Last month, Fannie Mae and Freddie Mac all but ended Interest Only Mortgage loans, so the only loans left are Amortizing Mortgages.  (Some borrowers can still get an Interest-Only style mortgage, but they are very restricted now).

If you have ever closed on a mortgage, you probably remember the large stack of paperwork you needed to sign.  A large chunk of that is the “Amortization Schedule”, which is the spreadsheet that shows month by month what the loan balance is projected to be, how much of your payment goes to interest, principal and mortgage insurance if possible.

An Amortizing Loan is simply a loan where your payment never changes, but the amount you pay in interest declines each month as the principle balance is paid down. (Here in North Carolina, the banking commission makes us use two pages of disclosures in the loan application package to explain that one sentence).

The Amortization Schedule is a useful tool for an Annual Review of your mortgage.  However, there is a major problem with the original Amortization Schedule you received at closing.  As soon as you pay as little as $1 extra in principle, the remaining months on the schedule become inaccurate.

When you pay extra principle on your mortgage, you shorten the term of your loan, effectively skipping past months on the schedule.

Here are a few ways to shorten the term of your loan, if that is something you want to do:

1. Bi-Weekly mortgage payments.  This is a separate service from your mortgage servicer that deducts half of a regular mortgage payment from your checking account every other Friday.  There are 52 Fridays each year, so this means you make 26 half payments or 13 full payments each year.  The extra payment each year shortens your loan term.  The problem with Bi-weekly mortgages is that you usually have to pay a fee of up to $400 for the privilege or sending the bank your extra payments.  It seems that they should pay you for sending in extra payments, but they don’t.  Bi-Weekly payments are handy if you get paid every other week so that you can have half your mortgage taken from each paycheck.
2. The ‘Banker’s Secret’.  A book from a few years ago explained the so-called Banker’s Secret.  What this program did was to have you pay the regular payment on the mortgage on the due date, but add in the extra principle from the next month on the Amortization Schedule.  This skips you down the schedule every month and effectively cuts your loan term in half.  The gotcha here is that as you get later on in the amortization schedule, you have larger and larger principle payments to make extra each month.  If you aren’t earning more money each year and don’t desire to put that money into home equity, the Banker’s Secret is actually a secret way for them to get more money from you faster, so that they can lend it out again and earn more interest.
3. Make One Extra Payment each year.  If you get an annual bonus or a regular tax refund, making one extra payment each year allows you to get the same benefit of the bi-weekly repayment plan without having to pay the extra fee.  This extra payment will go all towards principle, and not interest, so it will jump you pretty far down the Amortization Schedule each time you do it.  Maintain this practice for the term of the loan and you’ll reduce a 30 year loan to just over 24 years.

You can contact me for a free update of your Amortization Schedule – even if I didn’t originate your mortgage – I have some pretty good software to create an accurate update.

If you are a “Do it Yourself-er”, download a useful excel spreadsheet and plug in your own numbers.

Paying extra payments on the mortgage feels good for a lot of people.  Don’t fall into that trap of basing your financial decisions on your feelings!  If there are better uses of your money, such paying off other debts, building an emergency fund, or saving for kid’s college expenses – do that first.  Those beneficial decisions not only feel good, but are good for you.

I got two funny phone calls today from Charlotte Real Estate Agents, both asking about down payments.  Since the mortgage crisis started three years ago, the biggest mis-information in the media has been concerning down-payments, with most news articles saying you need 25% or more for a down payment.

The first call went like this:

Caller: “Hi, I have a client who needs 100% financing?”

Me: “Are you a Real Estate Agent, and is your Client a Veteran, or buying a Rural Property?”

Caller: “I am a Realtor, and no, my Client is not a veteran and wants to buy a house in Charlotte”

Me: “Uh, sorry to break the news to you, but, you don’t have a ‘Client’, you have a renter that is saving money for a down payment”.

Next call, 10 minutes later:

Caller: “Hey, I have some clients looking to buy a home with a Jumbo Mortgage.  The  Seller works for a bank and told us the North Carolina passed a law that made it illegal to do a Jumbo Mortgage with less than 20% down.”

Me:  “Well, then, tell the seller to call the cops on me – I just closed a Jumbo loan last week without 20% down.”

