Florida Loan Advocate

How to Determine Whether Your Loan Officer is Reputable

In slower markets, some loan officers may feel pressured to close deals that      aren’t in the homeowner’s best interest. In order to avoid getting into difficult and financially compromised positions with their mortgages, borrowers are well advised to be acutely aware of the signs of a responsible loan officer when selecting a mortgage professional.

First, look for a Mortgage Planner whose values are focused on helping individuals to achieve their financial goals in both the fastest and the safest way possible. A reputable Mortgage Planner will show you the numbers associated with the proposed loan and provide you with concrete information that backs up his or her claims. Review all of the numbers. If they don’t add up, ask for clarification. If your loan officer can’t or won’t answer your questions, move on--without the loan.

Secondly, a responsible Mortgage Planner will present you with financial information that goes beyond the point of the transaction, and will illustrate the total cost of the loan over time. If your loan officer is focusing only on rates and fees, you may be working with someone who’s looking out for his or her own best interests, not yours.

Responsible Mortgage Planners will also tailor their strategies to fit your unique situation. In other words, they always take your personal financial goals into account. No one should try to place you into a loan without knowing the intricacies of your personal financial situation.

Finally, if your loan officer is advising you on issues other than mortgages, you could be working with someone who is compromising your best interests. Issues like investment rates of return and real estate appreciation aren’t the areas of expertise for the vast majority of mortgage professionals and should be left to the professionals who have training and direct experience in those areas.

When seeking a loan officer, look for someone who specializes in mortgage planning, which is the process of evaluating a borrower’s unique financial situation and advising the borrower on a loan that best suits his or her individual needs and goals. If your loan officer is trying to put you into a loan without evaluating how that loan will effect your entire financial situation--including debt management, tax benefits, investment goals and net worth--it’s quite possible that you’re only getting half of the picture.

The bottom line is that your mortgage representative should always be looking out for your best interests, regardless of market conditions.

Money Merge Accounts: How Do They Work? (Beyond the Software) - Part 1

To start the series, I want to make sure you understand one thing, your situation is unique and this or any other strategy you read about (or are pushed into) may not be the best for you. 

Money Merge Accounts are being highlighted as the best thing ever to pay off your mortgage as fast as possible and become financially free.  Undoubtedly, you have seen or heard of being able to pay off your mortgage in as little as 6 or 7 years. 

Impossible?  Scam?  Too good to be true?  NO!

However, before you decide on purchasing a Money Merge Account, or any other mortgage acceleration program for that matter, you need to understand the truth about how they work and determine which one will be best for you.  You also need to seek proper guidance from a mortgage professional that can offer a wide variety of solutions crossing the realm to include equity harvesting.  Why?  That is the only way to ensure that the mortgage solution you choose is the best one for your situation. 

This series will go deep into how these work and why you really do not need expensive software to accomplish the same thing.  Heck, you can even use one type (a little more expensive) to set the program on cruise control and never even think about it again.  More on that later.

I will also show some other strategies, including touching on equity harvesting, to show how these strategies can outperform the mortgage acceleration programs, or simply be a more viable alternative for you.  For the majority of you, these other strategies will provide increased liquidity, safety and rates of return compared to the mortgage acceleration programs.

On to the basics....

Money Merge Accounts and other mortgage acceleration programs such as CMG's Home Ownership Accelerator, utilize a modified form of a Home Equity Line of Credit (HELOC) also referred to as an ALOC.  The reason for this is to utilize the interest calculation differences to minimize interest expenses and maximize principal payoff.

Make no mistake about it, the majority of the savings from any of these programs comes from you applying extra principal payments into your primary loan.  The HELOC allows for an "interest cancellation" effect to take place which "accelerates" the mortgage payoff.

HELOC interest is calculated on an average daily balance, so paying extra principal from your HELOC into your primary mortgage, then dumping your income into the HELOC takes advantage of this difference.  You then pull money for expenses out of the HELOC as you need them, but any money you don't spend is used to keep the HELOC balance down, thus minimizing interest accrual.

When the balance gets low enough, assuming you are utilizing the software, the program will instruct you to pay more money from the HELOC into your primary mortgage.  This means you are using your "discretionary income" to pay off your mortgage, which may raise a caution flag in your financial situation.  More on that later in the series.

