Home Is Where The Heart Is

Home is where the heart is. It’s anywhere you hang your hat and shelter yourself and your family. The need for shelter is basic to all humans. Since time began, that need has been satisfied by an enormous variety of homes — from caves and igloos to river boats, cabins and castles.

Your choice of a home is as individual as you are. Some people want to live in a ranch style home, where all the rooms are on one level. Others may choose a split level, a townhouse, a farmhouse — the list goes on. The type of home you choose is a unique expression of your individuality.

In the same way, deciding whether to rent or to buy a home is up to each individual. Some people choose to buy their homes; others prefer to rent. There is no right and wrong. Whatever you chose to do is right — if it is right for your own individual situation.

For many, the decision to purchase a home is the realization of the American dream. In many countries, owning a home is a privledge for the privledged few, but the United States remains a land of vast opportunity. Owning a home is an achievable dream for virtually anyone. Only you can decide whether or not it is your dream.

If it is your dream, this blog site can help you turn that dream into a reality. It’s wonderful to dream; it’s even better to make your dreams come true.

Over the next few months, I’m going to be writing a series of articles (posts) that will make the home buying process less daunting and help you understand what is necessary for you to purchase a home.

Buyers, You Will Pay More For A Home Than The Agreed-Upon Purchase Price

In real estate, the true cost of buying a home is always higher than the home’s purchase price itself. 

This is because of service charges from governments, lenders, and title/escrow companies.

Because there is no such thing as “typical” closing costs because each home purchase is different, home buyers should remember that the actual cost to purchase a home is a mathematical formula:

(Home Purchase Price) + (Closing Costs) = (True Cost To Purchase Home)

So, if a home is purchased for $250,000 and the costs are $5,000, the true cost to purchase the home is $255,000.

If the buyer is using a mortgage to finance the home, the mortgage is not based on the true cost, however.  It’s based on the home’s purchase price. This means that a person making a 20% downpayment is actually paying 20% plus whatever closing costs are listed on the final settlement statement.

Therefore, the home buyer’s required cash at closing would be 20% of $250,000 ($50,000), plus $5,000 in closing costs.  That adds up to $55,000, or 22 percent of the purchase price.

That said, the monies required at closing are usually reduced by credits paid from the seller to the buyer.  We’re going to ignore them for purposes of discussion because these types of offsets are inconsistent and can vary wildly from purchase to purchase. 

They come in the form of “seller tax credits” and/or “seller concessions” and we’ll cover those two concepts another day. 

For purposes of good planning, though, buyers should always be conscious of how closing costs can impact their bottom line on a purchase. 

If making the expected downpayment based on the purchase price is a stretch, making the downpayment plus the closing costs may be an impossibility.

Why You Should Remain In “Ready Position” For Your Mortgage Rate

Easy come, easy go.

There was a strong rally Monday afternoon in the mortgage bond market.  It was sudden and furious, mostly coming on in the last 60 minutes of trading.

When markets closed, mortgage rates for conforming home loans were grazing their lowest levels in nearly two years. 

It lasted overnight and into the early hours of the morning.

Then, several news pieces later, the financial markets turned.

By 8:30 A.M. ET Tuesday, the rally from Monday had been erased completely; mortgage rates were up by as much as 0.375% in some cases before the clocks struck noon on Wall Street.

The rally had been reversed.

Instances like this illustrate how financial market volatility can impact homeowners.  A 0.250% change in rate, for example, equates to roughly $16.50 for every $100,000 financed on an amortizing loan.  It’s $20.83 for an interest only loan.

Those kinds of savings add up over time.

Americans are not in the market for new homes or new home loans every day, but when we are, it can be profitable to pay attention to markets and be ready to act on a moment’s notice.

The markets won’t “put rates on hold” for you while you make up your mind so that moment — whenever it may come — could represent tremendous savings long-term on a home loan.  Be ready to act.

(Image courtesy: CompUSA)

The Week In Review (November 26, 2007) : What To Watch For

In a holiday-shortened trading week, mortgage rates finished the week slightly improved. 

But, because many traders had left early for Thanksgiving, matching buyers and sellers at any given price proved to be an exercise.  Mortgage rates bounced wildly as a result.

Between now and the New Year, expect the same volatility.  Fewer market players means less stability in mortgage bond prices and, therefore, in mortgage rates. 

