Monday, October 08, 2007

By Jack Guttentag
Inman News
The one thing that virtually all borrowers know about their mortgages is the amount of the initial scheduled payment. This is the amount they are obliged to pay each period under the terms of the mortgage contract. They know that failure to pay that amount is a violation of the contract, leading to late charges, delinquency reports and ultimately to foreclosure.
While borrowers know the amount, they are often hazy about how it is calculated and what it includes. I will illustrate the possibilities related to a $100,000 loan at 6 percent.
In the simplest possible case, the scheduled payment includes only interest until the final payment, when it includes repayment of the balance. The interest payment each month is .06/12, or .005, multiplied by $100,000, which equals $500. The final payment, assuming the borrower paid only interest throughout, would be $100,500.
Most mortgages written during the 1920s were of this type, usually with terms of five or 10 years. Their weakness is that they must be refinanced at term, which during the depression of the 1930s became very difficult because property values and borrower incomes had fallen. The notion took hold that it was prudent for borrowers to pay down the balance over time by making a mortgage payment larger than the interest. This additional amount is called the principal payment.
The principal payment is always a residual -- the total payment less the interest. If the borrower in the example paid $600, the $500 of interest would be deducted, leaving $100 as the principal payment. If the borrower paid $700, the principal payment would be $200.
Including principal in the scheduled payment requires a rule for determining what that payment is. The most obvious rule is to pay back equal amounts of principal every month. If our sample loan is for 30 years, we divide $100,000 by 360 to get a principal repayment of $277.78 a month.
Loans of this type have existed, most recently in New Zealand, but they have a serious drawback. The scheduled payment that includes a fixed amount of principal every month starts high -- too high for many borrowers -- and ends low because of the decline in interest. In month one, the scheduled payment is $277.78 plus $500, or $777.78. In month 360, it is $277.78 plus $1.39, or $279.17.
So some unknown pundit reasoned as follows: "If payments beginning at $777.78 and declining every month to $279.17 will pay off this loan, there must be some amount in between, which, if made every month without change, would do the same." The reasoning is correct -- the amount ($599.56 in my example) is called the fully amortizing payment.
The fully amortizing payment is calculated from an equation that my editor says does not belong in a family publication. It is on my Web site under "Formulas." But you don't need the equation; financial calculators have programmed it so you can derive an answer in seconds, whereas solving the equation takes minutes.
If the interest rate does not change, the fully amortizing payment is constant over the life of the loan. However, the part going to interest declines, and the part going to principal rises every month.
After World War II, virtually all mortgages carried fully amortizing payments. However, borrowers generally seek lower initial payments, and lenders seek to accommodate them if possible.
The only way to reduce the initial payment is to reduce the principal payment -- principal is the only payment component that has any "give" in it. Lenders will not forgo interest but they may allow borrowers to delay making principal payments. This was the prevailing practice in the 1920s; the practice largely ended in the 1930s, and then it returned in recent years with interest-only options and options ARMs.
On mortgages with an interest-only option, the scheduled payment is the interest payment for the length of the interest-only period, usually five to 10 years. After that, the scheduled payment becomes the fully amortizing payment.
On option ARMs, borrowers have the rare privilege of selecting their own scheduled payment during the first five or 10 years. The can select the fully amortizing payment over either 15 or 30 years, the interest-only payment, or a "minimum" payment that is less than the interest. Most borrowers select the last, and sometimes find themselves in trouble when their scheduled payment increases in future years.
The scheduled payment may not be limited to interest and principal. The monthly mortgage insurance premium, if there is one, will be included. If the borrower has agreed to escrow property taxes and homeowners insurance, most lenders treat the monthly escrow payments as if they are also part of the scheduled payment; if the escrow payment is short, the payment is considered delinquent. A borrower can start down a slippery path to foreclosure by failing to pay required escrows.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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Tuesday, October 02, 2007
By Ilyce R. Glink
Inman News
Mortgage rates are dropping, right? Time to start the process of refinancing your mortgage.
That's what many Americans assumed after it was announced that the Federal Reserve had lowered its federal funds rate last month by a half percentage point, to 4.75 percent. So, around the country, thousands of people either picked up the phone to call their lender or went rate shopping online.
