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Should you accelerate mortgage loan payments?

March 13th, 2011

Many Americans have slashed their spending and are doing without in order to pay off debt and lessen the effects of the troubled economy. Paying off mortgage loans early has become more popular, something that many financial experts have traditionally advised against.

Getting free of a mortgage

The argument for accelerating payments on a home mortgage is that you build equity faster and ultimately will own it free and clear of any debt obligation. You will always have the security of knowing that the place is yours as long as you want it to be. Paying off a home mortgage in full also would likely free up a significant chunk of your income, allowing you to have more control and freedom to use it for other purposes.

Using income for other investments

Those who are against accelerating mortgage payments often cite the loss of the mortgage interest tax deduction. They also point out that instead of putting extra cash toward a home loan, the money could be invested in mutual funds or other investments that may earn you more money. Also, during the years when you are accelerating mortgage payments, you may have less income to put toward other things.

Biweekly mortgage payments

Before you starting attacking your mortgage debt for a faster payoff, learn as much as you can about the various methods. Biweekly mortgage loan payments can allow you to pay off a 30-year mortgage about six years ahead of schedule. Instead of making mortgage payments once a month like a lot of borrowers do, you make a payment every two weeks. So instead of making 12 payments a year it works out to 13 payments.

Most mortgage lenders allow biweekly payments, but usually charge a fee to set it up. Skip the fee and set up your own biweekly mortgage payment plan. Check with your mortgage lender to see if you can send half of the payment every two weeks. If the lender won’t allow it, divide the monthly payment by 12 and add that amount to the payment on the principal each month.

Use cash windfalls

Use bonuses and other cash windfalls to pay down mortgage debt. Make sure you don’t need the money for other expenses that are more pressing than paying off a mortgage. For instance, putting lump sums of cash toward credit card debt can wipe out high interest payments, which would give you a better return on your money than paying off low interest mortgage debt.

All-cash deals made up 28 percent of home purchases in 2010

March 4th, 2011

Having enough money to purchase a home outright might seem like a fantasy, but 28 percent of all homes bought in 2010 were all-cash deals, according to a recent Wall Street Journal article. Areas that had more depressed housing markets had more all-cash purchases.

Among the areas that saw a lot of these purchases is Miami-Fort Lauderdale, were over 50 percent of purchases involved cash buyers. About 42 percent of real estate purchases in Phoenix were all-cash deals.

“The prices were just irresistible,” Richard Stoker, who paid cash for two condos in Miami Beach, Fla., told the Wall Street Journal. “Florida’s been hit pretty hard.”

No mortgage loans

Buyers who pay with cash may receive a discount off the price of a home.They also have the freedom that comes with owning a property free and clear of a mortgage. Often people who are able to purchase a house with cash are investors. According to San Diego-based DataQuick, “All-cash deals have become popular in many Western markets where prices have dropped sharply, luring investor buyers who don’t always qualify for traditional mortgages. Moreover, sellers favor the relative speed and certainty of all-cash transactions.”

While investors are more likely to do all-cash deal, that doesn’t mean that there aren’t buyers out there who can afford to buy a home without a mortgage. The Money Saving Mom blog describes in a series of articles how one couple scrimped and saved to get the money they needed to buy a home in an all-cash deal. Buying a home with cash isn’t for everyone and requires a lot of sacrifices and careful planning. To determine if it is even possible to aim for the goal of buying a house with cash, you may need to work with a financial advisor to put together a plan.

What if you need a mortgage?

If, however, paying cash is too unrealistic of a goal to achieve, you’ll need to plan for getting a home loan if you want to buy a house. Be prepared to provide plenty of documentation about your income and assets when applying for a home mortgage. You also want to have the best credit possible since many mortgage lenders expect you to have a credit score of at least 720 to qualify for the best mortgage rates.

Using a cash windfall as a down payment on a home

February 18th, 2011

Should you use an inheritance or other cash windfall as a down payment on a home? Obviously, the more money you have for a down payment the better. But is getting a mortgage loan to buy a home the best use of your money at this time?

Do you have a lot of debt?

