Archive for the 'Mortgage Prepayments' Category (Chronologically Listed)

Pay Off a Mortgage Early?

Not if you want to build wealth, new research suggests.

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Posted by Richard Barber on Apr 30 2007 under Mortgage Advice, Mortgage Prepayments





Mortgage Prepayments Decrease in January

Prepayments on U.S. mortgage-backed securities decreased in January, with weaker seasonal factors offsetting the impact of an additional calendar day, Wall Street analysts said Tuesday and Wednesday.

A Reuters report states that fixed-rate agency prepayment speeds fell by 6 percent in January, with the paydowns decreasing to $37 billion from $41 billion, according to JPMorgan.

Net fixed-rate, mortgage-backed securities issuance was about $24 billion, the company said in a research report. Prepayment speeds are factors for investors to determine the value of home mortgage bonds. If prepayments rise or fall too quickly, they hurt returns on mortgage securities.

The decline in speeds in January offset some of December’s increase, JPMorgan said.

December’s 12 percent increase was primarily driven by a fall in mortgage rates, which spurs home loan refinancing, a key factor in prepayment speeds.

January’s prepayment speeds were mostly in line with to slower than market expectations. Most of the impact of a rise in home loan refinancing activity at the beginning of December showed up in speeds during that month, while declining seasonal factors offset one extra calendar day in January.

It added that rising seasonal factors should begin affecting speeds of mortgage prepayments, up until June.

Analysts expectations on February prepayment speeds vary widely, from flat to a 5-10 percent decrease. February speeds are expected to slow due to a drop in the number of calendar days.




Posted by Richard Barber on Feb 08 2007 under Mortgage Prepayments





Should You Make Mortgage Prepayments a Priority?

Financial expert Liz Pulliam Weston answers consumer debt and mortgage questions via her website, asklizweston.com. One of her recent advice columns deals with the often difficult subjects of credit scores and mortgage prepayments, and appeared in Sunday’s Newark Star-Ledger.

THE QUESTION:

Can you address how to set priorities if you aren’t in the position where you seek debt consolidation? I make under $25,000 a year, so there’s not a lot of slack in the budget, but I do pay my credit card balances in full every month. What I’m trying to figure out is how to choose whether to get disability or health insurance.



I can’t do both, and I’m self-employed. I’m also trying to put 10 percent into my individual retirement account every month and build my emergency fund from three months to six months.

And I’m still chipping away at taking care of the house. I bought a fixer-upper three years ago and, thus far, have replaced all major appliances, gotten it weatherized and painted the trim, but there’s always more to do, right?

I’d love to accelerate paying down my home loan, obviously, but not sure it comes before the insurance choice.

THE ANSWER:

Prioritizing wisely is the essence of good financial planning. The less money you have, the more important prioritizing is - and the more likely you’ll have to make some painful choices.

For most Americans, the plan of accelerating your home loan might be filled with good intentions, but using mortgage prepayments should rank pretty low on the to-do list.

The first priority for just about everybody should be getting on track for retirement, then paying off credit card debt or any other high-rate debt.

Having some kind of emergency fund, even if it’s only $1,000, is the next step. You shouldn’t think about prepaying a mortgage loan until you’ve paid off all your other debt, are on track for retirement, have a fat emer gency fund and have all your insurance bases covered.

There’s also the fact that many lenders impose prepayment penalties. But the most important factor is that you’re not quite to the point where you should worry about this, and may not be for a while. The unfortunate reality is that disability insurance can be expensive, not to mention difficult to get, for the self-employed.

THE QUESTION:

I filed for bankruptcy a year ago. I’m trying to restore my credit. I have some collections on my credit report that are relatively small, but they were discharged in the bankruptcy. If I pay these off and have them deleted from my credit reports, would it boost my credit score?

THE ANSWER:

If you could actually persuade the collectors to stop reporting these small accounts to the credit bureaus in exchange for payment, you might see some small improvement in your scores. What’s really going to bolster your credit score, though, is proven, responsible use of credit.

That usually means having and using one or two credit cards. If all your cards were closed during bankruptcy, you may need to apply for a secured credit card, which gives you a line of credit equal to an amount you deposit with the issuing bank.

Another technique that can boost your credit score - the three digits that a mortgage company will use to gauge your credit-worthiness - is getting a smaller installment loan such as a car loan or a personal loan and paying it back over time.

You’re likely to pay high interest rates at first, but if you make all your payments as agreed you should see a notable increase in your scores. Then you’ll be able to qualify for prime rates and not have to resort to a bad credit mortgage.




Posted by Richard Barber on Jan 22 2007 under Bad Credit, Mortgage Prepayments





Mortgage Payoff Fees Raise Questions

Newsday tells the story of a couple who didn’t think twice when they got a payoff notice for their home mortgage that included more than $200 in fees in addition to their final payment in 2002.



The letter from Astoria Federal Savings listed an attorney document preparation fee of $125, a fax fee of $25 and a recording fee of $64.

They paid the fees. But two years after that, the Belle Terre, Long Island couple and several other customers charged in a lawsuit that the mortgage contract, as well as federal and state law, prohibit the fees.

