Home Loan Focus

Archive for January, 2008

Well, this was a pretty dramatic week for the mortgage market. There are banks taking more multi-billion dollar losses and the federal government preparing to increase loan limits for FHA loans and other loans that can be secured by Freddie Mac and Fannie Mae.  Oh and then there was the interest rate reduction by the Federal Reserve.

All of this is opening up things for the banks to reach out to people and refinance them secured with government money.  The banks have lost a huge amount of money and getting you to refinance could just be the thing they need to make some money and get closer to profitability.

Now before you go and get all patriotic sacrificing your hard earned wages and savings to refinance your house and bail out the banking industry, please, please take your time and review the deal very very closely.  Read every document, shop every offer and rate around.  If the deal goes south and they attempt to flip you into something that is less than desirable bail out.

DO NOT GO THE PAPERLESS ROUTE!

That is probably the most important lesson that mortgage borrowers have learned.  Demand to have your income verified.  Make sure they go over your tax paperwork even.  Do not let them push you into a more expensive loan that gives you a higher interest rate just so that you do not have to do as much paperwork.  This is one of the things that tricked many a borrower, yours truly included, over the last few years.  I was fooled once, but many people were fooled several times.  That promise of less work and an ‘easy refinance’ comes with a real financial cost.

We have all learned to ignore the freebies, the toasters, the camping gear, the karaoke machines and coffee grinders.  Now we have to learn to ignore the easy refinance and choose the road that is more difficult.

Oh and one other tip, don’t refinance before the end of the month.  Many people expect the fed to drop rates one more time!

This spring I will be faced with a serious problem as I prepare to sell my home.  We have an extravagant swing set and fort combination custom built in the back yard of our home.  Kids absolutely love the thing and many adults find it very interesting as well.  I have had several retirees (with grown kids) ask about getting one built for themselves, to presumably let their grand kids play in when they come to visit, but I know they are just hoping to climb up in there themselves.

So my problem is what to do about this great thing.  Conventional wisdom would suggest that swing sets should not be left at the house in order to appeal to the widest potential audience of buyers.  However, real estate is a little upside down right now.  I have a suspicion that if I leave it, it could be one of those things that helps to convince just the right buyer that this is the house for them and their family or even their grand kids.

Fortunately, I have several months yet to figure it out before I list the house.  I guess we will see how this turns out!

People were already making the move to refinance before the Fed came in on Tuesday and cranked down interest rates.  They were acting before the White House and Congress came up with a plan to open up credit by increasing loan limits for FHA loans and enabling Freddie Mac and Fannie Mae to secure some of those same large mortgages.

Refinance applications drove the increase: Applications to line up new financing on an existing loan rose 16.9% during the week ended Jan. 18, compared with the previous week, according to the MBA’s weekly survey.

“Refinance applications are up 92% since the beginning of November and purchase applications are up 7%,” said Jay Brinkmann, the MBA’s vice president of research and economics.

Refinancing applications continue to rebound, MBA data show – MarketWatch

Now don’t start packing your Samsonite bags in preparation for a vacation to Real Estate Boom 2.0.  The amusement park rides there are still shut down for repairs for the most part as credit is still tight.  The planets are starting to align themselves however, and there is potential that we might just pull out of this thing sooner rather than much later and that at least is good news!

This morning you might hear about President Bush’s Tax Cut stimulus plan.  He is releasing a newly revised stimulus plan today that would provide $800 for individuals and $1600 for married couples.  Bush hopes that this tax cut will achieve the same results that tax cuts in 2001 achieved as they helped to stave off a recession.  Back then the checks rolled in August and people spent the checks right away, buying lots of goods to help boost the economy either out of recession or in a way that cut it off before it really began.

I for one can and will use the money, but the reason why I will use the money is the same reason why this tax cut will not help the US avoid a recession.  I am going to take that full check and drop it on one of my credit cards.  That is the area where I have a need for an expense reduction both in monthly interest charges as well as in monthly payment requirements.  I am not going to go buy a new Wii or TV or clothes or any other stuff.  The reason is that I just bought a bunch of stuff for our household last month.  It was called Christmas and many Americans are going to do the same exact thing.

