What You Need To Know About Your Adjustable Mortgage Benchmark Indexes

Adjustable mortgages or ARMs are a kind of home loans in which the rate of interest paid on the principal amount is determined by the performance of a specific benchmark. Several benchmark indexes are used to calculate interest rates for adjustable mortgages. At least some of these are proprietary benchmarks fixed by individual lending institutions.

If you are planning to apply for an ARM, you will definitely want to know how these indexes affect your mortgage payment.

Overview of benchmarks

The most common benchmark indexes used to set ARM rates are the London Interbank Offered Rate (LIBOR), the 11th District Cost of Funds Index (COFI) and the One-Year Constant Maturity Treasury (CMT).

COFI

This benchmark is calculated on the basis of the weighted average of interest rates paid by member banks of the Federal Home Loan Bank of San Francisco to holders of their checking and saving accounts. The interest rate is adjusted every month. Adjustable mortgages which are associated with COFI reset once a year. Here the interest rates can increase every month, but COFI adjusts mortgage rates only once. This can lead to negative amortization. That means your monthly EMI will not be enough to cover your interest.

CMT

The CMT benchmark index is calculated on the basis of the average 1-year yield of the 4 most recently auctioned Treasury bills.

LIBOR

This benchmark is based on interest rates paid by London banks when they borrow money from one another. This is the most commonly used benchmark for determining ARM interest rates.

Several other benchmarks are also used to decide mortgage interest rates. While the names of these benchmarks are not exactly important, a borrower should know how these benchmarks work.

How benchmarks work

Both CMT and COFI are based on averages. As a result, rates change slowly. This is good when interest rates are rising rapidly. But when interest rates are falling, this can be disadvantageous. LIBOR can rise rapidly, so borrowers may see massive increases in their monthly mortgage payments.

Why benchmarks are important? 

Borrowers can choose an ARM that is linked to a specific index. Of course, they cannot decide which index the lender will use, but they can choose a lender that uses the index of their choice.

While selecting a benchmark, you should know whether the benchmark is based on averages. You should also know how often it adjusts and how much it can adjust. Is there the risk of negative amortization? These are a few questions you should ask.

Before the housing bust, adjustable mortgages accounted for 20% of all mortgages. But after the housing bust, their share dipped to 5%. Now most of the proprietary benchmarks have faded away and lenders have also become more conservative. Still, the borrower needs to be vigilant.

Should you choose an ARM?

Adjustable mortgages are ideal for people who plan to pay off the loan before the rates reset. They can help borrowers when interest rates fall. ARMs tend to have lower interest rates during the initial period of the loan. That is why many people prefer them to standard fixed rate mortgages.

However, borrowers who intend to live in the house for a long time should stay away from ARMs. This is especially true in the case of borrowers who are choosing an ARM to afford the monthly payment. While this strategy will work during the initial period; when the loan adjusts, rising rates can force borrowers to default.

Homeowner Equity is on the Rise

The latest data from the Department of Housing and Urban Development shows progress among the key indicators. In 2013, home sales had their strongest performance since the bubble burst in 2008 with foreclosure rates at their lowest and homeowner equity was up $3.4 trillion since the first quarter of 2012. While this does indeed show positive trends in the market, experts note with caution that the economy is still healing.

Obama Administration Efforts Have a Positive Effect

The Housing Scorecard shows that the effort of the Obama Administration continues to have a positive effect on the market according to Kurt Usowski, Deputy Assistant Secretary for Economic Affairs at HUD. “In 2013,” he said, “the number of properties in the U.S. that started the foreclosure process was down 33 percent from 2012, while salesof previously owned homes was up 9.1 percent.” He went on to say that with foreclosures down, home sales up, and home equity continuing to grow, he U.S. housing market will continue to make steady and strong progress, albeit slowly.

January’s Housing Scorecard shows that there is a continued need for the Making Home Affordable program while it’s still making progress. The Making Home Affordable report for January shows that there is a steady increase in the number of homeowners receiving permanent mortgage modifications. At the same time, homeowners numbering more than 258,000 have found other alternatives to foreclosures including short sales or deed-in-lieu of foreclosure.

