US Federal Reserve – courtesy Wikipedia

Last month Bankrate released their most recent forecast on mortgage rates, which outlined the Federal Reserve’s continued vestment in mortgage backed securities. The moves, aimed at reducing the burden of unemployment on the economy, also has positive effects for those interested in buying homes, as well as those interested in refinancing for gain. Barring a slowed economy for whatever reason, very low interest rates are here to stay for the near future.

We spoke earlier today with McBride (below right) about the Fed, the so called fiscal cliff (the effects of the Budget Control Act of 2011), and the overall economy. McBride offered this with regard to the generalities of Bankrate’s position:

“2013 will be favorable to home buyers and refinancers alike, with 30-year fixed mortgage rates staying between 3.5% and 4% for much of the year owing to the slow growth economy, high unemployment, and active Federal Reserve.”

A “go to” analyst who has appeared on hundreds of financial broadcasts including NBC “Nightly News,” CBS “Evening News,” and ABC’s “World News Tonight,” Greg McBride provides not only in-depth commentary, but practical advice for consumers.

According to many experts, interest rate stability and the overall economy depends greatly on how well Congress deals with the potential negatives that can arise via the “fiscal cliff” harbinger. On top of these concerns, I spoke with the Bankrate analyst about overall economic issues, for one, consumer confidence and spending. Even despite these continual low interest rates, the seeming inability of the administration and lawmakers to instill confidence seems at the core of America’s economic conundrum.

Regardless of actions by the Fed, which McBride pointed out at simply re-instituted past policies, investor and consumer confidences have to be shored up. In short, the biggest reason for the lukewarm economic recovery resides in infirmities from the problem solvers themselves, namely our own lack of confidence in decision-makers in Washington. Be that as it may, Bankrate and other analytics companies understand the public’s purse strings (corporate too) remain very tight. But in ending our conversation this afternoon, McBride pointedly suggested those with the wherewithal to buy a home, needn’t hurry to closing, he say’s these rates are with us for a while (6 months out).

Even as I write this, various financial reporting entities are announcing both concern and tentative actions being considered by the FOMC where this bond buying actions are concerned. The minutes of the meetings back in December can be read here, and the video below of the press conference with FOMC Chairman Ben S. Bernanke, offer more insight into what Bankrate and McBride partially project from.

Meanwhile, from the BBC to the Wall Street Cheat Sheet reports suggest these same FOMC board members have concerns that spending upwards of $85 billion dollars a month buying these bonds may kindle an inflationary fire America and the world does not need. A last note, McBride actually commented on the basic physics of the economic situation in our conversation, the point of our discussion being how action on the part of the Fed or other regulators always leading to a counterpoint elsewhere. The take away here should probably be, the Fed using “same old” tactics, will not likely affect a big fiscal change.

We’ll keep you updated.

Image © Paul Heasman – Fotolia.com

In fact, a $100,000 home financed by an FHA insured mortgage, with a 5% down payment will cost you approximately $235,000 over the life of your 30 year mortgage, and you’ll be paying virtually nothing but interest, taxes, insurance and loan fees for about the first 12 years.

Here are some quick and easy tips for saving tens of thousands of dollars on your home mortgage:

1. Pay as much as you can up front in your down payment. Most people opt for the lowest down payment possible, to minimize up front costs, but this means that the loan will be that much more expensive over time. Reducing your loan balance saves a lot of money over the years in interest expenses.

(Don’t fall for the argument that mortgage interest is tax deductible. That deduction will probably disappear in the near future. And the data shows that most first time or lower income home buyers do not itemize their taxes anyway.)

2. Prepay something on your loan principal from day one.

If you are buying in the near future, make plans to pay an additional amount each month, over and above your regular mortgage payment. Write a separate check for this amount. Do NOT add it into your mortgage payment. Write two checks. One for the mortgage payment, and one for the additional amount you wish to pay towards your loan principal. Label this check as “payment on principal” and check your monthly statement to insure that the additional prepayment is credited to your loan balance.

