9 posts from April 2008

The Federal Reserve cut interest rates today for the seventh straight time since September of last year. Many experts believe that the Fed is done cutting interest rates and will begin a new watch-and-wait policy. This new policy is due – in part – to the fact that the first Stimulus Act rebate checks are hitting millions of mailboxes this week. The Fed hopes this money gives a boost in the arm to the economy.

If you've been taking a watch-and-wait approach with your own finances, now is the time to call and review your options.

Consider this: the Federal Reserve Board meets 11 times this year to review the health of the US economy and make adjustments if needed. Don't you think you owe it to yourself to take just a few minutes and do the same with your own financial goals?

I want to ensure that you're taking advantage of this unique market and not letting it pass you by. Here are just a few things to consider:

• Today's tougher housing market means there are some great buys to be had if you're looking to purchase. This is an especially friendly market for first-time home buyers.
• The government has temporarily increased FHA loan limits in many areas across the US. These government-insured loans are not FICO-score driven and require little to no down payment. Here's the catch: these new limits expire at the end of the year, so you must act now.
• You really don't want to play the waiting game if you are holding an adjustable rate mortgage (ARM). That's because there is nowhere for the rates to go but up from here, if we are truly at the end of the Fed's cutting cycle.

Invest 10 minutes in your financial future. Call me today. Together we'll review your situation. While the Fed takes a quick break from cutting to plan its next move, take advantage of the opportunity to do the same for yourself. I look forward to hearing from you!

First on tap tomorrow (Tuesday) is the Consumer Confidence Index (CCI) for April - this gets at the touchy-feely stuff like how we feel about our financial situation and the overall economy. If sentiment is strong or rising, it is believed consumers are apt to spend.  If the trend is downward, it is an indication that consumers lack confidence and will hold off on large purchases.  The latter situation is better for the bond market and mortgage rates because a projected slowdown in spending reduces inflation concerns.  A decline from March is expected.

In addition to FOMC meeting results are 2 other important reports.  First on the menu is 1st Quarter Gross Domestic Product (GDP) and per the Treinor Report "arguably the single most important report that we see on a regular basis".   Considered the best indicator of economic growth or contraction, this report is expected to cause a major movement in the financial markets and therefore could domino-effect into the mortgage markets.  KEEP YOUR EYES OPEN FOR THIS ONE FOLKS.  Fuel-recession concerns abound.  Anything that smells of inflation concerns could push mortgage rates higher Wednesday.

Second item on that menu is the 1st  Quarter Employment Cost Index (ECI) a comprehensive measure of labor costs and growth rate. It is also a closely watched wage inflation signal. A large increase may cause the bond market to tank and mortgage rates to rise over inflation concerns.  A smaller than expected increase is better news for bonds and mortgage rates.  Per Bloomberg, consensus in the ECI - Q-Q change is 0.8% increase.

The FOMC meeting begins tomorrow and adjourns Wednesday afternoon so expect some movement this week with important information coming out throughout the week with greatest potential for volatility Wednesday or Friday.  Weaker than expected economic data could mean bond market rally.

When you refinance your existing mortgage, you are essentially paying off the existing mortgage debt and replacing it with a new loan. Many of the same costs are involved in refinancing a loan as are in first-time financing.

Once your loan package has been sent to the lender, there are a number of things you should avoid doing that will change your financial picture. Remember, the lender is looking for stability and consistency. If you want the best interest rate, keep that in mind. Here are a few things to consider:

The lender is looking to see what your source of down payment is.

Your lender will most likely ask you to provide proof of your liquid assets. This includes bank statements for checking and savings accounts, verification of investments, and any other liquid assets. Some of the things they ask for may seem trivial, but keep in mind, if you are planning a move to a new home, it's important to have all documentation readily available. If the lender asks for cancelled checks or deposit receipts to meet certain conditions, you want to be able to find these things quickly to avoid delaying the closing of your loan. Make sure your paper trail is easy to document, and don't move money from one account to another.

Major purchases tip the scales against your favor.

Avoid making any major purchases. You might be thinking about purchasing new appliances for the new home. This is not the time to do it. Avoid making any major purchases on jewelry, appliances, furniture, vacations, or anything with a significant price tag.

Buying or leasing a car can make a negative impact on the way the lender views your financial status. This is a big ticket item that dramatically affects your debt-to-income ratio. You may feel you have room in your budget to purchase a new car, and think this is a worthy investment if you are looking for a home that will mean a longer commute for you on a daily basis. But by tacking a car payment onto your existing debt, you reduce the amount that you will qualify for in a home loan. A $400 a month car payment can reduce your approved loan limit by as much as $50,000. Think about doing this after your loan is approved if you really need it.

If you have to change jobs, you may be asked to document why this change occurred.

If you are changing jobs to increase your income, that's a no-brainer for the lender. If you have an erratic work history to start with, another job change may make it look worse for you.