January is typically the month where people buckle down to pay off their holiday debt, bills, travel expenses etc.  This is not a spending month, this is a paying off debt month.

In the long term this tax cut is actually no tax cut at all.  Its more like a 1 year wash 2nd year tax increase.  That is because the tax cuts Bush wanted to make permanent are being completely abandoned to push this deal through.  So the money that we might benefit from today, basically comes out of our own pockets next year.  The year after that we pay more as well.

Now as  a general rule of thumb, when it comes to the government I’ll take a bird in the hand any day as its rare when the government actually delivers two in the bush, even when its Bush that is the one delivering.

How to Use Bush’s New Tax Credit to Save Your House from Foreclosure

Now I am going to put this money on credit card debt.  If you are working to save your own home from foreclosure, you should consider a different option.

A couple years ago if you had been given $1600, the smart money would have been to put that money into a directbuy home improvement, boosting up your kitchen, adding a bathroom or anything that might return you a home sales price of another $10k.  This year we are looking at falling home prices and possible foreclosures.  If you have a closing that is in trouble and the buyer is asking for some extra stuff, you might use the money to save the deal.  Unfortunately, that’s not likely for most people.

Odds are that if you are trying to save your home, you are better off using this money to make another payment and negotiate a refinance deal under one of the new FHA plans that is designed to help people on the cusp of trouble that have not yet defaulted.  If that isn’t an option, you might use the money to pay closing costs on an old fashioned (non-government backed) refinance. 

If you are not in trouble, you might invest the money in the stock market.  At about 12,000 the stock market is looking like a value play.  If stocks are not your thing, you might use the money to make an extra principle payment on your home or home equity loan.  This could save you money over the life of your mortgage.

Use the money to Get Green

If you wanted to remain true to the spirit of the tax cut, you might even use say $300 to go invest some money in LED light bulbs.  Upgrade the bulbs in your house with these energy saving bulbs and you will decrease your electric bill for the long term.  You can still use the remaining money to pay down debt, or just park that money in a rainy day fund.  Heck you could even bury some of that money in the back yard!

Maryland Governor Martin O’Malley said yesterday that he wants the states mortgage servicers to start filing monthly reports on how they deal with bar a worse in the United States that are facing foreclosure. But Mollie once detailed reports on how these people are dealt with as there are thousands of Marylanders on the verge of foreclosure.

But Mollie is considering offering emergency no interest loans to struggling borrowers but needs detailed information collected from mortgage lender service providers so they can determine how much money to appropriate and how to run the programs themselves in a way that will work with the mortgage service providers and not burn borrowers like a contractor wielding a festool wood burning tool.

Under the governor’s initiative Maryland would become the second state, after California, to give mortgage servicers such scrutiny.

Maryland seeks U.S. mortgage servicer scrutiny | Reuters

When it comes time to get a home loan, lenders will look at all of your outstanding debt.  This includes those student loans that might take years to pay off.  They probably have low monthly payments, but they still are payments and cut away from your ability to pay just a bit.  If you are looking to get financed for a home loan, you should consider trying to speed up the pay off of your student loans. 

If you can not pay off the loans, then refinancing those student loans could help.  If you are not careful it could also hurt.  When you refinance student loans, look at getting the obvious, a lower interest rate.  That will help!

But also look at avoiding any types of financing charges that roll into your total loan amount, this just increases your debt.  If you are struggling to get financed because of ability to pay, then consider refinancing your student loans for a longer term and lower interest rate.  The combination of these two items should also provide you with a lower monthly payment requirement.  This will enable you just a little more financing leverage to get your home loan, but be prepared to continue paying the same amount if not more to pay off those student loans.  The faster you pay them off, the better you are no matter what!

Plus, student loan interest is only deductible for the first 5 years of the loan, so pay those loans off quickly after that 5 years is up!

As a financial writer, I know that there are times when it makes sense to consider a reverse mortgage as an option to help solve an issue or a problem in your finances.  If you are cash poor and house rich, meaning you have very little money in the bank or available, yet you have a great deal of equity in your house, a reverse mortgage may be something that you might want to consider.

A reverse mortgage is a tool, and as a tool it can be used to good or to bad purposes.  There are a few mortgage providers out there that probably provides safe reverse mortgage offerings.  I do not know who they are, but I’m sure there’s an honest one out there somewhere.

