### Mortgage Faq

1. Should I pay zero points, or one point, or two or more points? Which choice saves the most money?
If you think zero points is always best, you're probably unaware of a powerful way to reduce your financing costs and get your monthly payments down at the same time. Keep in mind that you pay a lender in two ways. First, there's upfront fees --including points. Remember, a point is equal to one percent of the loan amount. Second, you pay a monthly interest charge (based on a mortgage interest rate) over the life of the loan.

Many consumers have the mistaken idea that each lender has a single price quote for each type of loan. For example, let's assume you're given a rate quote of 8.25% with one point. Many consumers would stop here mistakenly thinking that 8.25% and one point is their only choice. Actually, all lenders offer lower interest rates for all type of loans --if you pay more points; and higher interest rates --if you pay less points.

Lenders like to call it "buying the rate down" when you increase the points you pay and "buying the rate up" when paying less points. A rule of-thumb is that approximately 1/2 point equals a 1/8 percent in the rate. In other words, you can decrease the rate by a 1/8 percent by paying an additional 1/2 point, or vice versa. As you can see, there's lots of choices. The trick is in knowing which combination of rate and points is the most profitable for you. So where do you start?

STEP ONE: obtain some quotes by calling one or more lenders and ask them what the rate and monthly payment would be if you paid each of the following: zero points, one point, two points.

STEP TWO: you should figure what the long-term interest cost would be for each of the interest rates the lenders quoted. To do this take the monthly payment and multiply it times the number of months in the loan, and then subtract the amount you borrowed. Your result is the amount of interest you'll pay if you keep the loan to full term.

STEP THREE: determine what the interest cost would be for each interest rate if you stay in your home for only seven years, for example. To calculate this figure you'll need to obtain a sample payment schedule from a lender, or tackle the calculation yourself on a computer. The important things to determine are how much total interest and how much total principal will be paid in seven years for each of the rates the lenders gave you. Now you're ready to start comparing options.

On a piece of paper construct a table with the following column headings: 1) loan period; 2)points; 3)interest rate; 4) monthly payment; 5) points as dollars; 6) total interest paid; 7) dollar sum of points and interest; 8) total principal paid. Each of these eight items you have already determined or can easily calculate.

To start, fill in the options for keeping the loan to full term. For example let's use 30 years with zero points as the first option, then 30 years with one point as the second option, and finally 30 years with two points as the third. The next set of options is for keeping the loan for seven years.

Once you've filled all column headings for each option, you are ready to compare the benefits of paying points. Remember there are three goals here. First you want to pay less for the mortgage in terms of interest charges (including points). Second, you want to pay off the principal as fast a possible. Third, you'll want the lowest monthly payment possible while accomplishing the first two goals.

Another important consideration is the Federal income tax ramifications of each option. To incorporate the tax implications just add another column on your table that shows tax savings.

If you are refinancing, consider the options of paying the points and fees upfront or finance them along with the loan principal. Keep in mind that the more points you throw into the principal, the bigger the difference in monthly payment between options. In summary, consider that forking over cash to your lender in the form of points is not always a bad thing. A general rule is to spend more on points (and "buy the rate down") the longer you plan to keep the property. Also keep in mind that the choice of "points" to pay is a powerful tool to both reduce your monthly payments and to save on the total interest expense. TOP

2. Should I pay off my mortgage early?

Acquiring the right mortgage is only the first step in making home ownership a financially worthwhile undertaking. Sure, now you can deduct the mortgage interest on your tax returns, and in the future, you could refinance, secure a lower rate and reduce mortgage costs. If you stop there, however, you're missing the "big enchilada" when it comes to playing the mortgage game wisely. What I'm referring to is paying down the mortgage principal early and shortening the loan finance period --which equates to owning your home sooner, paying less mortgage interest, eliminating PMI sooner, and freeing up extra cash for savings or investments.

Sounds difficult? Well, it may not be as painful as you'd think, even if your finances are stretched thin now. You may even have received, and are considering, an offer from your loan servicer to accelerate paying off your mortgage without making extra principal payments. Of course, they'll require an extra fee to do this --but actually, you probably can do the same thing on your own for free. So where do you start?

First, check your mortgage agreement for any "prepayment penalties." A prepayment penalty is an extra charge some lenders tack on when you pay the mortgage principal more quickly than the agreement calls for. Usually such restrictions limit how much principal you can pay in advance each year. You may need to refinance in order to take full advantage of prepaying your loan if these requirements are too severe.

Payoff Options
The following are examples of ways to pay off a 30-year fixed-rate mortgage of \$150,000, with an 8 percent rate, sooner than the scheduled loan term. Remember, these ideas are probably not the full range of options available to you.

Single extra payment -if you made one extra \$500 principal payment during the first month of the mortgage, you would save \$4803 in interest over the life of the loan and retire the loan one year sooner. Make a \$5000 principal payment in the first month and you'll save \$42,386 in interest and pay off the loan 3 years early.