If you are an hourly wage employee, most likely a job change will have no effect on your ability to qualify for a loan. If you have a track record of a consistent amount of overtime or consistent bonuses over the last two years, the lender views this favorably. If you change jobs, there is no way of knowing if the new employer will pay overtime. Many do not! If you work on a salary + commission or straight commission basis, it has a dramatic effect on your stability. If you are considering starting your own business, again, this is something to consider after your loan is funded.

While a short sale may be a last resort for many homeowners facing foreclosure, it also represents a great opportunity for potential home buyers and real estate investors. This article is designed to help answer a few basic questions about the substantial risk and reward involved in this extremely complex and often drawn out process.

What is a Short Sale?

A short sale is a legally-binding agreement to allow a home to be sold for less than the amount that is owed. And, while short sales are not by any means common or easy, because of increasing inventory levels and foreclosures in some parts of the country, lenders are much more eager to negotiate with borrowers who are having trouble paying their mortgages. For potential home buyers and real estate investors, a short sale also offers a great opportunity to purchase property at a significant discount.

However, don't expect a lot of help from the lender without first providing a sales contract from a qualified buyer and all the information required by the lender's loss mitigation department.

Of course, lenders are not looking to bail out "flippers" or other borrowers who simply overextended themselves. In most cases, a borrower must have suffered a serious financial hardship that directly caused him or her to default on the mortgage: the loss of a job, a serious illness, or the death of a loved one.

A written declaration and supporting documentation demonstrating financial hardship will definitely be required by the lender. This may include pay stubs, tax returns, and liquid asset statements, among other documentation.

Key Considerations to Keep in Mind

It's important to note that the difference between what is owed on a mortgage and the final amount the lender collects after the costs of the sale, including real estate commissions and possibly other charges don't simply disappear in a short sale. In the past, this deficiency or "canceled mortgage debt" was considered taxable income to the borrower. However, thanks to the Mortgage Forgiveness Act of 2007, the tax burden for qualifying canceled mortgage debt (as high as 35%) for primary residences only has been temporarily waived until the end of 2009.

If there are multiple liens against the property, all lien holders will have to be involved in the negotiation process, not just the first lien holder. Therefore, communication and patience are essential components of any short sale. This is why an experienced real estate agent and mortgage professional become so valuable to this process.

When you refinance your existing mortgage, you are essentially paying off the existing mortgage debt and replacing it with a new loan. Many of the same costs are involved in refinancing a loan as are in first-time financing.

To start with, the lender will need personal information to verify employment for you and your co-borrower (if there is one). They will also need information regarding all of your debts and assets, including your existing mortgage.

In order to expedite the paperwork process, start gathering the following items:

• W2's from the last two years (For borrower and co-borrower, if you filed separately)
• If you are self-employed, bring signed copies of your last two year's tax returns, including all schedules that were filed, and a profit/loss statement or balance sheet for the current year
• Homeowner's insurance company name and number
• The original lender's contact information
• Most recent bank statements
• Most recent statements from 401ks, IRAs, mutual funds and securities accounts
• A copy of your current payment coupon for your existing loan, along with the outstanding mortgage balance

What costs are involved?

There are no-cost and low-cost refinance loans available, and some or all of the fees and closing costs may be waived with these types of loans. This is a brief rundown on fees that could be associated with a refinance loan:

• Application Fee - A fee charged by the lender to process the loan application.
• Appraisal Fee - This determines the current value of your home.
• Credit Report - The fee the lender charges to pull your credit report.
• Title Search and Title Insurance - You may be able to get your current title company to reissue a new policy and save money in this area.
• Survey - The lender may order a property survey to document the current status of the land your property is on.
• Loan Origination Fee - A fee the borrower pays the lender to underwrite the loan. Usually expressed in the form of points.
• Discount Points - One point is equal to one percent of the loan amount. You may want to pay discount points to secure a lower interest rate.
• Miscellaneous Fees - VA and FHA loans may have fees associated with them. Private mortgage Insurance (PMI), document preparation fees, notary fees and tax service fees may also fall under this category.
• Prepayment Penalty - If your existing loan carries a prepayment penalty clause, you will have to pay a percentage of the outstanding loan amount for paying the loan off early.

Just as you encountered in your original loan, your lender will be required to provide you with a Truth-in-Lending Statement that outlines the fees associated with your new mortgage loan. Let us help you evaluate your personal situation and assist you in finding the loan program that works best to meet your long-term goals.

Comments from Fed Chief Bernanke and weaker than expected data from the job market painted a grim picture of current economic conditions. Slower economic growth generally leads to lower inflation, which is good news for mortgage markets, and mortgage rates dropped moderately during the week.

Wednesday, Bernanke testified before Congress. The focus was on the Bear Stearns rescue plan rather than current economic conditions, but he did outline the Fed's latest economic outlook. While acknowledging that the economy is in the midst of a downturn, he suggested that the economy will strengthen in the second half of the year, and he expects that growth will be positive in 2009. He believes that Fed rate cuts and government stimulus packages will help lift the economy. He also predicted that inflation will moderate in future months.