Do not necessarily blindly trust the latest commercial you see on TV. Anyone can put a commercial on TV, pay a subtitle service company a fee to put fancy sub titles up in Spanish even, and hire a semi-retired actor, Like Robert Wagner or James Garner(one of my favorite actors) that do not want to take out a reverse mortgage themselves to cover their snappy retirement expenses. Not all actors (that you might like) take work for ‘good’ or ‘nice’ companies. Plus, some companies that are possibly ‘good’ or ‘nice’ may have a few bad apples working for them that are working very hard in a particular month to make more in commissions and they may cut a corner right through your house on the way to their new swimming pool.

There are many more companies out there offering reverse mortgages that are dangerous and could hurt your finances significantly.

About seven years ago there was a fad and car sales, all of the major car companies started offering up their own financing to people that would buy cars.  The financing that very creative and eventually people were buying cars with major balloon payments at the end of the car, they were not buying cars when they thought they were buying cars as the financing was structured as a lease and not a loan which enabled them to get the payment they wanted, but at the end of the lease term they didn’t have the car that they wanted and the car wasn’t worth half as much as they owed!

The car cubbies were providing a service that the customers seem to want, but the financing that so creative and so complex that ultimately consumers got ripped off.  The car companies made at great deal of profits off of this, but ultimately it was like a paramedic scheme and most of the car companies suffered losses at the end of the program.  They had to shut the programs down typically taking that loss in a particular quarter.  For example they might take a loss for a half billion dollars, Mitsubishi, when they had received a great deal more profits in the years before they took that loss.  Don’t feel too sorry for the car companies.

Mortgage companies offering reverse mortgages are doing some of the same tricks that the car companies did a few years ago, and they are doing some of the same tricks that they did was sub prime loans over the last few years.  They are working the numbers behind the scenes to make them a great deal of money in fees and commissions and a number of other items that don’t necessarily help the consumer actually taking out the loan.  You mortgage broker is not your Buddy, they’re not that your friend, they’re not your business partner or your financial advisor.  A mortgage broker is a salesperson trying to sell you a house loan, treat them as a salesperson and protect yourself.  You will need to work with them whether it’s on the phone or in person, but that doesn’t mean you shouldn’t check up on their work and make sure all their numbers make sense and that goes double if not triple for reverse mortgages.

With a reverse mortgage if you have $100,000 in equity in your house, you could essentially take out a $100,000 loan on your house.  This is a home equity loan in essence and you have to pay closing costs and a number of other fees for this particular loan.  Those fees could easily and legitimately add up to anywhere from $1000-$10000 depending on who you go with.  If you go with an unscrupulous mortgage advisor, these fees could add up to $50,000 or $80,000 and at the end of the day you’ll end up with $50,000 or $20,000 in cash and the bank will own your house in a few years.

So make sure you shop around for a good deal on a reverse mortgage if this turns out to be its tool that you really need.  If you do not shop around, then you are engaging in a very dangerous behavior that could cost you your home, your finances and maybe your health.  The thing about a reverse mortgage is, it can impact your income.  This can play a role in whether or not you qualify for Medicaid or Medicare if you’re retired.  So don’t just go take out a reverse mortgage to get some cash to make your retirement easier, take a look year or entire financial situation and make sure that you’re not harming something else that could be more important than having an extra bit of cash to take a cruise or buy a car.

If you are looking to buy a house this year, think about buying a house that you can afford.  Here’s a simple will rule to follow when considering just how much you can afford.

Do not go by what the bank tells you that you can afford — the bank makes more money if you buy a bigger house, so you simply can’t trust them.  Be your own advocate.

If the bank tells you that you can buy a $300,000 house, buy a $200,000 house.  As a general rule of thumb, shoot for a value that’s about 65% to 80% of what the bank tells you that you can afford.  Alternatively, if the bank tells you that you can afford a house over $400,000 in value, consider spending less just so that you don’t have to spend money on something you do not really need.  Warren Buffett, one of the richest men in the world, lived in the plain House in the suburbs driving a 20-year-old car for many years without having to go out and purchase a house that he could “afford”.

