My New Blog

I was recently at a fourth of July cook out. As soon as the people found out I was a mortgage broker all sorts of questions and comments came out. The perception seemed to be that all the issues in the housing market was due to the Adjustable Rate Mortgage (ARM loans).

On the opposite spectrum I am starting to see more ARM products hit the market.

Should a consumer ever consider an ARM? Is it a good product?

For years I have always said that there is not one perfect mortgage. You need to investigate your loan options to decide what is the best product for you. During 2004-2007 every one was selling the negative amortization ARM loans. People would ask me for them because they had heard how good they were. I am sure I lost a lot of business just to the fact that I would explain why I did not think that product fit that consumers goals. Now I have sold plenty of Negative am mortgages over the years. If I think that it is the right product for my client, I will let them know about it. ....By the way not all Neg Am loans are ARMs. This post is about ARMs. I should get back on track.

Most people seem to shop for ARMs by shopping interest rate and payment. This is not how a mortgage decision should be made.

What is an ARM. On ARM loans the consumer benefits from a lower starting interest rate by taking the risk of the future market. Why because the ARM will adjust. Sometimes up sometimes down. I know everyone thinks they only go up. Not so.

There are all types of ARMs but they all have the same Characteristics. Here is list of items you need to look at when shopping ARMs.

1) INDEX - definition of an index is a financial market that both the consumer and lender can view but neither party can adjust. This is what makes the rate increase and decrease. There are many indexes, examples are 1 year t-bills, 6 month LIBOR. I have heard from clients considering options from other lenders where they were told that the index never moves higher than "x" rate. All I had to do was show them the true history to earn their respect.

2) MARGIN - this is the profit that the lender would want for investing in you vs. investing in the Index. In other words you are considered a higher risk than the 1 year T-Bill. Therefore if they are going to invest in you they want a higher rate of returns. Margins very with each loan. The lowest I have ever seen is 1.25%. The highest I have seen is 8.5%

This is how your rate is calculated when it adjust. They take the index add the margin. Thus your new interest rate. This means your rate can go up as well as down.

Now most arm loans have what are known as protection caps. This means no matter where that index goes your rate can not adjust up or down more than "x"%. For instance, a 1 year ARM with FHA say's your rate can never move more than 1% per adjustment and never more than 5% over the life of the loan.

I have to get back to work I will add more about ARMs at another time.

The national average rate on a 30 year conforming fixed loan dropped by nine basis points to settle at 6.53%. Many predict that the next trouble spot in the economy will be car loans that will begin to suffer delinquencies. That is certainly reflected in the average new car loan rates that rose up slightly to 7.06%. Bank of America completed its acquisition of Countrywide Financial (CFC) thereby becoming the largest originator and servicer of mortgages in the U.S. One hopes that the diversified areas of operations of BofA would serve as a good and important cushion as the mortgage-related problems of CFC would continue to go through a painful but eventually healthy correction phase. We will continue to pay more than a passing interest in the fortunes of the new company as it will serve as a bellwether for the health of the mortgage industry and the larger economy in general.

Hope you had a nice fourth of July.

The Federal Reserve Bank of Chicago recently commissioned a study to find out if it is better to prepay your mortgage or increase your investment in your retirement account. They found overwhelmingly that 95% of Americans are not making a good financial decision by prepaying their mortgage and that they would increase their net worth significantly if they were to invest their additional cash flow rather than reduce their mortgage debt.

Conclusion, debt reduction is not wealth strategy, it’s a cash flow strategy. Wealth creation happens by making sound decisions about where money is invested. The truly affluent would never dream of prepaying a mortgage or owning a home free and clear. In their view, capital tied up in an asset, such as home equity, that is not earning a rate of return, is not prudent.

The Federal Reserve, taking a break from its aggressive rate-cutting policy, chose not to alter key interest rates Wednesday, leaving the Fed Funds rate at 2.00% and everyone wondering where interest rates are headed next.

Since last September, the Fed has cut rates seven times for a total of 3.25%. However, many experts believe that the Fed's decision this Wednesday, along with comments from the meeting itself, indicate an increased concern over inflation. This means the Fed could start increasing rates as early as its next meeting, which takes place in August.

The Fed is in a quandary. The economy has slowed, led by a decline in home sales and rising inflation, stemming primarily from increasing energy prices. The Fed's primary role in relation to the economy is to combat inflation and preserve economic growth. To combat inflation, the Fed will ultimately have to increase interest rates in coming months.

What Does This Mean to You?

If you're looking to buy a house, consider these key points:

• Home prices in some areas are at five-year lows, while personal incomes in that same period have increased. Homes are more affordable for many right now, particularly first-time home buyers.
• Sellers are extremely motivated and many buyers in our area have benefited from the unbelievable deals that exist today.
• Experts foresee a strong rebound in home prices when the economy begins to recover, according to a new report from the Joint Center for Housing Studies. That means buyers today will be sitting on valuable properties tomorrow. Remember, annualized appreciation for homes exceeded 6.35% from 1940 to 2000.

Housing booms follow housing busts – and the savvy buyers aren't afraid to jump into a tough market. But these savvy buyers know that homeownership is a long-term investment. Call me to discuss these points and get your purchase strategy on track. Ultimately, population growth and demographics point to a stronger housing market in coming years.

