Mortgage rate shopping can kill

  1. Because both lenders and brokers will lie to you.
    • That’s right, even the big lenders will lie to retain clients or get new ones and they get away with it everyday.I see it happen almost every day, and I’m just one broker in one city in the entire Untied States. Not sure if your mortgage professional is being truthful? Post a comment and I’ll let you know what I think.
  2. Because Interest Rates Change Every Day, Sometimes Several Times A Day
    • I can tell you from experience that Lender A’s rates can be lower than Lender B’s on Monday and the opposite may be true on Tuesday. So you get a quote from Lender A on Monday of 6% and a quote from Lender B on Tuesday of 6.25%. Who do you go with? Well, most people would go with Lender A, right? The problem is Lender A may not actually have the best deal, you just happened to catch them on a day when rates were down. Lender B may very well have lower rates in general, but you’d never know that. This is where a good mortgage broker comes in. A good mortgage broker tracks interest rates from different lenders every day for his or her entire career. He knows which banks tend to have the best programs available at any given time. In my case, if I’m not sure who has the best programs available considering market conditions on a particular loan program, I can send an inquiry to all of my lenders and get several hundred quotes in about 20 minutes (of course, then I have to sort through all those quotes, which can take a couple days). The point is, a broker can compare apples to apples whereas consumers can only compare apples to oranges…not effective
  3. Because You Really Don’t Know Who You’re Talking To
    • How well do you know that person on the other end of the phone who’s quoting you rates? Don’t make the mistake of thinking Mortgage Broker’s have an easy job. To be truly effective, a Broker has to be on top of market conditions at all times, he has to have a thorough understanding of all the programs offered by his lenders, and most importantly, he has to be able to foresee problems with a file before they rear their ugly heads (because almost every file has a problem), and they have to be able to merge all this information into a clearly defined “mortgage plan” for their clients. I can tell you from experience, good mortgage brokers are few and far between. Have you ever been told what index your new Adjustable Rate Mortgage will be attached to? It’s information that may be important, and I’d be willing to be that in 80% of refinance transactions, the homeowner has no idea what index his or her loan is attached to; for no other reason than the broker didn’t know either.
    • Put it this way, if you were unlawfully charged with a serious crime, are you going to hire a $20 lawyer who makes his money on volume, who isn’t going to give your case the attention it needs, who’s going to clean his hands and walk away as soon as he files the paperwork and shows his face in court? Or are you going to pay extra for a lawyer to carefully consider all the details of your case and help you work to find the best way into a better position; a lawyer who knows your situation like the back of his hand and can let you know, if the laws relevant to your case change, that you should to take a different approach than originally planned; a lawyer who, after your case is over, isn’t going to walk away with his check and never speak to you again, he’s going to help you with appeals or fines, or any other issues you may have when the case closes, as well as offer advice in the future? Obviously, that’s your choice, but when you chose a broker based solely on the lowest cost, you’re representing yourself in the legal system known as the mortgage market on a case that involves what is likely your biggest investment (your home); and when is the last time you thought it would be a good idea to represent yourself in court?

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Marginal vs average tax rate

The difference between marginal and average tax rates is a fairly important concept for all tax payers to better understand the way the government gets paid. You’ve probably heard both terms, but maybe never knew what they were. Well, let’s fix that.

Marginal Tax Rate

Your marginal tax rate is the highest rate that you are taxed. For many people, a portion of their income is taxed at one rate, and the rest is taxed at another rate. For instance, if you make right around $40,000 a year, you may pay 15% on the first $20,000 or so and 28% on anything over $20,000. So, let’s break that down:

15% of $20,000 is $3,000
28% of $20,000 is $5,600
Total tax liability is $8,600

In this case, your marginal tax rate would be 28%, the highest rate at which your income is taxed.

Average Tax Rate

The average tax rate is the actual percentage of income going to pay taxes. In the example above we can calculate average tax rate as follows:

$8,600 / $40,000 = .215 * 100 = 21.5%

So, in this example, your average tax rate is 21.5%, a bit lower than your 28% marginal rate. It’s good to know this because this represents your actual tax liability.

Why the Two Tax Rates?

In the United States, we have something called a progressive tax system, meaning, the more money you make, the higher your tax rate. If the person in the example above only made $20,000, he’d wouldn’t have had to pay the 28%…instead only the 15% would apply. Our progressive tax system taxes you at a lower rate for the first so many dollars you make, everything over that amount gets taxed at a higher rate, and so on until you reach the cap, which, for 2008, was 35%.

So, it all boils down to this, your marginal tax rate is the highest rate at which you’re taxed, but it does not represent the percentage of your income that goes toward paying taxes. That number is the average tax rate.

