[photopress:class.jpg,full,alignright]I like “The Fremont Troll” with people on it. Gives you a better perspective of the size of the Artwork. Grabbed this photo from my sister’s site.
This cool video of the Fremont Troll, gives you a pan of the area and better perspective with regard to where it sits in the Cityscape.
I was surprised to find that this Seattle Street Art piece was done in the early 90s. Thought it was done in the 60s or 70s, because of the Volskwagon “Bug” that the troll is holding and the Peace Signs painted on it.
Seattle has tons of cool Street Art…Eastside has some as well. I’ll have to ask Loretta what her whole “tour” of Seattle is. I know my bedroom is on the tour LOL. View from my bedroom, actually. Have to get that upper deck expanded with a spiral up from the lower deck. Until then…tour through me bedroom is on her list 🙂 Plus the students love to visit our music room with over 4,000 cds and talk with Kim about his 35 years in the music industry. We are “on the tour”. My sister’s a piece of work…runs in the family.
Their previous home was a 15-yr mortgage. She never once said she was looking for a 15-yr mortgage now.
Mark,
She also never said she was considering anything else. She only mentioned a 15 year fixed mortgage. The purpose of this post is to show how much more home one can buy using different amortization.
Happy Presidents Day.
I don’t think that suggesting 40 yr mortgage is a good advice.
Anonymous, can you explain why you don’t think a 40 year is good advice instead of simply leaving a comment so…well…anonymous?
As a Mortgage Planner, it is my duty to explain the many different options available to a borrower and to help guide the borrower to select the right mortgage for their personal needs and financial goals.
I don’t think suggesting a 40 year loan is good advice either. Unless, of course, the alternative is renting. Rhonda’s advice is dead on. Buying with a very long term mortgage is still a better deal than not buying.
I look at this from a different perspective. I would say that if you cannot afford the 15 year payment, you should not buy the house. Looking at your numbers, the 15 year payment would result in you paying about $123k in interest over the life of the mortgage. The 30 year payment would result in you payinf over $402k in interest. Thats insane. Your best bet? Figure out what you can afford in a 15 year mortgage and then buy that and then buy a new house after that is payed off. Suppose you get a new 15 year mortgage on house #2 after the first 15 years at the same rate and same amount (albeit unlikely)… you will then have a house at $576k vs the $427k of the 30 year mortgage and you have paid the same ammount over the 30 years. Obiously this has to take into account real estate market conditions, rate changes, ets. but you get my point…
continued … In addition, I think anyone who takes an interest only mortgage is a sucker. 1) you get a rate that is not as good as the one of someone who is actually building equity. 2) you will inevitably take much longer to pay off your mortgage… possibly your whole life. 3) Similar to my prev. argument… you may be getting interest only because you can’t afford the principal payment (meaning you can’t afford the house) 4) This is probably the category of loans that defaults way more than any other. That should be enough reasons to not get an interest only loan.
And a 40 or 50 year mortgage…hey!…lets make it 100…is hardly better than an I/O loan in my opinion.
All anybody needs to do to figure that one out is look at a loan amortization table…you don’t even need to know how to add really…you’ll be so shocked seeing how much goes towards interest vs principal during the first decade or two that you might start reconsidering.
You are making the assumption that the only way to gain equity is to pay down principal, which is not the case, and in the first few years of any loan, you are mainly paying interest anyway. And mortgage interest is tax deductible so if you are only paying interest, your payment is effectively 30% lower than what is coming out of pocket.
In addition, currently, interest rates are lower than appreciation, at least in our market. You can take the difference in payment between an interest only and a 15 or 20 year fixed rate and invest it in the stock market or some other type of investment that has higher return than real estate. Those who have any understanding of the basics in investing know that real estate is supposed to be, OVER TIME, a stable investment that gives returns at a rate slightly greater than inflation, say, between 5 and 8 percent. Stocks are supposed to return between 8 and 10 percent. Both have performed better than historical averages over the last 20 years. Eventually this will no longer be the case as I think any intelligent person knows. What NO ONE on this board, not the realtors or the bubble busters or any of us, knows, is what is going to happen when the market factors that are underlying the run up in both stocks and housing cease to be the case. For instance, if China calls in our debt. But you have a better shot of coming out ahead if you have assets (i.e., real estate and other investments) than if you don’t. The thing about investments is, you have to manage them. You have to put the money where you think it will give you the best returns. My husband and I right now feel that the best return on our investment is in the stock market, so we would way rather be on an interest only loan and invest the difference in other ways, to get a 15 – 20 percent return, versus sock it all into our home for a historically normal 8 percent return.
That all said, we would not be on an interest only loan if we did not: 1) have more than $100,000 in equity in our home (and we have way more than that, and don’t think we will be losing it any time soon), 2) if you are using I/O to get into a home you otherwise could not afford, or 3) if you do not maintain your credit in such a way that you can refinance if necessary, and 4) if you are not a financially responsible person.
You also should be a person fairly comfortable with risk. Because there are some risks involved, and it is up to the investor/homeowner to manage that risk. Just as it would be with any other kind of investment. Historically stocks are more risky than housing, yet, the bubble people are not on here flipping out over the risk inherent to investing in stocks, yet, you cannot live in a stock. And also remember that the risk inherent to an investment strategy is directly proportional to its return. Higher the risk, the higher the return. So it has always been, and so it shall always be.
Besides, you can always make more than the minimum payment, all of which goes to principal, if you so choose.
Now at some point you do have to actually pay for your house, but the strategy is similar to what is recommended in the stock market. Younger people who are far from retirement can take on the risk of a more volatile investment or mortgage strategy, whereas people who are getting closer to retirement should be looking to minimize their risk. One size, however, does not fit all. We would all do well to remember that.
BTW–Interest only is not the category of loan that defaults more than any other. You are assuming that Interest/Only is synonymous with sub-prime, which it is not. Lots of people–I would even venture to say most people–on Interest/Only have great credit and are financially responsible. “A Paper” as they say in the industry. Now, if the Interest only loan is also a sub-prime, well, then it probably is a little more of a sketchy situation. That probably is a person who is shoehorned into a loan and a home that they can’t afford and really should just be looking in a different price range. Or, maybe taking a year or two to clean up their credit.
The main thing on loans is–and this is pretty basic–you have to make the payments on time and in the agreed upon amount. The loan does not cause you to default. Not making payments causes you to default. Even if you are underwater on your loan, if you make payments, you won’t default. And eventually, over time, if history is any guide at all, the water will rise and lift your boat IF you just keep making the payments.
The choice of financing is all about suitability. For the gentlemen above a 15 year fixed may be your financing of choice, but for someone like myslef I would never consider one. Your goal is to pay off the loan because you hate the thought of paying all that interest. For me my goal is to pay off the mortgage on my balance sheet. In other words having a side account(s) that is equal or greater to the amount of the mortgage so that it then becomes a strategic decision to pay it off. Even then I would chose not to pay it off for several reasons. I’m at the opposite spectrum in that I personally have a deferred interest mortgage and have chosen to make the minimum payments. However, I’ve qualified myslef and benchmarked my cash outflow to a fully amortized 30 year fixed. I make the minimum payments and take the difference I would have otherwise buried in my home and invest it into a few different asset accumulation buckets. Over time I’ll out earn the cost of the mortgage, maintian liquidity and maximize my tax deductions. My focus is on building wealth and not paying off debt. They are two different things. Every dollar you give back to the bank is a dollor you did not invest. Do you want wealth or do you want to be debt free? I know a lot folks that are debt free but have no money.
