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ARM-holding homeowners tend to panic when their mortgage gets set to adjust; the feeling of "I better do something fast!".

If that's you right now -- if you have a conventional ARM getting set to adjust -- just hang loose, blood. Math is on your side. The smart move may be to let it adjust.

ARMs Are Adjusting Lower Right Now

Your mortgage rate could fall to as low as 3.125 percent.

It's all because of how ARMs work.

1. For some fixed period of time, the mortgage rate stays constant
2. When the fixed time period ends, the mortgage rate adjusts to a new rate based on a preset formula
3. Every 12 months thereafter, the mortgage rate re-adjusts against the same formula

The formula by which ARMs adjust is as follows:

And what are the "variable" and the "constant"? It depends on your mortgage, really, but if your home loan is making its first adjustment in 2010, the chances are very good that your ARM is structured as follows:

• The variable is the 12-month LIBOR -- currently near 0.850 percent
• The constant is 2.250 percent

This has been the default conventional ARM setup since mid-2005 and so long as the 12-month LIBOR remains low, so should your mortgage rate.

But therein lies the rub. LIBOR won't be low forever.

LIBOR Is Bound To Rise In 2010

Historically, LIBOR rates track very closely with the Fed Funds Rate and when the Fed starts to raise the Fed Funds Rate, LIBOR is going to rise, too. It's unclear when that will happen exactly, but LIBOR tends to rise ahead of actual Fed action.

Therefore, we can expect the 12-month LIBOR to rise well before the Fed raises the Fed Funds Rate. Maybe by a little and maybe by a lot. Either way, ARMs won't be adjusting lower much beyond Q1 2010.

Oh, and by the way, Fed Chairman Ben Bernanke has started laying the groundwork for such a move just last week. The writing is on the wall.

If you pass on the refinance this year, know that ARMs adjust annually so you'll face the same "Should I Refinance My ARM" question in 2011. Should LIBOR return to its historical 5 percent avergage by then, you can be sure your next adjustment will be up.

In other words, it may be wise to let your mortgage adjust in 2010, but foolish for 2011 and beyond.

Think Of The Present, Plan For The Future

So, if your ARM is adjusting and you want to know whether it's better to refinance or to just let the adjustment occur, and we can talk about making a plan.

LIBOR can change suddenly so what makes sense for you today might not make sense on the date of actual adjustment. Having a plan, therefore -- with contingencies in place -- is the best way to manage your ARM.

Call or email anytime. I'm looking forward to it.

It's a good time to look at the 15-year fixed rate mortgages.

As compared to 30-year fixed rates, the relative discount for "going 15" is big. Interest rate spreads between the benchmark borrowing products haven't been this high since 2004.

But there's more to it than just the rates.  The 15-year and 30-year fixed rate mortgages each have their benefits and, because of that, interest rates can be sometimes irrelevant.

For example, assuming a $250,000 mortgage at today's rates, the lifetime interest costs on a 15-year mortgage are $142,000 less than a comparable 30-year fixed rate mortgage.

That's pretty excellent.

However, the associated 15-year fixed mortgage's monthly payment registers 41 percent higher than the same 30-year's.  Big payments like that can break a family's budget -- no matter how low the rate.

Furthermore, low rates don't matter much with respect to mortgage planning. There's a few sounds reasons you may want to pass over the 15-year in favor of a 30:

1. The 15-year mortgage's tax benefits are relatively tiny
2. There's opportunity cost in rapidly converting liquid cash into illiquid home equity
3. In the event of an emergency, you still have to make the larger, 15-year payment

Low rates are tempting, though, and when the spread between the 15-year fixed and 30-year fixed is as big as it is today, the arguments made above lose some gravity.

One thing to remember is that mortgage rates change everyday and the delta from product-to-product is far from linear.  The chart at top proves it.  So, if you're not buying a home for another few months, don't settle in on a strategy just yet.

Know your options, but wait until Game Time to make a choice.

For help with your mortgage planning strategy, feel free to call or . I am licensed in a lot of states and would be happy to help you figure which mortgage product is best for your household financing goals.

Planning to move in the next few years? Get smart about it.  Swap out the high-rate, 30-year fixed you're carrying and convert it to something more appropriate.

Refinancing to today's rate might save you 40 percent on your monthly payments.

