Shopping for a home loan? Things have changed - here's what you need to consider.
By Les Christie, CNNMoney.com staff writer
February 4, 2009: 1:35 PM ET
NEW YORK (CNNMoney.com) -- If you're shopping for a mortgage these days, it's a whole new world out there.
"There have been a huge number of changes over the past few years in mortgage borrowing," said Gibran Nicholas, founder of the CMPS Institute, which trains and certifies mortgage advisors.
Of course, many of the subprime loans that helped fuel the housing boom - those that didn't require borrowers to show any proof of income, or that let homeowners make minimum payments - are are simply no longer available.
But even buyers looking for a traditional mortgage are now faced with different factors to consider.
Here is what you need to know:
Paying up-front points. Borrowers can pay points - one-time, up-front fees - in order to reduce their mortgage's interest rate over the life of the loan. One point represents 1% of the mortgage value.
But they often assume that they should never pay points, according to Alan Rosenbaum, founder of mortgage broker Guardhill Financial. That's a mistake, in his opinion.
When interest rates were high, paying points didn't make sense because borrowers were very likely to refinance after rates dropped. They wouldn't hold their original loans long enough to recoup their up-front costs.
But now borrowers can get a lot more bang for their buck. The old rule of thumb was that paying one point at closing could lower their mortgage's interest rate by a quarter percentage point or so.
"Today the spread is worth a half point to a full point on the rate," said Rosenbaum.
It means paying $2,000 on a $200,000 mortgage at closing can shave as much as a whole percentage point off the loan's interest rate, changing a 6% loan to 5%.
That would save $126 a month, and pay for itself in 16 months. Even if the rate were only lowered to 5.5%, that would still save $64 a month, paying for itself in 32 months.
Still, not everyone is convinced. Rosenbaum recently had a client who chose a 15-year fixed rate loan at 5.875% with zero up-front points on a $800,000 loan, instead of paying a point to get a 5.375% loan.
Had the borrower chosen to pay that point, he would have recouped that cost in about three years, and then gone on to save more than $200 a month for the remaining 12 years of the loan.
Of course, there are caveats. Buyers who are planning to refinance or sell within a few years shouldn't pay points, since the strategy simply doesn't pay in the short term.
Making more than the minimum down payment. If you can afford to put 25%, 30% or more down, should you do it?
Most lenders require a minimum down payment of 20%; anything less and borrowers will need to obtain private mortgage insurance.
And if a buyer could afford to put more than 20% down, it was generally assumed that they should.
The traditional thinking was, "If you have the capital to commit, why not?" said Keith Gumbinger of mortgage research firm HSH Associates. "It will give you a smaller balance to pay off. But now, in light of declining home markets, not everyone would agree with that."
High down payments can be wiped out in severely declining markets.
Nicholas said he knows of a couple in Arizona who put a whopping $400,000 down on a million dollar house a couple of years ago. That gave them, they thought, a nice home equity cushion should they run into financial trouble.
"But prices are down so much, the couple still fell underwater," he said. "It would have been better to conserve that cash in case home prices continue to decline."
Locking in the mortgage rate. Many borrowers choose not to lock in when rates are falling, as they have been, since they assume that the deals will only get better.
But that's often a mistake.
"We almost always recommend that if you have the numbers that make your deal work, then lock it in," said Gumbinger.
His reason: Interest rates tend to jump up much faster than they inch down, meaning that buyers are much more likely to get stuck with a higher mortgage rate than they are to get lower one because they waited.
Besides, locking in at the currently very affordable rates can give borrowers peace of mind, which is no small matter when you're trying to buy a house.
"You'll sleep better at night," said Gumbinger.
Thursday, February 5, 2009
Tuesday, February 3, 2009
Foreclosures dominate home sales
Repossessed homes and short sales make up a large percentage of sales in many real estate markets.
By Les Christie, CNNMoney.com staff writer
Last Updated: February 3, 2009: 7:48 AM ET
NEW YORK (CNNMoney.com) -- Real estate values around the nation have collapsed, and sales of foreclosed and "underwater" homes now dominate many housing markets, according to a report released Tuesday.
The report, from Zillow.com, a real estate Web site, revealed that with foreclosures soaring, nearly 20% of the nation's home sales in 2008 were of bank-repossessed properties. Another 11% were short sales, in which homeowners owed more in mortgage debt than their homes were worth.
Madera, Calif., had the highest percentage of these distressed sales: 54.6% of all transactions there were foreclosed homes, and another 3.4% were short sales.
In Merced, Calif., 53.4% of sales were foreclosures and 4.8% were short sales. In nearby Stockton, 51.1% were foreclosures and 5.4% were short sales.
"As more markets turn down and markets that were already down go deeper, the pace at which value is being erased from the U.S. housing stock is rapidly increasing," said Stan Humphries, Zillow's vice president in charge of data and analytics.
"More value [was] wiped out in the fourth quarter of 2008 than was eliminated in all of 2007," Humphries said.
About $3.3 trillion in home equity was erased in 2008, with $1.4 trillion of that wipeout coming in the fourth quarter alone, according to Humphries. More than $6 trillion in value has been lost since the market peaked in 2005.
Those equity losses have put many homeowners underwater, where they're extremely vulnerable to foreclosure. These owners can't tap home equity for the cash they need to pay bills when they run into rough financial patches, and they often find it impossible to refinance - lenders will not loan more than the property is worth.
In the United States, 17.6% of all homes are now underwater, according to Zillow, as are 41.2% of all mortgages for homes bought in the past five years.
The worst-hit cities are in the once-booming Sun Belt. In Las Vegas, 61.4% of all homes are underwater.
Because so many homes are worth less than their mortgage balances, an increasing number have to be sold short. But short sale transactions can take a long time to complete, because lenders have been having trouble keeping up with the flood of requests.