Who’s the sucker? Think about it. If I lose my job, if my house burns down, if there is a natural disaster, if I can’t work due to disability, if the housing market declines, etc. You name it, would you rather have your money located in your home or outside the home where you have choice and control? Look at what’s happened to the Katrina victims who to this day are still fighting it out with the insurance companies.
Example. About a month ago a vendor came into our office to drop off some documents and asked about rates. He proudly said he had a 15 year fixed at 4.75%. I ran out the door to tell him I thought a 15 year fixed rate is often a mistake. He came back in and we had a conversation. Well, last week he called me and told me he had lost his job. He had very little cash and some debt. Can I help him? I can’t tell you how many time this has happened over the years. Focus on debt elimination and not wealth creation. When we need access to the equity the most we can’t get it.
Of course my approach does not work if you are not disciplined and comsume the money to buy jet skis. I’m a spender by nature and it was very hard to do auto deductions, however the benefits have been very good for me and my family. Long term, I know we’ll be better off. Remember liquidity is King!
I definately agree with the value of taking a i/o for the purpose of investing the money elsewhere. However, the original reason the author brought it up was as a means of affordign more house. Here is a simple formula. Get and I/O mortgage only for the ammount of the balance that you already own..1) Own your homw? Great! Go ahead and get it. 2) have $100k in equity? sure, get a i/o for $100k…. 3) have 20% down and want a mansion? NOOOOOOOO
With this post, I was really being very basic. My only point was to show how much more you can buy with the same payment factoring in different amortizations.
Once you factor in tax benefits and if you did interest only and reinvested the difference (etc.)…you can really make an amazing difference in your (or your clients) life. It does come down to “suitability” and comfort levels. Many are not comfortable with an interest only (especially considering the bad press the loans are receiving when they are lumped in with the neg. am. products) or 40 year am. mortgages. However, these options are available (again…I’ll sell against the neg. am. loan all day long) and consumers should understand them so they can make an EDUCATED decision on their finances.
A mortgage is so much more than a payment for housing on a long term debt. If used properly, it is a financial tool.
Some people cannot handle that responsibility, or for some, it makes them uneasy or nervous…they should maybe stick with a 30 year fixed.
I have had several clients with 15 year fixed mortgages with goals of paying them off…having to refinance because they cannot afford that mortgage and their debt structure. 15 year fixed mortgages cost too much for the average folk. Do a 30 year mortgage and pay the difference in payment towards principle, when you have the extra cash, and give yourself a little wiggle room when you need it.
JohnR
I think what Chik and I took umbrage to was your assertion that “anyone who takes an interest only mortgage is a sucker.”
If you have 20% down, interest only isn’t that risky. The situation, with 20% down, is basically the same as my $100K in equity. It reduces the risk that you will end up underwater on the loan–owing more than it is worth. O% down, on interest only….well, that’s a little iffier.
Rhonda –
Education is an admirable goal.
In that vein, could you explain in detail what happens with the monthly payments when your most popular I/O product (what that is would be interesting in itself – is it really 10 years?) resets?
Feel free to use the example above. Assume appreciation 1% over inflation, as has been the norm in our country for the last century, making refinancing difficult. My guess is I’m being generous.
Also, using the above example, could you estimate the annual tax benefits of the mortgage in a household making 80K/yr, assuming no other significant deductions?
Thanks.
I read the article to mean these people are in their late 40’s or early 50’s. Unless they plan on moving again, they only have 15 years left to pay off a mortgage. Given the trouble they’ve had finding jobs, and apparent lack of savings, a mortgage that would have them working into their 70’s or 80’s is probably not a viable option.
For them, Seattle is not affordable.
John,
My reply to your post is to long to publish here, so I placed it on my blog. The short of it is that you need to look at many more actors than just interest paid.
Biliruben,
Of course…except, in Seattle, I just can’t fathom using 1% over inflation because we are not “the norm in our country”. We have been lagging behind other cities. I will meet you somewhere in the middle and use a conservative (in my opinion) figure for SEATTLE of 7% appreciation for this exercise. Sorry Biliruben, for Seattle, I don’t think your estimate on appreciation is generous.
These figures are based on the sales price of $320,000 and loan amount of $256,000.
With the 30 year fixed mortgage 10 year interest only, after the 10 years the mortgage balance at that time is amortized based on a 20 year amortization schedule at that rate (you can do a 15 year interest only too, that will be amortized at 15 years of the mortgage balance after the first 15 years).
For example, if the note rate is 6.125% (APR 6.209) and the loan amount is $256,000, the payment would be $1306.67 (interest only). After 10 years, assuming they’re keeping the property and they have not refinanced, the payment would convert to a 20 year amortized mortgage based on the balance. If they elected to not pay anything toward principle, that payment would be $1852.57.
The interest rate remains the same.
Let’s also consider, during these 10 years that this couple may also be earning money on investments (investing the difference of the 15 year to the interest only pmt.), building their retirement plan and perhaps have received increases to their income.
This couple is actually not married, but we’ll assume a 28% tax bracket (and…I’m not a CPA).
Their first full year tax savings at a 28% bracket (not including real estate taxes…just factoring mortgage interest) is: $15,680. That’s $1306.67 a month they are LOSING paying rent.
If the property appreciates at 7% a year, that would be $22,400 additional lost monies to this couple in the full first year alone. That’s another $1866.67 per month!
So far, they are losing $1866.67 plus $1306.67 per month.
The 15 year fixed mortgage will cost $802 more per month than the 30 year fixed/10 year interest only. They could invest this difference in an interest bearring account.
If she keeps with her line of employment (which she is having difficulties with) they should consider a mortgage that would provide them with more flexibilty. A 15 year fixed rate is one of the least flexible.
Biliruben is going to love this…why do they have to pay off their mortgage?
I’m so sick. I just typed the longest comment regarding Biliruben’s comment and it’s LOST! ARRGGGHH.
I’ll try to remember everything I posted (maybe it was just too darn long).
First off, appreciation in Seattle is not 1% over inflation and Seattle is not like the rest of the country. We’re playing catch up with the other big cities. I’ll use a figure of 7% which I still feel is very conservative…hopefully we’re meeting in the middle somewhere for our exercise. Other assumptions for this are a sales price of $320k and loan amount of $256k and using the rates I quoted on Friday.
With the 30 year fixed/10 year interest only mortgage, the mortgage is amortized for 20 years (the remaining term) based on the loan balance at the 10 year point. If a borrower pays principle, the new loan amount will be based off of that.
The I/O payment would be $1307 per month for 10 years. That is a difference of $802 per month less than a 15 year fixed rate mortgage for the same loan amount. Once the loan adjust to a 20 year fixed mortgage in 10 years, assuming they have not paid towards principle, the payment will be $1853 per month (still $256 less than the 15 year fixed monthly payment). If these are savvy individuals, they could be investing the monthly difference in an interest bearring account. $800 bucks a month could add up nicely.
This couple is not married, but I will continue with this as if they were. Assuming they are a 28% tax bracket, during the first full year, they would have an approx. benefit of $4390.40 ($365 per month). This is not even factoring in deducting their real estate taxes.
If their home appreciates at 7% annually, during their first full year, that would be $22,400 (or $1866 per month).
Owning a $320,000 home would provide them financial benefits of approx. $2231.00 per month.
Since she’s had trouble finding jobs…a 15 year fixed mortgage is the LAST thing she needs. It is one of the least flexible mortgages available. With an interest only or longer term amortized mortgage, they have the option of paying what is due or paying more towards principle to reduce their mortgage term when they have the cash available.