You can take a 30 year mortgage so as to keep your regular monthly payment as low as possible. But in order to save interest, include a prepayment each month as stated above. If you financed $95,000 for 30 years at 5% interest, and pay nothing but your regular payment each month for the entire 30 years, you’ll pay out $88,593 in interest on that loan, and assuming your first payment was January of 2013, you will not have this loan paid off until December of 2042. And it will be 2030 before your regular monthly payment reaches the point where you are paying your loan down instead of paying mostly interest.

If you pay just $25 per month extra, starting with your very first mortgage payment, you’ll save $10,323 in interest costs, and your loan will be paid off 3 years earlier. Paying $50 per month extra will save you around $20,000 of interest, and your mortgage will be paid off a full 5 years earlier.

Shortening your loan length increases the monthly payment, but also pays the loan down faster. However, you can have the benefits of a 30 year loan combined with a shorter, lower cost loan, simply by financing long then prepaying as much as possible on the principal. Only $100 extra applied each month will cut your loan term by virtually 10 years. The $1200 invested yearly for 20 years will save $30,000 in interest costs. This is an 8% return on your money instead of a $30,000 expense.

Even if you have already owned your home for a few years, prepayments always make sense for the typical owner-occupant buyer with an income below $100,000 per year. If you are in the later years of an existing mortgage, you can still shorten the time frame and lower the effective interest rate with the use of prepayment strategies instead of a refinance which may actually cost more.

3. Take The True Costs Of Ownership Into Account Before You Buy.

No one tells you how much your home is really going to cost to maintain and “own”. Ownership responsibilities and costs go well beyond the principal and interest on your mortgage payment. A $100,000 home, relatively cheap by today’s standards, will have property taxes to pay ranging from hundreds to thousands of dollars each year. And any home with an FHA insured loan will require insurance; another $1000 or so per year. These two items will also be part of your mortgage payment, in order to insure that they are paid on time each year.

Will this home need painting every few years? How about the condition of the roof? Are the HVAC and plumbing new or older? These are all items that will cost something to repair or replace over the life of a 30 year mortgage. All extra expenses over and above the purchase price.

4. Pay Attention To The Fees And Other Loan Costs.

FHA insured loans come with a variety of fees that may be included in the monthly payment. It’s important to understand what those fees are, what they are for, and how much they will cost you. In my experience as a real estate agent, I’ve noticed that few buyers are aware of these fees and expenses related to their home purchase. Some of these fees could add up to thousands of dollars. Pay attention to these costs and negotiate to get them reduced whenever possible.

Housing Market Stability Rests On A Foundation Of Home Owners

Many homeowners with FHA insured loans are in over their heads already. Default rates are high and neighborhood upkeep is low. This is combining for a one-two punch in many neighborhoods across the country. It’s no fun for the borrowers either. Losing your home is one of the most traumatic events one may face in their lifetime. Buyers often have no concept of what the true ownership costs will be. This can destabilize them financially and lead to numerous other problems.

It would be in the best interest of the buyers themselves, the entire housing market, the professional real estate industry and the U.S. taxpayers to require that all first time home buyers who are qualifying for government insured home mortgages, take a course on home ownership, with the specific purpose of educating the buyer to the real costs involved, and create a realistic budget for a buyer up front, before they choose a home.

Planning for ownership expenses BEFORE you buy a home goes way beyond the interest rate on your mortgage. Understanding the true costs involved, and choosing a home you can afford to pay for and maintain will make you a happy home owner, help to stabilize the housing market and ultimately make it easier for you to build a solid financial future as the years go by.
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Donna S. Robinson is a real estate investor, author, and housing market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her latest book is now available on Amazon.com. It’s called Basics Of Real Estate Investing

Watch out, it's a trap!!! © Domas Balys - Fotolia.com

The primary difference is that in a good market, when prices are appreciating at a steady rate of 5% per year, you don’t notice the trap because it takes less time and effort to escape from it.

But today, with housing prices flat and still eroding in many markets, the trap is much more noticeable, and more difficult to escape from unless you make a superior effort to do so.

