Someone shopping for the best rate on their mortgage can easily be misled by low rate offers that are accompanied by low Annual Percentage Rates (APR). Federal Law requires that APR be disclosed along side the actual interest rate…this is in order to help borrowers make a more informed decision on their mortgage. The truth is that APR is a very poor way to comparison shop for a mortgage and can cause borrowers to make costly wrong decisions.

APR was created in order to provide a way for borrowers to account for costs associated with the mortgage. This sounds good because it may not be very easy to choose between a loan with a lower rate and higher fees or a loan at a higher rate and low fees. The problem is that the APR calculation makes some very bad assumptions. First, APR assumes zero inflation and that the value or buying power of a Dollar today will be exactly equal to the value of a Dollar 10, 20 even 30 years from now. Next, the APR calculation assumes that the mortgage will never be prepaid or paid off. That means no refinancing or selling the home…highly unlikely since the average life of a home mortgage loan is less than four years. Just think, about your own clients. Is it not rare to see the same loan in place for even 5-years…forget 30-years. The APR calculation does not consider the value of the money used for fees. So if you spent thousands of dollars in points or fees to get a lower rate, the APR calculation does not give any value to the money if it were not spent on closing costs. Finally, APR does not take tax consequences into consideration. This can be significant since higher fees on the mortgage may not be deductible while the higher interest rate typically is deductible. Moreover, APR can be manipulated, making it totally worthless.

So how does APR work anyway? I like to explain it to my clients by using triangles. I often draw two sets of triangle for my clients to illustrate the difference between Interest Rate and APR. The reason for the triangle is because there are 3 sources of input…”Interest Rate”, “Mortgage Amount” and “Monthly Payment”. If you know any two of the three, you can calculate the third. See the triangle below.

Since any two of the three variables allows you to calculate the third, a $911 monthly payment for a $150,000 mortgage calculates to an interest rate of 6.125%. But the APR calculation uses different information. The APR calculation only keeps the “Monthly Payment” information the same. Instead of the “Mortgage Amount”, APR uses “Amount Financed”. This is the “Amount Financed” information on the Truth in Lending statement. Amount Financed takes into consideration the fees that are lender imposed. This includes application fees, points, commitment fees…and interim or per diem interest. So, Amount Financed is the mortgage amount less any lender fees, points and interim interest. The more fees, the lower the Amount Financed. The monthly payment is then calculated as a product of the Amount Financed to give you the “Annual Percentage Rate” or “APR”. So the lower the “Amount Financed”, the higher the “APR” is. Amount Financed can be manipulated by assuming a closing on the last day instead of the first day of the month. That would increase the Amount Financed and decrease the APR.

Here is a real example on a $150,000 fixed rate 30-year mortgage with zero points: Lender “A” (triangle above) is offering a great low rate of 5.875% and lender “B” (triangle below) is offering a higher rate of 6.125%.

A closer look shows that Lender “A” is charging $3,000 more in fees than Lender “B”. How do you compare? If you look at APR, Lender “A” (5.875% with $3,000 higher fees) has an APR of 6.149%. Lender “B” (6.125% but a $3,000 savings in fees) has an APR of 6.211%. So according the APR, Lender A is a better deal even though the fees are $3,000 higher…this is exactly what these high fee lenders are hoping you look at.

Let’s look at the real story. The payment difference between the two is $24 per month. So is it worth paying $3,000 in fees to Lender A in order to save $24 per month? Hardly. It will take 10.5 years for a borrower to just to get back their investment! A bad choice when you consider that mortgage loans typically are retired within four years. To make the decision to go with Lender “A” even worse, if that’s possible, borrowers rarely take the value of today’s dollars into account. Rather than giving Lender “A” the windfall of your hard earned $3,000, you should give it to yourself. Reduce the loan balance on your mortgage by the fees you are saving. In the example above that would reduce the loan from $150,000 to $147,000. This makes the payment difference just $6 per month instead of $24 per month! The true time to break even is really 500 months (more than 40-years!). So it is impossible to benefit from the higher fee program from Lender “A” because the maximum period on the loan is 30 years or 360 months. One more thing…when you calculate your tax deduction on the payment difference, it makes even more sense to avoid paying higher non deductible fees. The obvious correct choice is to go with Lender “B” even though the APR is lower with Lender “A”.

Bottom line…your clients should forget APR and think twice about those advertised low rates when they are accompanied by higher fees. Use the above illustrations to drive your point home.

If you have any questions about how APR is calculated please feel free to view our additional mortgage resources.

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Sources: Inside Mortgage Finance and company announcements

Update: Many of these mortgage company’s have gone out of business. We specialize in San Diego Real Estate and California Home Loans. 

