Archive for October, 2007
1% Mortgage Refinance - How?
1% Mortgage Refinance loans, you’ve probably seen 100 different advertisements, but how is it possible? There is really only one big secret to 1% mortgages: 1% minimum payments are below the interest payable on the loan. Once we’ve addressed this feature, most of the other facets of 1% mortgages are relatively logical.
Mortgage Refinance loans, you’ve probably seen 100 different advertisements, but how is it possible? There is really only one big secret to 1% mortgages: 1% minimum payments are below the interest payable on the loan. Once we’ve addressed this feature, most of the other facets of 1% mortgages are relatively logical. 1% mortgages, which now come in dozens of varieties with start rates from below 1% (some even starting at 0% for a few months after refinance) up to 4% or more, offer astonishingly low payments. Some of them offer fixed rates for 30 or even 40 years, some of them are adjustable from the day you take them out, all of these are basically “1% mortgages” and are extremely popular amongst homeowners today. 1% mortgages and their offspring are being used for debt consolidation, cash flow management, investments, and for tax purposes, and they are being used a lot.
A full 40% of home loans originated in 2005 and 2006 are estimated to be from the 1% mortgage family, with multiple payment options. By its proponents, the success of the 1% mortgage has been hailed as a new era of affordability and flexibility, of an extremely sharp financial tool once available only to the very rich now available to every family in the country. Its opponents tend to think that the 1% mortgage is a bit too sharp for the average homeowner to handle, they fear “Average Joes” could conceivably cut themselves. Despite their division, one thing is certain, the popularity of the 1% mortgage is driven by the relentless pursuit of the American dream. There are more homeowners in the United States today than in any other period in history, and many of those who own homes have only been able to accomplish home ownership, which was once a lifelong achievement, in their early 20’s and 30’s, largely because of the extended availability of these 1% mortgages to normal borrowers.
How much less expensive is a 1% mortgage payment option versus the comparable 30 Year Fixed traditional principal and interest payment?
For a $500,000.00 Mortgage:
1% Minimum Payment: $1200.00 Normal Loan Payment: $3000.00 —————————– Cash Flow / Savings: $1800.00
It’s easy to see why the 1% mortgage refinance is so heavily marketed as a way to cut your mortgage payment in half. In the above example, the 1% mortgage minimum payment option is 60% less than a typical, traditional principal & interest loan payment. 1% mortgage minimum payments are usually 50% lower than even the highly lauded Interest Only payment mortgages, and most loans in the 1% mortgage family include the ability to pay more than just 1% if need be.
So How Does it Work?
In fact, 1% mortgages are more than just the 1% start rate. They have a fully indexed rate as well, which is the true amount of interest due each month. When making a 1% mortgage minimum payment, the borrower is not paying all of the interest due, which is seen by some as a good thing and some as a bad thing. Let’s examine some of the commonly perceived benefits and caveats of 1% mortgages:
Commonly Perceived Benefits of the 1% Mortgage Family:
1. Extremely Low Monthly Minimum Payment: As we’ve seen in our example, the minimum payment option is less than half of the typical traditional mortgage payment.
2. Flexibility to Control Your Own Money: Unlike a traditional mortgage, which requires a payment to principal each month, 1% mortgages allow borrowers to take the power into their own hands to make principal payments when they want to, e.g after a bonus or a particularly good year.
3. Separate Cash Flow from Equity: While many personal finance pundits laud the benefits of building home equity, the reality is that investing home equity yields a 0% return on investment on a month to month basis. In the above example, paying the traditional principal and interest payment forces the borrower to invest $1800 more each month in their home, money which is locked up entirely in the equity of the home. Home Equity is illiquid, meaning all this money locked in equity cannot be accessed unless the home is sold or refinanced. The bank won’t cut a check each month for the borrower’s home equity in a traditional loan. With a 1% mortgage minimum payment, that $1800 difference in payments is money in the borrower’s pocket, to invest or spend at their discretion. By deferring interest using a 1% mortgage, the borrower has full access to money that normally would be locked up until they sold the property. That $1800 per month adds up to over $100,000.00 in cash over 5 years on a 1% mortgage, and it’s available every time your paycheck does not get used up paying a huge traditional mortgage payment each month.
