The blog of Peter Boutell of Santa Cruz Home Finance

July 1, 2007 Use a buydown to lower your rate

Santa Cruz Home Finance — Tue, 31 Jul 2007 18:56:38 -0500

www.santacruzhomefinance.com

Mortgages come in all sizes and variations. The spectrum ranges from adjustable-rate mortgages that have low initial interest rates and low payments to the popular 30-year fixed-rate mortgage that has the highest interest rate and requires the highest payments. On the one hand, it is the stability of the 30-year fixed rate that makes these loans so popular but it is the temptation of low rates that draws borrowers to the adjustable-rate mortgages.

The mortgage industry came up with a loan program that marries these two extremes. It is called a Temporary Interest Buydown and combines relatively low initial interest rates with the long term stability of the fixed-rate mortgages.

The amazing thing is that these buydowns have been around forever. When I bought my home in Santa Cruz in 1989, the 30-year fixed rates were on the order of 10-11 percent. In order to make my house payments more affordable in the beginning [while I was building my mortgage business] I structured an interest rate buydown for myself.

Here's how that worked: The interest rate was set at 9 percent for the first year, 10 percent for the second year and then it would have gone to 11 percent for the remaining 28 years. I paid $207,000 for that home, put 20 percent down and borrowed $165,000. My payments for the first year were $1,327 per month, $1,448 for the second year and then would have gone to $1,571 for 28 years had I kept the loan in place. I saved more than $200 per month utilizing this buydown and that made a lot of difference to my budget back in those days.

Borrowers who are looking for a 30-year fixed rate but are balking at the payments based on the current rates, which are hovering in the mid 6 percent range, should consider an interest rate buydown. Your mortgage payments would be set in the 4 percent range for the first year. For a $600,000 mortgage, that could mean the difference between paying $3,800 per month or paying $3,000 per month.

Lenders require compensation for these lower payments because there is no free lunch. The "savings" that are enjoyed through lower payments for the first two years must be paid by either the seller or the borrower. In the example of the $600,000 mortgage above, the "cost" of the two years of lower payments would be $13,644. The buyer could ask the seller to pay this portion of the closing costs or the borrower could pay it in cash at the close of escrow or the lender could pay it in exchange for a higher interest rate [which the borrower ultimately pays for via higher payments for the life of the loan].

It was a hot seller's market when I bought my home in 1989 [right before the earthquake] and sellers did not need to make their properties more enticing by offering to pay for closing costs or buydowns. It is certainly different today. Today's sellers should be more than happy to make their homes as affordable as possible to prospective buyers. This buydown is an excellent tool that sellers and listing agents can use to make their homes more marketable.

July 8, 2007 Is this a good time to buy a home?

Santa Cruz Home Finance — Tue, 31 Jul 2007 18:54:10 -0500

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There are so many factors to consider when buying a home it is hard to know where to start. Perhaps one should start by answering the question: why do I want to buy a home?

Because you want to make money or because you don't want to make your landlord's mortgage payment or because you want a place to call your own are not good enough reasons. While those may be valid considerations, they can not be key elements of your decision making process.

With home prices relatively flat it is not a good time to figure on buying today and selling for a profit in two or three years. Even if home prices go up at the rate of 5 percent per year, buying costs, selling costs and carrying costs would likely eat up any potential profit if the property is not held for a longer period.

It is clearly easier on the budget to rent than to buy. The median priced home of $784,500 may rent for as much as $2,000 per month but even with a 20 percent cash down payment of $157,000 a home buyer who obtained a 30-year fixed-rate mortgage would have to pay a monthly house payment [principal, interest, taxes and insurance] of $4,800! Buying a home is not an affordable option for many residents of Santa Cruz County.

However, for those who can afford to buy a home but are still on the sidelines waiting for home prices and/or interest rates to fall may be missing the boat. The median price of a home in Santa Cruz County hit a high of $789,500 in November of 2005, prices then fell to a low of $710,000 in December of 2006. So far this year the median price of a single family home has increased steadily each month. In May the median price hit $784,500. Prices appear to be basically back to where they left off in 2005.

No one knows for sure what the future will bring but we can look at our neighboring counties along coastal California and can safely conclude that we are the best buy on this coast. In May, the median prices of homes in the counties of Marin, San Francisco and San Mateo were all higher than in our county.

Employment is one of the single biggest factors that drives home prices and right now the Silicon Valley is on fire. The employment engine of the San Francisco Bay Area provides an abundance of the high income jobs that are required to purchase homes above $800,000. The relatively close proximity of these jobs to Santa Cruz County assures us that there will always be buyers with enough income to afford the homes here. Furthermore, there is no reason why the median price of homes here will not continue to march up and some day reach the lofty levels of Santa Barbara, where the median home price has topped $1 million.

