Fannie Mae and Freddie Mac, the nation's two largest buyers of home mortgages, recently enacted changes in how they use credit scores to assess risk and price loans.  If you have excellent credit so you think this may not affect you, think again!  The latest announcement will affect borrowers with scores as high as 719, generally considered to be A credit.

Up until recently, borrowers who got Approval recommendations from either of the two Government Sponsored Entities (GSE's) would enjoy access to the same interest rates regardless of credit.  In other words, it didn't matter if your credit score was a 610 or a 780; as long as the automated underwriting engine returned an Approve/Accept recommendation, your rate was the same.  However, in response to turmoil in the secondary market, the GSE's are attempting to properly reflect the additional risk present with lower credit scores and higher loan-to-values. 

The net result of these changes is that it will become more costly for borrowers with credit scores below 720 and LTV's above 60% to get a mortgage; it will become far morecostly for those with lower credit scores and higher LTV's.  For example, those trying to borrow 90% of the value of their home with credit scores in the 620's will now pay a loan level price adjustment of 2.75%.  In other words, it will cost you almost 3 points to get the same rate that a borrower with excellent will qualify for.

As you can see, your credit score is more important than ever before when it comes to obtaining a mortgage.  And you can expect these additional risk adjustments to make their way into other credit markets, like car loans, credit cards, and even insurance.  So what do you do if your score isn't where you want it to be?  Well, the first thing to do is to understand how your credit scores are created.  It's not simply just paying your bills on time, although that's certainly a big part of it.  Managing your ratio of utilized credit to available credit, limiting credit inquiries, and the length of your credit history are all important factors as well.

If you know your score needs improvement, or you know somebody who needs some credit advice, give me a call at (978) 853-7066, or Click Here to send me an email, and I'll be happy to send you a free report entitled "Everything you Need to Know About Credit Scores".

The words get bandied about in the press, on TV, and at the water cooler.  Recession.  Inflation.  Deflation.  Stagflation.  Depression.  But what does it all mean?  Are we really heading into a bad time for the economy?  And if so, what can you do about it to protect yourself?

The truth is that whatever you want to call it, the economic forecast doesn't appear to be particularly sunny.  Banks are losing billions of dollars in the value of the loan portfolios they hold, with further deterioration expected.  This has lead to a tightening of credit standards across the board, making borrowing more difficult for individuals, companies, municipalities, and believe it or not, banks!  Contrary to what you may have heard on the TV news, this issue is not isolated to those holding sub-prime mortgages.

The effect of this credit crunch has led to a downturn in economic growth, otherwise known as a "recession".  Or as government economists would say, "A period of negative economic growth", (as if calling a pig by any other name causes it to cease being a pig).  Some of the ways you'll see the impact of this credit crunch are:

• Restricted access to credit - borrowers who've traditionally had little difficulty in borrowing funds will find it more and more difficult to do so, regardless of their credit history
• Those that do qualify for borrowed funds will find the terms less favorable
• Cities and towns will find it more expensive to borrow money through municipal bond issues, perhaps causing local budget issues and higher taxes
• Employers will look to reduce costs - lay-offs are one of the most common methods used

Recessions are typically short lived downturns in the economic cycle.  However, in the event that the recent Fed action to lower short term interest rates causes an inflationary environment within this recession, we'll have a much mortgage dangerous scenario, commonly known as "stagflation".  Stagflation occurs when the factors common to a recession are coupled with rising prices.  Consider that for a moment; money is hard to borrow, unemployment is up, asset values are down, and yet prices are rising.  Think the 70's.

So what can you can do to protect yourself in the event the economy truly heads south?  Here are some tips:

1. Priority #1 is to make sure you have an emergency cash fund sufficient to cover at least six months of living expenses if necessary.  This is so important that if you need to borrow from home equity to establish this fund, you should consider it.  Remember, CASH IS KING!
2. Assuming that you've got #1 covered, you may wish to explore whether or not paying off your mortgage faster is beneficial in your circumstances.  (I don't normally advocate paying down mortgage balances any faster than necessary; in fact, I prefer interest only notes.  However, given the current environment, I do believe some people will be best served with applying more cash to their principle balance.)
3. If you have a 401K, or other retirement fund, make sure you're talking with your financial advisor to make sure your portfolio is staying consistent with the changing economic landscape.  In other words, if you're invested in bank stocks, you might want to look at something a little less exposed to the downturn.
4. Reduce or eliminate the use of consumer credit cards for purchases.  The cost of carrying credit card balances is poised to skyrocket, despite the recent cuts in interest rates.  Remember, banks are hemorrhaging cash, and they'll be looking to make it up where ever they can.

