Mike the Money Man's Virtual Newsletter

Trigger List Tactics

2010-01-18T10:00:00.000-08:00

A brief history of the mortgage business: Well, a ten year history, anyway.

I began my career in the mortgage business in the later part of 1996, when interest rates were higher and there were fewer people in the mortgage industry. In 1996, 30-year fixed rates were hovering around nine percent and there were fewer types of loan programs available than there are today. Things have certainly changed sense then. Starting about seven years ago, rates for most types of loans dropped dramatically and banks began to make all kinds of new types of loans available that were simply not possible before the year 2000.

This combination lower rates and less stringent lending guidelines caused a wave of refinance and purchase business. Lower rates meant that borrowers could refinance to lower their monthly payments and buyers who thought they could not afford a house of their own found themselves able to purchase their first home. While that was great news for existing borrowers and new home buyers, it also attracted record numbers of people who wanted to work in as loan officers.

It was easy to be a loan officer then, and many professional “transients,” as I like to call them, got into the business in an attempt to make quick money. It seemed that there would be an endless supply of business for everyone.

Everything has it’s cycle, and the mortgage industry is no different. Many of the new loan officers that got into the business earlier in the decade were busy working on all the loans that seemingly fell into their laps, and not developing a sustainable business model for themselves, let alone a business model based on providing good customer service and becoming a valuable, trusted resource. When rates began to climb and demand for mortgages began to decline, many of these newcomers found themselves with little or no business. This led some mortgage brokers to resort to unscrupulous tactics in order to maintain the same level of business they had come to enjoy.

If it sounds too good to be true, …
There are many ways in which the less-than-professional mortgage companies will try to solicit your business. Most of these tactics exploit common misconceptions, the laypersons’ lack of knowledge of the loan process, or are simply underhanded.

Here are a few things to watch out for when applying for a mortgage:

We pay all of your closing costs!
Offers of no closing costs, low closing costs, or lender-paid closing costs exploit the borrowers ignorance of the loan process. They try to appeal to the bargain-shopper type of borrower who thinks that the loan officer can magically make the normal costs associated with a loan go away. Except in the rare cases of bank-originated second mortgages, all first mortgage and “purchase money” mortgages have closing costs, and a majority of those closing costs are not under the control of the loan officer. Most closing costs are dictated by the nature of the transaction, the type of property being purchased, the closing date, and many other factors that, again, the loan officer has no control over.

If a mortgage company is offering you a loan that has little or no closing cost, beware, as those closing costs are hidden or you are paying for it in the long run by agreeing to a higher-than-average interest rate. In the mid 1990s automobile manufacturers would try to entice truck buyers by offering up to $5,000 cash back on financed vehicles. You may have guessed by now that those trucks were over-priced by $5,000, and the overall interest rate for the financing was higher than the industry standards at the time. No company can stay in business very long by offering something for nothing.

Get a $500,000 loan for the amazingly low payment of $1,400 per month!
If a mortgage company is offering a mortgage that has a payment that seems unusually low then, again, beware. This type of mortgage is usually referred to as as option ARM. These types of loans go by many names, sometimes they are called option ARMs, pick-a-payment loans, smart loans, or negative amortization loans. Regardless of what they are called, these loans typically have a negative amortization feature where the difference between what you are required to pay every month and the actual fully-amortized payment is added to the balance of your loan, so your loan balance grows every month.

While these loans serve a purpose for some borrowers, they are definitely not for everyone. Unscrupulous mortgage companies that do not have their clients’ best interests in mind often sell these loans to unwary borrowers based on the low “required” monthly payments alone, and do not bother to explain the advantages and disadvantages of these types of loans with their clients.

We have special arrangements with our banks to offer you a super low interest rate that nobody else can!
Every mortgage company, funding company and mortgage broker all have access to the same lending sources. While it is true that a broker has a certain advantage over a bank in that a broker can shop around to different banks to find lower rates — no single mortgage company has access to cheaper money than anyone else does. This type of claim is simply false. The accompanying sensationalist advertising usually stresses the urgency of their “limited time offer,” pressuring you to “call right now so you don’t miss out!” A variation of this tactic is to stress that mortgage rates have hit an “all-time low” or a “forty-year low.”

Recently I listened to one Seattle-area mortgage company’s radio ads. Over the course of a week the owner of the company stressed that rates had dropped even lower than they had the previous day. He emphasized that rates were not going to say this low for long and that “smart” borrowers needed to “act now.” I tracked those so called “all-time low rates” and found that rates actually increased during the week of the ad campaign and had not gone down as he had claimed. I have always found that if a company has to attract attention via expensive radio advertising then someone has to pay for that advertising, and that “someone” is most likely their customers.

No one can control rates or even predict them with any real degree of accuracy, just as no one can predict what the stock market will do on any given day. The best any one can do if get a feel for an overall trend or market direction. Instead of focusing solely on rates, smart borrowers should pick a mortgage professional who is experienced, provides sound advice, is willing to advise you as to the best loan option for you, is always available to answer questions, and will be around to help you after your loan has been closed.

Staying off lender’s “Trigger Lists”
With the decline in both home purchases and refinancing due of rising interest rates, less- than-professional mortgage lenders have been resorting to bothersome tactics. Once you’ve officially applied for a loan, your credit report immediately reflects that recent activity. Some companies in the mortgage business purchase lists of people who have experienced such recent activity (called “trigger lists”) from lead-generation companies that get their information from the credit-reporting bureaus.

These unscrupulous lenders then contact these applicants, sometimes as quickly as 12-24 hours of their loan application, and offers them lower rates in an attempt to get them to switch lenders in the midst of processing their loan. While not strictly illegal, this practice is definitely irritating to home buyers and questionable when it comes to basic business ethics. It raises the question of why anyone would trust a company that has to resort to stealing business from someone else to remain in business during lean times.

To protect yourself from ending up on a trigger list, you can opt out of such lists through the credit reporting bureaus. To do this, visit http://www.optoutprescreen.com, or call (888) 567-8688. Another way to cut down on the number of solicitation calls you receive is to enroll in the National Do-not-call Registry online at http://www.donotcall.gov or by calling (888) 382-1222.

Providing experience, knowledge and service for ten years.
Instead of resorting to sensationalized advertisements, low rate come-ons, or bait-and-switch tactics, I have built my business on providing good service to my clients before, during and after the loan is closed.

In-home appointments
I always travel to meet my clients at their homes and offices at times that are convenient for them, and I never make my clients come to my office. I have been known to travel from Bellingham to Tacoma and from Fall City to Poulsbo.

About me
I always try to help my clients make a decision based upon rational, logical information rather than the high emotions that frequently accompany the purchase of real estate. If you have a friend, acquaintance or family member who is interested in receiving and honest explanation of currently-available lending options, please have then give me call.

I will be happy to sit down with them and discuss their particular needs. Every borrower is different, and every loan situation is different. I never assume that I can apply the same set of answers to each borrowers situation and still fully satisfy their mortgage needs. I am happy to spend the time to help you, your friends, and your acquaintances to determine the best course of action for each or their unique loan needs.

Providing education and information has become my specialty. I strive to make the mortgage process as comfortable and understandable as possible. I will meet my clients most any place they choose, and am always available by cell phone – even on nights and weekends.

Mike the Money Man’s End-of-Year Challenge

2009-11-01T09:00:00.000-08:00

A Win-Win-Win Offer!

This month Mike the Money Man is taking a break from the usual article writing and …well, I'm going to call it what it is… I'm appealing to you directly with an offer I hope you can't refuse.

You've heard me say that referrals are the lifeblood of my business. Well it's a no-brainer why referrals are so important. We all like to do business with people we know, like and trust. When a client, friend or trusted associate makes a referral, by association that referral becomes an extension of their trusted network. Suddenly you've joined the inner circle, and you've been stamped with a big fat seal of approval.

But the truth is, in any business, people seldom know you're looking for referrals unless you take the time to ask them.

So I'm asking you right now as a past client... Who do you know that I should know?

And here's my pitch to you…

Presenting Mike the Money Man’s End-of-Year Challenge –
A Win-Win-Win Offer!

A bit cheesy you say? Perhaps. But it truly is a Win-Win-Win for everyone.

I believe what goes around comes around, whether you call it karma or the golden rule. So I never ask for anything without giving in return. The people you refer to me save money, Mike the Money Man generates business and …drum roll please… you get a free lunch. What could be better?

How Can You Help Me Help You?

Here's what I'm asking.

Dig through that Rolodex, your shirt pockets and under the cushions of your couch! Do you have a friend, acquaintance or co-worker who is thinking about buying a house in the near future or who is actually making an offer on a property right now? Or maybe they're looking to refinance. Tell them what great service I gave you, and please refer them to me!

If that referral turns into legitimate business for Mike the Money Man between now and the end of 2009, I’ll take you to lunch at your favorite restaurant…No Joke! … Lunch on me just for referring business to me. What could be easier?

Here's the only catch. To be eligible for the bonus, your referral has to turn into legitimate business for me. And when it does, I will knock three hundred dollars off my normal fee for the people you referred.

You win, your friends win, I win—everybody wins!

Referring the Referral Source

Great referrals don't always come directly from friends and associates. Some people are in business or social networks that make them natural referral sources, so keep your eyes and ears peeled for these connectors you meet when you're out on your daily travels. Great referral sources include:

CPAs, Accountants and Tax Professionals

CPAs, accountants and tax professionals are very much aware of their clients' dirty little money secrets. They are also aware which clients might be in need of a good cash infusion that a refinance might help with.

HR Directors / Corporate Relocation Experts

Who do you know that deals with moving people into and out of the Seattle area? Perhaps someone who works directly in or for a large company ... oh, say, Starbucks, Microsoft, Boeing, Amazon or some other company. The people who hire employees for these companies meet people constantly who need to buy and sell homes. You guessed it! These would be great referral sources for Mike the Money Man!

Real Estate Agents

You'd think that every real estate agent was already connected to a great mortgage broker. The sad reality is that not every one provides the kind of service that Mike the Money Man has become known for. Some mortgage brokers are simply lazy and unavailable. If you hear of a Realtor in your travels that is complaining about their lending source, hand them my card. Better yet, pass their number along to me, and I will give them the exquisite care they deserve.

Divorce, Probate Lawyers or Marriage Counselors

Lets face it, life happens and sometimes people get divorced or a family member dies. When life-changing events do occur, people need to “deal” with the biggest asset they have—their homes. This usually means some form of refinancing has to take place. I understand their needs and love to assist people through these types of situations.

Now you know who to refer and how to do it. Just remember, the best form of advertising for me is simply conveying your enthusiasm and satisfaction for the service I have given you in the past.

So pass my name along, and if you need more cards, let me know. I thank you for being a part of Mike the Money Man's referral team. So let's get out there and win-win-win one for everyone!

First Time Home Buyer Tax Credit.

2009-09-01T09:48:00.000-07:00

Questions and answers on the confusing subject of the $8,000 first-time-home-buyers tax credit.

The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time-home-buyers purchasing a principle residence on or after January 1, 2009 and before December 1, 2009.

I have received so many questions about the first-time-home-buyers credit as of late that I am compelled to compile all of the questions into one article so everyone can benefit from the answers to the many questions. If I have not answered you specific question in this article please feel free to submit your question to me at the e-mail address listed below.

Please keep in mind that I am not a tax or legal expert. I strongly encourage you to seek the advise of a qualified tax advisor or legal professional regarding how the first-time-home-buyer tax credit will effect your unique situation.

mike@mikethemoneyman.com

Who is eligible to claim the tax credit?

First time home buyers purchasing any kind of home - new or resale - are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009, For the purposes of the tax credit, the purchase date is the date when the closing occurs and the property transfers to the new home owner. This date can generally be found at the top of the settlement statement that was provided to the new home owner by the escrow company handling the transaction.

What is the definition of a first-time-home-buyer?

By law a first time home buyer is defined as someone who has not owned a primary residence within the last three-year period. For married taxpayers, the law includes both the married couples. For example, if you have not owned a primary residence in the last three years but your spouse has owned a primary residence within the last three-year period neither of you will qualify for the tax credit. However joint, unmarried purchasers may allocate the tax credit to either of the buyer that may qualify for the tax credit. A very important distinction to keep in mind is that prior ownership of a vacation home or rental property does not disqualify buyers from the tax credit if they buy a primary residence within the tax credit period.

What is the definition of a primary or principle residence?

A primary or principle residence is one in which you intend to live in and not rent and where you spend at least 51 percent of your time.

How is the amount o the tax credit determined?

The tax credit is equal to 10% of the purchase price of the primary residence up to a maximum of $8,000.

Are there any income limitations for claiming the tax credit?

Yes, of course. There are always a few catches to these things. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing jointly. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 of a single taxpayer and $150,000 for married taxpayers filing jointly. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) of $170,000 (married) and is proportionally for taxpayers with MAGI between these amounts.

What is “modified adjusted gross income”?

Modified adjusted gross income or MAGI is defined by the IRS. To determine it, a tax payer must first determine “adjusted gross income” or AGI. Adjusted gross income is the total income minus certain deductions known as adjustments or above-the-line deductions but, before itemized deductions from Schedule A or personal exemptions are subtracted. On forms 1040 and 1040A adjusted gross income is the last number on page 1 and the first number on page 2 of the form. For form 1040EZ adjusted gross income appears on line 4. Please note that AGI includes all forms of income including wages, salaries, interest and divided income and capital gains.

To determine modified adjusted gross income or MAGI , add to adjusted gross income items like foreign incomes, foreign housing deduction student loan deductions, IRA contributions deductions and higher education deductions.

If my modified adjusted gross income is above the limit, will I qualify for any tax credit?

Possibility , it depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose modified adjusted gross income exceeds the phaseout limits.

Can you give an example of how the partial tax credit might be determined?

Lets look a one example, assume that a married couple \has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5, the result is $4,000.