The suit claims that the home mortgage fees should have been disclosed as part of the finance charge and that they exceeded the reasonable value of the services provided.

U.S. District Court for the Eastern District of New York in Central Islip certified the suit as a class action in September.

The amount of money varies for each mortgage borrower, but involves at least a few hundred dollars in each case.

“Obviously, you start to look at that from the perspective of the class-action suit when there are thousands of people that have all paid this,” David McAnaney, the plaintiff, said.

The law firm has filed a similar suit against Washington Mutual, with three of the four plaintiffs from Long Island.

Tim McGarry, spokesman for Washington Mutual, said the bank “intends to defend itself vigorously in this matter” but wouldn’t comment further.

Similar cases filed elsewhere have had mixed results.

The class in the Astoria Federal case comprises current or former customers who obtained residential mortgage loan products carrying fees deemed in violation of the contract or the law. The class action could involve tens of thousands of current and former customers.

Astoria Federal gets millions of dollars in fees for loan servicing: $5 million in 2005, down from $5.8 million in 2004, according to filings with the SEC. An Astoria Federal spokeswoman said the mortgage company doesn’t comment on pending litigation.

Fees assessed when residential loans are paid off, including unauthorized charges, aren’t new, but class actions have helped make the practice less common. Some banks will say they offer a no cost mortgage but include hidden charges.

“When they say they’re not going to charge you a fee, they don’t charge you that fee - but they call it something else,” said Michele Raphael, partner at Wolf Popper.

That’s what Joseph Policano of East Hampton claims happened to him. The retired executive said he insisted on a home equity loan without a prepayment penalty at Suffolk County National Bank in 2002, and the bank granted him one.

But a year later, when he went to refinance his home equity loan, the payoff letter included a substantial fee.

“They said, ‘This is not a prepayment penalty. It is a recovery of costs,’” Policano said. “I really thought it was like a swindle.”

Because of the fee, he decided not to move forward with the mortgage refinance. The result: He was stuck with higher interest payments.

Douglas Ian Shaw, senior vice president of the bank, said explicitly the fee was not a prepayment penalty.

“What he had was fees waived up front on the condition that he carried the loan over a period of time,” Shaw said.

A prepayment penalty typically applies to installment loans but very rarely to mortgage loans and is charged if a loan is paid before maturity.

The bottom line:

When you obtain a loan, ask about payoff fees. Read the contract closely.

Be aware that a loan or home equity line of credit touting “no prepayment penalties” may have other fees to recover closing costs if the account isn’t held for a certain period of time specified in the contract.

Ask about fees again before you plan to pay off a mortgage or home equity loan or line of credit.

If you think you’re being charged an unwarranted fee, ask the bank to explain. Press for details, such as the section of the contract that specifies the fee. Ask if there is any way to avoid the fee, such as processing some paperwork yourself. If the bank’s explanation isn’t satisfactory, consult a lawyer.




Posted by Richard Barber on Jan 15 2007 under Mortgage Prepayments





Be On the Lookout for Mortgage Prepayment Penalties

You buy the house, sign the papers and start paying your mortgage.

A year later, you want a mortgage refinance, get a better rate, find some more money.

You do … and that’s when you find out you have to pay prepayment penalties. Oops.

Want to sidestep this mistake? Rock Financial’s David Hall, courtesy of The Detroit News, has advice for those that do:

• When you approach a lender for a mortgage on a new home, don’t just check the rate and terms. Make sure there are no prepayment penalties.

• Don’t accept a loan with these penalties.

• If the mortgage lender won’t approve a penalty-free loan, go somewhere else.

Remember: Managing your mortgage is as important as managing your assets. Make sure you receive the right home purchase loan for your particular financial picture.

Earlier this decade, short-term interest rates dropped so low that many people took out ARMs, or adjustable rate mortgages, to save money and get a lower monthly mortgage payment, Hall said.

In 2007, as much as $1.5 trillion in ARMs will reset to a rate higher than today’s long-term interest rates, he noted. People with ARMs might want to refinance to 30-year fixed rates, but a prepayment penalty will cost thousands of dollars. They’ll be trapped.

Be careful and be aware.




Posted by Jed Moss on Dec 21 2006 under Mortgage Advice, Mortgage Prepayments





Do Mortgage Prepayments Make Sense?

One of the most common questions advisors get is whether someone should use a financial windfall or extra income to pay off a mortgage early.

The Federal Reserve Bank of Chicago published a paper which basically concludes that regardless of the direction of interest rates, it was nearly always better for homeowners to pay off their 1st or 2nd mortgage according to schedule and invest additional resources into tax-deferred investment accounts instead.

The study calculated that approximately $1.5 billion per year is being inappropriately allocated into mortgage payments on top of the designated amount required per month.

Whenever people ask for a recommendation, the Portsmouth Herald suggests they begin by comparing mortgage rates, adjusted for tax deduction for the interest, with the average long-term return of a conservative investment.

Since the majority of clients take advantage of mortgage refinancing when rates hit historic lows, the comparison nearly always shows that the hypothetical projected investment return exceeds the after-tax cost of the loan, meaning that accelerating the payoff seldom makes sense from a purely financial standpoint.