"The speed of short sales is a function of the resources being allocated to them by lenders, and those resources are being stretched to the limit," Humphries said.
That means lenders may not act on approving short sales for months. The deals cannot go forward without their approval, because the banks must agree to forgive the difference between what they're owed and what the sale brings in.
As the time it takes to arrange short sales lengthens, they become harder to complete.
Time and money wasted
One example of how price declines can doom a short sale occurred recently in Phoenix. Curtis Johnson, a real estate broker there, worked with a health care worker whose hours were being cut and who could no longer afford her mortgage. She fell behind and decided to sell.
Johnson was able to find a buyer willing to pay $183,000, and got an approval form the lender. The owner confidently moved out, got a new place and started a new life. But the lender folded and the mortgage went to a new servicer, who took six weeks to approve the deal.
"Unfortunately, the buyers who were approved were no longer interested because the real estate market had dropped significantly," Johnson said. "They wrote a new offer, considerably lower then the first, and it was time to start over."
Two more offers eventually fell through before a new buyer was found and the owner's bank approved the price, this time at $163,000. On the day of that closing, however, the parties discovered that the buyer's lender had run out of funds and dropped out of the deal. The home went to foreclosure auction before another sale could be arranged.
The house is now on the market for $139,900.
"[The house is] listed for less than what would have been received had the bank been willing to work with us, and still has not yet sold," Johnson said.
Distressed sales like that depress the market for all homeowners. Regular sellers in cities dominated by foreclosures have to adjust their prices downward to compete.
The percentage of homes sold for less than what their owners originally paid has leaped up in the past couple of years. In the United States as a whole, 34.6% of the sales made in 2008 were done at a loss. In Merced, 71.6% of all sales last year were for less than the seller paid. Stockton, Modesto and Las Vegas all had in excess of 68% of all homes being sold at a loss.
Foreclosures beget more foreclosures by adding inventory to the market, which depresses prices, which increases foreclosures, according to Humphries.
"The vicious cycle continues," he said.
First Published: February 3, 2009: 3:28 AM ET
By Les Christie, CNNMoney.com staff writer
Last Updated: February 3, 2009: 7:48 AM ET
NEW YORK (CNNMoney.com) -- Real estate values around the nation have collapsed, and sales of foreclosed and "underwater" homes now dominate many housing markets, according to a report released Tuesday.
The report, from Zillow.com, a real estate Web site, revealed that with foreclosures soaring, nearly 20% of the nation's home sales in 2008 were of bank-repossessed properties. Another 11% were short sales, in which homeowners owed more in mortgage debt than their homes were worth.
Madera, Calif., had the highest percentage of these distressed sales: 54.6% of all transactions there were foreclosed homes, and another 3.4% were short sales.
In Merced, Calif., 53.4% of sales were foreclosures and 4.8% were short sales. In nearby Stockton, 51.1% were foreclosures and 5.4% were short sales.
"As more markets turn down and markets that were already down go deeper, the pace at which value is being erased from the U.S. housing stock is rapidly increasing," said Stan Humphries, Zillow's vice president in charge of data and analytics.
"More value [was] wiped out in the fourth quarter of 2008 than was eliminated in all of 2007," Humphries said.
About $3.3 trillion in home equity was erased in 2008, with $1.4 trillion of that wipeout coming in the fourth quarter alone, according to Humphries. More than $6 trillion in value has been lost since the market peaked in 2005.
Those equity losses have put many homeowners underwater, where they're extremely vulnerable to foreclosure. These owners can't tap home equity for the cash they need to pay bills when they run into rough financial patches, and they often find it impossible to refinance - lenders will not loan more than the property is worth.
In the United States, 17.6% of all homes are now underwater, according to Zillow, as are 41.2% of all mortgages for homes bought in the past five years.
The worst-hit cities are in the once-booming Sun Belt. In Las Vegas, 61.4% of all homes are underwater.
Because so many homes are worth less than their mortgage balances, an increasing number have to be sold short. But short sale transactions can take a long time to complete, because lenders have been having trouble keeping up with the flood of requests.
"The speed of short sales is a function of the resources being allocated to them by lenders, and those resources are being stretched to the limit," Humphries said.
That means lenders may not act on approving short sales for months. The deals cannot go forward without their approval, because the banks must agree to forgive the difference between what they're owed and what the sale brings in.
As the time it takes to arrange short sales lengthens, they become harder to complete.
Time and money wasted
One example of how price declines can doom a short sale occurred recently in Phoenix. Curtis Johnson, a real estate broker there, worked with a health care worker whose hours were being cut and who could no longer afford her mortgage. She fell behind and decided to sell.
Johnson was able to find a buyer willing to pay $183,000, and got an approval form the lender. The owner confidently moved out, got a new place and started a new life. But the lender folded and the mortgage went to a new servicer, who took six weeks to approve the deal.
"Unfortunately, the buyers who were approved were no longer interested because the real estate market had dropped significantly," Johnson said. "They wrote a new offer, considerably lower then the first, and it was time to start over."
Two more offers eventually fell through before a new buyer was found and the owner's bank approved the price, this time at $163,000. On the day of that closing, however, the parties discovered that the buyer's lender had run out of funds and dropped out of the deal. The home went to foreclosure auction before another sale could be arranged.
The house is now on the market for $139,900.
"[The house is] listed for less than what would have been received had the bank been willing to work with us, and still has not yet sold," Johnson said.
Distressed sales like that depress the market for all homeowners. Regular sellers in cities dominated by foreclosures have to adjust their prices downward to compete.
The percentage of homes sold for less than what their owners originally paid has leaped up in the past couple of years. In the United States as a whole, 34.6% of the sales made in 2008 were done at a loss. In Merced, 71.6% of all sales last year were for less than the seller paid. Stockton, Modesto and Las Vegas all had in excess of 68% of all homes being sold at a loss.