How about another example? Assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds the $75,000 limit by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the results is 0.35. Multiplying $8,000 by 0.35 shows the buyer of this example is eligible for a partial tax credit of $2,800.

Please remember that these examples are intended to provide a general idea of how the tax credit might be applied for different situations. You should always seek the advise of a professionals for information relating to your specific circumstances.

How is this new $8,000 tax credit different from the tax credit Congress enacted on July of 2008?

The most significant difference is that the new $8,000 tax credit is not a tax free loan like the original first-time-home-buyer incentive and does not have to be repaid. This tax incentive is a true tax credit. However home buyers must use the residence as a principle residence for at least three years or face a recapture of the tax credit amount. Certain exceptions apply.

How can I claim the tax credit? Do I need to fill out an application or complete a form?

Participation in the tax credit is very easy. Home buyer ca claim the tax credit of their federal income tax return. Specifically, home buyers should complete IRS form number 5405 to determine their tax credit amount, then claim this amount on line 69 of their 1040 income tax return. No other applications or forms are required. However, you will want to be sure that you qualify for the credit under the income limits and first-time-home-buyer texts mentioned previously.

What type of homes can qualify for the tax credit?

Any homes that will be used as a principle residence will qualify for the credit. This includes single-family detached homes, Condominiums, Townhomes as well as manufactured homes and houseboats. The definition of a primary residence is identical to the one used to determine whether a buyer may qualify of the $250,000 to $500,000 capital gains tax exclusion for principle residences.

I have heard that the tax credit is refundable. What does that mean?

The tax credit is refundable which means that if the home buyer has no taxable income in a given year they will still receive a refund for the amount of the tax credit they are eligible for. This typically involved the government sending the home buyer a check for the portion of the tax credit they are eligible for.

For example, if a qualified home buyer expected a federal tax liability of $5,000 and had withholdings of $4,000 for the year in question, then without the tax credit the taxpayer would owe the IRS $1,000 in taxes for that year. If the home buyer is eligible for $8,000 of the tax credit they will receive from the IRS a refund of $7,000. ($8,000 worth of tax credit minus the $1,000 in taxes owed)

I bought a home in early 2009 and have filed to receive the $7,500 tax credit on my 2008 tax return. Can I still claim the $8,000 credit?

Homebuyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file the amendment properly and within enough time to make the December 1st deadline for the $8,000 tax credit.

Instead of buying a new home I have has a house built on a lot that I already own. Can I still qualify for the tax credit?

Yes, you can still qualify. For the purposes of the home buyer credit, a principle residence that is constructed by the home owner during the tax credit period is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of the first occupancy must be on or after January 1, 2009 and before December 1, 2009.

In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date found on the HUD statement.

Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond or a MRB mortgage program?

Yes, The tax credit can be combined with the MRB home buyer program only of 2009. First-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in a MRM Mortgage program.

I am not a U.S. citizen. Can I still claim the tax credit?

Maybe, Anyone who is not a nonresident alien (as defined by the IRS) who has not owned a principal residence in the previous three years and who meets the income limit test may claim the tax credit for a qualifying home purchase. You may find the definition of a “nonresident alien” in the IRS publication 519.

Is a tax credit the same as a tax deduction?

No, a tax credit is a dollar-for-dollar reduction in what a tax payer owes. That means that if a tax payer owes $8,000 in taxes during a given year and who qualifies for a $8,000 tax credit; they will owe nothing to the IRS.

A tax deduction on contrast is subtracted from the amount of taxable income the taxpayer makes. Using the same example, assume the tax payer is in the 15% tax bracket and owes $8,000 income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15% of $8,000) or lowered from $8,000 to $6,8000.

I bought a home in 2008. Do I qualify for the $8,000 tax credit?

No, but if you bought your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit.

Is there any way for a home buyer to access the money allocable to the credit sooner than waiting file their 2009 tax returns?

Yes and no, currently, there is now way to get the full $8,000 sum in your pocket today. Washington State legislators are working on a plan to allow buyers to “borrow” against a potential tax refund to be used for a down-payment for a first-time home buyer but as of yet that legislation has not been passed and it remains to be seen if legislators can get the measure past the make the December 1, 2009 deadline before the tax credit is no longer available for the IRS.

There is however a way for first-time buyers who believe they qualify for the tax credit to reduce their income tax withholdings to see some of the money now. Reducing the tax withholding (up to the amount of the tax credit) will able buyers to accumulate cash by raising his/her take home pay. This money can be then be applied to the down-payment. Buyers should adjust their withholding amount on their W-4 via their employer of through their quarterly estimated tax payment. IRS publication 919 contains rules and guidelines for income tax withholdings.

Prospective buyers should note that if income tax withholdings are reduced and a qualified home purchase does not occur within the tax credit period of at all then the taxpayer might be liable to repay the advances withholdings, possible penalties and interest to the IRS.

If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?

Yes, The law allows taxpayers to choose or “elect” to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know wether the income limit will reduce their credit amount. Taxpayers buying a home who wish to claim it on their 2008 tax returns, but who have already submitted their 2008 returns to the IRS, may file an amended 2008 return claiming the tax credit. Again please consult the services of a tax professional to determine how to amend your tax returns.

For a home purchase in 2009, can I choose whether to treat the purchase a occurring in 2008 or 2009 depending on which year my credit amount is largest?

Yes, If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.

About Mike the Money Man

Mike Carpenter, also known as Mike the Money Man, is one of Seattle’s leading mortgage-industry and subject-matter experts. Staying true to his motto, “taking the mystery out of mortgages,” he offers reliable and accurate information on today’s credit crisis and the prevailing economic climate. Recognized for his competence and real-world experience, Mike is available to answer questions and counsel people who are uncertain and baffled by the existing financial market conditions. He is committed to sharing his knowledge and unmatched expertise with clients, educators, and the media.

For reprint permission, contract Mike Carpenter at (206) 465-5528 or mike@mikethemoneyman.com.

The Home Valuation Code of Conduct and the Great Appraisal Conspiracy

2009-07-01T10:00:00.000-07:00

Why do we need appraisals?

An appraisal is an essential part of the home loan process. It is a requirement for all lenders on any real estate loan transaction for either purchases or refinancing. The purpose of an appraisal is to “approximate” the market value of a property at the time the money is borrowed. The appraisal is used to establish how much money can be lent on the property and to confirm that the property has enough value to act as collateral against the loan, as well as to prevent the fraudulent inflation of a property’s value.

Fraud? What fraud?

During any period of lax credit standard there is going to be a percentage of people who are going to find or invent ways to manipulate the system to make dubious profits or commit outright fraud. There is and always will be a segment of any otherwise reputable industry that will engage in disreputable acts and thereby give the entire industry a bad name. There can be no doubt that disreputable mortgage brokers, appraisers, and real estate agents who, during the height of the real estate boom, were engaged in fraudulent activity that led in some part to the mortgage crisis, even though that activity represented a relatively small portion of the overall lending market.

The Intent of the Home Valuation Code of Conduct.

It will probably take years to ferret out all of the causes and complexities of the credit crunch and mortgage crisis. I personally think that fraud perpetrated by individual mortgage brokers, appraisers or real estate agents will prove to be only a very small contributor to the global credit crunch. The intent of the Home Valuation Code of Conduct is to eliminate the possibility of fraud in the valuation of real estate for loans and perhaps accurately value real estate, especially now that most real estate has suffered some decline in value.

The Mortgage Crisis And The Valuation Process.

Since the so called credit crunch or mortgage crisis began over two years ago, there have been many changes in the mortgage industry. One of the most significant ways if which the mortgage crisis has affected the loan consumer is in how their loans are processed. On May 1, 2009, the Home Valuation Code of Conduct (HVCC) bill that had been passed by Congress went in effect.

This new law is, supposedly, designed to put the appraisal valuation process in the hands of a disinterested party and thereby reduce the incidence of fraud and coercion in the appraisal processes.

To get a perspective on what changes are going into effect and how that is going to effect the consumer we need to look at the way the “old” system of ordering an appraisal worked.

As a mortgage broker, I am approached by clients who are interested in buying or refinancing a house. One of the steps in this process is to call up my favorite appraiser and ask them what value would be reasonable for the particular house in question. I do this before the loan processing has even begun to ensure that the house has the value needed to make the loan work.

This trusted appraiser, who I have worked with for years, is capable of delivering a quality report in a timely manner. They enhances the loan process by delivering a valuable product needed to process the loan. The reason that I use one of my “favorite” appraisers is that through the process of elimination borne out of years or experience I know who I can rely upon to do a timely, quality job.

Under the HVCC system my appraisal will now be “managed” by a so-called disinterested third-party appraisal management company, who by lottery, picks an appraiser out of a pool of appraisers in my area. The appraisal is assigned to this random appraiser, who I most likely do not know, with whom I cannot have any contact, and who may have any amount of experience, skill level or commitment to his or her job.

This added layer of so-called security is a direct reaction to the mortgage crisis and is an attempt by politicians and banks to assign some sweeping fix in an attempt to eliminate the possibility of fraud and other problems related the mortgage crisis.

Generally, I am all for processes that help deliver quality loans to consumers, but, the adding of yet another intermediary to the process has quickly proven to deliver just the opposite of it’s intended effect.

The new HVCC system will add additional time and costs and a unique lack of accountability that will bog down the loan process — which is exactly the opposite of what is needed to get the housing market back on track.

An Ineffectual Model.

For many years a similar lottery system was in place that may well prove to have been a model for the new HVCC system (I know that all of the loan officers and realtors will cringe when they read these words): the Veteran’s Administration loan-appraisal process.

I am certain that the drafters of the bill used the VA appraisal process as their model for the new HVCC system, as the two systems are very similar.

Under the longstanding VA appraisal system, a VA-approved home appraiser is chosen at random and assigned a VA appraisal order that originated with the bank that would be processing the loan. In order to eliminate the possibility of coercion or fraud, the mortgage broker cannot know who the appraiser is, and the appraiser has up to three weeks to deliver the final appraisal. In the interim, the value that the appraiser will deliver is completely unknown. Mortgage brokers and realtors are then forces to wait for the appraiser to get around to delivering the appraisal, all the time biting their nails in hopes that the value will come in at a level that will actually support the loan application.

This is why VA loans are the scourge of the real estate world; because of the additional work and lengthy uncertainty created by the VA’s processes, mortgage brokers and listing agents alike rank them among the least desirable of transactions.

Cracks In The System Have Already Begun To Appear.

The HVCC system has already begun to prove itself to be slow and ineffective. These days, lenders are justifiably very conscious of the importance of obtaining a given property’s accurate value, and will frequently require two appraisals or an appraisal review, in addition to the appraisal that a mortgage broker already orders through one of the so-called independent appraisal management companies.

That additional appraisal work is understandable now that housing values have been declining, and is just one of the additional steps that mortgage brokers and borrowers will have to deal with until values begin to recover. These new requirements are mostly being required when refinancing, but they are occasionally seen with purchases as well. It is these second appraisals and appraisal reviews are beginning to reveal the ineffectiveness of the HVCC system.

To fully understand why this new system will prove to be a stone around the neck of the recovery of the real estate market, we need to understand how the appraisal management companies choose there appraisers and how they assign the work to there chosen appraisers.

Firstly, we need to understand that the average self-employed appraiser used to charge around $400 to do a full appraisal, and that was part of the standard cost of closing a loan. Now that the appraisal management companies are managing the work, they have to pay their staff and much larger operating costs and presumably still make some degree of profit for their efforts.

So, these appraisal-management companies are adding $100 to the average appraisal fee, raising the overall costs of an appraisal to $500 but paying the appraiser only $200 (or less), keeping $300-plus of that fee that is paid by the borrower.

Most good appraisers have spent years building their businesses through experience, hard work and earned reputations, just like good mortgage brokers and good real-estate agents have done, and these long-time appraisers are rightfully upset that they now have to be forced into accepting half of what they used to make for doing the same amount of work.

Most of the good appraisers that I know have confided in me that they are protesting by rejecting all of the work the appraisal-management companies are sending to them. The result is that the appraisal-management companies are being forced to work with the least experienced, least-qualified appraisers who will work for the least amount of money — the bottom-of-the barrel appraisers.

It does not take a Harvard-educated MBA to deduce that the worst appraisers are very likely to produce an inferior product and be the slowest and be the least accountable. This, of course, has proven to be true, at least so far. My personal experience with this has shown that the second appraisals overseen by the appraisal-management companies have proven to be far inferior to the appraisals I ordered through the appraisers that I have done business with for years. In fact, some bank representative that I work with have told me that they are appalled by the lack of quality information contained in these new appraisals.

Under the old system, an appraisal could be completed in as little a three days if a real estate transaction called for a rapid turnaround. This rapidity is no longer possible under the new HVCC system, as the appraisal-management companies mandate a two- to three-week delivery time on all appraisal orders. It seems that most of those two or three week “processing” times are being taken up by the appraisal management companies' search for an appraiser who will work for a pittance so the management company can maximize its profits.

I feel that from the standpoint of the appraisal-management companies, the new system has become less about stemming fraud and producing quality products and more about squeezing more profit out of this newly-mandated system.

A Free-market System vs. A Controlled-market System.

In a free-market system, the costs of products and services are dictated by forces such as completion time and supply and demand. The marketplace sets the prices of goods and services and when a willing and informed buyer and seller come together and agree on the price of those goods or services. The purchase of real estate is no exception. When a seller lists a property for $400,000, then a buyer makes an offer of $380,000, and they eventually settle on a price of $390,000, that is the free market in action.

Under the new HVCC system, that free-market system could be replaced by a system in which an appraiser who is unknown to all of the parties involved in the transaction could potentially set the value of the house in a given transaction, with the potential of that price coming in far off the market value one way or the other. This is an extreme scenario but may not be far from the truth.