One extra payment each month -pay an extra \$20 each month (\$6720 over the life of the loan) and you will save \$20,330 in interest. If you were to contribute \$100 extra each month (\$27,600 over the life of the loan), you will pay off the loan 7 years early and save \$72,951 in interest.

Divide monthly payment in two parts - pay 1/2 of the regular monthly payment every two weeks and you'll save \$69,451 in interest and retire the loan in 23 years. What you're doing in this example is making a full extra monthly payment each year (26 instead of 24 payments that are half the normal monthly payment).

Test The Waters First
The big question when accelerating mortgage payments is whether your loan servicer will cooperate. For example, if you decide to send one extra principal payment each month, will your servicer apply it to the principal balance right away, or delay posting it until the first of the month? Or worse yet, will the servicer ignore advance principal payments by applying them to the next scheduled monthly payment?

Usually there's no way to tell what will happen until you give it a try. The worst thing you can do is implement your strategy and not monitor what your loan servicer is doing with each of the additional payments. It could turn into a nightmare for you if you fail to keep track of what's going on and maintain good records. As added insurance, you can prevent an honest misunderstanding by helping your loan servicer understand what you are trying to do. For example, make out a separate check for each extra principal payment and identify it as such. The more guesswork you can eliminate on the part of your servicer, the better off you'll be.

You may be in a "no-win" situation if your loan servicer refuses to acknowledge your extra payments. In this case, aside from some expensive legal action with little promise of solving the problem, you may have no recourse but to refinance and hope for a better opportunity with another servicer. This can be expensive, but the amount of potential savings at stake is significant. The biggest disadvantage of accelerating your mortgage payments is that you have less access to these funds once they're committed to your mortgage. Also, in some cases, an alternative investment might bring a larger return. TOP

3. How Do Lenders Calculate Interest Charges?

An often overlooked detail in mortgage agreements is the method of interest calculation. If your lender receives monthly payments on the due date each month, there should be no difference in interest charges no matter what method is used. But most borrowers send the payment in the mail and this, along with inconsistent payment habits, adds variability to when the lender receives the check.

Many mortgage lenders ignore the fact that a payment has arrived a few days early or late, as long as it is received before a typical 10-day grace period ends. Lenders calculate the interest on a monthly basis by dividing the yearly rate by 12 (the number of months in a year) and multiplying the monthly rate times the loan balance. This month-to-month method of interest calculation mostly benefits borrowers who pay a few days late each month. Other lenders use daily interest methods that usually benefit them. Three common ones are the "365-day", the "360 day" and the "365/360-day" procedure.

In the first, the annual interest rate is divided by 365 (the number of days in a year) which yields a daily interest rate. The daily interest rate is then multiplied times the number of days between payments and then the result is multiplied times the unpaid principal balance during that period.

The second, or 360-day method, is similar except each month is treated as 30 days even though some months have more or fewer days. This method is simpler and in some ways better for borrowers.

The 365/360-day method is a combination of the two previous approaches that mostly benefits the lender. In this method the lender uses 360 days to calculate the daily rate, which is higher than the 365-day rate. The lender then applies this rate to a 365-day year. This approach allows the lender to collect 5 extra days of interest each year. Some states have outlawed this practice, but it still exists and has been popular with the banking industry for over two centuries.

A good place to learn about how interest is calculated is in your mortgage agreement. Somewhere in the loan papers is a precise description of how the lender is supposed to figure interest charges, payment terms, the grace period (if any) and any other requirements. Chances are you'll discover one of the above four methods applies to you but you shouldn't stop there. As many find out, what is supposed to be and what actually is can be different. Over a long period of time, a lender mistake can add up to a nasty surprise. Your only protection in the event of errors is to understand how interest should be calculated and verify that the lender is doing it correctly each month.

Start by selecting a previous month and duplicate the interest calculation from a monthly statement by using the method described in your loan agreement. If you are successful, try a couple of other months just to make sure. Remember that your results should equal, to the penny, what is included on your statement. In some cases, you might have to round up to the nearest cent.

If you cannot replicate your lender's calculations there are two possible explanations. The first is it's your mistake; the second is it's the lender's. Again, if you experiment and are successful, remember to verify at least 3 to 4 months of interest calculations. In an error situation, unfortunately the knife cuts both ways. You may have to pay the interest owed even though the error was not your fault. On the other hand, the error can be in your favor. Still you will have to document this and convince the lender you're right. TOP

4. Where's the best place to get a loan?

The mortgage market is full of options including lots of loan products and places to get loans. One of the first and critical choices is who to do business with. The list includes direct lenders or brokers, banks, savings and loans, mortgage companies, credit unions, subprime and hard-money lenders.

At first glance, more choice seems good for consumers. And this is true when you consider that increased competition fosters lower rates. But in a practical sense, many borrowers are intimidated by so many options because they are unable to sort out the good from the bad. No wonder consumers find themselves in an underdog position in the mortgage market, when it's essentially a crapshoot to find the right party to do business with.

One reason: there's no equivalent "buyer's agent" to help borrowers find the right lender and loan. While some financial planners are acquainted with mortgage lending, consumers have been reluctant to pay for such services. This is surprising considering the complexity of the financial decisions borrowers face and the fact that a mortgage can cost more than the price of the home. In the end, such advice would almost certainly pay for itself. But here're some tips in case you're going it alone.

