TedCo Software Financial Matters Blog

Here are a couple interesting links about the ten things different real estate and lending professionals won’t tell you in your interactions with them. These are eye-opening, informative articles.

Here are 10 things your Realtor® won’t tell you

10 Things Your Morgage Lender Won’t Tell You

And from Yahoo!® Finance:

10 Things Your Real Estate Broker Won’t Tell You

Are these lists of unspoken realities fair to all the professionals involved in your real estate transactions? No. There are fully-honest professionals in every field.

But like the cliches about the used car industry, there’s enough funny business in the real estate and mortgage industry that lists like these are written and published in national media outlets.

The takeaway lesson: Look out for yourself. While they may be very friendly, the other folks (lender, agents, seller, etc.) in your real estate transaction have their own agenda. They’re looking out for themselves.

During the last few years interest rates have been low. Yet at the same time, a large number of home buyers have used adjustable rate mortgages to buy homes. Instead of locking in a fixed rate mortgage (FRM) for 5.5% to 6% for 30 years and knowing exactly what one’s payment will be for the entire term of the mortgage loan, home buyers have jumped on the teaser rates of as little as 1% offered on adjustable-rate mortgages (ARMs).

Unfortunately for those who jumped on the ARM bandwagon, interest rates are already low and are generally expected to adjust upward in the future. You see the ads for ARMs on TV like, “borrow $500,000 for only $1,600 per month!” The fine print scrolls so quickly and is so fine you don’t have a chance to read that in a year or two that $1,600 per month can jump to as much as $3,000 per month or more as the adjustable interest rate adjusts.

Before you sign for an adjustable-rate mortgage you MUST know the details. And one of the best places to get a healthy introduction to adjustable rate mortgages is the Federal Reserve Board’s website. The FRB’s “Consumer Handbook on Adjustable-Rate Mortgages” starts by explaining, “your monthly payments could change”, “your payments may not go down much, or at all”, “you could end up owning more money than you borrowed”, and “if you want to pay off your ARM early to avoid higher payments, you might have to pay a penalty.”

You can read the “Consumer Handbook on Adjustable Rate Mortgages” online or download a PDF version which you can print and read as you wish away from your computer.

If you or someone you know is considering an ARM, point them to the Consumer Handbook on Adjustable Rate Mortgages.

While many live in homes they feel are perfect for their families or their lifestyles, no one lives in a perfect home. Every home needs routine maintenance.

A few nights ago a clunking sound gave me the “opportunity” to move our clothes dryer away from the wall in the utility room. Before I pushed it back into place, I noticed a small gap around the dryer exhaust pipe where it entered the wall.

I ran to my local builder’s supply store and bought two cans of an expanding foam to fill the gap. (One can was enough.) It was an easy fix and worked so well I toured the rest of the house looking for gaps. I found another in an exterior closet where a hot water heater pipe enters an interior wall.

Filling the two gaps wasn’t much work and I felt like I had actually done something to improve my home a bit. As I thought about it afterwards, I realized I should have taken care of these little gaps earlier. But I had never noticed them. Why? I hadn’t done an organized inspection of my home.

The irony is that I have access to an excellent little Home Inspection Form available in Real Estate Calculator Suite. You can use it, too!

Download the trial version of Real Estate Calculator Suite. Click on the “Home Inspection Form” button on the menu page, print the Home Inspection Form, and start looking around your home.

Ending one year and beginning another is an excellent time to give your home a good inspection. There are so many different items to inspect that a Home Inspection Form can be a useful tool to remind you of the details. Also, by keeping the completed form in a file, you can compare this year’s home inspection to one you do later.

The Home Inspection Form in Real Estate Calculator Suite is only designed to help you conduct a quick review of your home. While you’ll not be performing a professional home inspection, you’ll probably notice things that usually escape your notice because you’re accustomed to them as they are.

Caution: Don’t do anything during your home inspection that requires the skill or abilities of a professional.

Tip: Before buying a home, it’s a great idea to have it inspected by a professional home inspector whom you hire.

Chances are good that (even in a well cared for home) you’ll find a few minor details that require attention. And remember, prevention is always better than a cure.

Check out the Home Inspection Form in Real Estate Calculator Suite … it’s a free download.

Washington Mutual has sold its mortgage servicing business to WellsFargo. The accounts of 1.3 million mortgage servicing customers will be soon transferred from WAMU to WellsFargo.

Whether it’s a letter from WAMU or another mortgage servicing company, chances are pretty good that your mortgage will be sold a time or two during the 20 or 30 years you make payments. When you get the letter (AKA “Notice of Servicing Transfer“), what should you do.

First, hang onto it and file it in the folder where you keep your other mortgage-related documents.

Second, document that status of your mortgage. If you’re one whose mortgage servicing is being transferred from WAMU to WellsFargo, login to your WAMU account and print the information you see in your web browser: Account Summary, Loan Details, Escrow Summary, Transaction History, Amortization Schedule and other pages that contain information about your current loan status.

