Mind Your Own Mortgage

Robert Bernabe

• Publisher: Thomas Nelson
• Year: 2010
• ISBN:
  9780529124333
• Topic: Développement personnel
• Subtopic: Finances personnelles

LEARN TO SHOP FOR AND MANAGE YOUR MORTGAGE UNTIL YOU HAVE ELIMINATED IT—ONCE AND FOR ALL!

Mind Your Own Mortgage empowers homeowners to shop for a mortgage as if it were a commodity—as easy as buying a gallon of gas—and enables them to eliminate their mortgage debt by revealing inside information used to keep them enslaved to the mortgage industry. Mind Your Own Mortgage changes the game—putting you in charge:

• Shop with confidence—an exclusive system helps you make decisions based on the best price
• Identify slick sales gimmicks and lender manipulation
• Refinance only when it makes sense for you—not for the mortgage company
• Eliminate your mortgage in record time—so your retirement years include retirement

A SOUND MORTGAGE = A SOUND ECONOMY

Stocked with compelling real-life scenarios, budgeting tips, and handy financial tools, Mind Your Own Mortgage is a timely wake-up call for homeowners and a candid decree that the American dream is still possible—if we dramatically rethink the way we finance our homes.

IT'S TIME TO MIND YOUR OWN MORTGAGE.

"Whether you're getting a new mortgage, refinancing an old one, or dealing with the mortgage you have already, you won't find a better mortgage coach than my friend, Rob Bernabé."—Mary Hunt, personal finance expert, best-selling author, and CEO of Debt-Proof Living

"Finally, consumers have what they need to hold any mortgage provider accountable."?R. Jarret Lilien, founder and managing partner of Bendigo Partners and former president and COO of E*Trade Financial

SHOP FOR IT

7
KEEP IT SIMPLE

John and Cynthia: Simple Is Better

John and Cynthia live in a nice neighborhood in Southern California. John has a good job, which has allowed them to realize Cynthia’s dream of being a stay-at-home mom. They bought their house in 1998 and watched it skyrocket in value up until the crash.

John and Cynthia refinanced in 2001 and again in 2004, each time for the sole purpose of trading their thirty-year fixed-rate mortgage for another with a lower rate, paying very little in closing costs each time. Their current mortgage rate is 5.5 percent and they have continued to make the original payment all along and added more whenever they had the extra cash. Despite the recession, they are on track to being mortgage free by 2019—fifteen years earlier than they would be had they taken advantage of the new payment each time they refinanced.

John rejected the constant offers for rates as low as 2 percent during the mortgage boom years. He ignored the messaging to refinance, doing so only when it was in the best interests of his family’s future. It’s a good thing he did.

Although their home is worth far less than it was during the boom cycle, it’s not nearly as underwater as any of their neighbors’. Despite a few foreclosures on their street, they don’t feel the pain of the recession, nor are they worried about the value of their home. It was never meant to be an investment from which they would supplement their lifestyle.

John and Cynthia kept things simple—simpler than Alan Greenspan would have had he followed his own advice to take advantage of lower adjustable mortgage rates. Life is good when it’s simple. John and Cynthia have the time and freedom to enjoy life.

Simple is better.

You Are at Risk

In order to obtain the right loan at the right price, you must learn how to shop. With the confusing and cumbersome pile of disclosures you must sign regarding your mortgage, and the lack of clarity over how it’s priced, it’s all too easy to get frustrated and give in to the process.

Whenever you shop for a mortgage, you are at risk of acquiring a loan at an inappropriate price that’s not right for you. This happens for two reasons:

1. The more complicated the mortgage loan, the harder it is for you to understand. For example, far too many consumers have entered into mortgage loans that have low introductory payments, yet they don’t understand the mechanics of how the payments are calculated, how they adjust, and the economic circumstances that will cause their mortgage payments to increase or decrease.

2. While price is a relatively simple concept to the lender, there isn’t a simple method to communicate it to the consumer, nor is there a method to communicate the range of price options within a particular loan product. It’s not that there isn’t a way to provide the information, it’s that the mortgage industry has withheld the information from the consumer in order to prevent commodity pricing.

If the industry would allow commodity pricing, there would be little differentiation. People would shop on price instead of the manufactured benefits of relationships, perceived product features, and payment. You’ve been taught how the mortgage market works, so you know there are only a few entities that control underwriting standards, which drive loan products. How different can one lender be from another? After all, a mortgage is simply a pile of money.

Since differentiation between lenders must be manufactured, it stands to reason you’ll be exposed to gimmicks in order to get you to sign on the dotted line.

Since differentiation must be manufactured, it stands to reason you’ll be exposed to gimmicks in order to get you to sign on the dotted line. How many times have you heard low payments or rates being advertised? But what’s the true price? The very focus on these elements creates an environment that leads to the wrong loan at the wrong time.

