The American Recovery and Reinvestment Act of
2009 features an $8,000 tax credit for first-time
buyers who purchase a home on or after Jan. 1, 2009
and before Dec. 1, 2009.
Details include:
The temporary credit is only available for
home purchases made from Jan. 1, 2009 to before
Dec. 1, 2009 and is equal to 10 percent of
the cost of the home, up to a maximum credit
of $8,000. (For example, a home purchased for
$80,000 or more would qualify for the full $8,000
credit while a $70,000 home would only qualify
for 10 percent, or $7,000)
Buyers claim the credit on their federal tax return
to reduce their tax liability. If the credit is
more than their total tax liability that year, the
buyer will get a refund check for the balance.
Only first-time homebuyers can take advantage
of the tax credit.
A first-time buyer is defined
under the tax credit as an individual who has
not owned a home in the last three years.
For married joint filers, both must
meet the first-time homebuyer test
to take the credit on a joint return.
Eligible properties include anything that will be
used as a principal single-family residence—including
condos and townhouses.
There are income guidelines on the credit. Individuals
with an adjusted gross income up to
$75,000 (or $150,000 if filing jointly) are eligible
for the full tax credit. The credit is phased
down for those earning more and is not available
for those with an income above $95,000
(or $170,000 if filing jointly).
The new tax credit does not have to be repaid
if the buyer stays in the home at least three
years. But if the home is sold before that, the
entire amount of the credit is recaptured on
the sale.
People who purchased homes under the 2008
$7,500 tax credit program will still be required
to repay that credit to the government over a
15-year period.
All information is deemed reliable but is not guaranteed.
E-mail me at RealtorChris@msn.com
Friday, February 27, 2009
Wednesday, March 26, 2008
Monday, January 28, 2008
Ask Realtors to name the most important consideration in buying property and the answer will be the same: location, location, location. The idea is as old as housing itself. It was the cave up on the hill versus the cave down by the creek: One caveman didn't have as far to go for water, but he was flooded out once a year. This was the first move-up buyer.
In the Where to Live book series, which scores neighborhoods by city, location scoring is based on a good economy and five vital elements:
Value (as perceived by the buyer and his budget)
Convenience to the buyer's universe (job, family, friends, fun and faith)
Amenities (restaurants, a good supermarket, the bank, post office)
School district (even if the buyer doesn't have children, good schools are an indicator of a community's self-image and reinvestment in culture)
Beauty (people like to live in pretty places)
Using a rating from zero to five stars, the formula puts art and science behind the word location. This obvious formula nails the best appreciating neighborhoods. The data is invaluable to buyers, and it places an objective tool in the hands of Realtors that allows anecdotal projection of values.
NEIGHBORHOOD METRICS
Who lives there? Why? What is the turnover? Knowledge of prices and price appreciation over multiple years as well as tax and typical rents is crucial. Although such research may seem like a lot of work, it can pay out in the number of recurring transactions real estate professionals handle for multiple investors.
BARGAIN HUNTING
Investors who buy cheap typically get similar results. A bargain in a modest neighborhood may not really be a bargain or even a good investment deal. The numbers and returns do not lie.
Investors should always try to acquire the property under market value. However, it is often smart to make the highest offer on a dump in a great location. A "buy, over-improve and hold" strategy in historic inner city neighborhoods can pay handsomely. Investors must clearly understand what improvements will cost and how they will add value over a specific time period. Unlike Enron or WorldCom stock, the reality is if there is dirt involved, the investment can never go to zero value, short of an earthquake swallowing the property. Well-located land is a very finite resource; they aren't making any more of it. The question is how long an investor will need to hold the property to realize a gain.
Boomers have changed the overall market, as they no longer assume that Wall Street knows best. Wall Street does not want the populace to wake up to the advantages of real estate investing. Generally, a wise, non-traded real estate investment, by virtue of mortgage leverage, can deliver five to 10 times the annual cash-on-cash returns of a typical portfolio based on stock, bond funds or real estate investment trusts. When purchasing a stock, full price is paid at the time of purchase. With real estate, a buyer typically puts down a fraction (10 percent to 20 percent) of the total cost (leverage). Historically, any gains have been incorrectly calculated on the total property price, not the down payment and cost of any improvements. The return is properly calculated as the cash returned on the cash employed, or cash-on-cash return.
ADVICE ANACHRONISM
Most financial managers have little training in real estate investment. They are not licensed and earn fees selling stocks, bonds and other financial instruments. The inverse can be said for real estate professionals. Neither will talk to their clients about investments if they are not licensed to provide advice or sell so individual investors have to find their own way.
Newcomers to real estate investing both Realtors and investors visit an investment club, talk to as many well-informed people as they can and listen to which experts' names are being repeated. Beware of people in the "teaching, not doing" game who try to sell the new investor on seminars, books and tapes. Many people who buy into these offers never buy a single piece of real estate.
MONEY DOWN AND MONEY IN RESERVE
True real estate investors do not buy into the "no money down, millionaire by midday" pitches advertised in newspapers. Home buyers are always taught not to over leverage and to maintain a reserve. It is important to put enough money aside to support a property for six months in the event a tenant is unavailable or an investment is necessary to make the property rentable or sellable.
STATE OF THE MARKET
Real estate investors and the processes that have sprung up around them are models for where much of real estate will go. These are part technology and part human factors, but the most important aspects are trust, education and service. The real estate professional who embraces these changes will be a highly sought-after provider. After all, fortune rewards the inquisitive.E-mail me at RealtorChris@msn.com
In the Where to Live book series, which scores neighborhoods by city, location scoring is based on a good economy and five vital elements:
Value (as perceived by the buyer and his budget)
Convenience to the buyer's universe (job, family, friends, fun and faith)
Amenities (restaurants, a good supermarket, the bank, post office)
School district (even if the buyer doesn't have children, good schools are an indicator of a community's self-image and reinvestment in culture)
Beauty (people like to live in pretty places)
Using a rating from zero to five stars, the formula puts art and science behind the word location. This obvious formula nails the best appreciating neighborhoods. The data is invaluable to buyers, and it places an objective tool in the hands of Realtors that allows anecdotal projection of values.
