Darwin's Finance » Real Estate

Mortgage Rates Dip Below Key 5% Level – How to Get Yours Even Lower

Darwin — Fri, 12 Feb 2010 12:56:51 +0000

Mortgage rates dipped below the key 5% level for 30 year fixed rate mortgages again this week. While many had predicted that rates would rise by mid-2010, it’s looking as though they may stay low at least through the year. The government intervention and reluctance to raise rates given a near 10% unemployment rate has suppressed rates to historically low levels.

How to Beat the Average Rate

A year ago, the benchmark rate was at 5.2% and the record low from December is 4.7%. I had locked into a 4.625% conventional 30 year mortgage with no points in 2009. How? I had the credit score. The key is having a top credit score in order to beat the averages cited above. There’s only one score that counts – the FICO score and there’s only 1 way to get it free (Details HERE). Other scores by other companies aren’t shared cross-company and are useless otherwise, and to pay for them is a complete waste.

No Money Down Loans in 2010?

The new homebuyer tax credit allows first time buyers to realize the $8,000 credit up through a binding contract date of May 1, 2010. Aside from attempting to beat the mortgage averages by having a great credit score, you can actually still get a no money down mortgage. Amazing, right? Well, under an obscure government program, the USDA Farm Loan program allows many people in relatively typical neighborhoods to apply. It was formed under the guise of “rural lending” but many of the suburbs that are eligible are anything but.

40 year Term Mortgage Loans?

If you have the money for a down payment but the monthly payments are going to be tight, there are 40 year mortgages and even longer terms like 50 and 60 year if you can believe it. The longer terms probably aren’t right for most people, especially if paying a higher interest rate, but if the plan is to move or it’s the only way to pull off a payment, perhaps it makes sense.

How to Choose Between Mortgage Options?

I had developed a Net Present Value model for just this situation and I share with spreadsheet with anyone who asks. Check it out since you may have to choose between a better rate or lower points and want to confirm which is the better option in present dollars.

If you’ve already locked into a mortgage rate and these lower rates are enticing, you may be thinking whether to break your mortgage lock. Many people do it and the article within outlines pros and cons.

USDA Home Loan Program – The 0% Down Bonanza You’ve Never Heard About

Darwin — Tue, 24 Nov 2009 03:18:09 +0000

The USDA loan program is offering, and has been for years, home loans at incredible terms even following the housing collapse, under the edict of rural lending (farm loans) given the challenges faced in finding a mortgage loan or deriving high income in sparsely populated areas. The surprise is – many of the zip codes enjoying the benefits of the USDA rural development program are in relatively typical suburbs of major cities.

Incredible Benefits of the USDA Rural Loan Program

The only actual NO Money Down Loan you can get anymore
NO PMI
No Loan Amount Limits
No Assets needed to qualify

How does the USDA Farm Loan Program Work?

All mortgages are conventional 30-year fixed rate mortgages
Both new and existing home purchases are eligible
Credit Score of 580 is needed (see the ONLY way to get a Free Credit Score)
The income limits for the Guaranteed Loan Program vary by state

Here’s the amazing bonus opportunity – if you’re eligible for the home buyer tax credit, you can actually MAKE money on your home purchase, right? If you keep your transaction costs down and pick up say, a $6,500 tax credit, this can actually be a money maker right from the start! Think about it – 0% down, a few grand in moving/closing fees matched with several thousand back on a tax credit. It’s a pretty incredible deal.

While the program is supposed to be geared toward low income families, some of the state limits I found during a cursory search showed pretty high limits, especially for a large family.

While some will inevitably question whether this loan program is another bubble waiting to burst due to the preponderance of no down payment loans going into default now, USDA officials have argued that their program is much less prone to speculative buying and their underwriting criteria are much more strict than the Wall-Street model of buying and selling loans from anyone willing to sign on the dotted line regardless of assets, income or liabilities.

Does this sound too good to be true? Normally, when it does, it is. However, in this case, if your family qualifies, it’s the real deal. Thousands of Americans are qualifying and the government’s endorsing it, so if you’re lucky enough to qualify, you might as well take advantage of the USDA Farm Loan Program.

If you don’t qualify, you can always check out a 40 year loan for a lower monthly payment than a 30 year conventional or check the refi/mortgage info page for more on how to find the best mortgage rate, avoiding the lender traps and how to perform your own NPV to confirm you’re going with the best deal.

FHA Loan Introduction and Explanation

Darwin — Fri, 12 Jun 2009 21:45:20 +0000

The following is a guest post at Darwin’s Finance. If interested in guest posting here, inquire further via this contact form.

The FHA (Federal Housing Administration) was formed by congress in 1934, to help a needy country rise out of the depths of depression. The majority of the country did not own their own homes, but rather rented. Congress hoped that by establishing the FHA it could turn this trend around.