Long-term Customer Relationship
Mortgage companies are usually smaller organizations licensed by each state, whereas banks, savings and loans and credit unions are federally regulated. Knowing this is important for two reasons.

First, some believe that federally regulated banking institutions are motivated to establish a long-term customer relationship in order to sell financial products other than just mortgages. They have a higher public profile to maintain and are more heavily audited than smaller mortgage companies. These factors play big in the minds of consumers who look for long-term relationships over a one-time transaction. Still this is not the only valid viewpoint. Many consumers have developed reliable long-term relationships with small mortgage companies that yield just as good or better results. The bottom line is that it is not only the organization but the individual loan agent that matters. So it pays to interview both the organization and the loan agent you would be dealing with before making a decision.

Second, the source of an organization's license is important in case you run into problems. To file a complaint, you would have to go through the licensing authority. The best way to deal with mortgage problems, however, is to head them off before they occur. Remember that licensing authorities usually will only record a complaint --not resolve it. This means going to court on your own for resolution.

Mortgage brokers tout their rates as the lowest because they pick and choose from numerous loan sources. Direct lenders say just the opposite -that consumers can eliminate the middleman broker fee and save big money by going to a direct lender. Both sound convincing, right?

Actually in today's mortgage market, I believe both of these arguments are more come-on than reality. The surest way to find the best rate is to bypass the hype and make them all compete for your business on the basis of the lowest quote.

Researching a Particular Company
There is no useful repository of information that will directly answer all you questions. You'll have to work for it. A good starting point is the appropriate federal or state licensing agency. Usually these authorities maintain complaint records that are available, in some form, to the public. The Attorney General's office and the Better Business Bureau are also good sources to check. Remember that lack of a complaint record is no guarantee of legitimacy.

In addition, you should contact the company and ask for information. Find out how long they have been in business, where they are located and how long they have been there. Ask for references and contact the references about their experiences with this lender or broker. Avoid companies that won't provide references or that don't have written information about their business or products. Most important, wait until you have checked out a company and feel you can trust them before providing personal and financial information about yourself.

Independent Rating Services?
I have not run across a service that evaluates lenders or brokers. Although it's an intriguing idea, the reality of developing an objective rating system and keeping it up-to-date would be difficult, if not impossible. Developing funding for such a costly venture also would be prohibitive. TOP

5. What Can I Do About Loan Servicer Problems?

It can happen any time after you sign the mortgage papers. Even if you took great care in selecting the best mortgage company, it's likely that some other organization will end up servicing your loan. And it's not uncommon to have loan servicers switched on you more than once.

The problem for some borrowers, however, is that there's no choice in the matter. If you end up with a black hat servicer, you must find a way to deal with them or refinance and hope that a better servicer comes with your new loan. Keep in mind that there are probably many more good servicers than there are bad ones. Here's one example of things-gone wrong.

Angelica Smitham's of Streamwood, Illinois says her problems started shortly after her loan was sold to Mellon Mortgage Company. "We are living in a nightmare." Our 3-year ARM monthly payment has increased from \$1333 to \$1618 in the first 30 months. Every time we write, fax or call Mellon, they give us different reasons for the increases. On top of that, they waited 6 months to notify us that we were late on a payment and now they're trying to foreclose on our home. They continually harass us. They don't always return phone calls or reply to faxes or letters. The return receipt for certified mail sent to them comes back with squiggles instead of a person's name. Our attorney is trying to find a way to work with them, but it looks like we are stuck unless we can refinance with another lender. The problem is they have played havoc with our credit history and it's going to be difficult to qualify for another loan until this is straightened out.

How Good Servicers Operate
A loan servicer is the lender's representative while the mortgage is being paid. They typically collect a fee of 0.25% to 0.5% of the unpaid loan balance. Their primary job is to collect monthly payments, send the principal and interest to the lender and keep track of the financial status of each loan. They also keep tabs on impound accounts to make sure property taxes and hazard insurance payments cover what's needed. Each year the servicer sends out Form 1098 to notify borrowers of the total interest paid in the previous year. But from a borrower's perspective, what separates the good from the bad, however, is the quality of customer service. A loan servicer should have a toll-free number and provide a live representative to answer questions and help solve problems. A helpful attitude makes all the difference.

No matter what problems you are having, it is most important to keep making your full monthly payment on time. This will help protect your credit record in case you want to refinance. For example, beware if your servicer starts recording your payments late even though you mail them with adequate time to arrive by the due date. Avoid this problem by using a dependable two-day delivery service such as Federal Express or UPS that will require the servicer to sign and date the arriving payment. It's an extra expense, but a real bargain when you consider what's at stake.

The best solution is to resolve issues directly with the loan servicer. Start by contacting your servicer and explain the problem. Before you call, organize pertinent documents and have them in front of you. Keep track of who you talk to, the date and always carefully record what was said. If the person you talk to can't immediately solve the problem, ask for a follow-up action within an agreed upon timeframe. After each call, send a letter to the servicer that briefly outlines what was said or promised. Keeping good records is essential to get the results you want.

