Archives for February 2007

Recently at Rain City Guide…

I have been meaning to highlight post over at Rain City Guide on a more regular basis…I’m slipping!   Here are a few I thought you might benefit from reading (or just click on over and check them all out).

Earlier this month, Jillayne tackled why you should not shop interest rates by APR.  This is a must read if you are a "rate shopper".

There have been a couple post forecasting the future of our local real estate marketing, including this one from Ardell and Jon featured two posts that inspired reactions from the "Bubble Bloggers".

If you’re considering buying home at a new construction site, then Ardell’s post is a good read for you regarding dealing with site agents and when lots are released.

Yours truly added two post to RCG dealing with zero down buyers and the future for subprime borrowers.


Prepayment Penalties: Foul or Fair?

Mpj040179500001A prepayment penalty is a fine charged to a borrower if they payoff their mortgage before a certain time period (typically 2-3 years).   The fine is commonly 6 months interest (just shy of six months mortgage payments less your monthly taxes and insurance) and may vary.   

Most often, the prepayment penalty is "hard", meaning that it will be assessed whether someone is refinancing or selling their home prior to the time period being met.   Sometimes, the prepay may be a "soft" penalty and is forgiven in the case of a person selling their home, but charged if the borrower is refinancing.

For example, on a $200,000 loan amount with 6% interest, a prepayment penalty based on 6 months interest would be $6,000.  It’s expensive.   It may be a tax deduction since it is prepaid mortgage interest, however, if you’re paying if off for a refinance, it is also taking away home equity.

Some times, prepayment penalties are required for the certain mortgage program.  This is most often the case with subprime mortgages.   This has potential to cause a dicey situation if a subprime borrower has 100% financing, like an 80/20 with an adjustable rate mortgage, and the borrower does not work on improving their credit before the prepayment is over and the ARM adjust.   Subprime loans are becoming tougher to qualify for and  some subprime lenders have closed their doors.

If the borrower has good credit and equity or a down payment, then the prepayment penalty should be optional and the borrower’s choice.   The prepayment penalty may be used to lower the mortgage interest rate.  If this is the case, the Loan Originator should show the borrower the difference between the two rates and payments and fully explain the terms of the prepay.    If the "a paper" borrower is not receiving the benefit of the choice between having or not having a prepayment penalty, then it could very well be lining the pockets of the loan originator.    If your loan originator is telling you that you must have a prepayment penalty, and you have great credit PLEASE GET A SECOND OPINION.

Prepayment penalties need to be disclosed to the borrower up front.  This should not be a surprise to a borrower at signing.   Review your Federal Truth in Lending statement that accompanies your Good Faith Estimate.   There will be a sentence with a box stating:

Prepayment:  If you pay off your loan early, you  ( X ) may (   ) will not  have to pay a penalty.   

If the "may" box is checked, you have a prepayment penalty on the proposed loan scenario.   If the loan originator did not disclose this to you upfront, contact them to find out if and why there is a penalty.

The Good Faith Estimate and Federal Truth in Lending are required to be provided to you from the loan originator within 3 days of providing you a rate quote.   At signing, you will also receive a disclosure regarding the prepayment penalty.

Whenever a prepayment penalty is optional, even if it is to lower a borrower’s interest rate, I am opposed to them.  You never know when life will happen and you need to sell your home or if mortgage interest rates improve and you want to take advantage of the lower rate.    With some programs, such as subprime loans, the prepayment penalty may be required.   If this is your scenario, ask the loan originator if the prepayment penalty can be "cashed out" or reduced upfront. 

Regardless of your situation, your loan originator should fully explain all of your options to you.   Should you decide to obtain a second opinion from a Mortgage Planner, simple provide them with your credit scores, loan-to-value (sales price or value of the home and the loan amount), documentation (is it easy to document your income and assets or do you need a no-income verifier type of loan), and program type.   You may also consider providing the lender with a copy of your good faith estimate to review from the first loan originator.  The lender who provides you a second opinion should not  have to re-pull your credit at this stage.

