11 must-knows about early mortgage payoff
Seniors close to retirement can boost return on investment
By Jack Guttentag
Inman News™
Q: Will I save money if I make my regular monthly payment early?
A: No, paying early merely allows the firm servicing your loan to earn interest on your money until the payment due date. This is not the case, however, if you have a simple interest mortgage (SIM). Because it accrues interest daily, the earlier you pay a SIM, the more interest you save.
Q: How do I know if my mortgage is "simple interest"?
A: Your note will say that interest accrues daily. Also, the monthly payment on a SIM varies month to month, so if your payment is always the same, you do not have a SIM.
Q: What is the best time of the month to make an extra payment?
A: If you include it with your regular payment and pay before the grace period, the extra payment will be applied to the current balance. If you make the extra payment after the grace period, it might be applied to the current balance, or it might not be credited until the following month, depending on the systems/policies of the servicer. You should find out where the servicer's cutoff is for receiving credit in the current month.
Q: If I make a large extra payment, will my future scheduled payments be lower?
A: On a fixed-rate mortgage, the scheduled payment is not affected by the extra payment. You just pay down the balance faster. On an adjustable-rate mortgage, the scheduled payment remains the same until the next rate adjustment. At that point, the payment is recalculated based on the reduced balance, the new rate and the original term. So unless it is offset by a rate increase, the payment will drop.
Q: Would I be better off investing excess funds rather than paying down the loan balance?
A: Not very likely. Paying down the loan balance is an investment carrying a yield equal to the mortgage rate, with no default risk. There are no riskless investments today that pay a yield that even comes close.
Q: Would this apply to a high-tax-bracket borrower who deducts mortgage interest payments?
A: Yes, what matters is the after-tax yield on the mortgage repayment relative to other investments, and the tax-rate adjustment affects them equally.
Q: Isn't it better to make extra payments in the early years of a mortgage when the regular payment goes largely to interest than in later years when most of it goes to principal?
A: No, the return on investment is not affected by where the mortgage is in its life cycle. While the allocation of scheduled payments between principal and interest changes over the life of the mortgage, extra payments go entirely to principal, no matter what stage of its life cycle the mortgage is in.
Q: Is there a way to escape a prepayment penalty clause?
A: No, the clause is there to protect the lender, or the ultimate investor if the loan was sold, which it probably was. Investors pay extra for the protection. I have never heard of a case where a prepayment penalty clause was voluntarily waived.
Q: Should seniors close to retirement pay off their mortgage?
A: It is a prudent move if they have the assets to do it, because the rate they are paying on their mortgage is higher than the return they can earn on assets having a high degree of safety. Paying off their mortgage also clears the way for a reverse mortgage in the future, should the need for additional income arise.
Q: If I have two mortgages, which do I pay down first?
A: In general, pay down the mortgage carrying the higher rate. However, if that mortgage is fixed-rate while the lower-rate mortgage is adjustable-rate, the decision must consider the possibility that the rate on the adjustable will increase in the future.
Q: Is a biweekly payment mortgage a painless way to pay it off sooner?
A: Making half the monthly payment every two weeks is not painless, because it requires an extra monthly payment every year, and the lender will charge you for the privilege. An alternative approach that is equally effective, and which is entirely within your control, is to increase your scheduled monthly payment by 1/12 of the payment.
If you would like expert advise and representation in your next move, please contact me.
Suzanne O'Brien
(313) 516-6644
suzanneo@realestateone.com
Thursday, December 22, 2011
Wednesday, December 14, 2011
3 options for buying home after short sale
3 options for buying home after short sale
REThink Real Estate
By Tara-Nicholle Nelson
Q: I experienced a hardship two years ago and had to sell my house via short sale. I am now ready to purchase a home but heard I would have to wait another year because of FHA rules. I have been paying my rent on time and my credit is in the 700s. What programs or other options do I have in terms of obtaining a loan? I want to purchase a house for $70,000. --T. Jordan
A: I'm glad to hear that your hardship has passed, and that you've been able to get your finances back in shape. Whoever you've spoken to is correct: There is a three-year waiting period after a short sale before you can qualify for an FHA loan on a new home. As I see it, though, you have three clear options:
1. Wait a year. The fact is, time flies -- and you're only 12 months away from the expiration of the FHA waiting period. Frankly, there are so many homes on the market right now, including an enormous percentage of distressed properties with condition problems and such, that between getting their own financial ducks in a row and house hunting, it is taking many homebuyers more than a year from the time they get started to get into contract, even without any waiting period.
Unless you have an uber-urgent reason to move or are very flush with cash (see No. 2, below), my advice is to wait the year. In the meantime, pay your bills on time -- every time -- and work with your mortgage and real estate brokers to make sure all your other financial ducks are in a row so there are no surprises when your waiting period is up.