This is not a knock on the 30-year fixed mortgage.  It's a terrific product for homeowners in want of predictability and an unchanging payment. Fixed rate mortgages are popular for good reason.

But families grow, kids go to college, and jobs relocate.

When you know you won't outlive your home's 30-year fixed rate mortgage, it's time to check your choices.  Especially with mortgage rates as low as they are right now.

Switch your fixed to an interest only ARM.

Interest only adjustable-rate mortgages aren't right for everyone, but they're ideal for soon-to-be-moving households.  Interest only ARMs drop monthly payments down as low as possible, and enable homeowners to stash more cash for pending downpayments or other purposes.

Remember -- an ARM won't adjust until after its starting "fixed rate period" ends and 5 years is the most common fixed rate period. So long as you sell your home within 60 months, therefore, your loan will never adjust. And, meanwhile, during all of the months in between, you'll be saving big bucks on your mortgage payment.

But before you rush to refinance, there's a few caveats. You have to do the refi right:

1. The loan should be a true, zero-cost refi. Have your lender pay all of your fees.
2. Don't "pad" your loan size with cash out or otherwise. Resist the urge to roll in your upcoming mortgage payment, or tax escrow population.

Furthermore, you'll want to make sure your home doesn't sell within 120 days of closing because your lender may subject you to "recapture" fees of up to 2%.

If you're selling your home in the next few years, there's no good to keep your high-cost mortgage while a suitable low-cost mortgage is available. And right now, with ARMs pricing very well, it's a good time to explore what's available.

When your life changes, your mortgage should, too.

To see what a switch to an adjustable-rate mortgage could do for your monthly mortgage, call me or . If you have a copy of your mortgage statement handy, send it along as well.

I can help you use the system to your advantage. Reach out anytime.

For homeowner and home buyers, one of the biggest rate-shopping difficulties is trying to respond to a market in flux.

On any given day, pricing is up and down, depending on the hour, and different lenders are coming in and out of competition.  The best priced bank in the morning, therefore, may not be the best priced bank in the afternoon.

And, choices get more complicated when you haven't settled on a particular loan product.  This is because mortgage rates change at a non-uniform pace across the product list.

For example, just because rates on 30-year fixed rate mortgages go up by a quarter-percent, it doesn't mean that rates on all loan products went up a quarter-percent.  Some may have increased by an eighth-percent.

Some may even have fallen.

It's why shopping for a mortgage rate and a mortgage product at the same time is like multi-variate calculus.

Except harder.

Consider the 15-year fixed rate mortgage as compared to its 30-year cousin.  At the beginning of the year, the interest rate differential was negligible.  Now, it's pronounced.

• December 2008: 0.250 percent difference in mortgage rate
• October 2009: 0.570 percent difference in mortgage rate

In December, there wasn't much reason to opt for the 15-year fixed over the 30-year.  Today, though, the 15-year fixed rate mortgage is a no-brainer for homeowner that don't mind its aggressive amortization schedule.   By Groundhog Day, though, who knows.

The same is true for 5-year ARMs.

Just 5 months ago, the 5-year ARM was priced worse than the 30-year fixed.  Today, it's about a half-percent better. If you happened to be holding onto to your Springtime Strategy, you'd end up in the wrong loan.

Therefore, homeowners planning for a new mortgage in 2010 would do well to leave their future mortgage strategy flexible. Until it's time to actually lock in a rate, don't etch the plan in stone.

Market dynamics tell us --  the math that works today probably won't work tomorrow.

For assistance with a rate locking strategy or comparing rates on loan products, call . I'll look at your situation and can make recommendations.

Buying a home with a boyfriend, girlfriend or business partner can be a risky endeavor in Cincinnati -- much more risky than buying a home with a spouse, anyway.  This is because, with respect to Estate Planning, married homeowners typically get protection on the federal and state levels from which non-married homeowners are typically exempt.

It's why non-married, joint homebuyers should make their own federal and state protection with the help of an attorney.

At a minimum, consider two agreements:

• A cohabitation agreement
• A property agreement

Hiring an attorney will cost a few hundred dollars you didn't plan for, but it's money well-spent.  The cost of getting the proper agreements in place and filed with the county is far less expensive that the cost of fighting a battle in court or, worse, in probate.