NEIGHBORHOOD METRICS
Who lives there? Why? What is the turnover? Knowledge of prices and price appreciation over multiple years as well as tax and typical rents is crucial. Although such research may seem like a lot of work, it can pay out in the number of recurring transactions real estate professionals handle for multiple investors.
BARGAIN HUNTING
Investors who buy cheap typically get similar results. A bargain in a modest neighborhood may not really be a bargain or even a good investment deal. The numbers and returns do not lie.
Investors should always try to acquire the property under market value. However, it is often smart to make the highest offer on a dump in a great location. A "buy, over-improve and hold" strategy in historic inner city neighborhoods can pay handsomely. Investors must clearly understand what improvements will cost and how they will add value over a specific time period. Unlike Enron or WorldCom stock, the reality is if there is dirt involved, the investment can never go to zero value, short of an earthquake swallowing the property. Well-located land is a very finite resource; they aren't making any more of it. The question is how long an investor will need to hold the property to realize a gain.
Boomers have changed the overall market, as they no longer assume that Wall Street knows best. Wall Street does not want the populace to wake up to the advantages of real estate investing. Generally, a wise, non-traded real estate investment, by virtue of mortgage leverage, can deliver five to 10 times the annual cash-on-cash returns of a typical portfolio based on stock, bond funds or real estate investment trusts. When purchasing a stock, full price is paid at the time of purchase. With real estate, a buyer typically puts down a fraction (10 percent to 20 percent) of the total cost (leverage). Historically, any gains have been incorrectly calculated on the total property price, not the down payment and cost of any improvements. The return is properly calculated as the cash returned on the cash employed, or cash-on-cash return.
ADVICE ANACHRONISM
Most financial managers have little training in real estate investment. They are not licensed and earn fees selling stocks, bonds and other financial instruments. The inverse can be said for real estate professionals. Neither will talk to their clients about investments if they are not licensed to provide advice or sell so individual investors have to find their own way.
Newcomers to real estate investing both Realtors and investors visit an investment club, talk to as many well-informed people as they can and listen to which experts' names are being repeated. Beware of people in the "teaching, not doing" game who try to sell the new investor on seminars, books and tapes. Many people who buy into these offers never buy a single piece of real estate.
MONEY DOWN AND MONEY IN RESERVE
True real estate investors do not buy into the "no money down, millionaire by midday" pitches advertised in newspapers. Home buyers are always taught not to over leverage and to maintain a reserve. It is important to put enough money aside to support a property for six months in the event a tenant is unavailable or an investment is necessary to make the property rentable or sellable.
STATE OF THE MARKET
Real estate investors and the processes that have sprung up around them are models for where much of real estate will go. These are part technology and part human factors, but the most important aspects are trust, education and service. The real estate professional who embraces these changes will be a highly sought-after provider. After all, fortune rewards the inquisitive.E-mail me at RealtorChris@msn.com
Tuesday, August 28, 2007
The Ins and Outs of the Mortgage Business "Has Your Mortgage Been “Sold”?
The Ins and Outs of the Mortgage Business
By Ron Cahalan EWI Protege and Mortgage Professional
Have you ever been surprised by a letter you receive in the mail instructing you that you are now to make your house payment to another lender and/or loan servicer? It happens often and, if it hasn’t happened to you already, chances are it will. If the lender you originally obtained your mortgage loan from has any knowledge that they may sell your loan and ‘hand-you-off’ to someone else anytime in the future, they are required by law to notify at closing. Those who may purchase your mortgage could be any type of financial institution; a bank, credit union, another mortgage banker or an investor. There are companies that specifically go out in search of mortgages to buy in order to make money off of the ownership of your mortgage. Many homeowners have found that their mortgage passed through the hands of a number of investors or mortgage servicers over the life of their loan. How does a mortgage servicer make money and why or how are mortgages bought and sold? There is an interest-rate spread between the ‘actual net-rate” charged or paid for a mortgage and the rate you pay each month. That “spread” has a value over the term of the loan and, for simplicity purposes, let’s say the spread on your loan is .375% (3/8ths of one percent… which is typical, by the way). If you have a $200,000 loan and the spread is .375%, then for one month this would amount to $62.50 of income to the servicer or an annual income of $750. Lets say that servicer is servicing only 500 loans. The income to that 500 loans ($100 million dollars at an average of $200,000 per loan) would be $375,000 in income. Now you see the value. And, most servicers are managing thousands of mortgages, not just 500. The contract to service all those loans is worth a real measurable value over the assumed life of a loan (say 7 to 10 years). It is the contract or agreement to service your loan that is bought and sold between these servicers. That value can be between 1% and say 2.5% of the loan amount. (Again, we are giving you a simplistic view; it is quite a complex calculation when it comes to Wall Street and bond traders, etc.) That said, let’s say you are a servicer and you have a portfolio you want to sell that equals $100 million dollars in mortgages. The market is fairly aggressive for those contracts and it is willing to pay 1.5% for your portfolio. If you sell that $100 million of mortgages for 1.5% it could bring you an immediate windfall of approximately $1,500,000! But, if that investor kept the contract for an estimated 7 years and earned the $375,000 per year, the realized income would have been over $2.6 million dollars. See the value? Now, the mortgage servicer is going to do a few things for you. They collect your payments every month and process the payments. Then, they send those payments on to the mortgage holder/owner, which is typically a mutual fund or mortgage bond holder. They keep their 3/8ths of a percent income for performing these services. The service they are performing is for the lender, not actually for you as the homeowner. It is also the service of the loan servicer to pay your property taxes and hazard or homeowners insurance for you during the year (most mortgages have the taxes and insurance as a part of the mortgage payment). They also typically send you a statement or coupons to track your payments to the mortgage, the county for taxes and insurance companies paid. They also make the adjustments to your payments and notify you of this should there be a change in your insurance or property taxes or an adjustment in your interest should you have an adjustable rate mortgage. It is also the responsibility of the servicer to counsel you in how to manage your mortgage, help you work through problems and financial crisis and work with you if you have missed payments. They