6. What Are Qualifying Ratios And How Do I Overcome Limitations?

The good news is you've found that perfect home to buy, plus your excellent credit rating qualifies you for a mortgage. The bad news is the lender has restricted your loan amount to below what's needed to purchase the home because your income is too low or maybe your debts are too high.

In this situation you will likely hear that you don't qualify because you don't meet the ratio requirements. Although this may seem like the end of the road, it's not -- you still have lots of alternatives in securing the loan you're after.

What Are Ratios?
Most mortgage lenders will refuse a loan because of a poor history of paying debts. Likewise, they will frequently decline loans to borrowers who appear incapable (in terms of financial capacity) of repaying loans above a certain size.

In the first case, lenders use a borrower's credit record to measure creditworthiness. In the second, a borrower's financial capacity is usually measured by using what's called "front" and "back" ratios. Remember that a ratio is simply a comparison of one thing with another.

The front ratio compares the total monthly housing expense (principal, interest and mortgage insurance) to the total gross monthly income. The standard front ratio calls for total housing expense to be less than 28% of total gross income (31% for FHA).

The back ratio compares total monthly obligations (including housing) to total gross monthly income. The standard back ratio limits monthly obligations to no more than 36% of the total gross income (43% for FHA). After calculating these ratios, a lender will usually take the most restrictive one (from the borrower's perspective) and interpolate a maximum monthly payment and maximum loan amount.

The important thing to know about qualifying ratios is that they are not cast in stone. Every lender has some flexibility in deciding who can qualify for a mortgage. So if you're initially told that your ratios will keep you from getting a loan, don't believe it.

You can solve these problems by working around the ratios with your current lender, checking other loans and lenders, proposing other options to the seller, or doing some combination of the above. Here are a few ideas to help get you started:

1. Submit compensating factors -Start by testing your lender's flexibility to qualify you by submitting a list of compensating factors. Your loan agent may have already done this, but some factors may have been overlooked. For example, try to itemize your best financial strengths such as: long-term job stability; stellar credit especially for rent payments; job promotion/income prospects; potential overtime or other income. The object is to sell yourself and prove that you can meet a mortgage obligation beyond what the lender's ratios show.

2. Improve ratios -Try to pay down short-term debts (credit cards) by selling assets or getting financial help from a relative, for example.

3. Increase your down payment - A larger down payment should soften the underwriters' ratio requirements. Evaluate whether you can convert some of your assets to cash in order to increase the down payment. Consider offering the seller your assets in trade for a credit applied to the down payment. Or do you have a service you can barter with the seller to increase the down payment?

4. Shop other lenders and rates -Since all lenders have different ways of operating, it pays to shop around. Also consider that some lenders may be more eager for your business and that may translate into more flexibility. Remember that the mortgage interest rate is a key determinant in your ability to qualify for a mortgage: the lower the rate, the higher the qualifying maximum loan amount.

5. Shop other loans - A different type of loan may make all the difference in solving a qualifying problem due to ratios. Adjustable rate mortgages are especially good in this situation because a low start rate is used as the basis for determining the maximum qualifying loan amount. Be careful, though, that you don't end up trading an increase in your qualifying loan amount for an expensive mortgage that you will regret later.

6. Consider seller financing - You won't need to worry about ratios if you can find seller financing. In fact, you'll have full flexibility in the terms of the loan agreement based on what you're able to negotiate with the seller. There are drawbacks to this arrangement, however, and it's best to fully understand what you're getting into. TOP

7. How Do I Estimate Property Value?

Much of what happens in real estate transactions starts and ends with what's known as "property value." Lenders use this key piece of information to define terms of the loan agreement -such as the monthly payment, the upfront fees and need for mortgage insurance. To establish what the property is worth, lenders use an appraisal method that meets underwriting standards. Yet, the results of the lender's appraisal is really only one opinion of what the property is worth. The buyer and seller may have different convictions. So what is the true property value?

When property is sold the true value is the price a willing buyer will pay a willing seller. The National Association of Realtors defines fair market value as "the most probable selling price in terms of money which a property will bring when exposed for sale in an open and competitive market under all conditions essential for a fair sale . . . assuming both buyer and seller act cautiously and the price is not influenced by pressure."

This coming together on a price, however, can produce variable results. Therefore lenders must look at "property value" in a broader sense, with a viewpoint that covers the overall market with a range of opinion. An appraisal accomplishes this by evaluating the property both scientifically and also through the educated opinion of a professional appraiser.

Still there are times when homeowners want to estimate what their home is worth without selling it or through a formal appraisal. Maybe you believe your home is over-assessed in terms of property taxes, or you would like to remove the requirement to pay private mortgage insurance, or you would like to know your equity position in order to take out a second mortgage or refinance a first mortgage. No matter what the reason, it's now possible to easily gather lots of information about property value at a reasonable cost. The trick is in knowing how to use it.