This week, markets have a plethora of data to digest, plus they will be speculating about the outcome of this year’s Holiday Shopping season.  With more spending by shoppers, fears of a recession should wane, stabilizing mortgage rates somewhat.

On Tuesday, we’ll see the Existing Home Sales report for October.  There’s nothing that should surprise us here — the real estate story has been beaten to a pulp in the papers.  Any figure below 5 million, though, will likely spark talk of a recession.  That could be bad for mortgage rates.

The same can be said for Thursday’s New Home Sales report.  Remember that the difference between existing sales and new sales is that Existing Home Sales measures homes sold by a “homeowner”; New Home Sales measures homes sold by a developer/builder.

Then, on Friday, we’ll be treated to the Federal Reserve’s favorite inflationary measure — the Personal Consumption Expenditures (PCE).  PCE is expected to show 1.8 percent year-over-year growth, a figure generally believed to be neutral.  If PCE surprises to the high-side, expect mortgage rates to rise on fears of inflation.

Who Are Fannie And Freddie And How Do They Help Homeowners?

Fannie Mae and Freddie Mae are quasi-government agencies in that they are publicly-owned, but overseen by the government. 

The purpose of Fannie and Freddie is to make sure that money is available to homeowners that want home loans.

Neither lends to consumers directly, though; you’ll have to talk to your loan officer for that.  Instead, Fannie and Freddie’s role is to buy loans from lending institutions that make loans to everyday people.

For example, all banks in America abide by laws limiting the amount of money they can lend as a percentage of their total asset base.  If your home loan is on the books of Bank ABC, Bank ABC is, therefore, restricted in issuing additional loans because your loan counts against that ratio.

But, if Bank ABC sells the loan to Fannie Mae or Freddie Mac, your mortgage converts back into cash and Bank ABC can then lend again to somebody else. 

Because of Fannie and Freddie, a bank can lend to multiple homeowners using the same asset base, thereby making sure that “the system” has plenty of money available for homeowners in need of loans.

In this sense, both Fannie and Freddie keep mortgage money flowing on the street level.  But it only works to a point.  Fannie and Freddie have very strict guidelines about what types of home loans they will purchase from banks and only accept loans that conform to their respective criteria. 

Loans falling outside the criteria, by contrast, will not be purchased by the agencies. 
 
This is why some mortgages are called “conforming” loans — they conform to Fannie or Freddie’s guidelines.  The other loans fall into the categories of “Alt-A” or “sub-prime”.

This also explains why Alt-A and sub-prime loans are harder to come by lately — there’s no government agency that guarantees to purchase these types of loans.  Without that guarantee, banks are largely unwilling to tie up space on their balance sheets.

On Random Rate Rallies And Thin Trading

Mortgage bonds staged a late-day rally yesterday, exaggerated by the holiday-shortened week and because trader participation is light. 

(We’ll revisit this theme several times between now and the New Year so don’t get tired of it.)

When mortgage bonds rally, it means that demand for them is strong and that pushes mortgage rates down. 

Unfortunately for people shopping for loans right now, the rally happened so quickly that lenders did not have time to adjust their mortgage rate sheets before the market’s closing.

This morning, rates are slightly higher.

The rally yesterday happened for a number of reasons including the November Homebuilders Index remaining at an all-time low.  This illustrates the difficulty most developers are having in moving their inventory.

Another factor in the rally is that markets believe that the Fed is backed into a economic corner and will be forced to lower the Fed Funds Rate at its December meeting.  This is happening despite (non-voting) Fed member Randall Kroszner implying in a public speech that the Fed may be entering a “Wait-and-See” mode and the further rate cuts would be imprudent.

There will be a lot of speculation about the Fed between today and December 11, the date of the next Fed meeting.  Expect thin trading volume to make rates yo-yo until then.

If you see a rate and payment combination that makes financial sense today, better to lock it in then to wait for tomorrow.  Rates may be on the upswing.

Is Latest Foreclosure Data Questionable?

Per an article in the OC Register (Orange County, CA), the credibility and accuracy of foreclosure figures released by RealtyTrac are in question. This is important because both the media, government agencies, consumer groups and companies rely on RealtyTrac foreclosure counts to measure what many consider a developing housing crisis.

According to the 11/18/2007 OC Register article:

“questions are being raised about whether the firm’s oft-cited numbers overstate the real dimensions of the foreclosure problem. And that could create a problem for the company’s credibility.

