How Congress Is Providing Tax Relief To Foreclosed Homeowners

After Thursday's passage of the Mortgage Forgiveness Debt Relief Act of 2007, foreclosed homeowners have one less worry: taxes.

When a homeowner defaults on a home loan, a mortgage lender will sometimes "forgive" the debt owed.

One example is when a foreclosed home sells for less money than is owed on it. The mortgage lender will sometimes accept this lesser amount, while considering the mortgage to be "paid in full".

This is often called a "short sale" because the lender is "short" of the full amount owed.

Prior to Thursday, the IRS treated the forgiven mortgage debt as taxable income. This added thousands of dollars to a foreclosed homeowner's tax liability.

A $50,000 short sale, for example, could yield an additional $12,500 in taxes owed.

After the bill's passage, that tax liability is gone. No taxes will be owed on primary residence mortgage debt that is forgiven or written off by a mortgage lender.

The bill has two sides, though.

In order to recover the estimated $650 million in tax revenue that will be lost, Congress has limited the amount of tax breaks available on the sale of second/vacation homes. That will be impactful on homeowners, too, of course.

If you think the Mortgage Forgiveness Debt Relief Act of 2007 will impact you personally, be sure to talk with your accountant.

For Some Homeowners, PMI Is Tax-Deductible Through 2010

The resurgence of private mortgage insurance continues -- if only because it's aided by Congress.

For eligible homeowners, lawmakers voted to extend the tax-deductibility of PMI through 2010. The law was previously scheduled to expire at the end of 2007.

For all loans originated prior to December 31, 2010, and within those years, private mortgage insurance is 100% tax-deductible provided that two tests are met:

• The homeowner's household income is $100,000 or less in the calendar year
• The home loan is for a primary or secondary residence

For households earning more than $100,000, the deduction is phased out to the tune of 10% per $1,000 of additional income until it reaches 0% at $110,000.

So, if a single person earns $90,000 in 2007 and buys a home using PMI, the PMI expenses are tax-deductible in 2007. If that person's income exceeds the threshold prior to 2010, the deduction is phased out.

As always, talk with your tax professional about how tax deductions work and whether you qualify for a PMI deduction.

You've Been Pre-Approved -- Now Get RE-Approved

Even if you've been recently pre-qualified (or pre-approved) for a mortgage, it may be prudent to get "re-approved".

The mortgage industry is changing quickly; being prepared beats the alternative.

Recently, mortgage lenders have made adjustments in what they will lend, and to whom. This shrinks the pool of eligible mortgage borrowers.

Some of these guideline changes include:

• Low or no down-payment loans may require more income and/or assets
• No income verification (i.e. stated) loans may not be available
• Higher credit scores may be necessary to qualify

In addition to tighter guidelines, many mortgage lenders are now required to pass higher fees and/or mortgage rates along to their clients as well.

The burden of these mandatory extra costs will be the difference-maker in a mortgage approval for some mortgage applicants.

Getting re-approved can give home buyers a realistic sense of how mortgage financing may shape up in the changed mortgage environment. It's important to make sure that the mortgage plan still fits into your short and long-term financial goals.

But, if nothing else, getting re-approved gives you the opportunity to speak with your Real Estate professional and Mortgage Planner about changes to the industry, and how it impacts you on a personal level.

How To Squeeze Extra Tax Deductions From Your Mortgage In 2007

For most Americans (but not all), mortgage interest is tax-deductible in the year in which it was paid.

With some advance planning, therefore, a homeowner can increase his 2007 tax deductions by paying additional mortgage interest while the calendar still reads 2007.

The key is to make the mortgage payment due January 2008 a few days early.

Because mortgage interest is paid in arrears, a mortgage payment due January 1, 2008 accounts for interest that accumulated throughout December 2007.

Rather than make January's mortgage payment on January 1, 2008, a homeowner can send payment this week or next -- while it's still 2007 -- and increase the amount of mortgage interest paid in 2007. This can increase 2007's tax deductions.

Tax planning can be a complicated issue and not all homeowners qualify for mortgage interest tax deductions. Be sure to consult your tax professional before making any tax planning decisions. If you are without a tax professional, call or email me; I would be happy to make a trusted recommendation to you.

Giving the Gift of Choice

So, you're not sure what to buy for your anniversary? Maybe it's your teen niece or nephew's birthday, or maybe someone's graduation. Is it a wedding you're going to, or maybe a baby-shower? Perhaps you're a supervisor/manager or business owner and are looking for a cost-effective, but personal way to reward/motivate your staff.

Whatever, the reason or occasion, why not give the gift of choice?
That's right. You choose your budget, and allow the recipient to choose their own gift. You don't have to go through the stress of trying to find a gift that the recipient will actually like and appreciate. And, it's more personal than just a cash award which, most likely, will be spent on something that will not remind the recipient of your generosity and thoughtfulness.

It's very simple.
Choose your budget - Gift cards/albums range in price from $25.00 to $750.00, and just about everything in between. You can order a Gift Card that will allow the recipient to view their gift choices and redeem them online. Or, you can order a Gift Card, Album, and Envelope ensemble which will allow the recipient to view their choices in print before making their selection online.