Home prices are so low in most markets that it is indeed a great time to buy a home. The key lies in how you choose to finance your purchase. It’s the loan costs that leave the home owner owing more than the property is worth. And low-down-payment-loans are the most expensive of the so called “affordable home loans”. So expensive in fact that if you purchase your home with 5% down and a 30 year term at the historically low rate of 6%, you’ll pay about $250,000 for a $100,000 home by the time you’ve paid off your mortgage. And that’s just principal and interest, plus loan fees. We haven’t even included taxes and insurance in that total.

When you look at this fact, you realize that all borrowers who use these types of loans are instantly “under-water” from day one. You’ve just agreed to pay $250,000 for a $100,000 house. Even if it triples in value over the next 30 years, you’re not making a profit!

Today houses really are a great buy, but buying them with government insured, low-down-payment-loans could mean you’ll be paying on your home for 10 years or longer before the value of your home will be higher than the amount you owe on your mortgage. (i.e. before you have any equity at all) If you needed to sell in less than 10 years, you could have a problem selling for enough to pay off the loan.

As a real estate licensee, I am well aware of the “tenet of faith” that most home buyers must have a low-down-payment-loan in order to buy a home. But this ignores the simple fact that these types of loans are very expensive and come with fees that can add tens of thousands of dollars to the cost of an “affordable” home.

In fact, I think that licensees would do themselves a big favor by helping their buyers understand how to save as much money on that new mortgage as possible, so that they can buy a bigger house later on. This would help the licensee’s business as well.

But for some reason, most licensees never discuss this with their buyers. Buyers are left to fend for themselves once the deal is closed and the papers are signed. And often, buyers are encouraged to borrow the maximum they qualify for, not what they can comfortably afford, making it harder to make extra payments on the loan balance.

So What’s A Buyer To Do If All They Have Is 5% Down Or Less?

The smartest strategy for buyers who must utilize expensive “government insured” loans with low down payment requirements is this:

Buy a home with a comfortable payment level, then pay an additional $50 to $100 per month over and above the regular payment, to pay down the principal faster. If you do this from the very first mortgage payment, you can easily cut your 30 year loan down to 15 years or less. This is because you are paying down the principal directly. When you do this, you avoid the interest that would have been charged.

Interest is amortized in a mortgage loan. During the first ten years of your mortgage, the lender charges much more for interest. You are paying mostly interest those first ten years.

Paying an additional amount on the principal is the only way to avoid all that interest. When you do this, you are drastically reducing the total cost of your low-down-payment-loan. Your loan balance will go down much faster, your fees will be reduced much faster, you’ll build equity much faster and you’ll avoid the risk of being “under-water”. Plus, you’ll pay for your home years earlier. Then keep that equity because there is nothing more important for most ordinary folks that having a roof over your head that is paid for. Gambling is for gamblers. Equity is for home owners.

Here’s a handy link to a mortgage amortization calculator with a prepayment function you can use to help you reduce your loan costs.

So don’t be afraid to take advantage of today’s low housing prices, and if you need to, take advantage of that government insured loan program. Just plan to pre-pay a bit of your principal every month. If buyers had been educated to do this years ago, we could have avoided the housing crisis.

And now that you know this little fact, you are positioned to take advantage of today’s low prices and cheap interest rates, and make a much better deal out of it to boot. It’s a fast track to building wealth that is very practical and smart in any market. ***
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Donna S. Robinson is a 16 year veteran of the real estate industry and a residential market analyst. She also has an extensive background in residential real estate investing. Get her free newsletter on her website at www.RealtyBizConsulting.com

It's official - Now is the time to buy! © Patryk Kosmider - Fotolia.com

Market fundamentals usually develop so that the market with the lowest prices now will tend to rebound with more “bounce” over time. This means that the hardest hit markets, still highly desirable locations in the sunbelt, will yield much better equity over time. The stronger areas, which have sustained higher prices per square foot, will not be as volatile to the “up-side” as these areas that were over-built and over-invested.

The one reason I am confident in declaring an official market bottom is because in many areas where the foreclosure crisis has been intense, it’s now cheaper to buy a foreclosure than it was to build the same home originally.

Fundamentally, a residential property “hits bottom” when the selling price is lower than the cost to build originally.  Generally speaking, that’s about as good of a deal as you can get. And when you are talking about nice homes, it’s even better.