The bottom line in how these work is being more efficient in how you apply using any or all of your discretionary (or disposable) income to pay off your mortgage as quickly as possible.  The software assists you in doing this a little more efficiently, but the software itself does not provide any "real" savings, simply a means to make the program work more efficiently, assuming you use it.  I will address that more later as well.

The next part of this series will be basically a reiteration of how these programs work.  I will, however, add a table that shows how the money is transferred around in a "best case" scenario.  I will then likely touch on how these programs may not help you and show how you can do this without expensive software. 

Continuing in the series, I will show some other strategies, many of which have been posted by me before through the times, that show potentially better strategies than to focus on paying off your mortgage.  Many of these strategies, if implemented and followed, could actually put you in a position to pay your mortgage off even faster than a Money Merge Account can.

I will then end the series with a recap of the various scenarios, how they compare and which one(s) will lead to the most wealth over time.  Again, remember that even the ones leading to the most wealth may not match your specific financial goals, so do not be "swayed" into either one.

As food for thought before my next post in this series, remember the following...

You cannot focusing on saving money and investing money at the same time.  In other words, if you go for a mortgage acceleration program, in order to make it work as advertised you will not be able to divert money into other investments to achieve other financial goals.  To do so renders the benefits of such programs as just about useless.  Choose one strategy and stick to it in order to achieve that strategies true benefits.

Suze Orman has Lost Touch With Reality

I was just watching a snippet from Suze Orman on how she says to get a 15-year mortgage and "stop wasting money" with a 30-year mortgage.  Has she lost it? 

Well, some things about Suze you should know.  Yes, she is a Certified Financial Planner(R), but she currently is not practicing it.  Also, several years ago, 1998 to be exact, the Journal of Financial Planning reported on their own study comparing the 15 year and 30 year mortgages.  They determined that the 30-year mortgage was the best.

It is important to note that the Journal of Financial Planning is produced by the Financial Planning Association, the association of Certified Financial Planners.  So, Suze is going against her own profession by making these comments, and reality for that matter.

Does what she says makes sense?  For the vast majority of Americans, the answer would be NO.  Forbes Magazine has even had an article saying Suze's advice is not the best for most (December 2004 issue).

So, who should you listen to?  Why not listen to those who are not simply entertainers.  You know, those everyday Americans that have chosen to do things different and became wealthy.  Those which can provide guidance on how you can achieve wealth by changing your thought process and not following conventional wisdom, which is basically what Suze reiterates.

In Suze's defense, her advice is good advice to those struggling to pay their bills or lack discipline to implement better strategies, which may even be you.  But if you are looking to meet your financial goals in a better way, providing for your children's education, other goals or simply more money for your retirement, then stop listening to her and start listening to those who have achieved that.

Take Your "Toxic" Mortgage and Be Happy

If someone were to ask you to name the most toxic or dangerous mortgage that exists, you would most likely name the pay-option ARM.  Why?  Because it allows the borrower to go deeper into debt by paying less than the minimum interest owed each month, adding that difference back into the loan principal.  You may even talk about the potentially high prepayment penalties associated with some of them prevent borrowers from being able to get out easily once they are in it.  Chances are that you would support the current move to ban these "worst of the worst" type loans.

Guess what though?  It turns out that the worst is actually the best.

Option ARMs and other so-called "toxic" mortgages have been portrayed incorrectly by the media.  Yes, there are numbers of homeowners who were duped into these products by greedy mortgage originators.  But, reality, as is often the case, is quite different.

A study from professors at Columbia and NYU actually found that the "optimal" mortgage in a perfect world is the Option ARM.  Sound crazy?  It's not.  I have explained how these products can be used to create tremendous wealth, but they must be used properly.  I have even talked about how taking on more debt can actually help you become debt free faster.

The study breaks it down through mathematic formulas (the report is 65 pages long) and surmises that the "optimal" mortgage in a perfect world would be an adjustable rate mortgage with an option for negative amortization and a ban (or at least severe restrictions) on prepayment.  The report goes on to say that a perfect world is namely one in which borrowers are fully rational and always do what's in their own best interests.

Therein lies the problem as most Americans do not meet the criteria for living in a "perfect world".  Unfortunately, many Option ARM holders foolishly believed they would never have to pay more than the minimum monthly.  Eventually, after paying the minimum long enough, their loan balance hits a ceiling at which the loan recasts and becomes a new loan in essence with larger payments.  Now these homeowners face default and foreclosure.