In our aforementioned free-market transaction, if the buyer and seller agree on a price of $390,000 but the low-budget “managed” appraiser decides that the value of the property is only $350,000, then there will be plenty of problems. All of a sudden the buyer and seller are not setting the value of the real estate, rather, our the bottom-of-the barrel appraiser is setting the value, and setting it incorrectly based on lack of experience or care or some combination of both. Given enough of those sorts of errors we could see a definite dampening effect on the recovery of real estate prices.

What can be done?

If you have had trouble with the new HVCC system or you know of someone who has, or if you simply wish to express your concerns or complaints about the new valuation system, please contact your member of Congress via the link below:

http://capwiz.com/namb/dbq/officials/

The National Association of Mortgage Brokers is quite actively working to overturn this bill. You may also send your HVCC “horror story” to the NAMB at

hvcc@namb.org

More information about the HVCC can be found by following the following links:

http://www.namb.org/namb/NewsBot.aspMODE=VIEW&ID=257&SnID=992184185

http://www.appraisalinstitute.org/newsadvocacy/downloads/HVCC_myths.pdf

About Mike the Money Man

For reprint permission, contract Mike Carpenter at (206) 465-5528 or mike@mikethemoneyman.com.

Why now is the best time in recent history to buy or refinance.

2009-05-01T09:00:00.000-07:00

I have often said that this may well prove to be the most fortuitous time to buy or refinance a home. A combination of the recent economic downturn combined with the events that will likely occur over the next two to five years may create a “perfect storm” of home financing opportunity.

The events of the last two years: why waiting to buy has worked in your favor.

By now everyone should be well aware of the fact that housing prices have steadily dropped since 2006. The whole nation has suffered in varying degrees from the drop in housing prices, but locally housing prices have rolled back to roughly what they were in 2004. At the height of the market the median housing price in King County was $397,275. According to the Case Shiller Index, the median price has fallen roughly 15 percent, to $337,684. Some areas of Seattle have suffered greater drops in value than others, but the overall drop has averaged 15 percent.

Thirty-year fixed mortgage rates reached a nationwide high of 6.88 percent in July 2006. Over the subsequent 20 months rates dropped significantly. At the time this writing (March 14, 2009), 30-year fixed rates stand at 4.875 percent, a drop of 2.01 percent.

Not only have housing values dropped by 15 percent, rates have dropped an unprecedented 19 percent. Simple math tells us that homebuyers can cut their housing expense by 34 percent, or buy 34 percent more home than they could just 20 months ago.

To put these numbers in perspective, lets take the median housing price for Seattle at the height of the market in July, 2006: $397,275, at 6.88 percent. Payments on a loan for that amount would have cost $2,611.14 per month for principle plus interest. Currently, that same loan amount of $397,275 can be had for a monthly payment of $2,102.41
(principle and interest ), which is a reduction of $508.73 per month.

Again, simple math shows us that the drop in 30-year fixed rates combined with the drop in home values allows today’s average home buyer 34 percent more buying power that just 20 months ago. If we take the median home price from July, 2006, of $397,275 and add 34 percent to that figure, today’s savvy home-buyer can get a home loan of $493,405 while keeping their payment relatively equal to what their payment would have been for a lower-priced home back in July, 2006. By holding off on buying a home, savvy buyers have gained $96,130 in buying power, just by sitting on the sidelines and waiting.

Great, so if waiting to buy has benefited me wouldn’t it benefit me more to wait a little longer?

No! Sure, there are plenty of prognosticators who would advise you to wait until prices drop further, but there is a looming, insidious force that will soon begin to eat away at the buying power gains you currently have available to you right now. That force is called inflation.

By any form of measurement, the entire planet is experiencing a severe economic recession. In fact, there have only been two recessions in history that have lasted longer and been more severe than this one. Those two recessions were in 1957 and 1981.

The Fed has attempt to lessen the severity of our current recession by lowering the federal funds rate — short term interest rates for banks to lend money to one another — and the federal discount rate to effectively zero. This has eased things a bit but has failed to bring the economy around.

The Fed really has only two tools left to help improve the economy: buying or selling long-term treasury securities or literally printing more money. Buying or selling long-term treasury securities and printing money are effectively two sides of the same coin, representing an attempt to circulate more money throughout the economy. The downside of creating more money is that it frequently creates the unhealthy effect of increasing the rate of inflation.

These two deeper recessions mentioned previously were followed by dramatic increases in inflation rates. As the country came out of those recessions mortgage rates peaked at a high of 10.63 percent coming out of the economic downturn of 1957, and reached a high of 17.60 percent in February, 1982, right after that deep recession in 1981.

If the Fed opts to increase the flow of money in an attempt to bring us out of our current downturn, we may well see a dramatic increase in both inflation and mortgage rates. If rates reach anything close to what we saw at the end of the last two recessions, the buying power now currently available to home buyers may be reduced by nearly 50 percent.

For example, if we again work with the numbers we used above, we know that the increase in buying power caused by the combination of the decrease in home value and the lowering of rates now allows a principle-and-interest payment of $2,611.14 to finance a $493,405 loan.

If inflation does result from the Fed’s attempt to bring us out of our current downturn, and mortgage rates reach somewhere near 12 percent, the same payment of $2,611.14 will only finance roughly $253,851. That would be a very dramatic reduction in buying power. If inflation were to drive rates up dramatically and incomes didn’t rise to keep pace or home values didn’t fall to compensate for inflation, about $239,554 in buying power would be erased, which represents a 50-percent reduction in buying power.

What do deflationary periods have to do with future housing prices?

Periods of deflation are almost always followed by an increase in real-estate prices. While the past is certainly not the perfect indicator of future trends, history has shown increases in real estate to be a likely by-product of inflation. For example, the average house price in the Seattle area during 1981’s severe recession was $80,240.

Between 1981 and 1985, the average price of a home in the Seattle area increased at an average rate of 3.5 percent and settled at and average price of $92,588. Despite 17-percent mortgage rates and runaway inflation, housing prices still rose a dramatic $10,130, or 13 percent, over that relatively brief four year period.

If history repeats and we see a modest increase in housing prices, say, three percent over the next three to five years, the buying power we now enjoy will be reduced by up to an additional 15 percent over the aforementioned 53 percent.

To put the numbers in perspective, in today’s dollars, a mortgage payment of $2,611.14 will buy a house worth $493,405. If we experience inflation, an increase in interest rates as well as an increase in housing prices, that buying power could be reduced to only $215,773 in future value.

Is it also a great time to refinance?

Yes, all of the aforementioned “good news” applies to refinancing as well. For borrowers with an adjustable-rate mortgage that will soon reset or borrowers with interest-only loans who want to start paying down the principle, now is an ideal time to look at refinancing. The future cost of money is uncertain and a low 30-year fixed rate will always remain low despite what future economic conditions may hold.

The chart below graphically illustrates the contrast between the current buying power situation verses the potential threat of inflationary deterioration of that buying.

About Mike the Money Man
Mike Carpenter, also known as Mike the Money Man, is one of Seattle’s leading mortgage-industry and subject matter experts. Staying true to his motto, “taking the mystery out of mortgages,” he offers reliable and accurate information on today’s credit crisis and the prevailing economic climate. Recognized for his competence and real-world experience, Mike is available to answer questions and counsel people who are uncertain and baffled by the existing financial market conditions. He is committed to sharing his knowledge and unmatched expertise with clients, educators, and the media.

© Copyright 2009, Mike Carpenter. All rights. No reproduction without express written permission.

For reprint permission, contract Mike Carpenter at (206) 465-5528 or mike@mikethemoneyman.com.

Is it a good time to buy?

2009-03-01T10:49:00.000-08:00

In five to ten years, when the financial crisis is just a memory and housing prices are up again, the current period in real estate history may well be marked as one of the greatest buying opportunities to date.

Locally housing prices have rolled back to what they were two years ago. In 2006, the median housing price in King County was $397,275. Since that time, the median price has fallen roughly 9 percent, to $365,000.

One of the beneficial differences between today and 2006 is that mortgage interest rates are substantially lower than in 2006. In July 2006, 30-year fixed conforming-rate mortgages peaked at a nationwide average of 6.88 percent.

As of this moment, conforming 30-year fixed rate loans can be had for 5.125 percent. Of course, rates change daily and are as unpredictable as the stock market, but these lower rates represent a huge opportunity for qualified home buyers.

There is some talk that the U.S. Treasury Department could try to entice Fannie Mae and Freddie Mac to lower rates even further to 4.5 percent in an attempt stimulate home buying and thus spark an upturn in the national economy. If this rate drop were to occur it, would mark an unprecedented lowering of rates.

Buyers need to look at current rates from a historical perspective to understand where we currently are and how cheap financing a home really is at today’s rates. In the last 25 years rates hit a high of 14.77 percent nationwide in July of 1984 and as high as 17 percent in 1978. We have only reached our current lows one time in that 25-year period.

To put a real perspective on the differences in rates on a 30-year fixed loan, check out this example: the principle and interest payment difference on a loan amount of $300,000 between a rate of 6.88 percent and 5,125 percent is $338 per month, and the difference between 5.125 percent and 4.5 percent is an additional $113.40 per month.

That difference of $338 in payment translates into an additional $62,000 in buying power.

Smart buyers are buying value, which means they are buying more house for their money these days. We have already discussed that we are better off by 9 percent from our 2006 highs in housing prices. The current rates are affording buyers an additional 17 percent off the payment they would have made in 2006. Essentially, buyers can buy homes at a discount of roughly 30 percent.

I have never seen rates as low as they are right now. With so many sellers willing to negotiate, there is no doubt that this is a genuine buyer’s market. All those yard signs should be reading not “For Sale,” but “On Sale.”

The Panic of 2008

2009-01-01T11:19:00.000-08:00

One for the history books?

How did we get here?
I started in the mortgage industry ten years ago, during what I might call a time of rationality where the typical borrower needed to prove their ability to service a mortgage with real income. Back then, a borrower had to put at least three percent down for an FHA loan, or five percent down for a conventional loan, and the borrower was required to pay mortgage insurance as part of their monthly payment.

In 2000, lenders recognized that not all borrowers fit into the prevailing rational lending guidelines, and seized the opportunity to open additional profit streams by offering so called ‘alternative financing’ options. One by one, lenders began to deviate from the established rational lending guidelines. Eventually those guidelines became more and more irrational and the old rules of income and down payment requirements were suspended. There was a time not so long ago when only 40% of the people I did loans for needed to provide a pay stub or proof of income and a full 60% of them were financing a hundred percent of the purchase.
One of the forces that fueled this period of irrational lending was the secondary market’s thirst for all types of mortgage-backed securities. Investors from around the world bought mortgage-backed investments that they thought were safe.

These irrational loans were bundled with all kinds of other loans and then were rated by bond insurance companies as “good” (or excellent?) investments.

Eventually these untested ‘alternative financing’ loans began to default at a much higher rate than was expected by the investing public, the bond insurance companies and lenders themselves. This caused the investing public to lose their taste for mortgage-backed securities, bringing this period of irrational lending to an end.

The unexpected effect to all of this has been to freeze liquidity in the real estate market. When money to finance real estate is easy to obtain, it attracts more buyers and speculators and that drives up the prices of homes. When money is tight, there are fewer people that can borrow money; fewer buyers reduce demand for real estate and drive down prices.

There is an old adage that says that we are all interconnected. With the emergence of the global financial markets nothing could be farther from the truth. We are now seeing how truly interconnected we all really are.

Money is the lifeblood of the vast ecosystem that is our economy and like any complex ecosystem, when one segment is disturbed it can affect the rest of the system in profound ways.
This is exactly what we are experiencing now. The defaults in the ‘alternative financing’ market led to fear of mortgage backed securities, which led to a tightening of money for real estate, which meant fewer buyers for real estate and a corresponding increase in foreclosures along with drops in housing prices. Fear of risk gripped the consuming public and the financial markets. Bank failures occurred, consumers stopped spending and all of this has led to one of the worst weeks in financial history and a downturn in all the global markets.

During periods of advanced financial euphoria, the normal level of rational prudence tends to be suspended; these periods are marked by the misplacement of risk, overuse of leverage and the assumption that assets such as houses and securities that secure debt, will always rise in value.
As John Kenneth Galbraith wrote in A Short History of Financial Euphoria, “All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means or payment”.

Where were the signs this was going to happen?
This is the question that everyone asks when something like this happens. Along with, “Why didn’t we see this coming?”

It was asked after the dot-com crash, the Savings & Loan meltdown, and in the 1930’s during the Great Depression. People have been asking themselves this very question back before the Dutch Tulip Mania of the 1630’s.

There are never clear or obvious signs to an impending end to a period of hyper-financial enthusiasm. It is even less clear when the public or the market place is entering into such a period. Signs only become obvious after the fact.

If we all could have seen the signs of what was going to happen we would have all known exactly when to buy and sell our houses and securities for maximum profit and the mystery would be removed from our so called “efficient market” system. Even the most astute investors never know exactly when to buy or sell.

Financial over-exuberance and asset hyper-inflation do not happen overnight. A market downturn either in stocks or real estate comes after a long and usually very slow build up and the correction is usually quite swift. The last run-up in housing prices in Seattle lasted from 1991 to 2007 - a full 16 years.

I personally started to see the end of the irrational lending — and the beginning of the economic downturn — in January of 2007. This was just two years ago, and I was working on a loan package for a client that would seem ludicrous today: $1.75 million, stated income, 100% financing; when I received a call from the lender telling me that the loan program had gone away. Soon after that, more and more irrational loan programs began disappearing at an astonishing rate.

I personally think that history will mark the beginning-of-the-end of this particular period of financial exuberance as the famous, and sparsely heeded, “Irrational Exuberance” speech by former Treasury Secretary Alan Greenspan in December, 1996.

