Not so Timely HELOC Advice
October 31, 2005 by Administrator · Leave a Comment
Always on the lookout for good advice and discussion about home equity loans and HELOCs, we came across an inviting newsfeed over the weekend ("The best financial moves to make now") from Bankrate.com. Parts of the story dealing with home equity loans and HELOCs are shown below:
Bankrate.com
The best financial moves to make now
Friday October 28, 6:00 am ET
Michael Larson…
Home equity loans: Home equity loan rates tend to follow the prime rate. Because it changes within a day or two of a Fed cut, new home equity loan customers will start seeing lower rates shortly thereafter. Existing borrowers, however, won’t see an impact at all because equity loans have fixed payments and rates.
Best move now: For months, we’ve advised borrowers to hold off taking out home equity loans on the expectation the Fed would keep cutting rates. The rationale was simple: When the Fed is cutting rates, equity loan borrowers can get lower rates by waiting until the end of the rate-cutting cycle.
Now, that end may either be here already or just around the corner. That makes the next couple of months a great time to lock in a low equity loan rate. If you can afford to make the payments on a loan, wait a couple of weeks for banks to adjust their rates to reflect the latest Fed cut, then pounce!
Equity loan rates averaged 9.07 percent on May 9. Use Bankrate’s equity loan search engine to find the best rates in your area.
Home equity lines of credit: Both new and existing line of credit customers are paying significantly less to borrow today than they were in 2000. That’s because most equity lines of credit feature variable rates and payments tied to the prime rate, which declines whenever the Fed cuts rates. The prime rate is probably close to bottoming out, though, after falling 250 basis points this year. So don’t expect your HELOC rate to hit 3 percent.
Best move now: While home equity lines of credit, rather than loans, were the better option for borrowers earlier this year, that isn’t the case any more. With the Fed about done cutting rates (or maybe done already), borrowers should give banks a couple of weeks to adjust their rates to reflect the Fed’s latest cut, then lock in low fixed-rate equity loans. After all, if you get a variable-rate line of credit when rates are at or near a nadir, your risk of higher rates and payments in the future rises substantially.
Equity line of credit rates averaged 7.63 percent on May 9. Click here to search for the best home equity line of credit. …
Took a few moments and a few re-reads before realizing Bankrate’s advice was from 2001! Someone (Bankrate, MyYahoo, etc.) got their signals (or files) crossed and sent out this dated story last Friday. Not sure how widely distributed it is or how many folks read it, but the underlying lesson is clear: free internet financial advice (from any source) can be great, but always pay attention to details and check with a trusted advisor before making important decisions.
Will the HELOC Interest Deduction Survive?
October 26, 2005 by Administrator · Leave a Comment
President Bush’s bi-partisan tax reform panel is finalizing recommendations to make the tax code simpler, fairer, and more geared toward promoting economic growth. Among proposals being seriously considered are far-reaching changes to the mortgage interest deduction. Specific proposals include:
* Reducing from $1 million the size of a mortgage on which interest may be deducted. If such a proposal were made, it’s possible that the mortgage size would vary by region depending on local home prices.
* Replacing the mortgage-interest deduction with a tax credit, allowing all homeowners with a mortgage to get a tax break — not just those who itemize.
* Reducing the tax rate at which mortgage interest may be deducted. Likely a proposed rate would be a middle-income tax rate, such as 15 percent or 25 percent. That would preserve the benefits of homeownership for middle-income taxpayers, Poterba said.
* Reducing the total capital gains exempted from tax.
* Combining two of these elements — say, reducing capital-gains exemption threshold and lowering the deduction rate on mortgage interest.
Members of the panel stressed that if any changes were made, there would have to be a gradual transition period so as not to upset the housing market, or harm current homeowners. The transition might involve grandfathering in the tax breaks enjoyed by current homeowners, or phasing them out slowly.
What is not clear at this point whether the panel has the “second mortgage” interest deduction in it sights as well. Currently, you can deduct up to $100,000 in interest on the principal of a second mortgage or home equity loan, provided the value of the property exceedss the first and second mortgages combined. And unlike first mortgages, where the deduction (up to $1 million) is available only if you use the money to buy, improve or build your home, you can use a second home equity loan for almost any purpose, and still get the interest deduction.
Limiting the second mortgage deduction in any way would certainly reduce the appeal of HELOC loans. On the other hand, if the home equity deduction survived on top of a more-limited first mortgage deduction, demand HELOCs and other home equity loan products could be greater than ever.
In any event, changes of the magnitude being considered by the tax reform panel will clearly face an uphill battle in Congress and with the public. Good economic arguments can be made on both sides of the mortgage interest deduction issue and they deserve full public debate and consideration. The panel’s final report is due November 1 and we will closely monitor developments.
TILA - Truth in Lending Act
October 25, 2005 by Administrator · 1 Comment
The Truth in Lending Act (TILA) provides important protections for HELOC borrowers. Following is a comprehensive description of TILA and the specific consumer protections it provides:
The Truth in Lending Act (TILA), Title I of the Consumer Credit Protection Act, is aimed at promoting the informed use of consumer credit by requiring disclosures about its terms and costs. In general, this regulation applies to each individual or business that offers or extends credit when the credit is offered or extended to consumers; the credit is subject to a finance charge or is payable by a written agreement in more than four installments; the credit is primarily for personal, family or household purposes; and the loan balance equals or exceeds $25,000.00 or is secured by an interest in real property or a dwelling.