This may be especially beneficial to Mortgage and Real Estate professionals.
Just think about it for a moment. You can surprise your very own co-workers in the office ...(hint-hint)... maybe with a congratulatory Gift Album when they reach a certain milestone, or maybe the new person when they accomplish their first transaction. But, you can also leave a great impression with your clients (past, present, new) by showing them how special they are because you did not settle on giving them the standard fruit basket.

So, what are you waiting for ???
Head on over here and take a look for yourself (if that link does not work you can type: http://spabon.ordermygift.com into your web-browser). Look through the items that are available in each Gift Album. You'll probably want to order one for yourself. That's fine too.

Just a friendly reminder
If you are a Real Estate and/or Mortgage professional, please make sure that you are always abiding by RESPA, especially Section 8.

The Week In Review (December 17, 2007) : What To Watch For

Last week proved once again: The Fed does not control mortgage rates.

On Tuesday, after the Federal Open Market Committee lowered the Fed Funds Rate by 0.250%, mortgage rates began an ascent that carried all the way through Friday's close.

As a result, mortgage rates are dramatically higher today than just one week ago.

Other factors contributing to last week's run-up in mortgage rates:

1. The costs of running a business grew much faster than expected
2. The cost of living grew much faster than expected
3. Holiday sales were much stronger than expected

All three of these items point to inflation, the enemy of mortgage bonds. Inflation tends to push mortgage rates up.

This week, there isn't much new data of importance until Friday's Personal Consumption Expenditures release. PCE is the Federal Reserve's preferred measure of how much more (or less) everyday living is for Americans.

As the week progresses, expect increasing volatility in mortgage rates.

Market players will be in short supply because of holiday parties, half-days, and vacations. Fewer buyers and sellers in a marketplace mean finding the "right price" is more challenging.

(Image courtesy: The Wall Street Journal Online)

Why Recession Is Not A Guarantee In 2008

In its biggest month-over-month jump since 1973, the Producer Price Index rose 3.2 percent in November.

PPI is like a "cost of living" measurement for consumers, except that it applies to business.

PPI measures how expensive it is to produce goods on a day-to-day basis.

PPI spiking in November is an important development for all of us. When businesses spend more to create outputs, they may decide to pass those higher costs on to consumers.

Sometimes, they pass on the costs right away. Sometimes, they wait. Eventually, consumers could pay more for everything because businesses are paying more.

Now, economists and experts will say "if we don't count the cost of energy and food, business costs only rose 0.4% in November".

Yes, they're right. But costs are costs and businesses still have to pay them. And the price of energy is not expected to cheapen anytime soon.

Eventually, we all could to pay more and, when we do, it will be called "inflation". That would be bad for mortgage rates.

(Image courtesy: The Wall Street Journal Online)

Mortgage Rates Are Going Up -- But Not For The Reason You'd Expect

Conforming mortgages are getting more expensive -- but not because of mortgage rates.

To protect against further weakness in the housing sector, Fannie Mae and Freddie Mac are instituting "delivery fees" on all conforming mortgages, effective March 2008.

Fannie Mae's Adverse Market Delivery Charge and Freddie Mac's Market Condition Delivery Fee will add a one-time, quarter-percent fee to every home loan purchased from mortgage originators.

This means that on a $100,000 conforming mortgage, the borrower could:

1. Pay a $250 fee out-of-pocket
2. Accept a slightly higher interest rate that "finances in" the higher fee

Because the fee is in percentage terms, as the loan size increases, so does the fee. A $300,000 mortgage will carry a $750 fee, for example.

Unfortunately, mortgage borrowers may not get to choose on how they pay the extra cost. Many mortgage lenders are just adding it to their rate sheets.

Be aware, the 0.25% fee does not apply to all loans -- only to loans sold to Fannie Mae and Freddie Mac. This specifically excludes portfolio loans and sub-prime loans.

If you're not sure for what type of loan you are applying for, be sure to ask.

Making English Out Of Fed-Speak (December 2007 Edition)

The Fed lowered the Fed Funds Rate by 0.250%. The rate decrease was not well-received, though, as many investors were calling for a deeper cut of a half-percent.

In response, dollars moved from stock markets to bond markets and, therefore, mortgage rates fell.

Because it is tied to the Fed Funds Rate, Prime Rate fell by 0.250% yesterday, too. Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month's statements.

In the statement above -- as explained by The Wall Street Journal -- the Fed expresses concern about the consumer and business slowdowns. This leaves the possibility of future Fed Funds Rate cuts open.

Source
Parsing the Fed Statement
The Wall Street Journal Online
December 11, 2007
http://online.wsj.com/public/resources/documents/info-fedparse0712.html

Why Credit Card Holders May Benefit From The Fed's Actions Today

The Federal Open Market Committee meets today and will release a public statement at 2:15 P.M. ET.

It is widely expected that the FOMC will lower the Fed Funds Rate by at least 0.250%.

