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Mortgage and Finance


The Scoop On Prepayment Penalties ? Will it Affect The Tulsa Homeowner

Back in the old days, mortgage products were limited. You could choose a 30-year fixed rate, a 15-year fixed rate, or a one-year adjustable. If you had some credit problems, you would have probably needed to visit a loan shark.

Today, there are programs for everyone. This is a good thing, as more choices to the consumer equates to a more personally tailored mortgage program. Today I'd like to write about an undesirable feature that is part of many new mortgage programs -- the pre-payment penalty.

A pre-payment penalty is simply a clause in your mortgage note that allows the lender to charge a fee if the loan is paid off within a specified period of time. Most pre-payment penalties expire within one to three years.

It's easy to see why some lenders want to slap a pre-pay on the loan. Consumers demand cheap loans these days, meaning they don't want to pay any points. As a mortgage broker, it would be hard for me to find a situation where I would actually recommend paying points to a customer. Lenders must accommodate such a market demand, so they offer to pay a mortgage broker a "yield spread premium" in exchange for a slightly higher interest rate. This enables the borrower to get into a loan with little fees and points.

The problem is that the lender doesn't want to fork out a few thousand dollars in order to make a loan that's just going to be paid off in a few months. Thus, the emergence of pre-payment penalties.

Let me give you a quick run down on what you might expect. First, check Oklahoma state law. Some states prohibit pre-payment penalties. If you live in one of these states, you won't have this problem, although your loans might be more expensive, but that's a different story.

Most pre-payment penalties don't exceed three years. A loan with a three-year pre-pay might carry the following terms:

·         Penalty of three percent of the outstanding loan balance if paid off in the first year;

  • Penalty of two percent of the loan balance if paid off in the second year;
  • Penalty of one percent of the loan amount if paid off in the third year.

The penalty lessens the longer the loan is held. Also, most lenders will allow additional principal curtailments of up to 20 percent of the loan balance per year without a penalty.

And last, many pre-payment penalties apply only to a pay off as a result of a refinance. This means the homeowner may sell the property within the pre-payment penalty period.

Clearly, the terms of a pre-payment penalty described herein are designed to do one thing: prevent "refinance churning."

Another common pre-payment penalty that is a bit easier to stomach is a one-year pre-pay. Often called a "soft" pre-pay, you will probably find similar terms as the three-year pre-pay, with the penalty only lasting one year instead.

Prepayment penalties are not common in fixed-rate mortgages or balloons. However, you may find a penalty on some adjustable-rate mortgages, interest-only payment mortgages, and higher interest rate, alternative credit loans.

The bottom line is this: First determine the mortgage product that best suits your particular objectives. If that product contains a penalty for early payoff, understand the terms completely. Then decide if you can live with the terms. If you can't, your competent loan officer will be able to give you other viable options.



Most ARMs Held By Tulsa Homeowners Are Less Risky Type

Most Tulsa, Jenks, Broken Arrow, Bixby, homeowners who do hold adjustable-rate mortgages (ARMs) hold those that are initially the least risky, according to the third major study this year aimed at deflating major provisions in bubble market theories.

The Federal Reserve Board's Senior Loan Officer Opinion Survey on Bank Lending Practices for July reported 45 percent of domestic loan officers said conventional ARMs that re-price at regular intervals accounted for less than 10 percent of all home mortgage loans on their books. Most institutions reported that the loans accounted for less than five percent with only 12 percent saying the share was greater than 50 percent.

Responses received from only 30 percent of the 56 lenders surveyed indicated "hybrid" ARMs -- those with an interest rate that is initially fixed for a multi-year period, but subsequently adjusts more frequently -- accounted for more than one-half of all residential mortgage loans on their books.

On the average, almost 90 percent of conventional ARMs held were due to adjust within the next 12 months while on average only 12 percent of the hybrids were due for re-pricing.

The loan officers also said that almost 60 percent of hybrid ARMs, on average, will not be re-priced for at least three years.

More than 50 percent of the officers reported that hybrid ARM´s accounted for at least 75 percent of all ARM´s originated during the past three months, and another 17 percent of respondents indicated that such loans accounted for between 30 percent and 75 percent of all originations over that period.

Bubble-market theorists say, in part, that there are too many over-priced homes financed with too many high-loan-to-value conventional ARM loans, which, as interest rates rise, can cause a household's budget to melt down with the potential for foreclosure. If too many over-leveraged homeowners lose their homes, the market could be flooded with housing that depresses values.

The argument might well fly in select local markets. Tulsa real estate ups and downs are, after all, a product of local market conditions, but nationwide there simply aren't enough mortgages and loans of concern to cause a national melt-down.

The Fed's April loan officer survey found that over the prior year, 60.3 percent of the mortgage originations came with loan-to-value ratios that were less than 80 percent. An additional 25.8 percent came with ratios from 80 to 89 percent. The remainder, only 14 percent, had higher ratios, from 90 percent to more than 100 percent.

Even when second mortgages were included (including equity loans), only 19 percent of the loans officers held had loan-to-value ratios of 90 percent or more. The survey found 29.6 percent of total mortgage indebtedness had ratios of 80 to 89 percent and most of the home loans represented a loan-to-value ratio of less than 80 percent.

As for concerns about too many ARMs, some states and population groups do carry a disproportionate share of riskier loans, but the Federal Housing Finance Board found that only 18 percent of consumers nationwide opted for adjustable-rate mortgages in 2003.

Home Owners Reap Large Returns

Home owners, on average, in the past year, earned more than $15,000, thanks to home value appreciation chugging along at nearly 9 percent.

