Edina, Minnesota
Let's talk about the Twin Cities Real Estate Market. I will post helpful links and answer questions about real estate or mortgages. I live and work in Minnesota, so some of my ideas may focus specifically on Minnesota real estate or mortgage regulations applicable to our state.
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Feb. 13, 2008
Unless you are in the mortgage industry, you probably haven't heard about the Mortgage Insurance Industry is experiencing HUGE losses. Public company MGIC Investment Corp-symbol MTG just announced today that they lost 1.5 BILLION DOLLARS LAST QUARTER ALONE. PMI Group-symbol PMI and Radian Group Inc-RDN might be next. They haven't announced their earnings yet. Since they are all in the same business it might be a logical inference to assume they will be announcing less than positive news.
What PMI did do this week is send out a letter to mortgage broker clients like myself with a guideline change effective for March 1st. Basically, they are not going to be insuring the all the same loan programs at the higher loan to value 100% limit that they once did. They are also raising their cost of insurance. What does this mean to a consumer? YOU need to buy now before the programs change. Most companies will allow you to close on an older approved program at the lesser cost mortgage insurance, as long as you are approved with a mortgage certificate by a certain date. PMI told me when I called them that I needed to have my client's mortgage insurance certificate in hand by March 1st. Some area of the country are also being designated as declining areas, this too is a reason the insurance companies are stopping to provide insurance for high loan to value loans. If you are a first time buyer-it's time to take action.
The higher cost of MI and greater down payment requirements are defensive measures put in place because of all the foreclosures and defaults in mortgage loans. I can't blame the mortgage insurance companies, in fact I commend them for being proactive and protecting their business. At the same time, if you are a buyer who needs the maximum amount of financing-such as 100%-you might not be able to get it. Not all programs are affected by this change and not all mortgage insurance companies have changed their guidelines-YET. The window of opportunity is here and now. This lack of liquidity will remove more potential buyers from the real estate marketplace and make the inventory of unsold homes that much worse. That in turn will put more pricing pressure on the existing inventory of homes. What a viscous cycle.
We have been in this business since 1986. We've seen something similar in the real estate and mortgage markets back in 1989-1991 during the Resolution Trust days and the first Gulf War. This time it seems a little more severe in nature. If you are contemplating buying, NOW really is the time to buy, especially if you need underwriting flexibility or a low down payment program. Visit my Minnesota real estate site to begin an online search for a new home.
Feb. 10, 2008
Take Advantage of Low 30-Year Fixed Rates
Are you looking to buy a home? You are actually at a great advantage now, despite all the horror stories on the news every night. The astounding number of foreclosures across the country has forced the government to find ways to stimulate the economy. One of the major benefits for buyers in the market today is the low 30-year fixed rate.
Recently, 30-year fixed rates dropped to the lowest level in the last four years. The average fixed mortgage rate in the final weeks of January 2008 was 5.48%, marginally above 2004's low of 5.40%. This marks the third consecutive week that 30-year fixed rates were below six percent.
In a battle to combat a recession, the Federal Reserve implemented key interest rate cuts. This has been one of the main factors in the drop, along with a further weakening of the economy. It is hoped such a large drop in rates will spur more people to buy homes, whether new or existing.
For current homeowners looking to refinance, the current low 30-year fixed rate is the perfect opportunity. With so many in foreclosure peril from adjustable rate mortgages, homeowners are looking to save money and lower payments.
The advantages of a 30-year fixed rate are obvious. While the payments initially may be more than an adjustable rate mortgage, the fixed nature of the mortgage will keep payments steady. When adjustable rates balloon, as they have recently, the fixed rate will remain the same. Also, the early payments of a 30-year fixed rate loan are primarily interest, which is tax deductible. Monthly financial planning is easier when you know what each payment will be.
One of the cons of a 30-year fixed rate is higher interest. With a 15-year mortgage, payments are much higher but interest is significantly lower. Also, without a down payment, mortgage insurance is usually required. This adds a small amount onto each payment until a percentage of the principle has been paid, usually twenty percent. After this the private mortgage insurance (PMI) is no longer required. If you have PMI in your mortgage payments, be sure to notify the lending institution when you have paid off that percentage of your property. Otherwise they may continue to charge you for it.
