5 days to cure and since ours are non-recourse if the borrower cannot cure the loan default they can simply walk away.

“What is your minimum and maximum loan amounts?”
Our minimum loan amount is $50,000 and there is no maximum loan amount.

“Can you lend against securities that are traded in another country?”.
Yes. Any security (stocks, bonds, mutual funds, T-Bills, options) that is publicly traded anywhere in the world qualifies for this program. There are some exceptions such as China, Venezuela and others. Please contact us for an update list of countries that are excluded.

And an update as to stock dividends.
If the dividends of the stock exceed the interest rate on the loan then the dividend proceeds are first credited towards their loan payment and the balance is given to the borrower.

The New Economy and Future of Investor Financing
(Or: The Future of Investor Financing)

Just a few short years ago, in the late 1990s, a real estate investor
using conventional financing had a completely different set of
challenges than they did during the decade between then and now. In
1998 a real estate investor would need a minimum of 20% down, have the
burden of proving positively your income and assets and be required to
demonstrate a strong credit history. Proof meant copies of everything
official and nothing could bend the rules except cash.
“By expanding the type of loans that it will buy, Fannie Mae is hoping
to spur banks to make more loans to people with less-than-stellar
credit ratings.” ? New York Times, Sept. 30, 1999
Fannie Mae showed the first signs of making some mistakes stretching
lending limits and obfuscating guidelines because the new breed of
“sub-prime”, also called “non-conforming”, loans had started to take
its share mostly of borrowers with challenges in credit, assets or
income. Soon what Fannie did began to spread in to non-owner occupied
real estate investment loans. Interestingly enough, as a side note, in
that same New York Times article we find the following: ?”From the
perspective of many people, including me, this is another thrift
industry growing up around us,” said Peter Wallison a resident fellow
at the American Enterprise Institute. ”If they fail, the government
will have to step up and bail them out the way it stepped up and
bailed out the thrift industry.”
Soon a new president was elected, the dot com boom and bust were in
our rear view mirrors and the future looked pretty bright prior to
September 2001. We had a robust American economy, lending had loosened
under President Clinton and Fannie Mae Chairman Franklin Raines, jobs
were growing with unemployment hitting an amazing 3.9%, Gross Domestic
Product was at 4.1% and interest rates were falling from 8.5% to 7.48%
during the year 2000.
By the mid 2000s interest rates were in the 5% range, housing values
had skyrocketed, housing starts were at all time highs, investors
could borrow 100% of the sales price of a home if they had a 620
middle score. Income was not important and assets were not important
because of a very dangerous loan some of you crave today called a “no
doc” loan. Then the very loud sound of the secondary mortgage market
collapsing into a hellish abyss called “today’s economy”.
Where we are headed depends largely on how quickly we can
de-socialize, de-nationalize if the “s” word is offensive to you,
banking and private enterprise and distance ourselves from the
foolishness turned to pain of that period. As long as the government
or their appointed agents are guiding, or at best limiting, the
decision making process you can default to lending not being in the
favor of the small real estate investor. That does not, however, mean
the bells have tolled for the industry. In fact we may be at the
apogee, the point farthest away from where we were or where we’re
headed.
Several years ago people in my position in the mortgage banking
industry began predicting cash would once again be king as it had been
in 1998 and before. Little did the majority of us know fully how far
the mortgage industry would implode. Today, in fact, it is very
difficult to get a real estate investment loan from a conventional
mortgage bank. Fannie Mae does have guidelines for you to own up to
ten properties on credit yet lenders have guidelines which are
superimposed on the top of Fannie’s guidelines. There are, in fact,
only a couple of national mortgage investors purchasing real estate
investment loans which means those who originate cannot extend the
credit to you.
Today the investor who is winning is tapping in to alternative methods
of acquiring properties or simply paying cash. Investment clubs which
originally sprang up many years ago to pool cash and team investors
will resume their stance as they did in their infancy. Though they
expanded to hundreds or thousands of members in the boom most of those
people have disappeared back to whence they came. Old techniques like
“wraps”, also referred to as “subject to” purchases, will begin to
show up again especially as interest rates continue to rise - and rise
they certainly shall.
The first signs of recovery will be when inventory levels are
approaching a six months or less supply instead of as much as four
times that number. As the number of available properties decreases
prices will stabilize and even begin to recover. Stabilized values
mean less risk to lenders and our investors which also means lending
guidelines will stabilize and lending itself will loosen up. Do not
expect stated income or stated asset loans to return any time in the
next several years but expect lenders to actually remove some of the
overlays on top of Fannie guidelines.
Once lending is returned to the street , values have stabilized and
inventory levels return to manageable levels then you can expect
private lenders, small real estate investment trusts and buyers like
many of you to enter the market once again. Saying exactly when this
will happen is a guess at best and depends very much on how soon the
jobs market recovers and the economy takes a deep breath signaling an
end of this long, fast, sprint to the bottom.
Even though rates are bound to rise, quite possibly to 1998 levels or
higher, improving values on homes will mean you are still able to
purchase below future market values so even an eight percent to ten
percent interest rate is manageable. Only those who did not experience
investing before the new millennium grimace at the thought of double
digit rates. Remember, it’s not the rate, it’s the return and return
it shall.

Nobody knows when but interest rates will go up. Seriously, nobody knows when. Rates have been at a historical low for months and months. You, your friends, your family, and your co-workers keep reading little articles like this one saying, “refinance now or buy now if you need to because rates are going up.” Still, you have not done so. No, you’ll wait until rates are up and say, “man I can’t believe I missed that opportunity!”