4. Maximize Debt Consolidation: Using a 1% mortgage refinance to pay off all of your other creditors, such as credit card companies and high interest rate lenders, means that you can save even more money than with a 1% mortgage refinance alone. Since you aren’t throwing high interest money at your creditors each month, the cash which you save by making the 1% mortgage payment actually goes into your pocket, your savings, your investments, or wherever you need it most. That’s ultimate control. Let’s say that in our $500,000 1% mortgage example above, we rolled in $30,000 of credit card and other high interest debt that have a monthly minimum payment requirement of $1,000. By using a 1% mortgage refinance to pay off those debts, total monthly savings using the earlier example would be over $2800 per month, $1000 from the debt consolidation plus $1800 from the difference between the traditional loan payment at 6% and the 1% mortgage minimum payment.
5. Turn Equity into a Tax Deduction: First, the 1% mortgage payment is 100% interest and therefore should be 100% tax deductible in most cases. Secondly, One of the most attractive benefits of 1% mortgages is the additional tax deduction available on deferred interest. What this means is that borrowers can realize a tax deduction on interest they did not have to lay out the cash for, and choose the time at which this deduction is realized, which can be a huge savings upon liquidity or refinance. For real estate investors, this is a huge advantage as it can often wash out the capital gains consequences of selling a property. Disclaimer: We do not dispense tax advice, and you should consider consulting a CPA.
6. Easy Qualification: Normally, to qualify for low payment mortgages, borrowers are required to have exceptional credit. However, 1% mortgage refinance loans are routinely available to borrowers with credit scores as low as 620, and if they are borrowing less than 80% of the value of their home, scores can even be in the 500s provided there are no late mortgage payments reported on their credit file. The borrower’s income can be stated, and sometimes no income or employment documentation is required at all.
7. Enhanced Protection from Foreclosure: Because the minimum payment option is so low, the cash savings each month so high, and the loan is so flexible, the 1% mortgage family offers homeowners a low minimum payment option which they have a much higher likelihood of paying should they suffer an interruption of income or become disabled.
8. Biweekly Payments: A popular way to maximize the benefits of the 1% mortgage refinance is to elect to make biweekly payments (which are available on select 1% mortgages). This optimizes the loan to coincide with most borrower’s payment cycles and reduces any possible negative effects of deferring interest.
Commonly Perceived Caveats of the 1% Mortgage Family:
1. Artificially Low Payments: Because the minimum payments are so low compared to traditional mortgages, many pundits fear that people who would normally not qualify for home ownership can now own a home. The fear is that new or “low income” homeowners could “get in over their heads” by buying more house than they can truly afford. Ultimately, it is up to the borrower to decide how much they can afford.
2. Deferred Interest: Often referred to as negative amortization, this concern is commonly cited by journalists as a “negative” because the loan balance may increase over time if the minimum payment is always selected. However, this perspective does ignore the advantages of dramatically increased cash flow in the borrower’s pocket each month and the tax benefits of deferring interest. Of course, the borrower can choose for themselves whether they want to spend their money paying interest to the bank or if they would rather put the difference into their own pockets.
3. Depreciation: If the value of the borrower’s home falls dramatically, and other factors force the borrower to sell the home while the value is low, the borrower may wind up owing more than the home is worth. This is a valid risk over short periods of time for all types of mortgages, not just 1% mortgages. Even a traditional principal and interest mortgage does not pay off enough principal over the first 5 years of its life to offset a dramatic short term decline in home values. The risk of property values declining is a real risk of owning property, period. However, history tells us that residential real estate appreciates consistently over any given ten year period in the past 50 years.
4. Too Easy To Qualify: This may not seem to be a disadvantage to most borrowers looking to purchase or refinance a home, but there are those who believe that borrowers should be forced to document significantly more income and assets to qualify for these types of loans. A lot of this sentiment is an outgrowth of antiquated conceptions of 1% mortgages as a “Rich Man’s Mortgage“, which used to require significant net worth to obtain, and some of it is attributable to equally antiquated “one size fits all” notions about mortgages. Your perspective will likely depend on whether or not you are in a position to provide extensive documentation of your income and assets in support of your loan application.