But it may be that not everyone will get a chance to take advantage of the new, lower interest rates. Sometimes mortgage rates move in opposition to the federal funds rate. If the federal funds rate goes down, mortgage interest rates may rise.
What you have to decide is this: Is now the right time to refinance your mortgage or should you wait until later in the year when interest rates may drop again?
Start your calculation by gathering your basic facts: How long is your current mortgage? Does it adjust? When will it adjust next? How high can your loan go? How many years left on your loan do you have at the current interest rate? What is the interest rate you're paying? How good is your credit? What is your credit score? What interest rate will you qualify for (this speaks directly to your credit score)? How long will you keep this loan? How much home equity do you have? In other words, what will the debt-to-value ratio be for this property?
Let's start with credit. With the current mortgage mess, lenders have raised the minimum credit score you need to get a Grade A or Grade A- loan. If you previously need a 720 on your FICO score to get a great rate, you now need 760 or even 780.
You also need to have some equity in the property in order to refinance. In some places, homes have fallen in value. If that's the case in your neighborhood and you bought the property with a 100 percent loan two years ago, you may not have enough equity in the property to refinance. So unless you're prepared to come to the closing with a check, you may not be able to refinance.
Assuming you have good credit and equity in the property, you need to assess if interest rates have fallen enough to make a mortgage refinance worthwhile. This is just about doing the math.
If your current mortgage is fixed for 30 years at 6.5 percent, today's 30-year fixed rate is at 6.83 percent with some closing costs, according to HSH, a mortgage information publisher.
Since the going rate for your loan is higher than what you're currently paying, it wouldn't be a good idea to refinance.
However, if your current mortgage is now 8.5 percent, and you can swap that for a 30-year mortgage at 6.83 percent, you'll save money right off the bat, even factoring in some fees. It's a good move even if you'll keep this loan for only three to five years.
To give yourself the largest number of options, be sure to shop around. When I'm going to refinance one of my loans, I typically call four or five different lenders to make sure I'm getting a good rate. Try a credit union (if you belong to one), a mortgage broker, a local bank or savings and loan, a national mortgage company, and one other lender for good measure.
You can also check out various rates, points and fees at Bankrate.com (but be aware that they don't show every rate in the marketplace and that some of the rates posted might not be available when you call).
Since you'll want to work only with a mortgage lender who will show up with the cash at the closing, be sure you check out your lender thoroughly. You'll want a company with a great reputation for customer service and that has been in the market for a long time. Be sure to search for any news or information on the lender, so you can see if the company has had any trouble with the subprime loan debacle.
At the end of the day, whether you should refinance hinges on one key concept: How much money will you save?

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October 08, 2007
The housing market is soft. Hard times for some can mean opportunity time for others. Could now be a good time to step into the housing marker and pick up a bargain?
Generally, it is a better time to be a buyer than a seller, but this is not so in every market. In San Francisco, for example, there are still more buyers than sellers for prime upper-end properties. You're not likely to pick up a bargain there.
Many more markets are suffering from too much inventory and too few buyers. These markets would seem to offer the best opportunities. However, this is not necessarily so. Even though the price you pay is relatively low, it could take some time before the value of your investment increases.
Anecdotal evidence suggests that the best housing investments are properties that are always in demand. These are well-planned and well-constructed homes in prime locations that appeal to a wide cross section of home buyers.
In a strong seller's market, virtually all listings sell if the inventory is low enough. For example, a small two-bedroom, one-bath home on a substandard lot in Rockridge, a trendy Oakland, Calif., neighborhood, might be snapped up quickly in a seller's market, and buyers feel an urgency to buy before prices rise further. In August, there was such a listing on the market in Rockridge. By mid-September, it had received no offers, even after a price reduction that would have triggered multiple offers in a stronger market.
HOUSE HUNTING TIP: Property that's not selling isn't necessarily a bargain if no one wants to buy it. A foreclosure that's selling for less than the defaulting owner paid for it isn't a bargain unless there is clearly upside potential.
A property in a good location that suffers from deferred maintenance could be a prime property in the future. That is, as long as it doesn't have incurable defects, like the two-bedroom, one-bath home on a small lot with no expansion potential mentioned above. These starter homes sell well in a hot market. The demand dries up quickly when the market slows because these homes don't satisfy most buyers' long-term needs.