Third, using the online Document Request feature or by calling your current mortgage servicer, request paper copies of the information you have printed. Ask for copies of all your loan documents including the HUD-1, the Escrow Statement, a Payoff Quote, and other documents the servicer has available. It’s better to have these and not need them, than need them and not have them.

Fourth, if your mortgage loan payment is being automatically drafted from a checking or other account, pay close attention to your account statements to ensure the payments occur as they should after the transfer. If you use a third-party service to make your loan payments (an online bill paying service for example), remember to provide the service with the new mortgage servicer’s payment information (account number, address, etc.).

Fifth, while you may have no say in whether your mortgage loan is transferred to another servicer, you do have some very clear consumer rights and protections related to your loan servicing. These are detailed in section 6 of the Real Estate Settlement Procedures Act (AKA RESPA) which is Federal law. The US Department of Housing and Urban Development has an excellent web site with information about your RESPA-guaranteed rights.

Finally, if you have problems or experience any difficulties resulting from the transfer of your mortgage loan from one servicer to another, always communicate with your loan servicer in writing.

In the rush to build fueled by the recent housing bubble, home builders churned out an incredible number of new homes. And the building still continues. If you scan the anecdotal reports blogged on the ‘net, you’ll read some tales of rushed housing projects, shoddy work and poor quality materials.

If you’re looking for a new home, pay attention to the quality of the construction. In my small part of the world, it’s obvious that homes built individually in the late 80’s are more solid than many built en masse in the last few years. In other words, don’t be afraid to consider buying a solid, older home. New isn’t necessarily better.

If you have a home built to your specs, make sure it’s built well. The best way to stay on top of the construction and ensure the builder or laborers aren’t cutting corners is to visit the home site as frequently as you can. Take your carpenter friend along a few times, too, to get his or her opinion. Don’t be afraid to be clear with the builder if you see things that are substandard. And don’t wait. Like writing software, the sooner a problem is corrected, the easier it is to fix.

ConsumerReports has an online article titled, ‘Housewrecked‘, that is a good place to begin learning about the problems that ‘plague many newer homes.’ The article includes a list of 9 warning signs to looks for when you’re looking at a home to buy. It’s good stuff.

Remember, it’s a ‘buyer beware’-world!

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This custom branded real estate software clearly displays your picture, logo, graphics and contact information. The software includes links to your web site, internet services and email addresses. You can gain an edge in real estate and loan origination by promoting yourself while providing your clients a great way to play with their own numbers.

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www.CustomCalcs.com
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Reliant Home Warranty Corporation announced today that it will be the first to market a 50-year amortization for subprime borrowers in North America. They also announced a 5 year blended mortgage (3 years interest only and 2 year P&I) for a 53 year loan!

In today’s financial environment that offers so many odd, exotic mortgage options, I like to compare them to the good ol’ standard, a 30-year fixed rate mortgage. (Regardless of what you hear on tv or read in the newspaper, it’s hard to beat a 30-year FRM.)

Here’s how a 30 FRM compares to a 50 for the purchase of a $250,000 home.

Let’s start at HSH Associate’s web site to get today’s national average mortgage rate. It’s at 6.61% for a 30 year FRM. The monthly payment (principal and interest) required to amortize a $250,000 purchase at 6.61% for 30 years is $1,598.30. (The quick way to compute this is to use Loan Spread Calculator Pro!)

The monthly payment on same loan for 50 years is $1,430.04. Subtract this from the $1,598.30 and it looks like you’ll save $168.26 each month by getting a 50 year loan instead of a 30 year loan!

Multiply that $168.26 by 30 years of payments and it looks better. It sure looks like you’ll “save” $60,573.60 by getting the 50 year mortgage. The problem is that while you’ll save more than $60,000 in monthly payments, you’ll still have 20 year left on the 50 year loan!

And remember those 20 years require monthly payment sof $1,430.04. In other words, you will still owe $343,209.60 on your $250,000 house! In fact, during the 50 years of your loan, you’ll pay a total of more than $858,025 for your house.

The 50 year loan will cost you $282,637 than the 30 year and take 20 more years to purchase.

Doesn’t really make sense, does it? Use Real Estate Calculator Suite to check the numbers for yourself.

Those who buy a home as a place to live, a place to raise a family or where they can settle comfortably for a period of time, aren’t usually concerned about the normal, expected fluctuations in home values.

And while it doesn’t make the news as much as the current talk about real estate bubbles and exotic mortgages, I think it’s still true that the American dream includes buying a home. Notice I didn’t write, “buying a house”. In my opinion, there’s a difference.

It feels good when your home appreciates in value. And when real estate prices slide, if your home depreciates in value, it may not feel good, but it doesn’t cause too much stress. You know the primary value of your home is that it is a home.

However, the real estate market has another side that can be stressful and financially dangerous. It’s called “flipping”. And in some places it seems like everyone is doing it and, in those areas, the real estate market is a little crazy.