Shelter is an essential part of human existence. This fundamental fact helps to insure that there will always be a demand for shelter. As long as there is enough demand, the value of homes will not go below the affordable level for that particular area.

I’m in Atlanta, Georgia. We’re the most depressed housing market in the U.S., according to the Case-Schiller index. And we’ve got neighborhoods here that are selling at 30% of their original value, even in move-in condition. This used to be the exclusive territory of old junkers and fixer-uppers in the inner city. Today it’s homes in the burbs that are 10 years old or less.

When you start buying homes with 1596 square feet of living space, plus a 1596 square foot basement, 3 quarter acre lot with fenced-in backyard, for $40,000 you are talking about buying the home for $25.06 per square foot –  less than it cost to build it originally. It sold new in 2001, for $115,500, or about $72 per square foot.

Once you reach this level, demand will naturally rise. Fundamentally the property begins to become viable again, as either a rental property, or an owner-occupied home. The key is legitimate demand from a real end user, not a speculator who needs to resell. (Demand from end-user buyers must be real to sustain prices at any level).

You can’t even get a typical mortgage for a property that is this cheap. Most lenders don’t go below $50,000. Today we have almost-new houses, in excellent condition, selling for 1/2 of what it cost to build them.

Reason number two for calling a bottom: Prices are finally so low, that cash flowing for rental is viable again as a real estate investing and retirement strategy.

The housing market boom ran prices up so much that landlords found their ownership costs often outstripping their cash flow from rentals. In other words, they could not raise the rent high enough to support the higher property prices, so rental property stopped cash flowing, and by 2005 landlords were starting to go into foreclosure.

The landlords in boom cities were at the front of the wave of what would become a tsunami of foreclosures, as buy prices exceeded the ability to increase rental rates.  They found themselves with properties that either would not rent for enough to cover their PITI, or they could not find a tenant at all.

By 2006 there were so many investors with section 8 rental properties, the supply actually exceeded the demand in many markets, and those markets – places like Atlanta, Las Vegas, Miami, and Phoenix, started to stall out.

But today, the low selling prices for foreclosures have gotten rid of the worries over cash flow. Most of the houses that can be bought for $40,000 can be rented for $850 to $900 on the open market. Section 8 pays even more. In 2012, the rental property market is “cooking with gas”, with positive cash flow at the best levels we’ve seen in many years.

Reason number three for calling a bottom: The ability to generate equity on day one. When buy prices are low, there are a variety of benefits to the owner. Another great benefit of low cost foreclosures is instant equity. 

Equity is the difference between what you owe on your mortgage, and the total market value of the property. Just taking a foreclosure and putting it back into service will add instant equity. Foreclosure takes a property and makes it “distressed” even if that property is in very good condition. Buying foreclosures for $30,000, that cost $60,000 to build, generally will guarantee you some instant equity, simply by putting the property back into service. If repair costs are minimal, and you are buying at 30 cents on the dollar, you’ve got one heck of a deal that virtually did not exist prior to the 2008 market collapse.

Buying now will lead to instant equity © frenta - Fotolia.com

Here’s the bottom line: If you are a smart home buyer or real estate investor, this market is what you’ve been waiting for.

With Wall Street “gangs” getting into the rental property market, it’s just a matter of time before the fundamentals swing back to favor rising prices. Once the initial market glut has been bought up, prices will begin to rise slowly. If interest rates go up, as they most probably will at some point in time, you’ll look like a genius if you’ve got a portfolio of houses bought for 30 cents on the dollar, financed at 4%, and rented for $850 a month.

I have an investor friend who tells me that they are bulldozing houses in a few areas in California. Those locations are the farthest out, and there was never any real demand from end users like landlords or owner-occupants. It was false demand caused by rampant speculation and over building. Location is still a fundamental issue that carries a lot of weight. Areas with no buyer demand, and no occupants have no value. Houses only have value where there is real demand. Don’t ignore this basic market fundamental. And that being said….