One of the primary causes of recession is the self-perpetuating phenomenon of expectancy.  As consumers expect things to get worse economically, they begin buying less and saving more.  And because the economy is so dependent on consumer spending, this behavior ends up perpetuating the very recession consumer's fear.  So in the interests of potentially averting a recession, I encourage you to hope for the best, be positive, and make good decisions about spending.  However, it makes sense to prepare for the worst by having some emergency cash, paying down debt, and managing your spending.

As always, I welcome your comments!

One of the consequences of the continuing decline in home values across the country is that lenders are beginning to feel a little uneasy about their portfolio of Home Equity Lines of Credit (HELOC).  As a result, several major lenders have begun freezing access to the untapped portion of their borrower's HELOC's, which can be a major hardship for those using their HELOC as a regular part of their financial plan.

HELOC's are 2^nd mortgages taken out on a property that provide a revolving line of credit that homeowners can access as needed, much like a credit card.  Many borrowers use these funds to bridge temporary gaps in income, or to cover expenses like college tuition, major home renovations, or repairs.  Others use the line as an emergency cash fund, which allows them to place more of their savings into less liquid accounts, like 401K's, annuities, etc.  However, once a lender freezes a HELOC, no additional draws on the line are allowed, eliminating the line as a means of borrowing additional funds as necessary.

The reason lenders are taking this action is somewhat complicated, but it has to do with the enormous liquidity problems the financial markets are dealing with, otherwise known as a "credit crunch".  In a nutshell, banks are only required to carry around 10% of actual liquid reserves on hand, meaning that if you have a $50,000 available equity line balance (or for that matter, a savings account balance), the bank only needs to have $5,000 on hand because the assumption is that everyone isn't going to show up on the same day and ask for their money.  However, given the enormous amount of write-downs banks have been forced to take recently (the composite total is in excess of $100 Billion!), they may be faced with the need to borrow funds to meet reserve requirements without the benefit of interest payments to offset the additional borrowing cost.   It's far easier, and less costly to simply lower the liability by reducing the available line amount. 

So far, this action has been largely confined to areas, such as large portions of California and Florida, as well as cities like Las Vegas and Phoenix.  However, many areas of Massachusetts are now considered declining market areas as well.  While to date I haven't heard of any lenders freezing HELOC's in our market, it appears to be only a matter of time before we can expect to see this sort of thing locally.  (UPDATE:  Since I originally wrote this column, I've heard from one of my clients in Amesbury, MA who had their HELOC chopped by $40,000 despite a perfect payment record, existing equity, and outstanding credit.)

So what can you do if you're dependent upon your HELOC to cover income or expenses in the near term?  The first thing to do is to assess your risk of a freeze of your line of credit.  Higher combined-loan-to-value (CLTV) properties are at the greatest risk, so try and find out what your total CLTV is.  First, get a feel for what your home is actually worth.  Look at what similar houses are selling for in your neighborhood in the last 3 to 6 months.  (Check out zillow.com for some comparison numbers.)  Next, add the outstanding balance on your first mortgage to the total line of credit on your HELOC; in other words, if you have a HELOC for $100,000 but only have a $50,000 balance, use the $100,000.  Finally, take that number and divide by the estimated value of your house.  This figure is your estimated HCLTV. 

If your HCLTV is higher than 95%, your risk of having the line frozen at some point in the near future is relatively high.  If your HCLTV is lower than 80%, then you're probably at low risk.  And if you're in the middle, there's a moderate risk of losing the ability to draw on your HELOC. 

If you're relying on the funds available in your HELOC for something really important to you, you may want to consider drawing those funds now and putting them in a safe, interest earning side account so you'll have the money available when you need it.  Whether or not taking this action is warranted is dependent upon how important those funds are to your current planning, and what the costs of taking the funds now will be. 

If you need advice on whether or not you should consider drawing on your HELOC, or you know someone who could use some sound advice, please don't hesitate to call me directly at (978) 853-7066, or email me at doncarter@myallstarmortgage.com.

Unless you've been vacationing on another planet for the last several months, you're no doubt aware of the crisis gripping the mortgage market.  While most of the attention is being paid to the "sub-prime" and "Alt A" markets, the uncertainty within the secondary mortgage market is or will be felt throughout the entire real estate market.  It's important to understand how all of this may affect you.