Okay… I have typed a LONG response to Biliruben’s comment twice now. Apparently I’m going into the spam bin? I guess I’ll have to do a new post as well in order to answer your excellent questions! I’ll let you know when it’s ready. Sorry. 🙁
Pingback: freemortgageadvice.info » Blog Archive » 15 VS 40, not as bad as you might think
The longer term may reduce the payment in the short term, but as others have pointed out the total interest paid will likely be higher unless we have an inverted yield curve market at the time of loan rate lock. Longer term loans typically have higher note rates to compensate investors for higher maturity risks. Higher notes rates usually mean higher effective costs of capital or higher effective interest rates to the borrower. And, I think it is more complicated. More variables will impact buy versus rent.
To effectively evaluate the renting versus buying the after tax cash flows of each alternative have to be analyzed. The alternative with the highest Net Present Value (NPV) at the borrowers discount rate is the best alternative. In Seattle, purchasing tends to be the best alternative for a variety of reasons particular to our market.
What is the borrowers after tax opportunity cost or yield on investment? The opportunity cost of alternative uses of capital will impact the borrowers decision to continue renting and invest the difference or buy or buy at different costs of financing and invest the difference.
What is the borrowers tax rate and will they benefit from the mortgage interest deduction? In 2005 Congress considered doing away with the deductibility. Bush’s tax-panel reported from IRS data that less than 30 percent of American taxpayers benefit from the mortgage-interest deduction.
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
I sent Dustin an email to see if he can find my last two attempts before I start a new post to answer Biliruben’s comment. I know he’s got to be very busy with his seminar in Seattle tomorrow…which I plan to be at. I’ll be back after the seminar to revisit this…if not as a comment somehow retrieved, then as a new post. Good night! 😉
BTW Todd, I really like your post on your blog! Great job and thank you!
I will agree that Seattle is not a great city to be living in if you are retired or near to retirement because the cost of living, including housing and therefore taxes, has increased so much and seems likely to continue to do so. Plus, everything else is more expensive here too. That is problematic for those on a fixed income, or those whose income is not increasing at a rate faster than inflation.
I am sympathetic to that issue but the reality is that people often find themselves having to make geographic decisions based on economic factors. You have to go where the jobs are, and where you feel you can afford to have a decent standard of living. If you don’t feel you can do that in Seattle then you have to buck up and make the decision that is right for you. Which I guess is where Ms. Thomas in the article that started this whole thread finds herself.
The other reality is that if you are in your 50s with no savings you WILL be working until you are 70 or 80 anyway regardless of if you have a mortgage or not. At least if you own something, you can do a reverse mortgage. In spite of their downsides, RMs are an option that keep folks with no other financial resources in their homes and with food on the table. Not that I am recommending them, but if you have no money, and you can’t work and you have some equity in your home, they are an option.
If you own nothing and have no money saved and aren’t willing to consider living anywhere but here…well, that is a worse situation to be in when the day comes that you can’t work anymore.
All this high-powered intellectual economic advice is just overwhelming to a rube like me, who only studied math and finance.
Just to make sure I have it straight, could one of the Professionals(R) here on this blog tell me if there is any sort of market in which it’s _not_ a good time to buy?
Thanks so much! I’m getting my documents together now so I can get my 40 year mortgage. I think if I stretch, I can get on the equity rocket ship and it’s up, up, up!
Thanks so much all,
I’m hoping someone can tell me what everyone is successfully investing in, with their extraneous cash flow due to the IO loan.
Stocks? Bonds?
I was personally thinking about investing it in more real estate – I just want to get some more information to make my spreadsheets work out:
What happens (if the unthinkable occurs!) and housing values were to take a downturn? We know this basically can’t happen (except for in the late 80s/90s, And the early 80s, and parts of the 70s), but just hypothetically if it was even possible — what would happen if I had to sell?
It appears my lengthy comments from last night cannot be saved. I’m leaving this morning for Dustin’s seminar in Seattle. I will be back this afternoon to try leaving my comment for Biliruben again. Third times a charm?
Pingback: Seattle | 15 Year Mortgage Too Pricey for Normal People
I can’t believe that a mortgage planner would be writing what they are. The strategy that you are talking about is futile.
Let’s say today I plan to buy a house with a 30 year mortgage. Great I can. But the rub is that if I can buy a house with a 30 year mortgage so can others. Then prices increase and people start thinking about 40 year mortgages and soon we will be with 100 year mortgages.
The problem, and this is something that Housing Panic blog has stated in the UK is that this is a financial house of cards. People are living beyond their means and it will mean that housing will crash.
I remember when I was a kid in the 80’s there would be shows on how people would be oh so happy when they paid off their mortgage. As things are going now this is not going to happen for most people. And then I ask what do they do when they retire?
Thanks, Rhonda. I know from experience that can be frustrating!
I’ve had it happen on this blog before, and I realize now why it happened. I used a “less than” symbol, and your HTML is on, so it was looking for code it never found.
Hope that helps.
Thank you, Biliruben. I will be back this afternoon. I want to leave you a detailed response which I can’t do in this short of time before the seminar.
Christian, 30 year mortgages have been the single most popular term of mortgage for many, many decades. Not only did they not cause a housing crash, they created massive wealth and the highest ownership rates in history.
In addition, they are reality. You are correct that they help drive prices up. But to reject them just means you are the one who misses the appreciation train.
Rhonda Porter may be nuts. Literally, nuts. She completely ignores that for each additional dollar the “longer term” or “interest only” mortgages initially facilitate, the total compound interest debt load over time increases exponentially.
She’s not highlighting how much 10 or 15 more years of $2100 monthly payments would cost – not just in real dollars but also forgetting what that $2100/month could alternatively EARN in interest or investment return.
Plus, her advice is just insane if for any reason a person is buying into an overpriced housing market or into a market that will not appreciate much in the next 10 to 15 years.
Take the example of the person who wants to resell in 2 to 3 years because their circumstances unexpectedly change. These longer term loans or interest only loans could crush those people if they are like most people and on a tight budget – if they have to sell in a few years and home price appreciation has not occurred in that time period.
So clearly, my advice is to not listen only to Rhonda. First, talk to 2 or 3 other lenders. Then, more importantly, talk with 2 or 3 other financial planners to get a real sense how to make the best return on your asset dollars. Don’t just listen to a lender who makes more money proportionately based on how well they can persuade you to increase your total debt load through longer term or “interest only” options.
Pingback: What Gives With Interest Only Being Better? on InvestorGeeks
Hi and thank you to our gracious hosts at this blog. What a fabulous resource – I love the dialog and the insight into what’s really going on inside the industry.
I haven’t seen a reply to my earlier questions yet — could someone give me some pointers?
It is so interesting.
Rhonda is saying–“My only point was to show how much more you can buy with the same payment…”
In other words, you recommend a buyer to buy maximum with the same payments. do you seriously believe that people who go for 40yr mortgage, save money for investing?
Rhonda can explain some relationship between I/O loans and increasing forclosures in our state.
I think, lending practices like these have got us where we are in now.
I’m back from my seminar and Dustin saved my original response to Biliruben as well as my second attempt. I’m not sure when my responses to Billirube resurfaced (if it was after some of these other comments or not).
Mark:
“So clearly, my advice is to not listen only to Rhonda. First, talk to 2 or 3 other lenders. Then, more importantly, talk with 2 or 3 other financial planners to get a real sense how to make the best return on your asset dollars. Don’t just listen to a lender who makes more money proportionately based on how well they can persuade you to increase your total debt load through longer term or “interest only
S: my post is above. I just returned to my computer. 🙂
anonymous and all:
I am just showing possible different options available. They may not be the right loan for you. It is up to the borrower to make a decision. I do not throw everyone into an interest only loan. How many times do I have to state that?