Where Does Data Come From?
There are a growing number of data firms that specialize in collecting and analyzing property data for consumers and the real estate industry. These firms operate by regularly gathering information about property sales and from assessor's records. This data is publicly available from county recorder and property assessor offices and you can collect the raw information yourself. But unless you are an expert in property value analysis, it will be difficult to make sense out of it.

Once collected, the data firms run computer models and attempt to interpret current property values. Actually, the property value information is developed through the use of statistics and the results reflect a range of value --not a single value. The wider the value range, the less accurate the results.

According the John Karevoll of Acxiom/DataQuick, the methods used by all data firms have limitations. More meaningful results are possible for geographic areas that have lots of sales and also when there is good neighborhood uniformity as far as price range and type of housing. Data firms that provide a single estimated value can have a large error factor. To avoid this problem, Karevoll recommends using a comparable sales approach to estimating your property value.

Comps Sales Method
This approach is a simple comparison of recent (less than one year) home sales of properties similar to yours and located in the same area. A meaningful comparison should include a review of square footage, number of bedrooms and bathrooms, and lot size. You may have to drive by the comps you have selected to make sure they compare in appearance and overall condition for landscaping, paint, roofing and style.

If the prices are similar for the home you are comparing, then you have a good basis to estimate what your home is worth. If the prices are much different, then you should try to determine why. One way to learn more is to call the Realtor who sold it. Remember that the price is also affected by circumstances other than the physical property size and condition. Another way to estimate value is to compare the cost per square foot of homes that vary by size and then average the results for all comps. Then compare the average for comps with the cost per square foot for your home.

Nationwide Data Firms

1. Acxiom/DataQuick, 800-999-0152, http://www.dataquick.com/consumer.htm

2. Case Shiller Weiss, http://www.cswv.com/

3. Experian, http://www.experian.com/home/renovation.html

4. INPHO, 800-846-3377, http://www.inpho.com/

5. Resicom Analytics, Inc., 888-864-6339, http://www.resicom.com/residential-buyers.html.

8. Do Tax Deductions Justify A Home Purchase?

The "rent or own" dilemma is tough to solve, especially if you've never owned before. For many the easy part is weighing the pros and cons of lifestyle changes. The hard part is understanding the financial aspects because of the large number of variables involved. There's new furniture and household items, different maintenance costs, utility and insurance charges, and lots of other expenses to compare. From a financial standpoint, the deeper you dig, the more you'll understand and, in the end, the better your decision.

Many simply look at home ownership as a way to capitalize on the fabled mortgage tax break. But is it all it's cracked up to be? If you're thinking about buying for the first time --estimating tax benefits is a good place to start. But don't make the mistake of stopping there. It may surprise you when all the calculations are done that renting makes more financial sense for your situation. Although you may choose to buy a home anyway, at least you'll know what you're getting into.

What's Deductible?
In general, there are three basic federal tax deductions for homeowners: real estate taxes, points and mortgage interest. Always check with an accountant for details and restrictions.

State and local real estate taxes are deductible. This applies to real estate taxes you paid at settlement. It does not include taxes for water or trash service, or for "local benefit" such as for construction of streets, sidewalks, or water and sewer systems. An exception is a tax paid for maintenance, repair or interest charges on local benefit items. You cannot deduct property transfer taxes or homeowners association assessments. Remember, you can only deduct the amount of property taxes actually paid --not the amount that goes into the escrow impound account.

Loan fees, also called "points," are deductible in the year paid if certain tests are met. Remember, points are defined as an upfront fee with one point equal to one percent of the loan amount. First, the loan must be for buying or building your main home. Second, paying points must be an established business practice and in the range of what is generally charged in your area. Third, the points must appear as such on the standard Form HUD-1 and not apply to other fees such as appraisal, inspection title or attorney costs. Other restrictions apply but these are the major ones. In general, points paid to refinance are not deductible in full in the year you pay them. In this case you would spread them over the life of the loan.

The largest and most important deduction is for mortgage interest. Each year lenders must send you a Form 1098 that shows the total interest you paid for that year. Again the deduction is valid if you paid the accrued interest for a loan on your main or second residence. You cannot deduct interest payments made for someone else. Likewise, interest charges for second mortgages, a line-of-credit or a home equity loan up to \$100,000 are also deductible. There are restrictions as to when you acquired the debt, and the maximum applicable loan cannot exceed the value of your home. Mortgage prepayment penalties and late charges for mortgage payments are deductible. Prepaid interest (except points) is deductible only in the year that it applies to.