may offer you forbearance or a deferral of principal and interest payments as a temporary remedy to difficulties you may have in your finances. If your problems can’t be worked through and foreclosure ends up being the only option, then the servicer will be the party to carry out that order. Mortgage servicers have to follow the same rules, guidelines and regulations that the bank, credit union and mortgage banker does. If your mortgage is sold to another servicer, it is the responsibility of BOTH servicers to notify you of the transaction. The new servicing company cannot change the terms of your mortgage either. There will be times when your loan is sold and you may have a few glitches with the new servicer. Carry out all of your communications in writing. Never stop paying your payment due to any hassles you may be having between the servicers. The servicer(s) must solve any issues within 60 days. So, should you be concerned when your mortgage is sold? No. Just watch your statements for any mistakes. Track that all the payments are being applied correctly and that your taxes and insurance are being paid per the terms of your mortgage loan documents. Keep all documents you receive from the servicers, including all checks and letters of correspondence. Otherwise, your mortgage activities should be fairly uneventful. E-mail me at RealtorChris@msn.com
By Ron Cahalan EWI Protege and Mortgage Professional
Have you ever been surprised by a letter you receive in the mail instructing you that you are now to make your house payment to another lender and/or loan servicer? It happens often and, if it hasn’t happened to you already, chances are it will. If the lender you originally obtained your mortgage loan from has any knowledge that they may sell your loan and ‘hand-you-off’ to someone else anytime in the future, they are required by law to notify at closing. Those who may purchase your mortgage could be any type of financial institution; a bank, credit union, another mortgage banker or an investor. There are companies that specifically go out in search of mortgages to buy in order to make money off of the ownership of your mortgage. Many homeowners have found that their mortgage passed through the hands of a number of investors or mortgage servicers over the life of their loan. How does a mortgage servicer make money and why or how are mortgages bought and sold? There is an interest-rate spread between the ‘actual net-rate” charged or paid for a mortgage and the rate you pay each month. That “spread” has a value over the term of the loan and, for simplicity purposes, let’s say the spread on your loan is .375% (3/8ths of one percent… which is typical, by the way). If you have a $200,000 loan and the spread is .375%, then for one month this would amount to $62.50 of income to the servicer or an annual income of $750. Lets say that servicer is servicing only 500 loans. The income to that 500 loans ($100 million dollars at an average of $200,000 per loan) would be $375,000 in income. Now you see the value. And, most servicers are managing thousands of mortgages, not just 500. The contract to service all those loans is worth a real measurable value over the assumed life of a loan (say 7 to 10 years). It is the contract or agreement to service your loan that is bought and sold between these servicers. That value can be between 1% and say 2.5% of the loan amount. (Again, we are giving you a simplistic view; it is quite a complex calculation when it comes to Wall Street and bond traders, etc.) That said, let’s say you are a servicer and you have a portfolio you want to sell that equals $100 million dollars in mortgages. The market is fairly aggressive for those contracts and it is willing to pay 1.5% for your portfolio. If you sell that $100 million of mortgages for 1.5% it could bring you an immediate windfall of approximately $1,500,000! But, if that investor kept the contract for an estimated 7 years and earned the $375,000 per year, the realized income would have been over $2.6 million dollars. See the value? Now, the mortgage servicer is going to do a few things for you. They collect your payments every month and process the payments. Then, they send those payments on to the mortgage holder/owner, which is typically a mutual fund or mortgage bond holder. They keep their 3/8ths of a percent income for performing these services. The service they are performing is for the lender, not actually for you as the homeowner. It is also the service of the loan servicer to pay your property taxes and hazard or homeowners insurance for you during the year (most mortgages have the taxes and insurance as a part of the mortgage payment). They also typically send you a statement or coupons to track your payments to the mortgage, the county for taxes and insurance companies paid. They also make the adjustments to your payments and notify you of this should there be a change in your insurance or property taxes or an adjustment in your interest should you have an adjustable rate mortgage. It is also the responsibility of the servicer to counsel you in how to manage your mortgage, help you work through problems and financial crisis and work with you if you have missed payments. They may offer you forbearance or a deferral of principal and interest payments as a temporary remedy to difficulties you may have in your finances. If your problems can’t be worked through and foreclosure ends up being the only option, then the servicer will be the party to carry out that order. Mortgage servicers have to follow the same rules, guidelines and regulations that the bank, credit union and mortgage banker does. If your mortgage is sold to another servicer, it is the responsibility of BOTH servicers to notify you of the transaction. The new servicing company cannot change the terms of your mortgage either. There will be times when your loan is sold and you may have a few glitches with the new servicer. Carry out all of your communications in writing. Never stop paying your payment due to any hassles you may be having between the servicers. The servicer(s) must solve any issues within 60 days. So, should you be concerned when your mortgage is sold? No. Just watch your statements for any mistakes. Track that all the payments are being applied correctly and that your taxes and insurance are being paid per the terms of your mortgage loan documents. Keep all documents you receive from the servicers, including all checks and letters of correspondence. Otherwise, your mortgage activities should be fairly uneventful. E-mail me at RealtorChris@msn.com
Thursday, July 26, 2007
How to defuse a ticking home loan
Interest rates on about $1 trillion in adjustable-rate mortgages are headed up by the year's end. If your loan is among them, this five-step game plan might save you a lot of grief.
Latest Market Update
July 26, 2007 -- 09:40 ET
By Liz Pulliam Weston
The young woman just wasn't getting it.
She called Consumer Credit Counseling Service of Nevada and Utah for help managing her family's mortgage payments. A year ago, a mortgage broker had persuaded her to refinance the family home, pull out all of the equity and invest the cash in a rental property. Now both mortgage payments had reset to much higher levels, with the interest rate on the rental jumping from 1% to more than 8%.
She couldn't afford either payment. Michele Johnson, the CEO of the counseling service, remembers the woman pressing for a way to keep her home, but there wasn't one. The problems were that:
Both properties had lost value as Las Vegas' real-estate bubble popped. The woman owed more on the homes than they were worth, so lenders wouldn't refinance the loans.