Though there are some slight drawbacks associated with a 30-year fixed rate mortgage, they are generally a homeowner's best bet. Some studies have shown homeowners saving money on adjustable rate mortgages, but these are rare cases. Especially with the current economic uncertainty, a 30-year fixed rate is a reliable constant.
Lending institutions have varying interest offers. Many Websites report on the current rates offered by large lenders. A good site has no direct connection or interests attached to any of these companies. Be mindful of any sites that offer advertising for any financial institutions.
With smart shopping, it's a great time to find a home with the current 30-year fixed mortgage rates. The housing situation will recover, and the rates will go up. So take advantage of this time to buy your dream home or refinance your existing property. Visit our mortgage broker website at http://www.ventureloanapp.com
Jan. 25, 2008
Loan Size on FHA Mortgage Loans Will Be Increased
Here's what we know so far: There will be an FHA modernization bill that passes this year. The proposed bill is bouncing back and forth between the House and Senate. Once thing is for sure, or as sure as we can be at this time, the FHA mortgage loan limit will rise to 125% of the median home price with a cap of $730K This will have a bigger affect on areas of the country that don't utilize FHA to a great extent at the moment-Areas such as the two coasts which have more expensive housing. FHA mortgages price better than conventional jumbo loans. This can make that big house more affordable.
In Minnesota, our average home is just over $200K. At the same time, this new FHA loan limit will help as it will bring in another financing option to consider. With regards to refinancing, this might prove to be extremely advantageous. FHA allows you to refinance up to 97% of a homes value. Unlike conventional loans, the mortgage insurance-called MIP( mortgage insurance premium) is not predicated on loan to value or credit scores. For this reason, I could see many people with conventional loans refinancing into an FHA loan in order to get a lower payment. This will also help on reverse mortgages. If the limit is increased, people can do larger FHA reverse mortgages in place of conventional reverse mortgages. So the big question under the new law is how big will the new FHA mortgages be allowed in Minnesota.
Some sticking points revolve around the down payment requirement with FHA. Will they allow a zero down product. Fannie Mae and Freddie Mac allow zero down with programs such as the Flex 100, My Community and Home Possible. FHA may create a similar program. The lower mortgage insurance with FHA will make a dramatic difference in the housing payment when all the other options are compared side by side.
There are a couple of other points of contention, such as down payment assistance and bonding requirement vs. net worth requirement for mortgage brokers that want to offer FHA loans. These points are being fine tuned. The future for FHA loans looks very bright indeed.
To find out more about FHA mortgages and the FHA Secure Mortgage program, visit our website http://www.ventureloanapp.com and specifically our FHA page http://www.ventureloanapp.com/FHA_20_LOANS.html
Jan. 20, 2008
Remember that real estate investment is part of an overall financial plan-it shouldn't be just stocks, bonds, and mutual funds. Investing in real estate requires specific tax, spending, budgeting and people management advice. Based on your other assets and your overall financial plan, investment property might be a worthy goal, but only if it fits your investment strategy and if you’re willing to put the time and effort into creating a successful business. Many investors exclude real estate investing because they think it is too difficult. It really isn't that hard to do successfully, but you do need to educate yourself. REMEMBER-if you act like everyone else, you will end up like everyone else.
Don’t spend until you study: If you don’t have an intimate knowledge of neighborhoods, rental rates, commercial traffic or any of a dozen more factors that make real estate investments a particular success in one community and not in others, don’t even start. John Mazzara recently wrote a book entitled "Reality Based" Real Estate Investing. You can order the book and learn more at http://www.RealityBasedRealEstateInvesting.com There are many helpful tips and technique in addition to some humorous real life stories.
The most successful people in real estate investment have taken the time to learn about the properties they’re buying, sensible ways to borrow and economical ways to manage the buildings they have. Make sure you assemble a good advisory team around you starting with your financial planner, your tax adviser and an attorney knowledgeable about real estate transactions. They’ll teach you and keep you from making serious mistakes. Experience counts. Don't pick advisors who've never been involved in what you want to invest in. You will provide their education. You can visit http://www.edinamortgage.com to see some of the programs that might for you.