The other important factor that should provide an incentive for prospective buyers to get serious sooner, rather than later, is the current status of mortgage interest rates. They are not forecast to head down anytime soon. Economists are now predicting that the Fed may not drop rates until next year and, in the meantime, may still have to increase rates to cool down the prospect of inflation.
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To top it all off, the sellers who had unrealistic expectations about the value of their homes over the past two years may be more willing to give a bit on their price or offer concessions to buyers to help them with closing costs or interest rate buydown fees. Keep in mind though that those sellers who have nice homes that are fairly priced are receiving multiple offers from anxious buyers and selling prices are often exceeding asking prices.

Now is a great time to buy a home in Santa Cruz County. Start your process by meeting with a mortgage professional who has been introduced to you by a friend or trusted advisor so you can find out what your mortgage options are.

July 15, 2007 Home financing still easy to get

Santa Cruz Home Finance — Tue, 31 Jul 2007 18:51:30 -0500

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Despite some headlines to the contrary, the economy is doing fine and the mortgage market is alive and well. Our country's economic growth is steady, inflation is within the Fed's target range and at the current national unemployment rate of 4.5 percent, virtually everyone who wants a job has a job.

The notoriously conservative mortgage industry got caught attempting to increase loan volume by dropping prudent underwriting guidelines. As a result, this created homeowners out of many who should not have taken the risk. This, in turn, contributed to the upward spike in home prices in the 1998-2005 period.

As in any economic cycle, the upside had to reach a plateau and have a downside. It wasn't until the sizzling hot upward trend in home prices cooled that homeowners who really couldn't afford their homes realized that they couldn't sell them or refinance them [at lower rates]. When so many homeowners realized they were stuck, the mortgage industry figured out that it had been too lax and began tightening its guidelines.

Unfortunately, it was too late for those who could not really afford their payments and were counting on making a profit when they sold. For those who cannot afford to hold on until home prices start rising in earnest again, an understanding lender [which is rare] or foreclosure may be the only option left.

The mortgage industry is now attempting to figure out who can really afford to own a home and is rewriting the underwriting guidelines accordingly. Surprisingly, there has been little change in the basics. For example, 100 percent financing is still available; loans that do not require income documentation are still available and loans for borrowers who do not have any visible source of income are available with a large down payment.

While mortgage interest rates are above their historic lows of a few years ago, no one can really complain about today's rates. The popular 30-year fixed rates are just about where they were one year ago and there are more loan products available today than ever before.

What has changed is that borrowers with low credit scores [below, say, 660] are no longer able to qualify for the riskier mortgages. For example, 100 percent financing is not an option for borrowers with low credit scores. Loans that do not require income documentation are no longer widely available to these borrowers either.

Ben Bernanke and the Federal Reserve Board has a good grasp on monetary policy which has kept mortgage rates in control. While the Fed raised short term rates above 4 percent between 2004 and 2006, long-term fixed rates remained relatively stable. Although there is a slight chance that the Fed will notch up rates one more quarter of a percent within the next six months, most economists are predicting that the Fed will have to start lowering rates next year in order to keep the economy, inflation and unemployment within acceptable limits. This will cause the prime rate [which is the index for most home equity lines of credit] to fall and will put downward pressure on adjustable-rate mortgages.

July 22, 2007 This loan pays off sooner without increasing payments

Santa Cruz Home Finance — Tue, 31 Jul 2007 18:48:58 -0500

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A new loan program introduced in the United States two years ago is revolutionizing the way homeowners are paying off their mortgages.

It combines the flexibility of a home equity line of credit with the idle cash that sits in your checking account to pay off your loan sooner without changing your spending habits. The loan is called the "home ownership accelerator"

As we all know, you can pay off your mortgage faster and save tens of thousands of dollars by simply increasing your payment each month with a conventional mortgage. However, that requires discipline and a tightening of your personal budget. Also on a conventional loan, once you have made extra payments your money is locked up permanently unless you refinance.

By using the cash that sits in your checking account, the home ownership accelerator will automatically lower your principal due on your mortgage. Each time your paycheck is direct-deposited into your account, it makes a large impact on your loan balance. On the other hand, when you want money back, simply write a check. This 30-year loan is a home equity line of credit that allows unlimited payment and withdrawal privileges.

This innovative product may be the only loan that you will ever need for your home and here's how it works. It takes the place of a first mortgage and a home equity line of credit and must be in first position, which means that if you are refinancing you will use it to pay off any existing mortgages that you now have. If you are using the home ownership accelerator to buy a home it will effectively become both your mortgage and a line of credit.