So-called rescue funds, set up by some states and some lenders to help victims of predatory lending, had far more applicants than funds, and they weren't available in her case anyway.
A bankruptcy filing, touted by attorneys in television ads as a way to "fight foreclosure," would just put off the inevitable.
The woman's only option for avoiding foreclosure was a short sale, in which she might persuade a lender to accept the sale proceeds from both properties and forgive the rest of her debt. But, Johnson said, the woman didn't want to hear that.
"People have this unrealistic viewpoint that 'this is my home; I'm not going to lose it.' It all becomes very emotional," Johnson said. "Listening to facts and figures is not what they want to hear. They want a rescue."
Don't delay If your loan is among the $1 trillion in mortgages scheduled for payment increases by the end of the year, ignorance and denial are not your friends. You need to take action, and the sooner the better:
If you've still got some equity in your home and the ability to handle a larger payment, you may be able to switch to a smarter loan.
If your situation isn't as rosy, quick action can contain the damage to your personal finances.
Here's your game plan.
Know where you stand. Dust off your mortgage documents, advises LendingTree.com chief economist Jim Svinth, and scour them for important information, such as:
When your payment is scheduled to adjust.
What benchmark the payment will be based upon (such as the LIBOR rate or the one-year Treasury).
What your margin is (this is what is added to the benchmark to determine your new rate).
What your caps are (many adjustable loans typically can increase no more than 2 percentage points in a year and 6 percentage points over the life of the loan, but check your documents to be sure).
You can find the most recent benchmark rates at HSH Associates' ARM index page. Once you know what your new interest rate is likely to be, you can use HSH's amortization calculator to determine what your new payment would be.
Math-challenged? You may be able to simply call and ask your lender or loan servicer, if they're not too busy handling all the folks who have already defaulted.
You also need to find out whether you would face a prepayment penalty for refinancing your loan. Prepayment penalties are unfortunately common on loans extended to people with troubled credit, and until they expire, they can make a refinance harder to justify financially.
Your future is tied to your past Get your credit reports and FICO credit scores. Your options will be dictated in large part by those scores, said credit and mortgage expert Gerri Detweiler of FreeRateSearch.com, particularly if you don't have much equity in your home or can't document your income with tax returns or other proof. You generally need a score of 700 or better to get the best rates and terms. If your scores are 660 or below, LendingTree.com's Svinth said, you'll face more scrutiny from lenders and have a tougher time getting a loan.
This is a big turnaround from a year ago, Svinth said, when lenders were falling over themselves to give no-down-payment and no-equity loans to borrowers with credit scores below 620 and income they couldn't or wouldn't prove.
"We've gotten back to basics," Svinth said. "Credit and collateral matter now."
Someone with credit scores in the 700s who is able to document his or her income and who wants a loan for 95% or less of the home's value "has plenty of options," Svinth said. "It's the ones with poor credit who want a 100% stated-income loan. . . . I'm not saying there are no options, but they're going to be expensive."
You can get your credit reports once a year for free from AnnualCreditReport.com, but scores are not free. To get FICO scores, which are the same scores mortgage lenders use, you'll need to pay about $50 at MyFico.com, the only site that sells FICOs for all three bureaus. Mortgage lenders typically base their decisions on the middle of the three scores, or the lower of the two middle scores when lending to a couple. You also can get an approximation of your scores with MSN Money's credit-score estimator.
You may be able to boost your scores by successfully disputing serious errors on your report, such as accounts that aren't yours or late payments that actually were made on time. Another tactic for quick score improvement: pay down credit card balances and use your cards lightly. The less of your credit limits you use at any given time the better. Using 30% or less of your credit limits is good; less than 10% is even better. Because balances are reported monthly, improvements in your scores should show up quickly. Read "7 fast fixes for your credit score" for more tips.
Get real about your equity. Refinancing to a different loan will be tough, if not impossible, without at least some positive gap between what your home is worth and what you owe. Home-value estimators such as Zillow, RealtyTrac and Domania can get you started, but you may get a more accurate figure by talking with several real-estate agents who are familiar with your neighborhood. If home prices are dropping in your area, understand that lender appraisals may be getting more conservative as well.
Start shopping. If you can refinance, your next step is deciding whether you should. You can research your options at FreeRateSearch.com, LendingTree.com and other sites.
What you should do next depends on the specifics of your situation.
If your current, fully indexed rate is significantly higher than the rate you could get with a no-cost refinance, mortgage expert Jack Guttentag recommends jumping to a new loan, assuming there's no prepayment penalty. (Guttentag's site, the Mortgage Professor, includes an article about whether to refinance an adjustable rate into a fixed-rate loan, as well as other information about refinancing.)
If the new rate isn't much better, though, and you can handle the bigger payment, you might just stick with the loan you have, Guttentag said.
"Ninety-nine percent of ARM borrowers approaching a rate reset face a rate increase," said Guttentag, "but it could be small, and if there is a prepayment penalty, it might not pay to refinance."
Detweiler, of FreeRateSearch.com, votes for fixing your rate if you can. She notes that rates, though higher, still are near generational lows, and she thinks the gap between fixed and adjustable rates isn't great enough to justify going with an adjustable loan's greater risk. That's true for folks with good credit as well as for those with troubled credit.
Here's an example. Someone who in September 2005 opted for a two-year hybrid mortgage for $250,000 and who had a credit score of 615 could have qualified for a loan with a payment of about $1,579 a month. In September 2007, the payment on his loan would be scheduled to rise to $1,906, a 21% increase.
Because rates have risen overall, jumping to another two-year loan wouldn't save much: less than $100 a month. Switching to a 30-year fixed rate would, by contrast, result in a payment of about $1,881 a month, just $60 more than the two-year hybrid.
Can't cope? Talk to a housing counselor. If you think you can't swallow a bigger payment and you have no equity in your home, Detweiler said, it's time to call for help. A HUD-approved housing counselor can discuss your options and offer budgeting assistance to see whether there's a way to handle the new payments.
