Sub Prime mortgage fallout
If you pay any attention to the news, I am certain that you have heard numerous reports of Sub-Prime lenders going under.
This is rocking the financial markets. There are many reasons for this, including the glut of money that was
dumped into the markets over the last 5 or so years. Another culprit is the innovative loan products that were sold to people that had no business getting them. Couple this with VERY loose underwriting standards and...VIOLA!
You have
companies dropping like flies now that their portfolios of loans are defaulting and they are cash strapped.
But what does this have to do with you? Even though you may have good credit, solid job and easy to prove income, this does effect you. It effects you in rates. Obviously, as this shakes out in the markets,
mortgage rates are bouncing around like a yo-yo as Mortgage Backed Securities investors try to figure out how to price their deals.
One other effect of this is in underwriting times. I have a loan in underwriting right now that is taking 2 to 3 times as long as it did 6 to 12 months ago. I am certain that this is due to the fact that, due to the lack of work, underwriters are getting
layed off. So, a loan that would breeze through in the past in about 2 to 3 days, now takes over a week to get done and that time is getting even worse.
Another way this effects you is in underwriting standards. I ran a loan today that, 6 to 9 months ago would have flown through the underwriting engine. But not today. It took some real time and the final deal that I could put together for the client was not as attractive. This is all due to the pressure put on the markets to tighten up the belt. So, it effects you in what you may qualify for, since the pot is smaller and pressure is on the banks to deliver better QUALITY loans, as opposed to
QUANTITY. So, if you have credit that is good, but not great, or if you have some other extenuating circumstances, get involved early. Do not let someone tell you that "we can get that done in 10 days", because that is unlikely. Stay on top of it and understand that, if you are working with a professional mortgage planner, you are in good hands. They will figure something out for you.
The one thing you can count on in the mortgage business is CHANGE!
Labels: Buyers, Financing, General Real Estate News, Subprime
Personal Finance and Strategic Equity
(cell 1) 3-6 Months emergency incomethen
(cell 2) Get out of non-preferred debtthen(cell 3) One year salary (liquid)then
(cell 4) Payoff the mortgageI must give proper credit to this model. It was developed by Jim McQuaig of Nations Home Funding of Reston, VA.
Basically, the model is a very conservative approach to personal finance, and I doubt that there would be anyone that would argue it would not work.
The real strategy comes into play in cells 3 and 4. It is Mr. McQuaig’s belief (and my own) that whether the mortgage is actually paid off or strategically paid off is the personal decision for everyone.
By actual payoff, I mean that the loan is satisfied and a payment is no longer made to the mortgage company. You own the home free and clear.
A strategic payoff is if cell 3 (One year salary in a liquid account) actually continued to grow to the point that there is enough in this account to payoff the mortgage at anytime. You personal balance sheet has an asset (the side account) greater than the liability (your mortgage). You are in a POSITIVE position.
There is much more to this model and this thought process. I will try to share more in the coming weeks. If you would like to discuss this further, or apply a particular situation to this model, call or email me.
Labels: Buyers, Financing, Mortgage Planning
Inman.com has a Wiki
If you are unsure what a "wiki" is, take a look at
Wikipedia. It is user controlled content. The users of the service write the content.
Inman.com, a nationally known real estate information service, has a new wiki. It is located at
Inmanwiki.com.
I just added the following information on Adjustable Rate Mortgages this morning.
== ARM (Adjustable Rate Mortgage)==
An adjustable-rate mortgage, aka ARM, usually has a fixed interest rate period, followed by a period of fluctuating interest. The fixed period can range from as short as one month to as long as 10 years. ARM's are always linked to an index. These indices are usually published numbers such as the LIBOR rate, treasury bill or bond rates, or the Cost-of-Funds Index. The lender then adds their margin on top of this index. A good place to look at historical index numbers is [http://www.forecasts.org Forecasts.Org].
These loans act just like fixed rate loans during the initial fixed rate period. However, as soon as the loan begins to adjust, things can change and quickly. Lenders differ on margins that are added to the index rate and they differ on how fast the rate can adjust. Recent trends though show that the rates can go to their max rate on the first adjustment, which can almost double your interest rate when you move from the fixed period to the adjustable period.
