One of the reasons that mortgage brokers and bankers don’t want you to notice the APR in their print materials is because they don’t want to confuse you, the borrower. I admit I’ve been in that camp myself. After all, your monthly payments aren’t figured on the APR and all it does is raise more questions than it answers.

Until now, 2010, that is…

Which brings me to the other reason that some mortgage companies and professionals have been all too happy to dismiss the APR as something that,  though required on advertising, is not something you should pay attention to. This reason? It allows you as the borrower to do some shopping.

See, the annual percentage rate shows you what the interest rate looks like when you take into account the charges you will incur to secure the loan. Sure, your monthly payments are figured on the actual interest rate, but the APR will show you where the rate stands in relation to the up-front costs. In many ways, it can act like a ratio. This is an over-simplification, since loan size can also affect this somewhat, but the greater the distance between the actual interest rate and the APR, the higher the up-front fees to secure the loan.

Aha! (See why loan officers have been fearful?)

But now, there is a new procedure sweeping the nation known as GFE2010. All good faith estimates given to you by your mortgage loan professional as of January 1 now must show all fees in a different manner than before, making the APR just that much more interesting.

Let me explain…

Mortgage brokers and bankers both have a fee they charge up front, usually called origination, in addition to processing, underwriting, and legal fees that go to the lender and the attorneys. But, they also get paid by the lender on the back end of the loan in the form of a rebate for securing the loan. Mortgage bankers have not been required to disclose this, mortgage brokers have. Here’s where the GFE2010 gets interesting!

From here on out, when you get a GFE from a mortgage broker, all of their compensation is going to be listed up front. As of 1/1/2010, they can no longer be paid the rebate by the lender. Instead it will now be credited to the borrower! This is not true for loan officers working for a bank, which doesn’t seem quire fair for the broker, now does it?

Ah, but it is, because it creates a very interesting dynamic now more than ever with the APR. And this all benefits you, the borrower. How? Well, the rebate credit coming from the lender to the you in a brokered loan reduces the APR. You can now compare apples to apples when it comes to loan charges. In fact, in some cases, your APR on a brokered loan may now be lower than your interest rate!

So, when shopping for your next mortgage loan, pay attention to the APR and do a little shopping around. Chances are, you can end up with not only a lower actual rate with a broker,  but a lower APR to boot! And you’ll know exactly how much your broker will be compensated.

So, it’s January 2010… Do you know where your APR is?

Take a look at this convergence–

Low Interest Rates. Just this week, indications of higher interest rates are fading. That’s right… fading. This article at Bloomberg shows why. The economy, while no longer in free-fall, is in slow motion recovery. Should Ben Bernanke announce an end to the artificially low rates any time soon, we could start sliding off the side of the mountain again.

Government Rebates. The extension and expansion of the home-buyer’s credit is unprecedented. Whether you believe government handouts are a good thing or not, they’re a reality. And who doesn’t want free money to the tune of $6,500 for many existing owners and $8,000 for first-time buyers. Cha-ching.

Phenomenal Inventory. With existing owners putting their homes on the market in order to get the tax credit on top of the traditional “heading into spring” inventory boost, it’s a solid buyer’s market. But did you know that there are loads of foreclosed properties that haven’t even hit the market yet? Banks have been holding inventory for months and expectation is that they will soon be opening the floodgates. Bargains will be available in nearly every neighborhood.

Coming Inflation. What do you get when the same government that holds interest rates at 0% for an extended period of time also prints money like there’s no tomorrow? A falling currency value. And that means the price of everything has to rise. It may take a number of months yet before this really starts to happen, but not only will the money you borrow be worth less, the house you bought with that money will be worth more. That spells e-q-u-i-t-y with a capital E.

The result? If you’ve even hinted at a thought about buying a house, whether as your primary residence or as an investment, THIS IS YOUR YEAR. Not in your lifetime will you ever again see such an opportunity for building equity and wealth.

Most people (me included from time to time) represent inflation in the wrong manner. So in this post I want to focus on what inflation really is, and then also take a look at who the true beneficiary of inflation is. Why? To lay the groundwork for my next post on how you can be better prepared when all havoc breaks loose in certain aspects of our economy.

First, what is inflation? A simple definition is that it’s an increase in the money supply. When the United States government prints more paper dollars and adds them into circulation (like they have been doing non-stop over the past year), that’s inflation.

So in reality, people keep talking about the potential of coming inflation when we actually have already been having it at super sonic speed for a year. More correctly they should be warning about the coming effects of inflation. Why is this a big deal to note? Because you need to understand why it’s a bad idea for the government to print more and more money. The answer to my next question, however, will give you the reason our government isn’t as concerned about inflation as you would expect.