Friday's Employment report fell short of even Wall Street's reduced expectations. Against a consensus forecast for a loss of -50K jobs, the economy lost -80K jobs in March, and the figures from prior months were revised lower by an additional -67K. This marked the worst monthly results since March 2003. Once again, the construction and manufacturing sectors performed poorly. Average Hourly Earnings, a proxy for wages, rose at the expected rate. Overall, even though the job market performed very poorly during the first quarter of 2008, the current Unemployment Rate of 5.1% is still reasonably low by historical standards, and the Fed thinks that a recovery is not too far away.

The U.S. economy, interest rates, and the housing market are frequent topics on the nightly news. Viewers are told about leading economic indicators, how the stock market has performed, and whether the Federal Reserve is planning on changing interest rates. What isn't explained is how these items are interrelated and how they may impact which home loan is best for you.

The Federal Reserve attempts to keep the U.S. economy healthy through its use of monetary policy. As fears of inflation increase, the Fed will raise certain short-term interest rates such as the federal funds rate, which is the interest rate banks pay each other for overnight loans. Such an increase causes a ripple effect, with banks raising their prime lending rate. This, in turn, causes an increase in Adjustable Rate Mortgage (ARM) rates and the indices they're tied to, such as the 12-Month Treasury Average (MTA), the 11th District Cost of Funds Index (COFI), and the 1-Month London Inter Bank Offering Rates (LIBOR).

Under normal circumstances, long-term interest rates would also increase even though they are determined by market trading of bonds and mortgage-backed securities rather than monetary policy. However, in certain instances, the market responds in an unexpected manner.

Long-term interest rates are driven by a desire to place money in a steady vehicle that will provide a decent rate of return. When the stock market is underperforming, many corporate and individual investors will sell stocks, and invest their money in bonds. Typically, the longer the holding period of a bond, the higher the yield it will offer. This makes sense because the longer an investor's money is tied up in that investment, the more they should receive for it. However, when there is an increased demand for bonds, the law of supply and demand comes into play. As the demand for bonds increases, the need to attract investors decreases, so the yield offered on those bonds declines.

When the Federal Reserve pursues an aggressive policy and raises short-term interest rates repeatedly over an extended period, and the bond and mortgage-backed securities markets are booming so their yields are lower, an unusual situation arises. Short-term interest rates are high while long-term interest rates remain lower. This leads to a shift in the usual yield-versus-term paradigm, known as an inverted yield curve.

So what does this mean to a consumer who is trying to determine what type of mortgage would be best under these economic conditions? It means that the cost of an Adjustable Rate Mortgage is not significantly lower than that of a 15- or 30-year fixed mortgage. Rather than taking out (or keeping) an ARM, which is variable and will increase if short-term interest rates keep rising, it may be better to pursue a 15-year or 30-year fixed rate mortgage.

Because economic conditions are constantly changing, it's important to consult with a mortgage professional who is knowledgeable about the markets and how they impact the different loan programs available. This will ensure that homeowners obtain the best mortgage available despite market fluctuations.

Points are up-front fees paid by the borrower to obtain a better interest rate on a loan. One point equals one percent of the loan amount. And while a lower interest rate may result in a lower monthly payment, it is important to consider how long you intend to be in the loan and to compare current interest rates to historical market trends. This will help you to determine whether paying points is a worthwhile investment.

Let's look at a sample scenario. If you take out a $300,000 mortgage and decide to pay one point in order to lower your interest rate, this would translate into an up-front cost of $3,000. To keep things simple, we'll assume that paying this one point will save you $50 a month. This means it will take you 60 months to recoup the cost of that point. If you decide to refinance or sell the home before the 60-month mark, your money is lost – not to mention the opportunity cost of not having this money invested elsewhere. In this scenario, you would only benefit financially from paying points if you were to remain in the home for no less than 60 months.

It's also important to remember that interest rates run in cycles. When rates are at historical lows, it makes more sense to pay points if you plan to live in the home for an extended period of time. If it's unlikely that rates will go down in the near future, then there will be no need to refinance.

When interest rates are high, however, there is a strong likelihood that they will come down again before too long. Therefore, this is not a good time to pay points. The chances of refinancing in the near future are extremely high, and you will likely not be in the loan long enough to recoup the up-front cost of the points.

Tax deductibility is another thing to consider when choosing whether or not to pay points. For new purchases, interest from both points paid and your mortgage are tax deductible up front. For refinances, however, points are not deductible up front. Instead the deductions are spread out over the term of the loan (unless the entire loan is paid off early), making points more costly in comparison.

Ultimately, there's a lot to consider when it comes to points and whether or not they are a worthwhile investment. An experienced mortgage professional will work with you to determine the best course of action based upon your specific situation. Request a comprehensive cost comparison to see whether paying points could be financially beneficial to you.