The FHA does not lend money to home buyers; it insures the loan for the lender. This means that should the home owner default on their mortgage loan, the FHA will cover the cost to the lender. This insurance lowers the risk of loss and allows the lender to grant mortgage loans to those who might not otherwise qualify. In order to reach its goal of creating a nation of home owners, the FHA makes certain demands of the lenders, in exchange for the insurance provided.

In order to be eligible for an FHA loan, the borrower must have a social security number, be a lawful US resident and be old enough to sign on a mortgage loan. Once these simple requirements have been met, anyone (not simply first time home buyers) may apply for a new mortgage loan or refinance that is FHA insured.

The FHA requires that lenders look at credit history rather than credit score. Thus an applicant with a less than desirable credit score, but a good payment history, may in fact qualify for a new mortgage loan. It is still important for a home buyer to be aware of what is on their credit report and be prepared to offer a reasonable explanation of anything that may be considered negative.

FHA loans generally have lower income requirements and require only a 3.5% down payment. The down payment can come from virtually any source including gifts from family. This is an advantage over conventional mortgages, as often it is saving for a down payment that keeps young families from buying a home.

The FHA offers several types of insured loan plans. If you are considering purchasing a home speak to a lender about the possibility of an FHA loan.

Brandon Laughridge is a mortgage blogger for Mortgage Loan Place. MLP focuses on educating consumers on FHA mortgages and other government loan programs.

40 Year Mortgages – And 50 & 60 Year Mortgages While We’re at it

Darwin — Thu, 28 May 2009 04:57:07 +0000

I’ve been seeing more ads lately for 40 year mortgage loans and once my curiosity was piqued, I also found that there are 50 year and 60 year mortgage loans out there. On one hand, I found this to be rather unorthodox and novel since you never hear about “40 year mortgage rates breaking new records”, etc. in the press – it’s always the 30 year conventional loan followed by the 15 year conventional. Conversely, the notion that these new longer duration mortgages would start to flourish in this environment is logical upon further consideration. Where there’s a will, there’s a way. Let me explain:

With the current underwriting scrutiny and backlash over the ridiculous lending practices that led to the recent housing bubble, it’s not as easy to qualify for a mortgage as it used to be. Now, you have to demonstrate the ability to pay your mortgage with actual income (what a concept!). For many people, even at today’s lower home prices, they can’t afford the payments on a conventional 30-year mortgage. While Interest-Only Adjustable Rate Mortgages are an option, with rates this low, I’d be remiss to lock into a record low rate now with the assumption that it isn’t going to jump substantially when the Fed eventually has to raise interest rates significantly in order to stave off inflation, taking mortgage rates with it (indirect correlation, not a direct relationship; these resets are based on LIBOR). Therefore, lenders and prospective homeowners alike are rushing to fill a vacuum. The vacuum is created by the removal of the old risky loans with the insertion of new longer duration, “more easily affordable” 40 year, 50 year and even 60 year mortgage loans. As outrageous as these longer term loans sound, let’s investigate the pros/cons a bit more – who said a 30 year mortgage was right? That sounds long to me as well. It also seems short to me given life expectancy in the US. It’s all a matter of perspective.

Benefits of a 40 year, 50 year or 60 year mortgage:

Longer duration = Lower Payment – Similar to the difference between the common 30 year and 15 year conventional mortgages, by extending your mortgage term out, your monthly payment drops accordingly.
Flexibility - While you may start with a 40 year mortgage, you could easily turn that into a 30 or even less by employing any of the common ways to reduce your mortgage term like making bi-weekly payments, making one extra payment per year, etc. The rationale here would be to start off early with a lower payment based on your ability to pay and as your income grows while the mortgage payment remains roughly fixed (nominal increases for tax and homeowners annually), it would be easier to make the additional payments in the future or flat out refi into say, a 15 year down the road.
More House for your Money - While this is the mindset that got so many Americans into trouble to begin with, let’s face it, we want what other people have. You see the neighbor down the road who doesn’t make as much money but has the new car and bigger home. You have a family member you’re jealous of because they have more “stuff”. People want to push the limit of what they can afford, and often exceed that limit with our various generous debt instruments. As such, a 40, 50 or 60 year mortgage allows one to have much more house than they’d normally be able to afford in a conventional 30 year mortgage.
Example 40 Year Mortgage Calculator - If you have a $300,000 loan with a conventional 30 year mortgage vs. a 40 year mortgage, even though you’ll pay say, .25% higher in the 40 year mortgage, your monthly payments will be about $100 less per month. That doesn’t seem like much, but this might put you either in or out of your debt/income ratio to afford the house of your dreams. Use Quicken Loans to see what lenders in your area are willing to offer you on various mortgage terms. I began my search for the best refi deal on the internet in similar fashion – comparison shopping!