For example, last year, RealtyTrac’s data showed Colorado had the nation’s highest foreclosure rate. That didn’t sit well with state officials, who decided to do their own count of foreclosures and came up with a figure much smaller than RealtyTrac’s. 

RealtyTrac counted 54,747 “foreclosure actions” in Colorado last year.

That number wasn’t useful because it didn’t reflect how many homeowners were actually in danger of losing their homes, said Ryan McMaken, spokesman for the Colorado Division of Housing. “We couldn’t really use those numbers for having serious discussions,” he said.

So McMaken put an intern to work calling all of the state’s 64 counties to get a count of how many homes entered the foreclosure process last year. The number he came up with: 28,435.”

Why is this important and what does it mean to the economy and housing market in general? According to Jack Kyser, chief economist with the Los Angeles County Economic Development Corp.:

“Figures that overstate problems in the housing market “become sort of a self-fulfilling prophecy in that people are afraid to go out and look for a home,” Kyser said.

Moreover, inflated data on foreclosures could prompt politicians to push through ill-considered mortgage reforms.

“You do something that’s good, but it’s the law of unintended consequences,” Kyser said.”

Sound familiar?

I’m not claiming in any way, shape or form the housing and mortgage industry problem is not real, however, it is critical those in the media and government agencies use data that provides a clear and accurate picture of the housing market and not base their actions on faulty information.

Remember – Garbage In, Garbage Out.

Earlier this month, Rhonda Porter published a wonderful post in which she wrote:

Senator Robert Bennett from Utah discussed how 15 years ago, the cry from Congress was that credit was not available to the poor and more needed to be done to make home ownership less restrictive.  Now the cry is that too much credit became available.  He went on to say that large institutions who created these programs are paying the price and they should.   As well as people who falsely stated their income to lenders and flippers hoping for “tulip time” by pushing an inflated home price onto another buyer.   

“Markets make better decisions than government.   Markets will punish.   Markets will reward and markets will eventually stabilize”.

Bottom line, it’s CRITICAL government agencies, corporations, the media and academia use accurate data and not politically correct emotion charged ascertains to influence change. Change is good when it is based on accurate underlying information, however beware of individuals or entities looking to enrich and/or make a name for themselves based strictly on an agenda. 

The Week In Review (November 19, 2007) : What To Watch For

In a holiday-shortened week with no major economic data releases, expect worries about the credit markets and speculation about holiday shopping to take center stage.

Last week was a mixed bag for the economy and mortgage markets responded in kind.  Rates were relatively unchanged.

The news started with Wednesday’s Retail Sales report.  In showing a modest increase, the ongoing fears of a consumer spending decline were allayed. 

This is good news for the economy as a whole because consumer spending accounts for roughly two-thirds of the U.S. economy — even a small dip could push a precariously balanced economy into recession.

Unfortunately, this could be bad news for rate shoppers as individuals – a slowing economy could drag down mortgage rates with it.  And, with six weeks remaining in the Shopping Season, the American Consumer appears to want its presents.

Also making news last week:

1. CPI data showed that the Cost of Living increased 2.2% in the past year
2. Oil prices fell from its all-time high, reducing inflationary pressure on the economy
3. Gas prices fell nationally, shedding 3 cents per gallon according to GasBuddy.com.

This week, expect mortgage rates volatility as we get closer to Thanksgiving; fewer traders will be participating.  With fewer buyers and sellers, it’s harder to find “the right price” for mortgage bonds. 

This same economic phenomenon may explain why it’s easier to buy or sell a home in the Spring than in the Winter — more market participants makes it easier to find a match.

Most important release of the week: Wednesday’s University of Michigan Consumer Sentiment survey.  If it comes in strong, expect positive reaction in stock markets which will, in turn, drag down mortgage bonds and push rates higher.

Why Driving Extra Miles For Cheaper Gas May Be A Waste Of Money

With gas prices up 37% nationally since this time last year, Americans have grown accustomed to driving a little bit further just to find a “gas bargain”. 

But, is it worth it?

Based on today’s national average gas price of $3.00 and assuming a 15-gallon fill-up and a 20 miles-per-gallon vehicle, a car owner would need to see 1 cent savings per gallon at the pump for each extra mile driven in search of better gas prices.

Broken down:

If gas costs $3.00 per gallon and the car gets 20 miles per gallon, it costs 15 cents/mile to drive the car.

