Every year thousands of people make big purchases on their homes. These new homes come equipped with all the latest amenities like granite counters, new appliances, the fresh smell of paint and new carpet. Borrowers are very excited to move to their new furnished home. It’s that home for which they have worked so hard to own. Later, facts start coming after the second year of their living on that home. The property tax comes due. Follow this simple illustration below. I and my wife together purchased a home for $200,000 in July of 2007.

Since the home was new, the taxes were on the land only since it’s an unimproved property. The tax was calculated by the cost of the land times three percent or $35,000 x 3% making the total $1050 per year or eighty-seven dollars per month. Everything is going fine until the taxes hit in the month of November 2008. Now, the new taxes will be calculated on the basis of improved property times three percent or $200,000 x 3% making the total new tax bill $6000 dollars per year or $500 dollars per month. Based on the old escrow account, I would have saved eighty-seven dollars per month times twelve months in the year. I accumulated $1050.00 but owe $6000. I am almost 5000.00 short in the escrow account. In case, I can’t come up with that money, the mortgage company will gladly pay it for me.

Now, since the mortgage company has paid my taxes, they will increase the mortgage payments by $500.00 per month to recoup the money they paid the taxes with and adjust the payment by $413.00 dollars per month to set the new escrow account up correctly. At the end, I realize that my mortgage payments have jumped up by almost $1000. I may not be in a situation to afford the new payment. The bank will foreclose the property and I will have to move to another apartment. My credit is ruined and the dream is turned over to a hard terrible reality.

Now, the question in your mind that comes first is to have a solution for a situation like this. First, it’s very important that you deal with a reputable mortgage lender. He will give you the time to explain how to set up the escrow account correctly. Anytime, when a new deal is finalized, the lender has the option of working with the borrower and set up the escrow account in such a manner so that you don’t fall into a shortage. They can set it up on the basis of improved or unimproved taxes. It’s always a good decision to have more than sufficient in your escrow account than to run short of the required amount. Before the escrow account shapes up a big problem, it is better to have a solution always ready and it can only happen when you have the required funds available. At the end you must question yourself one thing. Can you afford for a $1000.00 per month jump in your mortgage payment?

The annual percentage rate (APR) is an interest rate commonly used to compare the loan programs offered by different lenders. As per the laws in Federal Truth in Lending Act, every mortgage company is required to disclose the APR when they advertise their rates.

Example:

30-year fixed

8%

1 point

8.107% APR

This APR will not have any affect on your monthly payments. Your monthly payments are set on the basis of the interest rates and the length of the loan.

APR is designed to measure the true cost of the loan. Sometimes, lenders don’t show the actual rate of the loan and they tend to charge any hidden fees after the loan is granted to the consumer. APR helps to understand the actual cost of the loan and stop lenders from advertising a low rate or any hiding fees in the beginning.

Every lender calculates APR in their own way. So a loan with a lower APR may not be the best deal that you have got from the market. The best way to compare loans will be to ask lenders to provide you a good faith estimate of the actual costs on the same type of program at the same interest rate. then you can subtract all fees that are independent of the loan such as homeowners insurance, title fees, escrow fees, attorney fees, etc. The lender that has the lower loan fees is cheaper than the lender who charges high fees.

In most of the cases, it’s pretty hard to compute APR because the fees are actually not well defined. Go through the fees mentioned below.

These are generally included in the APR:

• Points - both discount points and origination points
• Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
• Loan-processing fee
• Underwriting fee
• Document-preparation fee
• Private mortgage-insurance

The following fees are SOMETIMES included in the APR:

• Loan-application fee
• Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)

The following fees are normally NOT included in the APR:

• Title or abstract fee
• Escrow fee
• Attorney fee
• Notary fee
• Document preparation (charged by the closing agent)
• Home-inspection fees
• Recording fee
• Transfer taxes
• Credit report
• Appraisal fee

An APR will not tell you the duration for which the rate is locked. A lender offering 10 day rate lock might have a lower APR than another lender who offers a 60 day rate lock.

Never compare a 30 year loan with a 15 year loan using their respective APR. A 15 year loan may have a lower interest rate but the APR might be set high because the loan fees are amortized over a shorter period of time.

Sometimes, even the lenders are not certain about the APR they are charging on the loans. There may be different results on calculating APR because of using different software programs to compute the APR.

APR is a very complex calculation and not clearly defined. Always get a good faith estimate from the lenders and compare the costs. And make sure that you exclude those costs that are independent of the loan.