This past week we saw rates jump from 4.75% to 5.25% in less than 4 hours. We saw people who had not yet locked in their rate have their payments jump as much as $50 or more per month just by waiting a few more days.

Now we do expect rates to decrease slightly in the coming week but not one person knows when or how much. You can rest assured thousands of bloggers will be guessing and some will be right but not because they necessarily knew anything special - even though it does take knowledge and understanding to “get close”.

Do yourself a favor and call a LOCAL MORTGAGE BROKER or lender like Novation Mortgage if you are in Georgia or Florida and get the facts today. The chances of rates going higher are vastly greater than them going lower or even staying level.

Georgia and Florida FHA loans for purchase or refinance including the 203(k) and streamlined.

If you know golf, you know par. From the dictionary at AudioEnglish.net par is “a state of being essentially equal or equivalent; equally balanced”. In golf it’s essentially zero (no more, no less). In mortgages it is applied to mortgage brokers who have access to “wholesale rates” who pass along those wholesale rates at no yield (no profit) in order to beat the bank in interest rate.

The “par rate” is generally about .25 to .5 percent lower than the average rate you can get at your local bank or big national lender.

Lenders don’t actually have a “par rate” because they are not required to disclose their profit like brokers are. Brokers are required to disclose the amount of “Yield Spread” they earn which is the profit between the par rate and the rate they are charging the borrower. Banks and lenders receive much higher profits often called Service Release Premium but they are not required to disclose even though they are making as much as several thousand more dollars in immediate profits.

You may have had some advice to “never pay points” or to “watch out for the points” on a mortgage. Chances are if you got that advice it was probably from someone who knows little about mortgage financing. Now that I have your attention …

There are different types of points so saying “points” simply generalizes a term that is dangerous mostly when generalized and not comprehended. In this very short article I will talk about four different kinds of points and none of this is intended to be a concise guide or to take the place of speaking with a seasoned mortgage broker.

What is a “point”?

In high finance there are basis points which are each 1/100th of 1 percent.? So that means 100 basis points, also called bips, is 1 percent. You may hear people refer to 50 bips or 50 basis points when referring to 1/2 of 1 percent. One full point, 100 basis points, is 1 percent.

Interest points and other points associated with a mortgage are calculated in bips and points. When speaking with customers regarding interest rates the mortgage broker may use percent and say it in English like four and three quarters percent (4.75%). While speaking about points that are not related to the rate they will most likely say points.

Closing Points

This is a generalization usually applied to closing costs. People will often mean this when they ask “what are the points”? Mortgage brokers know there is no such term so they will either assume the asker is mimicking terms they have learned or are genuinely not familiar with the terminology. Closing points could be loosely used to translate to closing costs which are comprised of points, fees and associated escrows. Closing points is not a real term.

Discount Points

Have you ever noticed one advertiser may say interest rates are one number and another will say a much lower number for the same loan. This is almost always a result of something called “discount points”. These points amount to pre-paid interest and this is where the tricky advertiser can beat the uninformed customer.

Discount points are not bad and in fact can work to a home owner’s advantage when properly understood, disclosed and used. Proper disclosure should start with advertising or at the very least the first phone call. Discount point, in other words, can be used to your benefit or detriment. Working with an experienced mortgage broker and not one of the phone operators at the bigger lenders you should be given all the facts and allowed to choose whether or not you want to use discount points - you should never be presented with an initial rate quote that would require the payment of discount points.

Broker Points

Most brokers no longer charge broker points although I did see a good faith estimate a few weeks ago with 2 broker points. That was a fee that goes straight to the broker of 2 percent of the loan amount. Now that may be okay if there are limited other closing costs but in this case all other fees were present so be careful with broker points. Broker points can be used by the broker to pay for the appraisal, attorney fees, other points or for any other purpose the broker deems reasonable and to which you agree.

Origination Points

Almost every lender, broker and banker has an origination fee. This fee is almost exclusively used to pay salaries, commissions, and other costs of running a business. Once again these are expressed in points or percentage so if your mortgage broker says the origination fee is 1 point they mean it is 1 percent of the loan amount.

Those are the three types of points you should expect to see associated with your loan. There are other costs but generally not expressed in points or percentage. Attorney fees, appraisal fees, title fees, inspection and other fees may also appear in association with your loan.

Make sure you read my other articles and especially the one on How To Shop For A Mortgage.

FHA has extended the temporary property flipping waiver that allows lenders and the property disposition firms they hire (or with whom they are affiliated) to sell properties on which they have foreclosed without regard to FHA’s 90-day seasoning requirement. The waiver is in effect for loans with purchase agreements signed by the borrower and seller on or before May 10, 2010.

From FHA Letter 06-14ML

Exceptions to 90-day Restriction

The following sales are exempt from the time restrictions provided by 203.37a:

• Sales by HUD of its Real Estate Owned
• Sales by other United States Government agencies of single family properties pursuant to programs operated by these agencies.
• Sales of properties by nonprofits approved to purchase HUD-owned single-family properties at a discount with resale restrictions.
• Sales of properties that are acquired by the sellers by inheritance.
• Sales of properties purchased by employers or relocation agencies in connection with relocations of employees.
• Sales of properties by state and federally charted financial institutions and Government Sponsored Enterprises.
• Sales of properties by local and state government agencies.
• Upon FHA’s announcement of eligibility in a notice (i.e., ML), sales of properties located in areas designated by the President as federal disaster areas, will be exempt from the restrictions of the property-flipping rule. The notice will specify how long the exception will be in effect and the specific disaster area affected.