Owning a home is part of the American dream. But it can be easy to rush into home ownership without really being ready for all the financial responsibilities. For instance, many people apply for mortgage loans even though they have a lot of credit card debt, auto loans, student loans and other bills. Take a careful inventory of your finances and decide whether it makes more sense to use a cash windfall to pay off some of your debt, especially high-interest debt like credit cards.

Do you have emergency savings?

Owning a home means that you’ll be responsible for all maintenance and repair costs. It is not a good idea to purchase a home without having money set aside in savings for routine maintenance and other projects that may come up. It is also important to have money in savings for other emergencies that may occur, such as car repairs, medical expenses or a sudden drop in income. If you have little or no money saved up, you may be better off using your windfall to boost savings.

Do you anticipate a large expense soon?

Are you about to send your kid to college or anticipating some other important event that will cost big bucks? Put together a spending strategy that prioritizes future expenses. As you go through the numbers it may become apparent that this is not the time to get a mortgage to buy a home. You also may find that you need to put together a budget so that you can take care of your financial obligations and still save up for buying a place in the future.

Take time to plan ahead

Avoid rushing into home ownership even if you can qualify for a home mortgage. Too many Americans have made the mistake of getting mortgage loans when they really could not afford them. If you need help knocking out debt and building up a savings, get help from a debt counselor. If you do receive a windfall for a significant amount, a knowledgeable financial adviser can help you figure out the best way to handle it.

Should you let extended family move in to help with the mortgage?

January 21st, 2011

The economic crisis has led more people to move in with family members. As a result, there has been an increase in multi-generational households since the recession began.

A record 49 million Americans, or 16.1 percent of the U.S. population, lived in a multi-generational household in 2008, compared with 12 percent in 1980, according to the Pew Research Center. Back in 1940, about a quarter of the population lived in multi-generational households.

Use checklist before living together

If you’re struggling to pay your home loan and other bills, it could help to have extended family members move in (and pay rent). But make sure that everyone involved has realistic expectations about the arrangement. Consider the following things when trying to decide whether to invite relatives to move in.

  • Do you actually like and get along with your relatives? You can’t pick your family members, but you can choose whether or not to be in close proximity to them. If you and your relatives have a history filled with disagreements and clashes, living together to get the mortgage paid could be a huge mistake.
  • Who will be responsible for various household bills? Ultimately, your name is on the documents for the home mortgage, so it is your responsibility to make sure it gets paid each month whether or not your relative comes up with cash to help. If necessary, draw up a formal contract that spells out the obligations for everyone.
  • If your adult children are moving back home, don’t expect them to have curfews or ask your advice for every move they make. It is important that they respect you and your home, so setting up some rules before they move in is important.
  • Set up an agreement for sharing household chores. You should not be picking up after your relatives all the time. Everyone should be fully aware of their responsibilities for cleaning the home, yard work, waiting for the cable guy, etc.
  • Are small children moving in with your relatives? If so, are they expecting you to be a regular babysitter? Decide exactly how much involvement you want to have with carpools, playground duty, and other child care arrangements.
  • Are elderly parents moving in? If so, what kind of care are they going to need and can you handle it?

Set up a plan for everyone

Depending on your particular case, there may be other factors you need to consider before agreeing to a multi-generational living arrangement. Take time to think through your situation to make your living arrangement as smooth as possible.

4 things to consider before getting a mortgage for a fixer-upper

January 14th, 2011

There’s something about old and/or rundown houses that can bring out the inner handyman in many people. But before you get caught up in DIY dreams of renovating and restoring an old house to its former glory or turning a huge profit on a foreclosure disaster, there are several things to consider. Use the following checklist to decide if buying a fixer-upper is the right choice before applying for a home loan.

