Why You See Advertisements for ARMs where the APR is less than the Note Rate

I walked into my bank the other day and saw this advertisement:
“5/1 ARM: 3.875%, APR 3.675%!!!” (The exclamation marks were the bank’s, not mine).

This has always been one of my pet peeves because it seems so misleading, although technically, it’s the accurate way to calculate APR on an Adjustable Rate Mortgage (ARM). APR is all we have as a means of comparing interest rate quotes, but I promise you, you will be better off asking what the Note Rate is and how much it costs you to refinance before analyzing APRs.

If you’re unfamiliar with what APR is, you can brush up on it in a previous blog post I wrote: http://loansbyireneblog.com/2008/10/06/what-is-apr/

You’re probably curious why a loan that costs you money reflects an APR that is less than the interest rate you will be paying your mortgage at. The reason is that the bank assumes after your loan enters adjustment, it will adjust based on today’s Index + Margin (which trust me, this will not happen). Because of our poor economy, Indexes are extremely low, providing lower interest rates, and therefore quoted APRs on ARMs are less than the actual Note Rate.

Published in:  on December 30, 2009 at 10:47 pm Comments (2)

Loans by Irene on Facebook!

I now have a Facebook business profile page! Click on the link below to sign in, and if you’d like, become a fan.
In addition to linking blog posts, I will be putting short and quick tips, pointers and updates.

Loans by Irene on Facebook

Thanks!

Published in:  on August 14, 2009 at 2:04 pm Leave a Comment

Interior Insurance Now Required on Townhomes and Condos

Lenders are now requiring homeowners of condos and townhouses to insure the fixtures and contents within their home. HOA dues (usually) cover insurance for just the outside of your unit and the development as a whole, not the inside. This can potentially change your homeownership obligation.

The type of insurance required is called a “walls-in” coverage policy. It was explained to me by one of my lenders as follows:
“We now require the borrower to have insurance to cover drywall, cabinets, stove, etc. Typically, a condo blanket policy will only insure to the studs. If you tip the home upside down, whatever doesn’t fall out is what needs to be insured.”

Although this never used to be required to get the loan, it is a smart thing to have, in addition to insuring your personal contents.

Published in:  on May 7, 2009 at 8:30 am Leave a Comment

Spring Fling Cocktail Party and Vendor Fair

For those of you who are local, Viva La Diva Parties is throwing a great event at the Sheraton in Sunnyvale this Thursday, from 6 to 9pm.

Spring Fling Cocktail Party and Vendor Fair

Spring Fling

It includes live music, buffet, cocktails, networking, shopping and a fashion show, among many other festivities.
There will also be a raffle event.  All proceeds will benefit NAMI (www.nami.org)

Check out the flier for more detailed information. You can purchase your $45 ticket at http://www.brownpapertickets.com/event/55826

Published in:  on March 23, 2009 at 2:49 pm Comments (1)

Chat with me!

I added the widget for “online chatting” to my blog. Scroll down and you’ll see the chat box in my sidebar. If you have any questions and I’m online, ping me and we can chat.

Have a great week!
Irene

Published in:  on March 16, 2009 at 8:39 am Leave a Comment

New Page Added: Mortgage Terms

I’ve added a new page!  “Mortgage Terminology” can be found in the sidebar underneath “About / References.”  I’ll add terms periodically and as they come up.  If there’s anything missing that you’d like me to define, please let me know.

Thanks!

Published in:  on February 6, 2009 at 10:25 am Leave a Comment

Subscribe to my blog!

Hello!  Please remember that you can subscribe to my blog using the link to the right.  Subscribing allows you to receive updated blog entries directly in your email inbox. You will not get spammed nor solicited in any way.

Please let me know if you have any questions or comments.

Thank you, have a great week!

Irene

Published in:  on January 12, 2009 at 9:47 am Leave a Comment

When Your Lender Freezes Your Equityline

Many homeowners are getting that letter in the mail – the one that states how home values in the area have dropped and they are freezing your equityline. Other homeowners have gotten notices that their equityline is officially closed.

