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15 YEARS ARE PLENTY
By ROGER SCHLESINGER
AuthorHouseCopyright © 2013 Roger Schlesinger
All rights reserved.
It's Not Your Uncle Bob's Mortgage—But It Ain't Bad.
Oh, Uncle Bob paid off his $200,000 house (current value) because he got his loan right after World War II. He swears by the 30 year fixed mortgage. He'll tell you all about it time and time again over Thanksgiving turkey. So let's go back and find out why Uncle Bob is so sure this is right for you, too.
The 30-year fixed began in the 1930's, decades before the 15 year fixed was introduced. It wasn't until the 70's that we saw variable interest rate loans, with hybrids, and fixed loans that adjusted. In the 80's, we saw adjustable (variables) that are fixed for a period.
But Uncle Bob had one choice. The 30-year fixed was an arranged marriage, and he had to take her. Thus, his expertise is rather limited. (No offense to your Aunt).
Now that I've ruled out Uncle Bob's advice, (besides, he always shows up to Thanksgiving with a questionable salad anyway,) let me save you money. In fact, let me save you a lot of money. If you read every page of this book, you should save thousands. I've broken it down to 50 simple points, highlighted to help you find the information you're looking for to help you make the right choice.
ECONOMICS (note, this is a highlighted point ...)
Economists are those rare professionals who can never be wrong (or right for that matter). It's an art, not a science, and results are subject to whomever is giving them.
Economists have the luxury of taking their theory, contradictory to each other as they may be, and automatically finding a home. If you're one way, you go Republican; if you're the other way, you go Democrat. Oh, if only all professions could be so simple.
But an economist is the epitome of the slogan, "what have you done for me lately? An expert can be right (or at least not wrong) for years and make one bad calculation, and he's suddenly yesterday's news. An amateur can make a wild/lucky on the mark statement, and he's the new messiah over night; that's what you get in an industry without standards.
Author's note: I have a Bachelor of Arts Degree (B.A.) in Economics from U.C.L.A.
Bottom line: Economics can go either way. It can help you if you research enough, and it may hinder you should you choose to ignore the mountain of information. But the best of the best contradict one another; it's just not a place to hang your hat.
The World Is Not My Problem
You turn on Fox or CNBC only to find the following: Asia's market takes a dive. Russia's funneling billions to private banks. Europe is ganging up on itself. South America is trying to go sober. So what should you do?
Fret not. That's it. Fret not. Whatever interest rates you're staring at right now are all that matter. The rest of the world is out of your control (assuming you're not one of those creeps pilfering the Russian money.) If you are—hey, thanks for buying my book anyway.
There are plenty of reasons to enter the mortgage arena including buying a house, refinancing your current mortgage, consolidating several loans, or pulling cash out of you property. If Japan eats South Africa, it shouldn't change your situation any time soon.
If your main reason to act is to lower your interest rate, then you're in for a nervous stomach. Interest rates must be right (now) for you to make your move.
My World Is Me
Your potential economic future is the one dictating force behind acquiring a new mortgage. Your job prospect, your earning potential, your retirement goals are singularly important, and every other outside force is irrelevant unless it relates directly to you.
The neighbor's dog, your mother-in-law, and the fact that airline seats seem to be getting smaller as your cushion gets larger, are all distractions in life. Nonetheless, don't let them distract you from your goal.
Know where you're going so you don't end up where you're heading. Sales leaders have always chided their sales people to plan their work and then work their plan. Your life is much the same. If you have a destination in mind, detours on the way to getting through can be easily dealt with. It's those people who don't know where they are heading who can easily get lost, and they do. Don't let that be you.
Inflation-Deflation, So What?!
It comes and goes, like relatives who visit more often than you like. And you're never sure how long they'll stay. It's that scary word—inflation. Is high inflation something you need to deal with or someone else's problem? Can it affect your way of living, or does that only happen to the big boys?
Like those relatives who eat all your food and drink all your beer, you need to stand up to inflation. Some inflation/deflation can mess up a well-conceived plan or even poorly conceived ones by the economic realities that occur in the economy during those times. It all boils down to one phrase which is a truth of Biblical proportions in the home-buying world. Ignore it, and you'll end up in mortgage hell. That phrase is as follows: you cannot have high interest rates without rising home prices. You might see times of home prices rising without inflation but probably never the other way around.
Fear causes people to paint a picture of a world where interest rates skyrocket while home prices remain steady, and this leads them to conclude that long term fixed rates are the only safe solution. If you know, however, that home prices will follow inflation, and that increased home equity will cause many people to sell or refinance and pull money out, then it's easy to understand why there's no reason to pay extra for a long term fixed rate. It feels safe but isn't well thought out.