Good candidates are properties that are located in areas close to urban centers with good transportation and where the population is growing faster than new homes in the area are being built. These locations could be the next hot spots when the market turns around.
Buyers have the luxury of being selective when there is a lot of inventory on the market. Before you waste time negotiating on a deal that can never come together on terms that you can accept, find out about the seller's situation.
Sellers who bought within the last few years may not be able to offer their property at a price that makes it a good deal for you. Many who bought in competition paid significantly more than the buyer who made the second to the best offer. In other words, they paid too much.
Also, many buyers who bought in a multiple-offer competition bought the property "as is" regarding deferred maintenance. To make matters worse, some of these buyers waived their right to inspect the property.
To avoid making this mistake, have any property you're seriously considering well inspected. And, keep in mind that a seller who paid a premium price for a property that he didn't inspect might not be willing or able to sell it to you at a price that's reasonable given current market conditions.
THE CLOSING: There are good buying opportunities in the current market for well-qualified buyers. Just make sure that you pick your bargains carefully.
Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
Copyright 2007 Dian Hymer
Distributed by Inman News

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Wednesday, October 03, 2007
By Tom Kelly
Inman News
If you decide that you are going to spend your remaining years in your primary residence or your second home -- and an overwhelming number of seniors would prefer to stay put -- what will you do to make those homes more comfortable?
That topic will be the prime focus of National Aging in Place Week (Oct. 1-7) as home modification experts, geriatric care managers, financial planners, home care workers and other experts in senior living gather to provide residents the information they need to find products and services to continue to live in the home of their choice.
According to AARP, the organization formerly known as the American Association of Retired Persons, nearly a quarter of Americans aged 45 or older say they or someone they live with will have trouble maneuvering around their home in the coming years. A survey by the group -- the United States' largest organization for those 50 and older -- showed that fewer than 10 percent of the nation's approximately 100 million housing units have features to make them universally accessible.
The survey also revealed that 90 percent of persons older than 65 would prefer to remain in their homes, but as they age accessibility problems can become an issue and make their age-in-place goal unattainable.
The process of altering a home to age in place is often complicated by the limited dollars you have. Every dollar of hard-earned cash can easily be spent elsewhere, so it's always important to plan before you remodel. Renovating your house is not an all-or-nothing process. Every area offers a lot of possibilities to spend more or less. However, if you are spending money to become more comfortable and be safer as you age, do your best to get what you pay for.
No matter the project, ask yourself the following four questions:
1. How long do I realistically intend to stay in this house? While the answer is often difficult to figure out, give some thought to a best guesstimate. While minor home modifications are fine for the short term, it's usually not advisable to go through the anxiety of a major room remodel if you definitely will move out in a few months. Roofs are a different story because they often are mandatory.
2. Who will do the work? When you employ construction help, it's important to find efficient and honest workers. If you have used contractors in the past, you probably have a roster of dependable helpers.
3. How do you find contractor referrals? Your primary source is friends who may have used others in the past or the local senior center can help. Also, ask the local home-builder association about its certified aging-in-place specialists (CAPS).
4. How will you pay for the remodel? If you are using a line of credit or a reverse mortgage that features a line of credit for all or part of the remodel, you will pay interest only on the funds you actually use. For example, you could pay one lump sum for a roof replacement, then wait until other remodeling bills or maintenance receipts are sent to you before drawing on your credit line.
While healthy returns on home improvements are great, some seniors simply seek comfort and don't really care if they recoup their investment. Others want the peace of mind of knowing that their children might recover a portion of the remodeling costs if or when the house is eventually sold. The impact of any home improvement on the ultimate sales price is not the same in all cases and usually depends on the location and condition of the overall house and the market demand at the time the home is marketed for sale.
What adjustment do you make first? How do you judge need versus want? Most of the time, you start with the roof over your head. One of the first places seniors plop down money is to repair or replace the roof of their longtime home. A bad roof will make even the best of houses unlivable. So it is a necessary evil that the owner cannot do without.
Take some time to decide what you need in your home to make you more comfortable in the years to come. To learn more about National Aging in Place Week, visit www.naipc.org.

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