Our former Treasury Secretary had ‘warnings” which were equally sparsely heeded;

"The housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease. As a consequence, home equity extraction will ease and with it some of the strength in personal consumption expenditures. The estimates of how much differ widely." - August 27, 2005

“The apparent froth in housing markets may have spilled over into mortgage markets. The dramatic increase in the prevalence of interest-only loans as well as the introduction of other, more-exotic forms of adjustable-rate mortgages, are developments that bear close scrutiny." - September 26, 2005

There are those that say that the current problems in our financial markets are the legacy of Mr. Greenspan, and that his policies are to blame for our current situation. I am not equipped personally to judge the work of Mr. Greenspan but I can say the warning signs were obvious and undeniable.

IThere have been many recessionary periods like the one we are in throughout our history and they are a regular and necessary feature of our economic system and I personally believe that, just like the other periods of the past, we will all roll on with our lives and that this too, shall pass. If we are lucky we will live to experience yet another period of prolonged irrational exuberance.

Who is to blame for all of this?
History has shown that in the aftermath of these periods of financial dysphoria, the public and policy makers tend to want to find a simple, easy to understand scapegoat – someone or some group that can be blamed for the mess.

There is a need to determine some cause for the crash, however far-fetched, which is external to the market itself. But in reality, the construct that brought about the financial crisis is usually very complex: the players are many, varied and far-flung, and no one group can be blamed exclusively for the resulting state of affairs.

I propose that we are all to blame in some small way.

… from the homebuyer who chose to buy a property that they really could not afford, to the real estate agent who sold the buyer a property they knew the buyer could not afford.

…from the real estate speculator who sought quick profit and in doing so further drove up the price of homes, to the banks that loosened lending guidelines fueling further price speculation.

…from the mortgage brokers that did not have their clients’ best interests in mind, to the bond insurance companies that improperly rated the mortgage backed securities and sold them to the investing public.

The investing public is also in some way to blame for not taking the time to understand the risks underlying the purchase of mortgage-backed securities.

As a point of illustration, another excerpt from A Short History of Financial Euphoria, regarding the real estate crash of 1819, which bears a striking resemblance to our current headlines.

"In the years that followed the end of the war (of 1812). land and other property values rose wonderfully … the rising values attracted those who were persuaded that there would be even further increases and from this persuasion ensured that there would be yet further increases to come … bank(s) involved themselves enthusiastically in real estate loans. Then in 1819 the boom collapsed. Prices and property values fell drastically; loans were foreclosed; and the number of bankruptcies went up.”

Is it a good time to buy, sell or bury my head in the sand?
It is easy to quote wisdom from those who have survived the turmoil of the past financial markets.

Phrases such as …

“Buy when there's blood in the streets, even if the blood is your own” - Baron Rothschild

“Be greedy when others are fearful” - Warren E Buffett

... are easy to quote because the wisdom of those that have survived such times always seem to be a source of comfort to us in times of uncertainty, and this period in financial history is no exception.

History has proven that periods like this provide excellent buying opportunities and those that have the mettle to weather the storm historically do well in both the stock and real estate markets.

If you need proof, consider the wisdom of the late Sir John Templeton, who proved his mettle when he famously purchased 100 shares of 104 companies trading for $1 per share or less in 1939. If his name sounds familiar, it should, Mr. Templeton formed The Templeton Funds and became a billionaire philanthropist who made his fortune as the pioneer of global investing in the postwar boom.

I personally have a former client who bought a then-undervalued piece of commercial property during the last real estate downturn in 1991 in Mukilteo and sat on that property until 2006 and now is a millionaire because of it.

What message do I have that I want to convey to the public.
By all means, remain calm. The country will not fall into a Depression. 1929 was marked by an administration that chose to take the stance that it was not the government’s role to get involved in the financial markets. We now have an administration that is doing what it can to right the financial ship and despite my personal misgivings about the competency of our current administration, I do believe the government does have a history of fixing the economy when it is called upon to do so.

Lets hope the tough do get going when the going gets tough.

At worst, I believe we will see another year of economic retraction and then we will be poised for another active real estate market. Markets retract and then recover as they always have done in the past.

Take a long-term view and remain calm. Now is not the time for rash, emotion-driven decision making.

Educate yourself before acting. Talk to your mortgage, stock or real estate advisor before making a rash decision.

Buydowns - A little known financing option

2008-11-01T13:34:00.000-07:00

What is a buydown?

A buydown, sometimes called a discount fee or discount point, is a cost that the borrower pays directly to their lender in order to get a lower-than-average rate on their mortgage. This fee is eventually added to the borrower’s overall closing costs. This fee can generally be considered a long-term investment which will allow the borrower to pay less interest over the life of the loan. In order to understand the overall concept of “buying down a rate,” the borrower needs to understand the point from which they are buying their rate down. In explaining these concepts, I will also have an opportunity to introduce the concept of the par rate.

The par rate - a place to start
When a lender publishes a rate for a given loan product that rate is generally considered to be “at par.” That means that that published rate does not require any additional costs to obtain as compared to the standard closing-cost expenses or loan-origination fee. If the borrower wants to get a rate that is cheaper than the prevailing par rates the borrower is expected to pay an additional fee to obtain a “lower than par” rate. That additional fee is usually expressed in increments of one-eighth of a percent, and that percentage expression is a percent of the loan amount. For example, if a borrower wants a loan of $250,000 and the par rate for a 30-year fixed-rate mortgage is 6.0%, a standard buydown in order to get to a rate of 5.75% might be one-quarter of a percent of the loan amount, which would result in a buydown fee of $625.

Obviously, the further down a borrower buys the rate, the higher the up-front fee will be. The buydown schedule listed below represents what a borrower might expect to pay to “buy down” a rate from par based on a $250,000, 30-year fixed-rate loan:

Typical Buydown Schedule (Based on $250,000)
• 6.000% - 0.000% fee - par rate - no buydown fee
• 5.875% - 0.125% fee - $312.50 fee
• 5.750% - 0.375% fee - $937.50 fee
• 5.625% - 0.500% fee - $1,041.67 fee
• 5.500% - 0.750% fee - $1,875.00 fee
• 5.250% - 1.000% fee - $3,125.00 fee
• 5.000% - 1.500% fee - $3,750.00 fee

Typically, the further down the rate scale or the further away from par the borrower wants to buy the rate down, the greater the buydown costs spread between rate increments. For example, according to the above scale it cost only one-eight of a percent of the loan amount, or $312.50, to buy the rate down from 6.0% to 5.875%, but it cost a full one-half of one percent of the loan amount, or an additional $1,041.67, to buy the rate down from 5.25% to 5.0%. This schedule is designed by banks and lenders in order to make the cost-to-benefit ratio less desirable, and to keep borrowers within what the banks consider to be a tolerable distance from par.

Buydowns are not right for everyone
Some borrowers do not like buydowns, as they think the up-front costs are not worth the long term savings, while others like the concept and have used buydowns to their benefit. The future is uncertain and plans change, and sometimes people keep a loan for a shorter time than they expected. The real benefit of a buydown lies in the long term savings it offers.

This type of detailed examination is a standard part of what I do when I meet with a new client. In fact before my clients make a decision about what type of loan is right for them I will have explained the advantages and disadvantages of all loan options.

About me
I always try to help my clients make a decision based upon rational, logical information rather than the high emotions that frequently accompany the purchase of real estate. If you have a friend, acquaintance or family member who is interested in leaning about the details of ARMs, or any other lending option, please have then give me call.

I will be happy to sit down with them and discuss their particular needs. Every borrower is different, and every loan situation is different. I never assume that I can apply the same set of answers to each borrowers situation and still fully satisfy their mortgage needs. I am happy to spend the time to help you, your friends, and your acquaintances to determine the best course of action for each or their unique loan needs.

Providing education and information has become my specialty. I strive to make the mortgage process as comfortable and understandable as possible. I will meet my clients most any place they choose, and am always available by cell phone – even on nights and weekends.

Balloon Loans – A little known lending option

2008-09-01T13:29:00.000-07:00

Just what is a balloon loan, anyway?

While most people have heard of fixed-rate mortgages and adjustable-rate mortgages, few have heard of balloon mortgages. Adjustable rate mortgages and balloon mortgages are similar in that they are generally considered to be a temporary lending option and they both have a start period that features a start rate that is typically lower than prevailing 30-year fixed rates.

Balloons - a two-stage mortgage

As stated in my previous article, adjustable rate mortgages have a fixed period where the rate cannot or will not adjust and an adjustable period where the rate will adjust on an annual or semi-annual basis. This adjustment will occur without any decision or input from the borrower, and all decisions about how and when the adjustment are set at the beginning of the loan.

Balloons differ from ARMs in that they consist of two distinct parts: a start period similar to those in ARMs where the rate is typically lower than the prevailing 30-year fixed rate, and a final period where the rate changes to the prevailing rate at the time of adjustment. While the start periods for most ARMs are 1, 3, 5, 7 and 10 years, the start periods for balloons are typically only 5 and 7 years. These balloons loans are commonly referred to as 5/25s and 7/23s.

The end of the start period is an important event in the life of a balloon mortgage in that it requires a decision from the borrower. Unlike ARMs, where how and when the rate adjustment will occur has been decided at the start of the loan, with balloons that decision comes at the end of the start period. At the end of the 5 or 7 year period the borrower is “forced” to make a decision between two options: either pay the loan in full or accept the lender’s current rate for the remaining term of the loan.

The demand feature and other important aspects of balloons.

The reason that balloon loans got their odd name in the first place is that there used to be only one option at the end of the start period: pay the loan in full. This final full payment was called a balloon payment. All balloons retain this demand feature as part of lenders’ options. But most, if not all, balloons now have a second option to keep the loan and accept the lender’s current rate. This current rate is typically close to what the current market rates might be for 30-year fixed rates.

Similar to rate structuring for ARMs, this new rate is not based upon random factors. Balloons adjust to one of two following indexes; the Fannie Mae or Freddie Mac 60-day yield. Lenders will take this published index, add 0.5% or 0.625%, and round the resulting number to the nearest one-eight of one percent. Listed below are the Fannie Mae or Freddie Mac 60-day yields as of the publishing of this article.

Fannie Mae 60-day yield - 5.75545% + 0.5% = 6.25545% or 6.375%
Freddie Mac 60-day yield - 5.59000% + 0.5% = 6.09000% or 6.125%

An important thing to remember about the second stage of a balloon is that the new payment will be calculated upon the remaining term of the loan, not the original 360-month term. The reason that a balloon is called a 5/25 or 7/23 is that the start period is 5 or 7 years and the new second stage term will be 25 or 27 years, respectively. Generally, there are six requirements that the borrower must satisfy to be eligible for the conversion:

A written request for conversion must be sent to the lender 60 days prior to the end of the start period.
The borrower will be required to pay a conversion fee, usually $250.
The borrower must have been current with their mortgage payment for the previous 12 months.
There may not be any other liens against the property at the time of conversion; i.e. no second mortgages.
The borrower must still occupy the property in the same manner in which they did when the loan was issued.
The conversion rate cannot be more that five percent over the original start rate.

What if for some reason I do not meet those requirements?

If for some reason those requirements are not met then the loan is due in full. The good news is that the balloon loan can be refinanced with another lender, assuming of course that the borrower qualifies for the new refinance loan.

The economy and balloons - How the economy effect both balloon and ARM indexes

There are many economic factors that can influence the indexes upon which ARMs and balloons are based, but, for the most part, when the economy is poor rates go down and when the economy is good rates trend upwards. There are periods in rate history where the rate for a 5/1 ARM were better than a comparable 5/25 balloon, and there were periods where just the opposite occurred. Typically, balloon rates are less than ARM rates for the same start period.

Why would a borrower want a balloon loan?

Balloons, like ARMs, are generally considered to be a type of loan that will be used for a limited time, and thus are good tools for borrowers who plan to own a property for a limited time. As stated in the last article about ARMs, borrowers who might find balloons attractive include:

A borrower who plans to buy a home and renovate it and sell it within three to seven years.
A borrower who plans to buy a starter home and they then intend to use its equity to move up to a more expensive property in a relatively short amount of time.
A borrower who plans to buy an investment property and rent it, and wants to produce better cash flow over what is available if they went with the higher monthly payments connected with a fixed-rate mortgage.

The cost-to-benefit ratio

Just as with an ARM, a borrower who is considering a balloon should examine in detail the cost-to-benefit ratio and weigh the risk of a potential future rate adjustment against and present interest savings. For example, if you think you might have your starter property for only 4 years before moving, you might save a bit on interest over that four-year period with a balloon mortgage.

If a borrower were considering a loan of $250,000 and the prevailing 30-year fixed rate is 6.0%, but the average rate for a 5/25 balloon is 5.125%, the cost-to-benefit ratio would look something like this:

$1,498.88 - Monthly payment for $250,000 at 6.0% 30-year
$1,380.51 - Monthly payment for $250,000 at 5.25% 5/25 balloon
$118.37 - Monthly payment saving for 5/25 balloon vs. 30-year fixed
$5,681.80 - Interest savings over four years

A thorough examination of all options

For some borrowers, this four years’ worth of savings is significant, but for others it is not. This type of detailed examination is as standard part of what I do when I meet with a new client. In fact before my clients make a decision about what type of loan is right for them I will have explained the advantages and disadvantages of all loan options.

About me

I always try to help my clients make a decision based upon rational, logical information rather than the high emotions that frequently accompany the purchase of real estate. If you have a friend, acquaintance or family member who is interested in leaning about the details of balloon mortgages, or any other lending option, please have then give me call.

I will be happy to sit down with them and discuss their particular needs. Every borrower is different, and every loan situation is different. I never assume that I can apply the same set of answers to each borrowers situation and still fully satisfy their mortgage needs. I am happy to spend the time to help you, your friends, and your acquaintances to determine the best course of action for each or their unique loan needs.

Providing education and information has become my specialty. I strive to make the mortgage process as comfortable and understandable as possible. I will meet my clients most any place they choose, and am always available by cell phone – even on nights and weekends.

