The Real Estate Sage at The Real Estate Investment Institute - REII

How long? How long should you finance your home for?Should you worry about amortizing (systemically paying off the principal) your mortgage?

A few days ago my friend Rich Kruse commenting onHow Much Should I Put Down / Equity Is No Protection / Liquidly Is Wrote: "I'd like to hear a post about interest only loans. Like 0 Down, they are not for everyone but can work for many if worked right." Then today someone commented on: A 70 Year Loan? I'll Be 110 By The Time I Finish Paying It Off...a uniquely personal post on long term financing by Mirela "m&m" Monte.

To answer Rich about interest only (I/O) loans, I checked today's rates. Today 2-22-08 you could have a fully amortized 30 year fixed rate loan for 5.875% or you could have a 30 year fixed rate interest only loan (for 10 to 15 years) at 6.25% for the same cost.

Over the first 5 years a traditional fully amortizing $200,000.00 loan would have a payment (P&I) of $1,183.03 for a total of $70,994.53 for the 5 years. The amortization would reduce the principal $14,181.12.

Over the first 5 years an interest only payment would be $1,041.67 for a total of $62,500.00. The principal would of course remain $200,000.00.

The I/O loan saves $141.41 each month or $8,484.53 over the 5 years. Certainly that $14,181.12 principal reduction is bigger than the $8,4884.53 cash savings. In fact you'd have to invest that $141.41each month at over 18.6% to break even. (Like maybe paying off your credit cards!)

So which is better? I could argue either side against the other. It depends upon if the borrower needs for that extra $141.41 each month. You can make a principal reduction at any time if you want.

Since most mortgages are paid in 3 to 7 years I don't believe principle reduction should a major factor in selecting a loan. A more important consideration is the term of the loan. The shorter the term the lower the rate.

Bill

William J Archambault Jr

The Real Estate Investment Institute

With two major exceptions you're going to pay more because you lack a down payment. The exceptions: VA loans, if you're a Veteran, you may also find some states subsidizing these loans for you, even the Dollar Down is only required if you included it in the sales agreement. The other is FHA loans, FHA does require a down payment but it doesn't necessary require it to be from the buyer's own money. Both FHA and VA allow closing cost to come from the seller, a friend or family member, and/or the mortgage broker, from the Yield Spread Premium and/or the Service Release Premium. Both VA and FHA do require the buyer to have cash reserves in the bank! Like I said it takes some money.

Then there are still numerous 100% conventional loan programs. If you want a Home see your mortgage broker, then your REALTOR® and go shopping!

Some people will discourage you, your payment might even be higher than your current rent. I suggest you read Bunk, BUnk, BUNk, BUNK

Others are going to knock the current real estate market, I suggest you read: Selling and Buying In A Down Market

Still others think you should always make a large down payment I suggest you read: Risking Everything / Sharing The Risk

If your mortgage broker or REALTOR® still can't or won't get you a home read my book "One House At A Time / Finding And Buying Single Family Rentals" The book will cost you $45.00 if that is more than a nuisance don't buy it! If you're truly are broke you're not ready to own a home yet, learn all you can and save what you can.

Best wishes,

Bill

William J Archambault Jr

The Real Estate Investment Institute

I recently tried to displace the myth that real estate and mortgage professionals could determine what you can afford. See: How Much Can I Afford / A Stupid Question, for most of you what you can afford is going to be less, sometimes considerably less than you can qualify for.

Now that you've determined what payment you can comfortably afford, it's time to consider how much you should put down on your new home.

For most of the last forty years my next question would have been, "how much do you have?" That's still where we need to start, for we can't normally put down more than we have. We also need to determine where the money came from, can it be easily and timely replaced? We need to know where it came from because the lender will not accept "mattress money" for your down payment and closing cost. We need to know how soon you can replace it, because you need to retain liquidly (your own cash available to you).

Allot of professionals have been advocating higher down payments in the current mortgage crisis. Such bad advice could best be described as testosterone laced bovine droppings!