Interest only loans are not for everyone…neither is a 15 year fixed.
The interest only loan that I’m referencing is a 30 year fixed with 10 year interest only and the scenario is 20% down. I highly doubt this is they type of interest only loan YOU are referring to with regards to foreclosures. I am guessing you are referring to 80/20 SUBPRIME loans? If you have more information that you would like to share on that topic, Anonomous, why don’t you?
I will ask my CFP. Since they’re certified, they’re way more qualified to give opinions on when to buy assets than some random blogger.
So what about you all? It sounds like such a no-brainer to get an IO loan to get on the equity ladder – and invest with the savings. So what sort of assets did you buy? Just so I can benchmark myself – what were your returns last year?
S-
It’s safe to say personal finances and fiancial goals and your personal finances and financial goals are different. They’re individual.
I never said it was a no brainer for an IO loan.
I think I’ve finally struck the real goldmine:
Get people to buy housing assets that they can not afford, by offering them exotic financing!
I’m still going to go ahead with my 40 year mortgage plans, as advocated above, which is smarter than not buying at all.
But now that I know the real deal, I’ve got my new career laid out in front of me.
I might moonlight giving seminars, as well. Look for me out there, you guys! Wish me luck!
S. Good luck with your seminars and your new career! 😉
All the loan programs I have referred to on this post are Freddie Mac or Fannie Mae–hardly exotic.
Thanks for taking a stab, Rhonda.
I hope you don’t mind a few comments and questions.
First, what is the most common I/O loan period for? Are you really able to get it at a similar interest rate to a 30-year fixed?
Second, the standard deduction is 10,300 and going up over time. That means that the tax savings would be $5380/yr or $449/mo, and that is the max it would ever be, all other deductions aside.
Third, you could very likely still rent a 320K place in Seattle for less than even the monthly I/O payment, and you could take the 64K down-payment and invest it.
Fourth, I think we have a greater chance of losing 7%/yr in housing value over the next 10 years than gaining 7%. We are right that we are, and generally do, lag other cities. We are going to be chasing them down very soon. There hasn’t been any appreciation at all since last May, and I think there is a good chance we will be seeing YOY declines by the end of 2007. That’s just my opinion, but I am willing to put my money where my mouth is (and have). Are you? Would you like to make a little wager? Email me if so.
Thanks again for your perspective.
Hi Biliruben,
Finally…you’re back!
Your email address isn’t available since your name is “blacked out” (without a link)…that would make it pretty tough to wager a bet with you. 😉
Bottom line is that none of us have crystal balls into the future. We can only make educated guesses. And we all come from different views and have our own opinions and seem to have varying ways of expressing them.
With your fourth point, of losing 7%, is that after gaining a huge percentage? You would still be coming out ahead. Where are you getting your information about no appreciation since last May?
In all my research, I cannot find anything to support that…however, if you point me in the right direction, I’ll check it out. You referenced using 1% plus inflation for appreciation on comment 16. I refer to the Core PCE (currently at 2.2%) to measure inflation. I just have a hard time buying that our appreciation in Seattle proper will be 3.2%.
PS: Thanks for offering constructive counterpoints and for not calling me nuts! 🙂
Sorry, it looks like I missed one of your questions. The 30 year fixed 10 year interest only is very popular and there is not a huge difference in rate between that and the 30 year fully amortized. The five year interest only ARM was pretty popular, but with the inverted yield curve, their is not as much difference between rates. I’m also noticing that many buyers are planning on staying in their homes longer. This seems to be a new trend. Previously, many buyers, especially first time home buyers planned on selling in a few years and using the home they were purchasing to “get into” the market. Any suggestions I make to clients for their mortgage absolutely factors in the length of time they plan to stay in their home. It’s a question I ask everyone before I provide a good faith estimate. Hopefully, if I’ve done my job right, they won’t need to refinance.
Sorry, Rhonda. I’m taking care of my 9 day old. Demanding little tyke!
Straight from the NW MLS
Median Seattle (proper) prices for closed homes for 2006
415K – May
415K – June
420K – July
405K – August
400K – Sept
420K – October
425K – November
420K – December
380K – January, 2007
Sorry to be the bearer of bad news.
Trade ya, I have a 13,14 and 15 year old. Demanding little tykes!
I’m not a real estate agent… but I have been in the real estate industry for just over 20 years (7 in lending and 14 in title and escrow). I would view some of that as normal trends (I’m saying this without seeing all of the stats–I’ll check into this more and give you my “stab” at it). Historically, transactions slow down during certain times of the year.
Congrats on the newborn Biliruben!
Biliruben-
Do your stats provide for just residential or res. and condos?
-Tim
Thanks, Tim. Very exciting!
Res + condo, because I was having a hard time finding the splits for some older months.
I’d love to see them stratified, if someone with a password has access to the complete data.
I don’t want no stinkin’ condo!
I think we should call upon the real estate agents/realtors reading or writing for this site to provide us with some real numbers.
Hey…I had a great condo in Des Moines, WA…I wish I still had. It has appreciated nicely.
13, 14 & 15 ?!?
Now that’s not the kind of spacing I would have chosen!
I lived in a Fremont condo for 9 years… of course I didn’t own it. $700/mo, 2 bedrooms, no hassles, steps from 20 bars, 20 restaurants and 2 grocery stores.
It was pretty sweet. The assessments were killing the owner, however. I even raised my own rent a hundy, because he was too nice to ask. He finally sold it our from under me after maintenance and the effects of a shoddy building got too expensive a few years ago. He probably did alright, but he bought it 15 years prior, and a low-point in the market. Appreciation probably almost paid for his costs. Maybe.
Happiness is a quarter acre and a mortgage that is less than 20% of our take home.
The 14 year old is naturally mine and the 13 and 15 year olds are my husbands. 🙂 Still carries all the drama in our home filled of puberty. (Sounds gross, huh? I’m thinking I can do a whole ‘nother blog on being a mom of teen and two step-teen-kids…but…nah…somethings are better left unsaid or unblogged).
I wish I had more clients like you. Yes, some lenders are the “bad guys”…maybe many are. This is not a career I selected…I use to pretty much detest most LOs from being in title/escrow…that’s a whole other story too. I care very much about my career and helping people with mortgages. I have been amazed at tone from some of the commenters to this post (not you, Biliruben) as if it’s my personal fault for the predicament many people are in (subprime 80/20s) . It makes me sick and I worry (which is why I did NOT want to be a LO). You would not believe the calls I get…people who have a negative balance in their checking account wanting to buy a home…of course, I can’t (and even if I could–won’t) put them in a mortgage. I try to offer guidance. Is it all the Dietech commercials that make people in tough positions think they should have a mortgage? It’s not your local mortgage brokers or bankers.
I’ve had a glass of wine…so I shouldn’t blog anymore tonight! 😉
20% of your take home…what amortization are you basing that on?
I don’t understand it either. I’ve had two close friends who I’ve lent money to just to make the bills in the recent past talk to me about buying a house. I tell them to take the difference between their rent and what they calculate their mortgage will be, and put it in a savings account for a year. If they can do that, then they can think about a house, and they’ll have a bit to put down for a deposit to boot! They can’t do it.
We’re in a 7-1 arm at 5%. We bought a few years ago while my wife was still in school, and made sure to buy a modest house so we could get by on 1 income. It’s nice to now have the flexibility with the wee one. I’m trying to talk her into waiting to go back to work. Because we can.
It would be nice to have a bit more space, but will be fine here for another 2 or 3 years.
I know too many people that would lose their house if one partner lost their job. It shouldn’t be that way.
You did it right, Biliruben. You and your wife considered your future and planned with the proper mortgage and home. Why do you think your friends lack the dicipline to do that?