The ABCs of ARMs

2008-07-01T14:25:00.000-07:00

What is an ARM anyway? - The basic mechanics of ARMs

For those borrowers who are uninitiated in the world of mortgage abbreviations, ARM is an acronym for adjustable rate mortgage. This type of loan differs from a fixed-rate mortgage in that ARMs have an adjustment feature and, at some point after the first payment, the rate will adjust. There is quite a bit of misunderstanding about ARMs and the mechanics of how an adjustable rate mortgage can adjust in the future. I hope to dispel few myths for you here.

Adjustable rate mortgages come in a number of different varieties, but they all function basically the same way. Each ARM has a fixed period during which the rate cannot or will not adjust and an adjustable period where the rate will adjust on an annual basis or a semi-annual basis. The fixed period can be 3, 5, 7 or 10 years in length, and typically the rate during the fixed period is lower than the prevailing fixed rates. Listed below are the two general categories of prime ARMs.

Annual Adjustment ARMs
1/1 - Referred to as One-One
3/1 - Referred to as Three-One
5/1 - Referred to as Five-One
7/1 - Referred to as Seven-One
10/1 - Referred to as Ten-One

Semi-Annual Adjustment ARMs
1/6 - Referred to as One-Six
3/6 - Referred to as Three-Six
5/6 - Referred to as Five-Six
7/6 - Referred to as Seven-Six
10/6 - Referred to as Ten-Six

To further clarify the definitions, a 3/1 ARM is fixed for three years, after which the rate will adjust every year thereafter. A 5/1 ARM will be fixed for five years and then adjust every year thereafter. It therefore logically follows that a 3/6 ARM is fixed for three years and then adjusts every six months thereafter, and a 5/6 ARM is fixed for five years and adjusts every six months thereafter. One-year adjustment ARMs are much more common than six-month adjustment ARMs.

ARM rates as compared to fixed rates?

As a general rule, ARM rates will be priced lower than what a borrower might find for comparable 30-year fixed rates for the initial fixed period. This rate “spread’ is typically what makes ARMs attractive as a financing tool. For example, if the prevailing 30-year fixed rate were 6.0%, one might find that ARM rates were similar to what is listed below.

Typical ARM Rate Spread
1/1 - 5.25% for initial period of 10 years - Rate spread 0.75%
3/1 - 5.5% for initial period of 10 years - Rate spread 0.5%
5/1 - 5.625% for initial period of 10 years - Rate spread 0.375%
7/1 - 5.75% for initial period of 10 years - Rate spread 0.25%
10/1 - 5.875% for initial period of 10 years - Rate spread 0.125%

Note that the longer the initial fixed period the higher the rate, or the closer the ARM rate gets to the prevailing fixed rate. This is not a mistake. Essentially, the more risk you’re willing to take on as a borrower, the lower the rate will be for the initial period. When choosing an ARM, most borrowers will opt for a “start period” of between three and 7 years, as these options provide the best combination of low rate, rate spread and start period.

ARM Rate Spread History

In an ideal world, the spread would remain constant between ARM and fixed rate mortgages as overall rates rise and fall. But this does not actually happen. ARM rates and fixed rates seem to move independently of each other. The variations in rate fluctuation produces periods in rate “history” where the spread between ARM rates and fixed rates widen and then get thinner. Over the last ten years, the spread has been as wide as a full percentage point to periods such as today, where the average spread is a little as one-eighth of a percent. As one would expect, the incentive for borrowers to finance their homes with ARMs diminishes in times when the spread is shallower and increases during time when the spread is wider.

What happens when the start rate period is over?

Contrary to popular belief, the rate for an adjustable rate mortgage does not and cannot adjust randomly. Each ARM has features that prevent the rate, after the fixed period, from skyrocketing out of control. Also, ARMs are based on logical and predictable “indexes” that can be reasonably anticipated.

Indexes and Margins - The guiding principles of ARM adjustments

All adjustable rate mortgages have two numeric components that govern how the rate will adjust after the fixed period. These two components are called the index and the margin. In a very general sense, most lenders do not lend their own money but rather borrow money from outside sources and then lend that money to the end borrower. Lenders, of course borrow this money at a lower rate than what they charge the end borrower.

This is similar to nearly all aspect of the free-enterprise system. The apple that you buy at the grocery store is marked up from the price the grocery store pays their apple supplier, and this markup is passed on to the end consumer. The cost of money that the bank or lender pays for the money it is lending to you is called the index. The profit margin that is added to the cost of that money is called the margin. A typical margin on an ARM is between 3.0% and 5.0%, depending upon the type of ARM.

This margin stays constant throughout the life of the loan. What does change, and causes the rate to fluctuate after the fixed period, is the index. Due to changes in the economic landscape, the cost of the lenders’ money may change over time. In fact, some of the indexes on which ARMs are based can change as frequently as every two weeks. While it is uncommon for an index to change that often, it can change frequently in times of economic uncertainty.

You will recall that the margin component of the adjustment is always fixed and the index component varies. At the end of the fixed period, these two numeric components are added together to determine the rate for the adjustment period for the ARM. This new rate will now be the rate for the next term of the ARM: one year in the case of an ARM with an annual adjustment period and for the next six months for an ARM with a six-month adjustment period.

This “new rate” is recalculated at the end of every adjustment period and another “new rate” is determined for each subsequent adjustment period.

Typical ARM Rate Adjustment Calculation

Index - Lenders Cost of Money - Variable Component - 3.25%
Margin - Lenders Profit Margin - Fixed Component - 2.75%
New Rate = 6.0%

The economy and ARMs - Influences on Indexes

There are many different types of indexes upon which an ARM can be based. A detailed explanation of the forces that cause these various indexes to fluctuate is perhaps the subject matter for another newsletter. However, in general, indexes are influenced by how good or bad the economy is doing.

In a very broad sense, if the economy is doing well, index values will be higher, and the poorer the economy the lower the index values will be. Just like the economy in general, index values can be influenced by myriad factors including stock and bond market performance, unemployment rates, housing starts, etc. Listed below are a few of the common indexes upon which ARMs can be based, in order of their popularity. For comparative purposes, I’ve also noted the value as of the writing of this article.

One-year Treasury Bill - 3.42%
6-month London Inter Bank Offer Rate (LIBOR) - 4.60%
12-month London Inter Bank Offer Rate (LIBOR) - 4.30%
12 -Month Treasury Average (MTA) - 4.662%
Cost of Savings Index (COSI) = 4.85%
Cost of Funds Index (COFI) = 4.172%
Cost of Deposit Index (CODI) = 5.293%
Constant Treasury Maturity Average (CMT) - 3.50%

Rate Caps - The limiting factors to rate adjustments

Contrary to common belief, the rate for an ARM cannot skyrocket out of control. All ARMs have limits on the amount the rates can adjust up or down over a given period of time. Rate caps limit the amount of rate adjustment for the first rate adjustment after the fixed period, the rate adjustment for every adjustment period afterward, and for the life of the loan. For example, an ARM with a 2/1/5 rate cap structure cannot adjust up more than 2% over the initial start rate, cannot adjust up more that 1% during any subsequent adjustment period or adjust more than 5% upward over the remaining life of the loan.

Listed below are the most common rate structure caps. The rate caps structure of a given ARM will vary depending upon the type of ARM and the indexes on which they are based.

1/1/5
1/1/6
2/1/5
2/2/5
2/1/6
2/2/6

Will my ARM rate always adjust up after the adjustment period?

Not always. The indexes that rates are based upon, in general, follow the up-trend or downtrend of the overall rate market. During periods of cheap rates, the indexes will also be cheap, and when rates are higher the indexes will generally be higher.

If a borrower obtains a 5/1 ARM during a period when the prevailing rates are relatively high, and during the five year fixed period rates drop, the indexes will also be lower. So, the adjusted rate after the fixed period could quite possibly adjust down from the initial start rate.

This convergence of events occurred between 2004 and 2005 when rates were at one of their lowest points. Borrowers who had obtained 5/1 ARMs in 1999 and 2000 enjoyed a substantial rate reduction five years after the origination of their mortgages.

Why would a borrower want an ARM?

Many borrowers have been lead to believe that ARMs are bad and should be avoided at all cost. This is not necessarily true. An ARM can serve a useful purpose so long as the borrower has a good overall plan for the use of the loan. For example, a borrower who has a “limited window of operation” or only plans to own a home for a limited time is a good candidate for an ARM. Some reasons for having a “limited window of operation” are:

A borrower plans to buy a home, renovate it, and sell it within three to seven years.
A borrower plans to buy a starter home, which they intend to use to build equity and “move-up” to a more expensive property at a later date.
A borrower plans to buy an investment (i.e., rental) property and wants to produce a better cash flow than would be available via a fixed-rated mortgage.

The Cost-to-Benefit Ratio

When considering whether an ARM is the right loan for their particular purposes, smart borrowers look at the rate savings over a given period of time versus the potential for risk. For example, if you think you might keep your starter property for only four years before moving up, you might save a bit on interest over that four-year period with an ARM.

If a borrower were considering financing $250,000 and the prevailing 30-year fixed rates were 6.0% and the average rate for a 5/1 ARM were 5.5%, the cost-to-benefit ratio would look something like this:

$1,498.88 - Monthly payment for $250,000 at 6.0% 30-year
$1,419.47 - Monthly payment for $250,000 at 5.5% 5/1 ARM
$79.41 - Monthly payment saving for ARM vs. 30-year fixed
$3,811.56 - Interest savings over four years

A Thorough Examination of All Options

For some borrowers the above four years’ worth of interest savings is significant, while for others it is not. This type of detailed examination is a standard part of what I do when meeting with a new client. In fact, before my clients make a decision about what type of loan is right for them, I will have explained the advantages and disadvantages of all appropriate loan options.

About me

I always try to help my clients make a decision based upon rational, logical information rather than the high emotions that frequently accompany the purchase of real estate. If you have a friend, acquaintance or family member who is interested in leaning about the details of ARMs, or any other lending option, please have then give me call.

I will be happy to sit down with them and discuss their particular needs. Every borrower is different, and every loan situation is different. I never assume that I can apply the same set of answers to each borrowers situation and still fully satisfy their mortgage needs. I am happy to spend the time to help you, your friends, and your acquaintances to determine the best course of action for each or their unique loan needs.

Providing education and information has become my specialty. I strive to make the mortgage process as comfortable and understandable as possible. I will meet my clients most any place they choose, and am always available by cell phone – even on nights and weekends.

Placing a Value on Service

2008-05-01T13:00:00.000-07:00

What is service?

When I speak to potential clients they often hesitate and then ask something like, “Um, could we meet at 7:30 a.m. at Starbucks in West Seattle?” The interesting part of my job is that I know this question is coming and my answer is always yes.

Unlike a banker, I make my own schedule, and part of my service is being very flexible about my availability. I enjoy meeting clients at a time of day that suits them best, rather than making them hurry through their lunch breaks and leaving their questions unanswered. Placing a value on this extra service is hard, because to me it is a standard part of what I offer my clients. But it is an added bonus for doing business with me. If you are interested in meeting with me, whether in the evening or on a weekend, I’ll be there, at practically any time of the day, and that is my service to you.

Why is a mortgage broker better than a bank?

Because a mortgage broker is a specialist. This is exactly why many people buy their coffee at Starbucks as opposed to a grocery store — the specialist knows their product best, from the behind-the-scenes knowledge of how to source and deliver the product to understanding how to best provide an enjoyable experience for their clients.

As a mortgage broker, I provide a wide range of mortgage lending options, source the lowest rates and offer superior service for all of my clients. I strive to be offer more competitive funding options than any other lending source.

I work with all major banks: Washington Mutual, Wells Fargo, Bank of America and US Bank. I also work with many of the smaller banks, funding companies and lending sources that you may have not heard of. This gives me an outstanding competitive advantage over bankers in that I am able to recognize when one bank has better rates than another or when a certain lending source might have a superior type of loan product that will fit my clients needs better that most bank loan products.

Much like Starbucks, I strive to earn my customers’ loyalty through consistency and hard work; a vast majority of my new business comes from referrals from satisfied clients. Here are just a few of the ways I help my clients:

Personalized service

I strive to make the mortgage process as comfortable and understandable as possible. I will meet my clients at most any place they choose, and am always available by cell phone – even on nights and weekends. The majority of my clients go through the entire loan process without ever having to visit my office; I bring my office to them.

A mortgage education is standard.

I take the time to create an informative experience such that my clients’ decisions are based on knowledge of the market and the mortgage process rather than emotion. This process requires a greater investment of time but results in a more satisfied, happy client.

Depth of Resources

My company has relationships with more than 125 different banks and lending sources. This gives us a competitive rate advantage over most banks and retail funding sources. Simply put, I can deliver a wider range of lending options at lower rates than banks or national retail lenders.

Helping your friends and family

If you have a friend, acquaintance or family member who is just not receiving the type of service that they feel they deserve please have them give me a call. Every borrower is different and every loan situation is different. I never assume that I can apply the same set of answers to each borrowers situation and fully satisfy their mortgage needs. I am happy to spend the time to help you, your friends or acquaintances figure out the best course of action for each or their unique loan needs.

Providing education and information has become my specialty. I strive to make the mortgage process as comfortable and understandable as possible. I will meet my clients most any place they choose, and am always available by cell phone – even on nights and weekends.

Renting vs. Owning a Home

2008-03-01T13:02:00.000-08:00

Homeownership has long been called the American Dream and more people own homes today that ever before: about 70 percent of all Americans own their home. In Seattle, the real estate market has moved to more of a buyers’ market. This new buyers’ market presents an opportunity for people who are indecisive about buying a new home when the market was more active.

If you are thinking of moving into homeownership, following are a few items to consider if you are trying to decide between owning and renting

The Costs of Buying and Selling

The first thing to think about when considering buying vs. renting are the costs associated with each option. Selling a home when you move takes time and money. For example, the rule-of-thumb for determining selling costs for real estate is roughly 8.0% of the property value. If you are like most homeowners in the Seattle area, your home’s value is roughly $518,000. Eight percent of $518,000 is about $43,300.