Net Savings
It is useful to remember that one hundred dollars of property tax and interest deductions do not equate to \$100 in net savings. First, in order to benefit from this deduction, it along with all other Schedule A deductions must total more than the standard deduction. Assuming it does, then your net savings will be based on your tax bracket. For example, if you paid \$10,000 for mortgage interest and property taxes and you are in the 28% tax bracket, then your taxes will be reduced by \$2,800 (0.28 x 10,000 = 2,800). In other words, you spent \$10,000 to save \$2,800. That leaves a \$7,200 (10,000 - 2,800 = 7,200) expense for interest and taxes paid during that year to own a home. Remember this is just one expense of homeownership. Of course each year as you pay off the principal, the interest cost will decrease and so will the amount you can deduct. The question then becomes --is this the best use for the \$7,200 spent for interest and taxes (in this example)? The only correct answer when comparing renting versus owning is in the context of all the costs and all the benefits. TOP

9. Should I Refinance Based On What The Ads Say?

You've seen the ads promising lower monthly payments with no upfront fees. At face value, such claims seem like a good deal, but are they? Something important from a consumer standpoint usually is missing from these advertised offers, yet rarely will a loan agent help you solve the true refi puzzle. What's missing is an "overall" cost comparison.

A classic example of this problem occurs with credit consolidation loans. Consumers carrying balances on multiple credit cards, for example, are sold on the idea of lowering their total monthly payment. What's not explained is the extra cost from accompanying changes in the interest rate, loan period and loan principal. All of these factors determine the "back-end" loan costs which become more important the longer you keep a loan. If you don't know the total cost, including both short- and long-term charges, you are only guessing whether the refi is worth it.

One of the best money-saving opportunities that many overlook when refinancing is "buying down" the interest rate by paying more points. All lenders and mortgage brokers will give you a better interest rate if you pay more points. Remember that points are a one-time, upfront fee with one point equal to one percent of the loan amount. What the lender is offering is a tradeoff: by paying more upfront in the form of points, you can obtain a lower rate and ultimately save on long-term interest charges. This long-term interest outlay is your largest mortgage expense if you plan to keep the property for five or more years. In other words, lowering the interest rate is more critical for longer loan periods.

Related to this is another tradeoff: should you finance the fees? For many this is the only choice since they don't have cash available to pay the upfront financing costs. But by financing these costs, including points, your tradeoff is a higher long-term interest expense, if you keep the property long enough. So how can you find the best approach for your situation?

Critical Refi Tool
Short-term loan costs such as points and fees are easy to calculate --you just add them up. Estimating long-term costs, on the other hand, can present a problem if you don't have the right information. Keep in mind that the long-term loan cost is the total interest charge. Each monthly payment has a principal and interest component. Early in the loan period, most of the monthly payment is interest and then as the principal is paid down, the amount of interest is reduced until, at the end of the loan, the payment is almost all principal. If you want to know the interest cost for a particular interest rate over the first 7 years, for example, you will find it's not a simple one-time calculation.

But most mortgage organizations will provide you with a useful tool called a "loan payment schedule" or "amortization chart" that will list every payment for a given interest rate and break this down into interest and principal components. Or if you have a computer, software is available that will do the same thing. With this information, you can add up the interest charges for any part of the loan period. If you plan to stay in your home five years, for example, then the long-term loan cost would be the sum of the monthly interest charges for payments 1 through 60. Remember, however, that you will need a different amortization chart for each interest rate.

In a final comparison, you will need to estimate the long-term interest charges for six alternatives, for example. The first three would include paying different amounts of points (zero, one and two) and the resulting long-term interest costs. The second three would involve taking these same options, include the upfront costs in the principal, and then calculating the long-term interest cost of each. One of these six alternatives will save you the most in terms of total overall cost. Then compare your current loan cost to the best refi alternative. TOP

10. What's The Best Way To Get Through The Loan Process?

Is the loan process unfair? Many would argue it is simply because it's so complicated and few experience it enough to fully understand how it works. No, lenders don't have an easy time either. But the lending procedure is established by lenders to get their job done and consumers must fend for themselves.

The process it is commonly viewed as having five steps, all of which occur in a particular order. The application is first and then comes loan underwriting, followed by application approval or denial, settlement and last, servicing and repayment of the debt. Although this sequence reflects lenders' needs, it is not the best arrangement for borrowers in terms of what to think about when. In fact, many consumer protection laws try to short-circuit lender procedures by changing the sequence of when information is provided to consumers. Still all of these laws only address a small percentage of what could help borrowers the most.

Early preparation is critical. The worst thing you can do is respond to an ad and fill out a loan application without first doing your homework. Once the lending process is set into motion your options are drastically reduced. Here's a few examples.

Shopping Effectively
Two big guns consumers have in their arsenal are: 1) comparison shopping; and 2) negotiation. Comparison shopping requires obtaining quotes from more than one lender and then using this information to play one mortgage company off on another. This method along with negotiating most fees will help reduce the cost of a mortgage. Ignoring this will most certainly cause you to pay more than you have to --a lot more.

Moreover, both of these tools are most effective when employed before formally applying with any one lender. Keep in mind that once you fill out the application and pay fees, your choices will be influenced by the risk of losing the money already paid to that lender.

Selecting The Product
Related to comparison shopping and negotiation is understanding your needs so you can shop effectively for the best loan price and loan product. One common misunderstanding is that each lender has one rate for each loan type (i.e. 30-year fixed rate). Actually, all lenders have a range of rates available with each rate corresponding to an upfront fee call "points." Points are really an interest charge but instead of being paid over time, they must be paid in full when you sign the loan papers. One point is equal to one percent of the loan amount.