Incidentally, here are the 2008 tax rates for Individuals, from Edwards Jones Investments:

Tax Brackets for 2008: Individuals
Marginal
Rate
SingleMarried Filing
Jointly
Head of
Household
Married Filing
Separately
10%0 –
8,025
0 –
16,050
0 –
11,450
0 –
8,025
15%8,025 –
32,550
16,050 –
65,100
11,450 –
43,650
8,025 –
32,550
25%32,550 – 78,85065,100-
131,450
43,650 –
112,650
32,550 –
65,725
28%78,850 –
164,550
131,450- 200,300112,650 –
182,400
65,725 –
100,150
33%164,550- 357,700200,300 – 357,700182,400 – 357,700100,150 – 178,850
35%over 357,700over 357,700over 357,700over 178,850

Now, here’s a little tip you might find interesting if you want to check your credit score for free. Every American consumer is able to get 1 free copy of their credit report each year from AnnualCreditReport.com. If you’ve already received one credit report in the past year, there is another way to get a free copy of your credit report. It requires a credit card, but does not cost a dime.

FreeCreditReport.Com gives you a free credit report as well as a 7-day free trial for their Triple Advantage Credit protection program. Now, this is a great program if you need credit monitoring, but if not, you can cancel within the 7 days and you keep your credit report for free. The only other option to getting a copy of your credit report is to buy one for $13-30 online, but why do that when you can get it free? A lot of companies try to make it nearly impossible to cancel the free trial so that you end up paying anyway, but FreeCreditReport.Com is run by Experian, one of the 3 major credit reporting agencies and is very legit. I’ve personally pulled my credit report there and canceled within the 7 days and it was no hassle at all. No cost to me whatsoever and I got a copy of my credit report free and clear. …

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Remove collections

What is the most commonly misunderstood aspect of every American’s life? I’ll give you a hint, it’s not the opposite sex; it’s their credit report. And rightfully so, the credit bureaus don’t exactly make their modus operandi public. In fact, the actual formulas used to calculate your credit report are closely guarded secrets of each of the three credit reporting agencies.

So, no one really has a set of exact guidelines that outline how different things affect your credit; instead, we have three methods of figuring out how your credit score is calculated.

The first is a set of best practices that have been acquired over time simply through trial and error; these aren’t perfect and are the source of much of the bad advice going around about credit scores. Secondly, the credit bureaus release general tips that help us increase our understanding of the factors affecting your credit score; these are just tips and don’t define the extent to which certain actions will affect your credit. And, finally, there is something called The Fair Credit Reporting Act (“FCRA”), which establishes certain limitations on the length of time negative items may be reported on your credit report.

Before we move on, you should consider double-checking your credit score. You can get a free copy of your credit score here. Also, consider watching this excellent video that reveals a relatively unknown secret to removing collections permanently. Now, on to the three steps to remove collections from your credit report:

Step 1: Dispute the collection charges.

Write a letter to the reporting company (i.e. Equifax, Transunion or Experian) referencing the account in dispute and include supporting documentation (i.e. Copies of receipts for payment or copies of cleared checks). Here’s an example of a credit dispute letter that you can use.

The reporting company generally has 30 days to review the dispute and notify the original company that filed the collection. The original company (i.e. Your credit card company, etc.) will then conduct an investigation to determine the validity of the dispute. If the original company finds that the collection was, in fact, reported in error, it must notify all three credit bureaus so they can correct the information in your file. At this point you should request the credit bureau to supply a notice of any corrections to anyone who received your report within the past six months (or 2 years for employment purposes). If the investigation does not resolve your dispute, you should ask that a copy of the dispute be included in your file and in future reports.

Step 2: Pay off the Collection

If you’re looking to get a mortgage, almost all lenders will require that any outstanding collections be paid off before the loan funds or be included in the loan. So, if you’ve disputed the collection and it wasn’t removed from your report, you’ll need to pay it off before you take out a mortgage or refinance. Even if you pay the collection off, however, it will still remain on your report for some time (see step 3 for the exact length of time a collection will remain on your credit report).

Step 3: Wait until the collection drops off your report

That’s right, even unpaid items will drop off of your credit report, but not for 7 years. What does this mean? Well, unless the collection was found to be reported in error, that collection will remain on your report for 7 years from the date it was first reported no matter what – even if you pay it off. I’ve read a lot of bad information on the internet about this. A lot of “experts” seem to think that the collection will remain on your report for 7 years after the date of the last activity, meaning that if the collection was first reported in 2004 and you pay it off in 2007, it won’t drop off of your report until 2014 (2007 + 7 years). This simply isn’t true; the Fair Credit Reporting Act protects you from this and states that collections must be removed from your report 7 years after the date the collection was first reported.

