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Topic - Who is in the First Position When it is a Short Sale! Educational!


 

To explain this as simple as possible, when you buy a home and get a loan for the home, the lender puts a lien on the property.  By doing so, the property becomes collateral for the loan. So, in the event the homeowner is unable to make payments, the lender can force the sale of the home to get paid.  There can be several liens at one time on a single property?


Lien priority is based on when things get recorded.  So let me give you an extreme example to illustrate lien priority. 

Here is an example situation with about everything that you could possibly come by.  We have a 1st mortgage for $250,000 with $15,000 in arrears.  This would include all back payments, late fees,
attorney fees and all the other fees they tack on.  This was recorded 6-20-1999.  We have a 2nd for $60,000 with $5000 in arrears.  Again this includes the back payments and fees.  This was
recorded 7-21-1999.  We have two judgments.  One for $2000 recorded 3-2-03, and one for $4000 recorded 4-2-03.  We have $3000 in state income tax recorded 5-5-04.  We have a $6000 IRS tax lien recorded 10-20-04.  And finally we have $5000 in property taxes recorded 2-11-05. Believe it or not all of these are different which we will talk about.

If we take a look at this example, we have a 1st mortgage and we can clearly see it was recorded first in 1999.  We also have a 2nd who is clearly in 2nd position.  Then we have a couple of judgments.  The judgment for $2000 is in 3rd position because it was recorded before the $4000 judgment.  So the $4000 judgment is in 4th position. Then we have state income tax for $3000 which is in 5th position.

Are you starting to see the pattern?  It's all based upon when you record.  Whoever records before another would be in "Senior" position and the other would be "Junior".  Hence the terms senior or junior lien holders.

Now we get down to the last 2.  These last two have rules which we need to discuss.  If we look at when these were recorded, the good ole IRS tax lien would be in 6th position. Now even though the IRS
is in 6th position, they have what's called redemption rights.  So here is the rule for IRS.  It doesn't matter what position they are in, they could be in last position.  If there is still equity in the property, they have 120 days to redeem the property.  Why would they want to redeem the property?  If there is a great deal of equity in the property and they know it, they can use that money to satisfy any tax liens.  It is very rare the IRS does this, but is can happen. Then we finally get down to the state property taxes.  All of you need to remember this.  This is very important.  Here is the rule for property taxes.  State property taxes have priority over EVERYTHING.  It does not matter when it was recorded.  If you look at this example, there is $5000 of unpaid property taxes that was recorded after everything else.  It was recorded 6 years after the first mortgage.  Guess what?  It does not matter.  Property taxes
always get paid first. 

So if we take a look at this example from what we just discussed, and the first is foreclosing - what is the opening bid at the auction?  $250,000 + $15,000 + $5000(property taxes) = $270,000.
All the other junior lien holders are wiped out if they don't protect their position except for ... the IRS tax lien.  Remember, they have their redemption period.  Now here is something else you need to understand.  Even though everyone was wiped out, the junior lien holders can still go after the borrower.  This is called a deficiency judgment.  Again this does not happen very often but it does happen.  A deficiency judgment is an unsecured debtand does not attach to any property.  Then depending on your states laws they can collect this debt. 

If the 2nd is foreclosing - what is the opening bid? $60,000 + $5,000(arrears) = $65,000 and you are responsible for anyone senior, in this case the 1st of $270,000 for a grand total of $335,000.  And everyone junior to the 2nd lien holder is wiped out except for IRS.  See why it's so important to know who is foreclosing?


Rates and Points Explained – Lower Isn’t Always Better


Rates and Points Explained – Lower Isn’t Always Better

The Confusion With Rates and Points

Borrowers are often confused about mortgage rates and points when deciding which home loan option is right for them. Traditionally, people simply want the lowest rate. But picking the lowest rate is not always the smartest financial move.

Interest Rates and Points Defined

Everyone knows what an interest rate is. It is a percentage "fee" charged by lenders for making a loan. The amount of interest you pay is based on the loan amount times the interest rate.

Example: $100,000 loan at 5% interest = 100,000 x 5% = $5,000 per year interest.

Points, though, are not always understood. "Point" simply means "percent", and is an up front fee that a lender charges for making a loan, based on the loan amount.

Example: $100,000 loan with 1 point = 100,000 x 1% = $1,000 up front fee.

Points are also referred to as "discount points" or just "discount". Whatever you call it, it's money out of your pocket at closing.

How Are Interest Rates and Points Determined?

The money for most mortgages comes from the sale of mortgage bonds. Much like the stock market, the bond market fluctuates constantly. This bond market fluctuation ultimately determines the minute-by-minute interest rates and points.

So here's how it works... Mortgage investors dictate a rate that they want at any given moment. Let's say 5%. Now, three things can happen:

1. The borrower accepts 5%. Since the investor got exactly what he wanted, the borrower doesn't owe anything else. The borrower pays NO points, known as "Par Pricing".

2. But what if the borrower wants 4.5%? The investor won't accept that, as he wants 5%. However, the investor will let the borrower pay less interest IF he gets extra money up-front. He figures out that x points, plus that 4.5% interest will yield him the same as the 5% he wanted. So this scenario is a loan priced at a "Discount".

3. Now, suppose the borrower takes 5.5%, which is more than what the investor wanted. The investor will give the borrower a credit, like an up-front refund, as the interest will be higher than required. This loan is priced at a "Premium" or "Rebate", and the credit can be used to pay the borrower's closing costs.

Put simply:

  • Lower rates can be obtained by paying discount points.
  • Higher rates will result in a credit to the borrower for closing costs.
  • The par rate is in the middle, with no points or credits.

What's the Best Combination of Rates and Points?

So the borrower is given some choices of rates and points to pick from. How should he choose?

The first factor in deciding may simply be cash flow. If the borrower wants to reduce closing costs, taking a higher rate and paying no points, or even getting a credit, may be the best option.

But what about a borrower without closing cost restraints?

The single most important consideration in choosing rates and points is time. That is, how long the loan will be in existence. In order to make a wise decision, we need to know how long the borrower will keep the loan.

Getting a lower rate means getting a lower monthly payment. But it requires an up-front investment (points). A "break-even analysis" is done to figure out what options make sense.

Break-even Analysis

Don't worry... this isn't difficult!

To compare two rate and point options, divide the cost for the lower rate by the monthly savings in the payment.

Example:

  • Borrower has two options for a $100,000 loan:
  • Option 1: 5% rate, no points, $536.82 payment
  • Option 2: 4.5% rate, 1 1/2 points, $506.69 payment

So, if the borrower takes Option 2 for the lower rate, it costs $1,500 in points to save $30.14 per month.

$1,500 divided by $30.14 = 49.77 months

It takes 50 months, over 4 years, just to get the initial investment back from the lower payments. This is the "break-even point".

Is the investment worth it? If they plan on having the loan for 30 years, then they may choose the lower rates and points. But what about a borrower that only plans to be in the home for 4 or 5 years? In that case, it makes sense to take the higher rate and save the money as it would be a losing investment.

Conclusion

We make investments in order to make a profit. Think of the rates and points combination as an investment. Without considering time, a borrower cannot make a wise investment choice. And, as you've seen, a lower rate is not necessarily better!

Any question? Please call Ludwig Parsamian, Keller Williams at 818.281.5889 or Karyn Weger, Sr. Loan Officer and Branch Manager at 909.499.8949