  1. How much will it cost? Don’t just factor in the purchase price and then name a dollar amount that you are willing to spend. You must do the math to actually determine the realistic costs that are going to be associated with the particular property you want to buy, not just the payments on a home mortgage. You’ll need to thoroughly evaluate the property and note all the repairs needed and what they are likely to cost in your area. If you hope to sell the home after fixing it up, it’s important to research current market values in the neighborhood.
  2. You must get a home inspection. Do not even think of skipping this step. To get arrive at a realistic cost estimate, it is imperative to have a thorough home inspection. Hire someone who is reputable and knowledgeable about what it will take to update the home. When you make an offer for a house the contract should have a contingency for the inspection so that if major deficiencies are discovered you can get out of the contract or try to negotiate for a lower price if you still want the property.
  3. Does the home need major structural improvements? Replacing plumbing, totally re-doing wiring, or fixing foundation issues can really drain your wallet. Are you willing to pay for these expenses and deal with any surprises that come up in the process?
  4. Will you need to apply for a home equity loan to pay for all the repairs? While many homeowners assume they’ll be able to get home equity loans when they apply for them, the fact is that many lenders are turning down many applicants even if they have good credit. Make sure that you aren’t going to be stuck without the funds you need to spruce up a fixer-upper once you’ve committed to monthly mortgage payments.

It’s important to choose the right repairs and renovations if you are on a limited budget. If you plan to remain in the home for many years, you’ll have time to budget and save for any work that is needed as you go along.

US home prices dropped 4.1 percent in 2010

January 7th, 2011

U.S. home prices fell 4.1 percent in 2010, according to a report from Clear Capital. The provider of data services for the real estate industry also said that home prices dropped in 70 percent of major markets, pressured by high unemployment and REO saturation above 22 percent during the year. REO saturation is the proportion of homes that are sold as bank-owned.

Is there a recovery?

Dr. Alex Villacorta, senior statistician with Clear Capital, said in a statement:

Some housing markets are well on their way to recovery, while others are experiencing a renewed downturn reminiscent of the housing crash only two years ago. Understanding which path a given market is likely to follow is dependent on several key factors, but the two clear drivers are local unemployment rates and the prevalence of distressed homes.

Housing markets change

Only eight major markets experienced double digit declines during the year, indicating that rapid and severe declines are subsiding. Those markets were Dayton, Ohio; Columbus, Ohio; Milwaukee, Wis.; Tucson, Ariz.; New Haven, Conn.; Jacksonville, Fla.; Virginia Beach, Va.; and Richmond, Va.

Of the 15 major markets that had price gains, six were in California, a state that has been hit hard by the housing crisis and had a lot of homeowners default on mortgage loans. Those markets were Riverside, San Diego, Los Angeles, San Jose, San Francisco, and Fresno.

Home mortgage applications

Some housing markets were lifted by home buyers taking advantage of a government tax credit. The tax credit encouraged many people to apply for mortgages while interest rates were at or near historical lows. Without the tax credit some homeowners may not have enough money saved up for a mortgage loan down payment and may put off buying a house.

Markets expected to continue struggling

The clear Capital data indicates that housing markets in the West may continue to struggle this year, and that Arizona may post double digit declines. Major Arizona cities have unemployment below the national average, but REO saturation in Tucson is more than 12 percentage points above the national level and more than 19 percentage points for Phoenix.

California markets that improved this year and posted gains may not experience that again this year. Also, housing markets in the South also are expected to struggle, with four of the 10 worst declining markets being in that region.

Rising “shadow inventory” could keep housing market down

November 27th, 2010

The “shadow inventory” of U.S. real estate rose to 2.1 million homes in August 2010, according to data from CoreLogic, a mortgage research firm. These numbers represent an 8-month supply of homes, compared to a 5-month supply, or 1.9 million homes, a year earlier.

Troubled home loans

Shadow inventory includes homes that are in foreclosure, homes that have mortgage loans that are at least 90 days past due, and real estate owned (REO) properties owned by mortgage lenders but not yet listed for sale. Shadow inventory usually is not included in official statistics about unsold properties. The visible supply of unsold inventory was 4.2 million units, unchanged from a year earlier.

The total supply of unsold homes at the end of August was 23 months, compared with 17 months a year earlier. Usually a supply of 6 to 7 months is considered normal.