It’s your money, your assets, your home and your responsibility to make sure you understand (ask questions…don’t be shy) your mortgage scenario.    Prepayment penalties are fair IF you understand how and why you have one with your mortgage.  If it’s helping someone with an iffy credit past (assuming the new home owner is now responsible with their credit, debts and cash flow) become a home owner, then I’m all for it.   If it’s to increase the commission of a loan originator, it’s FOUL.

President’s Day

Mpj040721300001Just a friendly reminder that Mortgage Master will be closed in observance of President’s Day on Monday, February 19, 2007.    Banks and government offices will be closed, too. 

I’m just planning on hanging around and gardening so if you need any mortgage help, drop me a line.

Mortgage Master will reopen for business as usual on Tuesday, February 20, 2007.

Bridge Loans

Mpj040255200001Lately, I have received more inquires about bridge loans.   Bridge loans are used when someone wants to make an offer on their next home non-contingent on the sale of their current residence BUT they need the equity from their property for part of the down payment on their new home.

Bridge loans can be a great tool in a hot market where sellers are in the position to be extra picky, when multiple offers are a possibility or perhaps the seller is simply not in a position to accept an offer contingent on your property selling.   A buyer wants to put forth the best offer if they really want the property for their next home.    With a bridge loan, there are no monthly mortgage payments and the interest that accrues is paid off at the closing of the buyer’s listed home.

Mortgage and some real estate companies offer bridge loans, as does our mortgage company.  The guidelines and terms may vary from company to company so if you are considering a bridge loan, please make sure your Mortgage Planner clearly explains the terms to you.   The terms that I am discussing in this post are those of Mortgage Master (with that said, our company may make exceptions as well).

Bridge loans lend a portion of the equity of the property that is listed with a real estate agent.  For example, if you have a home listed for $400,000 with a $200,000 mortgage balance, we would lend up to $120,000 (400,000 x 80% less the mortgage of 200,000).    The $120,000 would be used for down payment on the next home.  Different lenders have different ways of factoring how much they will lend for a bridge loan.

With a bridge loan, a deed of trust would be recorded against the current residence listed for sale.  The $120,000 bridge loan plus interest would be paid off once the property is sold along with the current mortgage in the amount of $200,000.

A home buyer considering a bridge loan should discuss this with their Mortgage Planner and Real Estate Agent.   The buyer will need to be approved factoring in mortgage payments for their current residence, the new home AND the bridge loan (interest only payments, even though no payments are due).

A possible down side to a bridge loan is if the home buyer’s property that is listed does not sale right away or if they have a sale that fails for what ever reason.  It is quite possible a buyer could be stuck with 2 mortgage payments.   There is usually a gap of one month before the payment on the new home is due.  However, it also takes time for closing to take place once an offer is made on the buyer’s former property.

Bridge loans are intended to be short term financing (6 months).   If you are considering a bridge loan, you may want to discuss market conditions with your real estate agent and make sure that your listing is “priced to sell” so you’re not in a position to become strapped with two mortgage payments for too long.

If you are interested in buying or refinancing a home located anywhere in Washington state, please contact me! Click here for a no-hassle mortgage quote.

Why Is My Payoff Higher Than The Principal Balance?

Mpj040096800001I am often asked this question during a refinance from homeowners.   Your mortgage payment is paid in arrears.   For example, your February payment is paying January’s interest.   Remember when you bought or refinanced your home and the loan originator stated “you’re going to skip one month’s payment” or “you won’t have another payment due until the following month after closing”?  Well this is where that payment essentially catches up with you.  (Technically, it’s not “that” payment, you’re just always paying the previous month’s interest).

[Read more…]

Should I Buy or Rent?