Interest rates on mortgages fluctuate on daily basis. The difference in the today mortgage interest rate and the mortgage interest rate tomorrow may be of only a few points, but these few points too make a big difference in the amount to be paid as interest depending how big your principle loan amount is. Thus if there is a gap of many days between the time you have taken a mortgage rate quote from the lender and the day you close the mortgage deal, check the rate applicable on the mortgage. You can even lock the mortgage rate depending upon the policy of the lender.

In order to get an accurate today mortgage interest rate you need to take a good look at the trends in the factors that determine the mortgage interest rate. There are various macro level and micro level factors that determine whether the today mortgage interest rate will rise up or see a downfall. Let us see what these factors are.

• Macro level factors affecting today mortgage interest rate:

Macro level factors are those that are related to the economy as whole. They would include:

1) Inflation Rate: A rise in inflation rate in the economy leads to rise in mortgage interest rates too. As higher inflation indicates growth in the country’s economy inflation rate depends on various indicators like Consumer Price Index (CPI), Producer Price Index (PPI), rise in Dollar rates, etc.

2) Inter Bank lending rates: Mortgage rates widely depend on the movement in the credit market, which includes many financial intuitions like banks. Thus the fluctuation in rates at which inter bank lending takes place results in fluctuation in mortgage interest rates too. Thus change in Federal Fund Rate, LIBOR (London Interbank Offered Rates), 12-month Treasury average (12 MAT or 12 MTA), Cost of Funds Index (COFI), and Constant Maturity Treasury Index (CMT) indicates change in today mortgage interest rate.

3) Stock Market: The stock market and mortgage market have a great effect on each other. That’s because mortgage rates basically depend on the fundamentals of demand and supply and ups and downs in the stock market have a major impact on the credit supply in the financial markets.

Though most of the mortgage loan rates are based on bank interest rates, sometimes the supply and demand forces have a larger role to play. Thus it is quite possible that today mortgage interest rate may move in a different direction than bank interest rates.

• Micro level factors affecting today mortgage interest rate:

Micro level factors are those that are related to an individual, i.e. the prospective borrower. This means that mortgage interest rate also depends upon your requirements as the borrower. Thus if the amount of loan is going to be high as against your income level then the rate of interest will also go up as the risk factor to the lender increases. Similarly interest rate for shorter-term loans would be lower than the long-term ones.

Also if you make higher down payment or discount points, lower will be the interest rate quoted to you. Your credit history and your current credit rating have a key role in reckoning the today mortgage interest rate.

In our previous article we looked at mortgage interest deductions. Now we go through the details of whether points paid are also deductible or not and if they are, would the full amount of points be deductible in the year they are paid.

But let us first start by looking at what are points. Points generally are the charges paid or treated as paid by borrower to get a mortgage. These are also called as loan discount, maximum loan charges, discount points or loan origination fees.

A borrower can fully deduct points in the year they are paid if the under mentioned conditions are satisfied. If all these conditions are not met then borrower has to deduct them equally (ratably) over the term of the loan only if certain other requirements are fulfilled (we will look at those requirements in the following sections).

Points deduction allowed in the year they are paid if –

1. Paying points is a common business practice in the area where the mortgage was made.

2. Borrower uses cash method of accounting. It means that borrower reports income in the year it is received & deducts expenses in the year they are paid (a good percentage of individuals use this method).

3. The mortgage is secured by borrower’s main home. (Main home is defined as the one in which borrower lives in most of the time)

4. Points paid are not more than what are normally charged in the area borrower lives.

5. Funds borrower provides before or at closing plus any points seller pays, are at least equal to the points charged. Funds borrower provides need not be applied to the points. It can be used for down payment, earnest money, escrow deposit or other similar funds borrower pays for before or at closing. But these funds cannot be borrowed from mortgage broker or lender.

6. Points were not paid in place of fees which are ordinarily stated separately on settlement statement, like, title fees, appraisal fees, attorney fees, inspection fees, & property taxes.

7. Points paid are computed as a percentage of mortgage’s principal amount.

8. The amount is shown on settlement statement as points charged for the loan. It is however allowed to show the points as paid from either seller’s or borrower’s funds.

9. The mortgage is used by borrower to build or buy his main home.

If all the above mentioned conditions are met then borrower can select between either deducting them over the term of his mortgage or fully in the year they are paid.

Now what happens if the mortgage was taken for home improvements, a second home or if it was a refinance mortgage?

• Borrower can fully deduct the points in the year they are paid on a mortgage taken for home improvements if the first six conditions mentioned above for “points deductions allowed in the year paid” are met.