If the car fills up with 15 gallons, a one-penny savings per gallon would yield 15 cents in savings.

15 cents is the same amount of money it cost to drive the extra mile to the “cheaper” gas. 

This isn’t an absolute, of course.  The one-penny-per-mile rule varies according to several factors:

1. The gas mileage of your vehicle: The worse your car’s gas efficiency, the fewer miles you should drive to find less expensive gas.
2. The savings at the pump: The greater the savings at the pump, the more miles you should drive to fill-up at that gas station
3. How much fuel you plan to buy: The larger your car’s gas tank, the farther you should drive for savings.

The best way to save money on gasoline is to curb automobile usage and follow good driving practices.  Then, trying using gasbuddy.com to find inexpensive fueling options in your area, listed by zip code.

It’s A Terrific Time To Revisit Your Mortgage Rate

If you bought your home in 2007 and your mortgage is a conforming home loan, you may be able to take advantage of  the current mortgage market conditions and lower your mortgage rate.

As of this morning, mortgage rates are near their lowest levels of the year.

Of course, not every conforming borrower is eligible. 

For example, if you bought your home without a downpayment, or if your home has decreased in value since your purchase date, you may not be eligible.  Most other homeowners are.

Mortgage rates change every day — just like stock prices — and when the economy shows growth, mortgage rates tend to worsen.  Wednesday, the Fed remarked that the economy is nearly in balance and is not declining as much as had been expected.  That means that the current level of low rates may not last much longer.

If you’re wondering when a good time to remortgage would be, now would be it.  We just can’t predict if the savings will be there much longer.

(Image courtesy: Bankrate.com)

Homeowners Should Have Basic Wills

Statistic #1: According to the Census Bureau, 69% of Americans are homeowners.

Statistic #2: According to lawyers.com, 42% of Americans have a basic will.

Basic Math: 27% of American homeowners are in need of a basic will.

Addressing mortality can be difficult for some people, but even more difficult is addressing a home that’s been put in probate after a homeowner’s death. 

If you own a home — whether you have a spouse, children, both, or neither — it makes sense to speak with an estate planning attorney to understand your options. 

Death is inevitable, so preparing for it is prudent.

Where You Find Speculators, You May Also Find Failures

This morning, RealtyTrac released its Q3 2007 foreclosure data for the United States.

The leading cities for foreclosures are:

1. Stockton, CA (1 per 31 households)
2. Detroit, MI (1 per 33 households)
3. Riverside/San Bernardino, CA (1 per 43 households)
4. Fort Lauderdale, FL (1 per 48 households)
5. Las Vegas, NV (1 per 48 households)
6. Sacramento, CA (1 per 48 households)
7. Cleveland, OH (1 per 57 households)
8. Miami, FL (1 per 60 households)
9. Bakersfield, CA (1 per 64 households)
10. Oakland, CA (1 per 71 households)

Looking more closely, we can see pattern.

California, Nevada, and Florida are well represented and that makes sense.  Between 2002 and 2006, these areas were popular with speculators, many of whom used 2- and 3-year adjustable rate mortgages that did not require income verification, nor did they require downpayments in excess of 5 percent.

These loans are now adjusting and in 2007, mortgages for investors are more stringent.  They typically require a 10-20% equity position and verifiable income. 

With no mortgage options, no buyer bailouts, and no means to pay the bills, many speculators are choosing to walk away from their investments.  Hence, the high foreclosure rates in California, Nevada, and Florida.

Rounding out the top 10 are Detroit and Cleveland. 

Foreclosures in these cities make sense, too.  Both have been decimated by job losses in the auto and manufacturing industries and without jobs, homeowners can’t pay the bills.

In other words, foreclosures are often not the result of a “bad mortgage”, but instead a “bad investment” or a “bad economy”.

The entire list of foreclosures by MSA are available on RealtyTrac’s Web site.

The Week In Review (November 13, 2007) : What To Watch For

The Dow Jones Industrial Average and NASDAQ shed 4.1% and 6.5%, respectively, last week. 

Normally, this would be good news for mortgage rates because investors tend to look for “safe havens” in bond issues, but instead, just treasuries benefited last week.  Mortgage bonds were left in the dust. 

Mortgage rates finished to the upside after a week without hard data and one in which psychology and momentum ruled. 

This week figures to be different.

