How your interest rate effects you

Last week, I was in Starbucks talking about interest rates and the current real estate market. It was not unusual that I was in Starbucks nor conducting business there, as it seems that Starbucks, these days, maybe second to the golf course in the culmination of business. This day, I happened to be talking with Ken Cusick. Ken and I were discussing the vulnerability of those homeowners who purchased their home with adjustable mortgages, primarily interest only mortgages and their mortgage rates. Ken had a lot to say about this topic. Ken is the principal of Cusick Financial, LLC, a financial consulting firm located in Olney, MD specializing in residential and commercial financing.

Ken and I agreed that many homeowners have a great mortgage rate because of the historically low interest rates we have had recently. I expressed my concern about the many homeowners who have bought their home with an interest only or variable rate mortgage to either allow them to buy more home than they normally could afford, or to keep payments down. After all, the interest rates for these mortgages usually started between three to four percent. This cut the mortgage payment by at least a few hundred dollars a month, if not more.

Ken had a few things to say in response, as well as a few words of advice. First, Ken asserted that because the interest only and variable rate mortgages are tied to short term indices, they usually tend to be a better deal than 30-year mortgages (which are tied to long term bonds and indices). Depending on the type of index the mortgage is tied to, the interest rate can change annually or even as frequently as monthly. He stated that the unusually low interest rate environment we have had in the past five years has made housing more affordable, which paradoxically led to the significant increase in home prices we have experienced.

Second, Ken stated that those homeowners who have a fixed rate mortgage would always be able to afford their home as long as their income never decreases and they never need to sell their home. Even if there is a correction in the real estate market to lower home prices, these homeowners are in good shape.

Third, homeowners who have interest only or variable rate mortgages are subject to the volatility of the market as rates rise and fall, and are at significant risk. As interest rates rise, their monthly mortgage payments rise. Additionally, as interest rates rise, the cost of housing rises and housing demand decreases. This creates difficulty for those who were betting on interest rates to stay low because the affordability of the mortgage becomes an increasing burden on those who may not be able to afford higher payments. Add that to the possibility of their home being devalued increases the burden of loss.

Ken’s advice was simple. If the homeowner could not afford the mortgage payment with an increase of of interest by two to three percentage points, then they should refinance into a fixed rate mortgage. He admits the payment will be higher, but the comfort that the payment will not change should be peace of mind in an uncertain future.

If, however, the mortgage rate does not adjust in three to five years and the homeowner intends to sell in within that time period, Ken says to hang in there. The logic is that the only risk the homeowner takes is the possibility of the home depreciating in value. If the mortgage balance is 70% to 80% of the current home value, then the risk is much less.

To many, Ken’s advice would seem a bit too conservative. I, however, believe that this advice to be the consensus of good financial planning.

by Dan Krell © 2005

This column is not intended to provide nor should it be relied upon for legal and financial advice.

There are options if you are in Foreclosure

Popular culture has a way of taking an item or an event and making it over simplified for the lay folk so as the item or event becomes a trite expression of a generation or decade. You can spot this happening when certain new buzzwords fly about the air. The event or item becomes trendy and ingrained in the psyche, then eventually becomes passe. This has become the case of trying to buy a pre-foreclosure. A pre-foreclosure is when the distressed homeowner still owns the property, most likely is still living in the home and is facing a sure loss of their hard earned money and home.

As a Realtor, it used to be pretty common for a buyer to say, “Oh, and I am interested in buying a foreclosure,” at the end of the first meeting. Lately, it has become trendy for buyers to assert that they are looking for a pre-foreclosure because it is believed that the home is still in good condition. The main reason for these assertions is that buyers believe they are getting a great bargain. Unfortunately, it is far from the truth. Most people, who buy a foreclosed home, pay a premium because the market is very strong. Even when the home is distressed, the buyer will pay top dollar for a home is a particular neighborhood, knowing that they will have spend another $50,000 to $100,000 to fix the home. Certainly a pre-foreclosure will sell for market value.

