Mortgage loans in Cook County just got a little more complicated. The new anti-predatory lending bill, SB1167, goes into affect today, July 1st. One of the provisions of the bill was to set up a database to keep track of all loans originated in Cook County. Borrowers who fall into certain risk categories will need to get counseling before they can close on their mortgage.

According to SB1167, all loans recorded in Cook County after 7/1/2008 are going to require either a Certificate of Exemption, or a Certificate of Compliance attached to the mortgage. The certificates will be printed from the Anti Predatory Lending Database web site set up by Cook County. Mortgage brokers and mortgage bankers who handle mortgages in Chicago and throughout Cook County are now required to enter the loan in the data base at the start of the transaction. This only applies to owner-occupied 1-4  unit residential properties.

Not every borrower needs the counseling though. The conditions that will trigger the counseling requirement are:

• Any purchase transaction where all borrowers are first time home buyers OR Any primary residence refinance where the loan has one of the features below.

1. The loan has an interest only feature
2. The loan has a prepayment penalty
3. The loan has a negative amortization feature
4. Total points and fees exceed 5%.
5. The loan is an ARM with an interest rate adjustment within the first 3 years. (We’ve been informed by the IAMP that 3/1 ARMs WILL require counseling, even though you may think that the rate adjustments are not “within the first 3 years, but occur after 3 years.)

The following loans are exempt from the counseling requirement: Reverse mortgages, Non-owner occupied (investment), Commercial and multi-family over 4 units.

Predatory lending has been the cause of a lot of foreclosures and a lot of ruined lives. Anything that can put a stop to it is worth doing. But like so many laws this solution isn’t going to have the impact that it is hoping for. For one thing, the real estate market has slowed down and mortgage guidelines have tightened. It’s not as easy to commit fraud when people are paying attention so a lot of the quick-buck sharks and sleazy operators have moved on. The other factor is that the market is ahead of the curve on a lot of these provisions. The loan features that trigger counseling are all features of sub-prime loans, mortgages for borrowers who couldn’t fit into the normal conventional guidelines. Sub-prime loans were the first casualty in the mortgage melt down last year, and no one is making those loans anymore. There will be some sophisticated borrowers who may be forced into counseling because they chose to refinance with an interest only mortgage for the cash-flow benefits, but if first time home buyers are taking on loans with these features they need to know exactly what they are getting into. The law will mean some loans will take a little longer, and it will add an extra step to the process. But who knows, maybe it will even help some people.

Illinois Mortgage Rates and News

I read a lot about the economy and what the experts say about it, but I get the best feel for what is happening from talking with my clients. People need mortgage money whether the economy is up, or down, but they need it for different reasons. When the economy was flying high, a typical phone call would be about buying a new, bigger home, starting an addition to their current home or buying a vacation home. I’m still doing a fair amount of new purchases, but a lot of my calls now are about cash out refinances to consolidate debt. It always makes sense to make sure your mortgage is in line with your overall finances, but it is especially important when money is tight. A debt consolidation loan can help you to restructure your debt in a way that puts more money in your pocket and gives you a plan to actually pay down your debts.

Most people look at their home mortgage and other debt separately. For many people their home is their security and paying it off quickly is their biggest financial goal. It’s not unusual to find someone who has a 15 year mortgage because they are trying to pay down their home quickly, but also has a big balance on their credit cards. The problem here is that the mortgage rate is almost always lower, and tax deductible besides. If you are carrying a balance on your credit cards you are paying interest on the interest, and if you pay the minimum payment there is almost no way to get rid of the debt. What is your over-all debt level? Are you feeling pressure making all the payment on your credit cards and other consumer debt? This is where the debt consolidation mortgage comes in.

A debt consolidation mortgage is a type of cash-out refinance where you use the equity in your home to pay off high interest debts. If you have owned your home for a few years, chances are you’ve built up some equity. Here in the Chicago area, even in this soft real estate market, appreciation has driven home prices much higher over the last years. If you are like most people, the equity in your home may be your biggest asset or source of wealth. A debt consolidation refinance doesn’t change the amount of money you owe, what it does is restructure the type of debt. By converting credit card and consumer debt into your mortgage you can lower your monthly payments, increase your tax benefits and use the savings to pay down your debt or start a savings plan. With conventional mortgages you can remortgage up to 90% of your home’s value for a cash-out loan, but the best rates are available at 70% of the appraised value ( We do have one lender who will loan 100% of your value). With an FHA loan you can take out up to 95% of your home’s appraised value at the best rates.