When the FOMC lowers the Fed Funds Rate, it is trying to "loosen" credit for American businesses and consumers. When credit is "looser", it is cheaper, and easier to procure.

Looser credit promotes spending and propels the U.S. economy forward.

By contrast, when the FOMC raises the Fed Funds Rate, it is trying to "tighten" credit which, in turn, slows down the U.S. economy.

The FOMC does not control mortgage rates, but it does have a direct impact on Prime Rate because (Prime Rate) = (Fed Funds Rate) + (3.000%).

Credit cards, construction loans and home equity lines of credit are all tied to Prime Rate and so interest rates are expected to fall on these loan types this afternoon.

The Week In Review (December 10, 2007) : What To Watch For

Among lingering doubts about housing and credit markets, and a general uncertainty about the U.S. economy, the mortgage bond market tanked towards the latter part of last week.

As investors moved away from mortgage bonds, mortgage rates forcefully bounced off their two-year lows.

A major factor behind last week's run-up in rates is the market expectation for Tuesday's Federal Open Market Committee meeting.

Those expectations sharply shifted after Friday's strong employment report from the Census Bureau and dragged rates along with them.

Prior to the jobs report, markets were expecting that the FOMC would lower the Fed Funds Rate by a half-percent. After the report's data showed inflationary hints, though, that expectation changed to a quarter-percent.

This is important to mortgage rate shoppers because inflation is the enemy of mortgage bonds. Typically, as inflation rises, so do mortgage rates.

The FOMC adjourns from its one-day meeting Tuesday and will make an announcement to the markets at 2:15 P.M. ET. Expect volatility before and after the press release.

Currently, the Fed Funds Rate sits at 4.500%.

Also hitting the wires this week is the Consumer Price Index (Wednesday) and the Producer Price Index (Thursday). These two reports are closely tied to inflation, too, so if the readings come in hotter than expected, mortgage rates will move higher in response.

CPI is also known as "The Cost of Living" index. PPI is its "business" counterpart.

(Image courtesy: The Wall Street Journal Online)

Great Home For Sale or Rent with the Option to Buy

This is a 4-BedRoom, 2-Bathroom, Split Foyer, Single Family Home in the Queensland community in Upper Marlboro, MD.

Conveniently located near US-301 South, this home is minutes to Andrew's Air Force Base, the National Maritime Intelligence Center, Bolling Air Force Base, Anacostia Naval Station, the Suitland Federal Center, Fort Meade, and many other locations in the D.C. Metro Area.

This home sits on just a little over a 1/4 acre and has a fenced-in backyard and deck. There are new rugs installed upstairs and downstairs. The inside has been freshly painted. The utilities are all electric (no gas), has a dishwasher, brand new electric glass-top range/oven, state-of-the-art water purification system, and comes with a washer and dryer.

There are many financing options available - especially to help those with less than perfect credit.

• Call to find out about a seller-financed second to help keep your loan-to-value at or below 80% to help keep your interest rate reasonable.

• Also, ask about a seller-paid 2-1 Buy-down which, generally speaking, will "buy-down" your interest rate during the first two years and then remain a fixed-rate from year 3 forward.

Buy this great home now for just $330,000.00 (USD), or call to find out how to rent this home with the option to buy. Rent will be $1800.00 (USD) per month.

Call now for more details: 301.702.0190 (x130).

Are you a Realtor with a buyer that's looking for a great and affordable home?
No problem. Earn your full 3% commission with the successful sale of this property.
Call 301.702.0190 and ask for Mr. Wooten.

Mortgage Rate Relief Plan: Who Qualifies For Help?

Thursday, the White House revealed its HOPE NOW program, aiming to help sub-prime borrowers freeze their initial "teaser" rates for a period of five years.

The program is receiving a lot of ink in the newspaper dailies, but sometimes it's unclear exactly what the program offers, and to whom.

Let's look at the details and see who qualifies and who doesn't.

Mortgage loan type

Qualifies: Sub-prime mortgage
Doesn't qualify: everyone else.

Date of mortgage origination

Qualifies: January 1, 2005 to July 31, 2007
Doesn't Qualify: Everyone else

Date of first interest rate reset

Qualifies: January 1, 2008 to July 31, 2010
Doesn't qualify: Everyone else

Previous mortgage delinquencies

Qualifies: No more than one 60-day late in the last 12 months
Doesn't qualify: Multiple 60-day lates, or one 90-day late

Potential payment increase

Qualifies: Payment will increase by more than 10% at first adjustment
Doesn't qualify: Everyone else

Credit score

Qualifies: Less than 660; less than 10% improvement since closing
Doesn't qualify: Everyone else

Because of the restrictions, only a small subset of the 1.8 million sub-prime loans issued between January 1, 2005 and July 31, 2008 are eligible for the rate freeze. A New York Times article estimates that figure to be 360,000.

For homeowners not qualified for the HOPE NOW program, mortgage servicers will attempt to remortgage their loans, or evaluate the homeowner for a rate reduction and/or for debt forgiveness on a case-by-case basis.

