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Financial Words of the Week: Points, Origination Fees and Closing Costs

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FWOTW
All three of these terms refer to costs associated with applying for a loan. Lenders sometimes charge these fees to cover the cost of underwriting, appraisals, document preparation and other parts of the process. Generally, the fees will be higher with mortgages than other loans. Mortgages have more complicated requirements compared to other loans. Origination fees are one-time flat fees that cover the costs of processing the loans. By comparison, closing costs may include expenses associated with the real estate transaction that cannot be included in the mortgage amount. A point is one percent of the dollar amount financed. Lenders may let you pay points to lower the interest rate or they may charge points instead of origination fees. Some examples of possible closing costs:

  • Appraisal: The cost of hiring a real estate professional to determine the value of the house
  • Inspection: Hiring an engineer or building professional to examine the structural condition
  • Flood Certification: By law, every mortgage made through federally-regulated or insured lenders must include a flood certification. This assessment determines if the property resides in a high-risk flood area. Homeowners with mortgages in high-risk areas must have flood insurance.
  • Realtor Fees: Real estate agents are paid based on the cost of the house, normally around 3 percent of the selling price.

Mortgage laws vary greatly from state to state. Additionally, each mortgage lender has different products and offers. Because of these complex issues, your costs may be different from those listed above. The best way to learn more is by working with an experienced mortgage loan officer. They can walk you through the full process and help you understand the costs involved. Be sure to check the blog for our “steps to buying your first home” series. So far, we’ve covered Pre-Approval (Step 1) and Choosing the Loan that’s Right for You (Step 2).

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UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Word of the Week: Jumbo Mortgage

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FWOTW

What is a jumbo mortgage? A loan for a big house? Jumbo mortgage refers to a mortgage for more than a certain dollar amount. The limit is currently $417,000 for most areas, with a higher limit in certain high-cost regions. Mortgages of less than $417,000 may be called conventional mortgages. Many federal homeownership programs do not apply to jumbo loans. Lenders often charge higher rates for jumbo mortgages or have more restrictions on the loan, even for the same borrower. If I’m looking at a house that’s $420,000, does this apply to me? Maybe. A number of factors affect the total amount financed. Your down payment, the loan terms and where you’re buying will all influence the size of the loan. These potentially complex issues present another reason why it’s so important to work with an experienced mortgage officer. When you get pre-approved, your mortgage officer will help you understand your situation and how much you can afford. Your mortgage will be as unique as your home, so make sure you get the individual attention you deserve. luxury house

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UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Word of the Week: Lien

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FWOTW

What is a Lien?

When a borrower uses collateral to get a secured loan,the lender has a legal claim to that collateral. That legal claim is the lien. Lenders most commonly place a lien on a home for a mortgage and on a car for an auto loan. When a creditor places a lien, the creditor must be paid and the lien released before the property can be sold. For secured loans, the lien is created voluntarily.

Liens and Car Loans

When you buy a vehicle using an auto loan, the lender places a lien on the car title with your state motor vehicle office (depending on where you live). That lien will remain on the car title (even if the car is subsequently transferred) unless the lender issues a lien release. A lender releases a lien by notifying the proper officials, usually upon payment in full of the loan. This is an important step to research when selling or buying a vehicle privately. When you buy or trade-in with a car dealership, they usually assist with this process.

Liens and Mortgages

Houses and other real estate can have more than one lien. If you have a mortgage and use your home for another loan or line of credit, the second lender will put a lien on your home. One lender will have a first lien, meaning that in the event of non-payment, they get paid first. The other lender has a second lien position, meaning they will be paid after the first lender.

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UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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2nd step to buying a home—choosing the right loan for you

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So you’re ready to buy a home, and have finished the first step of pre-approval. Did you know that nearly half* of home purchases are from your fellow first-timers? It can be a daunting process, so we’re continuing the step-by-step approach to help you navigate this important financial decision.

There are many home loan choices. Finding the right lender will be the key to obtaining the information you need to make the right decision. The pre-approval process should have uncovered many of the factors that determine which loan will work best for you and let you know what interest rate you might be paying. Remember, to get a good interest rate, you’ll need as high a credit score and down payment as possible. The right lender will be able to guide you and explain the differences in each of the loans you qualify for.

Here is a general discussion of some of the mortgage loans available, to help prep you for your first meeting with a potential lender. The main differences are the size of the down payment and whether the interest rates can change.