Foreclosures beget more foreclosures by adding inventory to the market, which depresses prices, which increases foreclosures, according to Humphries.
"The vicious cycle continues," he said.
First Published: February 3, 2009: 3:28 AM ET
Thursday, January 29, 2009
203 (H) Disaster Victims
The Section 203(h) program allows the Federal Housing Administration (FHA) to insure mortgages made by qualified lenders to victims of a major disaster who have lost their homes and are in the process of rebuilding or buying another home.
Purpose:
Through Section 203(h), the Federal Government helps victims in Presidentially designated disaster areas recover by making it easier for them to get mortgages and become homeowners or re-establish themselves as homeowners.
Type of Assistance:
This program provides mortgage insurance to protect lenders against the risk of default on mortgages to qualified disaster victims. Individuals are eligible for this program if their homes are located in an area that was designated by the President as a disaster area and if their homes were destroyed or damaged to such an extent that reconstruction or replacement is necessary. Insured mortgages may be used to finance the purchase or reconstruction of a one-family home that will be the principal residence of the homeowner. Like the basic FHA mortgage insurance program it resembles (Section 203(b) Mortgage Insurance for One- to Four-Family Homes), Section 203(h) offers features that make homeownership easier:
-- No downpayment is required. The borrower is eligible for 100 percent financing. Closing costs and prepaid expenses must be paid by the borrower in cash or paid through premium pricing or by the seller, subject to a 6 percent limitation on seller concessions.
-- FHA mortgage insurance is not free. Mortgagees collect from the borrowers an up-front insurance premium (which may be financed) at the time of purchase, as well as monthly premiums that are not financed, but instead are added to the regular mortgage payment.
-- Some fees are limited. FHA rules impose limits on some of the fees that lenders may charge in making a mortgage. For example, the lender’s mortgage origination charge for the administrative cost of processing the mortgage may not exceed one "point"—that is, one percent of the amount of the mortgage excluding any financed upfront mortgage insurance premium. In addition, property appraisal and inspection fees are set by FHA.
--HUD sets limits on the amount that may be insured. To make sure that its programs serve low- and moderate-income people, FHA sets limits on the dollar value of the mortgage. The current FHA mortgage limit ranges from $200,160 to $362,790. These figures vary over time and by place, depending on the cost of living and other factors (higher limits also exist for two- to four-family properties).
Eligible Participants:
FHA-approved lending institutions, such as banks, mortgage companies, and savings and loan associations, are eligible for Section 203(h) insurance.
Eligible Customers:
Anyone whose home has been destroyed or severely damaged in a Presidentially declared disaster area is eligible to apply for mortgage insurance under this program.
Purpose:
Through Section 203(h), the Federal Government helps victims in Presidentially designated disaster areas recover by making it easier for them to get mortgages and become homeowners or re-establish themselves as homeowners.
Type of Assistance:
This program provides mortgage insurance to protect lenders against the risk of default on mortgages to qualified disaster victims. Individuals are eligible for this program if their homes are located in an area that was designated by the President as a disaster area and if their homes were destroyed or damaged to such an extent that reconstruction or replacement is necessary. Insured mortgages may be used to finance the purchase or reconstruction of a one-family home that will be the principal residence of the homeowner. Like the basic FHA mortgage insurance program it resembles (Section 203(b) Mortgage Insurance for One- to Four-Family Homes), Section 203(h) offers features that make homeownership easier:
-- No downpayment is required. The borrower is eligible for 100 percent financing. Closing costs and prepaid expenses must be paid by the borrower in cash or paid through premium pricing or by the seller, subject to a 6 percent limitation on seller concessions.
-- FHA mortgage insurance is not free. Mortgagees collect from the borrowers an up-front insurance premium (which may be financed) at the time of purchase, as well as monthly premiums that are not financed, but instead are added to the regular mortgage payment.
-- Some fees are limited. FHA rules impose limits on some of the fees that lenders may charge in making a mortgage. For example, the lender’s mortgage origination charge for the administrative cost of processing the mortgage may not exceed one "point"—that is, one percent of the amount of the mortgage excluding any financed upfront mortgage insurance premium. In addition, property appraisal and inspection fees are set by FHA.
--HUD sets limits on the amount that may be insured. To make sure that its programs serve low- and moderate-income people, FHA sets limits on the dollar value of the mortgage. The current FHA mortgage limit ranges from $200,160 to $362,790. These figures vary over time and by place, depending on the cost of living and other factors (higher limits also exist for two- to four-family properties).
Eligible Participants:
FHA-approved lending institutions, such as banks, mortgage companies, and savings and loan associations, are eligible for Section 203(h) insurance.
Eligible Customers:
Anyone whose home has been destroyed or severely damaged in a Presidentially declared disaster area is eligible to apply for mortgage insurance under this program.
Thursday, December 25, 2008
Refi madness
Falling interest rates are leading to a rush to get cheaper mortgages. Should you join in?
By Les Christie, CNNMoney.com staff writer
Last Updated: December 24, 2008: 2:31 PM ET
NEW YORK (CNNMoney.com) -- Falling interest rates are fueling a mortgage refinance frenzy as homeowners rush to reduce their housing payments.
The average rate for a 30-year, fixed mortgage dropped to 5.08% last week, according to the Mortgage Bankers Association, more than a full point lower than just a month ago.
Mortgage applications were up a whopping 48% last week, according to the MBA and more than 80% were from homeowners looking to lower housing costs.
"It's snowing loans," said Steve Habetz, a Connecticut mortgage broker, "and they're all refis."
Among those were Elizabeth Mayer and Michael Keohane, who bought their Manhattan condo just a little over a year ago, financing $220,000 of the purchase price with a 30-year, fixed rate loan of 6.5%. That was affordable, with monthly payments of less than $1,400. But their new 5.25% loan will lower their payment to about $1,215, saving about $175 a month.
