Archives for January 2008

Just for Fun…Jack Block Park in West Seattle

Today my husband and I stumbled upon a park that we probably have driven by at least 100 times!  Jack Block Park in West Seattle on Harbor Avenue.  It’s industrial meets Mother Nature with the shipping lanes and Elliott Bay.  Lately a pack of Sea Lions have hanging around too.   What a treat!   We also ventured into Harbor Island…more posts will follow.   Click here for more photos.




Breaking Even on Your Refinance

I’m often asked "how many months will I break even on a refi?"    This is actually something very easy to figure out and worthwhile for anyone who’s considering restructuring their mortgage.  In a nutshell, you are taking the non-reoccurring closing costs and dividing the difference between your current mortgage payment and your proposed mortgage payment.   

To determine your closing costs, you are going to consider all fees except for your reserve account and prepaids (taxes, insurance and prorated interest).  This is what you are paying for your interest rate to refinance the mortgage. Your prepaids should not be factored into your closing costs because your existing balance of your prepaids/reserves from your current lender will be refunded to a few weeks after closing the new mortgage.   If you don’t wish to have your new reserve account financed into the new mortgage, you can bring cash to the closing table (a majority roll this cost into the new mortgage; but it’s totally up to you).  You can also opt to waive your reserve account all together if you meet the criteria, just know that there is a cost to doing this.

Next factor the difference between your current mortgage payment and your proposed mortgage payment.  Ideally, you should look at just principal, interest and mortgage insurance (excluding taxes and insurance).  Divide this figure into the closing costs and you have how many month’s it takes to break even on the refinance.

Here’s an example from a recent Good Faith Estimate I recently provided a client:

  • Current Payment: $1740 less the Proposed Payment: $1550 equals a monthly savings of $190.
  • Closing costs (excluding taxes, insurance and prepaid interest (Sections 900 – 1000 on the GFE) are $2390.   2390 divided by 190 equals 12.58 months to break even on the cost of the refinance.

If the borrower is staying in their home for over 13 months, the refinance makes sense.   They are "breaking even" on the cost of the refinance.   If the homeowner was only improving their monthly payment by $50 a month, it would take about 4 years to break even.   Does it still make sense?  This really depends on the individual home owner.  If they’re not likely to move and if the rate is low enough to where they’re not likely to refi, perhaps it still does.  This is just a tool to help consumers weigh the cost of refinancing.   Different pricing, such as with or without points or without closing costs, will also impact how soon someone will "break even" on their refi.   Watch for a follow up post on that!

Which Debts to Pay Off?

One of my clients who bought a home a few years ago contacted me wanting advice on which debts they should pay off now that they have received a bonus.  I welcome opportunities like this!   Their priorities are to:
  1. Eliminate debt while
  2. Maximizing their credit scores
Here are the debts:
  • Credit Union (motorcycle) – $5000.00 @ $185.00 per month (see #1 below)
  • Bank – $2115.83 @ $37.21 per month (see #9 below)
  • Bank – $5010.65 @ $165.00 per month (see #10 below)
  • Credit Card – $2278.74 @ $66.00 per month (see #7 below)
  • Credit Card – $1937.22 @ $44.00 per month (see #8)
  • Bank – $877.45 @ $15.68 per month (see #6 below)
  • Bank – $870.92 @ $27.00 per month (see #5 below)

They have received a bonus in the amount of $8,600 and expect a income tax return in the amount of $4,500.   They may eventually sell the motorcycle for around $4,000.   And…in May it sounds like they will be receiving a check compliments of the Economic Stimulus Package (they can put that in their rainy day fund).