If you're not sure whether you have a sub-prime loan, or whether you can benefit from the "interest rate freeze" program, reach out to your loan officer or call HOPE NOW.

Source
Who Qualifies for Help, And What Qualifies as Subprime?
Ruth Simon
The Wall Street Journal Online
December 7, 2007

Your Credit Score Doesn't Cost You Today, But In Three Months It Could Cost You Plenty

Credit scores are the best predictor of how a homeowner will pay on a mortgage, so it's no surprise that credit scores will play a bigger role in mortgage financing in 2008.

Actually "that date" is more clearly defined. It's March 1, 2008.

Beginning March 1, 2008, Fannie Mae and Freddie Mac will subject the bulk of their mortgage products to the interest rate adjustments when the loan-to-value exceeds 70%.

Credit scores will determine the amount of the rate adjustment.

• Credit scores between 660-679: 0.750% increase to rate
• Credit scores between 640-659: 1.250% increase to rate
• Credit scores between 620-639: 1.750% increase to rate
• Credit scores below 620: 2.000% increase to rate

For example, a person with a 6.250% mortgage rate would see their rate increase to 7.500% just because they carry a 650 credit score. It would jump to 8.000% for a 635 credit score.

Because the credit score adjustment does not go into effect until March 1, 2008, there is plenty of time to be proactive if you think you'll trigger the rate increase.

If you are planning to purchase a home on or after March 1, 2008, it would be prudent to have your credit scores checked as soon as possible. If your scores are below 680, or teetering on the edge, take ownership of your credit and start working to improve your score.

A terrific source of non-biased credit scoring information is myFICO.com.

What Does It Mean To "Escrow" Taxes And Insurance?

As a homeowner, your financial obligations extend beyond your monthly mortgage payment. Periodically, you are also required to pay real estate taxes and homeowner's insurance premiums.

Each month, you pay your mortgage payment to a company called a "mortgage servicer" (because they "service" your mortgage each month).

In addition to the risk of not getting paid by homeowners, servicers also face two other risks related to homeowners:

1. That a homeowner's real estate tax bill will become delinquent and will be sold to a third-party
2. That a homeowner's residence will face catastrophic damages during a lapse in insurance coverage

But these risks can be mitigated.

Rather than assume that homeowners will pay on time, mortgage servicers can pay these bills on the homeowner's behalf when they come due while passing that cost on as a mortgage statement line-item.

This service is commonly called "escrow".

The escrow payment varies from homeowner to homeowner, of course. It's the sum of the amounts due annually for real estate taxes and insurance, divided by 12 months in the year.

That yields a monthly amount which is then added to the homeowner's mortgage statement each month, and added to a bucket of funds held on reserve by the servicer.

For example, a $3,000 tax bill with a $600 insurance policy = $3,600 in costs annually = $300 monthly paid into escrow monthly.

A $1,500 mortgage payment, therefore, would require a $1,800 check to be written to the mortgage servicer each month.

When a mortgage servicer "escrows" on behalf of a homeowner, it knows that taxes and insurance will get paid on time, thereby protecting its own interests. This is one reason why some mortgage lenders offer lower rates and/or fees for borrowers that choose to escrow.

If you're unsure about whether escrowing is right for you, be sure to ask questions. As with all financial decisions, there are reasons to choose either route.

Why New Home Sales Data Doesn't Tell Us Much About The Real Estate Market

October's New Homes Sales report showed a modest month-over-month improvement from September.

Before we interpret that to mean that the housing market is rebounding, though, let's consider the fallibility of the New Home Sales report.

On the Census Bureau's Web site, there is a disclaimer about the validity of the data. Paraphrased, it reads:

A new housing unit is considered sold when a contract is signed and/or earnest money is exchanged. There is no follow up to verify if the sale was closed, or canceled.

Therefore, if cancellations are high, the New Homes Sales data can be overestimated.

Couple that with the 35-45% cancellation rates as reported by builders and you start to get the picture.

However! The disclaimer also includes the following text (again, paraphrased):

A housing unit will never be counted twice so if a previously canceled unit is later sold again, the Census Bureau does not count this sale a second time.

Therefore, when demand is strong, New Home Sales can be underestimated.

In other words, the New Homes Sales report overestimates sales figures in a weak market, and underestimates them in a strong market.

The long-term impact of October's New Homes Sales report is unclear. The only thing that is clear is that the monthly New Homes Sales report doesn't tell us a whole lot.

The Week In Review (December 3, 2007) : What To Watch For

If you enjoy roller coaster rides, last week's mortgage markets were a delight. Up and down mortgage rates went, trying to find a balance between inflation and recession (or maybe neither).

A major cue for markets last week came from a high-ranking Fed official who raised expectations for future cuts to the Fed Funds Rate. Currently, the Fed Funds Rate sits at 4.500%.

For homeowners, it is unclear how changes in the Fed Funds Rate will impact mortgage rates. Contrary to popular belief, changes in the Fed Funds Rate are not tied to changes in mortgage rates.