Two extremes ends of the market, but both Real Estate Agents were fed bad information that was causing them to pass on bad advice.  Here is a basic guide to minimum down payments:

0% Down:  VA Loans are available for qualified Veterans through Guaranteed VA Loans.  In Charlotte, you can borrow up to $417,000 with no money down.

USDA Rural Housing Loans are available in qualified areas and for borrowers earning less than the maximum income amounts.

3.5% Down:  FHA Insured Mortgages are available for loans up to $303,750 in the Charlotte area, and in the outlying areas, they may be capped at $271,050.

5% Down:  With Private Mortgage Insurance (PMI), you can put as little as 5% down with a mortgage amount up to $417,000.  With only 5% down, you will have some type of Mortgage Insurance.

10% Down:  For loans up to $417,000, you can put down 10% and have Mortgage Insurance available.  Some highly qualified borrowers, buying highly qualified house, may be able to get a second mortgage or home equity line of credit and avoid PMI.  Second Mortgages are much more complicated than PMI, so they aren’t nearly the sure thing they were a few years ago.  However, they will save most home buyers money, so they are worth looking into.

For Homes prices above $438,000, buyers can avoid Jumbo Mortgages and keep the down payment to 10% if they can qualify for a second mortgage.  We do this by getting a FNMA maximum mortgage of 417,000 and a second mortgage for 10% with a 10% down payment.

At higher home prices, while not a law, you may need up to 20% down.  Jumbo mortgages are limited to 80% of the home’s appraised value.  Second mortgages can make up some of the gap, but jumbo mortgage lenders will not allow higher than 80% Loan to Value, and PMI is not available on Jumbo loans.

When you are buying a house, your down payment is the most critical financial decision you will make.  Knowing the minimum required down payment is a good place to start your home shopping

I’ve been saying for years – Mortgage debt along with other savings is far better than no debt with no savings. In other words, build up your savings and form the habit of saving money, then pay off your mortgage.  apparently, the Wall Street Journal thinks so also:

By JANE J. KIM And JEFF D. OPDYKE

It would be the height of foolishness to load up on debt now, right?

Just look at the news these days. Homeowners are being foreclosed on at a record clip. Governments around the world are lurching toward insolvency. Job growth in the U.S. remains feeble at best. And at the center of the global economic storm are bad loans, which promise to weigh on consumers, businesses and governments for years if not decades to come.

And yet—and yet!—the cold clarity of financial analysis points to an inescapable conclusion: There has never been a better time for people to borrow money, whether to buy financial assets or boost cash reserves.

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For sophisticated, disciplined investors who have lived and invested within their means—and perhaps decried the bailouts being lavished on those who haven’t—this is your time to take advantage. Not only are interest rates just about as low as they can get, but future inflation could erode the paper value of loans, making debt even cheaper over the long run.The first step involves making peace with the idea of taking on new debt at this perilous moment in global economic history.

It isn’t an easy concept to embrace. While the inflation scenario seems likely over the long term, there is a small but growing chance that the global economy could suffer from the opposite problem, deflation. Japan could be the template for the kinds of problems facing the U.S. and other advanced economies: years of tepid growth and falling asset values and prices.

That would make new debt more expensive over time, not less so. It would also mean that the job market is headed for a longer slump than even the direst estimates now suggest.

Then again, the moments that seem the bleakest often turn out to be inflection points. Alan Greenspan has famously said that the worst of loans are made at the best of times. The opposite holds true as well.

Most important, “there’s nothing inherently wrong with leverage,” or borrowed money, says Christopher Jones, a New York financial planner working with high-net-worth clients. For people with the capacity to take on debt, who understand it and can tolerate the risk, “now is an ideal time to leverage cheap dollars to buy into areas that can produce much higher returns over the longer term,” he says.

Mr. Jones is advising clients who can afford to pay cash for a home to take out a mortgage instead and invest the funds in a diversified portfolio. “If you look at where the market is now and where it could be five to 10 years from now, the return potential is significant,” he says. Ideally, investors would want to borrow at rates below 5% and invest the money in a well-diversified portfolio aiming to return 8% a year over 10 to 15 years.

“You don’t want to be borrowing money and going to Vegas with it,” Mr. Jones says.

Investing the Proceeds

Wealthier investors who already have built up considerable equity in their homes might even consider—gasp—a cash-out refinance. Yes, this sort of behavior is what got so many people in trouble during the housing bubble. And, yes, leveraging a home to the hilt can be dangerous because if home prices continue to slide, you could owe more on the house than it is worth.

