Tag Archives: Mortgage/Lending

Is it Time to Refinance to Cash Out?

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rubber duckThe Seattle Times posted an interesting article giving the pros and cons of refinancing homes in order to take out an cash (or a line of credit). Interestingly, the number of people doing this is extremely high with “nearly three out of four homeowners who refinanced through Freddie Mac between July and October cashing out.”

What are the downsides to “cashing out”?

  • By carrying more debt (secured by your house), you put your assets at greater risk if you lose your job, get sick or run into other financial difficulties.
  • More debt also means higher monthly payments, especially if you opt for a 15-year payback term.
  • Refinancing typically costs much more in settlement and loan-origination fees than home-equity lines, unless you have your closing charges rolled into the note rate.

With that said, there are several good reasons to strongly consider an equity line:

  • Convenience and control
  • You pay interest on only the amounts you’ve pulled out, not the approved limit.
  • Most lines allow immediate access to more money using credit cards or checks

Tax Reform Hits Home…

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[photopress:soccer.jpg,thumb,alignright]CNN reports on some of the tax-reform proposals that have recently come out of a presidential panel. (note that none of these changes are law… yet… but rather they are just proposals and still have to go through congress.)

The panel recommended lowering the mortgage interest cap, which is the amount of a loan on which home owners would receive a tax break for interest paid, from $1 million to the average regional housing price in the range of $227,000 to $412,000.

The deduction would be converted to a credit equal to 15 percent of interest paid on mortgages up to the interest cap. A credit is a dollar-for-dollar reduction of the taxes you owe, while a deduction only reduces your taxable income by a percentage equal to your top tax rate. Deductions benefit high-income taxpayers the most and are limited to those taxpayers who itemize on the federal tax returns.

Generally speaking, the higher your mortgage loan and the higher your tax bracket, the more likely it is that you’ll see less of a tax break than you would under the current system. That’s because under the current system those in the highest tax brackets benefit most from the deduction.

CNN has more on how these changes could affect your tax bill here…

I really enjoyed Daniel Gross take on the issue in his article in his Moneybox column: Tax ’em Till They Turn Red.

In particular, he has a great description of the myopia experienced by both sides (i.e. blue-states vs. red-states):

Many of the people writing and talking about these issues suffer from one of two kinds of myopia. There’s blue-state myopia. Classic sufferers: Moneybox, Moneybox’s editors, many of Moneybox’s readers. These are people who think you have to pay seven figures to get a nice house with a nice yard in a nice suburb, or who think its normal to borrow $800,000 to buy a two-bedroom condo in a dicey neighborhood.

Then there’s red-state myopia. Connie Mack, the Republican ex-senator who is co-chairman of the tax advisory panel, is a classic sufferer. When asked by the New York Times Magazine whether limiting the deduction could “hurt the middle class and discourage people from buying, say, a $500,000 house?” he responded: “It depends on how you define middle class. I don’t think that there would be a large percentage of middle-income families that would have a $500,000 house.” Mack has obviously never spent much time in Staten Island, N.Y., where Vito Fossella, one of the few remaining Republican members of Congress in the Northeast, has already come out against the panel’s ideas. In the high-population, high-income states—the states that, by the way, produce a disproportionate share of federal income taxes—plenty of middle-class people live in $500,000 homes.

His analysis is definitely applicable to the Seattle market, where many people who would consider themselves squarely in the “middle-class” are living in $500k homes.

Stressful living!

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[photopress:IMG_5046.jpg,thumb,alignright] In reading today’s Seattle Times article on people who have used interest-only loans to get into homes they could not otherwise afford, I get the feeling that some people are much better at living under constant stress than me! 🙂

It can be a wonderful experience to own a home, but it still doesn’t make sense to me why people put themselves in these situations. I’ve heard some darn good arguments from investors regarding why it makes sense for them to use interest-only loans, but for the rest of us, it feels too much like gambling…

Dean Baker sums up the I/O like this: “In a falling interest-rate environment, you may be saving enough to make it worthwhile. But … in a higher-rate environment, there may not be a loan to bail you out.”