So, if the optimal loan is truly better for homeowners who behave rationally, maybe it makes sense to get people to behave rationally through extensive consumer education.  If you attend one of my seminars or read my blogs long enough, chances are you already understand that the "old way" of thinking can cost you incredible amounts of money over time, possibly even preventing (at least limiting) your ability to retire.

If you are a numbers guy like me (and there are a lot in this report), then read the report yourself. 

Education is the key to financial success as is looking at all financial strategies, including the proper integration of your mortgage into your overall financial plan.  Focusing on paying off your mortgage as fast as possible may actually be the worst thing you can do to your financial plan, as counterintuitive as that may seem.  Please keep in mind that there is no "one size fits all" strategy.

Fed Cuts Rates: Who Wins?

The Wall Street Journal posted this interesting "Parsing of the Fed" yesterday...

If you were watching the markets yesterday, it was unusual in that both stocks and bonds rallied after a surprising move by the Feds to cut the rate by 50 basis points (.50%).  As mentioned yesterday before the release, investors were expected to scramble as they changed positions and they did.

So, since the Policy Statement is what likely kept bonds moving higher, let's dissect it as the WSJ already has...

Overall, Feds are fearful of both inflation and a recession.  Say what?  Their view on growth hasn't changed since early August, but the move was "to help forestall some of the adverse effects on the broader economy"(recession concerns)>  At the same time, they mention that inflationary pressures remain and will be watched.

So who are the winners after this change? 

• Adjustable Rate Mortgage (ARM) Holders - Likely to see drop in rate if adjusting (see yesterday's post...Don't FIX It if Your ARM is Not Broken)
• Fixed Rate Mortgage Seekers - Mortgage Bonds also rallied yesterday and with a bullish crossover of the 25-day Moving Average and the 200-day Moving Average, the trend will likely be lower.  Mortgage Backed Securities are not directly impacted by what the Fed does with the rate, but their Policy Statement and concerns about inflation are what drove the bond market.
• Home Equity Lines of Credit (HELOC) Holders - Rates tied to Prime will fall.
• Credit Card Holders - Most rates are tied to Prime and will likely fall eventually.
• Auto Loan Seekers - Most loans are indirectly tied to Prime and will likely fall as well.
• Others with loans tied directly or indirectly with the Prime Rate will benefit as well.

If there are so many winners, who loses?

Anyone seeking Certificates of Deposits (CDs), and many Money Market Accounts, among others.  While their rates are not directly tied to the Fed's move, as bank's obtain cheaper money, they will likely start offering lower rates on CDs since they do not need that source of funds as much.  Since Money Market Accounts use CDs as part of their investing structure, the reduced rates will carry over eventually.  Other "secure" investments may see returns dwindle as well.

Don't FIX It if Your ARM is Not Broken

Many homeowners have been rushing to refinance their Adjustable Rate Mortgages (ARMs) into a Fixed Rate Mortgage, mostly out of fear. 

While it is true that many ARMs adjusting this year will put homeowners into increased mortgage payments, some of which they will not be able to afford.  However, I am approached by many ARM holders who want to refinance and they have a while, sometimes a couple of years, before their ARM adjusts.  Should they follow the herd?

The answer is a definitive NO!  Sounds strange coming from someone who  makes money selling mortgages, doesn't it?  Well, the reality is that the Fed is likely to start a rate cutting trend today.  Typically this lasts for a while and leads to a lower LIBOR index as LIBOR tends to track reasonably close to what the Fed does. 

So, if your ARM is not adjusting for a while, you may see it adjust to rates comparable to today's fixed rates, possibly even lower, by the time it does adjust.  So, if you are near or below today's current fixed rates, then why worry?  Take advantage of the current savings you may be receiving for a while and see how things play out. DON'T BE AFRAID!

So, if you are fearful of where your mortgage rate is headed, that is understandable and fine.  But taking action based on emotions typically leads to disaster, so take a step back and find a mortgage professional that came help you analyze your situation properly and help you make an educated decision.

Florida Property Tax Reform - Where's My Savings?

Ok, I have remained quiet about the property tax mess and the government's attempts to fix it.  Why?  Well, many people have already written about it and, quite frankly, I have mixed opinions about what has and is intended to be done.

For starters, the savings that everyone thought (and were led to believe) were coming this year have not occurred.  One of the biggest questions is about the valuation of one's property.  Since we are in a real estate market meltdown, why is the assessed value going up?  Simply put, the assessed value is based on last year, not this year, so it is a lagging valuation.