Home Sales Up, Foreclosures Down

Housing Scorecard for December features key data on housing market health and the impact of foreclosure prevention programs put into place by the Administration including:

·         Existing Home Sales Continue to Make Gains: In 2013 for instance, there were more than 5 millions sales of existing homes, which was 9.1 percent higher than the numbers in 2012. This was the strongest performance since 2006 when total sales reached an unsustainable level during the housing boom. Additionally, there was a total of 428,000 sales of new homes in 2013 – 16.4 percent above the total sales for the year 2012.

·         Home Foreclosures are Down: there were a total of 747,728 foreclosures started in the U.S. in 2013 according to Realty Trac. While this does indeed sound like a large number, and it is, it is still down 33 percent from 2012, and the lowest number of foreclosures started since 2005. The report went on to say that there was a total of 462,970 U.S. properties repossessed by lenders in 2013. This was down 31 percent from 2012 and the lowest level since 2007.

·         Equity Continues Growth: The equity that homeowners have in their homes is up $3.4 trillion according to the Federal Reserve. This translates into 55 percent growth from the first quarter of 2012 through the end of the third quarter of 2013.

·         Mitigation Programs Continue Providing Relief: More than 1.9 million actions have been taken in regard to homeowner assistance via the Making Home Affordable Program. This includes 1.3 million permanent modifications. The program, put into place by the Federal Housing Administration, continues to encourage improved processes and standard within the industry.

 

SOURCE: http://nationalmortgageprofessional.com/news46810/US-Homeowner-Equity-Up-%243.4-Trillion-Since-Beginning-2012

Jumbo Loans are Becoming Easier to Get

Jumbo loan rates have dropped to level at or below those of conventional mortgages for the first time in more than 20 years. Typically, a jumbo rate will generally run about one quarter to one half of a point higher than the current rate for a conventional loan. Lenders are changing their way of thinking however, as they begin searching for business from the nation’s wealthier customers.

Wells Fargo began this trend in 2013 when they dropped the typical minimum down-payment from 20% to just 15. Competitors have begun to follow suit with some experts noting that it was a good time to e a jumbo loan borrower. The big banks are the ones who will have the best rates, and borrowers are going to need a minimum 720 credit score to qualify for the money.

Jumbo mortgage rates are averaging right around 4.25% as compared to the typical 4.35% being sought for the 30-year-fixed conventional loan. Those who are seeking a ARM loan can find rates around 2.875%, but borrowers should do so only if they expect to move from the property during the 5-year-fixed period.

Because of the rebound of the housing market, loan origination and approval rates are on the rise, and investors are starting to turn their eyes to the jumbo mortgage sector.

Jumbo Loans are Easier to Obtain

According to financial experts, people that had less than a 740 credit score could not get a jumbo loan, but that’s all changing now as opportunities for obtaining jumbo loans are starting to crop up for credit scores at the 720 level or in some cases, even lower. That doesn’t mean that jumbo loans are extremely easy to get these days, but rather the borrower must have a credit record that is fairly clean as well as a significant savings accounts that are perhaps larger than what would be required of the borrower looking for a conforming loan.

While a jumbo loan is considered one that is larger than $417,000 in most areas, they may start above $625,000 in areas where costs are high. To help entice borrowers to seek these loans, banks like Wells Fargo have lowered the 20% requirement to just 15%, and it doesn’t hurt of course that the interest rate is a bit lower than the typical conventional loan. Another plus for the borrower, is that while most loans with less than 20% down require mortgage insurance, those at 15% under the new terms do not.

Second homes are Easier to Buy

Let’s not forget about the terms surrounding the buying of second homes that have eased as well, so there is a lot of incentive for a borrower to look more closely at the jumbo loan packages that are available to them. Because of the expansion of the guidelines, loans that were once amounting to 70 or 75 percent loan-to-value are now being granted at the 80 percent level up to and including $2 million on second homes.

