As many of you have seen on TV or in print, our financial markets have had an upheaval lately. A lot of this has to do with the real estate market and its current cycle of self-correction. Over the last 5-6 years real estate prices have sky-rocketed, lenders have relaxed lending standards, and millions of homeowners refinanced into generally riskier mortgages in order to try to get "the lowest rate".
This trend is something that could not truly sustain itself and has subsequently started correcting itself. Consequently, in some areas appreciation has slowed, in some it has flattened out, and in the most inflated areas a process of depreciation has occurred. So, now here we are....and what do we do?
Well, first of all, let's dispel the myth that there is a "one-size-fits-all" solution for everyone. Every day I see commercials from Ditech, Greenlight, and a host of other lenders about how they can get you into the "perfect" loan program for you. Just a few years ago, they were pushing tons of 2-year ARMs (adjustable rate mortgages) because of the LOW starting interest rates. Now, they are promoting the "cure" to the ARM as their fixed rate loans.
These loans are being solicited at rates that are near impossible for the average person to get without either having the perfect situation or paying points at closing. For more information on the contributing factors that go into setting your interest rate and whether you fit the "perfect" situation, see this blog I wrote on the subject.
Adjustable Rate Mortgages
Some homeowners got into these low-rate ARMs to qualify for either a bigger house, or because their credit was too low to qualify for other products. A lot of those 2-year and 3-year ARMs are now recasting to the fully indexed adjustable rates. This leaves the homeowner with one of two choices. They can either pay the new payment which are increasing by as much as 60% or possibly refinance. The problem is that some of these homeowners' credit situation may not have improved, or with the new restrictions lenders are now imposing, find that they are in the same situation as when they first refinanced. So, now they are stuck with either a high interest payment, or a high closing cost refinance.
The worst part about this scenario is that higher LTVs (loan-to-value...see blog link) are now costing a lot more in interest rates and points. So, even if the homeowner has some equity and tries to refinance, lenders are putting severe restrictions on how much of your equity they will allow you access to. If you go too high you will find that the closing costs could be astronomical.
Fixed Rate Mortgages
Other homeowners decided to try to get into more "traditional" fixed interest programs while the rates were lower. This was generally considered a good idea, but, that really depends. If you were lucky to get enough to get a 4.75% interest fixed-rate mortgage, you still could have problems. In today's market, if you need to access your equity (debt relief, college expenses, house repairs, tax issues, or divorce) yet don't want to get rid of that nice low interest rate first mortgage, you have a problem. Second mortgages have been seriously restricted now. In almost every case, it will COST you to have a second mortgage. You can expect to pay, on average, a minimum of two points for your second mortgage and that would still be for a rate somewhere around 12% or more depending on your situation. If you have a more complex or higher risk situation, this could trigger a combination of points as high as six and/or interest rates as high as 14% or more as laws allow.
Purchases
The BAD news is that right now with purchases, you want to be prepared to put down at least 5%. If you try to do 100% financing, you will trigger those severe restrictions and fees I mentioned earlier. The GOOD news is that the market is flooded with a bunch of houses to sell and not a lot of willing or capable buyers. So, most homeowners are more than willing to make concessions and contributions to the total purchase cost. By law, sellers are allowed to contribute a total of 6% of the sales price towards closing. That means that with a house costing $300,000, a maximum of $18,000 is allowed to be credited back to the buyer for closing costs and fees. This can seriously mitigate how much has to actually be brought to the table. For the crafty and creative negotiator, this may completely eliminate the need to bring money to the table. But, you will still have to have show to the bank that you actually HAVE the money to put down, if necessary.
There are Positives (The "Secrets")
The fact of the matter is that the mortgage system, as it is set up, was not designed for the average person to win at all. As a matter of fact, most people lose most when they think they have made the "right" conservative and "safe" decision.
When you are making the decision about what mortgage programs to go with, understand that no matter what choice you choose, it will take you until the 20th year in your mortgage to actually pay as much of your payment to principal as you are paying in interest. It will take until year 22 before you have actually paid off HALF of what you originally owned. You will repay a total of 215% of what you borrowed. That means that on a $300,000 home, you will pay off the original $300,000 and an additional $315,000 by the time the loan is paid out. Most of this interest is really paid up front. So, if you are buying in today's market, when appreciation is slowed or even negative, if you sell before the trend changes or before maybe 8-9 years, you will have nothing to put down on your next home. So much for an "investment", eh? (see attached spreadsheet)
Understand this:
In Europe, gas prices are almost 3-4 times higher than ours. Real estate is almost twice as expensive. And there has been a history of employment issues. Yet, with these factors, a good many homeowners are still able to pay for their homes and even find time and money to vacation and still gain some enjoyment in life. Why is that?