I’m going to be at my first class for the new mortgage brokers licensing this morning. So I won’t be available to comment until later today.
I don’t actually think it’s discipline, primarily, though that may be part of it.
I think they don’t make enough money to own a house. They are both about at the median income with no partner, and that just doesn’t cut it these days.
I’ve been following the posts and thought I’d offer a little perspective from north of the border. In Canada, many of our lenders are a little tighter with loans, and until recently, have always required 5 % down as a minimum. Depending on the size of the mortgage you require ( percentage wise) they will also require a CHMC (Canadian Housing and Mortgage Corporation), mortgage insurance – usually 1% – 3% above posted rates to insure a high risk mortage.
If you want to buy a rental unit, you would normally have to provide a 25% portion of the purchase price. Principal residence mortgage interest rates cannot be deducted from income taxes.
As a result, up here in the frozen north, we are obsessed with paying off our mortgages as quickly as possible – except perhaps in the case of rental property which has a tax deductable mortagage interest.
The result, for the most part, has been a steady 5-7% growth in real estate values ( except in the resource rich west which has seen an annual appreciation of 15-25% annually for the last few years)
The reports that we get from US TV stations keep telling about the US real estate market going into free fall because of changing population demographics, IO loans, and market speculation.
What part of the reported depreciation of the US housing market has been caused by over zealous lending practices, and perhaps folks getting into a market that they really probably shouldn’t be in?
I know it’s the dream to own a house, buy with a negative savings rate for more and more people, can it be reality?
Food for thought from your friendly neighbor to the north
Thanks Friends from the Frozen North. Some states have had much higher forecloser rates than others. I would say it’s more 80/20 subprime loans that are factors, especially when combined with interest only.
There has been talk of the mortgage interest rate deduction being eliminated in the states…this has not happened as of yet.
Another simple reason for owning a home is that it is yours to keep, make improvements too, etc.
I’m not sure that Seattle is too PRICEY for normal people. I just think it is too RISKY for normal people.
When you have to look at 40 and 50 year mortgages to afford basic shelter, something is outta whack. Much like people paying off their credit cards with their mortgage – it is a symptom of an underlying pathology of debt, stupidity and desparation.
The stupidity and desparation is always highest at the top. Debt loads usually peak around the tops of financial bubbles/booms. That is what bear markets are for – crushing bad/stupid business decisions, wiping out debt, and repricing assets.
So, where are we in the cycle? (not where do we HOPE we are in the cycle).
Enjoy your pricey assets, high debt loads and zany financing schemes. Smells like a top to me.
All the best,
Eleua – providing a “center’ for real estate professionals since 2006
Hi Rhonda;
Thanks for your response. I couldn’t agree more that a house is a great asset to have and to own in the long term. We all have to live somewhere, right? But is home ownership the end all be all we’ve been led to believe? The thing about houses is that there are really two parts to the investment, the land tends to appreciate, while the house itself tends to depreciate. ( Remember that old saying about land – they’re not making any more of it ). In most cases the house itself tend to depreciate – of course not at the same rate as a car or computer, but let’s face it, air conditioning units break down, the roof must be replaced, and as someone who owns several rental properties, I can tell you that there’s ALWAYS something to be fixed.
Now some readers may say, my Uncle Bob bought a house for 15K in 1956 and now it’s worth 945K. The truth is the house isn’t worth it, the LAND is the investment. Old Bob probably spent many times the original 15K on upkeep, additions, municipal taxes, yard improvements and so on.
Up here there seems to be an almost primeval need to have ownership out right of a house. Maybe it has something to do with our cold winters, or the frontier attitude of, well at least they can’t kick me into the cold, that drives people to secure their houses as quickly as possible. Well, that and the fact that the interest in non-tax deductable.
That said, there are certain times when certain folks would be better off renting, hands down.
The key is to have the discipline to invest the extra dollars that you might otherwise be dropping into mortgage/interest payments into a solid investment vehicle.
For example, up here you can’t claim the interest on your principal residence, but you don’t pay any tax when you sell it, and if you sell any rental properties, you only pay capital gains. For example you buy an investment house for 300K, sell it for 500K- your capital gain would be 200K – you would then pay capital gains at your marginal tax rate on 50% of that, so if your marginal tax rate was 20%, the actual taxes on the disposition of the sale ( gain of 200 K would be 20% of half your gain or approximately 20K on a 200K gain) – now if you can offset that with a capital loss in the stock market or other investment vehicle, you would then pay no tax on the disposition of the unit.
The other option of that investment would be to invest the 300K you would have put into the house into the stock market ( let’s assume that there was no mortgage). Depending on your stock investments and fees, there really is no depreciation on the investment, and if it’s a dividend investment or qualifies for capital gains, you would be taxed at the minimal rate ONLY at the disposition of assets, plus you could draw out income in the form of dividends, which are taxed at a favorable rate.
So, in the example illustrated, invest the cash into solid blue chip companies with a proven dividend, use the income from the funds to pay your rent, allow your capital to appreciate with the value of the stock, and you’ve got liquidity if you need it.
Of course this scenario doesn’t work for everyone, but the point I’m trying to make is that home ownership may not be for everyone, depending on where they are in life, the liquidity they desire, and whether or not they want the hassles of ownership. It truly is a double edged sword, and while you can’t live in a stock, it also doesn’t usually get termites, or sewage back up.
My two cents
A definate advantage to renting is that when you have termites or the sewage backs up…you call the landlord! 😉
Here is a question for any real estate professional.
If my annual rent on my home is $20K, and the owner’s payments are $40K + $2K in management fees + $3K in maintenance, and the house just lost $40K in value, how much did I “throw away” in rent?
Hi Eleua,
I like your questions. I have a question for you. In the above example (comment 68) the house just lost $40K in value. Over the time you’ll spend renting, wouldn’t the house value eventually come back up to where it was when the owner bought it?
I remember purchasing a home in 1991. We purchased at the top of the market. The appreciation rate died for a while but eventually it did come back up. but it took a LONG TIME to come back up.
I would think that if a renter was going to buy, he/she would choose a mortgage payment not too far over the $1666/month. But you and I both know that doesn’t happen all that often.
The owner of the home in that example, is losing money. Either a nice tax deduction for someone who needs a tax deduction, or a financial drain that will need to be unloaded at some point.
I think it would be totally cool to look at graph or maps showing average rents for a zip code, compared against average mortgage payment for that zip code, and then follow that graph for several months, along with a side chart showing an increase or decrease in late payments or defaults.
Answer to your question: zero.
Whoops, that last comment was from me, not Marie, who was using my computer earlier today. Apologies.
Marie/Jillayne,
Many of your points are true, but some are false. You assume an upward bias to real estate. True for the recent past in this market, but not necessarily true for the future. The house I live in appraises for $750K, but sold for $260K back in ’94. There have been no improvements to the property in the interim.
What is to keep the price from drifting back down to the mid-90s levels? Sure, that hasn’t happened in some time, but it doesn’t mean it won’t. Keep your eye on the subprime sector. This is the “bird flu” of the finance sector and will spread to non-subprime lenders and general banks in the not too distant future.
If I save $30K in PITI by renting, I would need to make an additional $100K to have the taxes offset it, provided I could deduct it all at that level of income. Add in the $40K that the owner rode down in value, and I need to make a bunch more, as that is not deductable for ME. Taxes are the least of my concern when dealing with numbers of this magnitude.
The business model of losing a bunch of money every month, only to make it up on the sale or a HELOC is fundamentally flawed – just like subprime lending. It will end in a bitter river of tears.