Understand What You Are Buying

Before you decide on price, you must examine the loan—because price tends to appear lower on mortgage products that present the greatest risk to the home owner.

Understanding your mortgage loan means that you are conversant with the terms of the mortgage note. These terms dictate the payment, the maturity (or payoff) date, and, if you have an adjustable-rate mortgage, the manner and timing in which the payment is subject to change.

There are such a wide variety of mortgage products offered at any point in time (which change depending upon economic conditions) that it’s impractical to list them here. However, there is generally a consistent staple of fixed and adjustable-rate mortgage products that are relatively uncomplicated. I believe it’s a waste of your time to consider anything other than the type of loans discussed below. And I strongly recommend that you only consider fixed-rate financing, for reasons you’ll discover as you read on. If you have the right view of finances, you have no reason to deal with an exotic or adjustable-rate mortgage loan. They sound good, but they almost always lead to trouble.

As discussed in chapter 3, mortgages that are acceptable to Fannie Mae or Freddie Mac (agency standards) are referred to as conforming loans. This means they meet the generally higher underwriting/qualification standards of these agencies and that the loans are no greater than $417,000 for a single-family residence. In some areas of the country, there are super-conforming loans, which are agency loans at higher amounts to compensate for geographic differences in home values. All loans over agency amounts, or those that do not meet agency underwriting standards, are considered nonconforming loans and are subject to different qualification guidelines standards, depending upon the marketplace and investor appetite for these loans.

In order to simplify the discussion, conforming or nonconforming mortgage loans fall into only two categories: fixed or adjustable. The descriptions below cover the most widely available types of these loans.

Fixed-Rate Mortgages

A fixed-rate mortgage carries an interest rate that remains the same for the entire term of the mortgage; it is generally offered for fifteen, twenty-, twenty-five-, thirty-, and forty-year loan terms. The shorter the term of the fixed-rate mortgage, the better the price will be and the larger the payment will become (notice how price and payment are inversely related).

Adjustable-Rate Mortgages (ARMs)

An adjustable-rate mortgage carries an interest rate that changes over the life of the loan, at predetermined intervals based upon a rate index. The initial mortgage payment, and all subsequent changes to the mortgage payment, are calculated based upon the payment necessary to pay the loan in full from the date of the interest-rate change to the maturity date of the mortgage. The most important features of an adjustable-rate mortgage are as follows:

• Initial interest rate: the rate that is used for the introductory period of the loan (commonly referred to as the start rate).

• The index rate: the base rate to which the margin is added to arrive at the interest rate.

• The margin: the amount that is added to the base rate to arrive at the interest rate.

• Adjustment period: the length of time between the dates on which the interest rate is changed.

• Interest rate caps: the maximum increase or decrease to the interest rate on an interest-rate adjustment date.

• Lifetime interest rate cap: the maximum rate that is allowed under the mortgage.

The most common type of adjustable-rate mortgage used by consumers in recent years is the hybrid adjustable-rate mortgage. These loans carry a fixed rate for an introductory period and are adjustable thereafter. The most common introductory periods are for one, three, or five years, but seven and ten years are also used. These loans are referred to as 1/1 ARMs, 3/1 ARMs, 5/1 ARMs, and so forth.

The shorter the introductory period, the lower the introductory rate (assuming normal market conditions). For example, a 3/1 ARM will have a fixed rate good for the first three years that is lower than the fixed rate for the first five years on a 5/1 ARM. Once the introductory period is over, however, both of these loans would be subject to similar adjustable rates and increases.

Interest-Only Adjustable-Rate Mortgages

Interest-only ARMs work exactly like hybrid ARMs, except that the payments in the fixed-rate period cover interest only. This further reduces the payment during the introductory period, but by the time the adjustments begin, it is likely you’ll still owe the original balance. If your loan is fixed for five years, this means you’ll now have twenty-five years to pay off the original balance of your loan instead of thirty.

Do you notice how much more complicated adjustable-rate mortgages are compared to fixed-rate mortgages? The fixed-rate loan can be described in one or two sentences!

In general, the only difference between the two is the party who assumes the interest-rate risk. With a fixed-rate loan, the lender takes the risk that rates will increase, which means the investor in the loan will make less if you don’t refinance your mortgage to current rates when they are on the rise. You carry very little risk because you can always refinance if rates decline and the cost to do so is acceptable.

With an adjustable-rate mortgage, the consumer assumes the risk of interest rate adjustments. This favors the investor, as his investment will “float” with the market. While it works well in times of low interest rates, the borrower with an adjustable-rate mortgage is at greater risk overall compared to the fixed-rate mortgage loan borrower for one simple reason: when rates increase, home values generally flatten or go down (or implode, such as the case with the housing meltdown). This means the holder of the adjustable-rate mortgage may not have the equ...