It is definitely tempting to go out and purchase as big of a house as you can afford, and who wouldn’t want to live in a mansion or at least a Mc-mansion.  But remember, you have to pay the bill, the entire bill and not just a single monthly payment from time to time, so consider what you are really getting into here. 

• Do you really need to spend a half million dollars on a house? 
• Duty to spend $300,000 on a house? 
• Could you be perfectly happy living in a house that cost $200,000, $100,000, or $80,000?
• Would you be happier living in an apartment, not a condominium but an apartment at someone else owns?

The great American dream is to own a home.  The great American dream is not to purchase a home.  Purchasing a home is not owning a home there is a distinct difference.  When you finance a home and purchase it, you do not yet own that home.  Making the purchase of a massive McMansion, is not achieving the American dream, and it might just lead you into the American nightmare of foreclosure.

So be careful with your money and your finances and don’t just go purchase a home because you can, because a bank allows you to make that purchase, like a dealer in Vegas would allow you to place a bet.  Because that’s what you’re doing when you purchase a house, you were betting on the value of that house and you are betting on the ability of your self and your wife to pay for that house every month until you finally do Own that house.

Car donations

as a side note I like to mention a charitable organization that accepts a car donation, so that they can use the money and the proceeds from selling those cars to make videos for kids.  The organization has some admirable goals, and for some people it’s just too difficult to get rid of that old clunker in the front yard.  This could be one way that you could do it and you could be helping some other kids when you get that eyesore out of your front yard and make your home a little more appealing for sale.  If you have the time, I recommend that you sell the car yourself and just donate cash if you feel like donating the cash.  However, the donation of a car could save you some time and effort and might be a little less hassle when you have other things to take care of. 

One of the questions that we have to consider about the changing environment of real estate is whether or not homeowners will stay in their homes longer that it has become more difficult to borrow and buy and sell their homes.  Over the last couple decades more people have been staying in the same home for a shorter period of time.  Many people continually moved up into bigger and better homes.  This continual movement meant that they did not always have defined a dream home the first time, because they could experiment and try again in a few years when they bought their next house.

Now that things are slowing down and it’s to be more difficult to buy and sell a house, buyers may have to become a little bit more choosy about what they buy and why they buy it.

Impact of Higher Energy Prices on Home Buying Decisions

at the same time there is a slowdown in the real estate and mortgage market, energy prices are at all-time highs.  The price of oil has finally reached the level of $100 a barrel in people are definitely noticing the cost of energy.  I suspect that people may take a look at the homes they are buying and work to ensure that these homes are built and energy efficient ways, using energy-efficient products, and possibly even powered with alternative energy it least in part.

I think the putting green products in the homes before a buyer closes on a home will also become a bigger trend.  Many alternative energy products are expensive and most buyers don’t necessarily want to foot the bill for an energy system separate from their home mortgage.  I suspect that many buyers may start requiring a sellers install alternative energy systems into their houses as a requirement of sale so that the buyers can then finance the upgraded home and the new alternative energy products with a single mortgage.

It only makes sense, why spend $20,000 on an alternative energy system and finance at 10 or 20% interest when you could pay six to 7% interest on the same energy system.  I also think this makes sense for small upgrades like replacing light switches with switches that automatically timeout in turn lights off in many other common everyday things in the household or a house that add to the cost of electricity, heat, natural gas and many more aspects.

The history of renting property may possibly go back as far as the history of buying or owning.  Over the last few years, many many more people that would historically rent a home have been purchasing homes or condos.  For some of these people this has been a great opportunity.

Credit was easier, sub prime mortgages were easier to qualify for and some of these people had the resources financially to make the purchase work.  For some buyers, easy credit was a trap and the easy credit may have set them back more in time and credit ratings than if they had followed a traditional route working their way up through rentals first  until their finances were strong enough to buy.

During the credit boom and real estate bull market, many people completely forgot about renting as an option unless they lived in Manhattan or were looking for nyc apartments for rent with New York’s notoriously high property prices and rent control pricing opportunities.

So now Sub prime and the mortgage companies that offered them are at some of their lowest points ever.  Credit has dried up considerably and people are looking to rent again, not by choice but by necessity.  Along the way they might even learn that renting can be the right financial choice for their future as well.