I won't attempt to explain how the secondary mortgage market works, and why it's in trouble.  That subject has been amply covered elsewhere.  Suffice to say that it is infinitely more difficult to obtain a mortgage today versus say December of 2006.  The purpose of this article is to call attention to the fact that the conditions we're dealing with will affect almost everyone that owns a home, and accordingly, homeowners should assess their risk of loss and take appropriate steps to mitigage it.

If you're currently in an Adjustable Rate Mortgage set to recast within the next 12 to 18 months, you're at risk of not being able to refinance into an affordable fixed rate mortgage when your reset date comes up.  This is because in many markets, property values are declining - in some cases, sharply.  In addition, lenders are agressively tightening underwriting guidelines to address the diminishing confidence in mortgage backed securities on Wall Street.  This will also lead to further interest rate increases to address the perceived higher risk associated with these investments.  Taken together, they make for a tight and uncertain mortgage market in the near term, as lenders can be expected (and already have) to lower acceptable loan-to-value ratios, meaning refinancing may not be a viable alternative to a recasting Adjustable Rate Mortgage.

Another area of risk related to this confluence of events is liquidity.  Many American homeowners have parked the majority of their wealth in their homes, considering home equity to be a safe place for their money.  However, in a declining real estate market, home equity can disappear quickly.  Relying on funds from future refinancing to pay for college, home improvement, retirement is very risky in the current environment because of the factors discussed previously.  In addition, unless a homeowner has access to liquid assets sufficient to cover expenses for 6 months or so, there is significant risk to home equity if there's an interuption in income due to job loss, major illness, etc.

To summarize, if you are currently in an Adjustable Rate Mortgage with a low initial rate, it makes sense to seriously consider refinancing now rather than waiting until your re-cast date.  Given the current uncertainty in the market, there's no guarantee that refinancing will be an option down the line.  If you are depending on using home equity to finance any future endeavors, it makes sense to look at harvesting that equity now so that you have the cash in hand - if your property value declines significantly, that equity may not exist any longer when you plan on taking it.

Football legend Bill Parcells is fond of saying "If you give a team an excuse for losing, they'll always use it."  Is that what some of us are doing now?  Latching on to the excuse that business is bad, rates are up, values are down, buyers aren't buying, sellers won't budge, blah, blah, blah?  The fact of the matter is that while business is off, there are still millions of Americans buying, selling, and refinancing real estate right now!  And most of us need only a very, very small percentage of that market to buy or sell with us to make a good living!

The next time you hear yourself answering the question "How's business?" with anything other than "Great!" (or some variation on that theme), call timeout, and start again.  Business IS GREAT!!  The market has a very healthy inventory of property, something for everyone, really.  Interest rates are still very, very low when placed in a larger context than the last 4 years.  Buyers can still buy with zero money down, and there has seldom been a time when there were more innovative solutions to meet your buyers lending needs than right now.  The economy is strong, unemployment and inflation are stable non-factors, and new technology to make our jobs easier seems to come out every day!

You're in a business where you're required to invest very little capital in order make a great living.  The barriers to entry are nominal, so when you've achieved enough experience and success, you can open your own shop with little trouble.  You can choose when to work, when not to work, who to work with, and who not to work with.  You can work where you want.  And most of all, when you do work, you can make a meaningful difference in the lives of your clients and their families.  How great is that!

So don't buy into the excuses.  Refuse to accept them.  And the next time you're asked, business is GREAT!!

Over 80% of Americans experience some degree of back pain during their lifetime.  While I would put myself in that category, having had a couple of bouts with some serious back pain, my wife happens to be among the unfortunate people that deal with debilitating back pain on a daily basis, such that she has been unable to lead a normal life for a number of years.  Because of her condition, my reticular activator is constantly in tune to issues with the back, and as such, I came across the work of a controversial doctor who specializes in back pain.

Dr. John Sarno is controversial because he believes that most back pain is not the result of structrual damage to the body or injury, but due to a condition known as Tension Mysosistis Syndrome, or TMS.  TMS is caused by emotional and psychological upheaval, and manifests itself as real pain, usually in the back, neck, shoulders, and some joints.  Dr. Sarno has had excellent results treating patients for TMS, and often these are people who have gone through years of pain, mis-diagnosis, and surgery.

