Making Your Home Sell Faster With Psychology

When selling a home, understanding a little bit about home buyer psychology can help you move your home more quickly.

After all, what people perceive helps define how they act.

A recent article from RealEstateJournal.com listed techniques home sellers can use to attract more offers from buyers.

The tips included:

1. Number Play: $299,999 seems far less expensive than $300,000
2. Connotation: Precise numbers indicate value; Round numbers indicate prestige
3. Simplicity: If you drop the price, make the math easy for the buyer so the savings are obvious

Curiously absent from the piece, however, is the #1 home selling tip that every good real estate agent knows:

To sell your home quickly, price it right.

A "good buy" speaks for itself -- no psychology required.

As The Fed Funds Rate Falls, 30-Year Fixed Mortgages Rise

Federal Reserve Chairman Ben Bernanke testified to Congress Wednesday, and alluded to further rate cuts to support an ailing U.S. economy.

Already, the Federal Reserve has lowered the Fed Funds Rate by 2.250% since September 2007.

The graph at right comes from the Wall Street Journal and it highlights a very important correlation between the Fed Funds Rate and mortgage rates.

The correlation is that there is no correlation.

Since the Fed began cutting rates five months ago, mortgage rates on 30-year fixed mortgages are higher, as are jumbo mortgage rates. ARMs, however, are lower.

Especially noteworthy is how 30-year fixed rates started to spike as the Fed cut rates through January. Another half-point cut in March could have a similar impact.

How Is Housing Doing? It Depends Who You Ask?

Yesterday, the Office of Federal Housing Enterprise Oversight released its fourth-quarter housing data.

The OFHEO report color-coded each state according to its annual price changes. The states shown in red lost value, and everyone else gained. Overall, the OFHEO measured a 0.8% national increase.

Also hitting the wires yesterday was the Case-Shiller Home Price Index.

This report focuses on the 20 largest metropolitan statistical areas in the United States and painted a much more grim outlook for housing. According to Case-Shiller, prices declined 8.9% nationally.

Both reports are imperfect, but one notable difference is that the OFHEO report measures all 291 MSAs in the United States and its data showed that two-thirds of them appreciated last year.

Once again, this just reminds us: real estate is a local phenomenon. Every market is unique with its own price trends, independent from the rest of the country.

Real Estate Term: Earnest Money

When a buyer and seller reach agreement on a home sale, the buyer typically puts a small amount of money into a trust account.

This up-front deposit is more commonly known as "earnest money".

A sales contract's earnest money requirement will vary from contract to contract. It can be as high as 10 percent of the purchase price and could be as low as $500; earnest money is a negotiable item between buyers and sellers.

Some factors that can influence earnest money amounts include:

• Market conditions: Stronger markets often call for more earnest money
• Buyer economics: First-time buyers often give less earnest money
• Seller psychology: Skeptical sellers often ask for more earnest money

No matter how large or how small, however, earnest money is supposed to give the seller a sign of good faith that the buyer wants to purchase the home.

To this end, earnest money can be forfeited if the buyer later "backs out" of the deal, or breaches the terms of the purchase agreement. Breaching, however, is infrequent.

This is because most purchase contracts are written with buyer-focused "outs" called "contingencies".

A typical contingency is that the seller must provide a clean title policy to the buyer, or that the buyer must secure financing prior to given date, or that the home must pass a satisfactory inspection.

If any of these contingencies cannot be met, the purchase agreement is voided and earnest money returned to the buyer.

When contingencies are met, however, earnest money becomes a deposit and is applied directly to the buyer's bottom line at settlement. If the buyer is expected to have $50,0000 for the closing, for example, the true bottom line is $50,000 minus the earnest money deposit.

Earnest money customs vary from state to state, city to city, and even locale to locale. Be sure to ask your real estate agent and/or real estate attorney for professional counsel before signing purchase contracts.

The earnest money you save may be your own.

Looking Back And Looking Ahead : February 25, 2008

It's a big week for mortgage markets (again) and that should cause rates to fluctuate wildly (again). The volatility we've seen since December has not been for the faint of heart.

Even this past Friday, as mortgage rates were poised to end the week lower, a late-afternoon stock market rally reversed it. In the last 45 minutes of trading, the Dow Jones Industrial Average swung 225 points.

Mortgage rates rose, too, peeving Americans who planned to go house-hunting over the weekend.

This week, mortgage rates will take direction from a handful of important economic reports including the Federal Reserve's preferred inflation marker -- the Personal Consumption Expenditures report.