I agree that a graph of rents vs PITI for zip codes would be very instructive. I think just watching the prices vs rents is easy enough, and for most of what I see, rents are 40-60% of what PITI is. That’s 40-60% of speculative premium charged to owners. That premium will vanish once the housing market starts downward in earnest. I would also submit that a ‘discount’ will be applied to housing in the event it shows itself to be an illiquid, loser investment. People would rather rent, and avoid the capital loss, maintenance, and transaction costs.
Add in the fact that many banks will fold in the impending bust, and you will have the zero-down, NINA loans as nothing more than an historical oddity – much like parachute pants and the Pet Rock. When banks demand a genuine 20% down payment, which is directly taken out of the borrower’s skin, I would submit that prices will crash. It won’t take much for a universal destruction of equity to take place – 15% +/-.
The question I asked was a trick question. You got most of it right, as I submit that I lost nothing by renting in that scenario. From an accounting POV, if you look at the renter/landlord as a zero sum, then I had my living expenses subsidized directly by $33K/yr (tax free), and the owner choked up an additional $40K. Should I end up buying the property, that money would directly flow to me (tax free).
I enjoy our little talks. Please keep your comments coming.
E
Great Article! It never seizes to amaze me the mindset some people have when it comes to financing. It’s the same mindset that their parents and grandparents enstilled in them. They tend to want to pay off their mortgage as quick as possible and live “debt free”. What they don’t look at are all the benefits of having a mortgage. Times have changed and in today’s market and for some people, the 15 year fixed mortgage just doesn’t make sense.
I love the article and what a great way to open peoples eyes!
“What they don’t look at are all the benefits of having a mortgage.”
From a consumer POV, what exactly are the advantages of being in debt beyond many years of gross income?
Hmmm…every month I have to pay a bunch of interest to a bank. The interest would be nice to have back, because I could use that money to send Jason and Jennifer to college, but my banker gets that benefit.
I can’t tell my boss to KMA because I have another 25 years of debt on my house that I need to keep paying. I would really like to move the amount of money I have to make down about $50K, so more job opportunities open up, but I still have to grind it out in traffic to come to the Fun Factory and make my boss rich.
I guess the tax bennies are good. Although, when I ran my numbers through Quicken, Jason, Jennifer, and Olivia are enough of a tax write off to make the standard deduction pretty attractive. Sure, I save an additional $350 by using Schedule A, but is $45000 in interest and taxes worth it? Hmmm…$45K vs $350? Let me think about that while I am sitting in traffic on my way to Initech to work on TPS reports, so I can make enough money to pay the bank to live in a house that is probably going to lose value this year….
I’m sorry, but what about a mortgage is good?
With the exception of the often elusive tax bennies, would a ‘mortgage’ on my automobile be just as beneficial?
Brock, thank you for your comments.
Eleua, I don’t understand comment 74. And, if you’re happy renting, that’s fine for you and whoever else prefers to rent. It’s great we all have options.
If everything happens, banks folding and foreclosures left and right due to all the NINA loans…everyone will have to rent. With fewer rentals (the bank will have repoed all the homes), won’t rents increase? At least with the 30 year mortgage, the payment will remain the same and the home owner has control.
Just a thought. Thanks for your comments. I love the TPS reports. I’ve been working on mine today which is why I have not been available to blog so much.
The ‘mortgage’ on my car is nothing more than a loan. Is that good? Yes, I know that since ’86 you can’t write off interest on a car, but you can on a house – for now.
Fewer rentals? Is the bank going to eat all those homes? Those homes will be puked back onto the market as rentals under new ownership. Yes, more renters (destitute renters at that), and more rentals. I doubt rents will increase, as the available stock of living units has exploded during this bubble (some areas more than others).
Bank sales and foreclosures won’t create more home owners, or people looking for a place to live. It just changes the status of those people, the ownership of the house, and the price of the house.
The homeowner only has control as long as he has a fixed payment, his taxes remain stable, and he makes his payments on time. It is doubtful that people will be enthusiastic about paying on an asset that is below what they owe.
I see the price of home ownership going down (function of price drops) and rents going down as well. When you have vacant houses, you drop the price until they are filled. When you have too many vacant houses, you run into all sorts of problems. Rent increases are not one of them.
I’m not a die-hard renter. I would rather own a sanely priced home. Since none have been available for over 3 years, I’ll gladly rent. It’s not a religion to me, but it seems that home ownership is a religion to most. It is the articles of faith for that religion that I challenge.
I like this forum because all of you are the clergy.
That’s the first time I’ve been called that! 😉 I have responded to past comments on this blog that home ownership is not for everyone and no one should buy a home that is over priced.
How “overpriced” is defined depends on who you’re talking to. As a lender, we rely on appraisers to determine the property is worth a certain amount by using comparable properties that have sold recently nearby.
I’m glad you got the intended humor.
How much pressure are appraisers under to ‘hit the number?’
We cannot (and would not) pressure appraisers to “hit the number”. Underwriters scrutinize appraisals and may call for additional comps or explainations if they feel the appraised value is not supported.
I’m sure that it may happen. I did see comments from an appraiser recently stating this.
I wonder if appraisers would answer the same way. I’m sure their “off the record” remarks would be illustrative of the current rot in the REIC.
As for appraisers and their valuations…
If an appraiser says a house is worth $250K back in ’02, and the house now appraises for $600K, but incomes are not any higher, which appraisal was valid?
You can appraise a piece of New Century Financial or Novastar stock based upon what the last sale was, but if it was taken 3 weeks ago, vs today, you would get two dramatically different appraisals. I wonder how much gets done based upon underlying fundamentals of the housing market, vs how much the last house sold for. It would seem to me that any dim bulb can look at comps and come up with a value. That’s good for now, but would be worthless in 6-18 months.
Also, I’m sure there has been a lot of pressure on appraisers to “find the value” of a house in order to keep their business flowing. It would seem that once the lawyers go after exuberant appraisals, the pressure would be on underestimating the values. I’m sure they will try to get ahead of the avalanche of housing price declines, as they don’t want to find themselves in the position of issuing an appraisal that looks too rosy a few months down the road.
Eleua,
It seems like you have everything all figured out. What do you need RCG for? 😉
The answer to your question regarding the value is yes, as long as there are other recent sales of a like property within a close distance. Appraisals are done for the lender, not for the consumer and they are reflective of the near past market conditions since they are based on closings, not listings or pending transactions.
An appraiser really feels pressure if they commit fraud from providing false information or values on a property. When a property goes into foreclosure, appraisals are reviewed bit by bit. They don’t want to lose their license or be prosecuted.
Some of the “a paper” lenders that I work with are now requring interior photos on all appraisals.
Want to know what appraisers think about pressure? Lots of forums out there….
Appraisers Petition Online
Hi Tim,
I only know from my experiences. And I know that I have NEVER pressured the appraisers I work with to come up with a value. The appraiser who I work with has been in the business probably 20 plus years. He’s not the fastest, but I totally respect him. If (and when…it does happen) he tells me a home will not appraise, it is in the BEST INTEREST OF MY CLIENT to know that. There’s no fudging of numbers. It does seem to happen with refi’s more than purchases…a refi, I’m usually relying on what the client believes their home is worth…lately, they have some pretty grand values and more often than not, the appraisals are coming in low. On purchases, in the past seven years, I’ve had a handful come in low. It’s more common with a refi…again—FOR ME. I cannot speak for all loan originators.
