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Buying a Home is Becoming More Expensive

marcus — Fri, 29 Jan 2010 12:30:47 +0000

Although home prices haven’t increased much and interest rates have remained steady over the past year, it’s still going to be a more expensive to buy a home soon. The Federal Housing Authority (FHA) has decided to increase the down payment requirements on the mortgage loans they guarantee/insure. This down payment was increased a year ago to its current level of 3.5% of the purchase price. (Ex. $100,000 purchase price X 3.5% =$3,500 down payment). Buyers can still obtain a mortgage for the 3.5% down payment, but they must meet a minimum credit score. Additionally, the FHA insurance premiums will increase on each loan and the amount a seller can contribute to offset the buyer’s closing costs will be reduced to 3% from 6%. FHA insures the majority of mortgage loans held by borrowers that would traditionally not qualify for a mortgage on more conventional mortgage loan routes…as called bank loans. FHA appears to be adopting more stringent guidelines for its borrowers, however, conventional loans generally require at least a 20% down payment and much higher credit scores. (Ex. $100,000 purchase price X 20% = $20,000 down payment). FHA is more lenient on past credit issues and is accepting of credit scores below 600.

There’s Money in Your Home

marcus — Thu, 28 Jan 2010 12:30:25 +0000

The FTHB Credit of $8,000(and $6,500 for repeat homebuyers) will be expiring soon. Those wishing to utilize the tax credit need to enter into a home purchase contract by April 30, 2010 and fully close the loan by June 30, 2010. The homebuyer’s tax credit can be used to offset expenses for a home purchase from the down payment to improvements. (Don’t forget the up to $1,500 energy tax credit for all home owners that receive energy efficient upgrades or additions in their homes.)

Buying a home is a big step for most; however, when considering your housing options, while reviewing your housing budget, sometimes seemingly more expensive moves may prove to be the most financially astute decision. Example – I purchased my first home…through FHA…. as a fulltime working student because I couldn’t afford the increasing rent at the time. My rent was increasing from $780 to 840/month and I was barely making ends meet and going to school. I took my father’s advice and decided to buy a home. Although I had to come up with approximately $1700 to close my loan, my new mortgage payment was $340/month and I had created a tax deduction with my mortgage interest payments. As the years went by the property became a pool of equity and eventually rental income. As a college student, it was strenuous to come up with $1700, but the temporarily more expensive choice made financial sense.

marcus — Mon, 25 Jan 2010 21:27:23 +0000

Mortgages are loans made by banks and lenders that package these loans (securitize) and sell them on Wall Street in the form of bonds called mortgage backed securities (MBS). The money made from the sale of the MBS them goes back to the bank/lender so they can complete more loans. The mortgage payments made by the homeowner eventually pay the investor that has purchased the MBS in which your mortgage resides with other like mortgages.

When the foreclosures started piling up, investors on Wall Street didn’t want to buy these MBS, which dried up bank’s and lender’s continual cash resource from the investor markets. The dried cash pools prevented lenders from mortgage lending. The White House administration pledged $1 trillion dollars to the buy those unwanted MBS, so that lending could continue and keep the housing market alive. The federal government’s involvement allowed mortgage interest rates to fall from 6% to its lowest 4.7% within a year of its involvement and made the volatile housing market an attractive bet as the government announced a healthy profit from its investment into the housing market.

The US Treasury department believes the federal government’s involvement into the housing and MBS markets was supposed to be short-lived and its purpose now completed. Although, many believe it’s too early for a government pullout of the fragile housing market because sales are low and the economy is ailing, but investors and housing market professionals could easily become reliant on the government’s presence and never allow the markets to fully strengthen to a self supporting level.

Loan Modification Process Strained

marcus — Tue, 15 Dec 2009 20:27:49 +0000

The Obama administration and the US Treasury dept are vowing to pressure the mortgage industry to administer more loan modifications as permanently modified mortgages have not kept up with the number of troubled households owning homes. While 14% of homeowners with a mortgage are facing foreclosure, only about 2% of homes applying for modifications have been approved.

The mortgage loan modifications were supposed to reduce the mortgage interest rate thus providing a lower payment for three months. At the same time borrowers were to provide financial documents to include an explanation of hardship. Banking officials are responding that many homes placed in a temporary plan failed to make timely payments for the temporary period or simply failed to provide paperwork. Lights of a recovering real estate market could be dimmed if the foreclosure crisis isn’t contained before another wave of adjustable rate mortgages reset in the new year.

Why Understanding the Financial News is Important

marcus — Wed, 28 Oct 2009 18:41:35 +0000

The stock market’s Dow Jones Industrials index recently reached the 10,000 mark and although the stock market hasn’t reached that mark in over a year, what is the significance of this seemingly random financial statistic to non-stock market investors?