Since the Fed’s decision to lower the Fed Funds Rate two weeks ago, there hasn’t been much hard data for market players to digest.  This week, we’ll get an overdue look at how American consumers are dealing with inflationary pressures with the releases of October’s Retail Sales and CPI data.

Retail Sales hits the wires Wednesday morning and consumer spending represents two-thirds of the U.S. economy.  Therefore, this very important data point will be closely watched because it could be foreshadowing how Americans will spend through the all-important Holiday Season.

If Retail Sales surprises to the strong side, mortgage rates may increase on worries over inflation.  If Retail Sales surprises to the weak side, mortgage rates may increase on worries over recession.  Either way, there’s no real room for error if you are floating your mortgage rate right now so locking prior to Wednesday may be prudent.

Then, on Thursday, the Consumer Price Index figures from October will hit the wires. 

CPI is a popular measure of inflation and is expected to show that the average “cost of living” increased by 0.3% in October overall, and 0.2% if we exclude the highly volatile prices of food and energy.

Because inflation is the enemy of mortgage bonds, stronger-than-expected CPI data would be expected to push mortgage rates higher.

(Image courtesy: The Wall Street Journal Online)

The Simple Math Of How Mortgage Rates Are Born

We talk a lot about how mortgage bonds are the driving force behind mortgage rates but we never get into the math of it.  So, to help our understanding of the subject, let’s delve a little deeper.

Here’s the (very simplified) math behind it:

If you pay $100 today for a $6 annual interest payment over 30 years and then you get your $100 back, you would have earned 6.000% on your money.

But, if you paid $98 today for that same $6 annual interest payment, your rate would have be 6.122%.

If you paid $102 today for that same $6 annual interest payment, your rate would have be 5.882%.

Because the interest rate of a particular bond never changes, we can see how lower price leads to a higher yield, or rate, and vice versa.

This basic math is why mortgage bond prices and mortgage rates move in opposite directions.

Now, the price of mortgage bonds is determined by the demand for them.  When demand for mortgage bonds increases, the price for mortgage bonds increases.  By contrast, when the demand for mortgage bonds falls, the price for mortgage bonds falls, too.

And, as we can see in the examples above, as bond prices rise and fall, the relative yields (i.e. rates) of those bonds move in the opposite direction.  Lower prices translate into higher rates, and higher prices drive rates down.

For more on how mortgage bonds prices work, check with Google.

Mortgage Rates Fall For ARMs Faster Than For Fixed Rate Mortgages

After running neck-and-neck for several months, interest rates for fixed-rate mortgages and adjustable-rate mortgages are finally diverging.

Despite pricing worse than its fixed-rate counterpart throughout much of August and September, ARMs are now close to 0.375 percent lower for conforming products sold through Fannie Mae and Freddie Mac.

This equates to roughly $25 per month per $100,000 borrowed.

If you know that you don’t need a 30-year rate commitment from your lender, you may find that a well-structured ARM is a real money-saver.

(Image courtesy: Bankrate.com)

It’s Not Your Imagination : Getting A Home Loan Is More Challenging For Everyone

If it feels like mortgage approvals are harder to come by than in years past, that’s because it is.

And we’re not just talking about sub-prime mortgages (for which the market has nearly vanished in just 12 months). 

According to a story on Marketwatch, mortgage guidelines are more challenging for everyone to meet — gold-star credit borrowers included.

The Federal Reserve conducts a quarterly survey of senior bank lending officials and in its most recent survey, nearly half of the banks said that their respective underwriting process have tightened, forcing borrowers to “jump over a higher bar” in order to get approved.

As a home buyer and/or homeowner, you can’t do much about the banks, or the mortgage markets.  But, you can make strides to improve your personal application stronger and increase the likelihood of an approval. 

That process starts with your credit score. 

If you’re planning to make a move within the next 12 months, know that it’s never too soon to get a credit consultation from a trusted mortgage loan officer or other financial professional.  Yes, banks are now demanding more strength in income and in assets before approving loans, but without sound credit history, those other two factors may not matter at all.

The mortgage approval process will likely get more difficult before it begins to get easier.  Therefore, take proper steps to review and repair your credit (if necessary) well in advance of needing a home loan.  Time heals credit blemishes and you may find that it’s the difference maker in getting a lender’s mortgage approval.

Source
Unprecendented tightening in lending standards
Marketwatch
Rex Nutting
November 5, 2007.  3:06 P.M. ET