PCE is a Cost of Living index and it's a fair representation of inflation pressures today as opposed to a speculative inflation figure in the future. PCE is a basis for many Federal Reserve discussions.

The biggest story this week, though, is Fed Chairman Ben Bernanke's Wednesday testimony to Congress.

While he's not expected to say "the economy is in a recession", or "the economy is doing just fine", markets expect Bernanke to give guidance about how far the Fed would cut the Fed Funds Rate to stimulate the economy.

Of course, the Chairman won't say outright "The Federal Reserve intends to lower the Fed Funds Rate to 1.000%". Therefore, it's the guessing of how low the Fed will go that should cause markets to buck.

It's important to remember that cuts to the Fed Funds Rate will not necessarily lead to lower mortgage rates. To the contrary: Since the Fed started cutting the Fed Funds Rate in 2008, mortgage rates have moved higher.

The more that the Fed Funds Rate gets cut, however, the more attractive ARM interest rates should become versus fixed-rate mortgage rates.

This is because additional cuts the Fed Funds Rate will fan inflation fires longer-term and inflation erodes the value of long-term mortgage bonds.

(Image courtesy: West Linn Tidings)

Spreadsheet Formulas: Calculating Home Payments

For a lot of homebuyers, calculating a prospective mortgage payment is an online experience. For example, a search on Google for "mortgage calculator" returns 39 million options.

Some people, however, prefer to plan on their local hard drive using spreadsheets. For these people, the hardest part is often figuring out what formulas to use.

Interest Only Payments

Home loans with interest only payments are much more simple to calculate than amortizing loans.

Using the graphic at right as a guide, enter your loan size and your interest rate into two separate spreadsheet cells.

Then, create a third cell and input the following formula that calculates the "Monthly Payment". The formula is:

= (Loan Size) * (Interest Rate) / 12

Principal + Interest Payments

For a home loan with (principal + interest) payments, the formula is a little bit more complicated than with an interest only home loan.

Using the graphic at right as a guide, enter your loan size, your interest rate and the duration of your home loan into three separate spreadsheet cells.

Then, create a fourth cell and input the following formula that calculates the "Monthly Payment". The formula is:

= - PMT(Interest Rate/12, Loan Term in Months, Loan Size)

For additional spreadsheet formulas and more in-depth reporting, explore your software's "Help" feature to see what you can find.

6 Things To Avoid While Waiting For A Mortgage Approval

When buying a home, there are two stages in the home loan approval process.

Stage 1 starts when a homebuyer submits a mortgage application to his loan officer for a pre-approval.

A pre-approval is a "walk-through" mortgage approval that says -- at a given purchase price and downpayment amount -- the home loan application will very likely be approved.

Stage 1 ends when the buyer signs a purchase contract on a home. At this point, the "walk-through" approval is useless because the buyer now needs a real home loan approval from an underwriter and not a loan officer.

Thus begins Stage 2.

During the second phase of the approval process, a mortgage underwriter is reviewing income, assets, credit, job history, and other items, too; the underwriters job is to make sure that the buyer meets the bank's criteria for lending.

If the loan officer did his job in Stage 1, Stage 2 is just a formality. And most times, it all goes according to plan.

Occasionally, though, a homebuyer sabotages his own mortgage approval by inadvertently changing his "risk profile". It doesn't happen on purpose, of course -- it just happens.

So, consider this a quick primer of what not to do while you're between Stage 1 and the completion of Stage 2 of the home loan approval process. Following these pointers will help keep the risk profile consistent.

1. Don't buy a new car (or take on a larger lease payment)
2. Don't quit your job or change industries (and certainly don't switch to a heavily commissioned role)
3. Don't transfer large sums of money into or out from your bank accounts (and remember that "large" is relative)
4. Don't miss a payment to a creditor (even if you don't think you owe it)
5. Don't open a new credit card (even if you're getting 10% off your new bedding)
6. Don't accept a cash gift without talking to your loan officer first (because there's rules on how to accept them)

There's other items, too, but this a good start.

Now, avoiding these mistakes may not be practical for everyone. Therefore, if you know you're going to violate a "rule", check with your loan officer first.

There are a lot of "gotchas" in mortgage lending and it helps to have professional guidance for your individual questions.

Tuesday May Have Marked The Unofficial End Of Low Mortgage Rates

For homebuyers and homeowners expecting low mortgage rates this week, Tuesday marked the unofficial end to basement 30-year fixed mortgage rates.

According to the market analysts at BestInfo, Inc., the 30-year fixed rate measured its largest one-day movement in more than 10 years Tuesday.

