Mortgages

Suggested Use 1- Provide reports to ensure a borrower understands the mechanics and risks of an Option ARM

Option ARM loans have gained in popularity over the last several years as home prices rose. The "minimum payment option" provided financial flexibility, and borrowers grew comfortable with deferred interest (negative amortization) because of rising home values. (Rising home values eclipsed any risks associated with an increasing loan balance as the result of making minimum payments.) However, with current home values flat, deferred interest seems to be more risky.

This is not necessarily so. The key to managing financial risks is to understand and measure them.

Equity should be an Option ARM borrower's primary measure of risk. Equity is a function of 2 things: home price appreciation and the loan's principal balance.

Use several of MortgageGraphics online tools to illustrate, explain, and demonstrate what effect the current conditions and forecasts of future market conditions will have on equity. Make sure your client fully understands the mechanics of an Option ARM and is comfortable with and able to manage the associated risks.

Tip 1: Use the MortgageGraphics Mortgage Index Forecast to illustrate and explain projected future interest rates. Click here to view an example of the Mortgage Index Forecast.

Tip 2: Use the MortgageGraphics Option ARM Analysis (as shown below) to demonstrate the effect that estimated home price appreciation and deferred interest (negative amortiztion) will have on equity.

In this example, the Option ARM demonstrated below has the following characteristics:

The loan is a $440,000 Option ARM tied to the 1 month LIBOR index with a 3% margin
The minimum payment increases 7% annually until month 61 when the loan "recasts"
The negative amortization limit has been set to 125%
The current value of the home is $600,000

Tip 3: Show alternate estimates of home price appreciation and the effect they will have on equity.

Tip 4: Use the MortgageGraphics ARM Scenario Analysis to calculate and illustrate Option ARM monthly payment and principal balance values based on varying interest rate scenarios. Click here to view an example of the ARM Scenario Analysis.

Conclusion: The MortgageGraphics online tools can be used to effectively educate a borrower on the mechanics and risks of an Option ARM. When provided good information, borrowers can make their own risked based Option ARM decisions.

Suggested Use 2- Demonstrate how it might be economical to refinance out of an ARM into a fixed rate mortgage

Short-term interest rates to which most adjustable rate mortgages are pegged have risen approximately 4% over the last two years. Many ARM's originated within the last several years now have, or soon will have, monthly payments higher than those available on current fixed rate loans.

MortgageGraphics has several online tools to help you demonstrate to your borrower that it might be a good time to refinance out of an ARM. You can use several of MortgageGraphics reports to illustrate and explain refinance options and scenarios.

Tip 1: Use a graph of projected monthly payments to show the monthly payment savings created by refinancing an existing ARM into a fixed rate mortgage. The graph below compares the projected monthly payments of an existing 3-1 ARM and a 30 year fixed rate mortgage with a 10 year interest only period (Note: as shown below, $4,000 in loan costs have been rolled into the principal balance of the new loan to reflect the costs of refinancing. Also note: with MortageGraphics you can show as many months as needed in a graph; in this example, 120 months are shown.)

The existing 3-1 ARM loan in this example has the following characteristics:

$400,000 remaining principal balance
326 months remaining term
a current fixed interest rate of 4.5%
the index is the 1 yr CMT index and the margin is 2.75%
2 months remianing until the first interest rate adjustment date - the interest rate adjusts annually thereafter
an initial, periodic, and life interest rate cap structure of 2-2-6

The new 30 year fixed rate interest only loan has the following characteristics:

$404,000 principal balance
360 month term
6.125% fixed interest rate
10 year interest only period

Tip 2: Use the MortgageGraphics Refinance Analysis to illustrate the economics of refinancing. Show multiple refinance options. Click here to view an example of the Refinance Analysis.

Tip 3: Use the Loan Summary to show the borrower the characteristics of each mortgage as well as key loan values at set monthly intervals. Click here to view an example of the Loan Summary Report.

Tip 4: Use the MortgageGraphics Mortgage Index Forecast to illustrate and explain projected future interest rates. Click here to view an example of the Mortgage Index Forecast.

Tip 5: Use the MortgageGraphics ARM Scenario Analysis to demonstrate varying interest rate, monthly payment, and principal balance scenarios for the borrower's existing ARM. Click here to view an example of the ARM Scenario Analysis.

Tip 6: MortgageGraphics has two loan analysis and financial planning tools which can be used to demonstrate the economics of refinancing an existing ARM loan into a fixed rate mortgage. Click here for more information on MortgageGraphics Financial Planning Tools.

Conclusion: MortgageGraphics online tools can be used educate and demonstrate when is a good time to refinance into a fixed rate mortgage. When provided with good information, borrowers can make sound and informed mortgage decisions. Your borrower and his/her friends will be back to see you for future business.

Suggested Use 3- Work with builders to provide innovative products to help sell homes

The past several years have been stellar years for home builders, but the rapid pace of home sales has slowed. The inventory of new homes has risen. Builders are now more focused on using mortgage incentives to help sell homes.