Does this happen with other appraisers/lenders? I’m sure it has. Appraisers will wind up on a black list if they provide overvalued appraisals that have wound up in foreclosure or from when lenders do their own value checks (avms) to compare to what the appraiser is offering. I’ve never been an appraiser. My professional career includes 7 years in mortgage and 14 in title/escrow. However, I would assume it is not always a specific LO pressuring the appraiser. It could also very well be an appraiser with week ethics (either case it would be) who just feels like they must meet a certain price to keep the business coming.
The appraiser’s company I worked with before my current one (who I’ve worked with for 6 years) DID wind up on a black list. I don’t know why, I never asked them to provide a “certain value”. It’s a total disservice to the buyer, lender and all involved.
I can only speak for myself.
“I’m sorry, but what about a mortgage is good?”
I don’t think there’s anything good about a mortgage. Question is what is so good about owning your home vs. renting one?
I know I don’t feel that way because I am a real estate agent, as I clearly owned my homes since the time I was married and before I was an agent. My Mom is dirt poor, but she’s always owned her homes and paid them off long before the mortgage was due. My parents made almost nothing and had seven kids, but we always owned our home.
I called my Uncle Nicky yesterday and said, “Did Grandmom own her home back on Girard Avenue?” He said she bought a house after her husband died in about 1945 with money she made selling pasta and my Uncle helped her with money from being in the service. Then they moved to the suburbs and bought that house too, where she died and he still lives with his wife. All of my Aunts and Uncles owned their homes. Not one of them had a “white color job”, except my Aunt Terry. Her husband dug graves and she worked in a bank.
There’s always been a sense of pride in owning vs. renting. I honestly can’t tell you why that is. Maybe it’s just being able to look at your wife and kids and know that no Landlord is ever going to knock on the door and say, “Sorry, you have to leave your home because I want to sell it”. Maybe it’s just being able to tell your daughter, yes, she can’t paint her room red or purple. Maybe it’s the feeling you get when you plant a tree or landscape or paint and stand back and know that every thing you do turns this house into “your home”.
But clearly it is not because there’s something about a mortgage that is good. It’s because owning your home is good. But maybe we were all brainwashed into thinking that way. I know that I feel a lot better when I own my home, than the few times in my life when I have rented.
Never did my family buy a home because it was “financially” a better way, or for a tax write off or because it would grow in value. They bought a house because they wanted a home of their own. It was that simple. Has life changed all that much really? I don’t think so.
Rhonda,
I certainly don’t have it all figured out. I’m just an observant guy that likes to ask questions. I hope you don’t take my questions as threatening in any way. They may be a little provocative, but they are honest questions.
Ardell,
CALL THE PI!!!! You and I actually agree on a post. WOW! I’m sitting in ashes and wearing sackcloth as we speak.
Homes are not investments or write offs. They are places to live.
Are you afraid of being excommunicated from the REIC priesthood?
E
This is great. Welcome back, Ardell. Eleua, I enjoy your comments.
A mortgage, if for nothing else, is a tool or vehicle for people to help become homeowners. Hopefully, they have proper guideance and are provided options and education to make the right choice.
I guess my question in #78 was answered, IN A BIG WAY, in post #82.
WOW! Way to go TIM.
Sorry I haven’t been around for a while…have other pursuits also. Interesting conversation. Was pondering some simple figures tonight.
69% of Americans are homeowners.
approximately 13% of Americans lived below Government Poverty thresholds per the 2004 census.
Poverty Per the government is based on the number of persons in a household….these are the numbers.
1 Person HH……..Annual HH Income $9,800
2 Person HH……..Annual HH Income $13,200
3 Person HH……..Annual HH Income $16,600
4 Person HH……..Annual HH Income $20,000
keep adding $3400 for each person in the family.
So…69% + 13% = 82%
Who’s left in that 18%?
A person making $6 per hour working 40 hours per week 50 weeks a year (I’m assuming that they get a couple weeks off) has an income of 12,000 So…said person is not included in the @13% tallied by the government…but is part of that mysterious 18%. Just taking a guess…but I would assume that there are quite a few people making only $8-12/hr.
So…just who IS left in that 18%?
That…my friends…is the $64,000 question.
gotta run…too much interesting stuff going on in the world to focus on your micro economy up there.
Hey….did you hear about Japan raising interest rates? 1/4% sounds small…but believe me…it’s not. I’ll bet Bernanke didn’t like that move very much.
Oh…and the OPEC guys are meeting on the 15th…The “Man In Charge” is pushing for further cuts…and our distillates and gas supplies are down per todays report…I wonder what gas prices are going to do.
going back to Rhonda’s comments in this post-
“Seattle is not too pricey for normal people–”
Rhonda, if you know the median income and median price of SFH in Seattle, you can do the math.
Mark, this is why if someone wants to live in Seattle with a normal income, they should not be considering a mortgage amortized for 15 years.
you didn’t get the point.
people with median income can not buy in Seattle with 30yr. fixed if they don’t want to go for I/O loans or other schemes (such as 40yr ).
this was not the case a few years ago and so a run up in prices is driving average income people away from seattle.
see this-
“Eagerness among mortgage lenders to increase their fee income pushes them to sell as many loans as possible, even ones they know borrowers can’t afford, outgoing Federal Reserve Governor Susan Bies said.”
Mark,
Yes, prices in Seattle have increased over the past few years. I don’t disagree with you. Who am I to tell someone where they can live? If a client comes to me who will not consider living out side of Seattle, and they understand all of the options and they make (key word) an educated choice with their mortgage, I see nothing wrong with that.
The statement you’ve provided is general and probably does apply to lenders. I have not seen the whole comment, if you provide a link, I’ll check it out. I’m wondering if it is referring to lenders (such as subprime companies) or loan originators.
This is not how I practice my business. In fact, just a few moments ago, I told a client she needs to sell her house first before she can buy her next house–she wants to make a non-contingent offer and is bit put off that I am not trying to do 100% on the new home while she still has her current residence. She might go down the street to get a “guido” loan…that’s her right I suppose. But I won’t do it. She would happily stretch herself with two mortgages.
Amazing…The information that gets “leaked” onto the net that is…I wonder if it is real?
XXXXXXXXX
Subject: First Franklin Changes Effective 2/26/07
Dear Lending Partners,
As most of you are painfully aware, the sub prime wholesale mortgage lending
industry has been going through some massive guideline, product, and pricing
changes. We ,at First Franklin, are not immune to those changes. We have been
in business for 25 years and want to continue doing business for another 25 +
years. However, we can’t continue to close loans under certain programs that
aren’t saleable and profitable.
Effective Monday(2/26/07), our minimum score for 100% Full Doc Owner Occupied
Purchases and refinances will be 620. With a 620 score we can do a combo
80/20 or a single lien 100%. Also effective Monday, our minimum score on Stated
100% Purchases will be 660, and W2 stated borrowers that are 1st time buyers
will be maxed @ 95%. If the borrowers are self -employed and have a 660, they
can obtain a 80/20 combo or single lien 100%. For a W2 Stated borrower to
qualify for a 100%, they must have owned a home for a minimum of 18 months and
have 0x30 on the mortgage history.
Since this is such short notice, loans that meet the criteria that was in
effect before the change(580-619 100% Purchase or Refi Full Doc/Rapid ) or
Stated loans with a 640-659 score , we will accept your loan packages on Friday
(2/23) without appraisals, title, dec page), IF THEY MEET THE FOLLOWING
Conditions below(1-3):
1) They are Approved and LOCKED in Easywriter,
2) If Purchase, you have a Sales Contract with a property address
3) All packages must contain 1003 / GFE / TIL / SIGNED BORR AUTH / 2006 w2’s
and 2 pay stubs (If full doc)
Please fax the packages that meet the above requirements to 866-637-3084 or
email them to tennsubmission@ff.com
I want to apologize for the inconvenience this may have caused you, please call
me or email me with any questions
Thanks for your business, I promise you we will get through these ‘Changing
times’ together.