So the second question is, “Who is the true beneficiary of inflation?” To answer that, let’s take a look first at what happens to the value of each dollar as more dollars are printed.

When the supply of money is increased, each dollar is worth less and less because there are more and more of them. Something that is rare always has more value, right? So, if a dollar is worth less, does someone who is holding a dollar today have the same purchasing value as someone who used it yesterday? Of course not.

But now let’s take it a bit further. What if someone lends $1000 to a someone else? As the effects of inflation are seen, those dollars are worth less and less. On the opposite end of the scale, what happens to the $1000 the second person owes the first? As the effects of inflation are seen, those dollars are also worth less and less. Hmmm.

So, the answer to my second question of who benefits from inflation would be “the borrower.” During inflationary periods, wealth is transferred FROM the lender TO the borrower. And who is the biggest borrower of all right now? The United States government. And who is currently inflating the money supply? I’ll let you answer that one…

More on how you can prepare yourself for the effects of inflation next time…

Good news on the real estate front! Recent reports indicate that parts of the recession may finally be waning as professional global confidence has now risen from 39% to 58%. That means that well over half of the world’s leading economists say they believe the worst is behind us. So, while there is still some turbulence expected, the overall outlook seems to indicate that we’re beginning to mend.

As I’ve said before, it was the real estate sector that was the exploding bomb that got us into this mess, and it would likely be the same sector to bring stability. Just watch for the signs. Here’s what I mean…

Think of it like surf on a beach. In 2007 the real estate wave had reached just about as far inland as it could possibly stretch before gravity took over. Home prices had seen a huge surge and many homeowners had been riding the wave without watching how close they were to face-planting on the sand. Then during the wave’s receding, those who had been skinny-dipping were suddenly exposed and were in huge financial trouble. Ruined.

But what happens when a wave pulls back as far as it can? It starts to come on strong again, bringing many more surfers along with it. And who stands to gain as much as possible on this new swell? Those who can read the wave and take action to catch it.

Here are some of the waves I’m watching right now, and timing is looking good… (i.e. if you’ve read this far, now I’m getting to the good stuff!)

Home Prices and Inventory
In July, US Home prices posted their first monthly gain in 3 years. It wasn’t an overwhelming leap, but it’s a strong indicator that we have hit the bottom in real estate. Couple this with a lower inventory of homes, and we should see a continued uptick in prices.

Foreclosures
The number of homes being offered for sale by banks continues to rise. Whereas that may sound like bad news, it’s actually created quite an opportunity. Investors are picking up properties right and left, and homeowners are finding quite a good selection of low-priced fixer-uppers as well. Bargains galore!

Interest Rates
Amazingly, rates have stayed low and steady since March with even a few dips to all time lows. What this means, especially with prices starting to show some rebound is that mortgage rates will likely be on the rise throughout the fall. This may be the last of the 5%-range interest rates for quite some time.

Loan Products
FHA loans used to only make up around 20% of home loans. But they’re now back in full force, accounting for a whopping 70%+ of new mortgages. Why? Because of the low down payment requirement of just 3.5% and leniency of credit scores down as low as 600. Consider also the “no-down payment” loans of VA and USDA (smaller communities), and we’ve got an amazing array of loan products to assist people with getting into or moving up in home ownership. There are even loans that feature
financing as much as 110% when the property requires remodeling. Now that’s flexibility!

First-Time Buyer Credits
Unless you’ve been under a rock, you’ve no doubt heard about the $8,000 tax credit being offered through December 1st. This deadline is fast approaching, and we’re down to only about 2 months before it will be too late to take advantage of this
government gold mine.

Coming Inflation
If you’ve read much of what I’ve been writing on this blog or on Twitter, you’ve heard me say that I believe high inflation is on it’s way. Wait… That’s bad, right? Well, yes and no. The “no” answer is for those who buy a home now while prices are low, the dollar is stable, and interest rates are steady. If inflation jumps through the roof, all of the debt you currently hold will suddenly be less expensive. Inflated away as it were….

The Perfect Wave
All of these signs point to one thing. Pay very close attention here… If you’ve thought about buying a home for the first time, or thought about moving up from your present home, or considered refinancing and pulling out a little extra money for investment purposes, NOW IS THE TIME. Not next month, not next spring. TODAY.

A few years back, (think during the economic surge of the mid-2000′s) the savings rate was negative. That means that the average American was living beyond their means, spending more than they were making, and saving nothing. The actual figure was somewhere in the -2% range as savings rates go. And the U.S. economy surged forward like a steam engine going full-out.

Back to today. The statistic that came out this morning is that the savings rate has now changed to +6.9%. Americans have decided that putting away a little money each month is now in style. Way to go!