If not, your last best hope may be selling the home before foreclosure. Read "Facing foreclosure? 9 options" and "Your lender doesn't want your house" to better understand your alternatives when you're facing default.
Columns by Liz Pulliam Weston, the Web's most-read personal finance writer, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Published July 26, 2007
E-mail me at RealtorChris@msn.com
Latest Market Update
July 26, 2007 -- 09:40 ET
By Liz Pulliam Weston
The young woman just wasn't getting it.
She called Consumer Credit Counseling Service of Nevada and Utah for help managing her family's mortgage payments. A year ago, a mortgage broker had persuaded her to refinance the family home, pull out all of the equity and invest the cash in a rental property. Now both mortgage payments had reset to much higher levels, with the interest rate on the rental jumping from 1% to more than 8%.
She couldn't afford either payment. Michele Johnson, the CEO of the counseling service, remembers the woman pressing for a way to keep her home, but there wasn't one. The problems were that:
Both properties had lost value as Las Vegas' real-estate bubble popped. The woman owed more on the homes than they were worth, so lenders wouldn't refinance the loans.
So-called rescue funds, set up by some states and some lenders to help victims of predatory lending, had far more applicants than funds, and they weren't available in her case anyway.
A bankruptcy filing, touted by attorneys in television ads as a way to "fight foreclosure," would just put off the inevitable.
The woman's only option for avoiding foreclosure was a short sale, in which she might persuade a lender to accept the sale proceeds from both properties and forgive the rest of her debt. But, Johnson said, the woman didn't want to hear that.
"People have this unrealistic viewpoint that 'this is my home; I'm not going to lose it.' It all becomes very emotional," Johnson said. "Listening to facts and figures is not what they want to hear. They want a rescue."
Don't delay If your loan is among the $1 trillion in mortgages scheduled for payment increases by the end of the year, ignorance and denial are not your friends. You need to take action, and the sooner the better:
If you've still got some equity in your home and the ability to handle a larger payment, you may be able to switch to a smarter loan.
If your situation isn't as rosy, quick action can contain the damage to your personal finances.
Here's your game plan.
Know where you stand. Dust off your mortgage documents, advises LendingTree.com chief economist Jim Svinth, and scour them for important information, such as:
When your payment is scheduled to adjust.
What benchmark the payment will be based upon (such as the LIBOR rate or the one-year Treasury).
What your margin is (this is what is added to the benchmark to determine your new rate).
What your caps are (many adjustable loans typically can increase no more than 2 percentage points in a year and 6 percentage points over the life of the loan, but check your documents to be sure).
You can find the most recent benchmark rates at HSH Associates' ARM index page. Once you know what your new interest rate is likely to be, you can use HSH's amortization calculator to determine what your new payment would be.
Math-challenged? You may be able to simply call and ask your lender or loan servicer, if they're not too busy handling all the folks who have already defaulted.
You also need to find out whether you would face a prepayment penalty for refinancing your loan. Prepayment penalties are unfortunately common on loans extended to people with troubled credit, and until they expire, they can make a refinance harder to justify financially.
Your future is tied to your past Get your credit reports and FICO credit scores. Your options will be dictated in large part by those scores, said credit and mortgage expert Gerri Detweiler of FreeRateSearch.com, particularly if you don't have much equity in your home or can't document your income with tax returns or other proof. You generally need a score of 700 or better to get the best rates and terms. If your scores are 660 or below, LendingTree.com's Svinth said, you'll face more scrutiny from lenders and have a tougher time getting a loan.
This is a big turnaround from a year ago, Svinth said, when lenders were falling over themselves to give no-down-payment and no-equity loans to borrowers with credit scores below 620 and income they couldn't or wouldn't prove.
"We've gotten back to basics," Svinth said. "Credit and collateral matter now."
Someone with credit scores in the 700s who is able to document his or her income and who wants a loan for 95% or less of the home's value "has plenty of options," Svinth said. "It's the ones with poor credit who want a 100% stated-income loan. . . . I'm not saying there are no options, but they're going to be expensive."
You can get your credit reports once a year for free from AnnualCreditReport.com, but scores are not free. To get FICO scores, which are the same scores mortgage lenders use, you'll need to pay about $50 at MyFico.com, the only site that sells FICOs for all three bureaus. Mortgage lenders typically base their decisions on the middle of the three scores, or the lower of the two middle scores when lending to a couple. You also can get an approximation of your scores with MSN Money's credit-score estimator.
You may be able to boost your scores by successfully disputing serious errors on your report, such as accounts that aren't yours or late payments that actually were made on time. Another tactic for quick score improvement: pay down credit card balances and use your cards lightly. The less of your credit limits you use at any given time the better. Using 30% or less of your credit limits is good; less than 10% is even better. Because balances are reported monthly, improvements in your scores should show up quickly. Read "7 fast fixes for your credit score" for more tips.
Get real about your equity. Refinancing to a different loan will be tough, if not impossible, without at least some positive gap between what your home is worth and what you owe. Home-value estimators such as Zillow, RealtyTrac and Domania can get you started, but you may get a more accurate figure by talking with several real-estate agents who are familiar with your neighborhood. If home prices are dropping in your area, understand that lender appraisals may be getting more conservative as well.
Start shopping. If you can refinance, your next step is deciding whether you should. You can research your options at FreeRateSearch.com, LendingTree.com and other sites.
What you should do next depends on the specifics of your situation.
If your current, fully indexed rate is significantly higher than the rate you could get with a no-cost refinance, mortgage expert Jack Guttentag recommends jumping to a new loan, assuming there's no prepayment penalty. (Guttentag's site, the Mortgage Professor, includes an article about whether to refinance an adjustable rate into a fixed-rate loan, as well as other information about refinancing.)
If the new rate isn't much better, though, and you can handle the bigger payment, you might just stick with the loan you have, Guttentag said.
"Ninety-nine percent of ARM borrowers approaching a rate reset face a rate increase," said Guttentag, "but it could be small, and if there is a prepayment penalty, it might not pay to refinance."