The movements of the stock market reflect the confidence of investors in our economy’s corporate future. When upward or downward surges occur in the stock market, investors show their enthusiasm or distrust in the economy by purchasing or selling ownership in public-owned corporations listed on a stock market. By purchasing shares in a corporation, the investors feel confident they will profit in the near or distant future from partial ownership of that company. Investors sell of stocks to access cash, gain a profit from a stock reaching a certain price or out of fear of losing money. Investors base their decisions on a plethora of information provided by government agency reports, corporate financial statements or trends in an industry of which a corporation may hold a position. If the government issues a report that the military will need an additional 2 million tires a year for its fleet off vehicles, then public companies making tires may see an increase in their stock price, since they will improve profits by selling more tires.

At the end of every quarter (March, June, September & December) corporations report their “Profits & Loss” and other financial statements. The stock market reacts this information and the Dow Jones Industrial index and various other indices will shift up or down by causing a reaction from investors. So why does this all matter to most of us? This investor activity drives bank lending practices, rates and activity. Commerce is driven by these banks’ ability to lend to growing companies and thus creating a stable employment market and industry growth. You have a vested interest in the movements of thee stock market, whether you literally place money in one of the stock markets or not.

The Benefits of Homeownerrship & Congress

marcus — Thu, 15 Oct 2009 18:31:15 +0000

A major part of financial literacy is an understanding of the rules of money. And there is nowhere better place to learn about rules than within hall of Congress. After all, these are the lawmakers of our society and they decide upon taxes levied and the regulation of commerce. The easy thing about money management and congress, is you actually have some input into the laws affecting your money. One method of injecting your opinion is by participating in elections with votes based issue positions and political accountability and not on incumbency and political parties. Another method is to contact your legislators directly by email, phone or letter and encourage others to do the same.

Currently, Congress is considering increasing the minimum down payment for a government backed FHA mortgage to 5%. That means if a home is selling for $150,000, a mortgage applicant would need to place at least $7,500 as a down payment. A little more than a year ago the minimum down payment for FHA mortgages went from 2.25% to 3.5% as a response to the high ratio of foreclosing homes…although the majority of defaulting mortgages were with creative and exotic mortgage products held by the banks. Raising the down payment minimum will lengthen the time for home purchasers to save for a home, while possibly slowing a still depressed housing market.

Additionally, the $8,000 tax credit to first time homebuyers is about to expire in November. This $8,000 credit has breathed a significant amount of life into declining housing markets and has helped thousands achieve the American Dream of homeownership. However, Congress is discussing the option of extending the tax credit.

So as you can see, without at least a proper understanding of Congress’ actions, a person saving to purchase a home next January, could be heavily disappointed by the lack of an $8000 tax credit and the need for an additional $2,250 towards a down payment, when using the aforementioned $150,000 home price.

Investors Slowing Loan Modification Process

marcus — Tue, 23 Jun 2009 20:07:31 +0000

According to Mortgage Bankers Association, over the past two years, 1 in 6 homes in the US have experienced mortgage distress as a result of the nation’s economic crisis, which was spurned by the housing market collapse. President Obama’s newly inaugurated administration made the housing crisis a priority and issued a loan modification program that compensated mortgage banks to modify delinquent mortgage loans. As a result many mortgage lenders have begun to modify delinquent home loans, thus preventing foreclosure and bolstering a saddened economy burdened by increased homelessness statistical reports. However, as the Wall Street Journal pointed out last week, many of these modified loans are rejected by the investors that hold these home loans in their investment bonds.

When mortgage loans are made, the company/bank that lends the money, pools the mortgage with other mortgage loans of similar terms, interest rates and risks. These pools are securitized (in short – packaged in a various dollar denominations and given an investment grade and interest rate) and sold on the bond market. US mortgage backed bonds are popular investment instruments and are purchased around the world by individuals and other countries’ governments as relatively safe investment…until two years ago.

So going back to mortgage loan modifications…when these investors get notice requesting permission to reduce a mortgage loan payment through a loan modification, the notice is essentially saying, would you, the investor, mind reducing your income from a bond and decreasing your investment portfolio substantially? The negative response by many of these bond holders/investors are causing many loan modifications to face rejection and a return to a foreclosure status after homeowners and loan servicers alike believe the loan is modified. Many housing finance experts think these investor actions will cause another flood of foreclosures over the next six months. Coincidently, if the homes go to foreclosure, the likelihood these investors will lose most of their investment is high. US Senator Durbin (D) has been arguing the defeat of the bankruptcy reform that allowed bankruptcy judges the ability to re-write mortgages of petitioners (someone filing bankruptcy) is the necessary teeth needed to motivate banks and investors to modify the very mortgage loans that caused the current economic depression.

