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YOU DON'T HAVE TO PAY MORTGAGE INSURANCE (A.K.A. PMI)

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YOU DON'T HAVE TO PAY MORTGAGE INSURANCE (A.K.A. PMI)

By failing to prepare, you are preparing to fail
— Benjamin Franklin

The mantra over the years has been that if you put less than 20% down on your home purchase, or if you want to refinance and have less than 20% equity, you must pay for private/monthly mortgage insurance (PMI).

But be encouraged!  There are a number of positive changes that have been introduced into today's housing market that have aided homeowners nationwide in avoiding the liability of having to pay PMI; or at least in significantly minimizing it's impact on your finances.

Here are a few options:

1)  UP-FRONT BUYOUT - Buying out PMI right out of the gate is an outstanding way to eliminate the hefty monthly premiums that so easily hamper a family's ability to afford the necessities of life from a cash-flow perspective.  And it's cheaper than one might think.  This is especially helpful if the home-owner/buyer plans on staying in the home for an extended period of time (as little as 2 years in many cases).  The net savings of this choice can be dramatic over the long haul and can free up monthly reserves in case the little ones need shoes or you'd just like a night out once in a while.

2)  MIX IT UP - Hybrid mortgage insurance options allow a buyer or refinance client to pay a smaller portion than a full buyout up front in exchange for a lower monthly premium.  Many view this as the win-win avenue in that they don't have to part with a considerable lump sum of money and yet can manage the cheaper premium on a monthly basis.

3)  BUMP AND RUN - Another option for the savings-minded individual is really quite clever.  This choice allows the home-owner/buyer to bump the interest rate slightly in exchange for eliminating PMI altogether.  The thought process is that since mortgage interest is tax deductible, a small bump in rate cancels out any negative effects via the tax break vs. paying PMI.  Theoretically, PMI is not deductible so it may make all the sense in the world to take advantage of this option.  This is a tricky one and we generally don't recommend it for anyone planning to stay in their home for more than 5-7 years.  Since we're not tax experts, it's best to check with your tax preparer to weigh the cost benefit from a tax vantage point.

One final note... With the exception of it's more lenient stance on credit issues (i.e. Bankruptcy, Foreclosure, etc...) FHA is no longer the best deal when it comes to purchasing a home with very little money down.  Unless you opt for a 15 year mortgage with FHA, you will pay mortgage insurance for THE LIFE OF THE MORTGAGE....ugh!!!  The conventional loan options presented above far and away give you the best bang for you buck with a down payment obligation even less than that of FHA!!  We're in this with you for the long haul and want to help you make the right choices when considering the future of your real estate endeavors for you and your family.  Let's talk about it.  Connect with us!

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Save a Nickel, Spend a Dime??™

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Save a Nickel, Spend a Dime??™

Do not save what is left after spending, but spend what is left after saving
— Warren Buffet

Knowing when is the right time to do something life-changing can be a daunting challenge. Especially when it comes to decisions that can have a profound financial impact on you and your family for many years to come. For most of us, I think it’s fair to say that we wish to leave a legacy of sound fiscal stewardship and monetary blessing for our children or other loved ones who follow.

NOW_LATER_NEVER_dice

I’m also quite certain that we’d all like to feel as though we did the wise thing in terms of ‘buying right’ when purchasing a home. There are so many variables, so many questions when faced with this decision.

In today’s post, I’d like to clearly address one of the more common buyer dilemmas that is particularly applicable in today’s home-buying environment.

"I know mortgage rates are low right now, but I've heard we're in another housing bubble...  Maybe we should wait for prices to come down."

Let’s look at some real numbers within several different scenarios. I believe these illustrations will help in making a prudent decision as to whether buying now or waiting makes sense. In order to be realistic, we’re going to use real-time prevailing rates as of the time of this writing and average prices based upon my local real estate market which happens to be Riverside County in Southern California.