And don't think it can't happen to you.  It happens all the time.  People don't just break-up -- they die.

The worst legacy you can leave to a loved one is a mortgage payment that was manageable with two incomes, but that's an impossibility with just one.  A basic life insurance policy can alleviate that risk and policies are cheap.

The clip above was first shown on NBC's The Today Show in May 2007.  It's message is still important today.  Love is blind, but it can also be blinding. Not every partnership -- domestic or business -- ends in happily ever after and joint homebuyers need to be prepared for that.

Contact me if you're planning to buy home with a girlfriend, boyfriend, fiance(e) or business partner.  Beyond the legal aspect, there's some mortgage-related steps you'll want to follow to make sure your rates are as low as possible.

I'd be happy to walk you through the steps.

Planning to move in the next few years? Here's a simple way to save some money.  Convert your 30-year fixed rate mortgage to a 5-year ARM.

It's playing the mortgage system to your advantage.

I've been a loan officer for long enough to know that homeowners around the country -- in places like Cincinnati, Chicago, Denver, or wherever -- will willingly pay a higher interest rate for a 30-year fixed rate mortgages than for comparable 5-year ARM.  This is because 30-year fixed rate mortgages guarantee unchanging mortgage payments for as long as the loan is alive.

To a lot of folks, the predictability of a fixed-rate mortgage is worth its premium price -- even at a cost of tens of thousands of dollars over the life of a loan.

But plans change.

Families grow, families shrink, and people relocate.  And when you no longer need the security of a 30-year fixed rate mortgage, the "premium price" you so willingly paid begins to look like a giant waste of money.

Consider an ARM instead.

Adjustable-rate mortgages frighten some people, but they're perfect for a relocating household.  Because the "beginning interest rate" of a traditional ARM doesn't change for a fixed period of time -- say, 5 years -- the risk of "outliving" the initial interest rate is very, very small. All the while, you're saving money on your mortgage payment.

Replacing a 30-year fixed rate mortgage from 2005 with a 5-year ARM at today's rates would save 20% per month.

But before you rush to refinance, there's a few caveats.  You have to do your refi right:

1. Your ARM should be a true, zero-cost loan. Ask your lender to pay all of your fees.
2. Your loan balance to stay exactly as-is -- don't "pad" it with cash-out

By taking both of these precautions, you will maximize your monthly mortgage savings.

Furthermore, you'll want to make sure your home doesn't sell within 5 months of the refinance to an ARM or else your lender may "recapture" its waived fees from you.

For soon-to-move households, there's no reason to keep a high-cost mortgage when a perfectly suitable low-cost mortgage is waiting.  And, right now, with ARMs priced really well, it's a perfect time to explore what's available.  Your life changes, after all -- your mortgage needs change with it.

To see what a switch to an adjustable-rate mortgage could do for your monthly mortgage, call or .  If you have a copy of your mortgage statement handy, you can send it along, too.  We'll want that information to get you as precise figures as possible.

How do you avoid paying jumbo mortgage rates on a jumbo-sized mortgage? 

You go off the beaten path to find a lender, that's how.

It's pretty simple when we break it down.

The word "jumbo" is a Wall Street-specific term for home loans larger than $417,000.  In certain "high-cost" areas, the number can be as high $729,750. 

Lately, though, rates on jumbo mortgages have been awful compared to its cousin, the conforming mortgage.  In addition, jumbo mortgages carry significantly higher loan fees. 

The price disparity is even worse for so-called "Super Jumbo" mortgages.  A super jumbo mortgage is similar to a jumbo mortgage, but bigger.

But the thing is, the terms "jumbo mortgage" and "super jumbo mortgage" -- these are words for a Wall Street-bound loan.  They're buckets into which certain mortgages are crammed for purposes of a classification. Just because your loan size exceeds $417,000 doesn't mean that you have to suffer. 

Avoiding the high rates and loan fees of a jumbo or super-jumbo mortgage is easy -- all you have to do is keep your loan away from Wall Street.

Because Wall Street created the convention of "jumbo" or "super jumbo" home loans, a non-Wall Street loan isn't subject to the same restrictions.  This is why bypassing your neighborhood Big Bank in favor of a smaller, niche mortgage lender could be a sound mortgage decision. 