"It was a nice holiday gift," said Mayer.
With savings like that, it's no wonder that homeowners are coming out of the woodwork. And mortgage brokers are beating the drums too, advising their clients to let the good times roll.
Mayer said her mortgage broker had kept her informed of interest rate declines ever since she originally purchased her home. "He's been encouraging whenever opportunities arose," she said. "We missed one opportunity last spring when we just weren't able to act on it."
The broker made sure they didn't miss this chance. "He e-mailed me [about it] from South Africa and called when he got back," said Mayer.
Who should refi...
Anyone with high adjustable-rate loans. Folks in this group should try to get into a low fixed rate if they can. Not only will they lower their payments immediately but it would also eliminate the possibility of future increases.
Those who would lower their rate by a percentage point or more. Borrowers who already have a reasonable fixed rate shouldn't jump into a new loan every time rates inch down, according to Orawin Velz, an economist for the Mortgage Bankers Association.
"You should have at least a percentage point difference before you even think about it," Velz said. "If you have a 6.5% loan right now, it would be a great time to refi."
Waiting for a substantial rate decrease makes sense because getting a new mortgage incurs some expenses. There are the costs of a new appraisal and origination and application fees. Plus, a title search and title insurance are usually required.
All those costs, which can add up to $2,000 or $3,000 or more for a typical $200,000 loan, are often rolled back into the mortgage, increasing the principal upon which the interest rates are applied. If that goes up so much that it offsets the interest rate drop, it doesn't make sense to refi.
Those who are planning to stay in their homes for a while. The increased balances usually take a year or two to be wiped out by lower monthly payments, so anyone planning to sell the home during the next few years probably should not refinance, unless the difference in interest rates is very substantial.
The actual rate borrowers get depends, just as with purchase mortgages, on credit scores, income and assets and the value of the home.
"If you have a high credit score and your equity is good, it's like a vanilla cream puff," said Velz. "You're going to get a great rate."
Borrowers with significant equity in their homes. Many homeowners have had much of their home values erased in the post-bubble bust, eliminating much or all of their home equity - the difference between the value of the home and the amount owed on the mortgage.
If a refi borrower's home equity has fallen below 20% of the total appraised home value, the borrower will likely have to purchase private mortgage insurance. The insurance adds a point or two to the monthly mortgage costs, which turns a 5% loan into a 6% or 7% loan, erasing any advantage of refinancing.
"That's the biggest hurdle for refinancing right now," said Velz.
Borrowers who don't think rates will decline much further. Everyone considering refis has to decide whether to wait for interest rates to go even lower, which the Mortgage Bankers Association has been forecasting.
That's only a prediction, though, not a certainty. Rates could turn higher instead.
Borrowers must weigh the advantages of gambling on rates turning around or locking in savings at the present very low rates.
First Published: December 24, 2008: 1:42 PM ET
By Les Christie, CNNMoney.com staff writer
Last Updated: December 24, 2008: 2:31 PM ET
NEW YORK (CNNMoney.com) -- Falling interest rates are fueling a mortgage refinance frenzy as homeowners rush to reduce their housing payments.
The average rate for a 30-year, fixed mortgage dropped to 5.08% last week, according to the Mortgage Bankers Association, more than a full point lower than just a month ago.
Mortgage applications were up a whopping 48% last week, according to the MBA and more than 80% were from homeowners looking to lower housing costs.
"It's snowing loans," said Steve Habetz, a Connecticut mortgage broker, "and they're all refis."
Among those were Elizabeth Mayer and Michael Keohane, who bought their Manhattan condo just a little over a year ago, financing $220,000 of the purchase price with a 30-year, fixed rate loan of 6.5%. That was affordable, with monthly payments of less than $1,400. But their new 5.25% loan will lower their payment to about $1,215, saving about $175 a month.
"It was a nice holiday gift," said Mayer.
With savings like that, it's no wonder that homeowners are coming out of the woodwork. And mortgage brokers are beating the drums too, advising their clients to let the good times roll.
Mayer said her mortgage broker had kept her informed of interest rate declines ever since she originally purchased her home. "He's been encouraging whenever opportunities arose," she said. "We missed one opportunity last spring when we just weren't able to act on it."
The broker made sure they didn't miss this chance. "He e-mailed me [about it] from South Africa and called when he got back," said Mayer.
Who should refi...
Anyone with high adjustable-rate loans. Folks in this group should try to get into a low fixed rate if they can. Not only will they lower their payments immediately but it would also eliminate the possibility of future increases.
Those who would lower their rate by a percentage point or more. Borrowers who already have a reasonable fixed rate shouldn't jump into a new loan every time rates inch down, according to Orawin Velz, an economist for the Mortgage Bankers Association.
"You should have at least a percentage point difference before you even think about it," Velz said. "If you have a 6.5% loan right now, it would be a great time to refi."
Waiting for a substantial rate decrease makes sense because getting a new mortgage incurs some expenses. There are the costs of a new appraisal and origination and application fees. Plus, a title search and title insurance are usually required.
All those costs, which can add up to $2,000 or $3,000 or more for a typical $200,000 loan, are often rolled back into the mortgage, increasing the principal upon which the interest rates are applied. If that goes up so much that it offsets the interest rate drop, it doesn't make sense to refi.
Those who are planning to stay in their homes for a while. The increased balances usually take a year or two to be wiped out by lower monthly payments, so anyone planning to sell the home during the next few years probably should not refinance, unless the difference in interest rates is very substantial.
The actual rate borrowers get depends, just as with purchase mortgages, on credit scores, income and assets and the value of the home.
"If you have a high credit score and your equity is good, it's like a vanilla cream puff," said Velz. "You're going to get a great rate."
