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Posted by Joel Britt on April 24, 2005, 11:19 pm
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To the original poster:
Your current mortgage situation is not uncommon. Everyday, all over the
country, people just like you will an 80/20 to avoid mortgage insurance.
Brokers, like myself and Jeff, will tell people that it is a good idea and
it is, but there are alternatives.
Other than the terms being somewhat confusing do to the fact that it is a
variable rate that can increase at anytime with no warning, you need to take
into account how it will also affect your credit score. At this point, you
have a $69,000 credit line which is essentially maxed out. If you run your
credit in 6 months, you will find that your scores will have probably
dropped by atleast 40 points or more. Thats not good.
If you can afford to pay an additional $1000 per month to apply toward your
principle you might be better off refinancing the home and making a higher
payment at a fixed rate. I would recommend a 95% rate/term refi with TAMI -
Tax Advantage Mortgage Insurance. TAMI is a PMI alternative where instead
of paying PMI, you would pay a slightly higher interest rate, that way the
additional monies you pay each year are still tax deductible.
The bottom line is, you obviously don't like the HELOC you have - guess
what, it's only going to get worse. The fed raises that rate .25% everytime
it increases it, and the rumor is that it may raise 2 more times this year.
Get out of it. Talk to Jeff, he will probably agree with me.
Joel Britt
NationOne Mortgage
Columbus, Ohio
>
>> Jeff:
>>
>>
>> I certainly appreciate your detailed answer.I will try to explain a bit
>> more throughly what I am looking at.
>>
>> The 20% portion of the loan is a 'personal credit line' based on
>> revolving credit. I fully understand what you have explained in terms of
>> deductibility on mortgage interest payments.
>>
>> While I admit I apparently didn't dig deep enough on the ramifications
>> of this loan, this is what threw us.
>>
>> The loan was initially for $65,000 at 6.00%
>>
>> We know that the rate on this can float from month to month. It opened
>> at 6%
>>
>
>
> Based on what you have said so far, you have a Home Equity Line of Credit.
> It is based on Prime + a margin, however the Prime hasn't changed .625, it
> has changed .500 or .750, depending on when you got it, but it has not
> changed .625, AND your margin hasn't changed at all.
>
> I am not in the position to argue the point that you have a personal loan
> or an Equity Line, but as a lender I can assure you that I have never
> extended a personal line in your circumstance, in all instances, I would
> extend a Home Equity Line of Credit.
>
> By extending an Equity Line, then I can put my name on title as a loss
> payee in the event you default on the loan. If I extend a Personal Line,
> then I am not sure I can get on title, and my interest is unsecured -
> meaning that I would have difficulty collecting on my interest if you
> defaulted. I might still lend money, but the rate wil be higher to protect
> my interests. Given the rate quote that you gave us, I can't help but
> think you have a HELOC and not a personal line.
>
>
>
>> The first invoice we received was for a payment of $228.33.
>> I don't know why that due amount was lower than expected. I will ask
>> them but feel it might have something to do with our closing date (not a
>> full 31 day billing cycle).
>>
>
> Well, your 1st trust deed has its payment due on the 1st of the month,
> your 2nd trust deed can be due on any day of the month. When your loan
> closed, the 1st had an interest charge that brough the interest due up to
> the 30th of the current month, and you interest began accruing on the 1st
> of the following month, and was due for you to make a payment on the 1st
> of the subsequent month, and on the 1st of each month thereafter. The 2nd
> can be due to be paid on any day, the 5th or the 15th for example. Since
> your first payment due might not have been a full month, it would be short
> relative to the other months.
>
>
>
>
>
>> In any rate, a few days before due date we paid the amount due ($228.33)
>> PLUS an additional $1000, fully expecting that THAT $1000 would be
>> subtracted from the principal.
>>
>> We were really shocked to see our latest statement.
>>
>
> OK, now we are getting to concrete facts.
>
> You paid 228 PLUS 1000? If so, then the 228 should have serviced the
> interest due and the extra grand should have goe to reduce the outstanding
> principle. If you started with a principle balance of 70,000, then yo
> should have gone to a new balance of 69,000.
>
> Bear with me as I digest this ...
>
>
>
>
>> Here are the numbers.
>> APR went to 6.25% (I have to set up automatic transfer to get a 1/4 pt
>> reduction on the APR.....ok fine
>>
>> Total Previous Balance - $68,728.33 (They added the finance charge to
>> the previously due principal)
>>
>> Payments - $1228.83
>>
>> Finance Charge $355.54
>>
>> Total New Balance - $67,855.54
>>
>> APR - 6.25%
>>
>>
>
> OK, the new Finance Charge is the new interest.
>
> Logic - which does not always apply in banking - says that they should
> have taken the orignial Amount Due and subtracted $1000, then applied the
> Finance Charge to the remaining amount, especially if you paid the Amount
> Due before the Due Date. So, you receive a bill that has a Due Date of
> March 30 <or whatever>. You make the payment, and ADD $1000. The next
> billing should be for the principle minus $1000, times the interest per
> day for the number of days in the billing period. The payments you send in
> should service the interest due first, then subtract any over payment from
> the principle. The next payment should look at the balance of the previous
> period, and multiply by the interest due per day by the number of days.