The unfortunate player in this scenario is the distressed homeowner who faced a hardship or two and fell behind on their mortgage payments. Many people facing late payments or foreclosure usually lack information of where to get help. The U. S. Department of Housing and Urban Development (HUD) recommends that the first thing the homeowner should do is to call their lender if they are falling behind on their mortgage payments, or they know they will have problems making the mortgage payment. By calling the lender and explaining the situation, the lender will usually provide options to help the homeowner through the hardship. HUD also highly recommends that the homeowner call a HUD-approved housing counseling agency to assist. Information on the housing counseling agencies is available on the HUD website www.hud.gov.

According to BankRate.com, lenders want to help the borrower as much as possible. The last thing the lender wants is to spend thousands on legal fees to foreclose on a property then have to sell it. Some of the options that lenders extend to delinquent homeowners include a forbearance and mortgage modification. These provisions are usually more prevalent with FHA and VA backed mortgages, however, they are also offered for conventional mortgages as well. A forbearance is a special repayment plan where the lender arranges payments such that it will allow the homeowner to make mortgage payments after the financial crisis. Usually this is a fix for a short-term financial crisis.

If the homeowner is seriously behind on your mortgage, the lender can modify the mortgage. A modification is when mortgage payments that have not been paid are added to the principal of the existing mortgage. This allows the homeowner to essentially catch up and get back on track.

Recently, it has become common to see many pre-foreclosure sales. This when the owner has fallen behind in their mortgage payments or is even in the foreclosure process and sells the home on their own or through a Realtor. In most cases, this may be the last resort for the homeowner because they cannot pay the mortgage even with the modifications. Although the homeowner cannot keep the home, this is usually a good arrangement because the homeowner can pay off the mortgage and get the equity out of the home to apply it towards the purchase of a smaller and more affordable home.
If you or someone you know has the misfortune of falling behind on the mortgage, talk to the lender, they want to help.

Copyright Dan Krell 2005.

What happens to your home in a divorce?

What happens to a family home in a divorce?

When divorce is imminent, people tend to worry about the children’s future, how to treat the mother-in-law who was so nice (lucky fellow), how their friends will react. Of course, these should be at the top of one’s mind. There are many concerns to worry about.

Beyond family concerns, finances and real estate are important also. Figuring out who gets what and how much can get messy, antagonistic and litigious. That is why an attorney should be consulted on these matters.

But what about the marital home? There are various options and outcomes. Sometimes the agreement is amicable.  However, there are many times where spouses disagree and rely on their legal counsel.  Sometimes, the court steps in and appoints a trustee to determine the disposition of the home.

It’s common for one party to offer to buy out the other’s interest in the home.  But in doing so, coming up with the money may be a challenge.  “Cash-out” refinance and home equity lines are sometimes a solution if the spouse meets the lender’s underwriting guidelines.   Of course, if the home has no equity, then relying on a cash-out refi may not work.

Selling a home is emotional and stressful. Selling a home during a divorce can compound the stress.  It’s important to be as objective and fair as possible when making decisions about the marital home.   If you are selling your home, hire a professional Realtor who is objective and adept in handling such sales.  Consult with an attorney on matters of separation and divorce.

by Dan Krell © 2005
Copyright Dan Krell 2005.

What happened to afordable housing?

Everyone in the Metro area knows that housing costs have risen at what seems to be an exponential rate in the last few years. If you are a first time home buyer, the shock of Metro area home prices must be like watching the Texas Chain Saw Massacre. But what about affordable housing?

What happened to affordable housing? According to the Greater Capital Association of Realtors (www.gcaar.com), the average sales price for a single family home in Montgomery County in January 2005 was $512,743. Comparatively, the price of a single family home in January 2004 was $435,898. Evidence that it is becoming increasingly harder for a first time home buyer to own a single family home.

Although the price of a home may not seem affordable, there are some ways to make it affordable. Montgomery County has always had some form of assistance to boost home ownership. Some of the programs that have been prevalent for some time now include the moderately priced dwelling unit program (MPDU), special loan programs and closing cost assistance.

The moderately priced dwelling unit program was established in 1974 by Montgomery County to provide affordable housing. The program allows a homebuyer to purchase a home at a special price. The homebuyer must qualify for financing and meet other criteria. There are MPDU’s scattered throughout the county in many communities and exist in many forms, such as townhomes, condos and semidetached homes.