Borrowers with significant equity in their homes. Many homeowners have had much of their home values erased in the post-bubble bust, eliminating much or all of their home equity - the difference between the value of the home and the amount owed on the mortgage.
If a refi borrower's home equity has fallen below 20% of the total appraised home value, the borrower will likely have to purchase private mortgage insurance. The insurance adds a point or two to the monthly mortgage costs, which turns a 5% loan into a 6% or 7% loan, erasing any advantage of refinancing.
"That's the biggest hurdle for refinancing right now," said Velz.
Borrowers who don't think rates will decline much further. Everyone considering refis has to decide whether to wait for interest rates to go even lower, which the Mortgage Bankers Association has been forecasting.
That's only a prediction, though, not a certainty. Rates could turn higher instead.
Borrowers must weigh the advantages of gambling on rates turning around or locking in savings at the present very low rates.
First Published: December 24, 2008: 1:42 PM ET
Tuesday, December 16, 2008
Fed slashes key rate to near zero
Ben Bernanke & Co. cite weakness in economy and reduced inflation threat as justification for cutting rates to a range of 0% to 0.25%
By Chris Isidore, CNNMoney.com senior writer
Last Updated: December 16, 2008: 2:47 PM ET
NEW YORK (CNNMoney.com) -- In its latest effort to try and stimulate the U.S. economy, the Federal Reserve cut its key interest rate to a range of between zero percent and 0.25%, and said it expects to keep rates near that unprecedented low level for some time to come.
The central bank typically sets a specific target for its federal funds rate instead of a range. The rate had previously been at 1% and this marks the first time the Fed has cut rates below 1%. Most investors were expecting the Fed to cut rates to either 0.25% or 0.5%.
Taking the rate so close to zero leaves the Fed with little room for additional moves if the economy does not start to show signs of improvement soon.
But the Fed said in a statement that it is looking at different steps it can take to stimulate the economy and keep market rates low, including the purchases of long-term U.S. Treasury notes. The Fed also said it will consider other, yet to be disclosed moves as well.
"The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity," the Fed said.
In explaining the reason behind the rate cut, the Fed said the U.S. economy, which has officially been in a recession for a year, was in danger of getting weaker, and that the risk of inflation had decreased "appreciably."
Earlier Tuesday, the Labor Department reported that the Consumer Price Index, its key inflation measure, fell by a record 1.7% in November.
The central bank's federal funds rate is an overnight lending rate used as a benchmark to set rates for a variety of loans, including adjustable rate mortgages, credit cards, home equity lines of credit and business loans. This marks the tenth time it has cut rates in the last 15 months.
This rate is the key tool the Fed uses to spur or slow the economy as it tries to balance its dual goals of economic growth and price stability. Lower rates are designed to encourage spending by making borrowing more affordable. Higher rates can keep prices in check by slowing the economy.
Other central banks, notably the Bank of Japan, have taken rates down to near the 0% level in the past. Last week, the Swiss central bank cut its key rate to 0.5%.
First Published: December 16, 2008: 2:29 PM ET
By Chris Isidore, CNNMoney.com senior writer
Last Updated: December 16, 2008: 2:47 PM ET
NEW YORK (CNNMoney.com) -- In its latest effort to try and stimulate the U.S. economy, the Federal Reserve cut its key interest rate to a range of between zero percent and 0.25%, and said it expects to keep rates near that unprecedented low level for some time to come.
The central bank typically sets a specific target for its federal funds rate instead of a range. The rate had previously been at 1% and this marks the first time the Fed has cut rates below 1%. Most investors were expecting the Fed to cut rates to either 0.25% or 0.5%.
Taking the rate so close to zero leaves the Fed with little room for additional moves if the economy does not start to show signs of improvement soon.
But the Fed said in a statement that it is looking at different steps it can take to stimulate the economy and keep market rates low, including the purchases of long-term U.S. Treasury notes. The Fed also said it will consider other, yet to be disclosed moves as well.
"The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity," the Fed said.
In explaining the reason behind the rate cut, the Fed said the U.S. economy, which has officially been in a recession for a year, was in danger of getting weaker, and that the risk of inflation had decreased "appreciably."
Earlier Tuesday, the Labor Department reported that the Consumer Price Index, its key inflation measure, fell by a record 1.7% in November.
The central bank's federal funds rate is an overnight lending rate used as a benchmark to set rates for a variety of loans, including adjustable rate mortgages, credit cards, home equity lines of credit and business loans. This marks the tenth time it has cut rates in the last 15 months.
This rate is the key tool the Fed uses to spur or slow the economy as it tries to balance its dual goals of economic growth and price stability. Lower rates are designed to encourage spending by making borrowing more affordable. Higher rates can keep prices in check by slowing the economy.
Other central banks, notably the Bank of Japan, have taken rates down to near the 0% level in the past. Last week, the Swiss central bank cut its key rate to 0.5%.
First Published: December 16, 2008: 2:29 PM ET
Monday, December 15, 2008
FHA Upcoming Downpayment Changes Effective January 1
Written By: Stacey Sprain,
Certified Ambassador Loan Processor (CALP)
HUD sure makes things confusing sometimes don’t they? With so many changes already in place and coming up with the New Year, I thought it might be a good time to run down a list so that everyone can prepare for January 1st. I’ve run across a few folks who are confused as to guideline changes and effective dates so this will serve as a helpful reminder. Effective for FHA purchases in which cases are assigned on and after January 1st, the minimum downpayment requirements change from the current structure which is a mass of varying requirements based on purchase price and location. Those calculations, which often prove to be very confusing, are being replaced by a simple 3.5% downpayment requirement/96.5% loan-to-value max limit across the board. This calculation will make things much simpler industry-wide when it comes to calculating the purchase maximum mortgage amounts.