Different from Big Banks, niche mortgage lenders don't package their mortgages for Fannie Mae or Freddie Mac and this allows them to make their own mortgage lending rules -- some of which look like blasphemy to the Big Bank crowd:

• PMI typically not required above 80% loan-to-value
• 100% of funds needed at closing can be gifted from anywhere
• Closing within a LLC or other corporation is permitted

And, on top of that, mortgage rates with niche mortgage lenders smoke what Wall Street has to offer.

I am currently quoting a $2,000,000, 7-year ARM at 5.500 percent from a niche lender in my stable.  For comarison, I tried shopping the same product at several Big Banks -- none of them would even look at the loan, let alone try to price it.

And, there are plenty of other examples like this, too. 

Consider the following niche lender mortgage scenarios, each of which is carrying a mid-5-percent mortgage rate as of this morning:

• $900,000 mortgage with 10 percent down, primary residence
• $1.5 million mortgage with 30 percent down, vacation home
• $2.0 million mortgage with 30 percent down, primary residence

Again, none of these mortgages are approvable through traditional banks channels including Chase, Bank of America, Citibank, and Wells Fargo.  It takes a niche lender to get it done. 

Now, finding niche lenders isn't always easy, but it can be worth the extra effort.  Mortgage rates are often lower, downpayment requirements are often smaller, and the underwriting process is often smoother.  As a mortgage broker, I work with a lot of them.

If you're having trouble finding a bank to service your "large loan", send me an email anytime.  I lend in all 50 states and am sure I can help you find one.

Author's note: The 2009 Conforming Loan Limits by County are not publicly available.  When they are, I will update this post accordingly.

Mortgage planning is about recognizing the right home loan product for the right homeowner at the right time. 

It's a challenge because not only do products change, but homeowners' lives change and the times change, too.

However, change is good because new mortgage landscapes means new mortgage planning opportunities for people that are paying attention.

• The U.S. economy in a recession
• Mortgage money is getting scarcer
• Homes are sitting on the market longer than in years past

And, for all of the talk that the mortgage market is dead, many Americans are quietly going about their business, using the economic situation to their advantage.

One group especially poised to take advantage of the economy is homeowners that plan to sell their homes in 2008 or early-2009. 

For these folks, a rarely-used mortgage product could be their new best friend.

Read the rest of this entry »

A mortgage rates is born from the price of mortgage bonds and nothing else -- not the Fed Funds Rate, not the 10-year treasury note, and nothing else, either.

But mortgage rate pricing doesn't end there; from the price of mortgage bonds, all we get is the "base mortgage rate".

The rates themselves are subject to additional adjustments based on the loan's inherent risk factors.

Some of these risk-based adjustments are well-known:

• Occupancy Type: Primary residences have fewer adjustments than investment homes
• Credit Score: High credit scores have fewer adjustments than low scores
• Equity Position: High equity levels have fewer adjustments than low equity levels

Others, however, are not.  And it's the lesser-known adjustments that push home buyers into big, costly mortgage planning mistakes. Big. Huge.

The most ignored interest rate adjustment turns out to be a fairly easy one to manage -- it's the mortgage rate lock commitment period.

A mortgage lender's rate lock commitment is the bank's promise to deliver a specified mortgage rate to a specified buyer for a specified period of time.

It's a contract, of sorts, in which the lender says: "I promise to honor this interest rate for the next x days."  Mortgage rate lock commitments are based in 15-day increments.

The most common rate lock commitment period are:

• 15-day rate lock commitment
• 30-day rate lock commitment
• 45-day rate lock commitment
• 60-day rate lock commitment

So, when a mortgage lender issues a 30-day rate lock at 6.000%, it is promising to lend at 6.000% at any time within the 30-day widnow into the future.

Now, there's a key inference to be made from that.  Because rate lock commitments correlate to some point in the future, they are really just predictions about where the mortgage market will be x days from now.

Predicting the future is a dangerous game and banks know that the farther into the future they try to predict, the less likely their predictions will be correct.

This is why longer rate lock commitments tend carry higher interest rates, higher fees, or both -- banks are hedging against the risk of time.

Home buyers that understand how rate lock commitments work can better manage their closing dates to save money in the short- and long-term.