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We came across a difference in what was stated in the Policy Statement before: they are backing off and taking out from the statement what said about “additional firming”, that can suggest that we can be seeing a interest–rate cut instead of a raise in a short future.

This is making both the stock and bonds rise higher.

Also a concern within the statement under the Feds eyes, is that the Core inflations it’s still high. Fed will not cut rate in mean while the core inflation stays above the feds target zone.

But we might see some changes, because the bond market seems to be adjusting, yesterday prices closed off the best level.

Reports show that the labor market it strength is getting better, because jobless claims reported 316,000 this number seem lower than the expectations and it’s the lowest level that we have seen in the past 6 weeks.

The leading Economic Indicators reported at -0.5% very little off the expectation they of -0.3%.

If you have any questions, please call or email Alex Aguilar

Alex Aguilar
www.alexaguilar.com

San Diego Real Estate

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I have often felt that there are 2 types of mortgage companies and deciding which one you want to work for depends a lot on your goals and what you want to accomplish with your mortgage career. The first type of mortgage company will never teach you to be anything more then just a glorified telemarketer. While this can be a great platform to get your foot in the door and get a start in the mortgage business it is often hard to learn much other then being a glorified telemarketer.

The second type of mortgage company is my favorite and is the ideal situation if you want a career in this industry. It will truly test your skills and help you learn the business from start to finish. This will allow you to create value for yourself and be a very knowledgeable and successful loan officer. I often tell new recruits that I would rather teach you how to fish then to feed you fish. It is pretty easy to understand that you will be more successful when you know more. This allows loan officers to become less dependant on the mortgage company they work for and more dependant on the knowledge they have gained. I am never worried about a loan officer leaving and working for someone else because most companies are like the 1st example.

Here are several questions you should ask when you are thinking about working for a mortgage company,

How ling have you been in business and where do you see your company in 5-10 years?

What is the best asset you feel you have within the company, what makes you click and give you the desire to come to work everyday?

What systems do you have in place to help your loan officer’s with training, continued education and making their business better?

What kind of turnover do you have within your company?

What support and mentoring will I be provided?

Asking these simple questions will help you find the right company to work for, If they have trouble answering any of these questions think twice before you go work for them. If you are interested in a career in the mortgage business please give me a call. I would be happy to sit down and discuss any questions you have and give you some suggestions on where to start,

Alex Aguilar
www.alexaguilar.com

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Last Week in Review

“I MISSED IT BY THAT MUCH!” Don Adams on the TV show “Get Smart”…And just like good old Maxwell Smart always explained his big goofs with this classic phrase - you have to wonder if the Department of Labor was thinking the same last Friday when the Jobs Report hit the wires.

The headline number of new jobs created in the US economy for September was reported at 51,000 - a miss from official expectations of 120,000, but very near where the market at large was anticipating. But then came the real “goof” - the previous month’s number of jobs created was revised upward by 60,000 jobs! That’s quite a big miss, adding more jobs by revision than September was reporting in total. Normally a weak jobs number would cause Bond prices to worsen and home loan rates to improve, but the surprise upward revision caught the market off guard. Home loan rates inched very slightly higher on Friday, yet overall ended the week very close to where they began.

A further surprise came in the form of a downward tick in the unemployment rate, moving from 4.7% last month now to 4.6%, indicating that the US still has a healthy job market on the whole. And although the housing market has cooled as expected - strong job markets lead to healthy housing markets.

ONE THING YOU MAY NOT WANT TO MISS IS THE YEAR-END DEALS YOU CAN GET ON NEW VEHICLES, AS DEALERS CLEAN OUT THE OLD INVENTORY AND MAKE WAY FOR NEW. BUT IF YOU DO WANT TO MISS SOME OF THE RUNAROUND OFTEN ENCOUNTERED DURING THE BUYING PROCESS, READ THIS WEEK’S MORTGAGE MARKET VIEW.

Forecast for the Week

So after the Jobs Report, how does the economic news lineup look for this week? A few noteworthy items are on deck, including the highly anticipated Fed Minutes from the September 20th meeting. Why all the excitement around the Minutes being released on Wednesday? Last month, Richmond Fed President Lacker was again a dissenter on the vote to pause in the rate hike cycle - he actually felt there was still enough inflation in the economy to warrant another hike. So the Minutes will be dissected for clues, wondering why Lacker isn’t on board with the rest of the team. The recent reports seem to indicate that the economy is cooling and inflation is controlled - which is the Fed’s biggest concern - and the Minutes will give some inside scoop as to what the Fed members all have on their minds.

