Blog   Tagged ‘mortgage’

Financial Word of the Week: Loan-to-Value

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FWOTW

You’ve probably heard the scary terms “upside down” or “underwater” when it comes to mortgages, especially six years ago. That’s one way of saying a home’s Loan-to-Value (LTV) ratio is too high or the value of the home is less than the loan amount. This is another financial number where lower is better.

Calculating your LTV ratio

Take the amount left on your mortgage and divide by the appraised value of your home OR the selling price (whichever is less). For example, if you bought a $225,000 home, but it was appraised for $200,000 and you still owe $175,000, your LTV ratio is 175,000 ÷ 200,000 = 87.5%. Now take that same scenario, but with a positive twist. If you made improvements on your home or the housing market in your area improves, let’s say your home is appraised for MORE than what you paid for it, $250,000. So your LTV ratio would now be based on your purchase price (the lesser of appraisal or purchase price) and your LTV would be 175,000 ÷ 225,000 = 77.8%.  The ratio has been reduced, and it’ll keep going down as you pay more of your loan amount (assuming the value of your home doesn’t fall below your purchase price). A good ratio to aim for is 75% or less. The lower your ratio, the less risk for your lender.

Should you refinance?

It’s worth consideration, but only after an informative chat with your lender. If you have a high LTV ratio and your home’s value has increased, refinancing could be a wise step for you. Plug in a few scenarios in this calculator, and chat with your lender about whether or not refinancing would be positive for you.

Special assistance

If you need even more help and purchased your home before June 1, 2009, you may be eligible for Federal Housing Finance Agency’s Home Affordable Refinance (HARP) Program. If you think you may be eligible, talk to your lender about refinances with further assistance from that government program.

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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.


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 Words of the Week: Fixed Rate / ARM

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FWOTW
Previously, we defined interest  as the cost of borrowing money. You have a range of options when it comes to interest rates. Before you take out a new loan or credit card, be sure you understand those options.

When looking at mortgages, you will likely see fixed rate and adjustable rate mortgages. With a fixed rate mortgage, your lender sets the interest rate during the application process, and it does not change for the life of the loan. With an adjustable rate mortgage, your interest rate will change regularly, based on a published reference rate. The frequency of this change depends on your mortgage.

Loans other than mortgages can be either fixed rate or variable rate. The definition of a fixed rate loan is the same as a fixed rate mortgage, but variable rate loans differ from adjustable rate mortgages in how frequently the rate can change. If the reference rate changes frequently, the interest rate on a variable rate could change monthly. Many car loans have fixed rates, while most credit cards have variable rates.

If you are unsure what your interest rate is on an existing loan, you can look at the terms and disclosures on your monthly statement or your loan paperwork. If you are applying for a new loan or line of credit, the application disclosure should tell you how the interest rate is set.

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

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FWOTW

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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1st step to buying a home: pre-approval

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Imagine walking in to your new house. You moved in a few weeks ago, you’ve unpacked most of your things, and it’s starting to feel like home. But then you wake up from this fantasy and realize you don’t know how to make this dream become a reality. We’re here to help.

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The process of purchasing your first home should be exciting and rewarding knowing you are taking control of your finances by investing into your own home. We want to give you a head start with understanding the process.

First things first. You’ll need to shop for a lender. Start with your own bank (a source you trust and believe in) and shop with other lenders as well. You’ll want to compare rates, cost associated with the loan and feel comfortable with the lender’s service levels before you apply.  A good lender will work closely with your specific situation. They will explain the loan and buying process and answer all your questions as a first-time home buyer.

The mortgage loan process has changed drastically over the years, so be prepared that the lender will want at least 30 days to get your loan approved and closed. Processing times will vary based on how complex your personal history is to document and verify. We suggest getting a pre-approval letter from your lender before shopping for your new home.

Why do you need a pre-approval letter?