Large numbers of houses are being bought and sold as investments — not as homes. If you’ve been to the book store, watched the news or read a newspaper, you’ve probably heard the phrase “house flipping”. It’s the act of buying a house and then selling it for more than it cost the buyer. House flipping is not about home ownership. It’s about turning a quick buck and in many markets involves a good bit of speculation.

If a house flipper doesn’t time it right, he or she can face significant financial loss. Someone is always the last to buy a house before the market slides. It’s important for house flippers to remember the old phrase, “what goes up must come down,” because it happens to house prices.

Imagine this scenario: Flipper “A” buys a house (an “investment property”) for $200,000 and sells it to flipper “B” for $220,000. “A” makes a nice profit. It’s probably not as much as he thinks (more about this in a future post), but a profit nonetheless.

Next, imagine that flipper “B” then sells to flipper “C” for $245,000. “B” makes a profit.

What goes up must come down. Let’s assume the market turns downward after flipper “C” buys and prices begin declining. Flipper “C” can’t find a buyer for the $260,000 he expected. Time passes and “C” drops the price to $250,000. “C” is beginning to fret because after closing costs and transaction fees, there’s not much profit between $250,000 and $245,000.

Let’s imagine in this contrived scenario that prices continue sliding until they return to “normal”. If that happens, Flipper “C” is stuck with a heavy loss because his investment property is now valued at $205,000 or $40,000 less than he paid. It happens.

Two Lessons: 1) Be careful flipping in a market that is already over-valued. And 2) if you’re a home buyer in a market that seems too pricey, the path of patience is probably worth considering.

People get excited about buying a new house for a lot of different reasons. For those buying their first home, the reason for excitement is obvious. For others who buy for “investment purposes” the thought of future returns can generate excitement about future prospects. Some buy a new home because their family has grown in size and they need additional space. Others buy a new home after a windfall and enjoy the excitement of a more expensive residence.

However, while buying a new home is exciting, there are also good reasons some people should NOT buy a new home. You hear it said that buying a new home is a person’s most significant financial decision. It certainly can be. A new home is usually acquired with a mortgage loan which must be repaid over an extended period of time (whether it’s convenient or not). Also, a new home will have some significant closing costs which include everything from a downpayment to prepaid homeowners insurance.

So how does one know if buying a new home might be a bad idea? It’s not always obvious (especially if emotions are high), but here are three reasons buying a new home might be a bad idea.

1. Buying a new home might be a bad idea if you can only do it with exotic financing your parents haven’t heard of before. If you can only purchase your home by squeeking into it with an interest only mortgage, it’s probably not a good idea. Your monthly payment will increase — perhaps by devastating amounts.

There are other odd-ball financing options that you not use without a clear-minded consideration of your future. Interest rates are low on conventional, fixed-rate mortgages (FRM) which allow you to know what your monthly payment will be decades into the future. Adjustable Rate Mortgages (ARMs) are unpredictable except for one thing: they will increase your monthly payment in the future.

2. Buying a new home may not be a good idea if you know you will be moving soon. You’ll lose all those closing costs that you pay to buy a new home.

3. Many believe buying a new home today in some “hot” real estate markets is a bad idea. In markets where the real estate prices have risen irrationally in recent years and months, many experts expect a “correction”, or a return to more reasonable home prices. If this happens, those who have bought a new home at a frothy price will regret it when home prices return to normal levels. In fact, after a correction in home prices, some recent home buyers will owe more for their new home than they could recoup by selling it. Finance guys call this “getting upside down” and it’s not a good thing.

Remember, it’s easy to get excited about buying a new home, but emotions are transient. Buying a new home is an important decision which should be based upon clear-headed thinking about your current and future financial situation — and not raw emotion. Look out for yourself!

At the same time mortgage interest rates for conventional loans are at historic lows, more than half of all mortgage loans are interest-only (IO) and/or adjustable rate mortgages (ARM). On the face of it, that doesn’t make a lot of sense.

Here’s what may be going on and if it is, it doesn’t bode well for the future.

An interest-only loan is one that allows a borrower to pay only the interest portion of the amortized loan for a period of time. However, IO loans are “interest only” for only an initial period of time. After that, the full monthly payment is due.

Interest-only loans encourage people to buy more house than they can afford with the hope that their income will increase before the fully payment of principal and interest is due. Others use IO loans to purchase a home with the intention of selling it before the full payment is due.

If one’s income increases to cover the full payment or one sells the home before the full payment is due, there’s probably little cause for concern. However, Interest-Only and adjustable rate mortgages still seem like risky gambles … especially when conventional rates are so low.

Another problem waiting in the future for those with interest-only mortgages is that many have an adjustable interest rate when the full payment begins. If interest rates rise during the next 3-5 years (as many believe will happen), those with IO loans will face a double-whammy: Full payments of principal and interest AND a rising interest rate. That will hurt!

While a conventional 30 year mortgage may not be as fun to brag about around the watercooler and doesn’t sound nearly as exciting as being able say, “I’m using some creative financing,” there’s a lot of wisdom in not buying more home than one can afford now AND in the future.

Takeaway Point: Don’t let an aggressive lender sweet talk you into creatively financing your home.