Mortgage Guideline Tip - Choosing an Adjustable Rate Mortgage (ARM)

Adjustable rate mortgages (ARM) can be intimidating for a borrower to think about when they are going through the mortgage process.  An ARM has its benefits and risks.  I always tell my clients, if you don't like gambling, don't go with the ARM.

ARMs have changed over the years.  Today if you were to get an ARM, it would be not be a pure adjusted rate, rather a hybrid ARM.  The borrower's interest rate will start off lower with an ARM than a fixed rate.  For example, if a borrower was getting a fixed rate on a conventional loan today with a rate for 4.125, on an ARM they would be offered an adjustable rate of 3.25.

So why doesn't everyone do it?  Its risky, the the rates do adjust.  If a borrower is getting a 5/1 ARM then the rate of 3.25 would be locked in for 5 years, then it would adjust yearly.

What factors make it adjust?

There will be different factors that determine what your rate adjusts to.  First there is the index, which will adjust based on which index the lender uses.  There are multiple indexes, The Succarotte Team, here at New Penn Financial, uses the LIBOR index. The index value changes from month to month.  These index values can be found online or in the newspapers.

Another contributing factor is the margin.  The margin is a fixed percentage rate that is added to the index.  Make sure you know what the margin is prior to making the decision to get an ARM, so you know whether or not you will be comfortable with the payment.  

Example time
Say your rate at the beginning of your ARM is still the 3.25.  LIBOR (your index) has a value of .90 on the day your loan adjusts.  Your margin is 2.25.  Your interest rate would be a 3.15%.  You would have made out and have been happy you gambled!

Interest Rate Caps

To help know what you, as a borrower, are getting into, lenders have interest rate caps.  These caps can serve to help you in the event that the market's rates are on a high rise.  There are 3 different numbers.  The first, subsequent, and lifetime.  Lets use 2/2/5 as our example.

The first number, which is the highest that an interest rate can go during the first adjustment is 2.  So if our interest rate is 3.25 the highest it can go up the first adjustment is to 5.25, even if the index and margin calculate otherwise.  

The second number, the subsequent adjustment, is 2.  This is the highest the rate can increase for every subsequent adjustment.  Say during your first adjustment your rate, your rate went from 3.25 to 4.25.  The highest your rate would be able to go during your second adjustment is 6.25.

The third number, which is 5, is the lifetime number.  This is the highest your interest rate can go up for the life of the loan.  So if your starting rate was 3.25, your interest rate could never exceed 8.25.

I hope this helps break down an adjustable rate mortgage.  It is a great choice for some borrowers, who don't plan to stay in their house for year to come, or plan to pay their mortgage off quickly (there are no pre-payment penalties).  It also might be a good option for a borrower when the rates are not doing well.

If you have any questions about an ARM or are wondering if it is right for you, please feel free to contact my team and I with any questions.

The Weekly Wrap Up - Test Your Stamina - Bike to the Bay

Overseas economic concerns are helping to keep rates low. Weakness in Europe and China is causing traders to seek safety in bonds, including mortgage bonds.

Rates responded favorably to the Fed's decision last week not to raise policy rates. Concerns about global economies may help rates remain low this week.

Global economies are also affecting the U.S. manufacturing industry. Demand for durable goods was slightly weaker in August, helping to keep inflation low. Beautiful day to the bike to the bay.... Bike MS: Bike to the Bay is a Delaware tradition.  It is occurring this weekend 9/26 - 9/27.  Bikers will enjoy a 2 day cycling journey through southern Delaware.  Different route options are available for bikers of different energy and skill level, the routes range from 17-175 miles.  Rest stops, bike mechanics, meals, and support vehicles are all on route for the bikers.  The bikers will cross the finish line feeling great welcomed by friends and family, great food, music, and massages.  For more information on the event check out their website.  Bike MS

Rents continue to rise nationally, making home ownership more affordable in comparison. However higher rents drive inflation, which could hurt rates.