• For a second home borrower cannot fully deduct points the same year they are paid. These can only be deducted over full term of the loan.

• Points paid to refinance a mortgage cannot be deducted in full in the year they are paid. However, if part of the proceeds of the refinanced mortgage are used to make home improvement & the first six above mentioned conditions are fulfilled then borrower can fully deduct that part of points which is related to the improvements in the same year they are paid from own funds. Rest of the points will have to be deducted ratably over the term of the mortgage.

If a borrower cannot meet the conditions to be able to fully deduct points in the year they are paid, mortgage is not taken for home improvements or he selects not to deduct them in the same year, then those points can be deducted equally over full term of the mortgage if following conditions are met:

a) Mortgage is secured by a home (need not be the main home).

b) If mortgage if for more than 10 years, then loan terms are same as those for other loans offered in borrower’s area for same or longer periods.

c) Borrower uses cash method of accounting.

d) Mortgage period is not more than 30 years.

e) Mortgage is for $250,000 or less, or number of points is not greater than –

i. 4, if mortgage is for 15 or less years, or

ii. 6, if mortgage is for more than 15 years.

Many borrowers think of certain amounts charged by a lender for specific services like, notary fees, VA funding fees, appraisal fees, mortgage insurance premiums, and preparation costs for the deed of trust or mortgage note as part of points. But it is not true; these amounts cannot be deducted as points in the year they are paid or over the term of the loan.

According to a study conducted by a nonpartisan research & policy organization called Center for Responsible Lending, more than two million people who had taken subprime mortgages are facing foreclosure this year & about 20% of such mortgages drawn between 2005 & 2006 have been projected to fail!Other disconcerting news is that few subprime lenders have filed bankruptcy this year and many others closed last year. Some observers are putting the blame on predatory lending & ignorance on borrower’s part about terms & conditions of the mortgage they were taking.In this article we will try to look at the causes because of which this crisis developed and how it is affecting us.

Subprime mortgages are available for consumers with poor credit records or those who cannot prove their income which would be required for making monthly payments on the loan. This type of loan is considered risky for lender as well as borrower due to combination of bad credit profile, high interest rate on the mortgage and unclear financial position of loan applicant.It all started from late 2003 through early 2004. At that time Federal Reserve Board had started encouraging lending institutions to introduce new adjustable mortgage rate plans in the market.Meanwhile in this same time period Federal Reserve Board raised mortgage rates from 1% to 5.25%, making ARMs beyond the reach of borrowers. And those who had taken ARMs during that period are now having problems continuing their mortgages and are facing foreclosure.

As many mortgages started going into default lenders were not able to recoup their losses. It resulted in severe credit crunch and threatened solvency position of numerous private banks & lending institutions.

The subprime crisis has been a mix of:

• Predatory lending by subprime lenders.
• Low level of effective government oversight.
• Wall Street investors not verifying strength of portfolios before backing subprime mortgage securities.
• Borrowers over-stating income on mortgage applications to qualify for loans.

Major steps have been taken by world central banks to stabilize the current situation -

1. Central banks all over the world have started coordinated efforts to increase liquidity of their currencies. This liquidity would thus result in stabilization of foreign exchange rates & stem further fall in US dollar and it being sold off. These steps would help prevent significant global consequences a run on US dollar would cause.

2. Federal Reserve has injected 43 billion USD, while European Central Bank & Bank of Japan has injected 191 & 8.4 billion USD respectively to stabilize the situation.

3. To make sure that Federal Funds rate trades at the target rate Fed has injected $30 billion and a further $38 billion for lowering the effective Federal Funds rate.

4. Federal Reserve has cut the discount rate by half a percent (from 6.25% to 5.75%) & left federal funds rate unchanged to help stabilize financial markets.

5. Federal Reserve has added another $31.25 billion in temporary reserves to keep credit markets from drying up. These reserves are temporary loans for banks which use securities as collateral.

Apart from these steps taken by central banks, House & Congress are both considering bills to regulate lending practices. Regulators are also looking at rating agencies which may have played a role in rating securitization transactions containing these subprime mortgages.

Many economists think that this current situation can take the economy into recession as now lenders are starting to tighten their standards, thus making it difficult for consumers to get loans.

Contrary to belief of such economists, Ben Bernanke, Chairman, Federal Reserve has clearly told Congress that crisis in subprime mortgage sector has certainly caused severe financial trouble for numerous individuals & families, but it will not have an affect on overall economy.

Find about mortgage interest deduction in our next article here:
http://www.financenewspro.com/mortgage-interest-deduction/