Entries Tagged 'Mortgage' ↓

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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A year ago I wrote this article about the government’s plan to freeze mortgage rates and how ridiculous it was. I also suggested that people should just walk away from their gigantic loans and buy something cheaper. A lot has happened since then. There were countless attempts by the government to revive the housing market with very little success, and many people did walk away from their underwater loans and buy cheaper homes. Yesterday, a report released by the Comptroller of Currency showed that more than 50% of borrowers who received loan modifications end up defaulting again anyway.

When I read the news I thought to myself, “well, what did you expect?” Many of these loan modifications either changed the loan term from 30 years to 40 years or lowered the interest rate, but the borrowers still owe a gigantic debt on a depreciating asset. There is no incentive for them to pay the debt if they can find a place to live in for even less money than the reduced mortgage payment.   Seriously, who would want to pay a $400,000 debt on an asset that is worth only $200,000?

Additionally, all of these loan modifications encourage bad behavior.  The borrowers probably think that if they don’t pay they will be bailed out again because bailouts are all the rage right now.  Everyday the news is reporting some kind of government action to deal with foreclosures.  So if you already got free housing for 3 to 4 month and then got a modification on your loan, then you have another 3 to 4 months until a foreclosure comes.  That’s 6 to 8 months of no housing payments even if there is no second modification, and that seems like a good financial incentive to default.

Another driver in re-defaulting is the worsening economic state of the world.  In November the United States lost 553000 jobs, and perhaps a lot of people no longer have the amount of income they had when they received the loan modification.  For now, I think the unemployment situation is only going to get worse.

I think the lesson in this is that the government should stop messing with the free market and let foreclosures happen naturally.  These modifications and bailouts are just prolonging the pain for everyone involved.  I suppose that more than 40% of these borrowers are still paying for their modified loans,  but they really  may be better off by renting and saving for a down payment on a cheaper home.  Home prices have come down more than 25% in many parts of the country, and it is slated to go down even further.  It would take a while for a foreclosure to come off someone’s credit report, but that might be the perfect time for that person to build up a sizable down payment.

I think home prices will go down for at least another 4 to 5 years and recover if the government stops with the interventions.  If they continue to manipulate the market through interest rates and loan modifications then it may take the housing market a longer time to recover precisely because the bad apples will still be hanging on.  For example, if a person gets a foreclosure now then  it would take seven years for it to come off their credit report.   So in seven  years this person would be a prime borrower again.  However, if he hangs onto the mortgage through various bank and government deals and then redefaults after two years, then it would take nine years from now for that person to become a prime borrower again.  The sooner people get foreclosed on, the sooner they can rebuild their credit and become suitable homebuyers again.  The housing market will only recover when the demand returns, and I truly believe that  all of these government polices to prevent foreclosure will simply stall the recovery of the housing market.

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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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