Many of the criticisms of 1% mortgages revolve around the adjustable rate variety of these mortgages, which like all adjustable rate mortgages go up and down with the rest of the market. However, in most 1% mortgages, the minimum payment stays fixed and can go up or down only 7.5% per year. So if your payment in Year 1 is $1000.00 , in Year 2 it can go no higher than $1075.00. Because the rate on the loan can change more or less than the minimum payment, which is extremely low, the loan can result in the deferral of interest if only the minimum payment is made. Many of the amortization issues which are seen by critics of 1% Mortgages as their key detractor have been recently resolved by the introduction of fixed rate minimum payment loans to the 1% mortgage family.
Fixed rate 1% mortgage variations, the latest additions to the 1% mortgage family, have fixed interest rates from 3 to 30 years or more. The minimum payment option is generally available for the first 5, 10, 15 or in some cases 20 years of the mortgage, at which point the 1% mortgage payment recasts or readjusts to the interest only payment or the full principal & interest payment. During the fixed period, the loan payment and interest rates of fixed 1% mortgages are utterly predictable and can be defined down to the penny. Many borrowers who would prefer a fixed rate can benefit significantly from the 30 year fixed 1% mortgage, which actually carries a minimum payment of 1.95% and a fixed rates in the 6% to 7% range for 30 years.
While there are those in the journalism community who believe that 1% mortgages have too much power for your average homeowner, ultimately the decision is in the homeowner’s hands. Make a high payment to the bank each month, or put the money in their pockets. And homeowners seem evenly divided, as refinances into loans from the 1% mortgage category are projected to represent over 50% of all refinances in 2007. Traditional mortgages are not a one size fits all solution, and neither are 1% mortgages, but with low minimum payment options, excellent debt consolidation capabilities, significant cash flow and tax advantages made possible by deferring interest, and flexibility to control your finances or insulate yourself from interruptions in income or disability, 1% mortgages continue to post significant growth across the country. Whether or not a 1% mortgage refinance is right for you should be determined by performing a detailed analysis of your personal financial situation with a home loan professional who has extensive experience with 1% mortgage products. As always, we welcome your calls and emails.
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Baltimore Prices, New Home Builders
So the Baltimore housing market is starting its decline. According to Housing Tracker , Baltimore ’s median price is down -10.5% year over year. And according to the newly release S&P Case-Shiller figures for Washington D.C. (although not Baltimore , we have a symbiotic relationship with that MSA ) DC is down -7.2% year over year. In reality Baltimore appreciated with about a 6 month lag behind DC so I have and continue to anticipate a 6 month lag for Baltimore . House prices are falling and if you don’t believe me, get an account at www.ziprealty.com and do a search for “short sales” and “reduced prices”. And if you’re really interested you may want to check out the REO homes (real estate owned) as in owned by a bank or lender
Do some searches for Maryland REO’s on
Countrywide
Bank of America
CITI
HSCB
IndyMac
I found one here today that looks very interesting. It’s a REO owned by Countrywide.
Current Listing Price: $489,900
Original Price: $549,900
2005 Prior Sale Price: $497,900
This house is back to 2005 prices already
Price Reduced: 05/24/07 — $549,900 to $537,900
Price Reduced: 06/12/07 — $537,900 to $529,900
Price Reduced: 07/18/07 — $529,900 to $521,900
Price Reduced: 07/24/07 — $521,900 to $513,900
Price Reduced: 08/22/07 — $513,900 to $505,900
Price Reduced: 10/10/07 — $497,900 to $489,900
Days on Market: 175
On ziprealty.com this house has this note attached to it
“This property will be offered october 15, 2007 - october 29, 2007 through an online bidding event.”
I’ll see if Maryland Land record get anything on this and then I’ll let you know.
Something new you might want the checkout:
Check out Jamie Smith Hopkins new Real Estate Wonk Blog via the Baltimore Sun. Though this isn’t a “Bubble” blog, she does post a lot and is a reader of a lot of my favorite bubble blogs.