Mpj038267400001_1I received an email this week from Samantha asking if she should buy a home now or continue renting.  Here is her basic information:

  • Gross annual income $85,000
  • Current rent payments $1350
  • Purchase price for home she’s considering:  $399,000
  • 10% down payment (from 401k and savings)
  • 38 years old
  • Average to good credit

Based on the information Samantha provided me, she easily qualified to purchase the home she was interested in.   She only planned on staying in the home for 4-5 years and wanted the lowest payment possible, so I provided her with a Good Faith Estimate based on using a 5 year fixed 10 year interest only product with a note rate of 5.75% (APR 5.854%).    Her total mortgage payment, including estimated taxes and insurance would be $2,278.   

Here’s where it gets more interesting for people who don’t own a home yet…when you factor in Samantha’s income tax bracket, her effective payment (factoring in what she will be able to claim on her income taxes in a full calendar year) is actually $1,633.

$1,633 IS MORE ($263 more to be exact) than her current rent in the amount of $1,350.   However, if you consider a conservative appreciation on her potential new home in the amount of 5% annually…the picture changes dramatically for creating wealth.

In 3 years, Samantha will pay $50,793 in rent with nothing to gain.   As a homeowner, after taxes she will pay $58,700 BUT her home will be valued (again, very using a very conservative figure of 5% appreciation) at $461,892; providing her with $103,956 in equity…in just 3 years.

So what if Samantha decided to rent and invest the difference of the after tax mortgage payment and rent in the amount of $263 into an interest bearing account (I’m sticking with 5% interest)?   In three years, after investing $263 per month, she would have just over $10,000.   And how likely is it that someone would actually be disciplined to do that? 

You can guess my answer to Samantha.  BUY! In three years, she could decide to sell the home and would have more of a down payment for a next home.  If she opts to rent, her $10,000 would make a significant difference in a down payment.  Her $399,000 home she wants to buy now would then cost $461,892.   She would still have 10% down based on the appreciation (assuming her savings and 401k performs well) …only now the house and the mortgage payment cost more and she would not have the $103,956 in equity.   Not to mention the emotional values of owning your own home and the freedom it provides.

Names in this post were changed to protect the innocent.   Do you have a question about your mortgage?   Drop me a line, I’m happy to address it (and I’ll change your name should I decide to use your question for a post).

JP and Gertrude Honored

Img_4824 Today in Fremont, Center of the Known Universe, JP Patches and Gertrude were honored with the unveiling of a statue to be completed by this date next year.  Today marks the 50th Anniversary of JP’s first television show aired in Seattle.    Patches Pavers are being sold in order to raise funds for the creation of the statue which will be bronze and at the entry of Fremont Bridge featuring JP, Gertrude and ICU2TV which will be a piggy-bank for donations towards Children’s Hospital.

In addition, Tully’s will contribute 25% of their revenue for beverages purchased on June 4, 2007 towards the statue and Children’s Hospital.   I’ll post a reminder when we’re closer to that date and when there’s more information available.   

In this picture, I had just given JP a bottle of wine (2005 Mollydooker Two Left Feet) as a gift since we had hired him to perform our wedding ceremony on April Fools last year but had a change of plans since we eloped.   If you would like to see more photos from today’s event, click here.    Below is the video of him accepting the gift, claiming the wine to be "cough syrup" for his cold. 

What’s This? Another Happy Friday Post!

Vote What’s the world coming to?  This is highly unusual two have two post "Rain City Guide–a great blog on real estate issues in the Seattle/Eastside region featuring a panel of professionals from real estate agents, attorneys, tech and me–your mortgage expert!

It has just come to my attention that Rain City Guide is in a competition on Metroblogging’s Blarch Badness with Izzle pfaff.   Rain City Guide, as humorous as it can be at times, is a real estate blog…Izzle pfaff is comedy.    A tough vote–but please do (click here to vote).

And…one last tidbit of fun…Who said, "Vote early and vote often?"