Entries Tagged 'Loans' ↓

Last October my husband and I spent a lot of time and money to purchase my hubby’s childhood home in Southern California from  his parents.  Everything went through at the moment we stepped on a plane for China.  So far it is going well.  Our entire family spent winter break at the house for over two weeks and now we have a wonderful family taking care of the home and we can visit whenever we want.  Since October, mortgage rates have dropped significantly so I was shopping around for a refinance.  Today we will be doing the signing with the same lender we are with now for a Fannie Mae to Fannie Mae streamline loan.  Our interest rate is going from 5.875% to 4.875% and we will be saving over $200 a month on interest.

Personally, I did not know that there was an option of the Fannie Mae to Fannie Mae streamline loan, but I talked to my lender in January about refinancing and they said that we qualify for a streamline loan  Basically, there is no need for a new appraisal and  broker fees were waived since we are just doing the refinance with  the same bank.  Some fees cannot be avoided, such as a new title search and title insurance.  They also ran a new credit check, but the process was very easy overall since they had pretty much all of our information.

After running a bunch of calculations on the costs I determined that it was still worth it to refinance because we would be saving over $80,000 on interest over the lifetime of the loan with the 1% difference in the rate.  We will recover our costs in a little less than 2 years and since we intend to keep the home for a long time it is not a bad deal.

Also, since we only paid our old loan for 3 months, we are not really stretching out the loan by all that much.  Now if we apply the extra money we are saving towards the principal every month, we will pay off the loan six years early so I consider this a good move for us.

I am not sure if interest rates will move even lower, but 4.875% is a rate I am willing to stick with for a while and if it really goes down to 3.5 I could just refinance again.  If you are interested in finding out about the Fannie Mae to Fannie Mae streamline refinance you can check out this product matrix at Fannie Mae.

The basic requirements are these:

1. Your loan must be originally fully documented and underwritten by Fannie Mae guidelines.  It has to  be held by Fannie Mae right now.

2. You cannot have late payments within the 30 days you are applying

3.  You have to submit to a credit check, and your credit score needs to be 720 - 740 if your loan is more than 90% of the value, and 660 - 680 if your loan is less than 75% of the value.  Basically, your credit score has to be fairly good.

There are also a bunch of variations on the requirements based on the type of property and loan to value calculations that you have to read the Product Matrix to figure out.  I think this could be helpful to people who have homes that lost value dramatically because they really do not do an appraisal.  I would have been okay with an appraisal since we just bought the home 3 months ago and prices haven’t slid 20% in 3 months, but I know a lot of people who bought in 2006 or 2007 who have lost 20% to 30% and can’t take advantage of the great rates now.  My suggestion is to ask your lender if you qualify for a streamline, and you may be able to save thousands of dollars.

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When I left for vacation I mentioned that we still haven’t closed on the house, yet.  Well, on the day we left I got a call right before the plane was about to take off that said that our money was received and everything was fine.  So now we are officially homedebtors.

Right now my in-laws are still living in the home and we will be visiting for the holidays and also my sister-in-law’s upcoming wedding.  My in-laws won’t leave until next year and we are working on finding a caretaker who could keep the home occupied for at least a year.  The caretaker will be responsible for the maintenance and any utilities they use.  There are a few families that know my in-laws who are interested right now since it would be a good deal for them, but we are still going to have a formal application process to screen them. Since my in-laws may return after a year abroad the caretaker is just temporary.

We did not buy this home as owner-occupied/primary residence since we don’t intend to move down there for quite a while, and that raises a few issues.  First of all, our homeowner’s insurance is simply Dwelling Fire, which means that nothing inside the home is protected.  This is not a big deal since we are not living there.  Second, if we do sell the home in the future we will have to pay capital gains taxes.  In the past people could avoid this by moving into the home for two years, but the laws have changed so that starting from 2009 this isn’t the case anymore.

Overall, the situation isn’t that bad because we have 30% equity in the home right now based on a recent appraisal and the mortgage is 15% of our gross income.  Since we already itemize on our taxes we can claim the mortgage interest deduction, and that cuts down the mortgage a bit more.  We plan to keep the home for a very long time and possibly pass it onto our kids so I’m not too worried about the value going down a bit more.  We are also planning to pay off the mortgage in 13 years instead of 30 by adding extra principal onto every payment, so  we now have 155 more payments to go.

There is a possibility that we will move down there in a few years if the hubby gets the job he wants down there, and if that’s the case then we would have a nice house to live in.

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I am leaving San Mateo for China first thing in the morning tomorrow.  Sorry for the lack of updates but these couple weeks have been insanely busy for me.  We actually still haven’t completely closed on the house because of a bunch of mix ups and confusion.  Hopefully it will be done tomorrow, but I won’t be here to see it.  That sounds pretty precarious and believe me, I have been pulling out my hair for about two days.  I have also been trying to tie up loose ends at work and it has been two extremely chaotic weeks.

I am so glad that I will be leaving on a jetplane tomorrow because I just need to get away from this crazy country for a while and escape to another crazy country.   We will be watching the presidential election through the filter of CCTV.  The hubby already voted early on Saturday, so he is all set.

I will be back early morning of November 14th, but there will be an excellent guest post by The Wandering Tax Pro in a couple days.   Stay tuned!

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The New York Times recently published an interactive calculator that allows you to compare your debt situation to a group of more than 360 American families that were surveyed in 2004. After playing with it for a little bit, it was pretty clear that this survey indicates that those with more income are more likely to have debt. This led to me to ask, why is that those with more means seem to borrow more?