So last weekend my wife and I went to a few new home open houses and here are my opinions.
Bozzuto Homes has a few homes right on North Charles Street called Woodbrook . They were priced at $800Kish and they were no more than duet homes which is new lingo for duplex. They are definitely not worth the price…I wouldn’t even give $300K for one.
Then we checked out K Hovnanian’s Holly Ridge homes in Timonium. No model home to look at, but your back yard is literally the Route 83 Harrisburg Expressway sound barrier wall. Lets just say I could definitely hear and SMELL the traffic on this sunny Sunday afternoon. Hope you don’t have asthma because for $600K you can have the best view in the world, a beige concrete wall with noise and smog surrounding your home.
Then we went over to White Marsh and checked out the crazy Honeygo section. We went over to Ryan and NV homes The Enclave and these had to be the worst built homes I have ever seen in my life. I couldn’t believe anybody would let the model home have such a bad paint job with paint dripping and crown molding that didn’t joint correctly. And why would anybody want a basement bar that is literally 1/2 of the entire basement and yet didn’t even have a sink or washing machine…. Buyers seriously beware of shoddy construction work. Years ago I was a project manager for a home builder and I know what cheap wet back labor looks like.
Then, we drove though all the neighborhoods and we saw hundreds of for sale signs on the new 2005 homes right in the honeygo area. Those sellers are screwed because the builder is selling newer units for less.
Finally we came into another development in the Honeygo area. Chateau Builders has the Chateau Estates at Moore’s Meadows. These homes were in the same price range as the Ryan homes, but drastically superior in quality, features, design, etc… But still at around $600K, I think the builder of these unbuilt homes needs to lower that to around $450K loaded. I’d buy one now if it was price at $450K.
Have you been out and about looking at homes recently? Post what you’ve seen and lets light up Baltimore .
The Benefits Of A Fixed Rate Remortgage
By: James Copper-5768
There are many types of mortgages. One type that potential home owners will hear a lot about is a fixed rate mortgage. When looking for a mortgage it helps to understand the differences in each mortgage and what certain terms, like fixed rate, mean. This can help a home buyer choose the mortgage best suited for them. It can help them to make an informed decision. As the home buyer will find out fixed rate mortgages have some benefits over other mortgages.
First of all, there fixed rate refers to the interest rate. In the mortgage world there are two types of interest rates. There are fixed rate and flexible rates. Fixed rates stay the same for the life of the loan. The home buyer locks into the current interest rate that id offered when they sign the loan agreement. A flexible rate mortgage has a mortgage rate that changes.
With a fixed rate mortgage the home buyer has the benefit of having a mortgage payment that will be the same every month for the life of the loan. They will also know exactly the amount they are going to pay.
With a flexible rate mortgage the home buyer will have different payments each month as the interest rate goes up and down. They will not know the total amount of their loan overall nor will they know ho w much they owe each month beforehand.
Now the term fixed rate can apply to different types of loans. A first time home buyer loan, for example, can be a fixed rate loan. Any loan except a flexible rate loan can be a fixed rate loan. This is important for a home buyer to understand so they do not get confused or otherwise tricked by a lender.
Additionally, a fixed rate loan can be a bad choice if the market is currently in a trend where interest rates are dropping. If a home buyer is buying a home during a market like this their better choice would be to get a flexible rate loan and then lock in once interest rate bottom out.
A flexible rate loan can often be changed to a fixed rate, but it is very hard to switch a fixed rate to a flexible rate. The reason for this is that with a fixed rate the bank knows what they are earning and they like it when the interest rate of the fixed loan is higher then the current rate because they are making more money off it. To change a fixed rate loan to get a different interest rate would require a refinancing of the mortgage.
A fixed rate remortgage can be a good idea, but it can also be a bad choice. It is up the home buyer to know what to watch out for and to make sure they are making the best decision possible. The home buyer is going to be the one paying for their decision in the end. The lender may be willing to explain the options, but they are not likely to push a buyer into choosing the cheaper option. They simply sit back and let the home buyer decide.
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