Detweiler, of FreeRateSearch.com, votes for fixing your rate if you can. She notes that rates, though higher, still are near generational lows, and she thinks the gap between fixed and adjustable rates isn't great enough to justify going with an adjustable loan's greater risk. That's true for folks with good credit as well as for those with troubled credit.
Here's an example. Someone who in September 2005 opted for a two-year hybrid mortgage for $250,000 and who had a credit score of 615 could have qualified for a loan with a payment of about $1,579 a month. In September 2007, the payment on his loan would be scheduled to rise to $1,906, a 21% increase.
Because rates have risen overall, jumping to another two-year loan wouldn't save much: less than $100 a month. Switching to a 30-year fixed rate would, by contrast, result in a payment of about $1,881 a month, just $60 more than the two-year hybrid.
Can't cope? Talk to a housing counselor. If you think you can't swallow a bigger payment and you have no equity in your home, Detweiler said, it's time to call for help. A HUD-approved housing counselor can discuss your options and offer budgeting assistance to see whether there's a way to handle the new payments.
If not, your last best hope may be selling the home before foreclosure. Read "Facing foreclosure? 9 options" and "Your lender doesn't want your house" to better understand your alternatives when you're facing default.
Columns by Liz Pulliam Weston, the Web's most-read personal finance writer, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Published July 26, 2007
E-mail me at RealtorChris@msn.com
Thursday, June 28, 2007
16 favorite money rules of thumb
Here they are, plain and simple. Follow these guidelines and your finances -- and nerves -- will be in pretty good shape.
By Liz Pulliam Weston
Sometimes, you just want an answer.
"Can I afford a new car?" "How much should I be saving for retirement?" "What's the best way to pay off debt?" "What's the right credit card for me?"
If you're a patient, detail-oriented type, you may be willing to sit still for an exhaustive lecture on any of the above subjects. If you're like most of us -- overworked, sleep deprived and in a hurry -- you'd rather skip the whole dreary "on the one hand this, on the other that" analysis.
So I've cut to the chase and compiled a list of my 16 favorite money rules of thumb.
These are, of course, just guidelines. By definition, rules of thumb aren't meant to be immutable laws or applicable in every situation. But hopefully these broad, easy-to-understand principals will at least give you a starting point for assessing what to do in your own financial situation.
Retirement, Part I: "Save 10% for basics, 15% for comfort, 20% to escape." This rule of thumb works pretty well if you start to save for retirement by your early 30s. Saving at least 10% of your income ensures you won't be eating pet food. Fifteen percent should get you a more comfortable living, while 20% gives you a shot at an early retirement (and yes, you get to count employer contributions as part of your percentage). Wait just a decade to start, though, and you'll need 15% for basics and 20% for comfort; an early retirement may not be in the cards. For a more customized estimate of how much you need to save, check out MSN Money's Retirement Planner.
Retirement, Part II: "Retirement money is for retirement; until then, keep your mitts off it." There's rarely a good reason to borrow against your retirement accounts, and almost never a reasonable excuse for cashing them out. Look elsewhere to find money to pay your debts or buy a home. Let your retirement money keep working for you undisturbed. Someday, you'll be glad you did.
Student loans: "Your total borrowing shouldn't exceed what you expect to make your first year out of school." Many graduates have learned to their chagrin that student lenders will gladly loan you far more money than you can comfortably repay. Students and parents need to put their own limits on how deeply they go into debt, or they could face a literal lifetime of student-loan payments. Read "How much college debt is too much?" for more details.
College savings: "Saving for retirement is more important, but try to put at least $25 a month per kid in a college savings plan." Your child can get student loans, but no one will lend you money for retirement. That's why retirement comes first. But contributing even a small amount each month will help reduce the amount of debt your child eventually incurs. Thanks to recent tax law changes and reductions in fees, 529 college-savings plans have emerged as the best way for most parents to save. To learn more, read "How Uncle Sam wants you to save for college."
Cars, Part I: "Buy used and drive it for at least 10 years." This one rule of thumb easily could save you tens of thousands of dollars over your lifetime compared with what you would pay buying cars new and owning them just five years. Not only will you buy half as many cars, but you'll avoid the 20% or so loss to depreciation that happens as soon as you drive a new car off the lot. Today's cars are better built and will last longer than ever before, so buying used isn't the gamble it used to be.
Video on MSN Money
Budget your way to freedomThe "B" word isn't a straitjacket on fun. Here's how to start your budget and how to find the leaks in your wallet.
Cars, Part II: "If you must borrow to buy a car, follow the 20/4/10 rule." Which means: Make a 20% down payment, don't borrow for more than four years and don't agree to a monthly payment that's more than 10% of your income -- or 8% if you plan to buy a home in the next few years. A substantial down payment ensures you'll have equity in your car when you drive off the lot -- which is important, since owing more on your car than its worth can leave you financially vulnerable if the vehicle is totaled or stolen. (Read "The real reason you're broke" and "Close the gap in your car insurance" for more details.) Limiting the loan term and monthly payment will keep you from overspending.
Cars, Part III: "To compute and compare the real monthly cost to buy, insure and operate a car, double the price tag and divide by 60." You can get more precise figures about how much a car will cost over five years by using Edmunds.com's "True Cost to Own" calculator. But this rule of thumb will help you determine if that car you think is affordable actually will be once all costs are factored in.
Credit cards: "If you carry a balance, look for the lowest rate. If you don't, get rewards at least equal to 1.5% of what you spend." Your primary goal if you carry credit card balances should be paying them off as quickly as possible. That means avoiding reward cards, which tend to have higher interest rates, in favor of the lowest-rate card for which you qualify, given your credit history. But if you already pay off your balances in full every month, you should look for cards that give you cash back or reward equal to 1.5% or more of your spending (read "People who charge everything" for more details). Sites like CardRatings.com and Bankrate.com can help you sort through the offers.
Debt repayment: "Pay off maxed-out cards first." When paying down credit card debt, the argument used to be between those who advocated paying the highest-rate card first (to save the most money) and those who argued for paying the smallest balance first (for a faster feeling of accomplishment that can motivate you to keep going). These days, though, you should first tackle any card that's close to its limit, since maxing out cards hurts your credit scores and can trigger penalty rates and fees.
