Author: Bill

Mortgage Prepayment is always a hot topic! On TV, in Magazines and on the internet I am constantly being hit with the latest and greatest  “debt free”  Guru’s product or strategy that makes me cringe when they say “How to pay off all debt including your mortgage in 5 years”. It is an absolute that you will pay less interest on a 15 year loan vs. a 30 yr. There is absolutely the sense that owning something and not having a payment makes sense and feels good! Prepaying a loan is good just look at the interest savings! Being debt free is fantastic. Here’s why I cringe… They take a position as an advisor without giving you both sides of the facts. If you chose option 1 and saved $100 dollars you would be happy. If you later found out there was an option 2 that you could have saved you $300 but they didn’t tell you how do you now feel about option 1?  What if it wasn’t $300 but $30,000! Let’s break it down and you decide which option is best for you. 

Is all Debt the same?  NO… You may have secured or unsecured debt. Unsecured debt is your word that you will pay. A secured debt will have collateral like a car, boat or your home. A car and a home loan may not be the same. Two questions you need to answer. Is the interest deductable? Does the secured item appreciate over time? The general answer for these questions would be “No” for a car and “Yes” for a home.

Is all debt Bad?  NO… You need to understand your debt  and understand if it is a good debt or a bad debt and how it impacts you personally! If you are unable to pay off your credit card in full each month that should be a warning sign that you may be developing bad debt. Your home will appreciate over time and you may also get a tax deduction.

Is Appreciation the same if I have a Mortgage? NO…The rate of appreciation may be the same but a financing creates leverages your return on investment.

HOUSE 1 is bought cash for $100,000 and appreciates at 2% per year for 5 yrs and now has a value of $110,408 or a 10.4% return on investment.

 HOUSE 2 is bought for $100,000 with $20,000 down and the balanced financed. Appreciation is the same 2% but what changes is your return on investment. $10,408/$20,000= 52% return!! This is leverage.

Why should I have  a mortgage on HOUSE 2?  Bingo! This is the real question behind Mortgage Prepayment! If I have the cash why would I have a mortgage? Great question but let me ask, What was the LOI on your money? LOI stands for “Loss Of Interest”.  Where did you get the money? You would need to pull from a 401K $142,857 minus 30% (10% penalty and 20% taxes) to net $100,000 to buy the home cash. Ouch! it may be wiser if possible to take a loan from your 401K to get minimum down and pay the loan back to yourself and use OPM for the rest. Unless it was cash in your closet you will not earn any future interest! $80,000 invested for 5 years with a 3% return would be $92,741. That’s a $12,741 LOI. At 5% it would be a $22,102 LOI. You need to determine if it is cheaper to borrow your money or cheaper to use the Lenders money. OPM- Other People’s Money. Think of home equity as a bank account. If you had $100,000 in a 30 yr CD at 2% would that be a good deal?

What about the mortgage payment on HOUSE 2?  If you borrowed $80,000 and you are in the 20% tax bracket the net interest paid in 5 years would be $19,234. Remember the LOI if you invested at 5% would be $22,102 money. It would be cheaper to have a mortgage! Money you either put in as a down payment or a prepayment is like investing at the after tax rate of your mortgage!

What if I take a 15 Yr loan instead of a 30 yr to save interest?  NO…  Mortgages are simple interest. Take a look at the 1st payment of an $80,000  15yr vs. a 30yr loan.

15 Year Loan at 5%: $632.63 total with $333.33 interest and $299.30 principal.

30 Tear Loan at 5%: $429.45 total with $333.33 interest and $96.12 principal.

The interest is calculated on the unpaid principle balance times your interest rate divided by 12. The amortization calculates the amount of principle needed to pay the loan in a set term. On a fixed payment loan a prepayment will shorten the term forcing a re-amortization of the loan. The rate is the rate. A 15 year loan will have a lower start rate than a 30 year because the Lenders risk is reduced. A lower interest rate makes less sense to prepay. Nothing is absoulute and there seems to be exceptions to most financing rules which is my issue with gross generalizations. A 15 year might make sense because your credit score forces you into a higher risk group and the interest rate will be much higher on the 30 yr vs. a 15yr. This is more a factor regarding loan selection resulting from pricing overlays than prepayment and should be considered with a loan professional or accountant.