To quote the same phrase Dustin used a few days ago with regard to hiring a lawyer, “A good night sleep should not be underestimated.”

Why Refinance Back into a 30-Year Loan?

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One of the biggest reasons homeowners refinance their mortgage is to obtain a lower interest rate and lower monthly payments. By refinancing, the borrower pays off their existing mortgage and replaces it with a new one. This can often be accomplished with a no-points no-fees loan program, which essentially means at “no cost

Interest Rates: When is the Best Time to Lock?

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I always advise my clients to lock in their interest rate at the earliest opportunity. Gambling with a client’s interest rate is never advisable. In my business, I have a standardized system in place that we adhere to for all of our clientele. A mortgage loan cannot be closed without locking in a rate, and there are three
main elements to take into consideration:

  • Interest Rate
  • Points
  • Length of the lock

Locking in on a rate does not obligate the client to commit to the loan until the loan is actually closed. The lock simply eliminates any risk of the borrower being exposed to market volatility. It provides the security of having time to complete the mortgage and Real Estate transactions with some sense of order. The lender must disburse funds to complete the transaction within the rate−lock period, or else the original commitment to provide a loan at a certain interest rate will expire.


When a lender permits an extended lock−in period, the borrower will usually see either a higher interest rate or more points associated with the loan. The lender does this to minimize their own exposure to market volatility; hence the borrower pays for the lender to take on this risk.

For example, a 30−day rate lock commitment may cost the consumer one−half point, while a 60−day rate lock commitment could cost 1 full point. If the borrower needed an extended lock period, but did not want to pay points, the lender could make up the difference in the interest rate. In this case, typically, a 60−day lock would have a higher interest rate than a 30−day lock.

In my business, our standard procedure is to lock in a rate as quickly as possible once we have received the loan application. My team and I let our clients know that while interest rates fluctuate daily, most lenders do not want to lose any business. We know that in many cases, if there is a significant rally in the market that causes interest rates to drop .25% or more, we can ask the lender to renegotiate the rate. or understand that we will take the loan to another lender.

Often the lender allows for a renegotiation of the rate to avoid losing the loan to another lender. If we allow our clients to sit on the fence and not lock in a rate quickly, we would leave them exposed to market volatility. Then, if rates do increase, the borrower may be unable to qualify for the loan they want, which is a situation we try to avoid at all costs.

By knowing our clients’ needs and working intimately with them to make the right decisions, my team and I are proud to say that we have many clients who are raving fans.

The Reservations of Greenspan

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Church Scene It’s no surprise that Alan Greenspan remains highly skeptical of the housing market, and considering he has access to a lot more data (and a lot better researchers!), I’m going to defer to him on the national issues.

Greenspan continued to register concern about soaring house prices and risky mortgages on expensive homes.

He also repeated his warning about signs of “froth” developing in some local markets that may be driving house prices to “unsustainable levels.”

Here’s are two quotes I found interesting:

  • “The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices”
  • “Speculative activity may have had a greater role in generating the recent price increases than it customarily had had in the past”

I think these quotes explain why the Seattle market is going to be fine despite his reservations. The employment market is healthy and I haven’t seen the type of speculation that is occurring in the SouthWest. Here’s a link I wrote a few weeks ago on the riskiness of the Seattle market.

It’s getting more expensive to borrow money

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The federal reserve has been raising interest rates for more than a year and that means that it is getting more expensive for homeowners to raise money by borrowing against their equity. For example, the prime rate is now at 6.5%, while it was only at 4% at the beginning of 2004. However, with the substantial increase in the value of nearly all homes during the past few years, home owners are still finding it convenient to refinance their mortgages and withdraw cash.

The Seattle Times had an article today about how this “cash-out” refinancing will have the largest influence on first-time home buyers, who used home-equity lines for “piggyback loans”: “Unable to foot a 10 percent or 20 percent down payment, many bought homes with little or no money down by taking a first-lien mortgage and one or two home-equity lines, according to Mary Boudreau, owner of Penfield Financial, a Fairfield, Conn., mortgage broker.”