August's existing home sales fell slightly, with lack of inventory cited as a possible cause. Rising prices may also be pushing some potential buyers out of the market.

New home sales increased in August at the highest rate since February 2008. Strong demand for new homes continues to fuel builder expectations and the economy.

Mortgage Guideline Tip - Maintain Your FICO Score With Balance Transfers

Boosting you credit can take time, patience, and effort.  A tool to consider when boosting, or even maintaining your credit is balance transfers.

Here are some important things to remember when considering a balance transfer.

• Consolidating simplifies payments.  
• Some of our clients have a large number of credit accounts, which can cause them to struggle to pay their payments on time.  This is not always because of affordability.  Sometimes it is because they have so many accounts they cannot keep up with all of the due dates.  Transferring your balances would minimize your due dates each month.
• Saving while paying.
• There are clients who can't afford to pay more than the minimum payment on their accounts.  They may have a high interest rate and although they are paying on time, they don't see their total balance going down.  Generally when transferring a balance, there will be an introductory period of 0% interest or very low interest.  So if a person has been comfortable paying $300 a month to a credit account with high interest, they can transfer their balance and continue to pay $300 and have more of their payment go to the principle.
• That introductory period of low interest does end.  It varies by company but it is usually between 12-18 months.  Make sure you make your payments accordingly and be aware of what the interest rate will jump to.
• Don't make re-transferring your strategy. 
• Are you planning on applying for a new balance transfer when your low interest introductory period ends?  I would advise a different strategy because that plan can damage your credit score.  It can also make you seem like a high risk borrower if lenders see you continuing to transfer high balances.
• Do your research.
• There are several companies that promote balance transfers.  Some will only work with those with excellent credit while others are more lenient.  Make sure you know when the interest rate will kick in and what it will be.

As always, please do not hesitate to contact me with any questions! We can help you figure out if transferring your balance is the right move for you and your credit.

The Weekly Wrap Up - Don't forget the Hagley Car Show

NOTE: At the time of this writing, the Fed announcement is still pending. Here are the factors that may have influence in their decision.

Consumers showed confidence by spending, as retail sales improved in August. Increases in spending could help the Fed decide to raise policy rates this week.

Fewer new applications for unemployment this week also evidence economic strength. Jobless claims fell to the lowest level in eight weeks.

Whatever the Fed decides to do regarding policy rates this month, market volatility is expected to follow. Mortgage rates should remain relatively stable though. Start your engine and drive down to the car show!! The Hagley Car Show 2015 200 Hagley Creek Road, Wilmington, DE 19807 Sunday, September 20, 2015, 10 a.m. to 4 p.m. If you have some time this Sunday, check out the fun at the Hagley museum!  There will be over 500 antique and restored cars from the early 1990s-1980s for you to browse.  There will also be vehicle parades, music, video, and go-kart racing, and a food court for you and your family to enjoy.  Tickets have been available in advance but are also available at the door.  Tickets purchased at the Car Show are $10 for adults, $5 for kids 6-14, kids under 5 are free.  Hagley members are also eligible for free admissions.

New housing starts remained above a one million-unit pace for the fifth straight month. Strong demand for housing continues to require more new home building.

Building permits increased 3.5% in August, signaling that more new homes will be built in the future. Single family permits rose to highest levels since January 2008.

Homebuilder sentiment is at a 10-year high. Strong demand for new homes continues to be fueled by a strong labor market and low mortgage rates.

Mortgage Guideline Tip - USDA: Rural Housing Guarantee Loan

 The Guaranteed Rural Housing Loan Program is offered through the Rural Housing Service (RHS), an agency of the USDA. The program is designed to help low-to-moderate income families achieve home ownership in eligible rural areas.  To see see eligible areas click here.

These loans are 100% financed, requiring no down payment.  First time home buyers can use this loan as well as home buyers who have owned multiple times.  However, a buyer cannot own a home at the time of closing with a USDA loan.  The only exception is if the home buyer had to move due to a job relocation.  There are specific requirements for getting a USDA loan.  Here is a outline of the requirements set by New Penn Financial.

