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Can You Really Afford That Mortgage

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					Can You Really Afford That Mortgage?
Lawrence Ward Instructor

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You will learn
 If your loan is putting your home at risk for foreclosure  How to avoid a bad mortgage  The pros and cons of fixed-rate versus adjustable rate mortgages  When it is a good idea (or not) to refinance  Are you a good candidate for refinancing
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You will learn
 The right questions to ask a mortgage broker or loan officer  Tips for making the refinancing process go a smoothly as possible  Tips to help you avoid scams and fraud.

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Class questions: True or False
 Mortgage lenders are required to give you the lowest rate available  If the lender is willing to lend me the money for my home, I must be able to afford it.  I can always refinance my mortgage in the future.

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Good reasons to refinance your home
 To lower the interest rate on an existing mortgage  To shorten the term of an existing mortgage  To make needed maintenance and repairs to your home  To convert to a mortgage that you are able to afford
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Not so good reasons
 To consolidate unsecured debt  To spend on clothes, vacations, fun  To make risky investments  Because you heard it was a good idea  Because you received a phone call or someone knocked on your door.

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Terms you should know
 Equity – The difference between what your home is worth and what you owe (mortgages). Equity can be negative or positive.

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Terms you should know
 Index – The base interest rate for adjustable rate mortgages. Common indices
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Treasury Bill (T-bill) Rate LIBOR London Interbank Offered Rate Prime Interest Rate

 Note: If you have a subprime product, you may not be able to track your index.
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Terms you should know
 Balloon payment – A payment of the remaining balance of the loan. If a mortgage has a balloon payment clause, you will have to find the money to pay the balance.

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Terms you should know
 Prime Mortgage – mortgage products available to those with good credit (FICO score 620 and above).  Sub Prime Mortgage – Mortgage products available to those with fair to poor credit (619 and below) or excessive debt (combined ratios over 41%). These products have higher interest rates and higher closing costs.  You do not have to have poor credit to be offered a sub-prime loan!
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Terms you should know
 Fees – The lender’s charge for processing your loan. This includes reimbursement for expenses. These are usually paid as closing costs. Normal closing costs will range from 1% - 5% of the loan amount. Mortgage brokers may charge you an additional fee for finding your mortgage.
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Is your loan unaffordable?
 You may be able to refinance to a more affordable mortgage.  Your current lender may work with you to change the terms of your loan.

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Mortgage Examples
 We will use a $300,000 mortgage to demonstrate the payments over the term of the mortgage without prepayment.  Closing costs should range from $3,000 $15,000 on these mortgages.  You may pay these costs in cash or if available, from the equity in your home.
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30-year fixed
 The monthly mortgage payment (principle and interest) for a 30 year fixed rate mortgage for $300,000 at 6.25% is $1847.15  Over the 30 years, a portion of the principle will be paid for each month until the $300,000 is paid off.  Taxes and insurance may increase.  See handout page 1

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2/28
 The example loan terms are  Interest rate 5.75% for first 2 years  Adjust 1% annually  Interest rate cap 11.75%  Initial payment lower than 30 Year Fixed but exceeds 30 year fixed in year 3

 See Handout page 2
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Blended Mortgage
 Also know as Piggyback loan, 80/20  Two mortgages
one based on regular mortgage rate  one based on an indexed (Prime, LIBOR, T-bill) rate  The example loan terms st  1 mortgage $240,000 @ 6% nd mortgage $60,000 @ 9.5%  2
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 See Handout page 3
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Interest Only ARM
 The example loan terms are  Interest rate 5%  Adjust .25% annually  Interest rate cap 12%  Initial payment lower than 30 Year Fixed but exceeds 30 year fixed in year 10  At the end you still owe $300,000.  See Handout page 4
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Optional Payment
 You have the option of making minimum payments, interest only, 30 year amortization, or 15 year amortization payment.  The difference between the minimum payment and interest only payment is added to the principle.  You will owe more than you borrowed to pay for the house (negative amortization) over 30 years.

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Optional Payment
 The example Loan terms  Interest rate 7% until option terms expire  Optional payment interest rate minus 3%  Adjust .25% annually  Interest rate cap 12% See handout pages 5 - 9
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Before applying for a mortgage
 Get a copy of your credit report and credit score to review for accuracy. (Handout page 11 and 12). Correct inaccurate information.  Determine if you are you eligible for a prime or subprime mortgage.  Gather necessary financial information (Handout page 13 and 14).  Determine how much can you afford to pay each month.
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Before applying for the mortgage
 Calculate your debt/income ratio.  Fill out a copy of the Uniform Residential Loan Application. (Handout Pages 15-18)  Shop for a mortgage.(Handout Pages 19 – 26)

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After applying for the mortgage
 Receive from the lender and READ
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Truth in Lending form - Handout page 27. Real Estate Settlement Procedures Act (RESPA) The Consumer Handbook on Adjustable Rate Mortgages (ARMs) Buying Your Home-Settlement Costs and Helpful Information Good Faith Estimate of Closing Costs
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Ready to close?
 Request and review a copy of the HUD Settlement Sheet (HUD-1) at least one day before closing (Handout page 29).  Attend closing – bring all documents that you have received from the lender

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Closing
 At the closing – review documents for accuracy including  Mortgage application  Review the mortgage note for the correct mortgage term, payment, interest rate.  Remember – YOU DO NOT HAVE TO SIGN THE DOCUMENTS IF THEY ARE NOT WHAT YOU EXPECTED.
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Closing
 If you are refinancing, the closing will take effect in 3 business days (includes Saturdays).  Take copies of all signed forms from the closing with you and put in a safe and accessible place.

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Fraudulent Practices
 Signing an application that you know does not accurately reflect your income.  Misrepresenting your income to get a mortgage.  Appraising a home for much more than it is worth

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Deceptive Practices
 The lender changes rates and terms at the closing.  The lender assigns an index to an adjustable rate mortgage that is not easily tracked.  The lender does not provided copies of the signed documents at the closing.  The lender does not provide appropriate disclosures during the mortgage process.

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Things to consider
 Refinances and getting cash back at the closing are not generally free. Closing costs and extra cash are deducted from the proceeds of your loan.  The index on an adjustable rate loan should be easy to track in the newspaper or on the internet.
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Things to consider
 The value of your home on the appraisal report should be consistent with the value of other homes in your neighborhood.  If you paid for the appraisal, you own the appraisal. Get a copy.  If you do not complete your own application, you should review it for accuracy before signing it.
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Things to consider
 You should request an amortization schedule (schedule of payments) for at least ten years of the best and worse case payment scenarios.  You should have a “Plan B” in the event that the closing does not go well. This will include being prepared to pay the bills you would have paid from the proceeds of the refinance.  You should review documents at closing before signing.
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Things to consider
 “You can refinance again next year” is not a good answer to getting a bad mortgage.  Ask your lender any question about your loan and expect an answer.  If you are borrowing money to repair your home, do not borrow money through the contractor.
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Things to consider
 The City of Boston offers grants and loans that will allow you to repair your home. Call Boston Home Center for more information.  Only the mortgage lender can guarantee a rate-lock. Brokers cannot.

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Things to consider
 The current normal interest rate for a 30 year fixed rate mortgage is between 6 and 6.5% for an owner-occupied home. If your mortgage is below 5% or above 7.5%, ask a lot of questions.  Check the Attorney General’s office for lenders involved in fraudulent practices (617)727-8400.
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Things to consider
 Work with companies and lending professionals with reputations for selling good mortgage products.  Getting a loan that will put your home in jeopardy is never a good idea!

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