TILA is intended to enable the customer to compare the cost of a cash versus credit transaction and the difference in the cost of credit among different lenders. The regulation also requires a maximum interest rate to be stated in variable rate contracts secured by the borrower’s dwelling, imposes limitations on home equity plans that are subject to the requirements of certain sections of the Act and requires a maximum interest that may apply during the term of a mortgage loan. TILA also establishes disclosure standards for advertisements that refer to certain credit terms.
There are five terms which are considered to be “material” disclosures required by TILA. While other disclosures are required, these are deemed to be so important that a failure to give any one of them gives rise to the your right to rescind the loan transaction if your home is pledged as security. The terms are:
Finance Charge: the “finance charge” is defined as the cost of credit over the life of the loan, expressed as a dollar amount. This includes, not only interest, but any other charge which is required as a condition of receiving credit. Examples include: “points”, document preparation fees and other fees which are excessive compared to their purpose (like excessive fees for notaries, appraisals, credit reports, title examinations, etc.).
Annual Percentage Rate (APR): the APR is the cost of credit expressed as a percentage. For example, a loan with an interest rate of 17% may have an APR of 25% (all finance charges are rolled into the APR).
Amount Financed: the “amount financed” is also expressed as a dollar amount. It is calculated by t
aking the principal amount of the loan and subtracting those amounts which are financed as part of the principal that are considered part of the finance charge. For example: you take out a $100,000 note and deed of trust on your home. The 5 points ($5,000) charged on this loan are financed and are therefore included in the $100,000 principal on the note. However, since the five points are defined as part of the finance charge, they are subtracted from the $100,000 in determining the amount financed ($100,000-$5,000 = $95,000).Schedule of Payments: the “schedule of payments” tells you the day of the month, timing, number and dollar amount of payments due over the entire course of the loan. Example: 1 payment of $500 on 1-5-96 and 50 payments of $100 on the 5th of each month beginning 2-5-96.
Total of Payments: the “total of payments” is also expressed as a dollar amount. It represents the total dollar cost of the loan to you, assuming all payments are made on time. The total of payments is calculated by adding up all payments disclosed in the schedule of payments.
In addition to financial disclosure, TILA provides consumers with substantive rights in connection with certain types of credit transactions to which it relates, including a right of rescission in certain real estate lending transactions, regulation of certain credit card practices and a means for fair and timely resolution of credit billing disputes. This discussion will be limited to those provisions of TILA that relate specifically to the mortgage lending process, including:
* Early and Final Regulation Z Disclosure Requirements
* Disclosure Requirements for ARM Loans
* Right of Rescission
* Advertising Disclosure Requirements
Early and Final Regulation Z Disclosure Requirements:
TILA requires lenders to make certain disclosures on loans subject to the Real Estate Settlement Procedures Act (RESPA) within three business days after their receipt of a written application. This early disclosure statement is partially based on the initial information provided by the consumer. A final disclosure statement is provided at the time of loan closing. The disclosure is required to be in a specific format and include the following information:
1. Name and address of creditor
2. Amount financed
3. Itemization of amount financed (optional, if Good Faith Estimate is provided)
4. Finance charge
5. Annual percentage rate (APR)
6. Variable rate information
7. Payment schedule
8. Total of payments
9. Demand feature
10. Total sales price
11. Prepayment policy
12. Late payment policy
13. Security interest
14. Insurance requirements
15. Certain security interest charges
16. Contract reference
17. Assumption policy
18. Required deposit information
Disclosure Requirements for ARM Loans:
If the annual percentage rate on a loan secured by the consumer’s principal dwelling may increase after consummation and the term of the loan exceeds one year, TILA requires additional adjustable rate mortgage disclosures to be provided, including:
o The booklet titled Consumer Handbook on Adjustable Rate Mortgages, published by the Board and the Federal Home Loan Bank Board or a suitable substitute.
o A loan program disclosure for each variable-rate program in which the consumer expresses an interest. The loan program disclosure shall contain the necessary information as prescribed by Regulation Z.
TILA requires servicers to provide subsequent disclosure to consumers on variable rate transactions in each month an interest rate adjustment takes place.
Right of Rescission:
In a credit transaction in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership is or will be subject to the security interest has the right to rescind the transaction. Lenders are required to deliver two copies of the notice of the right to rescind and one copy of the disclosure statement to each consumer entitled to rescind. The notice must be on a separate document that identifies the rescission period on the transaction and must clearly and conspicuously disclose the retention or acquisition of a security interest in the consumer’s principal dwelling; the consumer’s right to rescind the transaction; and how the consumer may exercise the right to rescind with a form for that purpose, designating the address of the lender’s place of business.