Tricks of the Trade

One more thing that I did go over in a previous article, but I’ll mention it again here. If you have a collection on your report with a zero balance, dispute it. As I explained above, the bureaus have to go through a lot to review each and every dispute; if the dispute is over an account with a zero balance, they may just remove the collection from the report entirely instead of committing valuable resources to check that a zero balance account should remain on your report. All I’m saying is that I’ve seen it happen.…

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Lender go bankrupt

With all the turmoil in the mortgage industry these days, a number of our readers have been wondering what happens if their mortgage lenders go belly up. Will the terms of your loan change? Will you have to renegotiate the loan with another lender? Well, most of what goes on in the secondary mortgage market is a mystery to most homeowners. Usually that’s fine, because you probably don’t care who holds the loan, as long as it doesn’t affect the terms you agreed upon in the first place. Well, since lenders have been dropping like flies lately, it’s pretty understandable to be a bit worried, or at least wonder what’s going to happen if your lender takes a nose dive, so let’s take a look.

After You Sign the Papers

We’ve covered the mortgage process a bit in the past, but we’ll give you a quick refresher here. In many cases, soon after a borrower signs his or her loan documents the loan is sold to investors on the secondary mortgage market. This happens more often than most people realize, in fact, even if you’ve got a loan with a major company like Wells Fargo or Bank of America, those lenders may still opt to sell the loan to investors.

When Mortgages Are Sold

Now, when mortgages are sold, generally they’re split into two major parts.

First is the actual mortgage itself, which is bundled with a bunch of other mortgages and sold to an investor in the form of bonds or some other investment vehicle. When you make a payment to the company servicing your loan (covered in the next paragraph), that company takes a small percentage and pays the rest to the investor. So, while you’re making monthly payments, the investor is receiving them, after the servicing company takes its cut.

The second part of the mortgage that is sold are the servicing rights. This is the portion that, if you’ve ever had a mortgage, you’re more familiar with (more so than you probably think at least). Servicing rights grant a company the right to handle, well, the servicing of your mortgage. Whatever company you’re making payments to is the company that holds the servicing rights to your mortgage. That company takes a small cut, usually around 0.25%-0.5% of the monthly payment in return for handling all the administrative tasks that come with servicing your loan, like sending out statements, collecting past due payments, etc… After that, the rest of the monthly payment is sent to the investor who bought the investment vehicle your loan is bundled into.2

What If Your Original Lender Goes Bankrupt?

If the lender who you got the loan through originally goes bankrupt, you may not even know about it. If that lender sold off both the mortgage and its servicing rights, you wouldn’t even be making payments to them anymore. They’ve essentially taken themselves out of the loop entirely this way.

Some of the larger companies will keep the servicing rights and sell off just the mortgage as an investment vehicle. If your lender goes bankrupt after this happens, the lender will be forced to liquidate its assets, in other words, it has to sell the servicing rights to someone else. Since we’re talking bankruptcy here, those servicing rights will generally sell at a discount and, in many cases, people/companies will be fighting tooth and nail to get to purchase those servicing rights. Once a deal is struck, the biggest change you’ll notice is that the company you send payments to will change. Most homeowners have had their mortgage servicing rights sold at one point, although it doesn’t always mean their lenders went bankrupt.

What If the Servicing Company Goes Bankrupt?

If your original lender sells off both the mortgage, as well as its servicing rights, you’ll have to start making payments to the new servicing company. Now, what if that company goes bankrupt? Same as above…that company will be forced to liquidate its assets, of which your mortgage servicing rights are one of those assets, and those rights will be sold at a discount to another company or investor, at which point you’ll have to start making payments to yet another new company.

What If the Investor Who Bought Your Mortgage Goes Bankrupt?

Now that we’ve covered the servicing side of things, what if the investor who bought the actual mortgage itself, as some sort of investment vehicle, goes bankrupt? Well, that’s just like if you bought some stock in a company and then you had to declare bankruptcy; you might sell the stock to someone else, or you might lose it in a lawsuit, either way, the company who’s stock you own isn’t really going to be affected. Likewise, if the investor who bought your mortgage goes bankrupt, you likely won’t even know about it.

Will the Terms of the Mortgage Change?

No. No matter what happens, no matter how many times your loan is sold or how many companies holding it go bankrupt, the terms of your mortgage will never change. Now, you may have to start making payments to a new company, and that can be a bit of a hassle, especially if it happens several times, but your 5.5% 30-year fixed (or whatever) will stay a 5.5% 30-year fixed.

Why All This Buying and Selling Mumbo Jumbo?

So, the question still remains, why are there all these companies that handle these different aspects of your mortgage? Aren’t they all middle-men jacking up the cost you ultimately pay for your home? Well, no, and we don’t want to leave you hanging, but that’s a topic for the next article here at Truthful Lending.…

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