Listed below are some of the selling costs one might expect to pay when selling a home in King County:

Real Estate Agent Commissions: 6% - $31,080
King County Excise Tax: 1.78% - $9,220
Settlement or Closing Fees: $1,000 (approximate)
Title Insurance: $1,500 (approximate)
Miscellaneous Fees: $500 - (approximate)

As you can see, there are significant costs associated with selling a house. Additionally, there are costs associated with buying a house. If you were to buy the typically-priced home in the Seattle area, you might expect to pay closing cost in the amount of roughly $7,500.

Listed below are some of the buying costs one might expect to pay when buying a home in King County:

Loan Origination Fee: 1% - $5,000
Appraisal Fee: $450
Processing Fee: $395
Underwriting Fee: $400 (approximate)
Tax Service Fee: $75 (approximate)
Settlement or Closing Fee: $600 (approximate)
Title Insurance: $600 (approximate)
Flood Determination: $20 (approximate)
King County Recording Fee: $75 (approximate)

The Advantages of Renting

While most people prefer to own the homes they live in, there are some circumstances where the benefits of renting make sense:
Flexibility: If you like being a free spirit or like to be relatively mobile, it is a lot easier and more inexpensive to pick up and move if you are a renter. Selling a home when you move takes time and costs money.

Timing: If you see yourself moving with a couple of years, it probably makes financial sense to rent rather than buy if you consider the costs involved with the process of buying and selling a home. If you were to buy a house in the Seattle are and then re-sell it within a two-year period, you might not recover the purchase and sale costs.

Convenience: It is much more convenient to have a landlord when it comes to general home maintenance. Renters generally have little or no responsibilities when it comes to maintenance.

Cost: In most cases, renting is slightly cheaper in terms of payment than renting on a monthly basis. While monthly payments for a mortgage and a rental may be similar, a homeowner also has to pay property taxes, hazard insurance and maintenance costs. In cities where the cost of homes are particularly high, renting can allow you to live in an area that might otherwise be out of your price range.

The Advantages of Buying

While renting can be simpler and sometimes cheaper that buying, there are also downsides to renting.

Landlord Unpredictability: Landlords can be unpredictable: they can sell the house you are renting and force you to find other living arrangements, they can raise your rent when your lease expires, putting a damper on your ability to build savings or investments.

Equity Building: When you write a rent check, you are paying for the right to live in someone else’s property. When you write a check to your mortgage company, you are building equity in your own home. As you build equity you can borrow against that equity to pay for things you might need, to make major purchases, pay for a child’s education, or other investments. Plus, all of the interest on the money you borrow is then tax-deductible.

Pride of Ownership: In most cases a landlord does not allow his/her tenant to make changes or alter the interior of the property. When you own a home you can paint the walls any color you want, add a room, remodel the kitchen, plant a big shade tree or cut down a nuisance tree. Homeownership allows a level of freedom and pride that renters simply never experience.
Great Tax Benefits: To encourage homeownership, the IRS affords homeowners generous tax advantages. The IRS allows you deduct mortgage interest for first mortgages, second mortgages, as well as property taxes. Additionally, when you sell your property the IRS allows you to deduct the first $250,000 in profit if you are single, and the first $500,000 if you are married, without paying taxes on those profits.

The cost of home improvements is also tax deductible once you sell your home. Additionally, if you are self-employed, you may be able to take deductions based on your use of a portion of your living space as a home office. A good tax professional can explain the full benefits of owning a home.

You are in the Game: For most buyers, their first home is not their ultimate dream home, rather a starter home that allows them a chance to “get into the game.” It is a first step toward their dream home. Over time, their starter home appreciates in value. They do some improvements, and, in a few years, equity is built up in the home through market appreciation and that equity can then be used as the down-payment for their dream home.

Security for Retirement: Rent goes on forever but a mortgage will eventually be paid off. Having a rent-free place to live in your retirement years allows you the freedom to spend your retirement money on things other than basic living expenses.

When to Buy

Financial guru Suze Orman calls owning a home “the absolute best investment out there, bar none.”

Over the past sixteen years, the Puget Sound region has experienced dramatic growth in real estate values. In 1990, the average single-family house cost $178,187. In 2006, the average was $518,108. If a buyer in 1990 put the minimum down payment of 5% ($8,909) on a typical house, by 1990 that buyer would have reaped a whopping $331,012 return their investment. That is an incredible 371.2% return on their initial $8,900 down payment.

The charts below were made using data compiled by the Northwest Multiple Listing Service (NWMLS), the official source that tracks real-estate sales data in the Pacific Northwest.

Chart one details the average price for single-family residences in 1990 and 2006:

King County Housing Price increase
From 1990 to 2006, Single Family Homes only

Since 1990, the Puget Sound region has experienced an average annual growth rate of 12%. Many experts feel that the market is seeing a much-needed correction, and they expect appreciation rates to settle down to an approximately five or six percent rate of growth. Even at that rate, homeownership is a great way to build wealth over time.

It’s a Buyers Market

The term “buyers’ market” is something that most people have heard, but few understand what it really means. A buyers’ market is created when there are a lot of homes on the market and fewer buyers. This gives buyers a slight advantage over sellers. This extra inventory means more choices for the buyer and even more room to negotiate with sellers.

Bottom Line – What does this mean to you and your friends?

The combination of low interest rates and steady housing values makes now the best time in the last 10 years to buy a home. Buying a home is one of the most important purchases in your life. The best time to buy is when it makes most financial sense: when you are emotionally ready, when you can afford it, and when you plan to live in your home for a while.

If you have a friend, acquaintance or co-worker who is thinking of buying a home, you can help them make a choice based upon sound logic and education by sharing this information with them and telling them where you heard it.

The Sky is Falling! Well, not really.

2008-01-01T13:20:00.000-08:00

This just in: Bad news sells papers!

If you are like most people, you have heard a lot of hype in broadcast and print news outlets about how horrible the mortgage and real estate markets are in the Seattle area, and how the big mean banks are planning to foreclose upon innocent people. While it is true that, in some areas of the country, foreclosures are slightly higher than normal, it simply is not as widespread an issue as the media would have us think, and it is especially untrue in the Seattle area.

Some loan programs have disappeared, but 30-year fixed rates are still cheap.

The higher-than-expected default rates nationwide have forced some lenders to suspend some types of high-risk loan programs. This, however, has not affected conforming mortgage rates. Conforming 30-year fixed rates continue to hover around 6.0%. From a historical perspective, the current conforming rates continue to be quite affordable.

Housing prices are not plummeting.

Seattle’s economy has always been strong and continues to be strong. Statistics indicate that as many as one million people will be moving into our area in the next ten years. This will continue to push housing prices up over that same 10-year period.

Historically, Seattle Housing has always been a good investment.

Statistics show that Seattle area housing prices have slipped a bit in the last couple of months but overall, housing prices have enjoyed the same average increases from year to year that they always have. In fact, housing values in the Seattle are have risen an average of 12% every year since 1990.

The average single-family house in 1990 cost $178,187. In 2006, the average house price was $518,108. If, in 1990, a buyer put the minimum down payment of 5%, or $8,909, on a typical house, that buyer would have reaped a whopping $331,012 return their investment. That is an incredible 371.2% return on the initial $8,909 down payment.

The charts below were compiled from data taken from the Northwest Multiple Listing Service (NWMLS), the official organization that tracks and compiles real estate sales data for the Pacific Northwest. Chart one details the average price for single-family residences in 1990 and 2006.

Chart two details the average sales price for the past calendar year October 2006 to October 2007 for both new and existing single-family-residences and condos. This data indicates that, despite what the news media will have you believe, Seattle real estate increased in value over the last 12 months.

Chart three shows the average price for all housing types, including single-family-residences, condos, town homes and manufactured housing, for the entire Puget Sound region. These figures cover January 2007 through October 2007. This again indicates that, despite news stories to the contrary, even if you purchased a modest manufactured home in Aberdeen or Kitsap County, you would have realized an increase in equity over the course of the year.

Bottom Line – What does this mean to you and your friends?

The combination of low rates and steadily-rising housing values makes this the best time in the last 10 years to buy a home. Prices are not going to get cheaper in the next 10 years. Rates are not expected to dip much lower that they are now. If you have a friend, acquaintance or co-worker who is thinking of buying a home, you can help them make their choice based upon sound logic and real data rather than irrational fear by simply sharing this information with them.

Helping your friends and family.

Over the years I have helped many of you purchase or refinance your homes. I hope that you found my expertise educational. I strive to earn my clients’ loyalty through consistency, honesty, and hard work.

I take the time to create an informative experience such that my clients’ decisions are based on knowledge of the market and the mortgage process rather than emotion. I strive to make the mortgage process as comfortable and understandable as possible. I will meet my clients at most any place they choose, and am always available by cell phone – even on nights and weekends.

Closing Cost Demystified

2007-11-01T13:41:00.000-07:00

Closing Cost a point of confusion

Over the years I have found that the part of the loan process that most borrowers are most uninformed about, and therefore have the most questions about, is closing costs. To live up to my reputation of being an educator, a resource, as well as a mortgage broker, I would like to take a little time to demystify this area of the loan process.

What are Closing Costs?

The term closing costs are frequently used to describe two general categories of costs: closing costs and prepaid items. For the purposes of this article I will separate them into their own categories for clarity and to alleviate confusion.

As I describe these separate costs, Ive categorized each as being either a fixed cost or a variable cost. I have done this to emphasize that a portion of closing costs will vary depending upon the size of the loan or the purchase price of the house. For example, an appraisal fee is the same regardless of whether the loan amount is $100,000 or $500,000. However, title insurance is based on the size of the loan, so the larger the loan amount the more expensive the title insurance will be.

Closing Costs
These are what I like to refer to as being true costs, as they represent all of the third-party charges for the services that are necessary in order to process your loan. Listed below are some of the costs one might expect to pay to buy or refinance a home in King County, Washington, with a loan amount of $250,000.

Loan Origination Fee: 1% of $250,000 = $2,500 (variable cost)
The loan origination fee is what my company charges to perform our services. It is typically one percent of the total loan amount. All lenders charge a loan origination fee to some degree or another to cover the costs of performing their service. Some lenders may call it a mortgage broker fee, and others may call it a percent or point, but essentially all of these terms are used to describe a fee for performing a service.

For example, If you visit a Bank of America branch and look at their advertised mortgage rates, you will find that their published rates might be, say, 6.0% for a 30-year fixed-rate mortgage with a one-point cost. This is the same 1% loan origination fee with a different name.

Appraisal Fee: $450 (fixed cost)
Except in very rare situations, all loans to buy and refinance a house will require an appraisal. The appraisal is necessary to establish the fair market value of the property in order to satisfy the lender that the property you are purchasing is truly worth what you are paying for it, or, in the case of a refinance, that the loan-to-value ratio is true and accurate.

Underwriting Fee: $400 (fixed cost - lender fee)
This cost is charged by the bank and is the fee that the final lender/bank charges to process and approve the loan(s). All lenders charge a fee to perform this service, and that fee typically ranges from $295 to $695.

Processing Fee or Document Preparation Fee: $395 (fixed cost - lender fee)
Some lenders/banks will also charge a processing fee in addition to the processing fee. Some lenders charge this fee and some do not it depends entirely upon the lender.

Tax Service Fee: $75 (fixed cost - lender fee)
The tax service fee is a one-time charge from the final lender to set up the reserve account for the servicing of your property taxes and hazard insurance payment.

Flood Determination: $20 (fixed cost - lender fee)
The food determination fee is a charge that the lender/bank charges to determine whether the house you are buying or refinancing falls within a flood zone. If the property does fall within a flood zone, you will be required to buy flood insurance in addition to your standard hazard/homeowners insurance.

Title Insurance - $500 (variable cost)
Title insurance is required by the lender to protect their interest in the property. Title insurance is protection against losses arising from problems connected to the title to your property. Before you purchased your home, it may have gone through several ownership changes, and the land on which it stands most likely went through many more. There may be a weak link at any point in that chain that could emerge to cause trouble. For example, someone along the way may have forged a signature in transferring title. Or there may be unpaid real estate taxes or other liens. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.

Settlement or Closing Fee: $600 (variable cost)
Almost all purchase and refinance transactions will involve an escrow company that serves as an independent party that will serve to facilitate the transaction, collect the monies, and facilitate the legal transfer of tile to the new owner and/or pay off any existing liens or bills as required. Please note that the terms escrow company, settlement company, and closing company are used interchangeably to describe the same sort of company. In addition, to a standard settlement fee, an escrow company may charge a few additional small fees similar to the one listed below:

Courier Fee: $35 (If a courier is required to move paperwork from one place to another)
FedEx Fee: $25 (If Federal Express overnight delivery of documents is required)
Wire Fee: $25 (If wiring of funds are required for the transaction)

King County Recording Fee: $75 (variable cost)
When the purchase or refinance transaction is finished the settlement company will record the new transaction at the county courthouse as a matter of record. All counties charges a recording fee to record transactions and each fee will vary depending on the county laws as well as the amount of paperwork that needs to be recorded. Generally, the standard recording fee runs between $65 to $175, depending on the complexity of the transaction and the number of loans being recorded at the same time.

Re-conveyance Fee: $75 (refinance only)
In the case of a refinance there may be an additional cost called a re-conveyance fee. For each mortgage that needs to be paid off, there is an underlying lender or lien position that has to be re-conveyed. Each lender has to relinquish its lien position to convey clear title, and that process needs to be verified to ensure that all liens or claims to your property have been properly reassigned.

Prepaid Expenses

This area of costs are items that you pay for in advance and on your own behalf. These items include prepaid property taxes, prepaid hazard insurance and other items that you seed your reserve account with to help pay your property taxes and insurance.