A slower market doesn’t mean a bargain market. Even though the gains of the past 15 years aren’t what they used to be, keep in mind many sellers aren’t terribly desperate to sell and they’re not dropping their prices all that much. Make sure you take the time to study a particular market not only for gains in price, but for stability in rent and overall quality of the property and neighborhood you’re examining. You might hear about a downtrodden neighborhood ready to “turn,” but that rotation might take years – start slow and pick properties with the best chance of appreciation. Recently, I've seen some huge opportunities within the Twin Cities marketplace. At the same time you need to be careful so you know what you're buying, especially if it was bank owned.
Unlike a pure rental property, home ownership is not a real estate investment. If you’re thinking about leapfrogging from one residence to a new one in hopes of huge gains when the market returns, give yourself a reality check. An investment is something you can sell when the moment is right without any hesitation. Is that something you can really do with a home you’ve grown comfortable in? When the market goes up or down, we don’t necessarily think of dumping our principal residence. There are emotional ties as well as physical ties to a home – whereas real estate bought as an investment must produce income during ownership or a profit at the time of sale without exception. We are making a strategic decision to sell one of our rentals at this time because we recognize that for certain reasons, the best time might be now. It is an unemotional decision. This usually isn't the case if you have a primary residence.
Real estate is not an automatic ticket out of financial trouble. In fact, you may end up in trouble. Some people have gambled their way out of debt by buying distressed properties and reselling them at a profit. They’re the lucky ones – and after hearing so much about the “flipping” phenomenon, many of those success stories might be apocryphal. Be aware of your risk tolerance at all times. Think about all the people who joined the "real estate party" late-such as condo buyers at the end of the boom in Florida, Arizona, and Nevada. Many will take huge losses. They were a victim of Greed, not careful analysis.
Enter the foreclosure market carefully. With all the reports of subprime borrowers losing their homes in recent months, don’t think those foreclosure numbers will automatically provide you with a can’t-miss opportunity in real estate. Taking advantage of the foreclosure market is both a learning exercise and an emotional one. It takes time to learn all the correct avenues in a community toward investing successfully in failed properties, and actual contact with families losing their homes can be wrenching even if you do know what you’re doing. Foreclosure and pre-foreclosure investing is not for the faint-hearted. There is a new law change regarding short sales. Basically, the sellers can sell a home and not have to recognized tax liability on their debt relief. Debt relief is the amount sold for less the outstanding loan balance.
Cash and credit lines are king. During the white-hot real estate market, people were buying and selling property for little or no money down because lenders were willing to take that risk. Today, in a higher rate environment, that’s definitely changed. While many successful real estate investors choreograph borrowing seamlessly into their strategy, cash is an important decision for down payments and covering ongoing expenses. This is where your advisory team comes in.
Keep your credit report clean: Only borrowers with the highest credit scores will find the best lending deals if they need to borrow. Make sure your credit report is clean before you enter the market. We at Venture Development will be happy to provide you with a copy of your credit report if you live in MN. There is an upfront cost to you and you will need to fill out our application and credit authorization. We are a Minnesota mortgage broker, so we ask that only Minnesota residents go to our site and fill out the loan application at http://www.ventureloanapp.com/apply.html
Jan. 19, 2008
A lot of the press today is states that interest only loans are “bad” and that they should be avoided. Instead, let’s examine why you might want to get an interest only loan. Once you understand how the typical product works, you can make your own educated decision. Think of your mortgage as a financial instrument that needs to be managed and integrated with your other financial goals.
A conservative example of an interest only mortgage product allows for ten years of “interest only payments”. The repayment period of the loan is traditionally 30 years. The interest rate is fixed during the entire 30 year repayment period. This loan offered through lenders selling to Fannie Mae. Fannie Mae is a government sponsored entity. They are very large and significant purchaser of loans, so you shouldn’t have too much trouble finding this loan. Most mortgage brokers will be able to offer it to you. This loan is one of our favorites-Minnesota mortgage broker Venture Development-http://www.ventureloanapp.com/interest_only.html
This loan product allows the first ten of the thirty years to have payments based on just repayment of the interest or “interest only”. After the initial ten year period, the outstanding remaining balance, often the same as it was in the beginning, needs to be amortized and paid off. You now have a 20 year loan, which represents the remaining time left on the mortgage. The interest rate remains the same as the initial rate. There was NO change in the interest rate. There is no interest rate risk. The only variable that changes is the amortization period, having gone from 30 to now 20 years. If you want interest only payments again, simply refinance. In fact, there are no prepayment penalties to pay off this loan.