Nearly any type of mortgage can be explained and illustrated using MortgageGraphics online tools. For example, MortgageGraphics has several tools which can be used to illustrate, compare, and explain 3-2-1 Buydowns, 2-1 Buydowns, 0 payment, and any other type of mortgage with a buydown or temporary start rate.

Tip 1: Use a graph of projected monthly payments to compare and explain various mortgages with temporary start rates. The loans shown as examples in the graphs below each have a principal balance of $400,000. The loans in the first graph are:

a 5-1 interest only ARM with a 3-2-1 buydown
a 3-1 ARM with a 2-1 buydown

The loans in the 2nd graph are:

a 30 yr fixed loan with a 1 year start rate and 5 year interest only period
a 5-6 interest only ARM with 0 payments for 6 months

Tip 2: When working with builders, use the MortgageGraphics Marketing Flyer. The Marketing Flyer is designed to be left on the countertop of a home for sale. It has a section that introduces suggested mortgage options, and a table and graph of the projected monthly payments of each. Click here for an example of the Marketing Flyer.

Tip 3: Use a table of loan values to explain the characteristics of any single loan. The loan shown as an example below is the same 5-1 interest only ARM with a 3-2-1 buydown as shown in the first graph above. (The loan amount is $400,000, the sales price of the home is $500,000, and as shown in the equity column of the table, there is estimated to be 0% appreciation in the first year -the home is estimated to appreciate at 3% annually thereafter.)

Conclusion: Use MortgageGraphics unique tools to work with builders to provide mortgage incentives to attrack buyers and sell homes.

Suggested Use 4- Show that in certain environmnets a 2nd lien is more economical than PMI

In many mortgage situations where the borrower has less than 20% of the sales price or home value to use as a downpayment, there is a choice between using a 2nd lien to reduce the amount of the 1st loan to 80% of the sales price or home value, or to pay private mortgage insurance (PMI).

The choice between using a 2nd lien or paying PMI is contingent upon 2 primary factors:

the loan to value ratio (LTV) of the 1st loan
the rate at which the home is estimated to appreciate

In markets that are appreciating quickly, it is often a wise choice to pay PMI for some period of time instead of using a 1st and 2nd loan combination because the loan to value ratio (LTV) of the 1st loan will drop to 78% or below relatively quickly at which point PMI can be eliminated with a new appraisal. If a 2nd lien had been used instead of PMI, the only way to eliminate the 2nd lien would be to refinance both the 1st and 2nd liens (loans) into a single loan or to pay-off the 2nd loan. This assumes, as normally is the case, that the interest rate on the 2nd loan is higher than the interest rate on the 1st position loan, and therefore, the weighted average interest rate on the combined 1st and 2nd loans is higher than the interest rate on a stand-alone 1st loan -meaning that once the PMI is eliminated on the stand-alone first loan, the monthly payments are lower than they would be on the combined 1st and 2nd loans. The key to the decision about PMI or a 2nd lien is how quickly the home value is forecast to appreciate.

Home prices are flat across most of the Untied States, and are forecast to remain relatively flat or to rise at a slower-than-normal pace for some period of time. Now is a good time to sell 2nd loans.

Tip 1: Use MortgageGraphics to estimate the rate of home price appreciation and run a scenario analysis on a stand-alone first loan with PMI verses a combined 1st and 2nd loan transaction. The MortgageGraphics online application automatically eliminates PMI when the loan to value ratio reaches 78% or below. The 2 tables below compare the monthly payments of a Stand-Alone first loan with PMI verses a "Piggy-back" loan combination based on the home price appreciation estimates shown in the tables above the graphs. Notice that the Piggy-Back loan combination holds its monthly payment advantage much longer under the low estimated home price appreciation scenario.

In this example, the sales price or value of the home is $500,000 and the loans have the following characteristics:

The Stand-Alone first loan

30 year fixed rate loan
$450,000 loan amount
6% interest rate
90% LTV
$350 per month PMI

The Piggy-back loan combination

30 year fixed rate first position loan
$400,000 loan amount
6% interest rate
80% LTV

30 year due in 15 years fixed rate 2nd lien
$50,000 loan amount
7% interest rate

Tip 2: Use MortgageGraphics online tools to create any type of 1st and 2nd loan combination. The loan values as shown in the table below are the combined totals of a 5-1 ARM with a 3-2-1 buydown and a HELOC with a 5 year interest only period. (The interest rate is a weighted average of the 2 loans. The LTV is the first position lien only.)

Tip 3: Use the MortgageGraphics Loan Summary Report to show the loan characteristics of both the Piggy-Back and Stand-Alone with PMI options, and key loan values at set monthly intervals. Click here to view an example of the Loan Summary Report.

Tip 4: MortgageGraphics has two loan analysis and financial planning tools which can be used to demonstrate the economics of using a combined 1st and 2nd mortgage or a 1st mortgage with PMI only. Click here for more information on MortgageGraphics Financial Planning Tools.

Conclusion: MortgageGraphics can be used to provide information to help borrowers make informed and educated decisions about using a 2nd mortgage verses paying PMI.

MortgageGraphics has many tools which can be provided to borrowers as educational resources and to enhance relationship based sales. All of MortgageGraphics tools are customizable. Demonstrated below are several tools.