2. Get a non-FHA loan. FHA is popular -- especially among those who only have the cash to make the FHA minimum 3.5 percent down payment -- but it's not the only game in town. The vast majority of conventional (non-FHA) loans available from mainstream lenders are insured by Fannie Mae and Freddie Mac.
Both these agencies impose a shorter, two-year, post-short-sale waiting period, as long as the borrower is coming in with a 20 percent down payment. If you wait an additional two years, the minimum down payment requirement comes down to 10 percent, but by then you will qualify for the 3.5 percent FHA mortgage.
3. Plead the case of extenuating circumstances. FHA guidelines do make an exception for the three-year, post-short-sale waiting period for former homeowners/wannabe borrowers who can document that they were forced to do the short sale by extenuating circumstances. The most common fact scenarios that fit the bill are a job transfer to another area (not job loss) or a natural disaster that affected the property (e.g., fire, flood, etc.).
Beyond that, whether a "hardship," to use your terminology, rises to the level of an extenuating circumstance for purposes of qualifying for an FHA loan is up to the discretion of the lender, but things like a job loss, the adjustment of a mortgage or the decline of the home's market value do not count.
If you had, say, an accident or illness that resulted in a temporary disability, it might be worth the effort to plead your case. Speak with your mortgage professional about whether you can make a credible argument in favor of shortening your waiting period.
If you would like expert advise and representation in your next move, please contact me.
Suzanne O'Brien
(313) 516-6644
suzanneo@realestateone.com
REThink Real Estate
By Tara-Nicholle Nelson
Q: I experienced a hardship two years ago and had to sell my house via short sale. I am now ready to purchase a home but heard I would have to wait another year because of FHA rules. I have been paying my rent on time and my credit is in the 700s. What programs or other options do I have in terms of obtaining a loan? I want to purchase a house for $70,000. --T. Jordan
A: I'm glad to hear that your hardship has passed, and that you've been able to get your finances back in shape. Whoever you've spoken to is correct: There is a three-year waiting period after a short sale before you can qualify for an FHA loan on a new home. As I see it, though, you have three clear options:
1. Wait a year. The fact is, time flies -- and you're only 12 months away from the expiration of the FHA waiting period. Frankly, there are so many homes on the market right now, including an enormous percentage of distressed properties with condition problems and such, that between getting their own financial ducks in a row and house hunting, it is taking many homebuyers more than a year from the time they get started to get into contract, even without any waiting period.
Unless you have an uber-urgent reason to move or are very flush with cash (see No. 2, below), my advice is to wait the year. In the meantime, pay your bills on time -- every time -- and work with your mortgage and real estate brokers to make sure all your other financial ducks are in a row so there are no surprises when your waiting period is up.
2. Get a non-FHA loan. FHA is popular -- especially among those who only have the cash to make the FHA minimum 3.5 percent down payment -- but it's not the only game in town. The vast majority of conventional (non-FHA) loans available from mainstream lenders are insured by Fannie Mae and Freddie Mac.
Both these agencies impose a shorter, two-year, post-short-sale waiting period, as long as the borrower is coming in with a 20 percent down payment. If you wait an additional two years, the minimum down payment requirement comes down to 10 percent, but by then you will qualify for the 3.5 percent FHA mortgage.
3. Plead the case of extenuating circumstances. FHA guidelines do make an exception for the three-year, post-short-sale waiting period for former homeowners/wannabe borrowers who can document that they were forced to do the short sale by extenuating circumstances. The most common fact scenarios that fit the bill are a job transfer to another area (not job loss) or a natural disaster that affected the property (e.g., fire, flood, etc.).
Beyond that, whether a "hardship," to use your terminology, rises to the level of an extenuating circumstance for purposes of qualifying for an FHA loan is up to the discretion of the lender, but things like a job loss, the adjustment of a mortgage or the decline of the home's market value do not count.
If you had, say, an accident or illness that resulted in a temporary disability, it might be worth the effort to plead your case. Speak with your mortgage professional about whether you can make a credible argument in favor of shortening your waiting period.
If you would like expert advise and representation in your next move, please contact me.