Some of these items with be required depending on the type of property you own or are buying, and whether you chose to have the lender service your property taxes and/or hazard insurance.

Because property taxes and hazard insurance amounts will vary greatly from property to property, and all details of a given transaction cannot be fully know until a borrower selects a specific property, I have made some assumptions about a typical property in King or Snohomish counties for the purpose of creating the estimates for the examples outlined below.

~ Special Note - In certain situations where the loan-to-value ratio for a purchase or refinance transaction is at 80% or below the value of the property, the borrower may elect to not have the lender service the payment of the property taxes and hazard/homeowners insurance. I have made a designation in the list of prepaid expenses below that denotes if the expense applies if the borrower elects to pay the property taxes and hazard/homeowners insurance on their own. I have also noted whether the expense applies to a single family residence only, a condominium only, or to both.

Prepaid Property Taxes: typically 6 months, $1,500 (both single-family residence and condo)

Assumptions - $3,000 annual taxes ($250 per month)

~Not required if borrower waives reserve account.

As a part of purchase or refinance transaction, the lender will require that the borrower set up a reserve account where the property tax and hazard/homeowner’s insurance portion of the borrowers payment will be held in “reserve” until those expenses will need to be paid. The county requires that property taxes be paid twice yearly, in April and in October. The annual premium for your hazard/homeowner’s insurance is paid on the anniversary of the purchase of your property. If the loan transaction is a purchase, the lender will, in most cases require that the borrower deposit 4-6 months worth of reserves into the reserve account managed by the lender for the servicing of the property taxes.

In the event that the borrower loan is 80% or less that the value of the property the borrower can elect to waive the reserve account requirement and the prepaid property taxes amount would not be required.

Prepaid Hazard/Homeowner’s Insurance: 12 months, $480 (single-family residence only)

Assumptions - $480 annual premium or $40 per month

~Required if borrower chooses to have reserve account or not.

On all purchase transactions lenders require that twelve months of hazard/homeowner’s insurance be paid in advance directly to the insurance company. This is required regardless the borrower waives the reserve account or not.

In the case of a refinance transaction the lender will want to see that the hazard insurance has been paid in advance for a 12-month period. For example, if the property was originally purchased in June of a given year and the refinance transaction is closing in March, then nine months’ worth of insurance has been used through the calendar year and at the point of refinancing and three months are left before the insurance premium will become due again, at which time the new lender will want to collect nine months worth of insurance as part of the prepaid expenses.

Prepaid Hazard/Homeowner’s Insurance: 3 months, $120 (single-family residence only)

Assumptions: $480 annual premium, or $40 per month

~Not required if borrower waives reserve account.

Depending on the specific requirement of the lender, sometimes they will collect an additional two or three months of additional hazard/homeowner’s insurance in advance as an additional “cushion” against changes in insurance costs over and above the 12-month amount paid directly to the insurance company at the time of a purchase closing. In the case of a refinance transaction, this additional insurance amount would not be required.

Prepaid HOA (Homeowners Association) dues, two to three months: $600 (condo only)

Assumptions: $200 per month.

~ Required if borrower chooses to have reserve account or not.

Depending upon the by-laws or house rules of a condo, the homeowners association of a given condo may collect 2-3 months of HOA dues in advance. These “collected” dues are not held in a reserve account but instead are paid directly to the homeowner’s association, and these dues will be used to pay the borrowers HOA dues going forward. For example, If a borrower were to buy a condo in January of a given year and as part of the prepaid expenses three months worth of HOA dues ware collected, then the borrower would not need to pay any HOA dues until the beginning of April.

Not all condos collect dues in advance and the amount of advance dues, if collected can vary from zero to three. My general experience has been that about half of the condo associations have some provisions to collect HOA dues in advance.

~ Special note - The practice of collecting dues in advance does not apply in the case of a refinance transaction.

HOA (Homeowners Association) move-in or processing fee: $150 (condo only)

~ Required if borrower chooses to have reserve account or not.

Although rare, some condo associations collect a small move-in, move-out, administration or processing fee for preparing the paperwork for the transfer of owners during a purchase of a condo.

~ Special note - The practice of collection dues in advance does not apply in the case of a refinance transaction.

Prepaid interest: 10 days, $499.63: both single-family residence and condo

Assumptions: $49.96 per day for 10 days, based on a loan amount of $250,000 over 30 years, fixed at 6.0%. Required if borrower chooses to have reserve account or not.

The expense item called prepaid interest is frequently misunderstood. When a borrower closes a loan they have to pay interest from the day they close through the remainder of the month in which they close. For example, If a borrower closes a loan on the 21st day of January, the per-diem interest is calculated through the remainder of the month (January 31) and is added to the prepaid expenses as a cost. In the example above, prepaid interest is calculated assuming that a borrower closed on a day ten days away from the end of a given month (this example is based upon the assumption of a 30-year fixed loan or $250,000 at 6.0%).

Obviously, the true amount of what the prepaid interest would be on any given loan is going to depend upon a multitude of factors including the closing date, total loan amount and the interest rate.

In general, the lower the loan amount, the cheaper the interest rate, and the closer to the end of a given month a borrower closes, the less the prepaid interest will be. The only way for the prepaid interest to be zero is if a borrower closes a loan on the last day of any given month, and that the last calender day is also a weekday and not a weekend day or a holiday.

Can’t the mortgage broker mitigate or make some of those cost disappear?

Untrue! This is one of the great misunderstandings of closing costs. The consumer has been lead to believe that a mortgage broker somehow controls the cost of mortgages. All loans in some way or another have costs associated with them and those costs can vary depending upon some of the following factors:

Loan amount
Final lender
The escrow and title company
Whether the transaction has a first and second mortgage or just a first mortgage
Whether the loan is for a refinance or a purchase transaction
The property taxes and hazard insurance costs
When the closing date is

... as well as myriad other factors that the mortgage broker does not control. Beware of any mortgage broker or bank representative who claims to be able to guarantee your closing costs or make them go away, as those costs will undoubtedly be hidden elsewhere in the loan.

What about so-called “no-cost” loans?

Except for a few bank-provided second mortgages or home equity lines of credit, all loans have closing costs of some kind. Mortgage brokers who claim to provide “no cost” or “zero fee” loans are in fact hiding the closing costs or are covering those closing costs by increasing the interest rate. Ultimately, the consumer loses by paying higher interest rates, which usually ends up costing more than the original closing costs would have.

Remember that if a deal sounds too good to be true, it probably is. If you hear of a great deal it is best to have the mortgage broker put the deal in writing — called a good faith estimate — and then get a second opinion. I am happy to provide a no-obligation review of any offer in writing to verify whether or not the proposal you have been given is legitimate. If I feel you are getting a good deal I will simply tell you so, and if I feel you are not being well served I will be happy to tell you that as well, with no obligation either way.

What about seller-paid closing costs?

This is one true way that a borrower can mitigate closing costs. On any purchase of a home the seller can choose to contribute 3% or 6% of the purchase price toward the buyer’s closing costs and prepaid items, depending on the type of loan the buyer has chosen.

Can closing cost be included in a refinance?

Yes, in a majority of the transaction the closing cost of a refinance are “rolled” into the loan and the borrower is not required to pay those costs out-of-pocket. The decision to include closing costs is one that requires an investigation as to whether it is cost effective to do so. This is a standard service I provide my clients. If you or you know someone who is considering refinancing it behooves you to sit down with a mortgage professional to see if it make sound fiscal sense to refinance.

About me

I always try to help my clients make a decision based upon rational, logical information rather than the high emotions that frequently accompany the purchase of real estate. If you have a friend, acquaintance or family member who is interested in receiving and honest explanation of currently-available lending options, please have then give me call.

I will be happy to sit down with them and discuss their particular needs. Every borrower is different, and every loan situation is different. I never assume that I can apply the same set of answers to each borrowers situation and still fully satisfy their mortgage needs. I am happy to spend the time to help you, your friends, and your acquaintances to determine the best course of action for each or their unique loan needs.

Providing education and information has become my specialty. I strive to make the mortgage process as comfortable and understandable as possible. I will meet my clients most any place they choose, and am always available by cell phone – even on nights and weekends.

Divorce And Your Home

2007-09-01T13:49:00.000-07:00

There are many questions that people facing divorce might have about their home, their mortgage, their equity, and the related options.

Should I keep my house or sell it?

There are several issues to keep in mind when considering whether to keep or sell your home during or following a divorce.

Size of your home:

Does the size of your home now fit your family’s needs? If your former spouse has custody of the children, perhaps it might make more sense to sell the home and downsize.

Expense of keeping the house:

It is likely that your household income might be cut in half. If that is true you should take into consideration your total monthly expenses including mortgage payment, property taxes, insurance, maintenance and other related bills. If you are now the sole responsible party for the housing expenses, you household income might be decreasing and your monthly expenses may be increasing. It is important to be aware of what your actual expenses will be in relation to keeping in maintaining your home following a divorce.

My spouse is entitled to a share of the equity in our home. How is that handled?

The value of your home needs to be determined by an appraiser or a real-estate professional. The appraised value minus the actual cost of selling the property equals the net equity in the property. Depending upon what is decided in the Dissolution of Marriage, the remaining equity could be split between the divorced parties. Also, in general, any funds you or your spouse contributed to the down payment or maintenance of the home during your married life needs to be taken into consideration to determine what portion of the existing equity will go to each party. Each divorce is unique, as each married couple has different financial situations. The advice of a good family lawyer is crucial to determining the outcome of your particular situation.

Options for distributing equity

If the divorce decree specifies that you are to share a portion of the equity in your home with your former spouse, there are several ways to accomplish this.

“Cashing out” your former spouse

First, you can “cash out” your former spouse with cash assets that you have on hand in your checking or savings account, stock, or 401K accounts. Before allocating cash funds you should consider the opportunity cost of not having cash on hand. Does it make more sense for you to borrow the funds against the house and retain your cash? If you have liquid assets in investments, is it logical to assume you might get a better return on you cash thought your investments than what you would pay in interest? These are the types of questions I help my clients figure out before they make their final decisions.

Keep the house and obtain a home equity line of credit or refinance the property.

If you are like most people, your liquidity is limited and most of your wealth is tied up in the equity of your home. In most cases that equity will have to be accessed using a home equity line of credit or by completely refinancing your property. It is important to weigh the advantages and disadvantages and costs of refinancing verses obtaining a second mortgage. In some cases the advantages of refinancing are obvious and clear, and in other cases they are not. A clear examination of the advantages and disadvantages of all options with the assistance of a mortgage professional crucial in making the right decision.

Sell the property.

Regardless of how emotionally-attached you might be to the house, sometimes it just makes the best financial sense to sell the home and split the proceeds with your former spouse, especially if the financial burden of keeping the house will be too much to handle.

What if I am the one leaving the house?

It is important to remember that even thought your former spouse was awarded the house in the divorce; you are still responsible for the loan in the eyes of the mortgage company. Many people assume that signing a quit-claim deed removing themselves from title automatically absolves them from the responsibility of the mortgage. This is simply not true. A quite claim deed only eliminates your name from the tile of the property, but not the mortgage loan. The benefit of a quite claim deed is that it insures that a former spouse no longer has ownership interest in a property.

One possible way to have yourself removed from the obligation to pay the mortgage is to ask the mortgage company to provide you with a “qualifying name deletion assumption.” This method removes you completely from the obligation to pay the mortgage while leaving the mortgage loan in place, effectively eliminating the costs of refinancing.

Can a divorce impact my credit?

Unfortunately for many, divorce is a time of great financial hardship and credit challenges — income has been cut in half and expenses have effectively doubled. There are also unexpected expenses associated with a divorce, such as attorney’s fees and court costs. Life has become financially unpredictable. Because you and your former spouse are both still obligated to repay the mortgage, it is very important that it remain current so both parties can maintain a good credit rating.

As stated in the last paragraph, a qualifying name deletion assumption may be the best way to relieve the non-occupying spouse of their obligation in the mortgage. The advice of a qualified mortgage professional can help determine if this process is the best option for you, or if refinancing makes better financial sense.

What if I want to buy another house?

Although it is difficult and not advisable to buy new house before a divorce if final, it is not an entirely insurmountable task to do so. Frequently, depending upon your credit score, the task can be accomplished with some ease, especially if the house has been awarded to your former spouse and that fact can be documented, as the existing mortgage payment can be ignored when getting pre-approved for your new home purchase and in some cases child support income can be used for qualifying purposes. However, any late payments on the existing joint mortgage will impact your credit score, as the mortgage is a joint liability in the eyes of your existing mortgage company and the credit bureaus until you are removed via a refinance, sale or other method described above. Each credit and income situation is different, so each situation will need to be carefully examined to determine exactly how to structure you particular transaction.

What if I want to buy another house before the divorce is finalized?

This might be possible, but remember that your former spouse may have an interest in your new property if you are still legally married. Washington is a community property state, so, if a couple is married but separated, that spouse still has interest in the other spouses real estate until they are formally divorced. There are methods that can be employed to help you purchase a property without your spouse being financially or legally involved. It is best to consult with a qualified attorney and mortgage professional before proceeding with the purchase of a new home while you are still officially married.

Helping your friends and family.

I understand that a pending divorce may be a very difficult time and many uncomfortable decisions will need to be made during this time. I am happy to provide you with the necessary consultation to help you plan out the best strategy to deal with issues as they arise. I am happy to spend the time to help you, your friend or acquaintance figure out the best course of action. Providing education and information has become my specialty. I take the time to create an informative experience such that my clients’ decisions are based on knowledge of the market and the mortgage process rather than emotion. I strive to make the mortgage process as comfortable and understandable as possible. I will meet my clients most any place they choose, and am always available by cell phone – even on nights and weekends.

Learn the truth about your Option ARM Loan

2007-07-01T13:53:00.000-07:00

Do you dread getting your mortgage statement every month - You are not alone!