This chart shows, for example, how the FFR increased more than 3.00% between 2004 and 2006 while mortgage rates only edged higher.

Similarly, the recent drops in the Fed Funds Rate have been accompanied by only a slight reduction in mortgage rates.

Instead, mortgage rates are based on the prices of mortgage bonds and recently the demand for the bonds has been erratic. This is why mortgage rates have been erratic, too. As demand goes up, mortgage rates come down. The reverse is true, too.

This week, demand for mortgage bonds should be tied to expectations from the Fed and its December 11 meeting, and to this Friday's employment data. Many economists believe that the Fed will take some cues from Friday's report so the numbers will take on added significance.

The economy is expected to have added 75,000 jobs in November, and the unemployment rate is expected to rise to 4.8%. If the actual numbers (jobs created) are stronger than the estimates, expect that mortgage rates will increase in response.

Remember, since mortgage rates are tied to mortgage bonds:
Good news for the economy (generally speaking) tends to be bad news for mortgage rates ... While bad news for the economy (again, generally speaking) tends to be good news for mortgage rates.

What Every Homeowner Should Know Before Paying Additonal Principal To The Mortgage

Have you ever thought about your Freedom Point?

"Freedom Point" is one of the more important concepts in mortgage planning and yet it gets surprisingly little attention.

As its name implies, Freedom Point is the particular date when a homeowner’s liquid assets exceed his debts. At the Freedom Point, paying off a mortgage transforms from an obligation to a strategic financial planning decision.

My duty as a Mortgage Planner is to help my clients reach their Freedom Point as quickly and efficiently as possible. I achieve this by helping homeowners to make informed liability and mortgage decisions.

In my playbook, there are two very basic -- and very different -- approaches to accelerating a Freedom Point.

1. Prepay the mortgage by sending extra principal payments to the bank monthly, or annually
2. Leverage a "low payment" mortgage program and then invest the difference between the low payment and the payment of a 30-year amortized loan in an interest bearing account

Let's look at Method #1 in a chart:

In Method #1, a homeowner pursues a safe and predictable plan of attack on his $400,000 home loan. By over-paying the mortgage each month by $250 (as shown in the "30 Yr Redux" column), the 30-year fixed mortgage is paid in full and the homeowner reaches his Freedom Point in 23.3 years.

In eliminating 6.7 years off the mortgage, the homeowner saved $131,788 in mortgage interest payments.

Not too shabby!

Now, using Method #2, the homeowner uses a low-payment mortgage such as a 5-year ARM with interest only payments, or a 30-year fixed mortgage with 10-year interest only payments. But, he also calculates what the "full" mortgage payment would be if the loan was not interest only.

The difference in the two payments is invested and then managed in interest-bearing accounts.

In other words, instead of paying principal to the mortgage company, the homeowner pays the principal to himself and earns interest on it.

Let's look at the chart for Method #2:

In financial terms, this is called "compounding" and is the main reason why money in the bank is better than money under your mattress. The longer the bank holds your money, the more interest it earns over time.

Because of compounding interest, the homeowner using Method #2 reaches his Freedom Point in just 22.6 years.

Why Method #2 may accelerate the Freedom Point is a matter of simple mathematics. If properly managed, the homeowner’s accumulation fund will earn interest, and then the interest earned will itself earn interest.

But there's an additional benefit for homeowners using Method #2.

Having an "accumulation fund" provides additional liquidity. With money sitting in a bank account (and available at a moment's notice), a homeowner has more financial options in the event of a life emergency such as job loss or illness.

By contrast, extra principal paid into a mortgage is not recoverable without a remortgage.

And now it gets interesting.

Once a homeowner reaches his Freedom Point using Method #2, he holds power over his finances and is leveraging his home to the fullest. Because a properly-managed interest-bearing account is virtually risk-free, the homeowner can now choose to:

1. Use the accumulation fund to pay off his home in full
2. Leave the accumulation fund alone and continue to earn compounded interest on it

These choices would not be available using Method #1. Remember, when a person pays extra mortgage principal to the bank, those dollars are considered "locked up" unless the homeowner chooses to remortgage his home.

So, which Freedom Point strategy is best for you?

It all depends on your personal savings discipline, short- and long-term goals, investment rate of return and current financial situation.

A key starting point, though, is to sit down with a qualified mortgage planner to do a Freedom Point Review. Annually, your mortgage planner should monitor your progress and help you to make adjustments to your plan, as needed.

Reaching your Freedom Point is all about goal-setting, having a plan, and making informed decisions. If you're not confident that your current mortgage planner can help you make informed decisions to accelerate your Freedom Point, please call me or email me anytime.

What If The Energy Company Paid YOU Each Month?

This 30-second video was posted to YouTube and shows a home's electric meter running backwards after installing solar panels.

The meter runs backwards because the home is putting more power into the electric grid than it is taking out for itself.

With energy costs expected to rise sharply this winter and the costs of "going green" coming down, it may make sense to evaluate whether solar panels are a good fit for your home.