Most people don’t realize it, but today’s housing market is a beautiful oasis of opportunity that will dry up and disappear in years to come. Investor activity is already reaching a fever pitch. If the economy does improve, and we see real job growth, this market could start going up a bit by 2013.  All things considered, things probably won’t get much better than they are today, where real estate investing is concerned. ***
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Donna Robinson is a 16 year veteran of the real estate industry and a staff writer for Realty Biz News. She is an active real estate investor who also provides coaching and consulting services to individual investors, investment companies, real estate agents and brokers.  Get her free newsletter on her website, www.RealtyBizConsulting.com 

Not all home owner financing “how to’s” begin and end with your home lending solution you know? The infographic below from Consolidated Credit offers some real value where kicking off 2012 to a good start goes. Check out some things that can help you not only start off on a new foot, but end up next holiday season with more cash in your pocket too.

Graphic Courtesy of Consolidated Credit Counseling Services, Inc. Credit Card Debt

DO NOT BE ALARMED! Those interest rates and accumulated charges up there may not strangle just you, your neighbors may look all pale and strained starting off this year too. Get your finances in order this year. Next year you can pledge to do a lot more than chop up some credit cards perhaps. Let us know your strategies for dealing with the high cost of living.

The South Florida banks that survived these past three years all appear to be well capitalized. Yet at least six of these have now been red flagged with this Texas syndrome. The Texas Ration compared a bank’s bad assests (loans etc.) with its good assets (loan reserves, good loans, etc.). And the bad news is: Capital is probably dangerously short for at least six major South Florida banks.

Not our best moment, the failed banks of America

As of the end of December, 2010, at least 8 banks in this region fell below the “well capitalized” Texas Ration status. These banks desperately need to raise capital to solve the problem. Below is a list via the South Florida Business Journal, of six of the banks in question and suggested problems. These are all banks with a Texas Ration of above 100%.

Tamarac-based First East Side Savings Bank, at 218 percent: This $85 million-asset bank is under a cease and desist order from Federal regulators since last May. The bank basically has to get more capital to meet requirements. No need to overly portray the slippery slope this institution is on.

Sunrise-based TransCapital Bank, at 201 percent: The  Feds want this bank to offer higher than normal capital rations, and slapped a consent order on them in January. Again, not good news if we are looking for an institution climbing out of the recession.

Coral Gables-based EuroBank: This $102 million operation has $7.4 million in repossessed property – mostly commercial real estate. The bank is not under a public enforcement order. Uh hum. They have a pretty website.

Home Federal Bank of Hollywood, sits at a Texas Ration of 148 percent: The $84 million bank also got a cease and desist order in August. Gotta beat the bushes for more capital. No website that I could find easily?

Doral-based U.S. Century Bank, comes in at 115 percent: This bank’s $50.2 million in Troubled Asset Relief Funds was the largest in South Florida, yet still the bank seems to be leaking money like a strainer. Okay, a really ugly website too.

West Palm Beach-based Flagler Bank, is just about the threshold at 112 percent: $125 million in assets, and it looks like based on the banks efforts to reduce losses, this one may be about to get off the Texas Ration list.

Now closed

Of course the Texas Ratio is not the most significant indicator of a bank’s potential for profit. It is however, something that Federal regulators look at closely for a reason, and a logical one at that. If anyone remembers the Great Depression, not to be confused with the Great Recession of late, one reason so many banks failed was the lack of such ratios applied to their operations. Enough said about Texas, but for South Florida’s investment market and banks, 6 more banks on the doorstep of failure cannot be good news.

More later from other regions.

These figures showed the rate this week falling from 4.82 percent to 4.78 percent on a thirty year fixed mortgage, but compared to the low of 4.17 percent in November, rates have actually skyrocketed comparatively.  Analysts now believe that rates actually bottomed out at then, and what we can expect is a continual climb from this point forward.

Are rates headed North?

Compared with August’s 6.48 percent rate for the same mortgages, but experts fear the record low rates that have spurred a bit of upswing may be over for good. Even with rates this low, it has been a difficult task to get consumers to budge toward purchasing. Of course this may not be a stickly market controlled variably, many millions of people cannot afford to buy anything. Mortgage applications have been on a slight upswing even still, even as most Americans are busy paying down their debt where they can.