But people who have a potentially profitable use for that money—preferably an investment—could come out ahead using this strategy. A borrower who takes out a mortgage at 4.5% is essentially borrowing money for free on an after-tax, after-inflation basis, assuming he or she is in the 33% marginal tax bracket and inflation returns to its long-term average 3% or more, says Greg McBride, a senior financial analyst at Bankrate.com. “That’s probably the best example of how those who are well positioned can utilize the low-rate environment and leverage up their financial return prospects,” he says.

If that hypothetical investor were to take out a $400,000 loan at 4.5%, he would come out ahead if his portfolio makes more than 3.015% a year after taxes, says Terry Siman, a wealth adviser in Spring House, Pa. If you assume 2% a year is lost to taxes, such as capital gains, dividends and interest income, then the portfolio needs to return 5.015% annually to break even. “Anything better than that and you’re in a winning situation,” says Mr. Siman.

Skip Fiore is a Waretown, N.J., director of a digital print-manufacturing company nearing retirement who is looking to rebuild a nest egg devastated by the stock-market collapse. He has no mortgage on his $1 million home, so he is in the process of taking out a $300,000 mortgage at a fixed rate of 4.75%, and plans to use the money to invest in his portfolio. “Fundamentally, it was cheap money,” he says. “And it was cheap money that could be used to supplement a depressed retirement portfolio.”

The risk, of course, is that the investment returns will be lower than the new mortgage interest rate. Investing in bonds probably wouldn’t make sense, says Mr. Jones, the financial planner, because Treasurys or high-quality corporate bonds aren’t yielding enough to offset the cost of carrying the debt.

Also, investors who are borrowing against their home can’t invest the money in municipal bonds and get both an interest-tax deduction for the home-equity loan and the tax-free income from the municipal bonds. “There’s no double dipping,” says Mr. Siman, who is working with Mr. Fiore to rebuild his nest egg.

Mr. Jones suggests using home-equity money only in a well-diversified equity portfolio split among U.S. and international markets.

Within the U.S. portion, he suggests buying equal amounts of U.S. large growth, U.S. large value, U.S. small growth and U.S. small-value and real-estate investment trusts. On the international side, he suggests equal helpings of large growth, large value, small growth, small value and emerging markets.

Marc Schindler, a certified financial planner in Bellaire, Texas, is encouraging clients to consider “pulling equity from their home with the idea they can invest and generate better returns.”

Rate of return is a big key when looking at leverage vs. mortgage payments.  Also consider the advantage of Liquidity and the Safety of Principle in your Mortgage Plan.

Last week’s jobs report, and the continuing financial woes in Europe, are keeping mortgage rates low in Charlotte and throughout the US.

On Friday, after the weak Employment Report, mortgage rates fell to their lowest level on 2010.

When rates eventually go back up, it will happen quick.  It could be this weeks $70 Billion in new treasury debt, so some surprise news from Wall Street that causes it, but something will cause rates to jump and they will jump quickly.  Rates always fall slowly, and rise quickly.

The issues in Europe won’t end this week, so we may see low interest rates all summer.

However, if you are still sitting on the fence about refinancing or buying, (I know you are out there – less than half of the mortgages over 6% have refinanced in the past year) don’t wait too long to get started.  Missed opportunity brings regrets.

Home Loans are not difficult to get – if you meet the basic criteria.  Commercial loans and business loans continue to be tough to get.  Every lender in the country will look at your credit score, documented income, and your savings.  If those things meet the criteria, refinancing or buying a home now is pretty simple when you work with a mortgage professional.

Mortgage markets worsened last week as concerned of a global debt crisis lessened and stock markets rebounded. The gains in stocks came at the expense of bonds — including mortgage bonds.

Conforming and FHA mortgage rates rose in North Carolina for the first time in 5 weeks, pulling mortgage pricing off its best levels of the year.

This week, mortgage rates are likely to rise some more, but still remain at the ‘historically low’ level that every mortgage marketer is screaming about.

The big deal this week in the monthly Jobs Report.  This comes out the first friday of every month and is usually a big contributor to volatile rates – and usually makes rates worse after periods of low rates.

In April, an estimated 290,000 jobs were created and, in May, economists think more than a half-million people re-entered the workforce.  This is good for the economy, of course, but can drag on mortgage rates.  If job growth even comes close to the 500,000 marker, mortgage rates could zoom higher.