However, with the new calculations come a few drawbacks. To date, borrowers have been able to roll in allowable closing costs up to their maximum loan-to-value but effective January 1st, closing costs are no longer allowed to be rolled into max mortgage. Closing costs no longer may be used to meet the minimum investment requirement on FHA purchase transactions. The borrower is responsible for covering the amounts of closing costs, prepaids and 3.5% downpayment required for settlement.
Now the seller-funded downpayment assistance options have been eliminated, this causes some concern for borrowers who have little monies saved for downpayment who wouldn’t qualify for any 100% conventional financing program options due to credit restrictions. So what are borrower options for covering the closing cost, prepaid and downpayment requirements on and after January 1st?
Interested-party contribution limits are not changing so sales agreements may still be written with the seller, realtor, builder and/or lender crediting up to 6% of the purchase price toward borrower closing costs and prepaids. As for the 3.5% downpayment, borrowers may still receive gift funds from relatives, may still receive government homebuyer grant funding in eligible areas, and may use secured funds in the form of a loan against a 401-k plan or other secured asset, or sale of personal property.
In regards to FHA up-front MIP and annual mortgage insurance premiums, these are already in place effective for cases assigned on and after October 1st and will NOT be changing with the downpayment requirement changes. For more info on the MI premiums, refer to Mortgagee Letter 2008-22.
Maximum LTV limits for refinances are explained in Mortgagee Letter 2008-13 and the attachment that was provided.
An important reminder regarding the upcoming downpayment requirement change- Don’t forget to update your loan origination software system as needed. Your existing Good Faith Estimate template(s) may need to be updated to remove the financing of allowable closing costs and may need to incorporate the new simplified downpayment requirement for 96.5% of the lower of purchase price or appraised value. If you utilize software with a major provider like Calyx Point, Contour Loan Handler or Ellie Mae Encompass, you may wish to contact your account representative for an update on what they are planning and when software updates may be expected.
About the Writer. As one of NAMP's volunteer writers, Stacey Sprain is currently a NAMP member in good standing and is a NAMP Certified Ambassador Loan Processor (CALP). If you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.
Certified Ambassador Loan Processor (CALP)
HUD sure makes things confusing sometimes don’t they? With so many changes already in place and coming up with the New Year, I thought it might be a good time to run down a list so that everyone can prepare for January 1st. I’ve run across a few folks who are confused as to guideline changes and effective dates so this will serve as a helpful reminder. Effective for FHA purchases in which cases are assigned on and after January 1st, the minimum downpayment requirements change from the current structure which is a mass of varying requirements based on purchase price and location. Those calculations, which often prove to be very confusing, are being replaced by a simple 3.5% downpayment requirement/96.5% loan-to-value max limit across the board. This calculation will make things much simpler industry-wide when it comes to calculating the purchase maximum mortgage amounts.
However, with the new calculations come a few drawbacks. To date, borrowers have been able to roll in allowable closing costs up to their maximum loan-to-value but effective January 1st, closing costs are no longer allowed to be rolled into max mortgage. Closing costs no longer may be used to meet the minimum investment requirement on FHA purchase transactions. The borrower is responsible for covering the amounts of closing costs, prepaids and 3.5% downpayment required for settlement.
Now the seller-funded downpayment assistance options have been eliminated, this causes some concern for borrowers who have little monies saved for downpayment who wouldn’t qualify for any 100% conventional financing program options due to credit restrictions. So what are borrower options for covering the closing cost, prepaid and downpayment requirements on and after January 1st?
Interested-party contribution limits are not changing so sales agreements may still be written with the seller, realtor, builder and/or lender crediting up to 6% of the purchase price toward borrower closing costs and prepaids. As for the 3.5% downpayment, borrowers may still receive gift funds from relatives, may still receive government homebuyer grant funding in eligible areas, and may use secured funds in the form of a loan against a 401-k plan or other secured asset, or sale of personal property.
In regards to FHA up-front MIP and annual mortgage insurance premiums, these are already in place effective for cases assigned on and after October 1st and will NOT be changing with the downpayment requirement changes. For more info on the MI premiums, refer to Mortgagee Letter 2008-22.
Maximum LTV limits for refinances are explained in Mortgagee Letter 2008-13 and the attachment that was provided.
An important reminder regarding the upcoming downpayment requirement change- Don’t forget to update your loan origination software system as needed. Your existing Good Faith Estimate template(s) may need to be updated to remove the financing of allowable closing costs and may need to incorporate the new simplified downpayment requirement for 96.5% of the lower of purchase price or appraised value. If you utilize software with a major provider like Calyx Point, Contour Loan Handler or Ellie Mae Encompass, you may wish to contact your account representative for an update on what they are planning and when software updates may be expected.
About the Writer. As one of NAMP's volunteer writers, Stacey Sprain is currently a NAMP member in good standing and is a NAMP Certified Ambassador Loan Processor (CALP). If you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.
Friday, December 5, 2008
Home Renovations On Sale
Materials costs are plunging, and contractors are begging for work. Suddenly that long-postponed remodel is looking like a smart idea.
By Donna Rosato, Money Magazine senior writer
December 3, 2008: 9:33 AM ET
(Money Magazine) -- If you're struggling to see a silver lining in the beaten-down real estate market, consider this one: It may be a rotten moment to sell your house, but if you've postponed a much needed renovation project on your home - replacing a rotting deck, repairing a leaky roof or updating an antiquated bathroom - now just might be the best time in years to tackle that task.
The reason: Costs are starting to drop - in some cases, sharply - on everything from building materials to contractors' fees as the economy weakens and housing prices tumble.
In fact, consumer spending on home improvements is off by 12% since peaking last year, according to Harvard's Joint Center for Housing Studies - and that works to the advantage of anyone willing and able to remodel now.
"It's hard for homeowners to think about spending on their houses when real estate values are falling," says Kermit Baker, a senior research fellow at Harvard who tracks remodeling trends. "But with contractors hungrier for business, you'll be able to negotiate better prices, win other concessions and hire better-quality contractors than you could a year or two ago."