To put things into perspective, only 16 percent of the total number of borrowers who applied for a jumbo loan in 2012 have been denied access to that money according to LendingPatterns.com while previous to that the denial rate was as much as 30% or more. It seems that the reason behind the trend of more approvals in the jumbo sector is that lenders are now more confident about the values of homes. This is especially true for the houses at the upper-end of values.

It’s the stability of the real estate market that is now driving up the desire of borrowers to buy move-up homes. Because of that, lenders feel more comfortable in loosening up the purse strings.

 

Top 5 Reasons to Get an Adjustable Mortgage

Adjustable rate mortgages (ARMs) are riskier; still, there are quite a few reasons to select an ARM over a standard fixed rate mortgage.

When it comes to adjustable mortgages, the interest rate on the loan can increase or decrease. It depends on the market conditions. It is a bit like gambling and there is no way to predict what the rates will be like five or ten years from now. So why should anyone gamble when they can get a fixed-rate home loan with predictable EMIs?

While it is true that nobody can predict how the interest rate will move in the future, there are still several reasons to get an ARM. In fact, for some homebuyers, an adjustable mortgage is a much better option than a fixed-rate mortgage. Here are the top 5 reasons to get an adjustable mortgage.

Low initial monthly payments

When you choose an ARM, you monthly EMIs during the initial period will be much lower. All ARMs have an initial period during which the rate of interest is fixed. This initial period can last between three months to ten years. During the initial period, the interest rate on your adjustable mortgage will be lower than the interest rate on a standard fixed-rate mortgage. This is a huge draw for many borrowers.

More savings

Since the initial monthly payments on the mortgage will be relatively low, you will be able to save more money. You can either invest this money or use it to pay down the loan faster.

Enjoy the benefits of lower rates

It is impossible to predict whether the interest rates will go up or down in the future. But if the rates drop (that is very much a possibility), your monthly payments will drop as well. By contrast, people who have a fixed-rate home loan will have to get refinancing to enjoy the lower interest rates. Refinancing can be costly. In addition, it is a time-consuming process.

Ideal for short term investors

If you are a short term investor who plans to sell the home in the near future, an adjustable mortgage is the best option for you. You just need to ensure that you sell the property before the rate hike kicks in. This way, you can not only enjoy lower initial monthly payments, but also protect yourself from possible rate increases in the future. If you intend to sell the home before the initial period expires, you have every reason to get an ARM

Rate caps

Even if interest rates go up in the future, they can't go beyond a certain limit.  Adjustable mortgages have rate caps and the rate on your mortgage can never exceed that limit. Read the mortgage documentation and disclosures carefully to make sure that you will be able to live with the highest possible monthly payments.

But before arriving at the final decision, you should do the math. First, decide how long you will be staying in the house. If you are planning to live there for five or six years, you should get an ARM with an initial period of seven years. Now compare the initial rates on a standard fixed-rate and an adjustable rate home loan. It wouldn't be hard to see that the benefits of an ARM outweigh the risks, at least during the initial period.

How to Choose Between a Fixed-Rate Mortgage and an Adjustable-Rate Mortgage

Now that interest rates on fixed rate home loans are beginning to increase, more and more homebuyers are showing renewed interest in adjustable rate mortgages. ARMs are riskier, but the lower rates in the initial years are tempting more borrowers to commit to this kind of mortgage.

Can't decide between fixed-rate mortgages and ARMs? We have got all the information you need to make an informed decision.

Question: I don't know if I should choose a fixed-rate home loan or an ARM. How can I find out which one is the best for me?

Answer: It depends on your unique situation. Ask yourself how long you intend to live in the house.

ARM is a smart choice for buyers who intend to move out in the next few years. These mortgages have lower interest rates during the initial period which can last up to ten years. During this period, your monthly payment will not change. The loan will reset after the initial period and then the monthly payments can rise significantly. It is hard to predict what the rates will be like when the fixed period ends. It is this unpredictability that makes ARMs riskier.

On the bright side, this kind of mortgage also offers substantial benefits for a borrower who intends to sell the home or who is going to inherit a huge sum before the initial period expires.

