Author: Bill

Congratulations!! You have done your homework and decided that home ownership is right for you. Many preparing buyers get anxious, frustrated, confused and possibly derailed by the whole mortgage approval and how much a Lender will qualify them for. Even worse many buyers are mislead into a loan that pre-approves them for a payment much higher than their comfort range or programs that lower the payment but needlessly increase the risk of future default! Let’s change MORTGAGE APPROVAL to PERSONAL RISK ASSESMENT to more accurately define the true goal in the process. As a buyer I’m concerned with the risk that my payment will be too high, home values may drop,  I’ll be house poor, I don’t have enough reserves,  I could lose my job and if something goes wrong I will lose it all. All of these risks should be concerns of the Lender as well but many times lenders do not always explain the negatives of a product. Lenders invest money and are concerned with you paying them back. Lenders are not investing in real estate, if they were, they would simply buy the home and rent it to you. Consider talking with at least one licensed  local mortgage Broker to compare products available from many lenders as well as your Bank or any online offers to make sure you are getting the best rates and programs and reducing your risk! 

RISK MANAGEMENT: Risk is just a fact of life. If I jump out of a plane there is risk. If the plane is on the ground I have minimal risk. Jumping out at 5,000 feet my risk of death is great, but if I use a parachute I can greatly reduce my risk. Buying life insurance does not reduce my risk of death but it will replace the loss of wages that others may depend on, greatly reducing their risk of financial hardship.  Knowledge, education, training and experience can all reduce risk.

If I came to you in 2005 and wanted you to invest everything in gold at $444.74 per ounce knowing the high was $615.00 in 1980 would you borrow money to invest? What if you knew the price would be over $1,500 per ounce just 6 years later?  

If you had a choice between twenty pounds of gold or a parachute and you must immediately get out of the plane, which would you choose? What are the conditions of the terms of this offer? You are at 5,000 feet and the plane is going down, which do you choose?  The plane has boarded but not yet left the gate, which do you choose? The offer is the same, the answer may vary as a matter of the terms or conditions. The same is true of a mortgage, unless you understand the terms and conditions of your mortgage you may not have full disclosure and be able to make an informed decision.

 The point is that risk is personal and the correct decision on payment and terms for you, is best made by you, based on the most reliable and complete information available.

TERMS MATTER: Lenders base their decision on your PITI Payment not a set loan amount!  Most Mortgages are based on simple interest, it is the terms that vary! Consider ways to reduce your PITI payment that reduce payments with little or no increase in Risk!

PRINCIPAL: This is the portion that repays the loan (Buying Equity). The difference between a 30 year term and a 15 year term is the amount of minimum principal obligation per month. You can pay extra as a prepayment and reduce the unpaid balance. Consider a 30 over a 15 to buy more house.

INTEREST: A mortgage is a series of payments. The interest is calculated by multiplying the unpaid balance, times interest rate, then divide by 12 to get the interest portion due that month. A lower interest rate will lower your obligation and also accelerate principal reduction! Consider a Hybrid ARM with a risk appropriate fixed portion or points to lower rate.

TAXES: Taxes are the taxes. You can consider an area with lower taxes to reduce the payment and qualify for more house.

INSURANCE: You can shop for home insurance. Reducing the cost of your home insurance by $25 per month will buy about $5,000 more house

MORTGAGE INSURANCE:PMI or MIP are generally required with less than 20% down. Mortgage insurance protects the lender if you default and can be very expensive. Consider a single MI or a split loan to reduce or avoid monthly mortgage insurance if possible!

ASSOCIATION FEES: Condo and HOA fees are added to the PITI payment for qualifying and are generally overlooked by buyers. A $250 dollar a month condo fee will cost you almost $50,000 in purchase power. Consider if the association is really a benefit to you and avoid where possible.

CREDIT SCORE: Your score may greatly impact the PITI. It can affect your interest rate, closing cost, increased mortgage insurance and reduce the programs available changing the terms offered to you!  Consider a rapid re-score or other techniques to improve your score. The pricing difference with <25% down and a credit score of 679 vs. 720 is about 1.5% price hit. On a $200,000 loan that is $3,000 or a Rate increase of .25% to .375% costing $40 per month and losing about $8,000 purchase power with rates around 4.5%.