Mortgage rates moved higher last week but are still very low. If you’ve been thinking about refinancing your mortgage, you haven’t missed the window – but don’t wait for rates to get lower – they most likely won’t.

Mortgage markets improved again last week on worsening news out of Greece and the Eurozone.  In times of turmoil and uncertainty, global investors are still showing they like the ‘security’ of US Government backed investments, so Treasury Notes, Bonds, and Fannie Mae / Freddie Mac mortgage backed securities are all attracting new cash.  The money flowing into mortgage bonds is causing bond prices to increase and mortgage rates fall as a result.

It’s the 4th straight week in which conforming mortgage rates in North Carolina improved and, against the expectations of experts everywhere, it’s now late-May and mortgage rates are as low as they’ve been all year.

If you’re a homeowner and haven’t looked at refinancing lately, it may be a good time to call a mortgage planner to talk over your options – remember, interest rates are just one factor, but every mortgage plan gets better when rates are lower!

This week, housing and inflation data takes center stage.

• Monday : Existing Home Sales data – expect a 1 month bump with the tax credit expiration
• Tuesday : Case-Shiller Index; Home Price Index – prices still soft
• Wednesday : New Home Sales data
• Thursday : GDP – Big growth would lead to higher rates.
• Friday : Personal Consumption Expenditures – big gain would increase rates, but I don’t expect that.

Each of these data points has the power to move mortgage rates — especially because trading volume is expected to thin as the 3-day weekend nears. As volume drops on Wall Street, it will be harder to match buyers and sellers and, as a result, mortgage pricing will get (more) erratic.

There are some signs that mortgage rates are about to reverse trend, so locking this week is probably prudent.

Fannie Mae, the government run entity that drives the mortgage industry guidelines is rolling out tougher standards for Interest Only and Adjustable Rate Mortgages.

Fannie Mae made its official announcement April 30, 2010.  The changes will roll out to home buyers and homeowners in Charlotte and everywhere else over the next 12 weeks.

For ARMs with fixed terms of 5 years or less, lenders must now qualify the borrower as if the interest rate on the loan is 2% higher than the real rate. As an example, if the 5 year ARM rate is at 4%, the borrower must qualify as if the rate is 6%.  This may make the 5 year ARM, currently a very affordable product for the right home owner, unaffordable for some people.

Interest only mortgages guidelines are really toughening up:

1. The borrower’s FICO must be 720 or higher
2. Borrower must have 2 years of mortgage payments ‘In Reserve’
3. The mortgage must be a purchase, or rate-and-term refinance. No “cash out” allowed.
4. The home must be a 1-unit property (No Duplexes)
5. The home must be a primary residence, or vacation home (Can’t be an investment property)

The 2 years of mortgage payments ‘ in reserve’ means enough money has to be in a borrower’s account at time of closing to make two full years of mortgage payments.

The Fannie announcement does say that this change with Interest Only ARMs is to make sure people use this program as a “financial management tool, rather than as an affordability tool”.

That last statement is  a key point in Fannie’s decision – Interest Only and Adjustable Rate Mortgages are simply Tools.  These loan programs can be used by craftsmen to build financial masterpieces, or by amateurs to destroy.  The power is in the proper use of the tool, and using your mortgage program as an integrated part of an overall home ownership and financial plan.

Interest Only and ARM mortgages allow homeowners to store their money in other places, such as retirement or college savings accounts when used correctly.  Used wrongly, they are for buying too much house, spending too much money, and getting into trouble financially.

If you have, or are considering an interest only or ARM mortgage, let’s create a home ownership plan for you that uses the tool correctly to help you succeed financially.

A lot of people dream about the day when they make their last mortgage payment and they finally own their house “Free and Clear”.  Sounds nice, doesn’t it? Unfortunatley, there are two problems with this dream – that can turn into a nightmare if not planned for.

Even with no mortgage, you can still lose your house.

Try not paying the property tax bill for a few years and see how good it was to pay off the mortgage.  Or, consider what happened to the thousands of homeowners who lost houses when hurricanes pass through town at 100+ miles per hour.  Last time I checked, Hurricanes don’t care if you have a mortgage or not.

Paying off your house each month with extra principal payments is the riskiest way to pay off your house.