Assuming a $300,000 home loan on a bank-amortizing loan (i.e. 30-year fixed), look at how various rate lock commitments change the monthly mortgage payment:

• 15-day rate lock: $1,798.65 payment
• 30-day rate lock: $1,822.83 payment
• 45-day rate lock: $1,847.15 payment
• 60-day rate lock: $1,871.61 payment

There is a measurable difference between closing on Day 45 versus Day 46 -- it's $24.46 monthly and $8,805.06 over 30 years.

Managing mortgage rate lock commitments is an often-neglected methods for keeping mortgage payments down -- mostly because home buyers don't know about it, and loan officers don't talk about it.

Before choosing a closing date for your home purchase, consider the impact of time.  It could lead to significant savings.

If you spend enough time reading the papers and watching the news, you'll notice a subtle bias when reporters talk about mortgages and real estate.

It's usually in the verb choice or use of adjectives.  Reporters serve up a healthy dose of connotation to go with the facts.

With respect to mortgages, you'll see talk about:

• Unscrupulous lenders making a "quick buck"
• Homeowners falling prey to mortgage lenders
• Adjustable-rate mortgage payments spiraling out of control 

This cartoon is another example.  It implies that interest only home loans are for people that can't otherwise afford homeownership.

That's patently false.  Interest only loans are used by all economic classes of homeowners -- not just those that "can't afford their homes".

Sure, there is some truth to the cartoon; there are homeowners that use interest only home loans to way to "get onto the housing ladder". 

But, let's make an important distinction here -- this cartoon is a statement about the homeowner and not the loan type.  It's also meant for comic relief.

There are other obvious examples of journalistic bias and it happens every day:

• Bias against adjustable-rate mortgages
• Bias against fixed-rate mortgages
• Bias against paying off your home quickly
• Bias against not paying off your home quickly
• Bias against using a mortgage broker to find a home loan
• Bias against using a local bank to find a home loan

Our opinions can be subtlely shaped by the words and imagery we absorb from news sources.  We would all do well to stop and ask the question: Stripped of opinion, what is this story really saying and how does it relate to me personally?

Every homeowner is unique with his own special set of circumstances.  If you're having trouble gleaning meaning from the news, ask a friend to refer a trusted loan officer. 

Get past the bias and seek the facts as they relate to you.

Unless you live on the moon, you've heard about the issues facing American homeowners with respect to mortgages.  You've heard it on TV, in the papers, and on blogs. 

The good news is that relief is on the way (somewhat).  Momentum to "help the homeowner" started with the states (Ohio), moved into Congress (FHASecure), and is now heading onto mortgage servicers (Countrywide).

The bad news is that not all homeowners are going to be relieved equally. 

The least protected class of homeowners in America right now are real estate investors that bought homes from 2001-2007.  There's not a line of legislation that will come to the rescue of any member of the over-extended-real-estate-investor class.

One television pundit was overheard saying this:

"They bought their tickets, they knew what they were getting into.  I say, let 'em crash."

Now, with respect to real estate investors, it's important to differentiate between the two types who may have bought from 2001-2006.

1. The buy-and-hold investor who makes money off rent, tax write-offs, and long-term property gains.  This is a long-term strategy.
2. The buy-and-sell investor who makes money off selling a property for more than its purchase price within a short period of time.  This is a short-term strategy.

For Type #1, the current market conditions are a stress, but nothing major.  Because their real estate strategy is a long-term one, the home was likely financed with a long-term fixed mortgage, and excellent rent prospects for the unit(s).

For Type #2, however, the financing tends to be much different.  Because their strategy was a short-term one, the home was likely financed with a short-term sub-prime ARM, and in an area that was designated as "hot", or "likely to appreciate".  Rent prospects were not necessarily a factor when the purchase was made.

Now, both investor types likely bought with very little downpayment.  Lenders didn't require it, so the investors didn't give it.  Real estate investment is about leverage, after all.  In a rising market, buying one property with 20% down generates a dramatically lower ROI versus buying four properties with five percent down.

But now the market is changing. 

As we mentioned, the long-term investor basically shrugs it off.  He knows that weak markets come and go and -- long-term -- real estate is a winning investment. 

By constrast, the short-term investor is facing some very real problems. 

First, sub-prime loans are no longer available for real estate investors.  And second, real estate property values are declining in many of the areas that attracted investment between 2001-2006.  The short-term investor hadn't expected the market to change while they were still in the midst of their "flip".