The Federal Reserve and Mortgage Rates

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Beeswax dragonConsumers are often misled when it comes to the subject of the Federal Reserve and how it affects mortgage interest rates. Often the media is the culprit causing the confusion. In the last few years, the Fed has taken action that caused mortgage interest rates to move in a direction other than what consumers expected, because the media provided weak reporting on the subject.

The Federal Reserve affects short−term interest rate maturities, the Fed Funds rate, and the Overnight Lending rate. These factors have a direct impact on the Prime rate. If you took only this into consideration, you may mistakenly conclude that changes made by the Fed will cause a similar movement in mortgage interest rates. However, mortgage interest rates are dictated by the trading of mortgage−backed securities, which trade on a daily basis.


The real dynamic at the heart of interest rate movement is the relationship between stocks and bonds. Stocks and bonds compete for the same investment dollar on a daily basis. There is literally only so much money to be invested. When the Federal Reserve feels that interest rates need to be decreased in an effort to stimulate the economy, this reduction in rates can often cause a stock market rally. When the market becomes bullish, the money to invest in stocks comes from the selling of mortgage−backed securities. Unfortunately, selling mortgage−backed securities to fuel stock market rallies causes interest rates to go up, not down.

Historically, there have been many times when the Federal Reserve has increased interest rates. Stocks then sell off in fear that the increase will affect corporate profit margins, and the liquidated stock assets need a place to park until the next rally comes along. The safe haven is found in mortgage−backed securities which cause mortgage rates to drop. The daily ebb and flow of money is what matters most when it comes to the movement of mortgage interest rates. I make it a point to continuously monitor interest rates for my clients, and advise them of opportunities to manage their mortgage debt at a better rate. This is the foundation of my business model as a Trusted Advisor.

One good faith estimate isn’t good enough…

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[photopress:Cats.JPG,thumb,alignright]In reading Elizabeth Rhodes response to an interest-only loan question, I realized that it has been a while since I talked about my uncomfort with interest only mortgages… I think way too many people are using them as a last resort to get into a house. When interest rates start rising, a lot of people could find out that they have bitten off more than they can chew.

The particular question Elizabeth was answering was in regards to whether or not someone should stick with a mortgage broker that made them feel uncomfortable… She gave an appropriate response (concluding that the client should walk away from this broker) but missed out on giving some truly useful advice that could really minimize this issue. What she could have said: “Get more than one quote!” or “You’re making a mistake by using only one broker anyway.”

In practical terms, “getting more than one quote” means getting at least two good faith estimates. At a minimum, you should get an estimate from at least one on-line banks and one local broker. If I ever create my own set of top 10 rules for a home buyer, getting two good faith estimates would be at the very top. No one has to tell you that you’re making a huge investment when you buy your home. By making loan brokers compete, it is entirely possible to get a much lower rate. Even saving just two-tenths of a percent on your loan can add up to thousands of dollars in the long run.

If you want some more detail, I wrote a bunch more on getting a home loan last March that stills seems relevant.

Flipping Responsibly

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lambsThe Las Vegas Review Journal reports that some flippers (people who buy and then quickly sell a property with the goal of making a large profit) have filed a class-action lawsuit against a home builder (Pulte) because they’ve lost money!

The crux of the story is that Pulte lowered the price on many of their homes across Las Vegas a few weeks after the flippers purchased homes from Pulte. The result is that the resale value of the homes the flippers had purchased dropped considerably.

Jason Beaver of San Francisco followed some untimely advice from a friend who’d made a hefty profit flipping homes in Las Vegas.

He paid $350,000 for a three-bedroom, 1,500-square-foot new home in the Solera subdivision of Anthem last September, just weeks before the builder, Bloomfield Hills, Mich.-based Pulte Homes, lowered prices in several communities across Las Vegas Valley.

It’s ridiculous of the people to sue Pulte or any of the other home builders. These people bought homes in a highly speculative market. They obviously didn’t do their research to find out a glut of homes were on the market and so they lost a lot of money. It is really hard for me to feel sorry for them.

Via The Housing Bubble 2 (which is currently the most active real estate blog for people anticipating a large correction in housing prices at some point in the future.)