A look at the chart below shows Bond prices remain on a clear uptrend, meaning home loan rates have improved over the recent months. Could rates continue to get better, or are they ripe for a reversal? The present technical support just underfoot Bond prices has helped them hold their improvements - but news that stinks of inflation could cause them to step off the Up Escalator, with home loan rates worsening. But if the floor of support can hold throughout the news of the week ahead - home loan rates should continue to improve overall. In observance of the Columbus Day holiday, the markets will be closed on Monday, reopening for action bright and early on Tuesday.

Chart: Fannie Mae 6.0% Mortgage Bond (Friday Oct 06, 2006)

The Mortgage Market View…

OH WHAT A FEELING…a new car can bring! It’s that time of year, when dealers are blowing out the 2006 models to make room for the 2007’s. The discounts are great, financing is exceptional, and you may even get to skip a payment or two. But before you run out for a test drive and fall in love with that new car smell - be sure to do a little homework and be aware of a few items that could have you paying more than you anticipated for that new car.

Before you even start negotiating the price of the car, ask the salesperson if the dealership requires that you sign either a “Dispute Agreement” or “Conflict Resolution” agreement. Sounds innocent enough, but here’s the deal. By signing the form you are agreeing that if a problem arises, the problem will be settled through arbitration…where the auto dealer chooses the arbiter, you pay all the fees, prohibits you from appealing the decision - but the dealership can appeal, and it also excludes you from participating in any class action lawsuits against the dealer. Whoa. So if the salesperson says that this form is a requirement, think twice - as dealerships that require these forms may possibly not be reputable ones, and may potentially face frequent lawsuits.

When reviewing the pricing and list of fees associated with the purchase, be on the lookout for “environmental fees” or “advertising fees”. These costs are often just a way for the dealer to make a few extra bucks at your expense, so be aware of that when negotiating price. Additionally, “protection packages” are generally not worth the cost. If you are super concerned about protecting the interior or exterior of your car from weather or sticky fingers - you are generally much better off getting that done on your own.

When you arrive at the financing table, take your time signing. Most people want to get it over with quick and race away, testing out the zero to sixty MPH performance, leaving a few skid marks in their wake…but those skids could be super costly if you speed too quickly through the financing process.

Review all the documentation with care - and ask in particular if your financing is approved prior to taking delivery on the vehicle. If you have signed a “Writ of Rescission” as part of your financing paperwork and take delivery on the car without your financing approved - you have just agreed to take a higher financing rate and higher payments, if you are not approved under the terms you were quoted. One way to avoid this situation altogether would be to obtain financing through a credit union or bank prior to going to the dealership. You may end up with a better rate, and not have to worry about unethical financing practices.

For more tips and details about the process of buying a car, visit www.autoissues.org, or purchase and read “Don’t Get Taken Every Time: The Ultimate Guide to Buying or Leasing a Car in the Showroom or on the Internet” by Remar “Bubba” Sutton. Doing your homework will save you time and money - and best of all, will have you driving off the lot knowing that you got the best deal possible for your new car!

The Week’s Economic Indicator Calendar

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Economic Calendar for the Week of October 09 – October 13
Date ET Economic Report For Estimate Actual Prior Impact
Wed. October 11 10:30 Crude Inventories 10/07 NA 3355K Moderate
Wed. October 11 02:00 FOMC Minutes 9/20 HIGH
Thu. October 12 08:30 Jobless Claims (Initial) 10/07 NA NA Moderate
Thu. October 12 08:30 Balance of Trade Aug -$66.5B -$68.0B Moderate
Thu. October 12 02:00 Beige Book Moderate
Fri. October 13 08:30 Retail Sales Sept 0.2% 0.2% HIGH
Fri. October 13 08:30 Retail Sales ex-auto Sept 0.0% 0.2% HIGH
Fri. October 13 09:45 Consumer Sentiment Index (UoM) Oct 86.0 85.4 Moderate

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IN THIS ISSUE…

You know things are really pretty bad when someone tries to console you by saying…”Well, at least you’ve got your health”. But what if you don’t even have your health? Cold and flu season is sneaking up on us already, and did you know there’s a little bit of “pirate lingo” that will help keep you and your family healthier this season? Keep reading so you won’t miss out on this intriguing info. And speaking of missing out, did you know that literally millions of Americans have “missing money” owed to them? And not just small change, the amounts are anywhere from a few hundred on up to thousands of dollars. It could be you! So read on and enjoy this issue of Views You Can Use, to stay healthy, wealthy and wise!

As always, please feel free to forward this issue to friends, family members or coworkers - and do call or email if you need any personal assistance at this time!

MISSING: $24 Billion Dollars!

Remember as a kid, you’d work on that loose tooth and get it out fast…just so the Tooth Fairy would arrive early with some cash under your pillow? There may be a much less painful way to find a pile of cash…that’s rightfully yours in the first place. Most people stash a few bucks away here and there, forget where the cash is stashed, and over time find it in odd places like between sofa cushions and in coat pockets. But what about the money you put on deposit with a utility company or the little bank account you set up for a rainy day? These funds can be easily forgotten too, especially if you are caught up in the details of a move…and once you have moved, you may not receive the notices reminding you of your refund due, or the current statement for that rainy day account.