Following will be the baseline for our scenarios:

Loan type - Conforming Fannie Mae Conventional Loan • Down Payment - 5% Down • Loan Term - 30 Year Fixed Rate • Mortgage Insurance - Yes

Let’s set the stage for Scenario #1:

SCENARIO_1
SCENARIO_1

As noted below, over the full term of the loan, Scenario #1 would result in the total of principal and interest payments of $504,729 and change…

TIL_scenario_1
TIL_scenario_1

Now, let’s set the stage for Scenario #2. We’re going to assume that the decision was made to wait out the ‘bubble’ for 6 months and hallelujah!  indeed prices went down over 8% to $275,000.00 (unlikely in a recovering housing market). Nevertheless, we saved $25,000 in purchase price, but alas!  interest rates went up by one full percentage point in just a couple of months! If you don’t think this is likely to happen, it just did. From May to August 2013, interest rates went up at least 1.0%. So here’s what Scenario #2 looks like:

SCENARIO_2
SCENARIO_2

Over the full term of the loan, Scenario #2 would result in the total of principal and interest payments of $519,348 and change. Can you see we have a problem here??

TIL_scenario_2
TIL_scenario_2

Let’s take it one step further with Scenario #3, our final scenario. While it is unlikely, it is certainly feasible. Here, we’re going to assume that instead of prices coming down only 8%, they went down a full 10%. So we’re saving $30,000.00 in purchase price rather than $25,000.00 but we waited out the ‘bubble’ for 10 months instead of 6 months and mortgage rates spiked by 2.0% rather than just 1.0%. As I said, perhaps unlikely but feasible in such uncertain times as these. Here’s what Scenario #3 looks like:

SCENARIO_3
SCENARIO_3

This time, over the full term of the loan, Scenario #3 would result in the total of principal and interest payments of $568,556 and change. Now we have a big problem! We “Saved a nickel and spent a dime!”

TIL_scenario_3
TIL_scenario_3

To sum things up, I want to mention one final note. We talked about total principal and interest payments over the life of the loan, but I purposely didn’t mention anything about the difference in total interest alone. I saved that little nugget of information for last (for drama of course :o). Take a look below at the difference of actual interest paid between Scenarios 1 through 3:

TIL_scenario_1_interest
TIL_scenario_1_interest
TIL_scenario_2_interest
TIL_scenario_2_interest
TIL_scenario_3_interest
TIL_scenario_3_interest

There you have it… The difference in interest paid between Scenarios 1 and 2 is $38,369 and $92,327 between Scenarios 1 and 3!!  Furthermore, the difference in monthly payment is nearly $200.00 more per month in Scenario #3 even though we're borrowing less money!

They say that good things come to those who wait. I would say that’s probably true most of the time. But sometimes it’s a bit of a gamble to say the least. I guess the question then is “Do you feel lucky… Well, do ya?”

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How To Be A Mortgage Interest Rate Nostradamus

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How To Be A Mortgage Interest Rate Nostradamus

He who asks fortune-tellers the future unwittingly forfeits an inner intimation of coming events that is a thousand times more exact than anything they may say
— Walter Benjamin

Before I get started with this post, I must forewarn you… Nostradamus wasn’t always right. In fact, contrary to popular belief scholars say that his prophecies proved true only 5.73% of the time. But for his part, he certainly turned out to be quite the character. Indeed he has gone down in history as one of the most notable so-called “prophets” the world has ever known.

 

So in light of today’s topic, while it’s true that I’m going to show you how to generally “predict” what mortgage rates will likely do on a short-term/day-to-day basis, the technique is not exact and should not be exclusively relied upon.

If you’re in the middle of a real estate purchase or refinance and applying for a mortgage, you should heed the advice of your loan officer. The mortgage market is turbulent (especially these days) and doesn’t always follow a rule of thumb. A loan officer who is in the trenches every day and worth their keep will ultimately guide you in the decision of when you should lock in your interest rate. I’ll give my own present-day rate lock advice at the end of this post.

Having shared my little disclaimer with you that this post is purely educational, let’s talk about how you can get an idea of what mortgage rates will do short term or day-to-day. I believe it’s important for folks to know a little bit about this area of concern when using financing to purchase real estate.