Types of mortgage loans:

Conventional vs.Non-Conventional– One of the first decisions you will discuss with your lender is whether you want a conventional or non-conventional loan, which often depends on the size of your down payment.

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Conventional - A conventional loan typically requires a minimum down payment of 5 percent.  If you put down 5 to 19 percent, private mortgage insurance (PMI) may be required. This insurance protects the lender if you do not repay your mortgage.  Typically, you’ll have to pay this insurance until 78-80 percent of your mortgage is left, and then you may be able to remove PMIfrom your payments.  To avoid that extra insurance from the beginning, you’ll typically have to put down 20 percent or more.

Most first-time buyers choose homes with a median value of $147,000*, but in case you’re wondering, the conventional loan limit in most areas is $417,000. These loans can be fixed or adjustable (more on that in a minute). Conventional loans also allow you to have the seller pay up to 3 percent of your home’s closing costs and prepaid taxes and insurance.

FHA (non-conventional) – FHA loans typically require lower down payments than conventional mortgages, but there are also drawbacks to them. For example, FHA loans require mortgage insurance up front and it is usually more than private mortgage insurance with a conventional loan. Here’s how this type of loan works: The Federal Housing Authority does not actually lend the money but insures 100 percent of what the lender funds. FHA loans tend to be the most flexible in their credit guidelines. They usually allow for lower credit scores, higher debt-to-income ratios and as little as 3.5 percent as a down payment. These loans allow for up to 6 percent seller-paid closing costs and prepaid taxes and insurance.

Veterans Affairs (VA) – The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry). The VA loan does not require a down payment and does not require monthly private mortgage insurance.

United States Department of Agriculture (USDA) – This loan is intended to help people purchase homes in rural areas. The property must be located within the USDA Rural Development Home Loan footprint. USDA loans offer 100 percent financing to qualified buyers and allow for all closing costs to be either paid for by the seller or financed into the loan.

Fixed vs. Adjustable Rate Mortgages – After choosing a conventional vs. non-conventional loan, it’s time for another decision: do you want a fixed or adjustable rate?

Fixed-Rate Mortgages – Fixed-rate loans are just that, loans that have interest rates that are locked-in for the term of the loan. This means that your rate will not change during the entire time that you have the loan. Keep in mind that even with a fixed interest rate your payment could vary based on changes in taxes or insurance. The repayment of the loan is also spread out, or amortized, over that same fixed period. You can choose from 10-, 15-, 20-, 25- and 30-year fixed rates. Generally, the shorter the term of the loan, the lower the rate, but also the higher the payment. For example, a 15-year loan will usually have a better interest rate than a 30-year loan, but you’ll have to pay more per month in order to get the mortgage paid off sooner. Therefore, choosing the fixed-rate period will be a large part of determining the amount of your monthly payment.

Adjustable Rate MortgagesThese loans typically allow you to have lower payments at the very beginning, but take on higher risk than fixed-rate loans. There is usually an initial time period (1 to 10 years) where the interest rate is fixed. However, the rate can change after the initial fixed period causing the monthly payment to go up. Be sure to talk to your lender about what type of loan is best for your situation. If any of these factors apply to you, your lender can explain in more detail how an adjustable rate mortgage would work for you. However, an adjustable rate may be a good option if:

  • you plan to sell in a few years,
  • you will pay off the loan early, within the next few years, or
  • interest rates are high right now and are anticipated to decrease in the coming years. (not the case today)

To avoid feeling overwhelmed, remember, your lender is there to walk you through everything. Instead, focus on what your needs are. Then, you can outline with your lender what you’re looking for so he or she can provide your best options.

Arrive at your first lender meeting with answers to the following questions:

  • How much will you have for a down payment?
  • What are your preferred neighborhoods?
  • Do you want to get your loan paid off as soon as possible even if it means higher payments, or do you need lower payments with more time to pay it off?

Choosing the right lender is just one part of your home-buying team. Adding an experienced realtor will save you time and money and will be discussed in step three of buying a home.

*statistic source: NAHB.org

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.




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Financial Word of the Week: Equity

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FWOTW

What is equity?

Think of equity as a form of ownership. When you take out a secured loan to make a purchase, you obtain physical ownership of your purchase, but not full legal ownership. If you sold that purchase before fully paying off the loan, you would still need to pay off the rest of the loan. Equity is the difference between the value of that item and the amount still due on the loan.

For example, if your car is worth $20,000, and you owe $15,000, your equity is $5,000.

shutterstock_161197448_equity

So what does this mean for me?