When you decide to delve into economics, try to uncover all the facts and set the right parameters to reach an intelligent conclusion that works for you.
What if We Lose the Tax Deduction on Our Mortgage?
This could be a real dilemma if the push to a real balanced budget continues. The only way to plan for this contingency is by developing a strategy to pay off your loan.
Many believe the interest rates will decrease when and if the deductibility of said rates are eliminated. Let me remind you of the unleaded gas story. Before unleaded gas was introduced to the market place, the oil companies told us it would be cheaper because they didn't have to add the lead. When the cars converted to unleaded, we were then told prices went up because they had to remove the lead. The people in control are always looking for a way to squeeze another buck out of you, and they almost always will. Your job is to outsmart them. And there's only one way to do this: pay off your mortgage. They are then left helpless. The politicians will be forced to go and sue the tobacco companies one more time to make up the extra cash.
Throughout this book, I'll give you tips on how to do this, but there are alternative viewpoints. While none maybe as good as mine, I will present them should you not want to pay off your mortgage. One concept states that you can't borrow money as cheaply as you can on your home so why pay it off?" These folks are merely talking to the big boys as most people will need the equity in their home to supplement social security to be able to survive the latter years. Be sure to create the equity before you need it and don't count on appreciation as your salvation.
What's Good/Bad Credit on a Home Loan?
The mortgage business is both similar to and also unlike any other business. In the "like other businesses" category, what occurs in the mortgage industry is paramount to you credit while incidences in other industries are less relevant. The industry differs from others because money cannot change certain factors such as a discount of the rate based on a particular credit score. In other words, you cannot buy the rate down without the score.
Allow me to define a few types of credit:
1. Good credit is 12 to 24 months of perfect mortgage payments. Bad credit is foreclosures, deeds-in-lieu and late payments. "My dog ate my payment" has even less a chance of working with a lender than it did with your second grade teacher.
2. Excellent credit is a credit report devoid of lates with small credit balances in relation to higher credit limits and a small number of revolving accounts. Lenders like to believe, true or not, that you can afford you payments.
3. Poor credit is a report with lates on revolving and installment accounts in the last 12-24 months and late payments on your current home loan. The individual's credit deteriorates as lates go from 30 days to 60 or 90 days. If you're getting calls from your creditor, you're likely in the 30-day category. If you cringe when those calls come in, you're probably in the 60-day category. If you've ripped your phone out of the wall, odds are you're in the 90-days plus category.
Irrelevancies are paid judgments and state or federal tax liens that are paid. In most cases, bankruptcies and foreclosures that are over three to four years old and short pays over two years can be disregarded. This is strictly a function of the lender.
Your credit can cost you money if you don't understand what is good and what is bad in the mortgage industry. An automobile repossession that is over 5 years old is minor, especially if there isn't a balance showing, but a house repossession without a loss to the lender can be huge! Lenders are allergic to repossessions, deeds-in-lieu of foreclosures, short pays or a straight foreclosure. It's like cat hair, a bee sting, dust, milk, and peanuts all rolled into one. If the allergy items are on your report, you need help. It's out there. Give it a search. In fact, right after you're done reading this book, make a note.
Much like an in-law, everyone has a credit score, whether you want one or not. When your credit is processed along with the actual report, there comes one or more credit scores. These numbers, at a point, are really out of your control.
Most lenders look at your credit score in determining your credit worthiness. The number one credit scoring company, The Fair Isaacs Co. (FICO), developed a secret formula akin to Colonel Sanders secret recipe of herbs and spices, and it can help you in processing a home loan but without all the deadly grease. The lenders with the best rates require a minimum FICO score and in some cases will reduce the interest on these loans for high scores. It's similar to how high scoring basketball players get out of trouble where you and I can't.
Conforming loans can have a minimum, and it's generally 620. A Jumbo's minimum is generally 640. The current parameter of scores for the primary borrower (the one who makes the most money) are as follows:
620—Minimum for most good lenders. You'll get a loan, but they may act like they're doing you a favor on par with France giving us the Statue of Liberty.
720—Reduced interest rate, baby! (Generally only with a loan to value of 60% or less).
There are a number of ways to help your score, from closing inactive revolving accounts to bringing down your balances on open accounts. Should you live right and pay your bills on time, life and your credit score should be okay.