Suzanne O'Brien
(313) 516-6644
suzanneo@realestateone.com
Tuesday, December 13, 2011
Real Estate Market Update October 2011
So far this year we have had a classic economic struggle of Good vs. Evil. The Good Side *Values are stable to rising (even Case-Shiller shows metro Detroit values are up!) *We are creating jobs in Michigan *Consumer Confidence moved up a bit *Strong pent up buyer and seller demand *Record low combination of prices and interest rates The Evil Side *Lack of saleable home inventories *Larger percentage of homes with little to no equity *Slow job growth *Stock market volatility To date, good has won out over evil, but the market did pause a bit in the last 45 days, with the pace of buyer demand sliding (but still ahead of last year at this time). There are a couple of potential causes. The stock market/European "noise" has been distracting (3rd quarter 401K statements came out in Oct, which may have scared some), but the main cause may be that we simply do not have enough saleable homes. If you don't have enough logs for the fire, it will eventually die down. We could be in for a strange stair- step real estate recovery cycle: sales rise, depleting inventories, then fall from fewer homes to sell which causes values to rise (fewer listings=feeding frenzy), which brings more homes back into the market (more sellers can now sell), and the cycle starts over again. It is a scenario that occurs with every recovery but exaggerated today because lower home equity levels are keeping a lid on inventories. Price per square foot has continued to rise compared to last year, with available homes for sale up slightly as well (mainly over $250,000). The available home levels feel lower, because it has actually fallen over the past 90 days (as it did last year as well). The seasonal shifts make it difficult to judge the true market momentum without comparing to the same time last year. Pending home sales are at a faster pace than last year as well, causing the Months Supply of Inventory to decrease over the past 90 days, which is putting positive pressure on values. Our best leading market indicators are open house visitors, website visits, and the number of showings on our listings. As you can see from the chart, compared to the same time last year, all three have positive trends, with the showing count giving some mixed signals (confirming the October slowing).
If you would like expert advise and representation in your next move, please contact me.
Suzanne O'Brien
(313) 516-6644
suzanneo@realestateone.com
Monday, December 12, 2011
4 Tips for Efficient Downsizing
4 Tips for Efficient Downsizing
The organizational benefits of downsizing can be very rewarding. You can save time, restore order, relieve stress, free up space and, perhaps most importantly, save money.
While the process may seem overwhelming to your clients, sharing the following tips will help them accomplish the task.
1. Try not to focus on the entire house at once. Take on one project at a time and don’t allow yourself to get overwhelmed. If the room itself is too much to take on, focus on one area at a time.
2. Evaluate what you have. If you haven’t used or thought about something in over a year, it’s probably safe to get rid of it. Craigslist and eBay are great online tools that will help you cash in on things that you don’t need anymore. Or donate items you no longer need.
3. Properly store irreplaceable items. Meaningful items such as old photos, yearbooks, wedding dresses, and christening gowns should be properly stored in sealed containers. You may even want to go one step further with old photos and convert them to a digital format to ensure that they will always be safe.
4. Stay positive. Getting rid of items that remind you of your past can be an emotional process. At first it might seem difficult to part with certain things. Concentrate on what’s important to you and visualize what your home will look like when you have de-cluttered and re-imagined your space.
Promote yourself as a REALTOR® who specializes in working with downsizers. Downsizing requires a unique set of skills and a great deal of planning and patience. Clients might find themselves needing the services of others, such as stagers, de-clutterers and junk removers, as well as a storage plan for the things they want to keep safe. With the right connections, you can help homeowners find someone who is familiar with the situation and can assure that the process moves smoothly.
If you would like expert advise and representation in your next move, please contact me.
Suzanne O'Brien
(313) 516-6644
suzanneo@realestateone.com
The organizational benefits of downsizing can be very rewarding. You can save time, restore order, relieve stress, free up space and, perhaps most importantly, save money.
While the process may seem overwhelming to your clients, sharing the following tips will help them accomplish the task.
1. Try not to focus on the entire house at once. Take on one project at a time and don’t allow yourself to get overwhelmed. If the room itself is too much to take on, focus on one area at a time.
2. Evaluate what you have. If you haven’t used or thought about something in over a year, it’s probably safe to get rid of it. Craigslist and eBay are great online tools that will help you cash in on things that you don’t need anymore. Or donate items you no longer need.
3. Properly store irreplaceable items. Meaningful items such as old photos, yearbooks, wedding dresses, and christening gowns should be properly stored in sealed containers. You may even want to go one step further with old photos and convert them to a digital format to ensure that they will always be safe.
4. Stay positive. Getting rid of items that remind you of your past can be an emotional process. At first it might seem difficult to part with certain things. Concentrate on what’s important to you and visualize what your home will look like when you have de-cluttered and re-imagined your space.
Promote yourself as a REALTOR® who specializes in working with downsizers. Downsizing requires a unique set of skills and a great deal of planning and patience. Clients might find themselves needing the services of others, such as stagers, de-clutterers and junk removers, as well as a storage plan for the things they want to keep safe. With the right connections, you can help homeowners find someone who is familiar with the situation and can assure that the process moves smoothly.
If you would like expert advise and representation in your next move, please contact me.
Suzanne O'Brien
(313) 516-6644
suzanneo@realestateone.com
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