There's still that up-front cost, but then there's the thrill of watching that meter run backwards. Each clockwise tick is lowering your monthly energy bill and could possibly even eliminate it.

It's worth watching those 30 seconds again.

Buyers, You Will Pay More For A Home Than The Agreed-Upon Purchase Price

In real estate, the true cost of buying a home is always higher than the home's purchase price itself.

This is because of service charges from governments, lenders, and title/escrow companies.

Because there is no such thing as "typical" closing costs because each home purchase is different, home buyers should remember that the actual cost to purchase a home is a mathematical formula:

(Home Purchase Price) + (Closing Costs) = (True Cost To Purchase Home)

So, if a home is purchased for $250,000 and the costs are $5,000, the true cost to purchase the home is $255,000.

If the buyer is using a mortgage to finance the home, the mortgage is not based on the true cost, however. It's based on the home's purchase price. This means that a person making a 20% downpayment is actually paying 20% plus whatever closing costs are listed on the final settlement statement.

Therefore, the home buyer's required cash at closing would be 20% of $250,000 ($50,000), plus $5,000 in closing costs. That adds up to $55,000, or 22 percent of the purchase price.

That said, the monies required at closing are usually reduced by credits paid from the seller to the buyer. We're going to ignore them for purposes of discussion because these types of offsets are inconsistent and can vary wildly from purchase to purchase.

They come in the form of "seller tax credits" and/or "seller concessions" and we'll cover those two concepts another day.

For purposes of good planning, though, buyers should always be conscious of how closing costs can impact their bottom line on a purchase.

If making the expected downpayment based on the purchase price is a stretch, making the downpayment plus the closing costs may be an impossibility.

Why You Should Remain In "Ready Position" For Your Mortgage Rate

Easy come, easy go.

There was a strong rally Monday afternoon in the mortgage bond market. It was sudden and furious, mostly coming on in the last 60 minutes of trading.

When markets closed, mortgage rates for conforming home loans were grazing their lowest levels in nearly two years.

It lasted overnight and into the early hours of the morning.

Then, several news pieces later, the financial markets turned.

By 8:30 A.M. ET Tuesday, the rally from Monday had been erased completely; mortgage rates were up by as much as 0.375% in some cases before the clocks struck noon on Wall Street.

The rally had been reversed.

Instances like this illustrate how financial market volatility can impact homeowners. A 0.250% change in rate, for example, equates to roughly $16.50 for every $100,000 financed on an amortizing loan. It's $20.83 for an interest only loan.

Those kinds of savings add up over time.

Americans are not in the market for new homes or new home loans every day, but when we are, it can be profitable to pay attention to markets and be ready to act on a moment's notice.

The markets won't "put rates on hold" for you while you make up your mind so that moment -- whenever it may come -- could represent tremendous savings long-term on a home loan. Be ready to act.

(Image courtesy: CompUSA)

It's A Good Time To Buy -- But Not For The Reasons You May Think

Since November 1, the following banks have written-down at least $1 billion in their respective loan portfolios:

• Bank of America
• Barclays
• Bear Stearns
• Citigroup
• HSBC
• Morgan Stanley
• Wachovia
• Wells Fargo

This is a big deal to people in the market for a home loan because when banks repeatedly take mortgage-related losses, it can lead to major risk aversion -- even for "good" borrowers.

It's one reason why mortgages are more difficult for which to qualify than in months past. Banks would rather pass on an "avergage" mortgage application rather than be stuck with a potentially "bad" loan.

If banks continue down this path throughout 2008, it means that buyers eligible for home loan financing today may actually be ineligible tomorrow. It could also mean that a home under contract may never close because the buyer's approval could be disqualified before the closing date is reached.

If you're a home buyer and your profile is not "ideal" to a bank, now may be a good time to write a contract because your mortgage options may get more thin very, very soon.

The Week In Review (November 26, 2007) : What To Watch For

In a holiday-shortened trading week, mortgage rates finished the week slightly improved.

But, because many traders had left early for Thanksgiving, matching buyers and sellers at any given price proved to be an exercise, to say the least. Mortgage rates bounced wildly as a result.

Between now and the New Year, expect more of the same volatility. Fewer market players means less stability in mortgage bond prices and, therefore, in mortgage rates.

This week, markets have a plethora of data to digest, plus they will be speculating about the outcome of this year's Holiday Shopping season. With more spending by shoppers, fears of a recession should wane, stabilizing mortgage rates somewhat.

On Tuesday, we'll see the Existing Home Sales report for October. There's nothing that should surprise us here -- the real estate story has been beaten to a pulp in the papers. Any figure below 5 million, though, will likely spark talk of a recession. That could be bad for mortgage rates.

The same can be said for Thursday's New Home Sales report. Remember that the difference between existing sales and new sales is that Existing Home Sales measures homes sold by a "homeowner"; New Home Sales measures homes sold by a developer/builder.

Then, on Friday, we'll be treated to the Federal Reserve's favorite inflationary measure -- the Personal Consumption Expenditures (PCE). PCE is expected to show 1.8 percent year-over-year growth, a figure generally believed to be neutral. If PCE surprises to the high-side, expect mortgage rates to rise on fears of inflation.

