Archive for November, 2007

Comments Off on What Every Homeowner Should Know Before Paying Additional Principal To The Mortgage

What Every Homeowner Should Know Before Paying Additional Principal To The Mortgage


Have you ever thought about your Freedom Point?

“Freedom Point” is one of the more important concepts in mortgage planning and yet it gets surprisingly little attention.

As its name implies, Freedom Point is the particular date when a homeowner's liquid assets exceed his debts. At the Freedom Point, paying off a mortgage transforms from an obligation to a strategic financial planning decision.

My duty as a Mortgage Planner is to help my clients reach their Freedom Point as quickly and efficiently as possible. I achieve this by helping homeowners to make informed liability and mortgage decisions.

In my playbook, there are two very basic — and very different — approaches to accelerating a Freedom Point.

  1. Prepay the mortgage by sending extra principal payments to the bank monthly, or annually
  2. Leverage a “low payment” mortgage program and then invest the difference between the low payment and the payment of a 30-year amortized loan in an interest bearing account

Let’s look at Method #1 in a chart:

The Mortgage Coach : Prepaying a mortgage helps pay the loan off faster

In Method #1, a homeowner pursues a safe and predictable plan of attack on his $400,000 home loan. By over-paying the mortgage each month by $250 (as shown in the “30 Yr Redux” column), the 30-year fixed mortgage is paid in full and the homeowner reaches his Freedom Point in 23.3 years.

In eliminating 6.7 years off the mortgage, the homeowner saved $131,788 in mortgage interest payments.

Not too shabby!

Now, using Method #2, the homeowner uses a low-payment mortgage such as a 5-year ARM with interest only payments, or a 30-year fixed mortgage with 10-year interest only payments. But, he also calculates what the “full” mortgage payment would be if the loan was not interest only.

The difference in the two payments is invested and then managed in interest-bearing accounts.

In other words, instead of paying principal to the mortgage company, the homeowner pays the principal to himself and earns interest on it.

Let’s look at the chart for Method #2:

The Mortgage Coach : You may reach your Freedom Point more quickly by making interest only payments and investing the principal

In financial terms, this is called “compounding” and is the main reason why money in the bank is better than money under your mattress. The longer the bank holds your money, the more interest it earns over time.

Because of compounding interest, the homeowner using Method #2 reaches his Freedom Point in just 22.6 years.

Why Method #2 may accelerate the Freedom Point is a matter of simple mathematics. If properly managed, the homeowner's accumulation fund will earn interest, and then the interest earned will itself earn interest.

But there’s an additional benefit for homeowners using Method #2.

Having an “accumulation fund” provides additional liquidity. With money sitting in a bank account (and available at a moment’s notice), a homeowner has more financial options in the event of a life emergency such as job loss or illness.

By contrast, extra principal paid into a mortgage is not recoverable without a remortgage.

And now it gets interesting.

Once a homeowner reaches his Freedom Point using Method #2, he holds power over his finances and is leveraging his home to the fullest. Because a properly-managed interest-bearing account is virtually risk-free, the homeowner can now choose to:

  1. Use the accumulation fund to pay off his home in full
  2. Leave the accumulation fund alone and continue to earn compounded interest on it

These choices would not be available using Method #1. Remember, when a person pays extra mortgage principal to the bank, those dollars are considered “locked up” unless the homeowner chooses to remortgage his home.

So, which Freedom Point strategy is best for you?

It all depends on your personal savings discipline, short- and long-term goals, investment rate of return and current financial situation.

A key starting point, though, is to sit down with a qualified mortgage planner to do a Freedom Point Review. Annually, your mortgage planner should monitor your progress and help you to make adjustments to your plan, as needed.

Reaching your Freedom Point is all about goal-setting, having a plan, and making informed decisions. If you’re not confident that your current mortgage planner can help you make informed decisions to accelerate your Freedom Point, please call me or email me anytime.

Comments Off on What If The Energy Company Paid YOU Each Month?

What If The Energy Company Paid YOU Each Month?


This 30-second video posted to YouTube and shows a home’s electric meter running backwards after installing solar panels.