“The weak demand for housing is significantly increasing the risk of further price declines in the housing market,” Mark Fleming, chief economist for CoreLogic, said in a statement. “This is being exacerbated by a significant and growing shadow inventory that is likely to persist for some time due to the highly extended time-to-liquidation that servicers are currently experiencing.”

Problems with shadow inventory

Homes included in shadow inventory may be difficult to sell even if they eventually are put on the market. They may be located in areas that have many distressed homes. The properties may need a lot of repairs before they can even be marketed properly.

Delinquent mortgage loans

Meanwhile, the delinquency rate for mortgage loans fell to a seasonally adjusted rate of 9.13 percent of all loans outstanding at the end of the third quarter of 2010, according to the Mortgage Bankers Association.

Michael Fratantoni, MBA’s Vice President of Research and Economics, said in a statement:

“Most often, homeowners fall behind on their mortgages because their income has dropped due to unemployment or other causes. Although the employment report for October was relatively positive, the job market had improved only marginally through the third quarter, so while there was a small improvement in the delinquency rate, the level of that rate remains quite high. As we anticipate that the unemployment rate will be little changed over the next year, we also expect only modest improvements in the delinquency rate.”

The delinquency rate includes mortgage loans that behind at least one payment but not in the process of foreclosure. The quantity of home mortgages that were in foreclosure fell to 4.39 percent in the third quarter, down from the previous quarter and down from a year earlier.

Mortgage interest tax deduction could be history for some

November 13th, 2010

Millions of Americans take a tax deduction for their mortgage interest payments each year. For many people the tax deduction is considered as a perk of being a homeowner, and for many people getting the tax break is viewed as a right. So what’s up with the government’s deficit reduction commission entertaining a proposal to change the mortgage interest deduction?

Trying to reduce the deficit

First, it’s important to understand why changes are being proposed. President Obama established the National Commission on Fiscal Responsibility and Reform to propose recommendations to cut excess spending and balance the nation’s budget. “We must stabilize then reduce the national debt, or we could spend $1 trillion a year in interest alone by 2020,” states the Commission in their draft proposal of Nov. 10, 2010.

Limiting mortgage interest

Proposed tax reform measures include limiting the mortgage interest deduction so that second homes and home equity loans would be excluded. Also, the mortgage deduction could have a cap of $500,000 instead of the current $1 million. Reaction to the proposed change in the deduction for mortgage interest has been met with concern and outrage.

Michael D. Berman, CMB, Chairman of the Mortgage Bankers Association, said in a statement:

Given the fragile state of the nation’s housing market, now is not the time to be scaling back incentives for homeownership. The mortgage interest deduction is one of the pillars of our national housing policy, and limiting its use will have negative repercussions for consumers and home values up and down the housing chain … We share the widespread concern over the growing national debt and want to help identify reasonable solutions, but we cannot support proposals that would chip away at the foundations of the real estate market.

A setback for the housing market?

Bob Jones, chairman of the National Association of Home Builders said in a statement:

Tampering with the deduction would be a major setback for today’s slowly emerging housing recovery. It would disrupt the plans of young households who are gathering their financial resources to purchase a home. And it would impose a substantial tax burden on existing home buyers, many of whom continue to stay current with their mortgage payments even as they struggle to make ends meet.

Arguing against the mortgage deduction

However, some tax experts say that the mortgage deduction should go. “What the subsidy is doing is driving up prices by encouraging well-off people to take out bigger loans, to buy bigger houses,” Roberton Williams, a fellow at the Tax Policy Center, told the New York Times. “So I think there’s a question about whether that is something the government should be doing with tax money.”

The deficit reduction commission is looking at many areas, not just mortgage interest deductions. If you feel strongly about any of the measures in the proposal, you can email comments and suggestions to the commission at commission@fc.eop.gov.

3 ways to cut your mortgage costs

September 10th, 2010

Buying a home is probably the biggest purchase you’ll ever make. Like most people you probably don’t have enough cash on hand to buy a property outright and need to obtain a mortgage loan, which means you are committing to many years of loan payments.