Pro Active Repair
The easiest way to take care of bad credit is to rid yourself of the obligation and, three to six months later, begin a letter writing campaign to the various credit gathering agencies denying ever having been late. The law states that the credit reporting agency must investigate each inquiry and remove the inquiry if the creditor doesn't confirm the information within a 30-day period. Since your obligation has been paid, the information is now most likely in storage and not readily accessible. It's a lot of work to take Sally away from her job of calling people and threatening to ruin their lives for being late in their payments and then having to send her down the hall to search for your records. The derogatory credit will have to be removed if not challenged within 30 days.
Trust me, it's worth the effort; I have client's who have saved millions by taking the time to clean up their credit and refinance after the fact.
Co-signers are desired by FHA and can also be used on Freddie Mac programs. A strong non-occupying co-signer can make the package go from weak to strong. If lack of money for down payment is your problem, have the co-signer gift you money and keep them off the loan.
B.K. or Foreclosure
Bubonic Plague or Black Death? Take your pick. These are mere colds if you're getting a car loan, but a house loan turns them into killers. If you're the unfortunate recipient of either, consider yourself quarantined for a while.
The best lenders won't look at you for a minimum of four years, if at all, while these blotches are on your credit. As far as they're concerned, you're infectious, ugly, and chew with your mouth open.
Some of the intermediate lenders who are not as strict but whose rates are not as good will consider you after as little as a year but generally after two years; V.A. loan consideration is 2 years.
A late payment after one of these disasters sets you back even further. The best lenders will turn and run like a vegetarian at The Outback.
Just because you made an error, your fault or an act of God, doesn't force you into servitude for life. You can right the ship and sail on.
LTV Makes it Right
Loan to value is the key to any lender. The lower the loan to value, the easier it is to make the loan. If your father-in-law is kind enough to sell you his $750,000 home for a measly $400,000, odds are good you'll get the loan. The bank will be licking its chops should you not make your payments, and your father-in-law will subject you to a lifetime of I-told-you-so's.
The old equalizer is equity. The greater the equity there is in your home, the easier it is to get a loan even with outstanding problems. The more equity the less risk to the lender.
The magic number is generally a loan at 65% LTV or less. Most lenders will give you some credit that will lower the interest rate for loans with this much equity in the property. They might even shake your hand and call you "sir".
This leads me to why I like the 15 year fixed. You can achieve this type of equity with a 15-year loan in as little as 7 years without relying on appreciation. Should you hit the right interest rate market or a rapidly appreciating real estate market, you might be able to cut into the 7 years.
Like diamonds to women, nothing rules the mortgage industry like equity, and smart borrowers don't rely on inflation to create equity. Amortization is now king. To maximize amortization, you need to lower the interest rate and shorten the term of the loan. Once that's in place then, with luck, you might be able to add rising prices and watch the equity grow. It's a jewelry store!
There are millions of homes purchased every year, from big mansions with gated entries to tiny, leaky houses under bridges, and the overwhelming majority need a mortgage to close the deal. Less than half of the houses are purchased for 100 percent cash.
The type of mortgage that is right for you is as personal as your DNA, so why are the majority of all loans 30 year fixed? That's basically a brunette boy with no real great skills and a bland personality.
The right home mortgage fits the family like a good son who calls his mother every weekend. The wrong one is like the kid who drops out of school, lives off you for 35 years, and never gives you grandkids.
The Loan is Equally as Important as the House
How many times have I heard a borrower tell me the following: "Get me a loan—any loan! I need to close this house!" You might as well cover yourself in blood and dive into a pool of sharks. The house that you so wanted will suddenly get ugly when you can't make the payments or, at best, you're locked into a loan that isn't accomplishing what you need.
What if your house depreciates and so does your equity? Or what if your five year plan to move up is going to take two to three times as long because you don't have sufficient equity? Suddenly, your aunt's offer to move in and bring her 3 kids for the price of a little rent doesn't look so bad. Now you know you're in trouble.
Get the loan right from the start, and the house will work. If you start house first and then try to let the loan take care of itself, you've parachuted into the middle of a landmine.
Save yourself the trouble—take notes on my next point.
Prequalification—A Free Look for Both sides
In today's complex and fast moving world, realtors always present a prequalification letter along with their offer to assure the seller that the buyer is qualified to purchase the home. The problem is that many realtors will simply call a buddy for a prequalification letter so he or she can present the offer. It's a troublesome part of the business that hurts the buyer more than anyone.
Excerpted from 15 YEARS ARE PLENTY by ROGER SCHLESINGER. Copyright © 2013 Roger Schlesinger. Excerpted by permission of AuthorHouse.
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