What other factors should I consider? How does the mortgage fit into your overall money picture? Ask yourself WHY? Here are some common answers:

• I want to own my home
• I don’t want to pay all that interest
• I don’t want a mortgage when I retire
• I want to have security
• I want to build equity so I can borrow it for children’s education
• I want to build equity so I can do a reverse mortgage

Savings are good. Investments are better! Prepaying a loan is saving and using Leverage, OPM and maximizing tax advantages will provide a better overall return by investing in yourself!

Would you choose a or b? You own a home with a value of $400,000.

• a. Home free and clear
• b. $300,000 invested at 5%, $100,000 mortgage at 6%

Let’s assume you are retired and the $300,000 is your  401K and the taxable interest income monthly of $1,250 is offset my your mortgage interest (P&I $599) and tax deduction vs Free and clear who live on SS income only because they wanted to prepay the mortgage and couldn’t afford to invest in the 401K and are now thinking about a Reverse mortgage because they can’t make ends meet.   You decide.

By Bill Frantz

How can a Debit Card hurt my credit score?

To be fair let me say that a Debit Card will not directly impact your credit score. That’s the point! A Debit Card will not impact your credit score. First lets take a look at the Debit Card.

Pros:

• Convenient
• Easy Access
• Track Spending
• Secured by Pin #

Cons:

• Easy Access
• Possible Fees
• Risk
• Secured by Pin #

 If I’m robbed and a thief steals my cash I am aware of it but there are thieves that will steal your debit information and clean out your account while the card is still safe in your pocket. Debit Cards should be protected as if they are cash and you should NEVER share your Pin #. This is not about the Pros and Cons of Debit Cards and their use is really a personal preference.

Being in the Mortgage industry I see a lot of credit reports and I am alarmed recently at the number of people that do not meet current standards for Lenders/PMI Companies. There are 2 things the Lenders are looking at. The first is your FICO credit score. Second it is your trade-lines in your credit profile that drives your score. Many Lenders/PMI Companies have credit overlays that want to see 3 to 4 open and active trade-lines or accounts for the last 12 months. Many people have either shut down or don’t use their credit enough to to keep their credit profile healthy because they rely soley on their Debit Card. You could have an 800 credit score and have an unhealthy profile! It’s like having a spare tire with NO air. Looks great in the trunk until that dark rainy night on the side of the road when reality strikes.

A profile may look like this:

• Car loan 9 months old
• Switched card B, for card C ,for better rate 6 months ago
• Keep card A for emergency haven’t used in 2 yrs
• Have a current Mortgage 3 yrs old

This profile has 4 accounts but only the Mortgage would count as an open and active trade-line. It is a good idea to pull your credit report at least every 1-2 years and make sure to keep your profile healthy and this will give you a FICO score you can depend on.

For more info on credit scores checkout this post:

“How Credit Really Works”

By Bill Frantz

Mary was moving to PA and looking for her dream home. Mary had a friend that recommended a PA Realtor that Mary decided to use. Like many buyers Mary loved to look at all the homes and pictures on the Internet.

Mary’s new Realtor seemed nice enough and was sending a few homes but Mary was seeing so much online that the new Realtor wasn’t sending and she didn’t want to miss a thing. When asked why these other homes were missing the Realtor explained that the criteria that Mary had given him as a “Must Have” in the home, such as the “fireplace”, “2 car garage” and “finished basement” were missing from these other homes so they were filtered out. They agreed that he should adjust to loosen the search for more results. Mary continued to search and a few weeks later came upon a home she just had to see. Mary called the Realtor and stated that she wanted to look at this home. The Realtor was going out of town for the weekend and told Mary he would call first thing next week to arrange the showing. Mary agreed but after viewing it several more times online she just had to see it now!