It isn't your imagination.

The index on which your mortgage interest rate is based has been skyrocketing. In the last three years the fully indexed rate on which adjustable-rate mortgages are based has doubled. Most of those gains have happened in the last 12-month period, and it is expected to get worse!

The facts dont lie.
Thousands of homeowners like you have been alarmed by rapidly increasing fully-indexed rates on their mortgage statements every month. The graph below illustrates the real truth about your negative amortization loan rate.

If you are only making the minimum start-rate payments, you are actually adding more and more money to the end of your loan each month, increasing your loan balance dramatically. If you are making the true fully-indexed payments, you no doubt have noticed your payment rising sharply every month over the last three years.

What are smart borrowers doing?
Thirty-year fixed loan rates are still low. In some cases, the rates are lower than the fully indexed rates of prevailing option ARMs. Smart borrowers are refinancing their option ARMs into still-low 30-year fixed loans.

Bottom Line What does this mean to you?
Your option ARM rate will likely continue to rise sharply over the next several months and continue to rise over the coming years. If you are an average homeowner in King County, you probably have a mortgage balance of $275,000.

If you are making only the minimum start-rate payment of 1.0%, then you are adding $950 per month to the end of your mortgage balance.

Thats $11,400 per year!

Every month you will continue to defer more unpaid interest to the end of your loan, dramatically increasing the balance of your mortgage.

I will give you an education about the REAL truth of negative amortization loans.
While most mortgage brokers are trying to sell their customers on the low payments that option ARMs, provided these loans are not always the best types of loans for all borrowers. I pride myself in educating my clients about the positive and negative aspects of all loan products. Mortgage Broker Associates offers a wide variety of loan products with features designed to ensure that your mortgage interest rate does not continue to surprise you in the future.

HELOCS vs HELOANS

2007-05-01T14:00:00.000-07:00

HELOC and HELOAN Explained

First mortgage types come is a dizzying array of options. Second Mortgages however come in only two varieties home equity line of credit and home equity loans. Each have different features, advantages and disadvantages that should be considered before choosing one or the other.

HELOC: Home Equity Line of Credit... like an adjustable rate credit card.

HELOCs work like adjustable-rate credit cards. They are, as the name suggests, lines of credit against the equity in your home. They are the equivalent to a second mortgage, and the payment adjusts monthly based on the outstanding monthly balance. The minimum payment is interest only, and is calculated based on the outstanding balance. The borrower can take money from the line of credit and pay down the balance as they see fit. If the borrower pays down the balance during a certain month then the payment will drop the month after the balance has been paid down.

For example if a borrower were to borrow $100,000 from their HELOC in a given month at a rate of 7.25%, the interest-only payment would be $604.17. But, if that same borrower were to pay down that line of credit by $50,000 the next month, then the payment would drop to $302.08.

The down-side to HELOCs are that they are monthly adjustable second mortgages and are based upon the prime rate. As of the writing of this article (December 29, 2007) the prime rate was 7.25%. Historically, it has been as high as 21.5% in December, 1980, and as low as 3.35% in August, 1955. Its most recent low point was 4.0% in June, 2003.

For reference purposes I have composed the chart below that shows the prime rate for the last 10 years to demonstrate historical fluctuations.

Another downside to HELOCs is that the minimum required payment is interest-only, and, unless the borrower is particularly disciplined and makes a concerted effort to make extra payments to cover the principal, then the balance of the loan does not decrease.

HELOANs: Home Equity Loans like a fixed installment loan

HELOANs differ from HELOCs in that the payment amounts are fixed, and that payment includes both principle and interest. Just like HELOCs, these loans are secured against the equity of your home. They do, however, differ from HELOCs in many ways, such as the fact that they have fixed interest rates that do not adjust.

In comparison to the HELOC scenario outlined above, if a borrower were to borrow $100,000 on a HELOAN at 7.25%, the principle and interest payment would be $682.18 an increase of $78.01 over the HELOC payment but keep in mind that the payment is principle and interest, not just interest.

HELOCs - Advantages and Disadvantages

Advantages

Low overall rate (at least at the current rates)
Low interest-only payments
Payment flexibility - payments decrease as the principle drops

Disadvantages

It can be difficult to pay down the principle amount unless borrower is disciplined
Adjustable rates, which are historically much higher than those available with a HELOAN

HELOANs - Advantages and Disadvantages

Advantages

Principle and Interest Payment - Easier to pay down balance
Manageable fixed-rate payment
Payment reliability - the borrower will always know what the rate and payment will be

Disadvantages

No payment flexibility - Payment remains constant despite principle reduction
Payment is slightly higher than HELOC

What factors can influence the interest rate for a HELOC or HELOAN?

There are two factors that can greatly influence the rate a borrower can expect for a HELOC or a HELOAN: combined-loan-to-value and credit score.

Combined-loan-to-value

In general, the higher the combined-loan-to-value (CLTV), the higher the rate will be for both a HELOC and HELOAN. To calculate loan-to-value, a lender takes the existing first mortgage balance and the proposed HELOC or HELOAN amount and divides that combined figure by the appraised value of the property. For example:

Existing First Mortgage Balance: $250,000
Proposed HELOC or HELOAN Amount: $150,000
Appraised Value of Property: $475,000
Combined-Loan-to-Value = 84%

This CLTV will have a lower interest rate than if the value of the property were $400,000 or if the CLTV were 100%

Credit score

Unlike first mortgages, your credit score can really influence the type of rate you can expect to get on a HELOC or a HELOAN. In general, the higher your credit score the lower the rate, and the lower the score the higher the rate.

What does this all mean to my rate?

Rates for HELOCs or HELOANs can vary greatly depending upon the borrowers credit score and the combined-loan-to-value. For example, a borrower with a high CLTV and a very low credit score might expect to receive a rate of 10% or 11% for a HELOC or a HELOAN. Conversely, a borrower with a a high credit score and a low combined-loan-to-value could be offered a rate of 6.0% to 7.0%.

About me

I always try to help my clients make a decision based upon rational, logical information rather than the high emotions that frequently accompany the purchase of real estate. If you have a friend, acquaintance or family member who is interested in receiving and honest explanation of currently-available lending options, please have them give me call.

I will be happy to sit down with them and discuss their particular needs. Every borrower is different, and every loan situation is different. I never assume that I can apply the same set of answers to each borrowers situation and still fully satisfy their mortgage needs. I am happy to spend the time to help you, your friends, and your acquaintances to determine the best course of action for each or their unique loan needs.

Providing education and information has become my specialty. I strive to make the mortgage process as comfortable and understandable as possible. I will meet my clients most any place they choose, and am always available by cell phone even on nights and weekends.

Interest only loans - a payment saving option

2007-03-01T14:05:00.000-08:00

The emergence of the interest only mortgage option.

Interest-only loans are relatively new type of loan that have become popular relatively recently in lending history. About two years ago, lenders began making interest-only loans available as an alternative to traditional principal-and-interest loans. In an effort to expand lending options and open up new types of loan products to the public, nearly all lenders offer some type of interest-only lending option.

How does a traditional principal-and-interest loan work

The payment structure of a traditional principal-and-interest loan is structured in a way where a portion of a borrowers payment goes toward principal or outstanding loan balance and another portion of the payment goes to pay the interest on the balance of the loan. During the first four years or so of a principal-and-interest loan, the majority of the payments go toward the interest, and over time a greater portion of a borrowers payment will be allocated toward principal.

Mortgage loans are unlike installment or car loans in that the interest is front loaded. This means that most of the interest is collected within the first five to seven years of the loan. The longer youve had the loan the greater the percentage of your payment will be allocated towards paying down principal rather than paying interest.

For example, If a borrower were to get a traditional 30-year fixed for $250,000 at 6.0% interest, the principal and interest payment structure would be similar to the following:

First Payment Structure

Total payment - $1,498.88
Principal portion of the payment - $248.88
Interest portion of payment - $1,250.00

As you can see, a majority of the borrowers payment go toward paying interest, in fact the ratio of interest to principal paid is 83.39% interest

Twelfth Payment Structure

Total payment - $1,498.88
Principal portion of the payment - $262.92
Interest portion of payment - $1,235.96

Ratio of interest to principal paid - 82.45% to 17.55%

Twenty-fourth Payment Structure

Total payment - $1,498.88
Principal portion of the payment - $279.13
Interest portion of payment - $1,219.75

Ratio of interest to principal paid - 81.37% to 18.62%

Thirty-sixth Payment Structure

Total payment - $1,498.88
Principal portion of the payment - $296.35
Interest portion of payment - $1,202.53

Ratio of interest to principal paid - 80.22% to 19.78%

Forty-eighth Payment Structure

Total payment - $1,498.88
Principal portion of the payment - $314.68
Interest portion of payment - $1,184.25

Ratio of interest to principal paid - 79.00% to 21.00%

Sixtieth Payment Structure

Total payment - $1,498.88
Principal portion of the payment - $334.03
Interest portion of payment - $1,164.85

Ratio of interest to principal paid - 77.71% to 22.29%

As you can see, after five years of payments only a little more than 22% of your payment is going towards the principle. For many borrowers interest-only loan options provide an interesting alternative method of home financing.

How does an interest-only loan work?

An interest only loan differs from a traditional loan in that the borrower is only required to pay interest for a given period of time. For example. if we take the loan scenario listed above in which we had a loan amount of $250,000 at an interest rate of 6.0%, then an interest-only loan payment would look something like the following )I have included the principal and interest payment structure for comparison purposes):

Interest Only Payment Structure

Total payment - $1,250.00

Principal and Interest Payment Structure

Total payment - $1,498.88

Monthly Difference

Total payment - $248.88
Payment difference in percent - 17.0% less

Depending upon a borrower’s specific needs and overall goals, a payment difference of 17.0% can be significant.

Interest only - a two-step loan structure.

As you may have expected, a borrower cannot continue to pay interest only and have an outstanding mortgage balance forever. Interest-only loans, like principle and interest loans, are designed to be paid off at some point in the future. They usually are amortized over 360 months, or a 30-year period, but the interest-only period is ten years or fifteen years. In other words, the borrower can pay interest only for, say, 10 years, and then the loan is “recast” and becomes a new loan after the ten year period. Three key events occur that the end of the interest only period.

The interest only period ends

The borrower is required to pay principal and interest based upon the remaining term.

The new loan term is shorter

If the interest only period was ten years the new term will be twenty years.

The new loan payment will be principle and interest

is the event of an Interest Only ARM the rate may adjust, in the event of a fixed interest only the rate will stay the same.

What might the payment look like after the interest only period?

After the initial interest only period the payment will go up dramatically as it is “recast” into a new loan based on a new principal and interest payment over a shorter term, and in the case of an adjustable rate interest-only loan, possibly a higher rate. For example, using our scenario mentioned above, ...

Interest-only payment structure - first 10 years

Total payment - $1,250.00

Recast principal and interest payment structure - remaining 20 years

Total payment - $1,791.08
Assuming a 30-year fixed, interest only at 6.0%

Payment increase after recast

Total payment - $541.08
Payment increase in percent - $43.0% more

What are the advantages and disadvantages to an interest-only loan?

Many homeowners seek ways to get the most house they can afford, typically revolving around how much of a monthly payment they are able to make. Interest-only loans are a good option to consider for certain types of people. Also, some people choose interest-only loans because it allows them to get more house for their money. People assume that over the years their income will rise, particularly people who are early in their careers, and who expect their income will rise with their experience level. This allows borrowers to maximize their buying power now, and get the most house for their lifestyle down the line.

Interest-only loans are also popular with borrowers who intend to buy a property, fix it up and sell it at a profit or, to rent the property and maintain it as a rental. Interest-only loans are ideal in situations where the monthly mortgage obligation should be kept at a minimum to help “cash flow” the property during periods of repairs or renting. Listed below are some of the advantages and disadvantages to obtaining an interest-only loan.

~Special Note - Unless the borrower makes a concerted effort to pay down the principle balance of an interest-only loan during the interest-only period, the loan balance will not drop as the minimum required payment only services the outstanding interest, not the principal.

Advantages

Low interest only payment for first 10 to 15 years.
Great “cash flow” tool for fixers or investment properties.

Disadvantages

Payment will dramatically adjust after interest-only period
No principle reduction during interest-only period unless borrower chooses to pay down the loan principal.

Is an interest-only loan right for my situation?

All loans can be good or bad depending upon how they are applied. If a particular loan product provides advantages that can be exploited to serve you particular plan then that loan can serve your needs. For example, if your plan to buy and fix up a property and your “window of operation” has you selling that property before the interest-only period has expired then an interest only loan might be right for your plan.

A consultation with a qualified mortgage professional can help you determine if a interest-only or any other type of mortgage product matches your home buying plans. An eduction about the different types of loans and the loan process has become a standard part of my service to my clients and the people they refer to me.

About me

I always try to help my clients make a decision based upon rational, logical information rather than the high emotions that frequently accompany the purchase of real estate. If you have a friend, acquaintance or family member who is interested in learning about the details of ARMs, or any other lending option, please have then give me call.

I will be happy to sit down with them and discuss their particular needs. Every borrower is different, and every loan situation is different. I never assume that I can apply the same set of answers to each borrowers situation and still fully satisfy their mortgage needs. I am happy to spend the time to help you, your friends, and your acquaintances to determine the best course of action for each or their unique loan needs.

Providing education and information has become my specialty. I strive to make the mortgage process as comfortable and understandable as possible. I will meet my clients most any place they choose, and am always available by cell phone – even on nights and weekends.

Home Improvement & Return on Investment.

2007-01-01T16:26:00.000-08:00

How to get the most from you home improvement dollars.

When you own a home, you often balance what you would like to do to your home with the forecasted return on any improvements you make. Every year, Realtor Magazine breaks down the return on improvement for a number of household renovations, including the return for specific cities. The averages for the Seattle area continue to be impressive:

Return on Investment for Home Improvement Projects