Understanding Affordability is a Major Part of Financial Literacy

marcus — Thu, 11 Jun 2009 04:09:38 +0000

I recently got a call from a friend whose grandparents (80 years old) were placed into an expensive “no documentation” residential mortgage loan that is now foreclosing. The grandparents were seeking cash for medical expenses and didn’t qualify for a loan requiring full documentation of income and income sources. However, due to their excellent credit scores, they qualified for a riskier loan product that would forgo the process of verifying financial ability and documentation. Well, the mortgage interest rate adjusted and the medical expenses increased, the grandparents found themselves in an all too familiar situation… unable to afford their home of over 25 years and facing foreclosure. Key point to remember here is that everyone must understand bank loan qualifying standards are set to insure the loan applicant has a clear and certain ability to repay the loan in a timely manner. The mortgage company that determined the grandparents couldn’t afford the mortgage under normal conditions was wrong for suggesting the “no documentation” loan product with an unchanged understanding of the grandparent’s finances. Of course, after managing to maintain stellar credit, the grandparents should have been able to see that the riskier mortgage was more expensive and could reach an unaffordable level. But the thought of receiving an approval by creditors gives a false sense of security that the bank believes the loan requirements were manageable and affordable. In mortgage lending, irresponsibility in one’s fiduciary relationship to the client is inexcusable. The applicants are people… grandparents… who are relying on the guidance of the mortgage professionals and misuse of this trust relationship can lead to heavy fines on the lender. However, when mortgage professional are dealing with the elderly, there are additional laws that prevent and prosecute predatory lenders.
I know it’s not always great to get an unapproved status back on a loan application, but sometimes it for the best. Beware of risky loan products that speak beyond your level of financial literacy and discuss options with unbiased financial professionals (like CPA’s) outside of the transaction. If you feel you or someone else has been illegally advised on a mortgage transaction, contact your state’s attorney general and professional licensing commission arm.

Mortgage Interest Rates Increase

marcus — Fri, 05 Jun 2009 03:46:15 +0000

Mortgage interest rates have increased by .5 % since last week and mortgage applications for refinances have dropped by 25% since then. The increase of a half a percent equates to about $50/month per $100,000’s of debt. Many banking industry experts are saying the historically low interest rate period is over and some industry heads predict mortgagee interest rates could hit the 8% range within the next 12 months. Mortgage interest rates had reached as low as 4.25% on 30 year fixed term loans in May and are now averaging slightly above 5% on a 30 year fixed interest rate mortgage.
Many people reading this news would rush to the mortgage bank and lock in on a lower mortgage interest rate before considering the cost of the benefit. How do we figure that out? Glad you asked… For illustrative purposes, let’s say someone has a 6%, 30 year fixed mortgage, desires to stay in their home for 4 more years and seeks to obtain the 5% mortgage “before it’s too late.” Going from a 6% to a 5% interest rate on a $100,000 mortgage, equates to roughly a $100/month savings. That’s $1200/year saved and after four years, $4,800…of which a nice savings account could be established. However, if the closing costs of the refinance transaction exceeds the total savings over 4 years, then the cost of the benefit is too great based on total dollar expenditure. Of course, one will need to speak with a tax professional to consider the tax deductibility of each itemized closing costs, but $1200 saved each year may not really be as much as it is being made. However, if $100/month savings can equate to a better investment plan or added financial security, then the benefit may be of more immediate value than the cost of the benefit. Those decisions are up to you and your financial planner/CPA but don’t let the numbers and news encourage you to start ordering more financial Cold French Fries.

First Time Homebuyer Credit More Accessible

marcus — Tue, 02 Jun 2009 20:54:31 +0000

Buying a home in this market is a no-brainer to anyone that understands financial literacy. Home values are at an all time low, the inventory of empty homes are higher and mortgage interest rates lower than any other time in recent history. However, since the economy is still in the “red” and news reporters are constantly trumpeting the woes of the employment market and the uncertainty of the nation’s financial future, many homebuyers are nervous to invest hard earned funds into a struggling housing industry. A little over half of all homes being purchase are a result of a foreclosure or short sale. Many of the homes may need costly repairs or maintenance that has likely been deferred, especially if the owners were experiencing financial difficulty and if the home was headed to a foreclosure status. The government and mortgage lending banks are making it easier for 1st time homebuyers to obtain the money to satisfy the newly imposed higher down payments and costly mortgage closing costs. Since the onset of the housing market decline, the government created an $8000 tax credit to first time homebuyers to offset the expense of buying a home and to encourage timid and market shy buyers to enter the market. But since tax time is so long from now, there is a new allowance to access the $8000 homeowner tax credit for the purchase of a home prior to completing the purchase. The $8000 1st time homebuyer tax credit cannot be used as a down payment, but it may be used to pay for closing cost. This is a great way to access affordable housing and take advantage of the bargains in the housing market and the homebuyer doesn’t have to wait until next year to realize the benefits.