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March 2011

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Pegasus Financial Real Estate Blog

Spring is in the air!

Maybe thatísí why some of us are sneezing.  I love spring, but I do suffer occasionally from allergies that tend to ruin the mood. Itís time to play in the dirt, plant things, trim others, and remove anything in the yard that died recently.  I know Lowes and Home Depot love spring.   Lots of seed and fertilizer to sell. I am definitely looking forward to some really good strawberries and tomatoes.

 The Truth?  All truth passes through three stages. First it is ridiculed, second it is violently opposed, and third... It is accepted as self-evident.    Arthur Schopenhauer

*I guess this was just his way of saying we are slow to wake upÖ.

IDIOT SIGHTING:

 The instruction manual for the VW Beetle was loaded with stupid instructions. It's been awhile since I read the manual, but the one I remember most clearly is: ďDo not travel with water or objects in the flower vase in the dashboard.Ē 

ĎYet anotherÖ

I was signing the receipt for my credit card purchase when the clerk noticed I had never signed my name on the back of the credit card. She informed me that she could not complete the transaction unless the card was signed. When I asked why, she explained that it was necessary to compare the signature I had just signed on the receipt.  So I signed the credit card in front of her. She carefully compared the signature to the one I had just signed on the receipt. As luck would have it, they matched. 

 HELOCs.  Home Equity Lines of Credit.

Should you be concerned about yours?

Many of these loans are ticking bombs, especially if they are a large part of your debt structure.  They are always good to have in case of emergency, but they may not be a great long term solution because of their variable nature. They are usually based upon the prime rate, which is a short term interest rate which can be volatile. Right now the rate is absolutely awesome. However in the early going the minimum payment is often interest only, so you are not reducing the level of debt..  Eventually these loans amortize and must be paid off, usually in 10 to 15 years.  Couple that with increasing interest rates, and that payment could triple. If you owe $10,000 or even $50,000 that might not hurt too much, but many people have credit lines of hundreds of thousands of dollars. If this is you perhaps you should consider refinancing now while rates are low, even if you payment goes up.  Youíll be glad later. You never know how long these rates are going to last.

Notable QUOTES

Prosperity is only an instrument to be used, not a deity to be worshipped.         Calvin Coolidge
 

Pegasus Financial

714-782-7345 or 800-200-9329

Adjustable rates: Reprieve or time bomb?

Adjustable rate mortgages have their place.  There are not as many of them around as there once was. There are a lot of adjustable rate mortgages still in play, including some pretty dangerous ones.  Right now they are saving some people because the indexes are so low.  This especially applies to some of the old Option ARMS.  You know, the ones that would get bigger because most people would make the minimum payment that wouldnít even cover the interest.  Most of these have reached the point at which they are no longer negatively amortizing, but the rates are down so low that they wouldnít go negative anyway.  Most of these loans are based upon indices that will not adjust rapidly when rates do go up, but when they do reach their peak they may double or triple your payment eventually. They donít go down quickly when rate improve either.  Feel free to call me if you have questions, and donít be afraid to pull out your Note  and read it.

What to do?ÖIf you have one of these beasts there are things you may be able to do.  You may be able to refinance now while rates are low to get rid of it. You may be able to talk to the lender about safeguards or fixing in the rate. I have not seen lenders real exited about doing this, because they donít have to, but itís worth a shot.

One thing you can do without permission is to take advantage of the low rate while you have it. This means either paying down on the balance while the rate and payment are low so you wonít have as much to deal with when it does go up, or setting the extra money aside so you will have the money available to pay down when the payment does go up.  The rate on some of these adjustable mortgages is sometimes so low that you can take the money and invest it at a higher return than what the bank is charging you, and make money on the deal. Whatever you do, donít make it nothing. Failing to plan is planning to fail.  Rates will go back up.  They always do.  If you have prepared you will fare much better than if you didnít.

For information on how credit is evaluated, or for how and where to dispute erroneous credit, visit our website at www.PegasusFinancial.net.  There are links to the 3 major credit reporting bureaus, and lots of helpful information. 

 

The New TILA 2011 Truth in lending?

On of the problems with laws governing our industry is that they are trying to substitute rules for ethical conduct. While rules and regs provide guidance and set a method of enforcement, it is my belief that they are no substitute for ethics and ethical behavior. Rules and regulations are necessary in our industry, but sometimes you can get too much of a good thing.  There are times in which they actually inhibit behavior that is beneficial to the very people the purportedly are protecting.

The Dodd-Frank financial reform bill reaches into this arena. I donít feel it is beneficial for the Federal government to micro-manage the financial industry with provisions that handcuff us to the point that it creates more injustice than it prevents.

At least that is my take on what it does to loan originators. It doesnít severely limit how much we charge, but it does limit our ability to modify terms to be competitive or to right wrongs that may occur within the context of an individual transaction. We have been prohibited from reaching into our pockets to pay for things that may come up during the course of a transaction on order to facilitate the equitable closing.