Financial flexibility: "You need to be able to get your hands on cash or credit equal to three months' worth of expenses." Ideally, everybody would have at least three months' worth of expenses saved up in cash to serve as a cushion against job loss or other disasters. But saving that much money can take a while, as I wrote in "The $0 emergency fund," and many families have more important priorities to address first. Space on your credit cards and an unused home equity line of credit can be used as stand-ins for a real emergency fund until you can get around to saving the cash.
Insurance: "Cover yourself for catastrophic expenses, not the stuff you can cover out of pocket." Insurance isn't meant to cover the normal expenses of daily living, as I wrote in "3 costly myths about insurance." It's designed to bail you out when you face expenses so big they might otherwise wipe you out financially. That's why you want high limits on your policies -- but high deductibles, too.
Life insurance: "Those who need it typically need five to 10 times their income." Most people need to answer only two questions about insurance: "Do I need it?" and, if the answer is yes, "How much do I need?" You probably need life insurance if other people are financially dependent on you. You probably don't if you're single or your kids are grown. If you do need life insurance, the most important thing is to buy enough. Term or "pure" insurance is usually the way to go, since insurance that includes an investment component can be as much as 10 times more costly -- busting most families' budgets. The five- to 10-times-income rule is a pretty broad guideline, so you'll want to use MSN Money's Life Insurance Needs Estimator for a more precise fix.
Mortgages, Part I. "If you can't afford to buy the house using a 30-year fixed-rate mortgage, you can't afford the house." There are good reasons for choosing less traditional loans, but buying a house you couldn't otherwise afford isn't one of them. Too many people today are facing foreclosure because they used an adjustable or interest-only loan to buy too much house for their means. Read "Who's at most risk for foreclosure?" for the grim details.
Mortgages, Part II. "Fix the rate for at least as long as you plan to be in the home." Lenders, brokers or real-estate agents may tout the low, low payments of adjustable-rate loans, but sooner or later those payments will jump -- sometimes substantially. Protect your family and your investment by opting for a loan with a fixed-rate period that matches how long you expect to live there. If you're sure you'll move in five years, for example, a five-year hybrid is a good option. If you think you'll stay put for 10 years or more, you might just go for the certainty of the 30-year fixed.
Video on MSN Money
Budget your way to freedomThe "B" word isn't a straitjacket on fun. Here's how to start your budget and how to find the leaks in your wallet.
Mortgages, Part III: "You almost certainly have better things to do with your money than prepay a low-rate, deductible mortgage." People get excited about how much interest they can save by making extra mortgage payments. What they don't realize is that they can get a much better return elsewhere. Don't consider prepaying your mortgage until you're taking full advantage of your retirement savings options and have paid off all your other debt. Read "Don't rush to pay off that mortgage" for more details.
Priorities: "Retirement, then credit cards, then emergency fund." Your highest priority, typically, should be saving for retirement, since every dollar you fail to save today could cost you $10 or more in lost retirement income. (The younger you are, the more you'll lose by not tucking money away now.) Also, opportunities to get a 401(k) match or to fund an IRA or Roth IRA are typically "use it or lose it" propositions. Dispatching credit card debt should be your next highest priority, since it's probably accumulating at double-digit interest rates and reducing your financial flexibility (see above). Finally, an emergency fund equal to three to six months' worth of expenses can be a bulwark against the inevitable setbacks life sends us -- job loss, disability, illness, accidents, natural disasters. Having a pile of cash in a high-rate savings account can also do wonders for reducing your money anxieties.
Columns by Liz Pulliam Weston, the Web's most-read personal finance writer, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Published June 28, 2007
E-mail me at RealtorChris@msn.com
By Liz Pulliam Weston
Sometimes, you just want an answer.
"Can I afford a new car?" "How much should I be saving for retirement?" "What's the best way to pay off debt?" "What's the right credit card for me?"
If you're a patient, detail-oriented type, you may be willing to sit still for an exhaustive lecture on any of the above subjects. If you're like most of us -- overworked, sleep deprived and in a hurry -- you'd rather skip the whole dreary "on the one hand this, on the other that" analysis.
So I've cut to the chase and compiled a list of my 16 favorite money rules of thumb.
These are, of course, just guidelines. By definition, rules of thumb aren't meant to be immutable laws or applicable in every situation. But hopefully these broad, easy-to-understand principals will at least give you a starting point for assessing what to do in your own financial situation.
Retirement, Part I: "Save 10% for basics, 15% for comfort, 20% to escape." This rule of thumb works pretty well if you start to save for retirement by your early 30s. Saving at least 10% of your income ensures you won't be eating pet food. Fifteen percent should get you a more comfortable living, while 20% gives you a shot at an early retirement (and yes, you get to count employer contributions as part of your percentage). Wait just a decade to start, though, and you'll need 15% for basics and 20% for comfort; an early retirement may not be in the cards. For a more customized estimate of how much you need to save, check out MSN Money's Retirement Planner.
Retirement, Part II: "Retirement money is for retirement; until then, keep your mitts off it." There's rarely a good reason to borrow against your retirement accounts, and almost never a reasonable excuse for cashing them out. Look elsewhere to find money to pay your debts or buy a home. Let your retirement money keep working for you undisturbed. Someday, you'll be glad you did.
Student loans: "Your total borrowing shouldn't exceed what you expect to make your first year out of school." Many graduates have learned to their chagrin that student lenders will gladly loan you far more money than you can comfortably repay. Students and parents need to put their own limits on how deeply they go into debt, or they could face a literal lifetime of student-loan payments. Read "How much college debt is too much?" for more details.
College savings: "Saving for retirement is more important, but try to put at least $25 a month per kid in a college savings plan." Your child can get student loans, but no one will lend you money for retirement. That's why retirement comes first. But contributing even a small amount each month will help reduce the amount of debt your child eventually incurs. Thanks to recent tax law changes and reductions in fees, 529 college-savings plans have emerged as the best way for most parents to save. To learn more, read "How Uncle Sam wants you to save for college."