Risks of a 40 year, 50 year or 60 year mortgage:

40 year mortgage rates are higher than conventional 30 year rates. It’s worse for 50 and 60 year mortgages. This is logical, as you’ve probably noticed that 15 year rates are lower than the 30.
You’ll Likely Never Own your Home – Let’s be realistic here on the 60 year mortgage especially. Since it’s unrealistic to start a mortgage until in 20s and life expectancy is 78 (according to wikipedia, we’re #45 in the World – pretty bad for a “superpower”), for those extending the full term, they may never live to see the day they own their home outright. Consider it renting, but with a minimal tax deduction in the tail end years. Put another way, you’ll build equity in your home at a much slower rate due to the way mortgage loan amortization works – primarily interest up front and slow equity build which eventually translates into a higher equity build and lower interest payments at the tail end of a loan, which for 40 year mortgages and beyond, is very much further out than conventional options.
Much More Interest Paid Over Time - This is true. You’ll pay what appears to be a huge number more in interest over time. However, I think the “interest over time” argument is often over-hyped, especially by these outfits advocating for you to save all this money by pre-paying your mortgage (see this criticism of UFirst Financial’s Money Merge Account). What it really comes down to is Net Present Value. There’s a current value of money and a future value of money. Once you understand what your cost of cash is and what your interest rate is, the spread is what you’re paying out of pocket across a day, a year, or 40 years. It’s all about NPV (see this NPV explanation and model with respect to determining your optimal mortgage to select).

My Take on 40 Year Mortgage Loans and beyond

I have mixed feelings on these longer duration mortgages. While I think the 50 and 60 year mortgages are pushing lunacy, the 40 year mortgage loan may not be the worst investment for a 20-something looking to get started and maintain a cash cushion with the extra money they’re saving each month. I know people are going to attack me for saying it, but is it really any different than people starting out with an Interest-Only loan and then refinancing into a conventional 30 year mortgage at some point in the future? After all, in the early part of the loan, you’re barely paying down any equity anyway. In this case, at least the 40 year mortgage loan involves some equity paydown early on right? Like I said below, various options present themselves to this homeowner. Five years into the loan, perhaps due to a changed financial situation, the homeowner can now either start making a few voluntary payments along the way to bring it down to a 25 or 3o, or they could simply refinance into a new loan later (assuming rates are attractive).

Conversely, my vacuum argument holds that while there may be 10% of the population who utilize the loan in a prudent manner in which I outlined above, we’ll have another 90% of the population who rely on 50 and 60 year loans to fund real estate that they couldn’t afford. What’s next, rather than the sub-prime meltdown, we’re going to have the 50-year loan meltdown bailout?

An argument I won’t use: Businesses enter into 99 year leases all the time in the likes of Singapore, Dubai, etc. If you can’t own the land, you enter into a lease that’s practically long enough that the business will be completely morphed by the time the lease is up. Whoever signed that initial lease deal will be gone anyway, right? Let’s not confuse a business deal like this with the place you have to live and possibly rely on as part of your nest egg.

What Would You Tell Someone Looking to Get Into a 40 Year Mortgage or Longer?

$Million+ House for $10 Raffle – Don’t forget the Taxes!

Darwin — Sun, 05 Apr 2009 04:30:07 +0000

As reported by the South Florida Sun Sentinel, a Fort Lauderdale couple has decided that since their house that they purchased for $2.35 Million in 2005 isn’t selling, the next best thing to do is to raffle it off. They’re intending on raffling off 300,000 tickets for $10 each. It’s a pretty sweet looking house as you can see below, but there may be some “fine print” or no print at all that you have to figure out yourself before taking the plunge.

Could be Yours for $10 (oh, plus tax!)

What potential bidders should consider is whether there are tax implications if they win. The fine print in the “terms” states: “Saint Simeon Church is obligated to report the value of the prize to tax authorities as income…All federal, state and local taxes associated with receipt or use of prize, including without limitation all applicable sales, use, luxury, income and special taxes are the sole responsibility of the winner.” Of course, if they could bridge the win and re-sale by tax time and have the liquidity to pull it off, I’m sure they’d come out ahead in the end (assuming the home doesn’t decline another 50% during the time it takes to sell it). But, let’s say you’re looking at a $2Million valuation (generous, given $2.35 Million at the peak of the real estate bubble in one of the worst markets in the country – See Case-Shiller Index and How to Invest/Hedge Real Estate) and the federal, state and local taxes owed are say, 40%.

That would be a $800,000 Tax Bill!

Couple that with a sale. If there’s transfer tax in Florida like many other states, as well as taxes on any gains during the time from possession to sale, some more taxes.