The banks institute adjustments based upon loan amount, :LTV, and credit score in addition to charging a flat administrative fee on every loan to keep them both competitive and profitable.  However, under the provisions of the Dodd-Frank bill we as originators are not allowed to do this. This may be why the bill received support from mortgage giants such as B of A and Wells, and was opposed by mortgage Brokers and Bankers.

My question is why the need to get so involved with the compensation of individual loan originators and their clients?  Some conspiracy theorists have suggested that the intent was to make it more difficult for small firms to compete and force the bulk of them out of business. My feeling is that it was very likely a concern of the lobbyists who participated in the creation of the legislation. Several lawsuits challenging this aspect of the bill are pending.

 

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Those great rates

5/1, 7/1 and 3/1  ARMS

One of the loan programs getting attention again is the hybrid ARM or fixed adjustable rate mortgage. You know the ones that are fixed for 3,5 7, or 10 years initially, and then adjust after that.  They also may have an interest-only period at the front end to keep the payment even lower.

 

These are situational loans, so if you decide to get one make sure it fits your personal situation.  If you are going to definitely have a house less than 10 years they may be something you should consider because they can save you thousands.  Just be careful about the definitely part.  Rates are incredibly low now, but may not be down the road. Refinancing may not be an option when you need to do it. You may have difficulty with the equity on income requirements down the road, or interest rates may be too high to be affordable.  To be honest, most of the 30 year loans I have gotten in my life would have been better served with a 5 year, but I didnít know that at the time, and I would have hated to have that particular decision to move or refinance made for me.  Iíd be happy to discuss your options with you if you think a loan at 3% for 5 years makes sense for you.  Of course, they donít end at the end of the fixed period, the just become adjustable.  There are also caps that keep the rate from going through the roof. Bu if your just making it a 3% it wonít be any easier at 8% if the rates happen to go that high down the road.

Challenge everything. It takes effort, more than most of us have time for, but if you want to understand the world we live in it is of the utmost importance.  LL

Pegasus Financial

800-200-9329

 

 Loan Modifications have helped a lot of people, but continue to take along time to get, and generally damage your credit, at least for the short term. This is because frequently people stop paying their payments, often to get the attention of the lender.  It is true that if you are making your payments on time they will not give you much credence, even if you are borrowing the money to make those payments. Keep in  mind that if you are not successful in getting the modification that not making you payments may lead to you losing your home, damaging your credit even further in the process.  Lenders are in the business to make money, and if you arenít paying them they arenít making money and they have every right to take action.  Also remember that if you are granted a loan modification the arrearages will be worked into the loan rather than forgiven. The late fees are generally waived if your modification is approved.

 There is a formula that they use to qualify you for the modification.  Generally your housing expense should end up being around 31% of your take home income, and your expenses canít exceed 100% of your take home income.  In other words, you can be disqualified for making either too much or too little.  If you make too much and can afford your payments you are not going to be approved.  If you do not make enough to cover your expenses you will also likely not get approved because a modification will just delay the inevitable.  Often candidates for loan mods are people who suffered lost or reduced income, but have either become re-employed or jus had their income curtailed enough that they couldnít make a high payment, but can make a lower one.  There is usually a trial period after the initial approval in which the reduced payments must be made on time or the modification is cancelled. Unfortunately a lot of people who get modifications have not kept their end of the bargain.

 If you do get a loan modification, be sure you keep on top of things and stay current with your payments. The rates are usually very, very good, and you likely will never ever be able to refinance at a lower rate.  It is a gift that should be appreciated.  Also, since your credit is often damaged, getting back into the housing market will be difficult.

 I am still a big believer in the temporary loan mod, given quickly once documentation is reviewed.  Since it is temporary any error can be corrected.  I have seen too many times in which a borrower does not make payments for an extended period. Better to have a borrower make a reduced payment than none at all. Loan modifications take so long that it costs the banks money , not to mention the borrower. It may be better for the lender to take a reduced payment for a few years to keep the borrower in the home, and hope that the economy turns the corner.  

I remember when I was young that I used to get out of bed and get ready to go in a very short time.  I never understood why it took people so long to wake up and get going.  I am sure I drove my parents, and everybody else nuts.  I now understand what it is like to awaken slowly.  I am not fully conscious until the second cup of coffee, and sometimes that is questionable.  Iíd like to think I am more even-keel about things, but I think thatís only on good days. My advice to the younger generation as almost never well taken (Imagine that!) The donít really want to hear that they should take care of their teeth and their backs, stop smoking & arguing and start exercising.  Sorta like we work, donít you think?ÖExcept for the smoking part. Tried it once, hated it, done with it. By the way, if you let you kids take a puff of an unfiltered cigarette at age 8 you might have the same result. 

 

Interest Rate Indices

 

Prime Rate

3.25%

 

Federal Funds Rate

.14%

 

 6 month  LIBOR

(London Interbank Offered Rate)

 

Never confuse movement with action.

Ė Ernest Hemingway

 

Nobody believes the official spokesman, but everybody trusts an unidentified source.

Ė Ron Nesen

 

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