Nationally, 30-year fixed mortgage rates increased 0.375%.

Here is the "real life" impact to mortgage applicants whose mortgage rates were not yet locked:

• $150,000 mortgage: $37 increase to the monthly mortgage payment
• $250,000 mortgage: $61 increase to the monthly mortgage payment
• $300,000 mortgage: $73 increase to the monthly mortgage payment
• $400,000 mortgage: $99 increase to the monthly mortgage payment

ARMs did not move as harshly as fixed-rate mortgages but they still increased Tuesday.

Mortgage rates can change quickly, and often do. Be prepared to lock your mortgage rate and make informed decisions quickly.

The mortgage markets wait for no one.

Looking Back And Looking Ahead : February 19, 2008

Early last week, mortgage rates rose on strong consumer spending and Warren Buffett's offer to assume $800 billion in debt from three major bond insurers.

Both reports were interpreted as signs of long-term strength in the economy, leading mortgage rates higher for long-term products such as the 20- and 30-year fixed rate mortgage.

Meanwhile, Fed Chairman Ben Bernanke painted a different picture about the economy's health.

In his testimony to Congress, Bernanke called attention to credit market weakness and alluding to a need for future Fed Funds Rate cuts.

The chairman's testimony, coupled with the worst consumer sentiment reading in 16 years, helped to hold short-term mortgage rates flat, even as long-term rates were rising.

In this holiday-shortened week, there is very little data and only one Fed speaker to influence the markets. Therefore, expect external pressures to weigh on market sentiments this week.

The lingering questions about the economy's health remain and so long as that uncertainty exists, mortgage rates will stay unsettled.

We've seen extreme bouts with volatility since December and there's little reason to suspect it will stop now.

(Image courtesy: Bankrate.com)

The Effect Of Fed Funds Rate Cuts On Mortgage Rates

As mortgage rates lurch higher this week, we have additional proof that cuts to the Fed Funds Rate do not lead to cuts in mortgage rates.

Since the Federal Reserve's surprise rate cut January 22, 2008:

• The Fed Funds Rate is lower by 1.250%
• The 30-year fixed rate mortgage is higher by approximately 0.750%

Mortgage rates are based on the long-term expectations of the U.S. economy. The Fed Funds Rate is based on the short-term expectation of the U.S. economy.

They are related in some respects, but certainly not directly.

Even yesterday, as Fed Chairman Ben Bernanke spoke of economic softness and left the door open for future Fed Funds Rate cuts, mortgage rates raced higher on the idea that any FFR rate cuts would lead to long-term inflation.

What The New Conforming Loan Limits May Mean To You

The $168 billion economic stimulus plan signed Wednesday
includes a temporary increase to conforming loan limits in some parts of the country.

Currently, many homeowners whose loans exceed $417,000 are paying higher interest rates because their loans are not securitized the way that smaller loans are.

The loan limit increase is intended to make housing more affordable in certain "high cost" areas around the United States.

However, the loan limit changes are not immediate. The stimulus package grants HUD 30 days to determine which metropolitan areas should be designated as "high cost" and it should take another few weeks for Fannie Mae and Freddie Mac to remodel their mortgage pricing engines.

All told, it could be mid-April before the new limits are in place.

Author's Note: There is a lot of speculation about which areas will be designated as "high cost" and nobody knows for certain until HUD decides. Rather than misreport the facts, we'll save our coverage until something is concrete. However -- if you're in a "high cost" area, you probably already know it.

When the new limits are official, though, expect that many homeowners will take advantage. That will lead to underwriting delays because mortgage refinance activity will surge.

Therefore, consider being proactive about your financing options if:

1. You suspect you live in a high-cost area
2. You have liens on your home exceeding $417,000

If you don't live in a high cost area, you can't take advantage of the new loan limits; and if your outstanding liens total less than $417,000, you won't want to be helped.

Converting from a jumbo home loan will not be appropriate for everyone, but it will be right for some. Get personal advice and figure out what's best for you.

And then hope the HUD fingers your neighborhood as high cost.

How Economic Stimulus Impacts Home Financing

President Bush is expected to sign the economic stimulus package today.

The package includes tax rebates and incentives for business and its purpose is to jumpstart a stalling U.S. economy.

If the package is deemed "effective" by Wall Street investors, we should expect the stock market to rally on the prospects of business growth.

The flipside of stock market gains is that they will likely come at the expense of the bond market.