Here is an example of how this works. Say you have a home that is now worth $350,000. You still owe $200,000 on your first mortgage and have a home equity loan for another $75,000 and you have credit card and consumer debt of $50,000. The monthly payments (not counting taxes and insurance) might look like this.

Principal and interest on your first mortgage $1,319

Interest on your home equity loan                      375

Minimum payments on credit cards                  1,200

Total payment                                                 $2,894 per month

If you refinanced this into a new FHA loan at 95% of the home’s value, you could borrow up to $332,500. This is enough to pay off all the debt, plus the closing costs and the amounts to set up the new escrow accounts. If the new rate is at 6.0% on a 30 year fixed rate – the same rate as I used in the example – here is how it turns out.

Principal and interest                                     $2,023

Monthly mortgage insurance                               140

Total payment                                                $2,164

This means that the debt consolidation refinance saves you $730 each month.

This plan has a lot of advantages, but you are increasing and extending your mortgage which can be a scary thing. Also, you need to have a plan on what you will do with the new savings. There can be a danger in this strategy. First, you are extending your mortgage and paying the loan over a longer period of time. You also need to watch how much the refinance costs. If you are paying too much for the refinance, it will be a long time before you see any benefits. But the biggest problem is that it is too easy to get back in the same trouble if you don’t change your credit habits. I’ve seen too many people who used a cash-out refinance to consolidate their debts and get a new start, only to run up their credit cards and get right back in debt. For a long term solution you need to be able to change your outlook and credit habits, too. On the other hand, if you take some of the money you saved and use it to start a monthly savings or retirement fund, or maybe shorten your mortgage so you are debt free years faster. What is best for you depends on your financial situation and your long and short term goals. Refinancing, if done properly, can be a tool to eliminate your debt and build wealth over time. Any time you take out a loan against the equity in your home you are trading some security for the cash you need, but if you have high balances on your credit cards it can be the right way to go.

Illinois Mortgage Rates and News

Do you have an adjustable rate mortgage that is due to adjust this year? If so, you’ve got plenty of company. There are a lot of Adjustable Rate Mortgages (ARMs) resetting this year. I’ve seen estimates as high as one trillion dollars worth – that’s one with twelve zeros behind it! That is serious money, and I’ve read a lot of commentary about how damaging this could be to our economy this year. But if you have an ARM, should you be worried that your interest rates are going to go pop up and make your payment unaffordable? Probably not. Should you rush out to refinance your mortgage? Not necessarily. In a lot of ways ARMs have gotten a bad rap. To see how an ARM reset would affect you, you need to understand how an ARM works.

The most popular versions are what is called hybrid ARMs, these are a combination of a fixed rate and an adjustable. That means they are fixed for a certain time span, 3, 5 or 7 years are the most popular, and converted into a one year ARM after the fixed period ends. So how does your ARM reset? Your ARM changes are based on two things that are set up at the beginning: the index, and the margin. The first part, the index, refers to the financial indicator the rate is based on. Different indexes are used, but they all move up and down based on the strength of the economy. The second part of an ARM loan is the margin. This is set at the closing, and it always stays the same.

So the first step to see what your new rate will be is to add the margin to the index. With the recent Fed rate cuts, all the short term indexes are down sharply. The current 1 year treasury index, a common index in ARM loans, is now around 2.11%. Adding in the margin, typically 2.75%, you get a fully indexed rate of 4.86%. Not a bad rate at all – quite a bit lower than what you could get by refinancing.

But this doesn’t necessarily give you your final rate. There’s one more step. Most ARMS have caps built in to them. Your rate typically can’t increase more than 2% per year, and no more than 6% over the lifetime of the loan. (That’s not the case with all ARMs, so take a look at your mortgage note to make sure.) So if you bought your home back in 2003 with a 5 year ARM, and maybe you bought when rates were near the bottom with the starting rate at 3.75%, if your cap is 2% at the first adjustment, your new rate can’t be higher than 5.75%, even if the fully adjusted rate is higher.