• Max Loan Amount
• The highest loan amount is $417,000. (DE, PA & MD)
• Credit
• The buyers needs to have a minimum credit score of 620.
• There cannot be any outstanding collections accounts on the borrower's credit report.
• The font end ratio cannot exceed 29%.  This is the portion of your income used to make your mortgage payment.  (This may vary with compensating factors)
• The back end ratio cannot exceed 41%.  This is the portion of your income that is used to pay our total debt, including your mortgage payment.  (This may vary with compensating factors)
• There is a credit depth requirement.  At least one applicant whose income or assets are used for qualification must have at least three credit lines that have existed for at least 12 months.
• Deferred Student Loans - Even if you loans are deferred a payment will be required for qualifying.  USDA will not exclude deferred student loan payments 
• Derogatory Credit
• No foreclosures within 3 years.
• No short sale in the previous 3 years (if you were not late prior to the short sale you may be eligible immediately)
• No bankruptcies within 3 years
• Guarantee Fee
• There is a guarantee upfront fee of 2%.  There is a monthly fee of .5%.  This is in lieu of mortgage insurance.

Wondering if USDA is a good loan for you?  Do you have any questions?  

Please feel free to call or email with any questions.  My team and I would be happy to assist!

The Weekly Wrap - Enjoy Brandywine Festival of the Arts!

The labor market improved as fewer Americans filed for weekly unemployment benefits, adding to speculation that the Fed may raise policy rates this month.

Alternatively, inflation pressure remains weak as import prices continued to drop. Weak inflation could cause the Fed to hold off on raising policy rates.

Weakness in global economies, especially China, could also cause the Fed to hold off. Mortgage rates remain stable while the markets wait for a Fed decision.

It is that time of year again, time for the Brandywine Festival of the Arts!  Festival hours are:

10 a.m.-6:30 p.m. on Saturday Sept. 12th
10 a.m. - 4 p.m. on Sunday, Sept. 13th

The festival features over 200 artists.  Enjoy your weekend at the festival! Where you can spend your time enjoying seeing and buying art exhibits, live music, great local good, children's activities and more! The festival is held in Brandywine Park, 1001 N. Park Drive in Wilmington, Delaware.  The admission fee is $5 (children 12 and younger are free).  Included in the ticket price is $1 access to the Brandywine Zoo.

Click here for more information on the Festival

More respondents of Fannie Mae's Home Purchase  Sentiment Index think it is a good time to buy a house.  Continued low mortgage rates helped fuel the optimism.

New home sales are more than 20% higher than last year's pace. Some analysts fear that new home supply could become an issue and more homes   are needed.

Man caves are being bumped aside for "she sheds." These backyard retreats are being designed for hobbies such as painting, ceramics, and gardening.

Mortgage Guideline Tips - Exciting new changes in the Mortgage World

There has been some changes on unreimbursed employee business expenses!  

The following changes and clarifications have been made on Conventional Loan related to unreimbursed employee business expenses.

For a borrower who is qualified using base pay, bonus, overtime, or commissions income less than 25% of the borrower's annual employment income:

• Unreimbursed employee business expenses are not required to be analyzed or deducted from the borrower's qualifying income, or added to monthly liabilities.  This applies regardless of whether unreimbursed employee business expenses are identified on tax returns (IRS Form 2106) or tax transcripts from the IRS.
• Union dues and other voluntary deductions identified on the borrower's pay stub do not need to be deducted from the borrower's income or treated as a liability.
• The guide now clearly states that tax returns are not required to document these sources of income.

For borrowers earning commission income that is 25% or more of annual employment income, unreimbursed employee business expenses must be deducted from gross commission income regardless of the length of time that the borrower has filed that expense with the IRS.

• The exception to this is if the expense is an actual automobile lease or loan payment.  If borrowers report an automobile allowance as part of their monthly qualifying income, the lender must determine if the automobile expenses reported on the IRS form 2106 should be deducted from income or treated as a liability.