Continuing to behave like a regional market on fire, the hot national market yielded a median price in July of $191,300 up from $176,000 in July 2003 -- an 8.7 increase in value, according to the National Association of Realtors.

Condo owners fared even better as the condo/co-op median price rose 12.1 percent to $189,400 in the second quarter this year, said NAR.

And second home owners were jumping for joy nearly twice as high.

A new survey by Orinda, CA-based EscapeHomes.com, "Price Index for Second Homes," found that home values in 10 select markets, known to attract second and vacation home buyers, rose 22 percent, from $419,000 to $511,000 during the period spanning the second quarter 2003 to the second quarter 2004.

Affordable Housing That Keeps Up With Changing Lifestyles

Like the extraterrestrial's subterranean Antarctic temple in the Alien vs. Predator (aka "AVP") film -- with much better lighting -- a new concept home will adjust to meet the changing lifestyle needs of its occupants.

The U.S. Department of Housing and Urban Development's (HUD) Partnership for Advancing Technology in Housing (PATH) program has designed an architectural model of a factory-built home that comes with movable interior walls, utility systems independent of the building's structure and "smart" materials all of which can be plugged together -- from ground breaking to completion -- in 20 days.

Like something from the set of a science fiction movie, the PATH Concept Home can be packed with out-of-this-world materials including electro-textiles that deliver current through wall coverings and photovoltaic roof shingles that inconspicuously generate power.

The concept model went on display at HUD's Washington, D.C. headquarters this summer to underscore efforts by building engineers and scientists to put more technologically-achieved customization in housing and by 2010 bring down costs to make home ownership affordable to 90 percent of the population.

One In Three Baby Boomers Leaving Empty Nests

Grown kids of one in three baby boomers had better make sure they have a roof over their own heads and don't need to return to the coop because their parents will have flown -- for good.

Most baby boomers plan to stay put when they retire, but more than one in three say they plan to leave their empty nests, move miles away and settle into smaller digs.

Home builder Pulte Homes' "Baby Boomer Report," conducted by Harris Interactive found, that 36 percent of empty nest baby boomers won't be far behind when the kids leave home.

One third of those who plan to move, want to move more than three hours away. One third of those who want to move plan to move into a more urban locale. And nearly half of those who plan to move -- 44 percent -- say they've earned the right to be tired of picking up after kids and want to leave house work behind them. They are looking for a smaller homes with less maintenance.


Rising Interest Rates Gives Rise To Borrowing Advice

Rising interest rates are coming with a rising tide of advice to help Tulsa, Jenks, Broken Arrow, Bixby home buyers and homeowners cope with the added expense.

To allay some fears, Larry Goldstone president of Thornburg Mortgage, Inc., a Santa Fe, NM mortgage lender specializing in adjustable-rate mortgages (ARMS), says mortgage interest rates will remain relatively low historically.

Even with higher rates, says Goldstone, ARMs remain a bargain.

"The advent of adjustable-rate mortgages (ARMs), hybrid ARMS, and interest-only loans will continue to bolster the housing market as interest rates rise," Goldstone said. Furthermore, compared to rates as high as 18 percent 25 years ago, today's interest rates remain a bargain.

A $320,000 mortgage in today's low-interest rate economy is the equivalent of a $100,000 mortgage with an 18 percent interest rate in 1981.

"Tulsa home buyers realize they can spend $200,000 more and actually pay about the same monthly payment as they were paying 25 years ago. I believe that low interest rates will continue to be the standard over the next several months, but keep your eyes on rates close to and after the election," Goldstone advises.

Still, says Sacramento, CA-based down payment assistance provider Nehemiah Corporation of America, a studied approach to home financing is the best policy.

Nehimiah offers five tips, provided here with some additional related advice:

·  Buy a Tulsa home you can afford. Lenders will offer you as much as your qualifications warrant and that amount can grow with an ARM, but that doesn't mean you can afford the loan. Make sure the mortgage professional fully explains how much debt you can reasonably handle given your income and be wary of pressure to borrow more. Home buyers should obtain counseling and educate themselves about all the costs of home ownership beyond the mortgage payment, taxes and insurance.

·  Find the best mortgage product. The mortgage market is a confusing maze of loan assistance programs available from a wide variety of sources from private lenders and brokers to government and social agencies. Nehimiah says traditional 30-year fixed-rate mortgages typically make the most sense for first-time homeowners. All borrowers should obtain trusted professional help from someone who is familiar with many programs. Seek out mortgage counselors who don't write or broker loans and lenders and brokers who reveal all the loan costs -- to the penny -- before the final settlement sheet, which often is available only a day before closing.

·  The old saw is to get pre-approved. Pre-approval before home shopping allows you to see the actual monthly payment you'll be required to make each month. That will help you budget the cost of your home. All pre-approvals, however, are not created equal. The new saw advises getting a loan commitment which should guarantee you a specific loan with a specific monthly payment -- for starters.

·  Know what's included in the monthly payment. Many first-time buyers' monthly mortgage includes principal, interest, taxes and insurance (both homeowners insurance and private mortgage insurance) built into monthly payments. It is important for home buyers to realize they will need a cushion for fluctuations in some of those elements. Depending upon the type of mortgage you have all those elements can rise -- sometimes drastically. Ask the lender for specific information about which elements can rise on your loan and an estimate of how much.

·  Consider mortgage protection. To some extent, job loss mortgage insurance and other coverage can protect you from unexpected events that could affect your ability to pay the mortgage. Understand what's available, what's covered and what isn't. Some critics argue, when it comes to your shelter, you should also protect it with self-insurance -- a savings account large enough to cover your mortgage and other crucial expenses for at least six months.


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