The other thing to keep in mind is how long you plan on staying in your home. If this is your forever home and you want to stay there for the long term, it might make sense to refinance and lock in to the current low rates, even if they are higher than what your adjusted rate would be. If you are going to be there for at least a few more years, refinancing might still make sense, especially if you refinance with low or no closing costs. But if you don’t plan on staying in your home for more than a year or two, you’re better off doing nothing. The current rates are better than your other options, and the worst case scenario isn’t all that bad.

If you have an ARM with a sub prime mortgage your situation will be worse. The margin on Sub Prime loans can be 6%, which means your payment could shoot higher causing real problems. If you have an Option ARM and you’ve been paying just the minimum payment, you owe more now than when you started, and you are on track for some real trouble. In these cases refinancing makes a lot of sense, but with the changes in mortgage guidelines you may find it hard to qualify. But we will talk about that in another post.

Illinois Mortgage Rates

I have a guest post over at Wicker Park Realtor Dave Weiss’s blog, Serious Real Estate. It’s titled,

If Rates Are Low, Should Everyone Refinance their ARMs? Stop by and take a look.

Mortgage interest rates are ticking down and refinancing is suddenly hot again. Make that Scorching Hot! A few years back when mortgage rates first dropped into the 5s, mortgage refinancing was the hot topic anywhere people gathered. It might not seem like the most scintillating party conversation, but this was a prime conversation as people vied for bragging rights on who was able to get the lowest interest rate. (Or maybe I just went to the wrong kind of parties.) Mortgage rates are back in the mid 5s again, and this time there isn’t the same level of excitement in the air. But it is a great time to take advantage of the low rates, improve your financial situation and put some extra money in your pocket

Why should you consider refinancing?

• You can lower your interest rate and payments.
• You can shorten your loan term and pay your mortgage off early. 
• You can take cash out for home improvements, college expenses, investments, or whatever your needs may be.
• You can restructure your debts with a refinance to get rid of your high interest credit card balances and save hundreds of dollars per month.
• If you bought with a low down payment, you can often refinance to get rid of mortgage insurance or your higher rate second mortgage.

You can get rid of an adjustable mortgage and lock in to a fixed rate.

These are just a few reasons you may want to take on a new mortgage. It is important, though, to make sure you know why you are refinancing and that it is really in your best interest.

For a quick check to see if refinancing makes sense for you, you need to consider 3 things:

How much will you save by refinancing?
How much will it cost to refinance?
How long do you expect to stay in the mortgage?

There used to be a rule of thumb that said that the interest rate needs to go down by 2 percentage points before it makes sense to refinance. This is no longer the case. The process has been streamlined, and closing costs are usually much less, at least here in Illinois where title costs are reasonable. So it may make sense to refinance even if you are only reducing your interest rate by a relatively small amount. (There have been periods when the rates were dropping, where I refinanced the same customer 3 times in a year, and they benefited more each time.) To find out you need to figure out your payback or break-even point. Let me work through the math to show you how this works.

The first step is to determine how much you will save. For an example, let’s assume that you now have a mortgage with a $200,000 balance and a 6.75% interest rate. This would give you a payment of $1,297 per month. Let’s say that rates have improved, and you can now get the same type of mortgage for 5.75% with a payment of $1,167 per month. This is a savings of $130 per month. Does it make sense to refinance?  Maybe. We still need to know more, though.

The next thing you need to know is how much it will cost to refinance. This is where it gets interesting. If you have spent any time on the Internet, you’ve seen lots of ads for mortgage companies claiming they offer the lowest rates. But low rates don’t mean a thing if you don’t look at the closing costs too. I’ve seen closing costs vary by as much as $6,000, so this is something that can make a huge difference. Closing costs include title fees and the amount the bank charges to process the loan, which includes fees for credit reports, appraisals, processing and underwriting charges as well as Points which are upfront financing charges.