>
> What the bank says is that you had a payment due, you made it but in the
> mean time the Interest Clock continued to click. The next biling should be
> for the number of days at the old balance, plus the number of days at the
> new balance.
>
> I think I understand your question, why did they deduct what appears to be
> "unearned interest" from the overpayment that you wanted to apply to the
> principle? This is a good question. If you continue tooverpay $1000 extra
> for each month, then this loan (the 2nd Trust Deed) should be retired in
> 70 months. If you made a fixed payment each month, say $1350, then the
> logic says your pricniple repayment should accelerate because the payments
> remain the same but the interest due should be going down.
>
>
>> We expected the additional $1000 (it was provided as a second payment
>> labled 'for principal only') to be substracted from the principal. In a
>> sense it was.
>>
>> $68.728.33
>> - $1228.33
>> -----------
>> $67,500.00
>>
>> But then they calculated the 6.25 APR monthly interest.
>>
>> 67,500 x .0625 = $4218.75/12 = $351.56
>>
>
> The math here works out correctly, the equation you gave does indeed work
> out to a solution of $351.62. They will add the new Finance Charge to the
> Previous Balance, then subtract the payment.
>
> Next month, the Fincance Charge will be recalculated on the same formula
> ...
>
>
>> and added the finance charge (in my case) $ 355.54 to the principal and
>> my 'new balance' is now $67,855.54
>>
>>
>> That's why I keep calling it revolving credit. Its just like a credit
>> card and frankly, we didn't expect that.
>>
>
> One thing that I have not calculated, and it appears you might not
> understand, is that interest due is calculated and collected in arrears.
>
> The deffinition of arrears is subtle but significant.
>
> When you make a car loan payment, for example, on the 1st of the month,
> you are paying for the NEXT MONTH's use of the money (interest). When you
> make a Mortgage Loan payment your paymen tof for the PRIOR MONTH's use of
> the money.
>
> If your loan balance is 70,000, then the payment at 6.25% is (interest
> only) is $364.58. If you overpay, the balance will drop, but the next
> payment will look back to the previous month and calculate the interest
> due for the next 30 days, and you get a bill.
>
> However, from your description, it looks like they took the current
> interest and applied the payment, then took the next interest and took it
> from the $1000, then calculated new interest on monies they already
> collected.
>
> One of us is not understanding what has happened, because it is clearly
> illegal if it happened the way I just outlined.
>
>
>
>
>> Obviously the only way you keep from taking a bath with this type of
>> loan is pay it off. But we are not in a position to do that.
>>
>
> Most people aren't. Don't stress about this.
>
>
>
>
>
>> We can afford the payments, have excellent credit and no debt at all
>> aside from the house.
>>
>> In your opinion do you think we might have any options with this re
>> refinancing just this 20% part or pay it off with another more
>> conventional loan?
>>
>
> You can certainly refinance the loan(s) into a single 1st Trust Deed. All
> that is needed is that you attain 12 months of seasoning, the loan has to
> be 12 months old to use a new appraised value, but that new value has to
> be enough to let you take a new loan and remain below 80% Loan to Value.
>
> Using round numbers, you have a 2nd Trust Deed of $70,000. This gives a
> Sales Price of $350,000 if 20% LTV. To refi your current 1st and 2nd into
> a new loan, you need an appraised value of about $438,000 or better.
> (350,000 / .080 = 437,500) This will give you a new 1st that will pay the
> 2nd off. If I could get an appraised value on your house of $450,000, I
> could give you a new loan of $360,000 and pay all of your closing costs.
> This means that you would have no out of pocket costs, except the
> Appraiser's Fee.
>
> Send me your full name and address off line, and I can check public
> records and tell you of there is a snowball's chance in Hell of getting a
> $450,000 value.
>
> Jeff Strickland
> Jeff@citymortgage.net
> jstrickland@ez2.net
>
> City Mortgage Services
> SanDiego, CA.
>
>
>
>
>> Or is that difficult with this type of 'second mortgage'.
>>
>> Any other options?
>>
>> Once again, many thanks in advance for your insight.
>>
>> Gerry
>>
>>
>>
>>
>>
>>
>>>
>>>>I have a few questions on what options I might have if any.
>>>>
>>>> I recently purchased a new build and took an 80/20 interest only 3
>>>> year ARM. Having previously always bought via VA, I did not fully
>>>> consider the ramifications of the 20 portion being a 'personal line
>>>> of credit' in terms of the 'revolving credit' aspect of the deal.
>>>>
>>>
>>> The 20 is not, or it isn't in my state, a personal line of credit or
>>> revovling credit. It is a full on mortgage secured by a lien on the
>>> property. The reason you take this kind of loan is that you do not
>>> want to take PMI (private mortgage insurance) with your 100% loan. The
>>> PMI is a feature of the VA loan, but these days the VA loans are not
>>> very competitive and they aren't large enough for many new home
>>> purchase transactions.