Black Friday Trivia

Today is "Black Friday", a day that many Americans get started on their Holiday Season shopping.

Did you know? The earliest known reference to "Black Friday" is November 29, 1975. The term was mentioned in two separate articles, both with Philadelphia timelines. Therefore, the term Black Friday is believed to have originated in Philadelphia.

Did you know? "Black Friday" was originally named with deference to other stressful and chaotic days such as Black Tuesday (the day of the 1929 stock market crash.

Store aisles were jammed. Escalators were nonstop people. It was the first day of the Christmas shopping season and despite the economy, folks here went on a buying spree. . . . . "That's why the bus drivers and cab drivers call today 'Black Friday,'" a sales manager at Gimbels said as she watched a traffic cop trying to control a crowd of jaywalkers. "They think in terms of headaches it gives them."

Did you know? The generally accepted meaning of "Black Friday" changed November 26, 1982. On that day, ABC News reported that Black Friday is the day that retailers' ledgers go from red ink to black ink, signaling profit. If this were true, companies like Wal-Mart and Target would show losses in the first three quarters of the years. They don't.

Did you know? Black Friday is not the busiest shopping day of the year. #1 is usually the Saturday prior to Christmas.

If you're out shopping today on Black Friday, remember to set a budget and stay within it. Good luck!

Sources
Purdue University News Service
"Christmas Shopping Facts and Figures"
Press Release, Nov. 22, 2000
http://www.newswise.com/p/articles/view/21693/

Black Friday (Shopping)
Wikipedia
http://en.wikipedia.org/wiki/Black_Friday_%28shopping%29

(Image courtesy: University of Southern Florida)

Who Are Fannie And Freddie And How Do They Help Homeowners?

Fannie Mae and Freddie Mae are quasi-government agencies in that they are publicly-owned, but overseen by the government.

The purpose of Fannie and Freddie is to make sure that money is available to homeowners that want home loans.

Neither lends to consumers directly, though; you'll have to talk to your loan officer for that. Instead, Fannie and Freddie's role is to buy loans from lending institutions that make loans to everyday people.

For example, all banks in America abide by laws limiting the amount of money they can lend as a percentage of their total asset base. If your home loan is on the books of Bank ABC, Bank ABC is, therefore, restricted in issuing additional loans because your loan counts against that ratio.

But, if Bank ABC sells the loan to Fannie Mae or Freddie Mac, your mortgage converts back into cash and Bank ABC can then lend again to somebody else.

Because of Fannie and Freddie, a bank can lend to multiple homeowners using the same asset base, thereby making sure that "the system" has plenty of money available for homeowners in need of loans.

In this sense, both Fannie and Freddie keep mortgage money flowing on the street level. But it only works to a point. Fannie and Freddie have very strict guidelines about what types of home loans they will purchase from banks and only accept loans that conform to their respective criteria.

Loans falling outside the criteria, by contrast, will not be purchased by the agencies.

This is why some mortgages are called "conforming" loans -- they conform to Fannie or Freddie's guidelines. The other loans fall into the categories of "Alt-A" or "sub-prime".

This also explains why Alt-A and sub-prime loans are harder to come by lately -- there's no government agency that guarantees to purchase these types of loans. Without that guarantee, banks are largely unwilling to tie up space on their balance sheets.

On Random Rate Rallies And Thin Trading

Mortgage bonds staged a late-day rally yesterday, exaggerated by the holiday-shortened week and because trader participation is light.

(We'll revisit this theme several times between now and the New Year so don't get tired of it.)

When mortgage bonds rally, it means that demand for them is strong and that pushes mortgage rates down.

Unfortunately for people shopping for loans right now, the rally happened so quickly that lenders did not have time to adjust their mortgage rate sheets before the market's closing.

This morning, rates are slightly higher.

The rally yesterday happened for a number of reasons including the November Homebuilders Index remaining at an all-time low. This illustrates the difficulty most developers are having in moving their inventory.

Another factor in the rally is that markets believe that the Fed is backed into a economic corner and will be forced to lower the Fed Funds Rate at its December meeting. This is happening despite (non-voting) Fed member Randall Kroszner implying in a public speech that the Fed may be entering a "Wait-and-See" mode and that further rate cuts would be imprudent.

There will be a lot of speculation about the Fed between today and December 11, the date of the next Fed meeting. Expect thin trading volume to make rates yo-yo until then.

If you see a rate and payment combination that makes financial sense today, better to lock it in than to wait for tomorrow. Rates may be on the upswing.

The Week In Review (November 19, 2007) : What To Watch For

In a holiday-shortened week with no major economic data releases, expect worries about the credit markets and speculation about holiday shopping to take center stage.

Last week was a mixed bag for the economy and mortgage markets responded in kind. Rates were relatively unchanged.

The news started with Wednesday's Retail Sales report. In showing a modest increase, the ongoing fears of a consumer spending decline were allayed.