You see, real estate last year was still appreciating, at least during the beginning of the year.  Overall, the market went up some, despite the downtrend already in place before the year's end.  So, your assessed value should be going up, at least slightly to reflect that.  Another important point to remember is that the assessed value is not indicative of current market value.

Still confused as to why your tax savings are not apparent?  Well, if you do not have the "Save Our Home Values" provision in place for one reason or another, you do not have a "cap" on the amount your assessed value for tax purposes can go up.  Save Our Home Values limits the increase in taxable assessed values to just 3%, regardless of market conditions.  Those without this provision in place, such as investors, are going to still see large increases in their tax bills most likely.

One drawback to the Save Our Home Values provision is that those homeowners that are protected by it may see assessed values continue to climb even in the next few years despite falling home prices.  Why?  The provision does not limit the 3% annual increases based on current trends, but rather limits the increases to 3% up to current market values.  So, if you have owned a home for several years, you will likely see a small increase in your taxes at least one more year.  A good side of the limitation is that the amount may be less than 3% as it is also capped by the inflation rate.

What about that "super-exemption" we have all heard about?  Well, it is still on the docket.  That is, Florida Voters will be in control of its approval come January 29, 2008 since it requires approval of an amendment to the state constitution.

Still question your assessed value.  Don't fear as you may have a way out.  The Value Adjustment Board will listen to your petition if you cannot get satisfaction from the Property Appraiser's office.  But hurry, the deadline is September 18th (tomorrow) in Broward County and September 20th in Miami-Dade County, so you only have a day or two.   

Does a Fed Rate Cut Lower Mortgage Rates?

I continue to get numerous emails and phone calls asking if mortgage rates are going to drop in the future.  Particularly interesting is the number of these inquiries that state they heard that since the Fed is going to cut rates then mortgage rates will go down as well. 

So, what is the truth?  The truth is that mortgage rates are solely dependent on Mortgage Backed Securities (Mortgage Bonds) and have nothing to do with the Federal Funds Rate and certainly not with the Discount Rate that you keep hearing in the news and how they are being cut.

Generally speaking, Mortgage Backed Securities actually trade opposite of what the Fed does to their rates.  So if the Fed cuts the Fed Funds Rate, mortgage rates are likely to increase in reality, though that does not always happen. 

Why is that?  It is all about demand.  When the Fed cuts rates, the rate of return (yield) is lowered.  Since investors are looking to maximize their rates of return, they want higher yields and will likely sell off Mortgage Bonds until the yield on them are appealing again.  Simply put, if yields are low then investors will take their money elsewhere until yields return to an appealing level. 

Now, one nice thing is that bonds compete on a global level, so with all of the "fallout" from the liquidity crisis happening around the globe, our bonds are still very attractive for many foreigners.  That will keep demand high and will likely keep our Mortgage Bonds trading in a fashion leading to lower rates ahead. 

Now, there are  some types of mortgages that the Fed Funds Rate will affect.  Since the Prime Rate is simply the Fed Funds Rate plus 3 percent, anyone with a Home Equity Line of Credit (HELOC) will see a change the next month.  Also, since LIBOR typically tracks closely with the Fed Funds Rate, those in Adjustable Rate Mortgages (ARMs) that use LIBOR as the index will likely see a change at their next adjustment period. 

One other nice thing about a cut in the Fed Funds Rate will be seen in our credit card statements.  We will all see a decrease in the interest since those rates are based on the Prime Rate as well.  Those who carry monthly balances will be happy to see at least a little savings.

To recap, the changes in the Fed Funds Rate does not affect mortgage rates, at least not directly.  Market forces, particularly demand for Mortgage Backed Securities, are what drives the interest rates on mortgages. 

If You Want to Know Where Interest Rates are Headed, Watch the Right Stuff

While I have mentioned this on other blogs before, I feel the need to ensure readers of this blog understand what truly drives interest rates.  You see, with all of the turmoil happening, I have had many questions about where I see interest rates headed.  The always seemed surprised when I said the Federal Reserve has nothing directly to do with it.

You see, Mortgage Backed Securities are the only thing that drives interest rates, nothing else.  Since they are bonds, you need to understand this point...if bond prices go up, interest rates go down and vice versa. 