The meter runs backwards because the home is putting more power into the electric grid than it is taking out for itself.

With energy costs expected to rise sharply this winter and the costs of “going green” coming down, it may make sense to evaluate whether solar panels are a good fit for your home.

There’s still that up-front cost, but then there’s the thrill of watching that meter run backwards. Each clockwise tick is lowering your monthly energy bill and could possibly even eliminate it.

It’s worth watching those 30 seconds again.

Comments Off on Buyers, You Will Pay More For A Home Than The Agreed-Upon Purchase Price

Buyers, You Will Pay More For A Home Than The Agreed-Upon Purchase Price

Home buyers sometimes forget to add closing costs into the purchase price of a home

In real estate, the true cost of buying a home is always higher than the home’s purchase price itself.

This is because of service charges from governments, lenders, and title/escrow companies.

Because there is no such thing as “typical” closing costs because each home purchase is different, home buyers should remember that the actual cost to purchase a home is a mathematical formula:

(Home Purchase Price) + (Closing Costs) = (True Cost To Purchase Home)

So, if a home is purchased for $250,000 and the costs are $5,000, the true cost to purchase the home is $255,000.

If the buyer is using a mortgage to finance the home, the mortgage is not based on the true cost, however. It’s based on the home’s purchase price. This means that a person making a 20% downpayment is actually paying 20% plus whatever closing costs are listed on the final settlement statement.

Therefore, the home buyer’s required cash at closing would be 20% of $250,000 ($50,000), plus $5,000 in closing costs. That adds up to $55,000, or 22 percent of the purchase price.

That said, the monies required at closing are usually reduced by credits paid from the seller to the buyer. We’re going to ignore them for purposes of discussion because these types of offsets are inconsistent and can vary wildly from purchase to purchase.

They come in the form of “seller tax credits” and/or “seller concessions” and we’ll cover those two concepts another day.

For purposes of good planning, though, buyers should always be conscious of how closing costs can impact their bottom line on a purchase.

If making the expected downpayment based on the purchase price is a stretch, making the downpayment plus the closing costs may be an impossibility.

Comments Off on Why You Should Remain In “Ready Position” For Your Mortgage Rate

Why You Should Remain In “Ready Position” For Your Mortgage Rate


Easy come, easy go.

There was a strong rally Monday afternoon in the mortgage bond market. It was sudden and furious, mostly coming on in the last 60 minutes of trading.

When markets closed, mortgage rates for conforming home loans were grazing their lowest levels in nearly two years.

It lasted overnight and into the early hours of the morning.

Then, several news pieces later, the financial markets turned.

By 8:30 A.M. ET Tuesday, the rally from Monday had been erased completely; mortgage rates were up by as much as 0.375% in some cases before the clocks struck noon on Wall Street.

The rally had been reversed.

Instances like this illustrate how financial market volatility can impact homeowners. A 0.250% change in rate, for example, equates to roughly $16.50 for every $100,000 financed on an amortizing loan. It’s $20.83 for an interest only loan.

Those kinds of savings add up over time.

Americans are not in the market for new homes or new home loans every day, but when we are, it can be profitable to pay attention to markets and be ready to act on a moment’s notice.

The markets won’t “put rates on hold” for you while you make up your mind so that moment — whenever it may come — could represent tremendous savings long-term on a home loan. Be ready to act.

Comments Off on It’s A Good Time To Buy — But Not For The Reasons You May Think

It’s A Good Time To Buy — But Not For The Reasons You May Think


Banks are approving fewer mortgage applications because of mortgage-related losses.

Since November 1, the following banks have written-down at least $1 billion in their respective loan portfolios:

  • Bank of America
  • Barclays
  • Bear Stearns
  • Citigroup
  • HSBC
  • Morgan Stanley
  • Wachovia
  • Wells Fargo

This is a big deal to people in the market for a home loan because when banks repeatedly take mortgage-related losses, it can lead to major risk aversion — even for “good” borrowers.

It’s one reason why mortgages are more difficult for which to qualify than in months past. Banks would rather pass on an “avergage” mortgage application rather than be stuck with a potentially “bad” loan.