For consumers, equity normally refers to houses, other real estate, and sometimes cars. Another way to think about equity is a fraction of ownership. When you first buy a home, your equity is approximately equal to the amount you put into your down payment. Over time, you pay down your mortgage and build equity in your home. Every payment you make lowers the amount owed to your lender and increases the amount you own.

How does this relate to a Home Equity Line of Credit?

A Home Equity Line of Credit, or HELOC (in the financial industry, we pronounce this “hee-lock,”) allows you to borrow using the equity in your home. Since HELOCs are revolving credit, they let qualified homeowners borrow money against the equity in their home whenever they need it. Because HELOCs are secured loans, they can provide credit at lower costs than unsecured loan, subject to the policy of the lending institution.

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UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Debunking credit score myths

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In an earlier blog post, we explained why credit scores are important and how to improve yours. For many people, it can seem as if their score was pulled blindly from a hat. So let’s take a look and debunk a few myths.

Credit Score Myths

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Ms. Stokes is a senior vice president and director of Private Banking at UMB. She is responsible for driving sales and relationship management activities. She works closely with the Wealth Management leadership team and regional presidents to grow business and helps to develop roles in wealth management, relationship management and presentation skills. She joined UMB in 2009 and has more than 30 years of experience in the financial services industry. She earned a bachelor’s degree in business administration from the University of Missouri- Kansas City and a Bachelor of Arts from the graduate school of retail banking.



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9 Financial Habits for Millennials

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Attention Millennials and those who hate labels but happen to be somewhere between 18 and 31. Here are nine habits to start today to give you more money at the end of the month. Come to think of it…these tips are universal, so watch no matter how young or old you are.

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Based on Nine Financial Resolutions for Millennials by Alexandra Talty. Forbes. December 10, 2013.

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Word of the Week: Secured Loan and Collateral

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FWOTW
What is a secured loan?

The word secured brings to mind images of armored trucks and locked vaults. Both can guard cash and valuables, but not a loan.

A secured loan is a loan in which the borrower pledges property (e.g. a car, house or other property) to the lender to act as a source of repayment if the borrower cannot pay back the loan.  The property that is pledged is called collateral.  If you do not make the payments as required on the loan, the lender may sell the collateral to cover the amount owed.  Usually a lender will require security for high dollar loans or when your credit is not good enough.

The opposite of a secured loan is an unsecured loan, which does not require collateral.  A lender may give you an unsecured loan when the borrower’s credit history is strong and the amount loaned is for lesser amounts.  Most credit cards are unsecured loans.

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So what does this mean for me?

Secured loans can help you make large purchases and pay them off over time. If everyone had to save for the full purchase price of a house, most people could not afford to be a homeowner until middle age, if ever. Because of the security provided by collateral, banks can provide lower cost credit options through secured loans. Your first step before borrowing should be to do a financial checkup (stay tuned for next week’s blog post to learn more about that) and figure out if you’re financially ready for that large purchase.

 

Statistics Source: New York Fed Household Credit Quarterly Report

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

 

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UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Credit Score: understanding the number

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Cholesterol, blood pressure, glucose, credit score…all numbers that mean nothing unless someone explains what is good and what is scary. Just like a doctor breaks down why your cholesterol level should be below 200, we’re here to explain what an ideal credit score could be. And you don’t even have to cut cheese out of your diet.

Your credit score (the most popular being the FICO® Score named after the organization that created it — the Fair Isaac Corporation) can range from 300 to 850 because it’s an adjusted scale. (You get 300 points just for having a credit history…so most adults have a higher score than 300 just by being “on the grid.”) In case you’re afraid to get the pronunciation wrong, FICO is pronounced “f-eye-ko,” like “psycho.”

Why does it matter? If you’re ever going to purchase a house or car or apply for a job, lenders and potential employers will be checking your score to assess your reliability and financial history.

While there are some schools of thought that advise consumers not to obsess over credit scores, the most popular being financial author and radio host Dave Ramsey, the FICO Score is a factor in 90 percent of lending decisions in the United States. And many in those anti-credit score camps still encourage you to be aware of your credit reports to check for errors and work on problem areas.

Most important step: check your score and your reports! Even if you’re worried because of past mistakes with late payments or credit card debt, it’s better to know where you stand and start taking action. No ostrich-like behavior!

head in sand_156983825

Good news—unless you’re within the 7 percent of the nation with a score between 350 and 549 (and if you are, stop reading this post and call a credit counselor), there is no need to stress. At a score of 550 or more, you can sometimes qualify for a loan. Your motivation for raising it as high as possible will be to get the best interest rates.