The tradeoff that all lenders offer is that if you pay more points, you will receive a lower rate and save on long-term interest charges. The benefits to borrowers of this tradeoff are immense --but only when used correctly. Once the best rate-point combination and loan program are identified, you can call lenders to comparison shop. Comparison shopping is practically useless without knowing how many points to pay.

Should You Lock?
The only protection you have from daily rate changes is to purchase a lock-in agreement from the lender. A lock-in is not a part of the loan agreement, but is a separate contract (in writing) where the lender agrees to hold a rate for a specified period, usually 30 or 45 days while the loan is processed. The cost to borrowers ranges from 1/4 point to one-eighth of a percent in the rate. Your decision about whether to use a lock-in and when, will affect how much you ultimately pay for the loan. Locking a rate at application will protect you if rates go up, but it also means you're stuck if rates fall.

In order to make the best decision about a lock-in, you must know something about the recent movement of interest rates. This means following available sources of information on rates before you apply for a loan. It may even effect your decision on when to apply. Remember, few loan agents are experts on interest rates and relying completely on their advice may not be in your best interest.

Settlement Cost Estimates
Within three days of loan application, lenders must provide an estimate of all settlement fees. If you wait to learn about these costs until then, it may put you in an inferior negotiating position. A better time to know about such fees is before you apply so you can do something about it before committing any money in application fees that could be lost. TOP

11. Should I Apply For A Mortgage Online?

Online mortgage lending is making a big splash. A combination of low interest rates, high refi demand, flowering technology and rapid consumer acceptance of the world wide web as a marketplace, has ushered in a new way to hook up with a lender. Touted as convenient, quick and cheap --the electronic mortgage is maturing into a unique experience.

Still mortgage shopping on the net is not for everyone. For consumers, the big tradeoff is service. Electronic forms and email have replaced face-to face communication. Also traditional loan agents are usually absent from the picture and this can put some consumers at a disadvantage. For example, those who require expert guidance to decide which loan is best for their circumstances or to help solve qualifying problems are pretty much on their own. If you're a first-time homebuyer or inexperienced with finance, you probably should avoid applying for a mortgage on the web. Here are some tips.

Shopping Web Sites
There are two major types of mortgage sites. The first are lender/broker sites where consumers deal directly with the mortgage company. These sites make up the bulk of what's on the web and today most every organization has a presence. A second is called a multilender site where a third party helps borrowers search through participating lender programs. The third party owns and operates the site and in exchange for bringing in new business, collects a fee from participating lenders. Examples include E-Loan (www.eloan.com), QuickenMortgage (www.quickenmortgage.com) and Interloan (www.interloan.com).

Although seemingly different, the process of getting a loan from single or multilender sites is pretty much the same. Multilender sites claim to save you time by doing the shopping for you. But the only way to be certain is to compare programs from other mortgage sites. The good news is that comparison shopping on the web can be easier than trying to pry information from lenders over the phone in the traditional way. The trick is to match up data from different sites so that what you're comparing is apples vs. apples. To do this effectively you'll need to tie down important factors such as --How many days lock-in is included? . . .Is the price different for different loan amounts . . . Is there a prepayment penalty? . . . And are the fees (other than points) in line with what other lenders charge? Remember that with mortgages "there's nothing for free" --plus there's usually a reason a particular rate is lower than the rest. The hard part is that it's your job to find out why, and this may require a phone call since most lender sites I've seen are short on explaining everything.

Using Online Calculators
Mortgage calculators, a common feature on many mortgage web sites, are attractive because they're easy to use. Just enter a few pieces of information about yourself and these calculators will estimate things like the maximum loan you could qualify for, what your monthly payment will be and whether it would be worthwhile to refinance. While in theory, computers are ideal tools to measure such subjects, their overall usefulness still comes down to how they are programmed.

In many cases, online web calculators are too simplified to yield meaningful results. In the worst case, trusting the output of a poorly designed calculator can lead you into costly mistakes --if you don't understand the inherent limitations. Keep in mind that the "real-world" of mortgages is fairly complex. There are many variables to consider, such as the type of loan and the array of unique qualifying requirements, all of which are impractical to plug into a useful tool for everyday consumers.

In general, the worst designed calculators try to estimate the value of refinancing. They claim to answer the question "will I save money if I refinance." While this is a simple question to ask, a meaningful answer is not so easy to obtain. I have yet to see one calculator that adequately covers all the variables involved and produces anything better than a wild guess.

Other Tips
Protecting yourself while doing business online is critical in case something should go wrong. This means researching the company and, at a minimum, determining if they have the proper licenses for your locality. Security issues about sending private information over web haven't proved to be as risky as once thought. Still, caution is a good practice. Don't apply to more than one lender at a time as this may negatively affect your credit score. Also, remember that an online application requires you to check your email regularly. TOP

12. Should I Get A Lease Option?

A "lease-option agreement" is a contract between a homeowner and a potential homebuyer in which the decision to purchase the residence is postponed for a period of time (1 to 3 years, for example). During that period, the potential homebuyer leases the property and lives there. Also during the lease-option period, a pre-agreed portion of the rent accumulates as a potential down payment. Then at the end of the lease period, the potential homebuyer either exercises the option to buy, or moves from the property.