In order to exercise the right to rescind, the consumer must notify the creditor of the rescission by mail, telegram or other means of communication. Notice is considered given when mailed, filed for telegraphic transmission or sent by other means, when delivered to the lender’s designated place of business. The consumer may exercise the right to rescind until midnight of the third business day following consummation of the transaction; delivery of the notice of right to rescind; or delivery of all material disclosures, whichever occurs last. When more than one consumer in a transaction has the right to rescind, the exercise of the right by one consumer shall be effective for all consumers.
When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void and the consumer will no longer be liable for any amount, including any finance charge. Within 20 calendar days after receipt of a notice of rescission, the lender is required to return any money or property that was given to anyone in connection with the transaction and must take any action necessary to reflect the termination of the security interest. If the lender has delivered any money or property, the consumer may retain possession until the lender has complied with the above.
The consumer may modify or waive the right to rescind if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency. To modify or waive the right, the consumer must give the lender a dated written statement that describes the emergency, specifically modifies or waives the right to rescind and bears the signature of all of the consumers entitled to rescind. Printed forms for this purpose are prohibited.
Advertising Disclosure Requirements:
If a lender advertises directly to a consumer, TILA requires the advertisement to disclose the credit terms and rate in a certain manner. If an advertisement for credit states specific credit terms, it may state only those terms that actually are or will be arranged or offered by the lender. If an advertisement states a rate of finance charge, it may state the rate as an “annual percentage rate” (APR) using that term. If the annual percentage rate may be increased after consummation the advertisement must state that fact. The advertisement may not state any other rate, except that a simple annual rate or periodic rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the annual percentage rate.
RESPA - Real Estate Settlement Procedures Act
October 23, 2005 by Administrator · 1 Comment
The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, first passed in 1974. Home equity lines of credit (HELOCs) are subject to the provisions of RESPA. Following is an overview of RESPA disclosure requirements and what you should expect to see from your lender before the loan is taken, during the loan process, and after settlement.. More detailed information is available from HUD.
The purposes of RESPA are:
1. to help consumers become better shoppers for settlement services and
2. to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.
Details about RESPA
Corresponding with the above purposes:
1. RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.
2. RESPA also prohibits certain practices that increase the cost of settlement services. Section 8 of RESPA prohibits a person from giving or accepting any thing of value for referrals of settlement service business related to a federally related mortgage loan. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company.
RESPA in general
RESPA covers loans secured with a mortgage placed on a one-to-four family residential property. These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. HUD’s Office of RESPA and Interstate Land Sales is responsible for enforcing RESPA.
Required disclosures:
1. At the time of loan application
When borrowers apply for a mortgage loan, mortgage brokers and/or lenders must give the borrowers:
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a Special Information Booklet, which contains consumer information regarding various real estate settlement services. (Required for purchase transactions only) and
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a Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate and the actual charges may differ. If a lender requires the borrower to use a particular settlement provider, then the lender must disclose this requirement on the GFE.
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a Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. It also provides information about complaint resolution.
If the borrowers don’t get these documents at the time of application, the lender must mail them within three business days of receiving the loan application.
If the lender turns down the loan within three days, however, then RESPA does not require the lender to provide these documents.
The RESPA statute does not provide an explicit penalty for the failure to provide the Special Information Booklet, Good Faith Estimate or Mortgage Servicing Statement. However, bank regulators may choose to impose penalties on lenders who fail to comply with federal law. Please read the section on RESPA enforcement for more information.
2. Disclosures before settlement/closing occurs
The terms “settlement” and “closing” can be and are used interchangeably.
An Affiliated Business Arrangement (AfBA) Disclosure is required whenever a settlement service provider involved in a RESPA covered transaction refers the consumer to a provider with whom the referring party has an ownership or other beneficial interest.
The referring party must give the AfBA disclosure to the consumer at or prior to the time of referral. The disclosure must describe the business arrangement that exists between the two providers and give the borrower an estimate of the second provider’s charges.
Except in cases where a lender refers a borrower to an attorney, credit reporting agency or real estate appraiser to represent the lender’s interest in the transaction, the referring party may not require the consumer to use the particular provider being referred.
The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.
3. Disclosures at settlement
The HUD-1 Settlement Statement shows the actual settlement costs of the loan transaction. Separate forms may be prepared for the borrower and the seller. Where it is not the practice that the borrower and the seller both attend the settlement, the HUD-1 should be mailed or delivered as soon as practicable after settlement.
The Initial Escrow Statement itemizes the estimated taxes, insurance premiums and other charges anticipated to be paid from the Escrow Account during the first twelve months of the loan. It lists the Escrow payment amount and any required cushion. Although the statement is usually given at settlement, the lender has 45 days from settlement to deliver it.
4. Disclosures after settlement
Loan servicers must deliver to borrowers an Annual Escrow Statement once a year. The annual Escrow account statement summarizes all escrow account deposits and payments during the servicer’s twelve month computation year. It also notifies the borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken.
A Servicing Transfer Statement is required if the loan servicer sells or assigns the servicing rights to a borrower’s loan to another loan servicer. Generally, the loan servicer must notify the borrower 15 days before the effective date of the loan transfer. As long the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized. The notice must include the name and address of the new servicer, toll-free telephone numbers, and the date the new servicer will begin accepting payments.
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