If you're currently shopping for a home or for a home loan, this is bad news because when mortgage bond markets fall, mortgage rates tend to rise.

A 0.125% increase in mortgage rates, as an example, adds $125 to the annual interest payments on a $100,000 home loan; a $400,000 home loan increases by $500.

One major reason why home financing has been so (relatively) cheap lately is because economists forecasted a major recession for 2008.

With each attempt to spur the economy, those odds are reduced and mortgage rates trend up.

Planning For A "Quick Close"? Now May Not Be A Good Time.

On the backs of surging purchase activity across the country and low mortgage rates, home loan applications have surged to near four-year highs.

For people with mortgage applications in process, some patience may be required.

In 2006 and 2007, mortgage volume slowed nationwide. Narrowing mortgage guidelines restricted the number of eligible borrowers and rising mortgage rates made refinancing impractical for many homeowners.

In a push for profitability, lenders eliminated jobs because fewer applications meant fewer people were needed on staff.

So now, with rates edging near their 2004 lows and with strong demand for home purchases nationwide, mortgage lenders are finding themselves short-staffed.

Lenders are understaffed to handle the volume of mortgage applications coming in each day.

As a comparison:

• October 2007: 24 hours to review and approve a home loan
• February 2008: As long as 20 days to review and approve a home loan

Some lenders have gone so far as to eliminate the benchmark 30-day rate lock option, replacing it with a 60-day option instead.

60-day mortgage rates are typically 0.125% higher than comparable 30-day ones.

As a home buyer, home seller, or mortgage refinancer, it's important to recognize that lenders may not have the capacity to move as quickly as you'd like them to. To help them move more quickly (and possibly save you money), be prepared and be responsive.

30-day closings are still possible, but, given today's demand for mortgage money, they are increasingly rare.

Looking Back And Looking Ahead : February 11, 2008

Mortgage markets are conflicted about the U.S. economy and the confusion is impacting home buyers.

If you've recently tried to lock a mortgage rate, you've probably experienced it personally.

On one hand, reports of plunging sales suggest that the economy is slowing more quickly than expected.

This is recessionary and tends to be good for mortgage rates. So, some days, rates have been down.

On the other hand, some pundits (including a Federal Reserve official) are saying that recent Fed cuts may stoke inflation in the second half of 2008.

This is inflationary and tends to be bad for mortgage rates. So, some days, rates have been up.

Neither side is wrong -- 2008 will likely show signs of both recession and inflation at some point. Markets are waking up to this fact.

And this is why mortgage rates have changed so much from day-to-day -- investors can't agree upon exactly when the Fed rate cuts will work their way through the economy. With each "target date" change, mortgage rates change.

This week, expect more of the same volatility with January's Retail Sales data being released and five Fed speakers (including Fed Chairman Ben Bernanke) stumping.

The spoken word of the Fed Chief can be a very powerful influence on markets.

If you've recently gone under contract for a home, you may find peace of mind by concentrating on a mortgage payment as opposed to a mortgage rate; rates could change multiple times each day and timing a market-bottom can be futile.

(Image courtesy: CNN)

Are You Inadvertently Merging Your Credit Score With A Stranger?

A 2004 study showed that 4 out of 5 credit reports contained at least one error.

The errors were of various types with different implications. A quarter of the errors, for example, were of the "serious" nature; errors that could lead to a credit denial because of a false-reporting delinquency or collection.

A much larger source of credit scoring errors, though, was related to misreported personal data.

More than half of the mistakes on credit reports were found to be related to erroneous name spellings, incorrect social security numbers, and/or wrong addresses.

These types of demographical errors can damage credit scores in not-so-obvious ways:

1. The strong credit report of a "Jr." may mix with the weak credit report of a "Sr.", or vice versa
2. Credit accounts demonstrating strong payment histories may be omitted
3. Derogatory credit of like-named people can "merge"

To limit demographical errors, a person should apply for new credit using a consistent form of their name, and then use that form on every new application.

John A. Smith, Jr., for example, should always apply for credit using the name "John A. Smith, Jr.".

Short-cutting an application with "John Smith" can lead to a "mixed" credit report that combines the tradelines of multiple John Smiths. Especially because there is a John Smith, Sr., who likely lived at the same address at one time, and who may have a similar social security number.

Credit agencies do not discern between two similar sets of demographic data very well.

In the four years since the original study, it's not likely that the 80% error rate has improved, but by limiting demographical errors in our own histories, we can reduce the frequency and severity of the problem.

Where Presidential Candidates Stand On Matters Of Money

In an election year, voting for a presidential candidate can be a lot like buying a home.