The strategy behind using these loans are to either maximize monthly cash flow or to get the best rate if you know that your time in the home will be limited. These loans are less popular in times with an inverted yield curve (see [http://money.cnn.com/markets/bondcenter/index.html BondCenter on Money.cnn.com]), because they offer rates that are close to longer term fixed rates, so the risk is not worth the reward. With an inverted yield curve, the short term rates, carry the same or higher risk as the long term rates. Normally, the yield curve shows that rates are lower with shorter terms, which makes sense. If I was to lend you money today for 6 months, I will not loose much buying power on that money over six months, so the interest rate I will charge will be less. However, if I loan you money for 30-years, the money will have significantly less buying power 30-years from now, therefore, I need to charge a higher interest rate. This is inflation risk priced into interest rates.Labels: Buyers, Financing, General Real Estate News, Interest Rates
American's no longer saving for a rainy day!
I heard a story on the radio this morning and found an article on
VOA NEWS. Last year, the national average personal savings rate was at a 70-year low of NEGATIVE 1%. That is
absolutely astounding that on average, a person earning $80,000 would have spent $80,800. They are going in the whole. I am not sure if this factors in retirement accounts like 401K's, but I know of many people that have taken loans against those retirement accounts.
This underscores a post I made in the past regarding saving some money in a liquid side account and calling it you "Mortgage Reduction Account". I would recommend this instead of sending extra money to the lender. This side account is liquid and can be a safe account (like a simple savings account, money market or CD) or something more aggressive. But it is yours! And, it increases your savings rate.
Life happens and this average American that this article talks about is going to be in trouble when it does, because they will have no choice but to go even
deeper into debt.
Labels: Buyers, Family, Financing, Mortgage Planning
Good news about Mortgage Insurance
I found this on
Behind the Mortgage website. This is very good news.
Congress Passes Tax Deductibility of Mortgage Insurance PremiumsA rare bit of good news from the beltway: Early last Saturday morning, congress passed a "tax extender" package that included the deductibility of mortgage insurance on new mortgages originated in 2007. Though this is great news, and a long anticipated change, there are some restrictions, so not every homeowner will benefit. The rules, as we understand them, follow:- Permits federal personal income tax deduction for mortgage insurance premiums
- Applies to new originations only in 2007 (like many other provisions in the bill, it must be reauthorized for 2008)
- Only taxpayers earning less than $110,000 per year are eligible for the deduction (We understand that the deduction is phased out for borrowers w/ incomes between $100,000 and $110,000)
- Applies to premiums for both private and government (FHA,VA & RHS) insurance programs.
As with any bill, this one now heads to the President's desk for signature, and there has been no indication of any veto action on this bill. Will post a link to this as soon as we can dig it up at congress.org
Labels: Financing, Mortgage Insurance
A simple idea to save money
I wanted to take a moment to throw an example out about the power of putting some money to the side. I am comparing this to the question of paying extra on your principal balance on your home loan, or investing the money.
Lets say that you just bought a home and borrowed $170,000 at 5.75% on a 30-year note. That payment would be $992.07 per month. You have budgeted and decided that you have $100 extra per month to put somewhere. Now, does that go to the lender or in a bank account?
If you give it to the lender as an extra principal payment, you will pay the loan off in almost 24 years (287 months to be exact). You will save a gross amount of $44,150 on the tail end of the loan. But, you did have to send in $100 per month for this time frame, so your “investment” in the home made $15,450 over the course of this time frame. That is a rate of return of 3.35%.
Now, what if you put that money to the side? The logical question is where is the best place. That answer is beyond the scope of this article, but I know that some online banks pay about 4% for simple money market accounts. CD’s pay in the 5 to 6% range. And, if you an find a good planner, I know that most of them can get you 10% if you give them enough time (7 to 10 years). So, lets just average it at 6%.
You take that $100 and put it somewhere that will earn ON AVERAGE, 6% per year. You pay the normal payment on the home. At about the same time (month number 287), you will have enough in this side account to pay the loan off in full. This assumes that you make 6% on average. If it makes 8% on average, you will have thousands more in the account than is needed.
The other benefit to this is that the side account is liquid. It is money that you can access for good or bad reasons, for investment opportunities, or to get you through a job loss or disability. I know from working in the mortgage business, lenders do not like to loan to people that do not have a job. There are loans, but there are strict limitations on cashing out equity and higher than normal rates. What if you had one-year worth of salary in this account and could take your time looking for a new job?
I know that this is very verbose and I apologize for the length. I am simply passionate about this topic. Americans have become HORRIBLE at saving, and anything that I can do to help people save just $25 per month, I will do it.
Labels: Financing, Mortgage Planning