Because the initial monthly payments on an ARM are significantly lower than the monthly payments on a fixed-rate home loan, you will be able to qualify for a bigger loan. In addition, lower monthly payments will allow you to save more money.

The biggest downside is that borrowers who do not sell their home before the expiry of the initial period will be in for a totally unpleasant surprise when the loan adjusts. That is why it is important for buyers not to overextend themselves. If you choose an ARM, you will be able to qualify for a bigger loan, but that doesn't necessarily mean that you should have it.

By contrast, fixed-rate home loans are the best option for those borrowers who intend to live in the house for a long period. Irrespective of what happens to mortgage rates or the economy, your monthly payments will remain the same throughout the life of your loan. This kind of mortgage is ideal for people who have a fixed monthly income. People who do not have a high risk appetite, too, should opt for a fixed-rate home loan.

Playing it safe has its own downsides. If the rates fall to even lower levels in the future, you will not be able to take advantage of them. You will have to be content with the interest rate which was in force on the day you signed up for the loan.

In this case, refinancing your mortgage will be the only option you have to get a lower rate. Unfortunately, this can be a long and arduous process.

Another negative with fixed rate home loans is that during the initial years, you will be paying much more interest than principal.

So here is the verdict: If you intend to sell the home after a few years, an adjustable mortgage should be your choice.  Just make sure that you sell the property before the rates adjust. However, if you intend to live in the house for the rest of your life, a fixed-rate home loan is the most appropriate option.

 

5 Practices to Become a Highly Efficient Mortgage Broker

We have come up with a few top practices that teach mortgage brokers to leverage their brands and stand out in the crowd. There are also certain other practices that charm new agents to grow dynamically and earn handsome commissions. These best policies include engaging the consumer audience comprising the buyers and sellers to operate digitally, producing premium leads, optimizing lead responses, cultivating and raising hot prospects until the closing, and then finally, tending to recurring and referral dealings.

While every individual mortgage broker is distinctive, these practices are followed and coveted even by the thoroughly seasoned mortgage brokers of today. Thus, each of these values driven practices when optimized, the result not only with a deep and compounding effect on the bottom line, but also enable mortgage brokers to draw, nurture, and preserve top agents.

The best practices to become highly effective mortgage brokers are as follows:

1.  Engage the audience

As nearly 92% customers begin exploring about homes online, it makes sense to build a good impression about mortgage brokers and agents well in advance.  By creating the right listing and branding, you can get better consumer research options. This can help you build recognition and credibility, and have customers at your disposal all 24/7.

2.   Generate leads

Mortgage brokers must remember that quantity and quality are two imperative aspects of lead generation. Thus to attract new agents to your mortgage brokerage, you must follow these two aspects consistently.

3.   Optimize response

Having the generated leads in one place becomes easy for mortgage brokers to be accounted for, managed, and also optimized for quick response. Also, with the right optimization plan, mortgage brokers can have better control and visibility on lead investments. Thus good lead management skills and routing solutions can enable mortgage brokers and their teams to fight the odds against any quick response challenges.

4.  Communicate

Studies have shown that customers prefer agents who are easily reachable through phone calls, messages, or emails. Thus mortgage brokers who arm their agents with customer relationship managing tools are able to gain a lot. If you don’t have agents, it is a good idea to be easily accessible via phone or emails.

5.  Repeat and get recommendations

Staying in touch with past customers is a great way to broaden relationships. Top mortgage brokers use many methods to put this into practice and gain. You can call them on major holidays, but make sure you don’t call them too often.

To make sure that your lead management is optimized, ask yourself these questions:

·         Which leads have arrived from which sources, and what’s the best source of leads?

·         Do you have agents working on all leads?

·         What is the overall conversion rate?

Success in the field of real estate depends a lot on your desire to sell. There are many methods of becoming a successful mortgage broker, but being organized is something that will make sure that you stay successful. Also, always try to be helpful towards your customers. Your service should be such that whenever a customer thinks of real estate transactions, they should think about you.