I recently picked up Dr. Sarno's book, "Healing Back Pain: The Mind Body Connection" and have been fascinated through the first half of the book.  While I haven't completed it yet, I've read enough to feel comfortable in recommending it to others.  I know how desparate people with chronic pain are for a solution to their problem, so I wanted to put this endorsement out there prior to completing the book.  Once both my wife an I have finished the book, I will post a more thorough review.

With the plethora of mortgage terms available today, including terms of 40, even 50 years, how do you compare the overall cost of one mortgage versus another?  It's actually pretty simple - but before you do, you need to assess what the expectancy of the mortgage life is.  In other words, how long do you plan on keeping the loan.  For the purpose of demonstration, I'll use a 5 year term as that is about the average today.

Let's compare a 30 year fixed with a 40 year fixed, and assume that the loan amount, closing costs, etc., are all the same.  The only variable will be the interest rate, as you will pay a higher rate for the longer term.  The following chart illustrates the comparison:

As you can see, the total cost of the 30 year option is over $5300 less than the 40 year option.  If the $86 per month savings was consumed rather than invested, the savings is over $10,400!  Naturally, as the term lengthens, the cost savings of the shorter term increase when compared to the 40 year option.

To make this type of comparison yourself, you simply need a calculator, and an amortization chart.  Start with the loan amount, and calculate the payment for each of your scenarios.  Next, multiply the total payment by the expected term of the mortgage (in this example, the term was 60 months).  This will give you your total of payments over the term.  Next, calculate your remaining balance of each loan scenario at 60 months by referring to your amortization table.  Subtract this amount from your beginning loan amount to derive your equity gained.  Finally, subtract your equity gained from the total of payments, and you have your total cost!

This calculation tool can also help you to assess whether or not refinancing is a good idea - you can easily adapt this to compare a new mortgage with your present loan. 

Of course, the easiest thing you can do is to simply call a mortgage consultant and have the calculations run for you.  If you're shopping for a mortgage in Massachusetts or New Hampshire, I'd be glad to run your numbers for you!  Just call me at (978) 853-7066, or drop me an email at doncarter@myallstarmortgage.com.

I always get a little chuckle when I see "Senior Loan Officer" listed as someone's title.  What exactly does that mean anyway?  Are they eligible for Social Security payments?  AARP benefits?  Or are they looking to do business with those who are?

I remember not too long ago, a new Loan Officer joined the firm I was working with.  She had a lot of experience in real estate, but had never worked in lending before.  Over her first month or so, she came to me quite often with questions about how to do this or that, and I always tried to help; I couldn't help but notice, however, that she seemed to be asking the same sorts of questions over and over again, and some of them were quite elementary.  Then one evening while helping her with a pricing issue, I noticed her business card on her desk and had to bite my tongue to keep from laughing out loud.  Her title was listed as "Senior Loan Officer"!

My guess is that at some point in the past, titles actually had some meaning.  You probably needed to have a certain level of experience and expertise to put something like "Senior" anything on your card.  Today, it seems like you can put just about anything you want on your card.  I've seen so many different titles, I can't keep track of them all.  Mortgage Originator, Mortgage Planner, Mortgage Expert, Debt Specialist, Debt Manager, Equity Manager, Debt Reducer, Debt Consolidation Specialist, Mortgage Reducer, Mortgage Acceleration Specialist, Cash Flow Consultant...I could go on.  In fact, take all of those titles and add the word "Senior" and you've got a whole new category!

The truth of the matter is that today, you really can't tell anything about someone based upon the title listed on their business card.  I don't think you can infer a lot by the designations you see either, as most of us don't know what any of them mean.  Ultimately, they're just a little ego blast for the card issuer, trumpeting their often overblown title, and telling you nothing about whether or not they're someone worthy of your trust - which is all you really need to know.

As for my card, it simply lists the name of my company, our address and phone numbers, and my name - no title!  On the back, I've added a paragraph that describes how I work By Referral Only, and offers an 800# to call to learn a little more about me.  Give it a listen, at 800-323-8625, extension 1.  I think you'll find that it reveals a lot more about me than any title or designation ever could!       

You've probably heard the pitch - "Refinance your existing mortgage with no points and no closing costs!  It's the biggest no-brainer in the history of Earth!"  But is it really?  Why would some lenders choose to charge closing costs if there's an alternative with zero closing costs?  The answer may surprise you.