The calculator allows you to input your mortgage debt, credit card debt, automobile debt, and educational debt.  Then you can choose your income and age group on the bottom and it tells you how many percent of the families they surveyed are like you. So I put in $0 and less than 35 year old.  In my age bracket, 39% of families making less than $20,000 per year had no debt, and only 3% of families making more than $150,000 per year had no debt.  This is a very stark difference.  When I changed the age bracket to all age groups, 47% of families making under $20,000 had no debt while only 14% of families making more than $150,000 had no debt. That is still a very big difference.

I noticed that regardless of income, most of the debt of these families came in the form of mortgage. The average amount of mortgage debt goes up as you scroll up in income. This makes sense because more income allows people to qualify for larger mortgages.  Higher income families also tend to live in areas with high costs of living so housing is more expensive to begin with. Some would argue that mortgage is a type of “good” debt because it allows people to have a piece of real estate after it is paid off, but that alone  does not change the fact that it is a debt.

In all the other categories of debt, higher income families still owed more than lower income families on average.  The average automobile debt of families making over $150k  is nearly 9 times the automobile debt of a family making less than $20k.  All of this just shows that those with higher income spends much more on the same goods and services.

Personally I have lived in both ends of the income spectrum presented in this survey.  When we just moved to America we were living on one graduate stipend.  All three of us lived on less than $1000 a month and we watched our expenses day to day.  Nothing was bought without a coupon, and the damaged foods section is where we shopped first. When my family was at that income level, frugality was necessary for survival  and  there is no room for debt because one credit card interest charge could mean a week’s worth of groceries.

Later, my parents graduated and we moved to the San Francisco Bay Area.  They both had well paying jobs after a few years, and they took on a mortgage. A big change I noticed is that we no longer cut out every coupon we found for food and we ate out much more.  It was much easier to spend money because we had more income than before.  The rationale was that coupons were no longer worth the time and effort to redeem, and paying for good food was great because we can’t cook like that anyway. Being frugal is just harder when you have the means to spend your money and justify it later as only 0.25% of your salary.

Though, having said this, I would like to clarify that my family was never that extravagant and got in any debt other than their mortgages. Also, I think it would more interesting if the NY Times reported the amount of assets these families had and see if these families could cover the amount of the debt they have.  If the higher income families had enough assets to make their net worths positive, then they are not too badly off.  If they had the most debt and least assets, then they are really in trouble.

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I am sure that most Americans are quite excited about the tax rebates that may be coming soon this year due to a major economical stimulus package. What is lesser known about this package is that it will also raise the “conforming” mortgage loan limit from $417,000 to $729,750 in high priced regions until the end of this year. This means that government sponsored enterprises such as Freddie Mac and Fannie Mae will be able to purchase loans as large as $729,750, and any loan under this limit will not be a jumbo loan. Basically, people will be able to borrow more money and pay less interest. Who is cheering for this change and why? More importantly, how will you be affected?

Opposing Views on the Issue

What I found interesting is that the National Association of Realtors put out an extremely positive review about this move stating that “NAR’s research found that simply increasing the loan limits for Fannie Mae and Freddie Mac to $625,000 would permit as many as 300,000 families to enter the housing market, reduce foreclosures by as many as 210,000 and allow as many as 500,000 jumbo loan borrowers to refinance to lower cost loans, saving these people $274 to $411 a month.” On the other hand, this article states that “the director of the Office of Federal Housing Enterprise Oversight (OFHEO), which is the governing body over America’s government-sponsored enterprises (GSEs), warned the Senate Banking, Housing and Urban Affairs Committee this week about expanding the GSEs’ ability to take on jumbo loans without first having the appropriate stipulations and regulatory structures in place.”

Who should we believe? The glowing report of an association of realtors who have lobbied for the change or the director of a branch of the government that has been tracking housing prices and demographics for more than three decades? I personally believe that the director of OFHEO’s opinion is prudent and logical. With bigger loans, the government sponsored enterprises will be taking on more risk, and if these agencies are destablized by more risky debt then the entire economy could collapse even further.

Best Case Scenario for the Average American

The best case senario I see is that nothing really happens and very few loans get funded under the new limit. These few homeowners will benefit from the lower rate and keep on paying their bills. Hopefully, the paltry number of these homeowners will not affect the housing market in any significant way. The prices of houses continue to decline for a while making homes more affordable and lowering the need for jumbo loans. Basically, the best we can hope for is that nothing changes.

Worst Case Scenario for the Average American

Unfortunately, I think it is possible that this footnote to the stimulus package could have a devastating effect on the current mortgage crisis. First, it may prolong the bubblicious prices in California and the Northeast. Right now I am reading many stories where offers on homes fell through because of the lack of financing. Considering the fact that the average price of shacks in my neighborhood is $700k to $800k, most of these buyers are trying to secure jumbo loans. Once this package goes through, financing will be possible, and the prices on the shacks will not come down as quickly. Even though this higher limit is only in effect for one year, it is possible that more speculators and fraudsters will get into the market and drive prices up even higher. After all, it only took about two years (2004 to 2006) for home prices to double in many parts of California. You may say that this is not a problem for the rest of America, but if Freddie Mac and Fannie Mae become insolvent because of more risky debt, then all Americans will have to pay dearly with mandatory bailouts. Then we can kiss that tax rebate and even more money goodbye.

What I Think Should Happen

I am not an expert, but I firmly believe that what we need is more affordable homes, and not larger loans. So it is probalby best if the limit was left alone and the ridiculous prices fell back down to earth. I think it is ludicrous that the “conforming” loan limit is being lifted more than $300,000 in this package in the blink of an eye considering that it took a span of 23 years for the loan limit to go up from $115k to $417k. Is more debt really good for Americans? What do you think should happen?

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