If their goals are to stay in their current home and just get rid of this debt, here is what I would recommend for a strategy:

  1. Pay off the bike.   This leaves $1600 of the bonus and free’s $185 per month.
  2. Put the $1600 into a savings account that they don’t touch.  This is the beginning of their emergency fund (which they currently don’t have).
  3. Put the bike up for sale.  Until it does…
  4. Put 10% of your gross income into your emergency fund…pay yourself first (before you go out to dinners, movies, etc.)…can’t do 10%, get in the habit of doing 5%.   You should have an emergency fund of no less than 3 months of your mortgage payment (for your first goal).
  5. Pay $185 (that was once paid towards the bike) plus the $27 all ready paid towards the bottom debt for $870 for a total of $212.  This debt will gone in just 4-5 months!  YEAH.   Cut up this card, close this account.  Ya don’t need it.
  6. Now you can apply $212 plus $15 for a total of $227 towards the next small debt and this will be gone in 4-5 months.  You don’t need this debt either…close it.
  7. You probably have your tax refund now of $4500.  Pay off the credit card for $2278 and put the remaining $1800 into your emergency fund.   NOTE:  You now have $3400 in an emergency fund plus your monthly contributions!  And you have also eliminated $293 per month in debt!  CONGRATULATIONS…
  8. Has the bike sold?  If so, pay off credit card with balance of $1937 for $44 per month.  Now you’re saving $337 per month to apply towards the debts.   Go ahead and put the difference between the credit card debt pay off and the bike proceeds into your emergency account.   YOU’VE ELIMINATED 5 DEBTS!
  9. Now take the $337 you’re saving plus the $37 you’re all ready paying = applying $374 towards bank debt in the amount of $2115 per month.  This debt should be gone in roughly 6 months.
  10. Take $374 plus $165 (that you’re all ready paying) and apply $539 towards your last debt in the amount of $5010…this one will be gone in 9 months!

Did this take a while to accomplish?  Yes.  Did it take you a while to create your debts?  Yes.  I think it’s easier to approach debts if you hit them one at a time starting with the smallest debt that has the largest payment.   You’ll feel rewarded as you accomplish paying debt after debt off.   

For the purposes of having a good credit score, you’ll want to maintain 3 accounts in addition to your mortgage.  The older the account is (in good standing) the more weight it carries with the credit scoring system.  If you have a car payment and a mortgage, pick two credit cards that are older with the best terms and keep them open with balances below 30% of the credit limit.  Close and chop up the others.

Now you can invest the $500 a month you were spending on debt into your retirement accounts or maybe start a 529 account for your children.

Good luck!

NOTE:  This strategy is specifically designed for one of my clients.  This may or may not work for you depending on what your goals and needs are.  Restructuring debt by refinancing is also an option if the home owner qualifies and their is enough home equity to do so. Please consult with your Mortgage Professional and financial advisors.

A Taxing Issue

According to this article in the Seattle PI, King County Tax Assessor Scott Noble is warning of possibly the largest property tax increase in Washington State’s history.

"This change … will produce the biggest property tax increase onto residential property owners in the history of the state of Washington," Noble said in an e-mailed warning last week to Finance Committee chairmen.

In King County alone, the change would shift as much as $200 million of taxes onto residential property owners, he said.

"In our budget-based property tax system, reductions of valuations will produce tax shifts onto other taxpayers, and my experience with advocates from our large commercial taxpayers suggests a large increase of appeals and lawsuits from these property owners who have sizable resources," Noble said in the e-mail.

House Bill 2977

Senate Bill 6517

Concerned?  You may want to contact your state representatives to express your concern, if any, of having your property taxes increased for the benefit of commercial business.   

Closer to Higher Conforming and FHA Loan Limits

Today Pelosi and Paulson announced bits and pieces of the Economic Stimulus Plan which includes temporarily increasing the conforming loan limit (currently $417,000) and FHA’s loan limits (vary by county).

Here’s what I understand so far:

  • Loan limits would last until December 31, 2008.
  • Both Conforming and FHA loan limits would be based on 125% of the local median home prices up to $730,000 (this is according to CNBC).
  • It’s also reported that both loan limits may be increased to $625,000.

This is expected to be approved by Bush very quickly…stay tuned!