Mary called the Listing office and was promptly connected to a Realtor. Mary said she was driving in from out of town and would like to see this home that she found online. The anxious Realtor  also offered to show Mary several other homes in the area at the same time. They agreed to meet Saturday morning. Mary didn’t hit it off with  anxious Realtor and quickly looked at the homes without much conversation.

Mary loved the home and excitily called her Realtor first thing Monday to have him write an offer. “That’s a problem” the Realtor stated. Mary was confused as they had reviewed the PA Consumer Notice and she had even signed a  Buyer Agency contract. 

 The Realtor explained the PA rules of procuring cause and that Mary’s actions created a situation where “anxious Realtor” may be entitled to the commission offered by the Listing office and that if she wished him to continue representing her that Mary would need to pay for his services directly because the listing commission would only pay one cooperating agent commission and that would be “anxious Realtor”. Procuring cause may kick in anytime a potential purchaser physically enters a property for sale, an open house or even new construction. If not accompanied by your agent the commission may go to the Agent present.

What if  “anxious Realtor” is also the Listing Agent and now becomes a Dual Agent. Who represents Mary?

This is how Mary lost her Buyer Agent. CHOOSE DON’T LOSE

For more info checkout these resources:

“PA Consumer Notice”

By Bill Frantz

 The Federal Housing Administration or FHA as they are commonly known will delver another blow to potential home buyers on April 18 2011. 

Per Mortgagee Letter 11-10 issued on Feb. 14th 2011: The Annual Mortgage Insurance Premiums are increasing on loans that do not have a valid FHA case number prior to the date. FHA will also cancel case numbers issued prior to April 18th 2011 that have not met certain criteria in the last 6 months and this includes new construction.

How bad is the increase?    27.7% in your monthly MIP

 If you are taking out an FHA loan for $200,000 your annual MIP cost will will increase $500.00 per year or $41.67 per month!!

The only way to truly see the bottom is in the rear view mirror! The market needs to turn upwards before the bottom is defined. When you see the upturn you have already missed the bottom. If you were waiting to Refinance you may have already missed your opportunity but in a Purchase rate it’s just one factor in home affordability. A 1% hike in rates could erode your purchasing power by $10,000 for the same monthly payment! “OUCH”.  Another factor is that seller assist will quickly disappear when Real Estate finds firm footing further reducing buying options and increasing out of pocket expense. “OUCH”.  Again the bottom is defined by an upturn which means Home prices will also be rising. “OUCH”. Market Bottom is also local as it starts in small ways as certain neighborhoods and areas turn upward long before the bigger picture grows enough to show up on the Evening News! In the Greater Philadelphia Metro Area this is the BOTTOM!  Home affordability is such that in many cases it’s cheaper to buy than rent… Waiting can be a very expensive price to pay!

By Bill Frantz

Can you stay in the house while a short sale is being worked out with your lender?

Yes! Actually, your lender usually prefers you stay in the house, even if you are not paying the mortgage.

Why Does The Lender Want You Stay?

If you stay in the house, you are protecting the house, which means you are protecting the lender’s investment.

Here’s how you help the lender by staying in the house:

• You are keeping the heat on, thereby protecting the house from freezing pipes and water damage.
• You are keeping the house ventilated, thereby reducing risk of mold.
• By occupying the house you are reducing the risk of vandalism.
• By keeping the lawn mowed you are keeping the county inspectors from attaching penalties against the house that eventually your lender may have to pay.
• You are maintaining the house as a home, rather than leaving it as an abandoned property.

All your simple actions of staying in the house help protect the lender from additional losses. Some lenders stipulate that you MUST stay in the house to qualify for the short sale.

Sounds Unlikely The Lender Will Want You To Stay In The House?

One easy way to find out is to call your lender and ask. You must get transferred out of the collections department to a department that is set up to help you avoid foreclosure. These departments have a variety of names;  Home Retention Dept., Foreclosure Workout Dept., Short Sale Dept., or Loss Mitigation Dept.

Ask them the same question: Can I stay in the house during the short sale, even if I’m not making mortgage payments?

You may be pleasantly surprised by their answer.

You should also confirm your decision with an attorney.

By Dave Halpern

Found at: www.activerain.com