Most creditors consider a score above 700 to be acceptable to give a consumer the best rates. If your score is below 700, here are some tips that can help you bring it up. You may be surprised how quickly you can make a change (1-3 years instead of the 7-10 years it takes to start fresh after declaring bankruptcy).

How to raise your score:

1)    Understand how the score is decided

Credit Score Formula

In order of greatest to least weight:

  • Payment history – Did you pay all your bills on time? This includes student loans, car payments, credit card bill, etc.
  • Amount owed – for example, you still owe $10,000 before you can pay off your car, $15,000 in student loans and $500 on one of your credit cards.
  • Credit history length – something positive about getting older! The longer you have a credit history, the higher your score rises.
  • New credit – did you recently open a slew of store credit cards in order to get a discount on a shopping spree? You may be paying for it in the form of a lower credit score.
  • Type of credit used – Credit bureaus look at mortgages vs. auto loans vs. student loans vs. credit cards. Some are better for your score than others.

2)    Stay on top of your bills
The best way to improve on your credit score is to pay your bills on time. Have a steady income and live within your means so your bills don’t pile up until you’re completely buried in credit card and loan debt.

3)    Ask about your custom credit score
Lenders might also look at your custom credit score in addition to your traditional credit score. A lender will use your custom credit score to get a closer look at the risk factors that are related to what you are trying to fund with the line of credit.

4)    Discuss internal credit scoring
Not every creditor is required to report your credit. Some major lenders use their own internal credit scoring systems to help them make a decision. Lenders use these internal scores to predict future behavior of their customers. When you answer questions on the loan application form, the responses will go in to creating a custom score for you.

5)    One size doesn’t fit all
What makes you appealing to one lender will not make you appealing to all. If your credit has been damaged, be sure that any new information is reported to credit agencies.

6)    Pay the minimum
If you can’t pay the entire balance of a credit payment, at least pay the minimum due. Paying the minimum will keep your credit score from dropping even lower than it would if you don’t pay the bill at all.

7)    Keep checking
You have rights as a consumer under the Fair Credit Reporting Act. Check your report (not score) once a year for free at AnnualCreditReport.com‡.

This video from the Federal Trade Commission’s website does a great job at explaining why you need to check your report and how to do it.

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When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


Ms. Stokes is a senior vice president and director of Private Banking at UMB. She is responsible for driving sales and relationship management activities. She works closely with the Wealth Management leadership team and regional presidents to grow business and helps to develop roles in wealth management, relationship management and presentation skills. She joined UMB in 2009 and has more than 30 years of experience in the financial services industry. She earned a bachelor’s degree in business administration from the University of Missouri- Kansas City and a Bachelor of Arts from the graduate school of retail banking.



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Financial Word of the Week: Revolving Credit vs. Installment Loans

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Ever been in a meeting with your banker or a cocktail party conversation where a financial term stumps you? Are you considering buying a house or want to plan for the future, but have no idea where to start? Well, look no further. We’d like to be a resource for you and to make all that financial jargon easier to understand. And by the time you’ve read a few of these, the added bonus will be impressing your friends with your new financial wit!

So now, we bring you the perfect (and easy) way to increase your financial knowledge.

What is the difference between revolving credit and installment loans?

Many forms of debt fall into one of two categories: revolving credit and installment loans. When you borrow money from a bank, you can choose to borrow a certain amount and pay it back in a set number of months (in installments) with an installment loan. Or you can choose revolving credit where you do not have a set end date. Instead, these accounts have a credit limit, which is the most you can borrow. At any time, you can use your credit line up to that maximum amount. As you make your monthly payments, your line becomes available again, if you need to use it. By contrast, an installment loan pays out only once at the beginning of the loan, such as a one-time purchase, and cannot be used again as you pay it down.

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So what does this mean for me?

You have choices when you need to borrow money. Some customers enjoy the flexibility of revolving credit options, like a home equity line of credit (HELOC) or credit card. Others prefer the fixed terms and certainty associated with an installment loan. As we will discuss over the next few weeks, different lending options have different criteria, different benefits and different costs.  The most important thing to remember is that a loan or line of credit should fit your budget. Different accounts have different payment options, allowing you to choose a payment plan that works for you.

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UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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