Most mortgage loans are set up to be paid out over a long period of time, such as 30 years, and the interest payments result in paying a whole lot more than the actual purchase price of a property. For instance, if you use a mortgage payment calculator to determine the amount of interest paid on a 30-year fixed mortgage loan for $200,000 at 4.5% interest, you’d pay $164,813.42 in interest over the life of the loan.

Cut Mortgage Costs

So what can you do to decrease the amount of money paid out of your pocket over the life of a home mortgage?

  1. Save up a larger down payment. This probably isn’t the first time you’ve heard this piece of advice, but you really can’t afford to ignore it. Using the scenario described above, assume that the down payment on the mortgage is 20%, or $40,0000. The total amount of interest paid out over the 30 years would be $131,850.74. Boost the down payment to 30% ($60,000) and the amount of interest paid would be $115,369.40. The more you put down the less interest you pay and the smaller the monthly payments are going to be.
  2. Property taxes and homeowners insurance add to monthly mortgage costs. Shop around for the best homeowners insurance policy you can find. Mortgage lenders require insurance premiums to be paid into an escrow account each month. Take time to compare different policies to find the best one for your situation. It may make sense to increase the deductible to have smaller monthly payments. You also may get discounts for being a long-time customer, having multiple policies, or not filing any claims over a certain period of time.
  3. Pay extra toward the principal. Even if you can only spare $50 extra to put toward a mortgage loan each month, do it. Paying down principal faster than the term of the loan can significantly cut your total mortgage bill. If owning your home free and clear of mortgage debt is important, focusing on reducing principal can help.

Refinance to lower payments

Also consider taking advantage of current mortgage rates to refinance out of a high-interest home loan. Decreasing your monthly payments could save hundreds of dollars a month, allowing you to keep more of your take-home pay. You also could refinance and continue paying the same amount each month to reduce principal quicker and cut the total amount of interest paid out over the life of the loan.

Are mortgages with no down payment making a comeback?

September 5th, 2010

Think no-down-payment mortgages are dead because of the housing crisis? Think again. The Affordable Advantage program run by Fannie Mae has allowed some home buyers to purchase a property with only $1,000 as a down payment. The mortgage loan program helps people with moderate incomes purchase homes, and housing grants can be applied toward the down payment.

Four states pilot mortgage program

Only four states are offering the mortgage loan program at this point: Idaho, Massachusetts, Minnesota, and Wisconsin. An article in the New York Times says the Wisconsin Housing and Economic Development Authority has issued 500 loans since March.

While it may seem risky to issue mortgages with low down payments, some housing experts seem to believe that the program’s requirements can cut the risk of homeowners defaulting. Only 30-year fixed-rate mortgages are available through the Affordable Advantage program. Risky adjustable-rate mortgage loans are not available.

Verifying borrower information

Homebuyers must have a credit score of at least 680 and live in the home purchased. Mortgage lenders also must verify the income and assets of home buyers, something that did not always occur before the housing crisis and contributed to a surge in sub-prime lending.

“In addition, we want to see what other lines of credit people have, and their performance. We look at their work history. We call their employers,” Kate Venne, spokesperson for the Wisconsin HFA, told the Washington Independent. The program helps borrowers if they become unemployed. Also, there is no requirement for mortgage insurance, which can bump up monthly fees.

Should you apply for a home loan?

If you live in one of the four states and are wondering whether or not to apply for a home mortgage through the program, here are some things to consider:

  • Are you really ready to take on mortgage payments and other expenses associated with home ownership? In addition to principal and interest, you need cash to cover homeowners insurance, property taxes, utilities, routine maintenance, and home repairs.
  • Would you rather save up a larger down payment to lower your monthly housing costs? Remember, the larger your down payment, the lower your monthly mortgage costs.
  • Do you need to clean up your credit to qualify for a home loan through the Fannie Mae program? Being on time with bill payments, reducing debt, and deleting outdated information in a credit report can help raise your credit score.

Finally, consider whether you are willing to buy a home in this economy. Housing prices and mortgage rates are low, making it a good time to buy a home. But home values could continue to fall even after you purchase a property. Honestly assess your tolerance for risk, as well as your commitment to staying in a home that could decline in value if the economy doesn’t improve.