  • A pre-approval letter will give your real estate agent a price range to know what homes to include in your search. It outlines the loan amount and terms you are approved for.
  • Pre-approval gives you a negotiating advantage. A seller might be more inclined to accept your offer if you have a pre-approval letter, even if you make an offer that’s lower than a buyer without a pre-approval. Sellers want the assurance of knowing their buyer can get financing since they are also planning on a home move.
  • A pre-approval letter is a stronger option than a pre-qualification letter because the approval is based on verified credit, income and asset data that an underwriter has reviewed and approved. The pre-qualification is based only on the data provided on the loan application that has not been verified or reviewed by an underwriter.

In order to expedite your loan process, here is a list of the documentation to bring to your lender when you have your first meeting for a loan application:

  • Last two years of W-2’s and tax returns with all schedules – This allows the lender to evaluate any other income or loss for qualifying purposes. All self-employed borrowers will need to provide a two year history of tax returns to determine income for qualifying purpose.
  • Most recent paystubs to cover 30 consecutive days – The lender will review and calculate income for wage earners.
  • Most recent asset statements to cover 30 days – This statement, also known as your bank statement, will need to show you have sufficient funds in your account to close on the loan. Any large deposits will need to be documented as to where the funds came from to meet loan requirements.
  • Additional information may apply based on the type of loan you are applying for – another important reason to select a lender who will walk you through the process and give you clear explanations.

The home-buying process can be long and complicated. Preparation involved in getting a pre-approval letter is fairly simple and it helps both you and the seller in the long-run.

Stay tuned for part two of this series: The second step to buying a home—choosing the right loan for you.

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Diane Hughes is Sr. Vice President/Director Mortgage Sales for UMB at 1010 Grand Blvd., Kansas City, MO.  She is responsible for the bank-wide mortgage services and has 29 years of experience as a Mortgage Banker. 



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Simplifying your credit

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When was the last time you downloaded your credit score? If you can’t remember or you have never checked it, you should consider taking a look at it soon. But you’re not alone. Two thirds of the population have not downloaded their credit report in the past year, despite the fact that the average American owes $118,000 in debt. This includes mortgage, student loans, credit card debt, etc.

Pie Chart Downloaded Credit Report in Last 12 Months

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Why do you need to know your credit score? High debt combined with little to no information about your credit score could put you in a risky financial situation. If you have so much debt that you can’t keep up with it and your regular monthly bills, you might end up paying a bill late or forget to pay it at all. This will lead to a lower credit score. Then when you go to apply for a home or car loan, you could be either denied or receive a higher than normal interest rate based on your lowered score.

Unfortunately, this has become a very common scenario. Many people are living month-to-month and often carry over their credit card debt each month just like their regular bills. One third of working adults don’t pay bills on time in part due to the number of accounts they have. Many have trouble keeping up with monthly expenses, requiring them to dip into savings to cover regular expenses.

Pie Chart Pay Bills on Time

Did you know that there are ways to reduce your loan interest rates and monthly payments? You can also reduce the number of payments you owe and even earn money with rewards points from certain credit cards.

To simplify your credit, consider the following options:

  • Use the bill pay option with your bank

    This saves time and you can go to one place to manage all of your bills and schedule them to pay once per month.

  • Consolidate your debt

    Consolidating your debt allows you to have one payment for all your debt and you can usually obtain a lower interest rate. This can allow you to pay your debt in less time for less money.

  • Reduce the number of credit cards you use

    This is another way to help you keep track of your spending and bills. Consider using a credit card that allows you to earn rewards. When you use the card you can earn points toward purchases, helping you save money.

  • Take advantage of low interest rates

    If you refinance your current mortgage to the low rates available now, you can save on your monthly payment. This is also true of auto loan rates.

If you feel overwhelmed by debt and monthly bills, take advantage of these ways to simplify your credit to help you work on becoming debt-free. Even if you don’t have much personal debt, it’s still a good idea to consider these tips to organize your finances, save money, and monitor your credit.

 

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.


Mr. Burditt serves as senior vice president of customer experience in UMB’s Consumer Division. He is responsible for developmental and strategic direction of the UMB consumer customer experience. He joined UMB in 2011. Mr. Burditt earned a Bachelor of Science degree in agricultural journalism from the University of Missouri-Columbia. He also is a graduate of the Greater Kansas City Chamber of Commerce’s Centurions program.



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