Lease-Purchase
A "lease-purchase agreement," on the other hand, is just what it says - you've committed to buy the home. The main difference between this transaction and purchasing a home outright, is simply the lease period prior to gaining ownership. The lease-purchase route is more complicated than setting up a lease option agreement because typically the complete terms of the purchase are spelled out and a closing date is set. A rent credit towards the down payment is also possible, if negotiated, in a lease-purchase agreement.

Option Cash
Both types of agreements require that the buyer put up what's called "option money." This usually is a nonrefundable sum of cash (or other consideration) that's applied to the purchase price when the sale goes through. At the end of the lease period, if the buyer refuses to purchase the property, the seller can keep the option money. Option money must cross hands to the homeowner for the contract to be binding; otherwise, the owner wouldn't be obligated to sell the property. How much are we talking about here? It could be \$500 or \$5,000; it all depends on what's negotiated beforehand. An obvious point is that the seller will attempt to get as much option money as possible.

The Downside
One of the hardest parts of a lease-option or lease-purchase agreement is finding the right residence. Although the opportunities for such agreements are fairly common, the home itself, its lot or location may not measure up to what you had hoped.

A homeowner who resorts to this type of agreement may be having difficulty selling the property. Be aware, though, that there can be other seller motivations --like a homeowner who must relocate quickly and wants to sell, but doesn't have sufficient time. A lease-option or purchase would be an ideal solution in this example because the owner could receive income from leasing the property while concurrently attempting to sell it.

Another potential pitfall is establishing the purchase price. Since this is done when the agreement is set up, and property values can change over a short period of a time, a badly priced property can kill the deal. Your option money would then be at risk.

As you've probably already guessed --lawyers are a necessary part of getting the most from these types of deals. Things can go wrong even with simple contracts, and most lease option/purchase agreements are on the complex side. Even so, overall, a lease option or lease purchase can make a big difference in terms of opportunity. With some luck, homeownership may follow. TOP

13. What's A VA Loan And Should I Get One?

If you're a veteran --you're in luck. Our country honors you with the only loan on the market that requires no down payment, plus you can finance all of the fees. Think of it --you can move into a home without paying a cent upfront. And if that's not enough, there's no mortgage insurance to pay on a VA loan and the qualifying ratios are less restrictive than for conventional loans.

What's A VA Loan?
VA loans are mortgages made by direct lenders with a partial guarantee from the Veterans Administration that the loan will be repaid. The VA doesn't actually make loans. But it does control all aspects of the lending process including qualifying the borrower and the property, and setting guidelines for lenders' fees. Currently, the VA program sponsors regular fixed-rate programs, adjustables, growing equity mortgages (GEMs), and graduated payment mortgages (GPM).

How To Get Started
Proof that you're a veteran is based on a "Certificate of Eligibility" that's issued from any local VA Office (check your phone book or call 800-827 1000). This is obtainable by completing a simple application (VA Form 26 1880) and enclosing a copy of your discharge record (for example, a DD Form 214).

Contact two or three lenders through referrals from friends and relatives or check a lender survey in your local newspaper. VA loans are widely available through larger direct lenders, as well as many mortgage brokers. It's best to "shop till you drop.

What Does It Cost?
The VA charges a funding fee based on the size of the down payment. The fee is 2 percent of the loan amount with less than a 5 percent down payment. If you put 5 to 10 percent down, the fee falls to 1.5 percent of the loan amount, and with greater than 10 percent down, it drops to 1.25 percent of the loan amount.

Since VA loan rates float up and down with changes in the financial markets, you'll find that VA rates (and points) are competitive with similar conventional loans. As I mentioned before, it does pay to shop around as rates and points will vary among lenders.

In addition, there are normal closing costs including: appraisal, credit report, recording fees, title search and insurance, survey and transfer taxes. Lenders usually charge a one-point origination fee on top of the discount points. Remember, one point is equal to one percent of the loan amount. The origination fee covers the lender's expenses such as office rent, telephone, advertising (and others). Discount points are paid by borrowers who want to get a lower rate by paying an additional upfront fee. The more discount points you pay, the lower your interest rate will be.

Of course there are a couple of restrictions. First, your loan amount is usually limited to the property value established in the VA appraisal. If the appraisal comes in lower than expected, then you can make up the difference, in cash, between the sale price and what the appraiser thinks the home is worth. Or, better yet, the seller can lower the price.

As you can see, the appraisal can lead to unexpected results. Therefore, from a buyer's perspective, it's a good idea to find out what the appraised value will be prior to final price negotiations with the seller. Also consider that the VA doesn't impose limitations on loan size, but most lenders cap the largest loan they will do at about \$203,000.

More Good News
VA loans have no prepayment penalties. Additionally, VA loans made before March 1988 can be fully assumed without the new borrower qualifying for the loan. For loans made after this date, the person assuming the loan must qualify with both the VA and the original lender. TOP

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