But whereas the U.S. economic recession has corrected the behavior of individual Americans, our government has decided that it must continue (and even accelerate) the borrowing in order to keep the economy from collapsing. What would happen if we as individuals would have done the same?

Utter disaster, that’s what.

And I believe the same is coming for the U.S. economy. The policies and practices that are taking place today in the name of correcting the economy are going to put it into a full-on nose dive. But that’s for another day’s blog.

So here’s the interesting take on today’s statistic. Our economy used to be built on the back of industry. We made things. We made things that other countries bought. As Americans were industrious and saved money, the national economy grew.

But times have changed.

We are no longer an industrious economy. We are a conusumer economy. We buy things that other people make, and borrow money from them to do so. As long as that cycle continues (which eventually it can’t), our economy continues to grow. When American’s stop spending and start saving, the wheels start to come off.

Great, you say… what to do about that?

Well, it starts with we Americans staying the course and living within our means individually. Then we need to continue urging our government to endure a little short-term pain for long-term health. They must reign in spending and borrowing and printing of worthless paper money. It won’t be painless, but it will be the right thing to do. Moving forward, our national and state governments need to support businesses and manufacturing that will once again allow us to become a dominant player in global exports.

Not an easy road, but one that our children will thank us for following.

Notice I said, “some”. Before you get too all excited and think the days of easy 100% financing are back, take a look at the guidelines below. You can even download HUD’s official statement here.

Here are the basics:

• Borrowers will still be required to put 3.5% down out of their own money (or gifted funds).
• The tax credit can be advanced in the form of a second mortgage (with or without payments), and can be used for additional down-payment, closing costs, pre-paid escrow items, or buying down the interest rate.
• The amount of the advance cannot exceed the total needed for down-payment, prepaid escrow items, and closing costs.
• Borrowers will not be allowed to get cash back from closing when using the advance.
• Borrowers will need to qualify for the payments of both first and second mortgage combined.

Personally, I’m glad that HUD has said buyers will still have to put 3.5% into the transaction. This will keep many from making the same mistakes of recent, mainly getting into a home without counting the cost.

There’s one phrase that really stands out to me in the list above— that the advance can be used to “buy down the interest rate”. Buying down the interest rate with “free money” will amplify your gain an HUGE ways. Think through this with me: An FHA mortgage is the only loan which is assumable (meaning a future buyer can take over the mortgage at the existing rate of interest). Having a low, low rate will 1) save you thousands of dollars over time with lower monthly payments and less interest paid on the balance, and 2) make your home sell for a premium (and quickly) because of the assumability factor.

So, normally I would frown on cash advances, however, in this market and with looming inflation, I think this is one to jump on. More details will be given in the coming days about approved lenders for the tax credit advances. So keep watching!

So, I thought I’d take a couple of posts in a row to talk about the score and particularly about the misconceptions most people have about them.

Misconception #1: “Scores are based on late payment history, and since I haven’t had any [late payments], I don’t have to worry about my score.” I hear this from two different camps of people– those who have a long credit history, and those who have no credit history at all.

The truth is, your score is based on a variety of factors. You could be doing great in the “no late payment” category and still have a score that’s impacted by other issues. Here’s a chart that shows the breakdown of every credit score. As you can see, late payments only makes up 1/3 of the total.

Misconception #2: “If I have too many credit lines open, this will affect my score negatively.” This comment usually comes from the conservative side of my clients.

Actually, the amount of credit lines you have open really does not impact your score. Rather it’s the ratio of how much credit you use compared to the amount that’s available. You could have only one credit card, a car loan, and a mortgage, but if your credit card is maxed out, you’ll be limited on your score. Conversely, you could have 10 different revolving accounts open with only small balances on them compared to their limits without it negatively affecting your score.

Misconception #3: “If I get a late charge on my credit card that means they’ve already reported this to the credit agencies.” Usually this comes from people who have a tendency to procrastinate on bill paying, because they feel defeated already.

But this isn’t true. Whether it’s your credit card or car loan or a mortgage, there is a grace period of a certain number of days after which your payment is due before a late charge will be assessed. Usually after the late charge, there is still another group of days before your account will be 30-days past due. Credit agencies only receive information once your payment reaches that 30-day late mark. So, even if you’re going to have a late fee, don’t assume the worst has happened and simply wait until next month to make 2 payments.

These are just a few of the misconceptions I hear regularly. If you have other questions, feel free to email me directly or post a generic comment. In the next post, I’ll give you some great strategies for keeping your credit score healthy (or bringing it back from the grave… ).

For the general economy and for the neighbors of those homes, this really stinks. But, for those ready for an amazing opportunity, answer the door … because IT’S knocking. Read on.

Most foreclosed properties have some work that needs to be done. Face it – the owners knew it was going under, so why take care of a sinking ship. In fact, why not just yank out anything valuable and take it with you.