>>>
>>>
>>>
>>>
>>>> I made an addtional payment of $1000 on the 20% portion of the loan
>>>> on the first payment and it was a real eye opener to see that the
>>>> 'principal' was not reduced by $1000 as it had the finance charge
>>>> added like a credit card.The 20% portion is also subject to prime
>>>> rate fluctuations.
>>>>
>>>
>>> Well, of course. If you pay $1000, the first thing the lender will
>>> take is the interest that is due, the remainder will go towards the
>>> principle. This is true of any mortgage loan, with the exception of
>>> the impounds that will be taken if there are any impounds - impounds
>>> will be set aside before the principle is reduced.
>>>
>>>
>>>
>>>> I had previously talked to the bank about making addtional payments
>>>> on principal only and got a story about how I had a 3-5 day period
>>>> around the posting date when I could do that. I will see them again
>>>> for a clarification but I got the impression that if I made
>>>> additional payments outside that window, I would not get 'full
>>>> credit' for those payments.
>>>>
>>>
>>> You didn't tell us what the loan amount was or the rate, but if we
>>> made some simple asumptions, yo could tailor the numbers to fit your
>>> particular scenario.
>>>
>>> Let's assume the 2nd is for 50,000. I haven't got my loan caluclator
>>> handy, but let's also assume the interest rate is 7.5%, the interest
>>> due on the note would be 312.50 (50,000 x .0750 = 3750 / 12 = 312.50).
>>> This means that the first 312.50 of your payment will go to service
>>> the interest, the remainder will service the principle. Many 2nd's are
>>> a Home Equity Line of Credit (HELOC) that lets you make interest only
>>> payments for the first 10 years. If you had a statement with a Payment
>>> Due of 312.50, then this is the interest that the bank demands you pay
>>> them. Any additional monies you pay at the time of payment will go to
>>> service the principle. The subesquent payments will be recalculated on
>>> the remaining principle.
>>>
>>> If you made additional payments outside of the window, those payments
>>> would not go to the principle in their entirety, the bank would
>>> service some of the interest that has become due shine the last
>>> payment. Your best strategy is to make additional payments at the time
>>> of your payment that is currently due.
>>>
>>>
>>>
>>>
>>>> Current balance on the 20 is 67885 on a 6.25 APR.There are 31 days in
>>>> the billing cycle.
>>>>
>>>> My questions are:
>>>>
>>>> 1) Is there any payment frequency/amount option(s) which would
>>>> minimize the
>>>> finance charge?
>>>>
>>>> 2) Any other options that would reduce or eliminate the revolving
>>>> credit aspect of this, i.e re-financing the 20% portion only or
>>>> whatever?
>>>>
>>>
>>> I am not sure what the "revolving credit" aspect is that you keep
>>> talking about. If you have a HELOC, then perhaps that is the revolving
>>> quality that you are talking about. If you have a HELOC, then it mose
>>> certainly does have a revolving quality. That is, as you repay the
>>> principle, that principle can be used again during the first 10 years
>>> of the loan.
>>>
>>> If you took out a $70,000 note for 6.25%, then you could calculate
>>> your payment by multiplying the principle by the rate, and dividing
>>> the result by 12. This may vary a small amount due to the term of any
>>> particular billing period, but you should be pretty close. Using this
>>> formula, your payment should be roughly $365.00. If you made a payment
>>> of $1000, then your principle should be reduced next month by $635, so
>>> your next payment should be based on $67,885 - $635 = $67,250. The
>>> next payment should be $350, so the same $1000 you send in should
>>> reduce the outstanding principle by $650, and so on.
>>>
>>> Since in this scenario, you will have reduced the principle by $1285
>>> over two payment cycles, then you will have an available balance of
>>> this amount, plus any previous principle reductions. This means that
>>> you can used mortgage dollars to do landscaping work or buy the big
>>> screen, and transfer the interest from your credit card to your
>>> mortgage. The reason you might want to do this is that mortgage
>>> interest is tax deducatble, credit card interest is not. And, mortgage
>>> interest is lower so you save on several fronts. You have the repaid
>>> principle available to you for furture spending for a period of 10
>>> years, after 10 years has gone by, you have 15 years to repay any
>>> outstanding balance.
>>>
>>> Another benefit of what you did is you avoid the PMI. PMI premiums are
>>> not tax deductable but mortgage interest is. If you took out a 100%
>>> loan and carried PMI, the payment would be higher than the payment on
>>> the 80/20, and the interest you pay on the 20% is tax deducatble
>>> whereas the payment to the PMI has no tax advantage.
>>>
>>> So, the short answer to your question is, pay more than the bank asks
>>> for, and include the overpayment in the payment that is due. This will
>>> reduce your outstanding balance by the difference in what is due and
>>> what you paid them. The subsequent payments will be recalculated on
>>> the lower principal balance.
>>>
>>>
>>>
>>>
>>
>
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