Both require a fair amount of analysis but -- in the end -- the decision is still highly emotional.

Using Bankrate.com's side-by-side candidate comparisons, some of that emotion could be replaced by fact.

In a gridded format, candidates are pitted head-to-head on the following topics:

• Education
• Jobs
• Health Care
• Social Security
• Taxes

The charts can help Americans get a better feel for where the candidates stand with respect to "pocketbook issues" that impact them personally in their businesses, their lives, and in their homes.

Opinions on the issues are current as of January 29, 2008. As with everything in politics, though, the candidate positions are subject to change.

What's Your After-Tax Mortgage Rate?

Many homeowners are entitled to two major tax deductions -- one for annual interest paid on a home loan, and another for real estate tax bills paid to government.

Calculating your approximate tax credit is basic:

1. Add mortgage interest paid and real estate taxes paid together
2. Find your marginal tax rate
3. Multiply your tax bracket by the sum of Step 1

So, for a homeowner that paid a combined $13,000 in mortgage interest and real estate taxes last year, and who is in the 28% marginal tax bracket, a tax credit of $3,640 may be due from the IRS.

This credit is one reason why some people sometimes refer to "after-tax mortgage rates". An after-tax mortgage rate is the adjusted interest rate after the IRS doles out credits and is calculated as follows:

(After-Tax Mortgage Rate) = (Mortgage Rate) * (1 - Marginal Tax Rate)

The same homeowner with a 6.000% mortgage rate, therefore, has an after-tax mortgage rate of 4.32%.

Because not every homeowner is eligible for mortgage interest and/or real estate tax deductions, and because not every homeowner should claim them, you should consult with your accountant to see how tax credits fit into your tax liability schedules.

Federal income taxes are highly personal and require the attention of an experienced professional.

Help Your Home Emotionally Connect To Buyers

The end of the Super Bowl kicks off the Real Estate Spring Buying Season.

As home sellers should prepare for the season's upcoming homebuyers, they could do worse than to watch this four-minute home staging video from Barbara Corcoran.

Barbara offer simple steps that "won't cost you a lot of money but could make a 10-20 percent difference in the selling price of your home".

Then, to watch home staging in action, tune in to well-known Home Staging professional Barb Schwarz as she takes the 20/20 news crew into Bothell, WA for a before-and-after.

With so much housing supply relative to recent years, home staging could be the difference-maker to home sellers. And it's usually less expensive than a price reduction.

Looking Back And Looking Ahead : February 4, 2008

We entered the New Year uncertain of the country's economic future. With January over, it's a little more clear.

Last week's data and events helped firm expectations.

In the near-term, we can expect weakness:

• The economy is shedding jobs
• Consumer sentiment is low
• Home sales continue to slump nationally

In the intermediate-term, however, the picture gets fuzzy.

The Federal Reserve has lopped 1.250% from the Fed Funds Rate in the last two weeks and those changes will work their way through the economy between now and the summer.

If the economy reverses course and begins expanding at a steady pace, the Federal Reserve will be applauded for its moves this past month.

If the economy expands too quickly, however, inflation will set in and that will erode the value of the U.S. dollar. The Fed will be derided for doing too much, too soon.

Inflation also causes mortgage rates to increase so it's possible that the short-term weakness put home-buyers and homeowners wanting new home loans in terrific positions.

There is no new data hitting the wires this week. Therefore, expect mortgage markets to take their cues from external forces such as politics, oil, and the public speeches of six members of the Federal Reserve.

(Image courtesy: Wall Street Journal Online)

How Prepaid Items Can Make Your "Closing Costs" Look Inflated

When buying a home, you pay for more than just physical property at the closing table. You also pay a series of charges. Commonly, homebuyers lump all of these charges under the heading of "closing costs".

That's a mis-categorization.

Many charges on a HUD-1 Settlement Statement are specifically not closing costs. They are more appropriately designated as "reserves" or monies "paid in advance".

These "prepaid items" include:

• Advance mortgage interest paid from the closing date to month-end
• Real estate taxes paid into an escrow account
• Homeowners insurance paid into an escrow account

Prepaid items are payments related to the home itself, and not payable to any third-parties facilitating the transaction.

This is different from "closing costs" which are charges stemming from the transaction itself. Closing costs can include lender fees, title fees, and government fees.

One way to gauge the difference between prepaid items and closing costs is to ask the question:

"Would these dollars be due even if I didn't buy this home today?"

If the answer is "yes", the charge in question is likely a prepaid item.