Since Mortgage Bond quotes are not readily available, including to the media, other securities are used in a vain attempt to see what interest rates are doing.  So, most of the media, and even the vast majority of mortgage professionals, use the 10-year Treasury Note as a gauge due to the ease of accessibility.  Tune into CNBC, Bloomberg or other financial media and you are going to see a ticker showing it.

While the T-Note tends to follow the Mortgage Bonds most of the time, there are, in fact, numerous times when they act complete opposite of each other.  It is kind of like comparing American Airlines with Southwest Airlines in trading.  Many times they trade the same direction, but plenty of times they don't.

Thursday was a prime example of how opposite Mortgage Bonds can be compared to the T-Note.  At one point, the T-Note was up 103 basis points while Mortgage Bonds were down 12.  For those of you who are watching the wrong indicators, it could have cost you, or your clients, a lot due to rate lock errors.

So, if you were expecting interest rates to fall on Thursday, they didn't.  However, Mortgage Bonds did manage to get themselves a little higher at the end of the day.  I do provide daily market updates on my other blog, but even those are dependent on my time and are only current at the time of posting.  Things can, and do change rapidly in the markets, especially in current times.

So, to drive the point home, if you, or your mortgage professional are not following Mortgage Backed Securities in real time, then it could be costing you.

The Asher Institute Report: Fact, Fiction, or Distorted Reality?

Many of you may have heard about the report titled “Profiting from the Banking Industry’s Biggest Secret” released by the Asher Institute for Consumers. If you have, hopefully you saw through some of the so-called facts portrayed in this report and did not succumb to its fallacies.

This report provides an ingenious mix of both fact and fiction to ultimately sell a product. This report has been used by numerous Money Merge Account and other Mortgage Acceleration program agents as a way to get people to buy their products. While there is some truth to it, which we will get into, people who use this report should be avoided at all costs.

In our dissection of this report, let’s start with the correct statements. Basically, there is one basic premise that the whole report surrounds itself upon. That premise is that all mortgage payments are based on amortization tables which end up being “front-end interest loaded”. That is about the only true fact in this entire report. Beyond that, the report goes on to twist the fact and tries to get you to believe that a fixed rate mortgage is actually an adjustable rate mortgage.

As we said, the report takes fact and then distorts reality to produce false and/or misleading statements to lead readers (or prospective clients) into one conclusion; their product is the only solution to your problems. What is amazing is that the product is a beneficial tool for some people (not all mind you) but they feel the need to use this report as a way of providing credibility to their product, not the simple facts about their product(s).

So, now let’s look at their ludicrous claims that are very misleading. To compel readers to believe their statement, they formulated an equation and coined the term “effective rate”. The easiest explanation of this rate is to say that it is a comparison of the principal you pay versus the amount of interest you pay. Here is the formula…

PV = equity built in a given time period

N = number of years being analyzed

PMT = monthly payments (as a negative sum)

CPT, then I/Y (Compute, then interest/year) = Actual Interest Rate (“Effective Rate”)

So, what they go on to tell you is that a 6.0% loan kept for 25 years is really a 9.43% loan. The further this distortion by showing varying examples of loans paid off sooner showing “actual rates” as being as high as 580% for a loan that is paid off in 1 year. These are absolutely insane statements!!

While we agree that the difference in interest versus equity is heavily favored to the banks, the real issue, making false statements to sell a product should be met with major penalties and anyone using these types of statements should be avoided at all costs.

Let’s look at reality (not to defend banks, but to show the truth)…

We will use an interest only loan as a comparison and a $100,000 amount for simplicity sake. If you have the same interest rate of 6.0% in this case, the interest you would pay every year would be $6,000. Since that amount does not change annually, it proves that a fixed rate loan is truly a fixed rate loan. And to prove that their statements are false, try using their formula to compute the “effective rate”. It does not compute because you never paid any principal on the loan. So, according to their calculations, despite having a “fixed” amount of interest you pay annually, your “effective rate” is infinite regardless of when you pay it off, hardly a factual statement.

Again, mortgage acceleration products do have their benefits to some Americans, but distorting fact to dupe prospects into buying their products should be outlawed. If you are researching these products and anyone mentions the following, please run, don’t walk, run away immediately (or hang up the phone)…

“A 30-Year Fixed Rate loan is really an Adjustable rate loan” (or even worse, they add “and I can prove it”) or anytime they mention the Asher Institute’s report.

Using these types of statements means they are most likely trying to distort reality in order to sell you their particular product and they should be avoided.