Even if you're not looking to purchase a home, opportunities still exist. With the Fed taking a breather, this doesn't mean you should be taking a break. It's never been more important to create a financial plan that makes the most sense to you and your family's long-term goals. Give us a call.

In the Cleveland market there is a lot of inventory.  In other words there are a lot of homes for sale.  This means you can probably find a good deal out there if you take the time to search.

How can you make sure you are buying safely and at the right price?

Step 1 is the old real estate saying "Location, Location Location."  Learn the neighborhoods and do your research.  You may be able to get a great deal in an undesirable neighborhood, but what then.  How will it appreciate?  You are better to buy in a mature stable neighborhood.  Even if you have to pay a little extra.

Step 2 Price.  How do you know if the home is priced right?  There are a number of ways.  My first suggestion is to partner up with a good real estate agent.  Don't call the sign. Instead find an agent you trust.  Secondly use my home scouting report.  The Home Scouting report allows you to track neighborhoods.  You will not only see the listing in an area but also what has sold.  I will put a link at the bottom of this post.  You can sign up for free.

Step 3 Spend the money on a home inspection.  The appraiser is not a home inspector.  The purpose of the appraiser is to make sure the property is a good investment for the bank, not for you.

Step 4 Research your loan options.  While every one else was pushing the neg Am ARMs, 90% of my business was fixed.  Now I do not think there is anything wrong with an ARM and other financing vehicles.  However I do think you need to be educated on how they work.  I like to say there is not one perfect mortgage out there.  When I pre-qualify someone I will show them what loans they qualify for and what advantages and disadvantages over the other choices.  I would prefer my clients make a sound and intelligent decision.  The choice you make may be an adjustable or balloon mortgage, but at least you will know why you chose that. 

The Home Scouting Report is a tool I use to help shoppers gather information on homes for sale.  It allows you the consumer to take control of your search.  It lets you track homes and know before most agents when something on a home has changed.  For example it sold, it was reduced in price or it just went to pending status.

Well now you can also see everything that sold, between the last two months to the last two years, in the neighborhood you are interested in.  This is strong because it will help educate you before you ever put an offer in. You can also track your own neighborhood to see what is selling there.

Education is why my partners and I do this for our clients.  We understand that the average home shopper actually goes through what we call "an education phase".  You do not need someone shoving a property or mortgage down your throat.  You need to get educated and feel comfortable before you buy.  We think it is so important we let people use it EVEN if they are planning on using a different realtor or mortgage company.

Who are my partners?  I have teamed up with some of the top agents from Re/Max, Keller Williams, Real Living Realty One, ERA, Coldwell Banker and Mission realty.

If you would like to try out or get more information on the Home Scouting Report you can Click Here.

In the last four of five weeks Loan applications have been down.   This is according to the Mortgage Bankers Association.  We are seeing a reduction in refinancing because of the spike in interest rates.

The national average rate was reported at 6.57%.  The nice thing is my rates were at 6.5%.  Ha, I beat the national average. 

Luckily the last two days have worked in our favor as far rates go.  The mortgage backed securities have improved somewhat.  If it keeps up we should see some lower rates today. 

Inflation fears are still hurting us.  Mortgage backed securities do not like inflation. 

If you are waiting to refi until the market hits a certain rate, let me know.  I have a rate watch program that I can put you on.

Now that the actual mortgagee letter from HUD has come out, it does not look so bad.  I first said that the rates and mortgage insurance would change because of credit score.  We now know that only the mortgage insurance (MIP) will change.  The change is not very drastic.   Even at the worse case it is still better than HUD was a number of years ago. 

However we are still seeing FHA loans having risk based pricing by the investors.  Oh well guess we cannot have everything.

Or in english Hud is being hard headed.  Why does HUD keep trying to stop the down payment assistance programs?  They have been proven to be a better deal for home buyers than the low down payment conventional programs.  This means less chance of foreclosure.  Here is excert from Nehemiah.  Nehemiah is one the non-profits that make this program possible.

Nehemiah Corporation of America Responds
to Re-Submission of HUD Rule Banning Private Downpayment Assistance

The following statement was made on June 9, 2008 by Scott Syphax, President and CEO of Nehemiah Corporation of America, in response to HUD’s resubmission of a rule banning private downpayment assistance.

“It is astonishing that HUD has the temerity to resubmit its rule banning private down payment assistance, given that two district courts have thrown out the rule, downpayment assistance has received extremely strong bipartisan support in Congress and has been championed by a number of significant and influential consumer and policy groups including the US Conference of Mayors, National Urban League and Congressional Hispanic Caucus. It is clear that the priorities of Commissioner Montgomery do not lie with low to middle income families to whom he is sworn to serve.

At this time, it is critical that the consumer groups, policy makers, government and elected officials, real estate industry and those who serve first time homebuyers in this country stand up and fight this rule that will do serious damage to a particularly vulnerable group with little political capital at this crucial time.

Programs like Nehemiah’s are putting people in homes, generating wealth and strengthening communities. The government can not and should not be in the business of restricting access to homeownership. Montgomery’s proposed rule would shut down an enormously successful program and slam the door on hundreds of thousands of families and their opportunity for homeownership in this environment. Nehemiah and other supporters of downpayment assistance have fought and will continue to fight on behalf of those who are capable and deserving of becoming homeowners. We will not watch Commissioner Montgomery or HUD sever the only lifeline available to the low to moderate income families.”