Now sits a property that’s bank-owned, needs work, and is priced below market value. That in an of itself attracts a lot of interested buyers. But what about the money needed to bring this property back up to speed?

Ah … that’s where a lesser known FHA loan product called a 203k loan can really be a boon to someone looking to capitalize on today’s opportunities. Check this out … with a 203k loan you can:

• borrow up to 110% of the after-repaired market value of the home for both purchase money and for hiring contractors to repair/update the property
• take advantage of the same low interest rates as conventional financing, even for the repair money
• have only one loan rather than a mortgage and a construction loan
• borrow money to pay your new mortgage payment while the property is being repaired if it’s not liveable
• qualify with a minimum credit score of 620. (Caught your attention with that one, didn’t I?)

The 203k program stands out just for those merits alone. It’s a great deal for many home owners.

But for the first time home buyer, this is the year that it’s supercharged! What do you get when you combine below market value pricing on a home, a 203k loan, and up to $8,000 tax credit? An opportunity that you’ll kick yourself over and over for if you let it slip by.

One caveat for you investment minded people that are drooling over this … the 203k loan is only for owner occupants of the home. For more information, shoot me a direct message. I’d be glad to help you determine if this loan is right for you.

Continuing with my analogy of ark-building, the news this week has some interesting similarities to the original story. Here’s Noah, busy building a stadium-sized boat in his back yard, and people around him surely start the mocking. I wouldn’t blame them really … it took him over 100 years to build the thing after all, and no rain the entire time. But he wisely continued building.

Back to the present. Yesterday Ben Bernanke spoke to Congress and said that there are several sparkling signs that the recession may be ebbing. Well, then … that recession wasn’t so bad for the majority of Americans, now was it? “See, no rain!” (I empathize with those who have experienced the storm … I was certainly among them, but the majority escaped disaster.)

Here’s my question: What if everyone is looking for recovery in the wrong direction? Consumer spending seems by consensus to be the magic bullet. If all of us start plowing money back into the economy through buying, all will be well, right? Wait … isn’t that what got us into this mess to begin with?

What most Americans (our government included) have been bracing for is a 1930′s style of depression. But the question is … which one? There were two depressions that happened at around the same time– an American and a German. Similar devastation, but different root causes.

The American depression we understand. It was deflationary, and the economy shrank in a dramatically painful way. The way to survive it was to save and to be thrifty– to stretch your dollars. Presently, I couldn’t agree more with the need to trim back expenses and be wise with the money we have. A large number of Americans don’t even have a liquid emergency fund tucked away in a savings account.

But are you prepared to survive and thrive through the German style of depression? The difference with their crisis was that it was inflationary. Suddenly the value of their currency couldn’t buy as much as it used to, and it kept spiraling upward. (That kind of sounds like the initial beginnings of our current economic storm, i.e. the price of gas back in 2008, and look what that caused.)

So here’s the direct challenge of where we are today. We’re looking at the two styles of economic crisis and they are very much like a hurricane. We’ve gone through (and are still experiencing) the first wave, and now we’re feeling the eye. Whew … glad that’s over! But soon will come the back wall. And I believe much of what our government has done in an effort to stop the first part of the storm is going to make the second part much more challenging than the first. (For a detailed analysis, read a little bit of Peter Schiff.)

What’s the average American supposed to do then? Here are some practical strategies to build a financial ark that can really help you survive and thrive through the storms yet to come:

1) Establish sound personal habits that include living within your means, reducing consumer debt, and funding an emergency savings account. These practices are sound in good times and bad times, and have been a huge life-preserver in my personal life this year.

2) Move some of your existing investments into assets that are not tied to the U.S. Dollar. When inflation starts, the value of each dollar you hold, whether in your wallet or in assets (stocks, bonds, your house, etc.) will drop, possibly dramatically. Moving your investments out now will not only keep you from losing value, but you’ll gain equally against the U.S. economy’s loss.

3) Use leverage to invest now. Using debt for consumer spending is bad. Using debt to fund the right investments is good, especially if the dollars you borrowed drop in value after you have used them to gain control of an asset. There are thousands of great investments in the real-estate market these days. Using debt to acquire income prior to an inflationary economy = winning.

Of course none of these strategies should be attempted alone and without education. Everyone needs to seek professional investment advice.

How’s your financial ark looking these days?

I know … I suddenly took you back mentally to high school social studies class where you struggled daily to stay awake, but don’t miss this. It’s well worth the next 10 minutes to get yourself back up to speed of what is so unique (and fragile) about this wonderful U.S. of A.

(And I promise Lee Greenwood does not appear nor sing in this video).

I’ll go back to my regularly scheduled programming with the next post. Until then … follow this link for a great lesson in U.S. Government.