Update January 24, 2008 2:00 p.m.

I just received this memo:

For Immediate Release
January 24, 2008


We are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform.  To restore confidence in the markets we must ensure that the GSEs’ regulator has all the necessary safety and soundness tools.

Yesterday Chairman Dodd talked about moving a GSE reform bill early this year.  We are ready to work with him and the Senate Banking Committee.  We will also be working with Fannie Mae and Freddie Mac to ensure that any increase in the conforming loan limit moves through their rigorous new product approval process quickly and has appropriate risk management policies and capital in place.

The One that Got Away: Bait and Switch?

HookI don’t mind losing a prospect (someone who’s shopping rates) to a fellow Mortgage  Professional, I do have an issue when I feel the shopper is being fooled or mislead by a loan originator.  Late last week, a "prospect" who had been asking for various scenarios kindly informed me that they decided to go to another lender who was offering a better rate.   Not a problem.   I do like to find out why and what was better than my Good Faith Estimate. 

The scenario:

  • 30 Year fixed rate/cash out refi
  • $417,000 loan amount with a home valued at 1 mil
  • No points (typically a point/1% of the loan amount equals 0.25% to rate).
  • No reserve account (this cost 0.25% in fee).
  • Full doc for a self employed borrower with excellent credit
  • No prepayment penalties

My Good Faith Estimate dated January 17, 2008 factoring in all of the above provided a note rate of 5.750% with an APR of 5.800% with total closing costs just shy of $2750 (title, escrow appraisal, etc).   Note:  I pride myself on having my GFE being as close to the final HUD as possible.  In fact if anything, I’d rather my estimate be higher to start with and have my client pleasantly surprised with lower costs at closing (instead of the alternative).

Nommag72008_3 The prospect selected another lender who’s quoting 5.25% with a total of $4,000 in closing costs.  I have searched all the lenders I work with and I have also checked out local credit unions.  I can’t find this anywhere!   5.25% may be available at a minimum of 1% discount/origination fee.  1% in fee would place the cost on this loan at $4170.  Then factor another 0.25% in fee ($1042) if the client opted to pay their taxes and insurance on their own.  How is the title, escrow and appraisal going to be paid?  This just does not pencil out. 

It smells a bit fishy to me and this type of volatile market may be tempting for some LO’s to "gamble" the market…betting (and praying, or should I say preying) that rates will improve to match what they have told a client they are locked in at.   It’s a pricey game that some LO’s make their keep playing.  As long as the LO honors the lock commitment to the prospect at what ever cost to the LO (in the event they lose big and rates don’t match what they’ve told the prospect they have), I have no issues.   If the LO begins to squirm should rates rise when they really have no lock at the promised rate…it’s foul play. 

Borrower beware.  I hope I’m wrong. 

Martin Luther King Day

Mortgage Master is closed today in observance of the holiday honoring Dr. Martin Luther King.   We will reopen for business as usuay on Tuesday, January 22, 2008.

I Have A Dream – Martin Luther King Jr.

Calling All Mortgage Brokers and Correspondent Lenders

Join WAMB at Legislative Day in Olympia on Tuesday, January 29, 2008.  It’s more important than ever to be active in your career and make your voice and opinions heard.   This is a full day event beginning at 9:30 a.m. and running until 7:00 p.m.  Advance registration is required as WAMB will schedule appointments with elected officials from your districts to meet with you and hear your voice…or as Tony Gallegos says "meet belly to belly".

WAMB’s Legislative Day 2008 will focus on:

  • DFI Draft Legislation "Preventing Mortgage Fraud"
  • Protecting the housing industry from further loss of valuable mortgage products. 
  • Make your voice heard during this crucial legislative session.

If you don’t like what is happening to our industry and you do nothing about it, how can you expect change?

I’m going.  Are you?

Want to go a step further…how about attending NAMB’s Legislative & Regulatory Conference in "the other Washington" on February 4-8, 2008.