Among innumerable other factors, you should know that mortgage rates get their marching orders from two main market forces:

1. The stock market’s Dow Jones Industrial Average (DJIA)

and

2. The U.S. government’s 10-Year Bond Yield

For simplicity, we’ll just call them the “DOW” and “10-Year Bond” from here on out. Generally speaking, these two markets are in competition with one another. Now as technical as this stuff sounds, we’re going to keep it super simple. We won’t really get into the ‘why’ of the matter; I’m just going to show you quickly where to look and how to decipher what rates will likely do based on what’s happening with these two market forces on a given day.

Let’s talk about where to look first. Each morning the first website I visit is MarketWatch. Here’s a screenshot of the website:

NOSTRADAMUS_yahoo_website_screenshot.jpg

No doubt, I’m sure there are thousands of websites that display this information, but I’ve found that Yahoo does a nice job of making it easy to look at while offering global articles pertinent to what I’m interested in. As I mentioned previously, for now we’re only going to look at two things on this website.

NOSTRADAMUS dow screenshot

The DOW is not really directly tied to mortgage rates.  The relationship is actually rather loose. However, the daily ups and downs do play a role. In a normal market if the DOW is down, it’s a good thing for mortgage rates. All you really need to remember is DOW down, RATES down and vice versa… DOW up, RATES up.  It’s really quite ironic in that on one hand, we root for bad economic news because it bodes well for rates, but on the other hand it’s a bummer for the economy outside of the housing market. It is important to note that we usually need to see significant movement up or down for there to be any noticeable impact on mortgage rates.  I consider significant movement to be anything more than 100 points in either direction. In the illustration above, you’ll see that the DOW is down -170.33 points.  So all other factors aside, in this scenario it’s a bad day for stocks and a good day for rates.

NOSTRADAMUS bond screenshot

Unlike the DOW, the 10-year bond IS tied directly to mortgage interest rates. This is the indicator we really need to pay attention to. In a normal market, rates will follow it up or down. As with the DOW, there's typically a threshold by which this indicator must move in either direction before we see any movement worth noting. It has been my experience that all other factors aside, movement must be more than 0.05 points up or down to have any real impact on interest rates and/or **pricing. Historically, I consider anything above +0.08or below -0.08to be fairly dramatic and anything above +0.15or below -0.15to be very dramatic. These scenarios will most likely cause rates and/or **pricing to move up or down during the day. You’ll notice in the illustration above that the yield on the 10-year bond was down -0.084 points on the day this particular screen shot was taken and as expected, we did in fact see downward activity in rates or **pricing because the movement was fairly significant.  It was another good day for rates.  (see definition of 'pricing' below)

** Pricingrefers to the credits or ‘points’ associated with securing the desired interest rate. For example, it may cost a half-point (0.50%) to secure a rate at a certain time of day, but if the DOW and/or 10-year bond moves up significantly during the day the cost may go up or the rate may become unavailable altogether. Of course, this applies vice versa if the market improves.

In conclusion, the market influences that really drive interest rates and the lengths at which 'analysts' go to predict them are ridiculously complex (just ask the guys that use the Japanese Candlestick Technique). However, I do hope the concepts laid out here will at least provide you with a basic understanding of how mortgage rates can be affected day to day. I want to stress again how important it is to rely upon your loan officer to help you determine the right time to lock in your interest rate. Just remember that at the end of the day, it’s nothing more than an educated guess. So have some grace if he or she gets it ‘wrong’. We are in uncharted territory and have seen unprecedented government intervention in recent years. No one has a crystal ball.

I told you earlier that I’d give you my rate lock advice as of the date of this writing (September 6, 2013)….  If you are in agreement with the rate and fees quoted,  LOCK ASAP!!! Rates have been artificially so low for so long, there just doesn't seem to be anywhere for them to go but up given all the factors that are pressing in today’s economic atmosphere.... 'just sayin'...  I wonder what Nostradamus would say ;o)

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