I was also thinking about the math on the raffle. Hmmm. 300,000 tickets at $10 = $3Million. So, between the couple and the church that’s administering the raffle, they’re taking in $3Million on a home that likely wouldn’t even fetch $2Million. A $1Million Profit (or 50% Profit) for some ingenuity in turning a bad situation into an innovative opportunity? Not bad, huh? On one hand, the odds are clearly in favor of “the house”, but still a better payoff to odds ratio than a typical state-run lottery.

The auction can be referenced here.

Disclosure: I have not bid, nor do I intend to.

Is it Ethical to Re-Lock your Mortgage Deal when Rates Drop?

Darwin — Mon, 23 Mar 2009 03:17:14 +0000

With mortgage rates hitting record lows last week following the news that the Fed would buy up to $300 Billion in Treasury securities on the open market, there was a mad rush to lock in the best rates and inevitably, there was a fair amount of “mortgage envy” on behalf of borrowers who had recently locked. If you just locked in a rate at 5.0% earlier in the month and your neighbor’s getting 4.75% for the same closing costs for a similar mortgage (and you have similar creditworthiness), that raises an ethical and financial question:

If You Already Locked in a Rate with a Mortgage Broker, is it Unfair or Unethical to Seek to Re-Lock or start comparing mortgage rates again?

Argument Against: On one hand, you made a deal, right? After you locked, how would you feel if because rates went up noticeably, your lender called up and said they needed to raise the rate on your due to market movements? You’d be furious, right? What was the point of locking? After perhaps a nominal fee to lock your mortgage rate and start the approval process, there are tons of man-hours that go into assessing your financial statements, credit reports, income verification, etc. They run a risk each time they start this process since the deal isn’t closed until closing itself and in theory, you could walk – so they’re going on faith that you’re going to honor an agreement you made to go through this the deal.

Argument For: On the other hand, are consumers supposed to put aside a 30 year savings totalling perhaps tens of thousands of dollars over a commitment they made to someone or some company they don’t have any actual connection with? Would the person on the other end do it for them? Heck, people are walking away from their homes altogether because they’re underwater; this would pale in comparison. In this day and age, you hear more and more often, “You have to look out for yourself”. The Net Present Value of your mortgage difference could be enormous, even if you have a lower monthly cost 40 year loan.

I’d be interested in your opinions and then I’ll share my opinion on the matter.

Mortgage Rates Dropping to Record Low – Time to Refinance?

Darwin — Fri, 20 Mar 2009 02:49:48 +0000

Mortgage rates dropped again last week to below 5% for conventional 30 year mortgages and will possibly break the recent record set in January when mortgage rates briefly dipped below 5% and then popped back up again. Fifteen year mortgages averaged 4.61% last week, down from 4.64% the week before. Based on recent market conditions and actions by the Fed and Treasury, the next few weeks may offer the best timing to refinance or purchase a new home that we’ve seen in decades, and perhaps for decades more.

What’s driving the rapid decline in rates?

The market had widely anticipated that the Fed was going to enact monetary policies favorable to mortgage rate declines, which has been depressing rates enough to drive mortgage refi deals at a breakneck pace. Note, that the recent decline is from last week’s data, PRIOR to the unanticipated timing of yesterday’s announcement that it would buy up to $300 Billion in Treasury securities on the open market. I would anticipate that the weekly numbers for this week come in even lower. The Fed also plans to purchase an additional $750 Billion in mortgage-back securities from Fannie Mae.

This announcement took the market by such surprise that the yield on 10-year Treasurys plummeted a half percent, which hasn’t occurred in over 20 years. Given the rapid reaction, instruments that short treasuries took it on the chin yesterday; perhaps setting up an optimal entry point to short Treasuries moving forward via leveraged short Treasury ETF/Fund options that exist. This play has worked well this year, one of the only asset classes up for the year in a down market.

If you’re Not Refinancing now, What are you Waiting For?

While the near term refinance rate environment looks good, it may not last and rates may not go much lower. Interestingly, when refinancing activity picks up like it has recently, the volume can actually overtake the staffing and lenders are sometimes reluctant to offer the lowest possible rate, so they can stay afloat, especially given the thinning of the ranks that has occurred following the housing bust.

Consider This!

If you’re considering refinancing, you’ll want to use a Mortgage Calculator, check out how to use Net Present Value calculations to perform and apples to apples comparison of the various mortgage offers out there since they come in all shapes and sizes, with different fees, closing costs and rates. Apparently, even the 50 year loan is becoming popular with its much reduced monthly payment structure. And more importantly, you’ll want to check out what the reading community is saying about how they’re getting the lowest refinance rate based on their experiences. I’m partially through the process now and will report back once everything is finalize – as of now, it’s looking like a great deal!