Your Subprime Mortgage partner,
XXXXXXXX
Rhonda-
What typically is the profile of a 620 ish FICO score borrower? In other words, do borrowers with that score incidate a credit history that is absent of credit issues? I ask because I really don’t know.
In addition, if you have a borrower with a 620 score, are they prime candidates for a 100% financed deal (80/20 or 100% 1st DOT) per First Franklin (a major top 10 sub-prime lender) comments in post #93 by EconE.
I think visitors to Rain City Guide would like to know what constitutes a sub-prime lender vs. a lender that is A-paper—ie, what threshold of FICO scores relegates borrowers to qualifying with sub-prime lenders.
EconE,
That is amazing this would be on hte internet but the letter itself is not surprising. And I think that having these guideline changes are moving in the right direction from subprime lenders.
As a correspondent lender, we have wholesale lenders, including FF, call on us all day long. Subprime wholesale lenders will ask an originator “any tough loans you can’t put together”….”zero down to 600” ….then it went to “zero down to 580″…. and now we’re moving back to tighter guidelines (thank God!).
The first subprime 2/28 80/20 loan that I did with FF closed in June of 2002. Back then you had to have a 600 min. score and funds to close (closing costs if the seller wasn’t paying for them) were not sourced. The buyer just had to bring a cashiers check to closing…no questions asked. I was shocked doing this loan as it was my first subprime…I might have to do a post about this couple…because actually…they’ve turned out great. Yep…I smell a post coming on…thanks, EconE. Please do let me know when you get your blog going. I’ll subscribe!
Hi Tim, I’ve been pondering that myself since everything is changing. And again, I’m thankful for that (tougher guidelines). To complicate things in the lending world, many things–such as underwriting, are often automated. If a 620 borrower had a down payment of 20%, they could have “A paper” rates (if they don’t get a sleezy LO who takes advantage of this). If a 620 borrower has zero down payment, then I’m using a subprime lender.
Two years ago, I had a client who had 650 score with 10% down, great income and assets, however, she was newly self employed (we’re talking 3 months). I was able to go to a subprime lender and she did receive a decent rate. It’s fairly close to the 30 year today (she had a 30 year) although at the time, she thought it was terrible. Her option was to wait until she had 2 years tax returns as self employed.
I don’t have a black and white answer, Tim. To my knowledge, there’s not a set credit score that dictates someone is subprime. You could safely say, if your score is under 620, you’re subprime. Historically, I’ve considered 680 and over a paper, but you can get a money with a lower score if you have other factors in your favor. It’s more of a total picture than just credit score (100% financing is very credit score driven).
Since underwriting is automated (a computer vs. human) it all depends what the computer spits out for a decision. Sometimes…I’m surprised either way (approval or denial).
I always try “a paper” first and if that doesn’t work, then I shop my subprime resources for the best mortgage possible (longer terms with lower rates and no or very short prepays).
Sorry Rhonda…no time for a blog. I could share the gems of information that I come across but I feel that it would not be understood here on this blog as this is primarily just real estate related.
I pretty much came to that conclusion after a phone call with Ardell who stated “What does China have to do with real estate?” (actually it was more of an interruption). Anything intelligent that I was trying to convey was flippantly dismissed and conversation was just steered towards “I was the redondo condo queen”…etc. etc. etc. Maybe had I told her that my father was interested in the Millenium Tower Condo that is currently listed she would have listened and not just talked. She may have “heard” me…but she wasn’t listening. To me…that is a sign of disrespect. And through that disrespect…she actually lost a potential future client. The only reason that I called her was see if she was someone that would listen to a client…or just talk. She is a talker…so…she lost a potential client…well…two…because my Dad wants to get me a condo also. But don’t worry…we are in no rush. Oh…and don’t worry about discussing loans…it’ll be a cash purchase.
So…what does China have to do with real estate? What is the significance of a 1/4% interest hike by the Bank of Japan? I have even dropped some pretty good gems on some sites lately…but nobody picked up on them.
Real Estate…although important is really just a tiny part of the bigger picture in global economics.
Why is Seattle my city of choice for RE observation?
Simple…Seattle is a great place…I know…I was an… ehem…renter…on Lake WA w/ my ski boat parked out front…pretty nice lifestyle….and damn cheap also.
EconE,
I’m calling it a night. You might appreciate this (it’s kind of timely with your last comment)…I’m just returning home from the 2007 Chinese New Year Gala hosted by the Seattle Chinese Chamber of Commerce and the Hong Kong Club of Washington. It was a great event that raised $98k for Children’s Hospital. I’m beat.
China is a huge buyer of U.S. mortgage backed securities and we (U.S.) are also huge buyers of goods from China and Asia. I know that’s probably more simplistic than what you’re looking for from me. But like I said…I’m beat.
I’m not responding to your post in hopes of your business. Any blogging I do is not with that in mind. I’m just providing my opinions and hoping it may be “gems” for someone else out there or to encourage interesting communication.
Good night!
Pingback: I am a Bear in Bull’s Clothing and I Think Bernake is a Market Socialist! on InvestorGeeks
When interest rates are less than the rate of appreciation, it makes sense to purchase as much real estate as possible with as little down payment as possible. After considering the tax-deductibility of mortgage interest, most of us should be thinking in terms of 5% after-tax interest rates. Leverage, leverage, leverage. 15 year mortgages dilute leverage and therefore dilute the return on investment.
Greg, You’re also paying down your mortgage very quickly and reducing your tax benefit. Especially in a purchase situation where the amount you’re able to claim is based on your aquistion mortgage (plus an additional amount for home equity loans).
It depends on what your personal objectives and financial goals are. A mortgage is more than a payment for your house, if used properly, it is a financial tool.
Does anyone actually know how tax deductions work? Yes, the interest paid toward your mortgage will be deducted from your income for that tax year, so you would be paying less taxes. But lets say that you make an average salary of $60,000 and have a modest home that you pay $15,000 in interest toward. That would effctively mean you would only pay taxes on $45,000. This person would fall into the 25% tax bracket meaning they would pay $11,250 in taxes as opposed to $15,000, a savings of $3750 in taxes. However, they paid the mortgage company $15,000 in interest so they wouldn’t have to pay the government $3,750. That is actually of loss of $11,250 dollars for the year. Great strategy everyone – Lets keep paying interest on our mortgages for that huge tax break. Your mortgage company loves that tax strategy too.
I don’t recommend having a mortgage JUST for the tax benefit. It is an advantage over the same payment you would be making towards rent. You are able to deduct your real estate taxes, too.
You’re right Rhonda, homes do have more value than tax benefits. They also have more costs than just the mortgage. The key benefits of home ownership include a place to live, and the value of an asset that tends to increase in value over time.
We could draw a simple analogy for owning stock. If you don’t own it, you can’t make any money from it. If you do own it, it will cost you, but the investor is looking for stocks that appreciate.
In a market appreciating on average 8% per year, the economics of appreciation far outweigh the costs of capital to buy the house.
Pingback: Bear Market? and Go Fly a Kite, Jim Cramer on InvestorGeeks
A 40 year or interest only mortgage is whats leading to all the foreclosures… that and advice from “experts.”.
The sensible person knows that overextending yourself during a period of historically super-low interest rates is a big mistake.
Edward, one product does not work for all. A fixed period interest only product or a 40 year is fine for the right circumstance…not for everyone. I do not provide “blanket” advice or “one size fits all” ever. The point of this post is that the renter was only considering a 15 year fixed mortgage. The programs stated were for comparison purposes.