This is good news for the economy as a whole because consumer spending accounts for roughly two-thirds of the U.S. economy -- even a small dip could push a precariously balanced economy into recession.

Unfortunately, this could be bad news for rate shoppers as individuals -- a slowing economy could drag down mortgage rates with it. And, with six weeks remaining in the Shopping Season, the American Consumer appears to want its presents.

Also making news last week:

1. CPI data showed that the Cost of Living increased 2.2% in the past year
2. Oil prices fell from its all-time high, reducing inflationary pressure on the economy
3. Gas prices fell nationally, shedding 3 cents per gallon according to GasBuddy.com.

This week, expect mortgage rates volatility as we get closer to Thanksgiving; fewer traders will be participating. With fewer buyers and sellers, it's harder to find "the right price" for mortgage bonds.

This same economic phenomenon may explain why it's easier to buy or sell a home in the Spring than in the Winter -- more market participants makes it easier to find a match.

Most important release of the week: Wednesday's University of Michigan Consumer Sentiment survey. If it comes in strong, expect positive reaction in stock markets which will, in turn, drag down mortgage bonds and push rates higher.

The Cost Of Living Includes The Cost Of Gas And Food (And May Get More Expensive Through The Winter)

October's Consumer Price Index was released Thursday and showed a 3.5 percent increase in the cost of living since October 2006.

The report also showed a core inflation rate of 2.2 percent. The "core CPI" is a smaller part of the overall CPI.

The math is the same, but it specifically excludes cost changes in energy products and food products because these two elements can be highly volatile.

When tracking inflation, therefore, economists tend to focus on core CPI instead of "regular" CPI.

Both are important -- Core for long-terms trends, and total for short-term consumer sentiment.

Inflation makes life more expensive and with more money spent to live, there's less money for savings and/or discretionary spending, and that slows down the economy.

USA Today ran a terrific quote from an accountant in San Diego on this topic:

"Have I been hit by rising energy prices? Hello! I live in the San Diego area, and I'm paying $3.41 a gallon," says Tage Woehl, an accountant. "On a 15-gallon tank, I'm spending over $50 per week. I find coupons when I can to eat, and seriously look at sales, because I'm spending a chunk more dough for gas than before."

And so, as we forge ahead towards the approaching Black Friday, the rate of inflation becomes very important to the U.S. economy. If consumers are feeling pinched, it's expected that they'll spend less, thereby slowing down the economy faster than was expected.

For home buyers and home sellers alike, this is bad news.

For buyers, mortgage rates may increase because the dollar should weaken; and, for sellers, homes may sit on the market longer because fewer buyers will qualify for mortgage loans at higher rates.

Source
TIPS, I-Bonds can help defang the inflation dragon
John Wagonner
USA Today, November 16, 2007
http://www.usatoday.com/money/perfi/columnist/waggon/2007-11-15-tips-treasuries_N.htm

Homeowners Should Have Basic Wills

Statistic #1: According to the Census Bureau, 69% of Americans are homeowners.

Statistic #2: According to lawyers.com, 42% of Americans have a basic will.

Basic Math: 27% of American homeowners are in need of a basic will.

Addressing mortality can be difficult for some people, but even more difficult is addressing a home that's been put in probate after a homeowner's death.

If you own a home -- whether you have a spouse, children, both, or neither -- it makes sense to speak with an estate planning attorney to understand your options.

Death is inevitable, so preparing for it is prudent.

Where You Find Speculators, You May Also Find Failures

This morning, RealtyTrac released its Q3 2007 foreclosure data for the United States.

The leading cities for foreclosures are:

1. Stockton, CA (1 per 31 households)
2. Detroit, MI (1 per 33 households)
3. Riverside/San Bernardino, CA (1 per 43 households)
4. Fort Lauderdale, FL (1 per 48 households)
5. Las Vegas, NV (1 per 48 households)
6. Sacramento, CA (1 per 48 households)
7. Cleveland, OH (1 per 57 households)
8. Miami, FL (1 per 60 households)
9. Bakersfield, CA (1 per 64 households)
10. Oakland, CA (1 per 71 households)

Looking more closely, we can see pattern.

California, Nevada, and Florida are well represented and that makes sense. Between 2002 and 2006, these areas were popular with speculators, many of whom used 2- and 3-year adjustable rate mortgages that did not require income verification, nor did they require down-payments in excess of 5 percent.

These loans are now adjusting and in 2007, mortgages for investors are more stringent. They typically require a 10-20% equity position and verifiable income.

With no mortgage options, no buyer bailouts, and no means to pay the bills, many speculators are choosing to walk away from their investments. Hence, the high foreclosure rates in California, Nevada, and Florida.

Rounding out the top 10 are Detroit and Cleveland.

Foreclosures in these cities make sense, too. Both have been decimated by job losses in the auto and manufacturing industries and without jobs, homeowners can't pay the bills.

In other words, foreclosures are often not the result of a "bad mortgage", but instead a "bad investment" or a "bad economy".

The entire list of foreclosures by MSA are available on RealtyTrac's Web site.