If banks continue down this path throughout 2008, it means that buyers eligible for home loan financing today may actually be ineligible tomorrow. It could also mean that a home under contract may never close because the buyer’s approval could be disqualified before the closing date is reached.

If you’re a home buyer and your profile is not “ideal” to a bank, now may be a good time to write a contract because your mortgage options may get more thin very, very soon.

Comments Off on The Week In Review (November 26, 2007) : What To Watch For

The Week In Review (November 26, 2007) : What To Watch For


In a holiday-shortened trading week, mortgage rates finished the week slightly improved.

But, because many traders had left early for Thanksgiving, matching buyers and sellers at any given price proved to be an exercise. Mortgage rates bounced wildly as a result.

Between now and the New Year, expect the same volatility. Fewer market players means less stability in mortgage bond prices and, therefore, in mortgage rates.

This week, markets have a plethora of data to digest, plus they will be speculating about the outcome of this year’s Holiday Shopping season. With more spending by shoppers, fears of a recession should wane, stabilizing mortgage rates somewhat.

On Tuesday, we’ll see the Existing Home Sales report for October. There’s nothing that should surprise us here — the real estate story has been beaten to a pulp in the papers. Any figure below 5 million, though, will likely spark talk of a recession. That could be bad for mortgage rates.

The same can be said for Thursday’s New Home Sales report. Remember that the difference between existing sales and new sales is that Existing Home Sales measures homes sold by a “homeowner”; New Home Sales measures homes sold by a developer/builder.

Then, on Friday, we’ll be treated to the Federal Reserve’s favorite inflationary measure — the Personal Consumption Expenditures (PCE). PCE is expected to show 1.8 percent year-over-year growth, a figure generally believed to be neutral. If PCE surprises to the high-side, expect mortgage rates to rise on fears of inflation.

Comments Off on Black Friday Trivia

Black Friday Trivia


Today is “Black Friday”, a day that many Americans get started on their Holiday Season shopping.

Did you know? The earliest known reference to “Black Friday” is November 29, 1975. The term was mentioned in two separate articles, both with Philadelphia timelines. Therefore, the term Black Friday is believed to have originated in Philadelphia.

Did you know? “Black Friday” was originally named with deference to other stressful and chaotic days such as Black Tuesday (the day of the 1929 stock market crash.

Store aisles were jammed. Escalators were nonstop people. It was the first day of the Christmas shopping season and despite the economy, folks here went on a buying spree. . . . . “That’s why the bus drivers and cab drivers call today ‘Black Friday,'” a sales manager at Gimbels said as she watched a traffic cop trying to control a crowd of jaywalkers. “They think in terms of headaches it gives them.”

Did you know? The generally accepted meaning of “Black Friday” changed November 26, 1982. On that day, ABC News reported that Black Friday is the day that retailers’ ledgers go from red ink to black ink, signaling profit. If this were true, companies like Wal-Mart and Target would show losses in the first three quarters of the years. They don’t.

Did you know? Black Friday is not the busiest shopping day of the year. #1 is usually the Saturday prior to Christmas.

If you’re out shopping today on Black Friday, remember to set a budget and stay within it. Good luck!

Purdue University News Service
“Christmas Shopping Facts and Figures”
Press Release, Nov. 22, 2000

Black Friday (Shopping)

Comments Off on Who Are Fannie And Freddie And How Do They Help Homeowners?

Who Are Fannie And Freddie And How Do They Help Homeowners?

Fannie Mae and Freddie Mac are quasi-government agencies that provide liquidity to mortgage markets

Fannie Mae and Freddie Mae are quasi-government agencies in that they are publicly-owned, but overseen by the government.

The purpose of Fannie and Freddie is to make sure that money is available to homeowners that want home loans.

Neither lends to consumers directly, though; you’ll have to talk to your loan officer for that. Instead, Fannie and Freddie’s role is to buy loans from lending institutions that make loans to everyday people.