Overall, experts say, you can expect to save at least 10% on the cost of a renovation and possibly a lot more, depending on where you live and the project you choose. And if prices on many remodeling materials continue to decline as projected over the next few months, the cost of home improvements should fall even further.
Yet another benefit: Putting money into needed repairs and updates now should help your home maintain its value even as other house prices keep falling.
Of course, not all renovations are created equal. Adding a home office or a swimming pool might be on your wish list, but these days neither is likely to give you much of a return on your investment.
With home prices still in a free fall, it's more critical than ever to understand which projects will return the most on your investment and how to negotiate the best deal with the pros you hire to do the job. The following strategies should help.
Cherry-pick your project
Understand this from the outset: No matter what kind of repair or renovation you undertake, you can't count on the payback you'd have gotten a few years ago when home prices were rising steadily.
According to a new study by Remodeling magazine, these days you can expect to recoup about two-thirds of your costs on a typical home improvement if you sell your home within a year after completing the job, compared with 87% in 2005, when home values were at their peak.
That means you have to be especially careful in choosing which jobs to do, considering the urgency of the need (if that roof is leaking, you really have to fix it now) as well as what you'll pay in material costs, how much of the total bill you may recover and any extra benefits you may get.
To the extent you have a choice, focus on projects with better-than-average returns that may yield additional savings in other ways. For example, installing new windows will cost $10,000 to $20,000 on average but return 75% to 80% of your investment (see "Payback time" above and to the right for the six projects with the best return).
And those improvements have the added benefit of making your home more energy-efficient, so you'll also save on your electricity and heating bills. Plus, you may qualify for tax credits that will further offset the cost of making the changes. A host of home improvement tax credits for windows, doors, insulation and roofing were added or extended in the recent bailout bill; for the complete list, go to energystar.gov.
Some exterior improvements also make a lot of sense right now thanks to sharply lower oil prices. That's because many petroleum-based products, such as asphalt and vinyl, are the core material in these renovations.
The costs of these products had soared recently along with the price of oil but have started to drop, making this the best time in a while to replace your aging roof, repave your driveway or redo your vinyl siding. (See "Building blocks at a discount" above and to the right for a look at recent price changes in key remodeling materials.)
Also think about limiting the scope of the project, since minor upgrades rather than major additions give you more bang for your buck today. For instance, if you modernize your bathroom, you can expect to recover about 75% of what you spent, but adding an entirely new bathroom will pay back only 64% of the cost of the job.
Press for a price break...
These days you'll find a glut of construction professionals vying for your business - a far cry from the situation a few years ago when it was impossible to get a reputable contractor to return your call and a six-month wait to start a kitchen remodel was the norm.
How low can you ask remodeling pros to go? According to a new survey by the contractor referral site Angie's List, 70% of home builders and remodelers are willing to drop prices at least 10%, and 30% say they'll give even steeper discounts.
"There's a larger pool of professionals fighting for these jobs, so a little negotiation may go a long way to get the best possible price for your project," says Angie Hicks, founder of Angie's List, which charges a monthly fee of $6 for access to customer reviews and references.
You'll have the most leverage in the areas that have been hit hardest by the housing slump. But no matter where you live, you should be able to strike a bargain (for tips, see "Hiring a Contractor" above and to the right).
Get bids from at least three remodelers, and insist that their quotes spell out all costs, including labor as well as materials (brand-name products where possible).
Let each pro know up front that you are comparison shopping and that price, in addition to quality craftsmanship, will play a key role in deciding whom you will work with. With the bids in hand, you can then compare prices and start negotiating.
Shopping around really paid off for Nancy Boris, who saved $2,800 on the cost of replacing the back patio of her 2,400-square-foot, three-bedroom home in Roseville, Calif.
Boris, a nurse case manager, got bids ranging from $2,400 (from a contractor who didn't have insurance or references) to $5,800. The highest bidder eventually came down $2,000 in price to $3,800, but Boris ended up going with a pro who had better references for $3,000.
...but be wary of super-low bids
As Boris discovered, it doesn't always pay to just reflexively choose the contractor who comes in with the lowest quote.
In their eagerness (or perhaps desperation) to win business in these tight economic times, some less than scrupulous remodelers may cut corners to come up with that low bid or else leave off charges that they may tack on later, making the actual cost of the project higher than it seemed initially.
Carefully scrutinize any bid that comes in significantly lower than the rest. Ask the contractor, politely but point-blank, how he manages to undercut his competition.
Does he have a general liability policy and workers' compensation? If not, should one of the crew get injured on your property, you'll be liable. Is he using low-quality materials? Is everything you need to get the job done included in the bid?
Then follow up by asking for references from previous clients and checking out his reputation and work history. To do so, go to contractorcheck.com, where for a fee of $13 you can get information about licensing and insurance as well as any legal actions taken. Sites like ContractorsFromHell.com and AngiesList.com can also provide valuable insights.
Wring out extra concessions
In addition to price breaks, ask for other perks while you're negotiating, like a faster completion or a more convenient schedule for work to be done, advises Sal Alfano, editorial director of Remodeling.
Remember, homeowners nowadays are in the driver's seat. "With contractors working on fewer projects, you can expect better service," he says. "Even if in the end you don't get a significantly better price on your project, you should at least get better work done."
By Donna Rosato, Money Magazine senior writer
December 3, 2008: 9:33 AM ET
(Money Magazine) -- If you're struggling to see a silver lining in the beaten-down real estate market, consider this one: It may be a rotten moment to sell your house, but if you've postponed a much needed renovation project on your home - replacing a rotting deck, repairing a leaky roof or updating an antiquated bathroom - now just might be the best time in years to tackle that task.