To maximize the effectiveness of this loan program you will set up a new checking account and deposit your paychecks into this account each month. Each dollar you put into your checking account will immediately reduce your loan balance by $1. Since interest on your mortgage is calculated on a daily basis, every dollar used to reduce your principal will help you pay off your loan sooner. Alternatively, as you write checks to pay your bills each month, the loan balance will increase. Your mortgage balance will fluctuate as you make deposits and withdrawals from your checking account. The more money you have left over at the end of the month after your bills are paid, the faster your loan balance will decrease and the faster you will accelerate the payoff of your mortgage.

Let's look at a home worth $800,000 that has a $400,000 mortgage. Refinancing with a new $400,000 home ownership accelerator loan will pay off the existing debt; however, if you want to have a $100,000 line of credit available for repairs, vacations or emergencies, refinance with a $500,000 home ownership accelerator loan. This will pay off the existing $400,000 mortgage plus give you access to another $100,000. You will only pay interest on the current balance owed.

Income-wise in this example, let's say you take home $8,000 per month and typically spend $6,800 of it each month for your mortgage, food, utilities, entertainment, etc. At the first of the month you deposit your $8,000 paycheck into your new home ownership accelerator checking account and immediately your $400,000 loan balance drops to $392,000. As you write checks for food, utilities, credit cards, etc. your loan balance will gradually increase. By the end of the month you may have only been paying interest on an average daily balance of, say, $396,000 because the money in your checking account was being used to reduce your loan balance each day.

This loan simply puts the money that you have sitting around in your checking account [earning only 1 or 2 percent] to work paying down your mortgage. At the same time, this loan gives you the control to access your money anytime you want it.

The home ownership accelerator is for those borrowers who are able to save money each month, who have good credit and solid income. It is ideal for self-employed borrowers, investors and high income earners; it can also be used as a reverse mortgage.

The home ownership accelerator is based on an adjustable index; given the above scenario and based on stable interest rates, it will pay this 30-year loan off in 17 years without changing the borrower's spending habits. When compared with a traditional 30-year fixed rate, the savings in interest will amount to tens of thousands of dollars! To find out more, contact a mortgage professional who has been certified to provide the home ownership accelerator financing or go to www.homeownershipaccelerator.net and find out for yourself.

July 29, 2007 Risky home loans not new to this decade

Santa Cruz Home Finance — Tue, 31 Jul 2007 18:44:45 -0500

www.santacruzhomefinance.com

No one can deny that today's increased level of notices of default and foreclosures are due, in part, to the relaxed underwriting guidelines that lenders have offered and supported during the years. However, this is nothing new.

Statewide we had almost as many foreclosures in the third quarter of 1996 [15,418] as we did last quarter [17,418]. I believe it has more to do with the rise and fall of house prices than anything else. In all aspects of the economy [take the stock market for example], there is a rise and fall that naturally occurs; home prices and the number of sales is no exception.

For as long as I have been originating mortgages [21 years] lenders have offered "risky" loans that did not require income documentation and allowed mortgage payments that were at or less than the mortgage interest and did so for borrowers with less than stellar credit.

The rapid run-up in home prices during the first five years of this century was due in part to lax underwriting standards but it was also due to a combination of an obvious pent-up demand for tenants to become homeowners and historically low interest rates.

It wasn't until the subsequent fall in home prices [beginning in 2006] when homeowners realized that the rapid appreciation they had been relying on to bail them out of their less-than-ideal loans was not happening. They were stuck, they couldn't afford the new increased payments that their adjustable-rate mortgages were demanding nor did they have enough equity in their homes to sell. As a result, many home owners as well as their lenders are suffering.

The other significant factor that has led to this increase in foreclosures is the rapid in-flux of novice and unscrupulous mortgage originators [e-mail, online and direct mail lenders] during the boom years of 2001-2005. They either did not know what they were doing or chose to be untruthful and took advantage of unsuspecting consumers who were anxious to own homes or refinance their present homes. They made promises that they couldn't keep and often made ungodly amounts of money on each transaction.

We have reviewed closed loan files from other lenders where the borrowers were charged as much as $30,000 for closing costs. Most of that money ended up in the pocket of the person originating the loan.

The mortgage industry is attempting to make up for lost time by regulating itself before our state and federal governments overburden us with much stricter guidelines. In fact, some states have outlawed loans that do not require income documentation. That certainly conjures up a vision of Big Brother. Each day we are seeing our investors tighten their underwriting guidelines on their own accord.

The mortgage industry is changing so fast right now that those prospective home buyers that met with a lender last week or last month or even just yesterday may be surprised to find out that the loan they had been contemplating may no longer be available. Or, worse yet, the loan they had been pre-approved for and were counting on to buy a home with may not be an option today or tomorrow.

If you are contemplating buying a home be sure you are working with a reputable and knowledgeable mortgage originator and check in often to find out what your current loan options are because there is one thing for sure: they are changing.