I can understand those that are selling you the house or the money. They are all to often ignorant and inexperienced. Then there are those who are anxiously willing to trade their integrity and your money for a quicker, surer commission. The inept and the immoral have always been with us. I group them tegether only because of the common desire for easer closings.

The other group, the one that disturbs me the most, is the knowledgeable guru that mistakenly advises that you need greater equity to protect you incase the value declines. Who are these pious prophets trying to protect? Certainly not the home owner!

Lets start with the idea that equity protects you incase the value plummets. It's true that you will lose money if the value should go down, that won't change weather we're talking about equity (cash) or your loan exceeds the value of the house. For any given scenario the gross amount of the loss is the same if the property goes down $30,000.00 from what you paid for it, it goes down $30,000.00!

If you had put an extra $30,000.00 down at the time of purchase who was protected? You've lost $30,000.00, but the bank still has equity (remember it was an extra $30,000.0 of your hard earned cash), that's it the bank was protected! You are protected from going "upside down" but is that desirable or false security?

Borrowing small amounts from your home equity is extremely expensive in the best case, if you've gone "upside down" it is nearly impossible and is certainly impractical! On the other hand, if you'd made a lesser down payment keeping you remaining cash in savings, all you have to do is ask for the cash you need! But, what about that "upside down" mortgage? What about it? The payment remains the same, probably allot less than you could rent a similar home for! When you make the 360 TH payment it's all your's just like you'd agreed to.

But, what if I loose my job, we could loose the house! Well lets look at the two possiblesituations, you made the large down payment, you can't make the monthly payments, if the bank foreclosures quickly they can recover all or most of their money, you've got 3 to 6 months to move to the street. If you'd keep your money in savings you've got several months cash available to let you look for a solution, if the bank forecloses they are going to lose money, they are going to be much more willing to work with you to avoid foreclosure. You might want to read: Risking Everything / Sharing The Risk

So how much should you put down? How much have you got? Once you've determined what you have available and what is acceptable to the lender, you should determine what you need to keep in liquid reserve. Conventional wisdom says you should have 6 month income, your personal number could be higher or lower. Now you know what you can put down, remember closing cost.

So should you use it all? Not necessarily. Mortgage programs have certain thresholds once you've met one there is no additional savings until you reach the next. For conforming loans, Fannie Mae or Freddie Mac the numbers are; 3%, 5%, 10%, 15%, and 20% the rate and cost don't go down between 5% and 9.99% so if you can't reach the next level I recommend you keep your cash on hand. FHA cost the same weather you put 3% or 10% down, of course cost are applied to the loan amount.

So how much should you put down? As much as you can comfortably afford!

Your loan originator can and should tell you your afterlives, but only you the home buyer can determine what you are comfortable with. Assuming reasonable credit you can still get almost any request.

Now go buy a house!

Bill

William J Archambault Jr

The Real Estate Investment Institute

You've reached that point in your life, somewhere between 18 and death, that you want a home of your own. You locate a REALTOR® or better yet a Loan Originator and make your first mistake. You ask "how much can I afford?"

This is possibly the second most asked question in real estate, the first is "what's the rate?" How would your REALTOR® or Loan Originator know what you can afford? The Loan Originator can determine what you qualify for, but that has little relevance to what you can afford!

If on the other you ask your REALTOR® or Loan Originator what do I qualify for, they will look at your gross income and apply a factor dictated by the loan program of 28%, 33%, 45%, 50%, or more. This may mean that you can get the loan, it doesn't mean that you can afford to make the payments.

Before you ask anyone anything, ask yourselves, what can I afford? Start with your current rent, then determine what additional income you could add to it. Are you saving money each month? Do you have long term bills being paid off? Are you getting a raise? Is there something your willing to give up that would save money? Are you really willing to give up anything?