But would you be surprised to learn there is over $24 Billion Dollars of this type of missing money…just waiting to be found by its rightful owner?

That’s a whole lot of greenbacks gone missing…and some of them might belong to you. What happens to this money, and how can you get it back? Good news - it’s easier and less painful than working out a loose tooth. Here is the scoop.

When individuals move, forget to change their address, and companies or banking institutions cannot contact them, their property is turned over to the state as “unclaimed property”. The state then acts as a custodian of the property until the rightful owner claims it. Unclaimed property includes financial items such as bank accounts, utility refunds, un-cashed checks, certificates of deposit or even escrow accounts on home loans.

To determine if you have any unclaimed property with the state, jump on the web and visit www.unclaimed.org. Click on the state that you live in, and you will be directed to the appropriate website. You will either be able to perform a quick immediate search online, or a few states give you the information on how to just contact them directly to inquire. If you have lived in several states, do a quick search for each, since the funds will be held in the state they originated.

And be cautious of solicitations by mail or email that require you to pay a fee to obtain information about unclaimed property. You may end up paying a fee and receiving no information about unclaimed property, just the contact information for the state. Any unclaimed property information can be obtained free of charge by visiting the above listed website. What about money in Canada, or Federal money such as IRS returns, Savings Bonds, or Federally insured Credit Union accounts? While you’re on www.unclaimed.org, just hit “links” at the top of the page to search these resources as well.

Last year over 1.3 million claims were paid, totaling around $1.2 Billion Dollars. That’s nearly $1000 per person of “found money”. So by taking a minute to do a quick search, you may find out that you are a bit richer than you think. And pass this article on to your friends, family members, or colleagues…but be sure to remind them to include you in their celebration when they find their missing “cash stash”!

DEAD MEN TELL NO TALES

Your doctor always says it…”Be sure to take your entire course of antibiotics - don’t stop taking them just because you are feeling better!” But let’s be honest, isn’t it harder to remember to take them when you’re out and feeling good, with all those nasty symptoms just a fading memory? Why does that doctor care anyways? After all, they’ll never know…and you’re tired of popping those pills.

But in fact - it is absolutely crucial to your own health, not to mention the health of countless others, to take your entire course of antibiotics - and here’s why.

When you take antibiotics, you are fighting bacteria that are making you sick. Once the antibiotic comes in contact with the bacteria, the antibiotic will start to kill it…but in the meantime, the bacteria is trying to fight back, by adapting itself to the antibiotic, trying to actually change its own formation in order to survive under the new conditions.

So as you take your antibiotics - you do start to feel better in a few days, as more and more of the bacteria are killed off. But when you stop early - those bacteria organisms that survived and learned how to survive in spite of the antibiotic remain…the insurgents. The insurgent bacteria may now begin to mutate and change their own structure, as they’ve learned from their battle against the antibiotic. And if you start to get sick again from the remaining bacteria - the same antibiotic may now be far less effective, since the bacteria have learned how to defeat it, and you will stay sick.

Worse yet - what if you pass your mutated infection on to another person? Now you’ve passed on mutant bacteria that their doctor may have difficulty treating, since the antibiotic they might be likely to prescribe no longer works…but they won’t know that, until the person remains sick long enough to realize that it’s not working. Ever stayed sick long through the course of an antibiotic, and had to go back for something else? Very likely, you got sick from mutated bacteria, passed to you from someone who didn’t take their full course of antibiotics.

Bottom line - dead men tell no tales, and dead bacteria can’t live to learn how to fight another day, and keep you and others continually sick. Take your entire course of antibiotics, exactly as prescribed. If your family complains when you remind them…just pull out your pirate eye patch, tell them the story, and help them keep steady on the course. And while you’re at it - protect your friends and family by passing this article along to them as well.

The material contained in this newsletter has been prepared by an independent third-party provider. The material provided is for informational and educational purposes only and should not be construed as investment, financial, real estate and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is not without errors.

We are sending you the Views You Can Use - MMG Monthly newsletter because we are committed to keeping you updated on news, financial events and hot topics that may impact or interest you.

And as your Trusted Advisors, we always look forward to hearing from you. If you or someone you know is in need of our services at this time…or even if you just have a quick question or would like to touch base…please feel free to give us a call or email today!

In the unlikely event that you no longer wish to receive these valuable market updates, please USE THIS LINK or email: alex@alexaguilar.com

If you prefer to send your removal request by mail the address is:

Alex E. Aguilar

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