The difference is the method of amortization. There are different types of amortization available to homeowners. If these methods of amortization are used effectively, then, it actually is possible to pay off mortgages in 7-12 years. Or, at worst, greatly reduce your principal quickly and give you equity you can use according to your own financial needs and planning. This mitigates, and in some cases, renders moot interest rate movements, up or down. ***NOTE- These methods DO NOT include dumb things like paying twice a month or one extra payment per year. That is only reducing your mortgage time by MAYBE 4-5 years. Yet, you would pay someone $30-$70/month for someone to do something you can do yourself.*** There are strategies that can allow you not to have to "rate shop" any more because you are not dependent upon only the $200/month principal payment your $1900 mortgage payment buys you.
There are a few different methods of doing this. It can be done, in some cases, without refinancing. In other cases, it may require changing loan products. But, overall in most cases, it can be done without spending any more money a month than what you are currently spending on principal and interest. So, why not spell it out here? Each situation is different and requires a more specific look at each person's situation and goals.
The "Anti-Sales" Pitch
So, now this is the part where you are figuring I am going to hit you with my sales pitch on how I have miraculously discovered the answer and cure to all these financial woes....and it all can be yours for $2999.99 (or insert your own high dollar figure). Sorry to disappoint you. This information isn't for sale. Why? Because its FREE. This blog is NOT a solicitation for my new tell-all book or the latest get rich gimmick. (Though, I should think about that. The tell-all book...not the gimmick)
I am just tired of hearing inaccurate and misleading crap filling the airwaves. I feel that everyone has the right and deserves the opportunity to take control of their life and finances. Every thing most lenders and banks will tell you is the RIGHT thing, actually, is not necessarily true. They count upon the fact that you have been taught over and over how to do things the "right" way. Buy a decent home and PRAY it appreciates.
The bottom line is this: There is no golden pill! Most things that can set you free can also enslave you and do MORE damage if you don't have the discipline to stay the course of your financial plan.
In the interest of fairness, I have included some general guidelines on picking your own mortgage professional. Feel free to take whatever knowledge and advice I may give and go to your mortgage professional of choice. But, as with any advice you hear, DO YOUR OWN RESEARCH! I can explain as much as possible, and I am very willing to help with any situation I can. But, each person needs to take any advice and research it to double check it to make sure you understand the ins and outs of any choice you may make.
As well, I would invite anyone else with helpful information to report it and it will be shared.
Finding a good Mortgage Professional
Now, I am going to attempt to write this section with as much integrity and impartiality as possible! J
There are a few key things you want to look for when searching out a mortgage professional. I am going to list these in no specific order.
•1. Honesty. If you have a feeling like something is being kept from you or you don't understand...ask until you understand or move on to someone who can explain it better.
•2. Options. Your mortgage professional should always present you with options. Even though some programs may seem to have obvious drawbacks, there may be hidden benefits. As well, some programs that seem to have obvious benefits have hidden consequences. Make sure you read and understand all disclosures to any loan program and then refer to Rule 1.
•3. Reality vs. "Pie-in-the-Sky". If it seems too good to be true, sometimes it is, sometimes it isn't. Often times, it can be true, but, with restrictions, conditions, and/or rules. Again....refer to Rule 1.
•4. Availability. A mortgage professional can sometimes get very busy, but, if you can't get in touch with him/her on the phone, try email. If you are still not getting the level of attention you think you deserve, you may need to find another professional.
•5. Overall Financial Picture. Your mortgage professional should have an eye towards your overall financial picture and not just selling you a loan. Hopefully, they have some sort of relationship with reliable financial planners and can keep your overall financial health in mind. If your chosen mortgage professional doesn't provide a referral, you should definitely seek out an independent party to review your financial situation with you.
•6. Ditech/Greenpoint. Whatever you do, do NOT work with either of these. Go to consumeraffairs.com and see the tons of complaints and note the nature of them. The complaints are fraught with hidden fees, bait and switch tactics, hidden clauses and an overall lack of full disclosure. Are they capable of making an honest loan? I am sure they can, but, I can't say why they don't do it more often. Do the research on your own. It is definitely worth the extra time.
This is an article that was published on MSN that goes into a little detail about some of the hardships going on in the present market conditions.
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