Cars, Part I: "Buy used and drive it for at least 10 years." This one rule of thumb easily could save you tens of thousands of dollars over your lifetime compared with what you would pay buying cars new and owning them just five years. Not only will you buy half as many cars, but you'll avoid the 20% or so loss to depreciation that happens as soon as you drive a new car off the lot. Today's cars are better built and will last longer than ever before, so buying used isn't the gamble it used to be.
Video on MSN Money
Budget your way to freedomThe "B" word isn't a straitjacket on fun. Here's how to start your budget and how to find the leaks in your wallet.
Cars, Part II: "If you must borrow to buy a car, follow the 20/4/10 rule." Which means: Make a 20% down payment, don't borrow for more than four years and don't agree to a monthly payment that's more than 10% of your income -- or 8% if you plan to buy a home in the next few years. A substantial down payment ensures you'll have equity in your car when you drive off the lot -- which is important, since owing more on your car than its worth can leave you financially vulnerable if the vehicle is totaled or stolen. (Read "The real reason you're broke" and "Close the gap in your car insurance" for more details.) Limiting the loan term and monthly payment will keep you from overspending.
Cars, Part III: "To compute and compare the real monthly cost to buy, insure and operate a car, double the price tag and divide by 60." You can get more precise figures about how much a car will cost over five years by using Edmunds.com's "True Cost to Own" calculator. But this rule of thumb will help you determine if that car you think is affordable actually will be once all costs are factored in.
Credit cards: "If you carry a balance, look for the lowest rate. If you don't, get rewards at least equal to 1.5% of what you spend." Your primary goal if you carry credit card balances should be paying them off as quickly as possible. That means avoiding reward cards, which tend to have higher interest rates, in favor of the lowest-rate card for which you qualify, given your credit history. But if you already pay off your balances in full every month, you should look for cards that give you cash back or reward equal to 1.5% or more of your spending (read "People who charge everything" for more details). Sites like CardRatings.com and Bankrate.com can help you sort through the offers.
Debt repayment: "Pay off maxed-out cards first." When paying down credit card debt, the argument used to be between those who advocated paying the highest-rate card first (to save the most money) and those who argued for paying the smallest balance first (for a faster feeling of accomplishment that can motivate you to keep going). These days, though, you should first tackle any card that's close to its limit, since maxing out cards hurts your credit scores and can trigger penalty rates and fees.
Financial flexibility: "You need to be able to get your hands on cash or credit equal to three months' worth of expenses." Ideally, everybody would have at least three months' worth of expenses saved up in cash to serve as a cushion against job loss or other disasters. But saving that much money can take a while, as I wrote in "The $0 emergency fund," and many families have more important priorities to address first. Space on your credit cards and an unused home equity line of credit can be used as stand-ins for a real emergency fund until you can get around to saving the cash.
Insurance: "Cover yourself for catastrophic expenses, not the stuff you can cover out of pocket." Insurance isn't meant to cover the normal expenses of daily living, as I wrote in "3 costly myths about insurance." It's designed to bail you out when you face expenses so big they might otherwise wipe you out financially. That's why you want high limits on your policies -- but high deductibles, too.
Life insurance: "Those who need it typically need five to 10 times their income." Most people need to answer only two questions about insurance: "Do I need it?" and, if the answer is yes, "How much do I need?" You probably need life insurance if other people are financially dependent on you. You probably don't if you're single or your kids are grown. If you do need life insurance, the most important thing is to buy enough. Term or "pure" insurance is usually the way to go, since insurance that includes an investment component can be as much as 10 times more costly -- busting most families' budgets. The five- to 10-times-income rule is a pretty broad guideline, so you'll want to use MSN Money's Life Insurance Needs Estimator for a more precise fix.
Mortgages, Part I. "If you can't afford to buy the house using a 30-year fixed-rate mortgage, you can't afford the house." There are good reasons for choosing less traditional loans, but buying a house you couldn't otherwise afford isn't one of them. Too many people today are facing foreclosure because they used an adjustable or interest-only loan to buy too much house for their means. Read "Who's at most risk for foreclosure?" for the grim details.
Mortgages, Part II. "Fix the rate for at least as long as you plan to be in the home." Lenders, brokers or real-estate agents may tout the low, low payments of adjustable-rate loans, but sooner or later those payments will jump -- sometimes substantially. Protect your family and your investment by opting for a loan with a fixed-rate period that matches how long you expect to live there. If you're sure you'll move in five years, for example, a five-year hybrid is a good option. If you think you'll stay put for 10 years or more, you might just go for the certainty of the 30-year fixed.
Video on MSN Money
Budget your way to freedomThe "B" word isn't a straitjacket on fun. Here's how to start your budget and how to find the leaks in your wallet.
Mortgages, Part III: "You almost certainly have better things to do with your money than prepay a low-rate, deductible mortgage." People get excited about how much interest they can save by making extra mortgage payments. What they don't realize is that they can get a much better return elsewhere. Don't consider prepaying your mortgage until you're taking full advantage of your retirement savings options and have paid off all your other debt. Read "Don't rush to pay off that mortgage" for more details.
Priorities: "Retirement, then credit cards, then emergency fund." Your highest priority, typically, should be saving for retirement, since every dollar you fail to save today could cost you $10 or more in lost retirement income. (The younger you are, the more you'll lose by not tucking money away now.) Also, opportunities to get a 401(k) match or to fund an IRA or Roth IRA are typically "use it or lose it" propositions. Dispatching credit card debt should be your next highest priority, since it's probably accumulating at double-digit interest rates and reducing your financial flexibility (see above). Finally, an emergency fund equal to three to six months' worth of expenses can be a bulwark against the inevitable setbacks life sends us -- job loss, disability, illness, accidents, natural disasters. Having a pile of cash in a high-rate savings account can also do wonders for reducing your money anxieties.
Columns by Liz Pulliam Weston, the Web's most-read personal finance writer, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Published June 28, 2007
E-mail me at RealtorChris@msn.com
Wednesday, June 13, 2007
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