Let's take a moment to discuss what closing costs actually are, and are not.  Closing costs are those charges that are external of the loan itself, but are required in order to obtain the loan.  In most cases, the fees are third party expenses, such as the appraisal, the legal fees, government recording fees, lender fees, and credit reports.  In other words, closing costs are not just a way for lenders to stick you for more money; they are third party expenses that are paid for services necessary for your loan to be processed, and by law, must be treated as pass through expenses - whatever is listed on the HUD as being paid to a third party must reflect the actual cost of the service performed.  Now this is not to say that some lenders don't try to take advantage by packing on "junk" fees to pump up their revenue.  But that's very different than the blanket statement that closing costs are rip-off.  In reality, there is no mortgage with zero closing costs; only mortgages where your closing costs are paid on your behalf.  Why is that an important distinction? 

The reason is that the people pushing the "No Closing Costs" mortgage want you to believe that because of their volume, or bargaining power, or out of the goodness of their heart, they've eliminated all of your closing costs.  The reality is, they've just changed how you pay them.  For example, compare the interest rate on a $250,000 mortgage with zero closing costs, to one with $2500 in closing costs (which would be typical in MA).  Generally speaking, you'll see a difference of .375% on the interest rate, which equates to approximately $61 per month in payment.  So in exchange for saving $2500 in closing costs, you agree to pay $61 more per month in payments.  Is that a good deal?  Maybe, maybe not - it depends on what happens next.

Let's say that you go with the higher payment, and elect to pay closing costs through higher payments.  This will turn out to be a good decision if you decide to refinance or sell within in a few years of opening the loan.  However, if you were to keep this mortgage for say 10 years (and many people that opt for this program are placed into 30 year fixed mortgages), you will have paid out $7320 in higher payments over those 10 years to save $2500 in closing costs.  Even if you were to invest that $2500 at 8% over 10 years, that investment would only grow to approximately $5300 in 10 years.  All in all, it doesn't look like a very sound decision.

Now, I'm not going to tell you that there's no Free Lunch, because you already know that.  What I am going to suggest to you is that when evaluating whether or not a No Closing Cost loan is the correct choice for you, make sure you compare the total package to a full closing cost loan, and then measure those costs over the time you expect to keep the mortgage.  I think you'll find that it's not the slam dunk the No Closing Cost guru's would have you believe!

The difference between Mortgage Brokers and Mortgage Lenders is often times very subtle, and generally transparent to most borrowers.  However, understanding how they differ is important when selecting a company to handle this very important aspect of your home buying process.  Before we begin, let's take a moment to clarify the technical differences; then we can take a look at what those differences mean to you.

A simple definition for a lender is an organization that provides the funds being borrowed.  Within that broad category, there are direct retail lenders (Bank of America, Wells Fargo, your local bank, etc.), and wholesale lenders.  Retail lenders typically will offer only their bank's particular loan programs; a wholesale lender may have relationships established with dozens of lenders.  Both will generally underwrite their own files, and maintain as much control over the process as possible.  When your loan closes with a retail lender, they will generally be the servicer as well, meaning you'll make payments to them.  When your loan closes with a wholesale lender, they will usually have an arrangement in place to sell your loan to the ultimate investor.  Their fee structure can be convoluted as they can receive premium payments for delivering your loan at a higher rate without disclosing this information on the settlement documents.

Brokers, on the other hand, do not lend money, nor do they underwrite files.  Their role in the process is to arrange financing for borrowers, utilizing their access to dozens of investors to select the best fit for the client.  All of their fees are disclosed upfront, including any premium payments from the investor, and their accountability lies with the client.  It's here where we see how the differences between lenders and brokers manifests itself for the client.

Brokers work directly for the client, with an implied fiduciary responsibility.  With their fees disclosed in advance, brokers are free to negotiate with multiple investors to find the best fit for their clients needs.  When working with a retail lender, it's not the lenders responsibility to inform you that the bank down the street is offering a better program for you, or lower rates and fees.  The assumption is that as the client, you're responsible for shopping rates and fees; the Loan Officer's accountability rests with the bank, not the client.  Wholesale lenders are a little different, but ultimately, when they shop through their list of lenders to place your loan, they are shopping for themselves, not you.  In other words, they will place their loan with the lender that pays them back the highest premium, not necessarily the lender that's the best fit for you.  And again, because this all happens in the background, most clients aren't aware.

Choosing whether or not a broker, retail lender, or wholesale lender is the right fit for you is a personal choice, based upon your own set of circumstances.  Being more informed about the differences between these various options should help you make the best decision for you!