Mortgage questions answered

I am receiving calls and e-mails from clients and regular readers of this column asking about my recommended course of action in these volatile economic times. Here are some of the recent questions and my responses:

Question. Should I refinance my current mortgage?

Answer. It depends on several factors. First, how long do you plan to stay in your current home? If you plan to be there for at least two more years, then the next step is to compare your current note rate with today's mortgage rates. Your mortgage banker will be happy to run the numbers to see if the savings in monthly payments will justify the costs of a refinance. If you currently have a 15-year note and expect to stay in your home until the end of that term, it is also wise to calculate how much mortgage interest you have paid so far. You may discover that once you factor in the interest you have paid on the existing mortgage, the savings may not be sufficient to justify a refinance.

Another important consideration with regard to refinancing is the amount of equity that you have in your home at today's appraised value. If your current mortgage is more than 80 percent of your home's value, then you would need to pay private mortgage insurance (PMI) on a refinance. If you are not currently required to pay PMI, it may be better to keep your current mortgage.

Q. I am worried about whether I can continue to make my mortgage payments. The advertisements on television and the web sound tempting. Should I call one of those credit repair agencies for help?

A. Who wouldn't want to reduce their outstanding indebtedness with just a phone call? However, your grandmothers were right -- when something sounds too good to be true, it usually is. When economic times are tough, the scam artists seem to come out of the woodwork to prey on those who are most vulnerable.

There are many borrowers who are having difficulty keeping up with their debt payments on their credit cards or mortgages. These scammers can smell a susceptible victim and often promise to have debts wiped out or reduced if the borrower will pay them an upfront fee. DO NOT FALL FOR THIS. If you have funds that you would consider paying to one of these credit repair firms, you would be better off using this money to pay down some of your outstanding indebtedness.

Q. Will my mortgage company modify the terms of my home loan?

A. Despite Washington's insistence that major mortgage banks find ways to make current mortgages more affordable, most of the banks have shown little willingness to do so. In fact, some of my clients have actually been told by banks' customer service representatives that there is nothing they can do to help the borrower until they are at least two months in arrears. Keep in mind that even if you follow their advice and fall behind on your payments, there is no guarantee that they will do anything to help you.

If you do not make your mortgage payments on time, you will be destroying your credit and jeopardizing your ability to get financing in the future. Additionally, future employers and even insurance companies do look at your credit score in making employment decisions and calculating your insurance premiums.

If you have fallen on hard times and it looks like you will be unable to keep making your mortgage payments, the best thing to do is to contact your current mortgage holder and keep asking to speak to someone who has the authority to modify the terms of your current loan. In general, banks do not want to own real estate. It makes sense for the lender to explore ways to reduce your payments and not face taking possession of your property and then trying to sell it.

Q. Is it still possible to buy a house with no money down?

A. Unless you qualify for a VA home mortgage, there are no 100 percent financing programs available right now. If you and the property you are interested in meet FHA underwriting guidelines, you need to plan to have at least a 3.5 percent down payment.

Q. Should I pay off my mortgage so I can be debt-free?

A. The analysis of this question hinges on what kind of return you can expect on the money you would use to pay off your mortgage. Your financial planner can help you to examine the opportunity cost of paying off your mortgage. For example, if you have borrowed mortgage money at 5 percent and your interest is tax-deductible, you will need to calculate what your real cost of borrowing has been at your personal incremental tax rate.

If we assume that your real cost of borrowing has been about 3 percent (after the tax deduction) and you can invest your money and achieve a return of over 3 percent, then it makes sense to do so. Thus, your money is working for you and growing instead of sitting in your real estate and not building wealth.

Q. Why hasn't my property sold?

A. In spite of the billions of dollars in bailout funds to lending institutions, the credit markets are virtually paralyzed. The only loan programs available are those that are government-sponsored -- FHA, VA and Fannie and Freddie mortgages. If we are to see a recovery in our real estate market, we need to see incentives for Wall Street firms to offer alternative financing vehicles to borrowers with good credit. Our elected representatives need to hear from us on a regular basis about turning the spigot of credit back on to stimulate the housing

market.

Q. When is the market going to improve?

A. The real estate market in the United States will not become active again until the credit market offers attractive alternatives to what is available today. Since the government-sponsored programs (VA, FHA, Fannie and Freddie loans) are limited both in terms of loan amount and underwriting guidelines, we need Wall Street to get back into the financing markets for residential properties. You can help to create your own economic stimulus by contacting your US senators and congressmen and demanding that Washington offer incentives for the private sector to re-enter the mortgage

markets.

Rebecca Bass is branch manager of Element Funding in Beaufort. Contact her at 843-379-0999.