There are restrictions on purchasing a MPDU, as one can imagine. The restrictions include a certificate of use, resale restrictions, and shared profits. The certificate of use requires the owner to live in the property, and not be able to rent to tenants. Additionally, when you are ready to sell your home, the price is restricted. Any profits that incur from the sale must be split with the Housing Initiative Fund (HIF) (which spends the money for additional affordable housing). The current price for a townhome is very affordable (check the website below). Information on qualifying and other regulations for the MPDU program, please visit the Montgomery County Department of Housing and Community Affairs website www.montgomerycountymd.gov/apps/dhca/index.asp.

If you choose not to go through the MPDU program, or if you do not qualify, there are other programs available to help with your purchase. Community programs, such as the Housing Opportunities Commission, offer special financing and closing cost help. If you visit their website, www.hocmc.org, you can see that there are currently two loan programs that offer below rate assistance for qualifying purchasers. One loan program offers a starting interest rate of 3.55%. These loan programs will qualify you to purchase a home that you might not otherwise qualify.

If financing is not a problem, you might need some closing cost help. The Housing Opportunities Commission has a couple of options for this too. One program offers a loan for up to five percent of the purchase price of the home. If you are short on cash, help such as this is a Godsend.

Although the average price of a home may not seem affordable to many first time home buyers, there are programs that are available to help with the purchase. Each program mentioned here does have qualifying criteria, as well as restrictions, and should be checked before embarking on your endeavor. Both agencies mentioned here are very knowledgeable and want to help you with any questions you may have.

by Dan Krell
Copyright Dan Krell 2005

Selling your home FSBO

When the real estate market is good, many people try to sell their home without a Realtor. These For Sale By Owner (FSBO) sell their homes on their own for one reason-to save money on Realtor commissions. However, before embarking on such an endeavor, one should take an inventory of the pros and cons of becoming a FSBO, as well as the tools necessary to sell FSBO.

The obvious reason to sell your home FSBO, as stated above, is to save on Realtor commissions. Seasoned real estate investors may find it natural to sell a home FSBO because they control the communication as well as being able to communicate directly with potential homebuyers. First time FSBO’s may find it a bit awkward at first, but can find the rhythm necessary to complete the transaction.

How much money can you realistically save? Traditional Realtor commissions have always been around 6%, which pays the listing (homeowner) agent and the selling agent (homebuyer). However, in the last few years, there as been a trend of reduced commissions, so actual savings for a FSBO have been reduced. I have seen Realtors list a home for 4% (if you don’t believe it, send me an e-mail)! Additionally, FSBO’s are contracting and paying commission with more Realtors and their homebuyers in this environment of limited home inventory. In the end, the FSBO’s savings from Realtor commissions may be marginal.

You might think that saving money outweighs all negative aspects of selling your home FSBO. However, there are some real negative aspects of selling your home FSBO, such as time, expense, and contractual obligations.

How much is your time worth? Selling a home requires the application of time to tasks. Among the many tasks of selling a home, the top things that a FSBO may do include (and is not limited to) preparing the home for the open house, contacting the paper to advertise, putting up signs, meeting potential homebuyers, and negotiating contracts. The time quickly adds up.

Selling your home FSBO is supposed to save you money right? Well, there is a bit of expense that is necessary. A FSBO must have signs in the yard, as well as directionals (the small arrow signs) to point homebuyers in your direction. Additionally, you might consider paying the local paper for advertising, as well as paying for an internet advertisement (although there are many websites that will allow you to post for free). Another expense may be to have your attorney to review the contract to make sure it is legal and enforceable. It seems that the expenses also quickly add up.

Selling your home FSBO relieves you of certain responsibilities under the law right? Wrong. The most important thing a FSBO forgets to check is the law. That’s correct, even FSBO’s are responsible to adhere to certain federal and local laws pertaining to the sale of real estate (i.e., equal housing, lead paint, Maryland disclaimer-disclosure). This is the one area that FSBO’s get themselves in trouble because of the lack of knowledge and expertise. There is an increased liability potential.

FSBO sales are steadily increasing in the community. However, if a home owner actually does a cost analysis they may find that selling FSBO may actually not be saving them money, and actually may put them at a higher liability risk because of the lack of information and knowledge of the law. So, before you sell your home FSBO, do your homework and consult a professional.

by Dan Krell
Copyright Dan Krell 2005.