Consider your friends or family members in places like Florida, Michigan, or California. If they sent in extra principal payments to their mortgage servicer, what happened to that money as home prices declined?  I know someone with a 15 year mortgage that sent in $2,000 per month to watch their house decline in value by $3,000 every month.  When you send in extra mortgage payments, your lender transfer the risk of the mortgage right back to you.  Put another way, each time you send in extra principle payments, your lender has less risk, and more of your money is now in a place where it can disappear or be destroyed.

If you send in extra principal payments, and then find you need the money back, you may not be able to get it.  It could have disappeared, like it has in some parts of the country, or the mortgage rules or your circumstances may have changed to where you can no longer get your money back.

Another way to be Free of your Mortgage:

If you had wnough money to write one check and pay off your mortgage, isn’t that the same as not having a mortgage?  Strictly from an accounting perspective, it is.  On a balance sheet, if the cash assets were greater than the mortgage balance, you are debt free. Now it just becomes a matter of deciding if you should pay off the mortgage, or keep things the way they are.  Think about it – what if you had a $300,000 mortgage, and $300,000 in investments that were targeted as ‘mortgage payoff funds’. You could write one check whenever you wanted to and eliminate that mortgage.  Or, you might recognize some benefits of having both investments and  a mortgage.

• Grow your savings over time, and after a while, the compound interest you earn will be much greater than the interest you pay.
• Mortgage Interest is Tax Deductible – having the mortgage may allow you to pay less in income taxes and keep more for yourself.
• Your mortgage (if it’s not interest only) will pay itself off over time – just let it do that.
• You have more freedom where to store your money – rather than putting it into the walls of your house, choose where it should best be stored for safety.
• If something happens to your house, you still have your money – separate the house and the wealth to keep both safe.
• Your money can earn Compound Interest if it is working for you.  Inside your house, it is just sitting still doing nothing.

Reaching the Freedom Point

You are debt free when you have enough money to pay off your mortgage.  You could still lose your house even if you have no mortgage, so don’t kid yourself into thinking a mortgage payment is your only threat.

A better goal in today’s economy is to plan to reach your Freedom Point as soon as possible.  Just be sure to plan ot do it the fastest, safest, way possible – store your money where it can be accessed if needed and where it grows for you.  You will be able to decide if you want to pay off your mortgage much faster and safer this way.

If you haven’t developed a plan to reach your Freedom Point by a certain day, give us a call – we can help you create a home ownership plan with a path to pay off your mortgage in the fastest and safest way possible.

With all the government spending, a lot of people are rightly concerned about future inflation.  The timing of when inflation from printing more US Dollars hit is the big question.  At some point, the dollar will become worth less than the goods and services that people need to buy, and prices will start to increase.

If you’re trying to predict whether mortgage interest rates will be rising or falling, one key to watch for is “inflation”.  Mortgage rates are highly responsive to inflation.

By definition, inflation is when a currency loses its value; when what used to cost $2.00 now costs $2.15. As consumers, we perceive inflation as goods becoming more expensive.  However, it’s not that thinks cost more, it ‘s that the dollar, or currency to buy it is worth less. Think of the baker who says, “You want to trade me those dollars for my bread?”  Your dollars have to be worth something to him in order to make the trade (sale).

As the dollar loses value to inflation, therefore, so does the value of every mortgage bond in existence. When bonds lose their value, investors don’t want them and bond prices fall.  (“You want to buy my mortgage bond with those dollars”)  Mortgage rates move opposite of bond prices, so when bond prices rise, rate drop.

In terms of Wealth Creation, in times of inflation you want to own “things” that are perceived as more valuable than plain old paper dollars, and it’s also a good time to owe money that was used to buy things – you will buy ‘things’ when they are cheap (your dollar buys more) and pay back the lender with inflated dollars that won’t buy as much anymore.

In today’s market, the relationship between inflation and mortgage rates is helping home buyers. The Cost of Living made its smallest annual gain in 6 years last month and the Fed has repeatedly said that inflation will stay low for some time. The combination is driving investors to buy mortgage bonds which, in turn, is suppresses rates.

So long as it lasts, the cost of home ownership will remain relatively low. Combined with the expiring tax credit, the timing to buy a Charlotte home may be as good as it gets.

Quick video blog to consider whether you should buy a house now, or wait a year for things to stabilize.