For example, all banks in America abide by laws limiting the amount of money they can lend as a percentage of their total asset base. If your home loan is on the books of Bank ABC, Bank ABC is, therefore, restricted in issuing additional loans because your loan counts against that ratio.

But, if Bank ABC sells the loan to Fannie Mae or Freddie Mac, your mortgage converts back into cash and Bank ABC can then lend again to somebody else.

Because of Fannie and Freddie, a bank can lend to multiple homeowners using the same asset base, thereby making sure that “the system” has plenty of money available for homeowners in need of loans.

In this sense, both Fannie and Freddie keep mortgage money flowing on the street level. But it only works to a point. Fannie and Freddie have very strict guidelines about what types of home loans they will purchase from banks and only accept loans that conform to their respective criteria.

Loans falling outside the criteria, by contrast, will not be purchased by the agencies.

This is why some mortgages are called “conforming” loans — they conform to Fannie or Freddie’s guidelines. The other loans fall into the categories of “Alt-A” or “sub-prime”.

This also explains why Alt-A and sub-prime loans are harder to come by lately — there’s no government agency that guarantees to purchase these types of loans. Without that guarantee, banks are largely unwilling to tie up space on their balance sheets.

Comments Off on On Random Rate Rallies And Thin Trading

On Random Rate Rallies And Thin Trading

Mortgage rates will yo-yo through the New Year on light trading volume

Mortgage bonds staged a late-day rally yesterday, exaggerated by the holiday-shortened week and because trader participation is light.

(We’ll revisit this theme several times between now and the New Year so don’t get tired of it.)

When mortgage bonds rally, it means that demand for them is strong and that pushes mortgage rates down.

Unfortunately for people shopping for loans right now, the rally happened so quickly that lenders did not have time to adjust their mortgage rate sheets before the market’s closing.

This morning, rates are slightly higher.

The rally yesterday happened for a number of reasons including the November Homebuilders Index remaining at an all-time low. This illustrates the difficulty most developers are having in moving their inventory.

Another factor in the rally is that markets believe that the Fed is backed into a economic corner and will be forced to lower the Fed Funds Rate at its December meeting. This is happening despite (non-voting) Fed member Randall Kroszner implying in a public speech that the Fed may be entering a “Wait-and-See” mode and the further rate cuts would be imprudent.

There will be a lot of speculation about the Fed between today and December 11, the date of the next Fed meeting. Expect thin trading volume to make rates yo-yo until then.

If you see a rate and payment combination that makes financial sense today, better to lock it in then to wait for tomorrow. Rates may be on the upswing.

Comments Off on The Week In Review (November 19, 2007) : What To Watch For

The Week In Review (November 19, 2007) : What To Watch For


In a holiday-shortened week with no major economic data releases, expect worries about the credit markets and speculation about holiday shopping to take center stage.

Last week was a mixed bag for the economy and mortgage markets responded in kind. Rates were relatively unchanged.

The news started with Wednesday’s Retail Sales report. In showing a modest increase, the ongoing fears of a consumer spending decline were allayed.

This is good news for the economy as a whole because consumer spending accounts for roughly two-thirds of the U.S. economy — even a small dip could push a precariously balanced economy into recession.

Unfortunately, this could be bad news for rate shoppers as individuals — a slowing economy could drag down mortgage rates with it. And, with six weeks remaining in the Shopping Season, the American Consumer appears to want its presents.

Also making news last week:

  1. CPI data showed that the Cost of Living increased 2.2% in the past year
  2. Oil prices fell from its all-time high, reducing inflationary pressure on the economy
  3. Gas prices fell nationally, shedding 3 cents per gallon according to

This week, expect mortgage rates volatility as we get closer to Thanksgiving; fewer traders will be participating. With fewer buyers and sellers, it’s harder to find “the right price” for mortgage bonds.

This same economic phenomenon may explain why it’s easier to buy or sell a home in the Spring than in the Winter — more market participants makes it easier to find a match.

Most important release of the week: Wednesday’s University of Michigan Consumer Sentiment survey. If it comes in strong, expect positive reaction in stock markets which will, in turn, drag down mortgage bonds and push rates higher.