When your equityline is frozen. Your 2nd mortgage is most likely with an established lender (ex. Wells/Chase). They have done a blanket appraisal valuation in your neighborhood and have determined that property values have decreased so they are “freezing” your line, meaning that you cannot borrow against it any more, until a future date when they tell you it is okay (i.e. when the housing market rebounds).

Tip: I have had clients fight the estimated value the lender determined and win. One of the homeowners did this at the cost of an appraisal ($350), but did end up winning out.

When your equityline is closed. Unfortunately, there is nothing you can do. In this situation, your 2nd mortgage is most likely with a bank that has filed for bankruptcy or closed its doors (ex. National City/IndyMac). It is hard to get a new equityline, but if it’s important to you, let me know and I can either help you directly or, at the very least, can give you some direction. As a heads up: you must have equity and an extremely strong FICO.

If you have a balance on your equityline and pay down a significant portion, this will most likely alert the bank and they will then freeze your line. If you want to be able to borrow against it in the near future, it is best to just pay little portions. They may end up freezing it regardless, but at least your action won’t cause that result.

Published in:  on January 4, 2009 at 5:50 pm Leave a Comment

Why Fixed Rate Mortgage are Cheaper in Rate than Adjustable Rate Mortgages

We all know how the concept of risk and return in our financial lives normally works … the more risk you take on, the greater your potential profit (or loss) can be. The less risk, the less you can potentially make (or lose). In “normal” markets, mortgage loan products work in the same manner. A Fixed Rate Mortgage carries a higher interest rate, but you’re not assuming any risk with how the market fares in the years to come. In contrast, an Adjustable Rate Mortgage (ARM) carries a lower interest rate because you’re taking on risk in terms of what will happen in the future when the fixed portion of your ARM is up.

So, right now, in this market, why are Fixed Rate Mortgage rates cheaper than rates on ARMs?

Well, secondary market players aren’t buying any of the new ARM loans because they’re deemed way too risky. A lot of what our housing market is going through right now doesn’t just have to do with the down cycle of real estate; it has to do with a down market (decreased home prices and values) in conjunction with homeowners’ ARMs coming due.

Here’s an example: John Doe bought a home in 2003 valued at $500k and chose a 5/1 ARM (the most common ARM) at 5.0% and put little down. Here we are in 2008 and the fixed portion is expiring, so John’s loan is about to enter the adjustment period. The new rate is based on a formula and is dependent on current market indexes (details on how ARMs adjust at a future date).

John’s loan and payment is about to adjust at a different rate and now on a 25 year term (because 5 years have passed). The shorter loan term, if not the new interest rate, means that his monthly payment is going up. In conjunction with the new rate and payment adjustment, the value of John’s home has likely decreased and he’s unable to refinance because banks are now requiring solid equity. So if he doesn’t find a way to make his new monthly payment and if the bank isn’t willing to help him negotiate new terms, then he’s going to lose his house.

Because of all this, investors are scared of ARMs and of this happening again, and so they aren’t buying the new ones. Because they’re not buying them, banks can’t sell them. There’s a greater risk associated with such loans, and the rates are higher.

Published in:  on December 3, 2008 at 4:36 pm Comments (1)

Retailers Filing for Bankruptcy: Use Your Gift Cards!

Beware of giving and receiving gift cards this holiday season.

If you have a gift card or store credit with a retailer that has filed for bankruptcy, you can be pretty assured that you won’t ever see that money. You could try standing in line behind creditors in bankruptcy court, but personally, I wouldn’t waste my time.

With Circuit City being the most recent retailer to file for bankruptcy, the number of retailers to do so are increasing.  Six retailers filed for bankruptcy in 2006, seven retailers in 2007 and this year alone has seen 17 retailers file.

If you have gift cards lying around at stores that you’re unsure of lasting through this economic downturn, I’d go spend them!

Published in:  on November 12, 2008 at 7:54 pm Leave a Comment
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