To see how the closing cost can make the difference, let’s assume that the cost to refinance is $1,600. If you are saving $130 per month and it cost you $1,600 to close, that means it will take you just about a years worth of mortgage savings to pay off the up-front costs. Every month after that will be a true savings. If that same loan cost $6,000 to close, then it would take 4 years before you would have any benefits from refinancing. So the lowest rate isn’t always the best deal.

The next part is figuring out how long you expect to be in the mortgage. If you plan to stay in the home for at least 10 years, and you don’t expect that interest rates will drop much lower than they are, then paying more to get a better rate might be the best strategy. Most people will either move or refinance sooner, though. The average 30 year mortgage is paid off in about 5 years. If you are like most people, you would be better served by getting a loan with lower closing costs. Even though the rate and payment may be a little higher, your savings will come quicker.

Things to watch out for- The idea that the lowest rate is the best deal can be a big problem. A few years back when we were in a huge refinance boom, one of my clients talked with a friend who boasted about the great deal she got, a rate below anything available on the market. My client called and she wanted the same rate as her neighbor was getting. I did a little research and found out that her neighbor was paying 3 points to buy down the rate. On a $300,000 loan that comes out to $9,000 in extra closing costs! A low rate is great, but it’s not going to help you if you have to pay so much extra to get it. Which brings up our next point. Refinancing doesn’t have to cost a lot.

No/Cost refinancing - When rates are down, the biggest obstacle to homeowners lowering their payments and taking advantage of the low rates is the cost of refinancing. The more that the loan costs, the longer you will need to be in the new loan before refinancing makes sense. So if a loan costs a lot up-front, it takes a big improvement in the rates before it is worth doing. On the other hand, if there are no costs at all, a small reduction in the rates can save you a lot of money over time.

Some people say there is no such thing as a true no-cost refinance. It does cost money to refinance, and it’s true, the lender and title company are going to be paid, one way or another. With a no-cost refinance we use the yield spread premium (the money that the lenders pay the mortgage broker or banker to bring them the loan) to pay for the closing costs. When I price loans I have several different options. Every day the lenders we deal with send us new price sheets. These sheets have matrices which allow us (the mortgage banker or broker) to price the loan in different ways. It is common in the Chicago area to price a loan to show no points or origination fees, but with the customer paying the normal costs at closing. If someone wants a lower rate, I can price it so that they pay more money up-front (points) and get a lower interest rate. We can also do it the other way, offering them a slightly higher interest rate means that the lender pays us a higher premium, which can then be used to cover all of the loan costs. This program isn’t available with all lenders, but is available with many mortgage brokers or mortgage bankers.

Here is how it works. Let’s say you have a mortgage with a balance of $250,000 and an interest rate of 6.75%. This loan would have a monthly payment of $1,621 for principal and interest. Let’s say that rates drop. If you are able to refinance at 5.75%, your new payment will be $1,459, for a savings of $162 per month with closing costs of $2,000.

If 5.75% is available with closing costs, the rate with no closing costs would be around 5.875% - just an eighth of a percentage point higher. This means a payment of $1,479 and a savings of $142 per month. The monthly savings are lower, but you save $2,000 up front. This works especially well for people who don’t plan on being in their home or their mortgage forever, or if you think that the rate trend is going down and there may be more opportunities to refinance and lower your payments again down the line.

No-cost refinances work best when the loan amount is higher. In many cases we can do a no-cost refinance for the same rate as other companies are doing full cost loans. Smaller loans, those under $150,000 are harder to do without any cost. The smaller the loan the higher the interest rate would need to be in order to cover all the closing costs. This won’t be the best route for everyone, but, depending on your situation, it could be a great option.

Things to watch out for – A true no/cost refinance means that you are not paying any fees or costs to get the loan. This is different than adding the fees and costs back into the loan. This means that your mortgage will be larger, and you will be paying the costs of refinance over the years you have the loan. There is no money coming out of your pocket at closing but you are still investing extra money. If you sold the home or decided to refinance again later, the money you paid will be gone. In some situations this could be the right way to go, but it is not a no-cost refinance. You need to know exactly what it is you are signing up for. That way, the next time you go a party you can be the one doing the bragging .

Illinois Mortgage Rates and News