CHOOSE DON’T LOSE: You qualify with payment (PITI+) Here are 3 Scenarios.

Credit score 679, 5% down 200k 30 yr fixed loan at 4.75%, taxes of $325 per month, Ins at $70 per month, HOA of $50 per month, PMI at $150 per month. $1043.29 + $325 + $70 + $50 + $150 = $1,638.29

Credit score 720, 5% down 200k 30yr fixed loan at 4.5%, taxes $300 per month, Ins at $60 per month, No HOA, Single PMI. $1,013.37 + $300 + $60 = $1,373.37

That’s a $264 per month savings and that would buy  $52,103 more home at the same monthly payment!!

Credit score 720, 5% down 200k 10-1 ARM loan at 3.875%, taxes $300 per month, Ins at $60 per month, No HOA, Single PMI. $940 + $300 + $60 = $1,300.47  If you plan to be in the home 5-7 years a 30 yr amortization with the first 10 yrs fixed adds a greater benefit without additional risk.

That’s a $338 per month savings and that would buy  $71,878 more home at the same monthly payment!!

You have choices! For more detailed info please check  the Norstar University section of www.PaFhaMortgage.com

By Bill Frantz         at Norstar Mortgage

What Is a Condo? Condo is short for condominium. A condominium is a form of ownership where you own the interior walls of the home and the exterior is owned collectively through a HOA ( Home Owners Association)  I have read some descriptions that seem to say it is the same as an apartment that you own. While it may be true that many apartment buildings have been converted to condominium ownership this represents a small portion of condo’s here in the Philadelphia, PA Metro area and leads to the confusion that there is some physical description of a condo.

Pick the Condo? 

• 4,000 Square Foot Colonial
• 900 Square Foot Flat
• 1800 Square Foot Townhouse
• 200 year old Farm House
• 1100 Sq. Ft. Garden Villa

The correct answer would be “All of the above”. Really! You can have a 4,000 square foot Colonial that is part of a Condominium. The association owns the golf course, the club house and maintains all the grounds and the exterior of the homes.

If it has an HOA Fee is it a Condo?   No… It could be a PUD (Planned Unit Development) A PUD differs from a condo in that you own both the interior, exterior walls and usually a small parcel of land and are responsible for the maintenance. A good way to tell is to ask about roof replacement. You are responsible… PUD.  Association is responsible… Condo.

Another distinction is the home insurance. A condo will include the major fire and liability insurance as part of the association fee. You will be responsible for an HO6 policy which is like a renters policy for contents PLUS coverage for things like kitchen cabinets, flooring, appliances, bathroom and light fixtures and possibly windows and doors. Think of things that would normally be part of the home as fixtures but are inside the walls. A PUD will need a standard home insurance policy like an HO3 endorsement or similar.

A PUD and a Condo are similar in that both have common elements. Common elements are the things owned, maintained and controlled by the association; Pools, Tot lot, Common hallways, grounds, parking areas, Club house, etc. Both must also have a master insurance policy to cover the common elements. Remember that you are a member of the association as well.

Are There Risks To a Condo?  Yes… lenders generally will have a different set of guidelines for a Condo than a PUD because of the increased risk. Here is a quick guide;

• 1,000,000 liability insurance
• Reserves for maintenance
• Current budget
• Investor ratio
• Ownership by Single Entity
• NO first right of refusal
• Control of Association
• Pending Lawsuits
• Delinquent Assoc. Fees

A current questionnaire will be sent to the association to complete for the lender to review and this may cost several hundred dollars in some cases. If the lender or PMI company are not satisfied they will decline the loan.

 WARNING: if the Condo Association is not healthy it could prevent financing in the development. No FHA, No PMI … this would result in 20% to 25% down payments and possibly No financing so that all purchases would need to be cash. This would negatively impact your value. Always review a Condo’s info before a purchase.