The reason: Costs are starting to drop - in some cases, sharply - on everything from building materials to contractors' fees as the economy weakens and housing prices tumble.
In fact, consumer spending on home improvements is off by 12% since peaking last year, according to Harvard's Joint Center for Housing Studies - and that works to the advantage of anyone willing and able to remodel now.
"It's hard for homeowners to think about spending on their houses when real estate values are falling," says Kermit Baker, a senior research fellow at Harvard who tracks remodeling trends. "But with contractors hungrier for business, you'll be able to negotiate better prices, win other concessions and hire better-quality contractors than you could a year or two ago."
Overall, experts say, you can expect to save at least 10% on the cost of a renovation and possibly a lot more, depending on where you live and the project you choose. And if prices on many remodeling materials continue to decline as projected over the next few months, the cost of home improvements should fall even further.
Yet another benefit: Putting money into needed repairs and updates now should help your home maintain its value even as other house prices keep falling.
Of course, not all renovations are created equal. Adding a home office or a swimming pool might be on your wish list, but these days neither is likely to give you much of a return on your investment.
With home prices still in a free fall, it's more critical than ever to understand which projects will return the most on your investment and how to negotiate the best deal with the pros you hire to do the job. The following strategies should help.
Cherry-pick your project
Understand this from the outset: No matter what kind of repair or renovation you undertake, you can't count on the payback you'd have gotten a few years ago when home prices were rising steadily.
According to a new study by Remodeling magazine, these days you can expect to recoup about two-thirds of your costs on a typical home improvement if you sell your home within a year after completing the job, compared with 87% in 2005, when home values were at their peak.
That means you have to be especially careful in choosing which jobs to do, considering the urgency of the need (if that roof is leaking, you really have to fix it now) as well as what you'll pay in material costs, how much of the total bill you may recover and any extra benefits you may get.
To the extent you have a choice, focus on projects with better-than-average returns that may yield additional savings in other ways. For example, installing new windows will cost $10,000 to $20,000 on average but return 75% to 80% of your investment (see "Payback time" above and to the right for the six projects with the best return).
And those improvements have the added benefit of making your home more energy-efficient, so you'll also save on your electricity and heating bills. Plus, you may qualify for tax credits that will further offset the cost of making the changes. A host of home improvement tax credits for windows, doors, insulation and roofing were added or extended in the recent bailout bill; for the complete list, go to energystar.gov.
Some exterior improvements also make a lot of sense right now thanks to sharply lower oil prices. That's because many petroleum-based products, such as asphalt and vinyl, are the core material in these renovations.
The costs of these products had soared recently along with the price of oil but have started to drop, making this the best time in a while to replace your aging roof, repave your driveway or redo your vinyl siding. (See "Building blocks at a discount" above and to the right for a look at recent price changes in key remodeling materials.)
Also think about limiting the scope of the project, since minor upgrades rather than major additions give you more bang for your buck today. For instance, if you modernize your bathroom, you can expect to recover about 75% of what you spent, but adding an entirely new bathroom will pay back only 64% of the cost of the job.
Press for a price break...
These days you'll find a glut of construction professionals vying for your business - a far cry from the situation a few years ago when it was impossible to get a reputable contractor to return your call and a six-month wait to start a kitchen remodel was the norm.
How low can you ask remodeling pros to go? According to a new survey by the contractor referral site Angie's List, 70% of home builders and remodelers are willing to drop prices at least 10%, and 30% say they'll give even steeper discounts.
"There's a larger pool of professionals fighting for these jobs, so a little negotiation may go a long way to get the best possible price for your project," says Angie Hicks, founder of Angie's List, which charges a monthly fee of $6 for access to customer reviews and references.
You'll have the most leverage in the areas that have been hit hardest by the housing slump. But no matter where you live, you should be able to strike a bargain (for tips, see "Hiring a Contractor" above and to the right).
Get bids from at least three remodelers, and insist that their quotes spell out all costs, including labor as well as materials (brand-name products where possible).
Let each pro know up front that you are comparison shopping and that price, in addition to quality craftsmanship, will play a key role in deciding whom you will work with. With the bids in hand, you can then compare prices and start negotiating.
Shopping around really paid off for Nancy Boris, who saved $2,800 on the cost of replacing the back patio of her 2,400-square-foot, three-bedroom home in Roseville, Calif.
Boris, a nurse case manager, got bids ranging from $2,400 (from a contractor who didn't have insurance or references) to $5,800. The highest bidder eventually came down $2,000 in price to $3,800, but Boris ended up going with a pro who had better references for $3,000.
...but be wary of super-low bids
As Boris discovered, it doesn't always pay to just reflexively choose the contractor who comes in with the lowest quote.
In their eagerness (or perhaps desperation) to win business in these tight economic times, some less than scrupulous remodelers may cut corners to come up with that low bid or else leave off charges that they may tack on later, making the actual cost of the project higher than it seemed initially.
Carefully scrutinize any bid that comes in significantly lower than the rest. Ask the contractor, politely but point-blank, how he manages to undercut his competition.
Does he have a general liability policy and workers' compensation? If not, should one of the crew get injured on your property, you'll be liable. Is he using low-quality materials? Is everything you need to get the job done included in the bid?
Then follow up by asking for references from previous clients and checking out his reputation and work history. To do so, go to contractorcheck.com, where for a fee of $13 you can get information about licensing and insurance as well as any legal actions taken. Sites like ContractorsFromHell.com and AngiesList.com can also provide valuable insights.
Wring out extra concessions
In addition to price breaks, ask for other perks while you're negotiating, like a faster completion or a more convenient schedule for work to be done, advises Sal Alfano, editorial director of Remodeling.
Remember, homeowners nowadays are in the driver's seat. "With contractors working on fewer projects, you can expect better service," he says. "Even if in the end you don't get a significantly better price on your project, you should at least get better work done."
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