Now that you've come up with your own number you need to ask yourself the questions no professional legally can. Do you really want to buy a home with someone you're not married to? Are you going to stay married? Mortgages are for 15, 30 or even 40 years, relationships are from now until the next argument, marriages sadly often are not much longer. How would you make the payments if one of you moved out? What if by plan or happenstance one of you should get pregnant? Would you be able to make the payments during and after pregnancy?

Now is the time to talk to the loan pro, and ask the proper question. "We can afford $2,500.00 per month principal and interest (the loan payment) taxes and insurance, what's the best program we qualify for and how much can we buy with our down payment and a new loan?

Your Loan Originator can't legally deny you any loan you qualify for, don't blame them if you can't afford the monthly payment! Don't blame your REALTOR® they legally must sell you any home you want and can afford. Only you can decided what you can afford!

Bill

William J Archambault Jr

The Real Estate Investment Institute

Surely, the press must have ergonomic keyboards! I can't believe what I hear in the news in speech and writing! They couldn't utter it with a straight face and I'm sure they couldn't type it with a straight keyboard!

To believe what we hear and read? First we'd "require the willing suspension of disbelief."

Then We'd have to accept that:

McCain is a conservative.

Hillary is a moderate.

Bill didn't have sex with that woman... (fill in almost any name.)

Obama is ... (fill in almost any anything.)

Huckabe is truly righteous.

Paul is sane.

Edwards is honest.

Kerry was a hero.

Gore invented the internet.

The media can be trusted.

More than a few NEA members care about our kids.

The REALTORS® did it.

Mortgage brokers are guilty.

Not one home buyer knew what his mortgage payment was.

People don't skip mortgage payments, mortgage brokers do.

Bill

I just read Lenn Hardly's blog: WHAT ARE THE BUZZ WORDS? TRANSPARENCY? CONSUMER'S RIGHT TO KNOW? NONSENSE!

People have a major misunderstanding of what they can except purchasing a short sale. Just what sort of discount will a bank to accept?

If you're hoping for a number, you can stop reading. If you are hoping to steal the property, you can stop reading. If you're hopping to buy the property for 50% of market value, you can stop reading. If you're hopping to wait and buy the property for less direct from the bank you can stop reading.

So what can you expect, what should you offer. The answer is simple! Except to pay current market value, less the cost of foreclosure and sale by the bank (these items can be accurately estimated) and a "fudge factor!" It's this "fudge factor" that covers the cost that will accrue if the bank has to take the property, that gives you room to negociate, a pre-foreclosure short sale.

If you attempt a purchase requiring a short sale at ridiculously low prices your chances of success are unlikely. If a seller accepts an unrealistically low offer for submission to the bank, they may well lose the house and incur considerably more expense and credit problems. With the banks taking so long to rule on short sale offers the seller may not have time to find another buyer.

There is a perverted school of thought that says wait until the "auction" or until the bank owns the property to buy it and you'll save money, this is a fallacy! A bank with an REO (Real Estate Owned, non-business property owned by the bank) has already incurred both the cost of foreclosure and the previously unknown "fudge factor" that they might have discounted in a short sale. Once a bank is in title you can now expect to pay current market value!

Historically, it was possible to get banks to discount their REO's, but not today. With so many foreclosures banks with many mortgages in any given subdivision and several REO's, can't discount them. If the bank accepts an offer below current market value, that sale becomes a comparable for the rest of their REO's in that market lowering the property values of the remaining properties and those similar homes of their other customers!

One final thought on what to offer. To you, today's buyer, the value of the properly you are considering has nothing to do with what the seller paid for it 1,2,3,4, or 5 years ago!

Bill

William J Archambault Jr

The Real Estate Investment Institute

I just watched Hillary explain to David Letterman that pre-payment penalties meant that "if the home owner gets a little money ahead and wants to put it on his mortgage, the pre-payment means that for the rest of the mortgage his payment goes up." This would be funny if she wasn't "the smartest woman in the world" or possibly the next presidential disgrace.

You may not know it but she has a great resource, one of us, on her staff. Some times great people, our friend are mislead, sometimes they are simply betrayed.

Bill

William J Archambault Jr