Can I Have a Dog?  You have the right to review the Association rules and regulations as part of your Agreement of Sale. READ THEM!! You will have to live by them. You may not be able to have a dog or it’s size may be limited. You may only be able to paint your front door red. You may not be able to place a grill outside or a table. You may not be able to put a flower pot on the front steps or porch. You may not be able to park a car or truck with any writing on it… company pickup with the name on the door.

Rules can be good as it keeps the development at a certain standard but sometimes it can also prevent your enjoyment of your home. Make sure you are comfortable with the rules before you buy. Associations all vary… some are very loose and others very tight so please read the rules.

A cape, townhouse, flat or garden villa are styles of homes, a Condo or PUD are a variation of ownership and have no physical description.

For more info checkout the website     www.PaFhaMortgage.com

By Bill Frantz

What is the rule of 72?

Simply it is a quick approximation of how long at a rate of return it will take to double your money.

How’s it work?

Divide 72 by a number: Rate or years, 6% will take 12 yrs to double or 12% will take 6 yrs to double

•      72/15= 4.75
•      72/12= 6.0
•      72/10= 7.2
•      72/8= 9.0
•      72/5= 14.4
•      72/3= 24.0
•      72/2= 36.0

If you had $100 dollars and you double your money well it just doesn’t seem life altering.

What if you had a penny and doubled it every day for 30 days?

$10.7 MILLION… Crazy isn’t it! But true. At 15% it takes 4.75 years to double once. Apply that to the Penny and it would take 30 x 4.75 = 142.5 years. I wish you a long life but frankly I don’t want to wait that long so I will need some leverage.

How does leverage help double my money?

•      $250,000 x 5% = $12,500
•      $25,000 x 50% = $12,500

72/50= 1.44 years… This is your 10% down payment leveraged with a mortgage to control an asset that appreciates 5%. Over time Real Estate appreciates around 5%. Yes Real Estate Values have ups and downs so timing is important but with Values approaching record  lows we are seeing huge upside potential for future growth.

Combine low values with low rates and the tax breaks for interest and property tax deductions it is cheaper to own than rent! Rents are also on the rise and we are seeing positive cash flows on even single unit investment properties.

Don’t get left behind…

By Bill Frantz   www.PaFhaMortgage.com

TWO MILLION DOLLARS!!

Did you know that the median income in the US is about $50,000 dollars a year. If you worked for 40 years that is 2 million dollars that will pass through your hands.

So… Who stole your money?   It’s not what you make but what you keep that is important! Take a look at your pay check and review the deductions. Whats missing between your gross and your net? 15%, 30%, or even higher!

What can You do about it?  When you purchase a home the property taxes and mortgage interest are tax deductable. You make $50,000 minus $12,000 (int & tax) = $38,000 that you now pay income taxes on instead of $50,000.  

I want my money NOW?  It’s great to get a tax refund but in reality a refund is nothing more than a loan of your money to the IRS for free. Remember that W4 form you filled out when you started your job. Update it with your current info and you will lower your withholding taxes and get a bigger net pay check.

What to do with your new wealth? Put it to work. Invest in You! Most people work for their money, wealthy people make their money work for them. Look at your debt, 12% credit card, 6% car loan. Paying ahead on revolving and installment debt is like investing at that interest rate!

Pay yourself first! 401K and IRA’s will not only build wealth but you get another tax deduction. Also consider a Roth IRA where you use after tax money to invest upfront but at the end it’s all tax free!

Who else is taking your Money?  Do a budget audit. Yes you have a budget, it’s what you spend your money on. Know where your money goes. Track it for a week or better for a month. $5 in debit fees, $125 fast food, $30 morning coffee, $250 dinners out, newspapers, magazines, your food shopping. You decide if your getting your monies worth for the small things and habits that we all fall into. Review and update any insurance, car, life, disability and any other policies you may have and look for lazy dollars!

Life is like a hole in your pocket that the change keeps falling out. Fix the hole and a few adjustments on spending as well as watching the back door with taxes and looking for opportunities to make your money work just a little harder will keep everyone else from stealing your millions!

By Bill Frantz    www.PaFhaMortgage.com