However, it has become clear that other factors need to be included in the analysis as well, as people seldom make financial decisions based solely on logic.

Do you just like the idea of making your mortgage go away? A study found that the risk tolerance of the participants played a major role in the decision process; most of the people who preferred to accelerate their mortgage payoff simply hated being in debt.

It’s interesting to note that the debt tolerance of the participants was not affected by their income or net worth. How can you decide what’s best for you? Ask yourself these questions:

1. If you are several years away from retirement but would still like to make extra payments on your mortgage, will doing so prevent you from saving enough money for your future? If so, you might be placing yourself at more risk by prepaying your mortgage.
2. How secure is your current income? If you direct the bulk of your surplus cash to additional mortgage loan payments, you might not have sufficient reserves to tide you over in the event of job loss, illness or other misfortune.
3. In the absence of other assets, you might have to tap into your home equity to cover unexpected expenses, but if you’re living on limited income, you might have difficulty qualifying for a loan or making the monthly payments. Also, mortgage rates might be significantly higher in the future.
4. If you decide not to use extra cash to prepay the mortgage, how will you invest it? Compared to the return on a low-interest savings account, a mortgage prepayment probably offers a better return.

Even without a home loan, you will still have expenses as you reach retirement. Determine all sources of your retirement income and be sure you will be able to accumulate resources to cover future needs.

Ultimately, the best course of action depends on each person’s particular situation. There is something to be said for the security of having a fully paid-for roof over your head. But before deciding to send extra payments to your mortgage lender, consider the big picture.




Posted by Richard Barber on Dec 11 2006 under Mortgage Advice, Mortgage Prepayments





No Gimmicks Needed to Pay Off a Mortgage Early

When Humberto Cruz paid off his $100,000 California mortgage early 19 years ago, he saved an impressive $97,468.70 in interest.

The columnist for the Los Angeles Times and his wife did so themselves and at no cost, simply by enclosing a second check with what they could afford with their regular mortgage payment each month. Along with this check, they sent instructions to use the extra money to pay down the principal.

This is basic math.

The less principal you owe on a home loan, the less interest you’re charged as part of each regular payment. As a result, more of each payment goes to further reduce the principal balance. If your goal is to pay off your home mortgage early (it may not be for everyone), you can do it without having to fall for a gimmick that overstates savings or hides the actual cost.

And there are plenty out there.

“Pay off your mortgage in 15 or even 10 years without having to change your current lifestyle,” is a typical pitch among several we’ve come across.

Although details vary, the essential idea is to turn your home loan into what amounts to a “cash-flow management account” that works like a bank.

You do it by depositing your entire paycheck and any other income you get “into” the mortgage — that is, putting an extra mortgage payment into the cash-flow account. All deposits immediately reduce the outstanding balance on your loan. As you need money to spend and make withdrawals from the account, the balance goes back up.

The concept is intriguing, the setup convenient. The companies promoting these programs typically offer free online bill-paying and free debit/ATM cards as easy ways to make withdrawals, in addition to unlimited paper checks. The math, too, would seem to work. If you are depositing more than you are taking out and doing so regularly, you’ll save more in interest than if you simply send extra payments to the principal occasionally.

By having your money deposited directly into these accounts, you create an element of discipline and forced savings that’s often lacking when you must remember and decide to pay down the principal on your own.

The problem is that the literature about these plans is often misleading, comparing apples and oranges and enticing homeowners into home mortgage refinancing taking on a home equity line of credit that provides for the unlimited checking, bill-paying and ATM access.

Through fuzzy math, this home equity line of credit, which charges a higher interest rate than the mortgage, is made out to be a brilliant savings move.

For example, one program boasts that a person paying 6.5 percent interest on a 30-year, fixed-rate mortgage of $300,000 could have the mortgage paid off in 15 1/2 years by using a cash-flow management account tied to a variable-rate home equity line of credit charging 7.72 percent to start.

To see the same savings made possible by the early payoff, a homeowner would have to find a 30-year home mortgage at an interest rate of just 3.83 percent, marketing materials claim.

In reality, what makes the early mortgage payoff possible is not the establishment of the line of credit, but the assumption that the person can and will save $800 a month into the cash flow management account. So why not simply keep the existing mortgage at 6.5 percent and send an extra $800 into the principal each month?

“If the person were to apply that $800 in savings toward the existing mortgage instead of refinancing into the newfangled home equity line of credit, the result would be paying off the mortgage in 14 years and three months,” or 15 months earlier, said David B. Jacobs, a financial planner with Pathfinder Financial Services LLC.

Not just that, but the homeowner would save an additional $45,000 in interest over the life of the loan compared with the line of credit.

Besides the line of credit costs, a one-time fee for setting up these cash flow accounts can run as high as 1 percent of the loan balance. If you were to apply to the mortgage principal the fees saved by not using one of these services you could reduce your mortgage payoff time by another year.

These schemes take the simple idea of making extra payments toward your principal and make it look more complicated so they can charge for what you could simply accomplish on your own. Don’t be deceived!




Posted by Richard Barber on Nov 08 2006 under Mortgage Advice, Mortgage Prepayments