How can an interest only mortgage be a good thing? Your mortgage payments are less than a traditional amortizing loan. The actual payment differential is about $100 per 100K borrowed. This means you can get the home you want for a lower payment. This allows you to allocate the “savings in payments” into other places. One good place might be your retirement plan. For example, maybe you are not taking advantage of a retirement plan at work or the employer match. Salary deferred into a retirement plan is generally on a pre-tax basis. This allows you to pick up the differential in dollars that would have been lost to taxes. Instead these tax deferred dollars are compounding in your retirement plan. If you are able to pick up the employer match where you hadn’t before, you effectively are earning up to 100% on your deferred dollar, assuming the match is dollar for dollar.
Interest only payments enable you to buy a larger home with the payment you find comfortable. This generally translates into 20% more of a home for the same monthly payment. This extra 20% of buying power might allow you to “buy up” to what you really want. Getting more of what you need in a home will allow you to remain in that home longer and build more equity. Moving often may strip you of a lot of your potential equity due to the costs involved in buying and selling a home.
You can’t deduct principal. At the end of the year, your lender will send you a 1098. This form represents the amount of interest that you’ve paid in the previous year. This is what you may be able to deduct on your taxes. Principal repayment is never deductible and may actually accelerate the loss of your “tax deduction i.e. mortgage interest” by reducing the outstanding mortgage balance from which interest is calculated.
You may be able to earn a higher rate on your invested funds than the rate you are able to borrow money at for a mortgage. This is mortgage interest rate arbitrage. This is why you might want to borrow as large a mortgage as you feel comfortable maintaining and invest your equity somewhere else. Following this strategy, you are doing the same things that banks and insurance companies participate in. Last time I looked, it worked pretty well for them.
Your equity due to appreciation grows the same way regardless of how you finance a home. Equity growth is based on the appreciation of the underlying property. Consider this: if you can buy more of a home with an interest only loan, and if all homes appreciate by the same percentage, then you will gain more equity from the home that initially costs more. The equity that you are building through amortization by paying down on a mortgage is really just a “forced” savings plan. It may be possible to take these payment savings that you pay into the “forced” savings plan and instead invest them into some alternative investment that will appreciate at a higher rate. If you should want your home paid off or paid down in the future, simply liquidate this alternative investment and apply it to your outstanding mortgage balance.
What are the negatives? You might be able to argue the other side of the advantages I’ve outlined, but I think you would be remiss. For example, you could argue that there are no alternative investments that offer a higher rate than the net rate you’re paying on your mortgage based on the risk you are willing to take. This might be the case for the most conservative. If that’s the case, I still think the other advantages provide enough reasons to consider an interest only loan. To be objective there might be one risk to consider. If you don’t think you can make the mortgage payment after the interest only period and you feel that in the future you might not be able to refinance or sell your home, for whatever reason, then you should stick with a traditional 30 year fixed conventional loan.
Jan. 11, 2008
Sometimes the unthinkable happens. Countrywide being bought out by B of A is one of those events. This is an example of how bad the lending market is at the moment. Countrywide stock had dropped from 45-5 dollars as of yesterday before the buyout was announced. It was rumored that they may even be forced into bankruptcy. The deals not done until it's done-so time will tell. What will be interesting will be the number of non performing loans and how many more will fall into that category before it's all over. Countrywide has a reported 26 Billion dollar portfolio of Option Arm loans. These are the loans that most easily fall into the toxic debt category.
Aug. 10, 2007
We recently sent out a press release that talks about the current mortgage market meltdown. The State of Minnesota may be making the current situation worse.
View it here:
http://www.prweb.com/releases/2007/08/prweb545749.htm
Aug. 6, 2007
Watch Jim Cramer explain the current state of the mortgage crisis. He's pretty passionate, so be prepared!
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