To impress upon how big of a deal this is, let's look at a "Sunny Skies" scenario for a short-term real estate investor.  We know that most investors have "Stormy Skies", but this is meant to show how all short-term investors are feeling a pinch:

In 2004, a person buys an investment condo in Chicago for $300,000, and mortgages $285,000 with a 3-year ARM that includes principal + interest.

The condo appreciates 4.000% annually and is now worth $338,000.  The mortgage balance is now $275,000.

Today, the home's LTV is 81% and the loan is about to adjust. 

So, for the "Sunny Skies" guy, it looks like everything's coming up roses.  But is it really?

For one, nearly every investment property home loan over 80 percent loan-to-value is going to be considered sub-prime, and the market for those loans vanished months ago.  In order to get out of sub-prime territory, it's necessary to pay down the loan to at least 80 percent.  75 percent is ideal.

Plus, if the investor decides to sell the investment property, he's competing for sales with every other investor nearby that also wants to divest.  The extra supply means lower prices for everyone.  It should also equate to more time on the market.

Meanwhile, the clock on all of those ARMs is still ticking so if an investor has a fire sale just to cut his losses, it's going to drop the value of every other unit nearby.  Ouch.

In other words:

• To remortgage will cost money as a paydown
• To not remortgage will cost money as a mortgage rate hike
• To sell the home will cost money in the form of depreciation
• To not sell the home will cost money in the form of lower home values

Ouch again. 

But, it's not all bad!  Many short-term investors can readily convert their short-term strategy into a long-term strategy by re-assessing their real estate portfolios.  And it starts with the mortgages.

See, in the current market, the biggest risk to a highly-leveraged investor is that there are no highly-leveraged mortgage products available for refinancing.  When the mortgage begins to adjust, therefore, the investor has no choice but to absorb the adjustment.  This impairs cash flow and usually leads to financial distress. 

Probability of Foreclosure: Very High.

This is why the first step to convert a short-term real estate strategy into a long-term strategy is to convert to long-term mortgages.  And, in order to do this in our current market, the home has to become un-highly-leveraged.  This requires the principal balance to be paid down to at least 80 percent, and preferably 75.  With less leverage, the loan is considered less risky and the mortgage moves from sub-prime territory into the conforming world.  Backed by Fannie and Freddie, the home loan programs are plentiful and relatively cheap.

Once the capital is ready, the next step is to remortgage the investment property into a long-term home loan with a lower LTV.  The new mortgage doesn't have to be a 30-year fixed, but it should be long enough to match your long- and short-term investment goals.  Your mortgage planner can help you formulate a plan.

Now, with a long-term mortgage locked in, the long-term payment is locked in, too.  By knowing the payment, you can set a monthly rental price and know exactly how much cash will be required to cover the monthly nut on the home.  Having a fixed cost also helps to build a predictable monthly budget.

Probability of Foreclosure: Very Low.

Yes, the hardest part about converting from a short-term real estate strategy to a long-term one is finding cash for a principal paydown; most people don't have access to that sort of capital at a moment's notice, nor do they know where to find it. 

Surprisingly, most investors ignore the most likely source because -- despite investors' tendency to leverage non-owner-occupied properties -- they don't always take the same approach on the homes in which they live.  The primary residence is an excellent source of capital and the equity existing on paper can be accessed and redeployed somewhere else. 

The same applies for second homes and vacation homes -- the equity is there and is sitting idle. 

So, let's come full circle on this. 

Remember that states, Congress, and mortgage servicers are trying to help homeowners, but not investors.  Therefore, there are loads of mortgage programs available for primary and secondary residences.  Plus, cash out transactions are still be approved to high LTVs.   This means that the equity required to go long on your real estate investments may be waiting there in your own home(s).

Buy-and-hold strategies works in real estate -- we've seen it historically.  In fact, other than baseball, long-term increases in real estate prices has been the one constant in America.  It's this short-term flipping that is causing problems. 

The good news is that with available equity, a real estate investor can change his tune, thereby protecting his assets, his credit, and his investments.

In mortgage planning circles, we call this process "equity repositioning" -- removing home equity from properties in order to meet financial goals.  There are risks inherent in strategies like this and it's not something to undertake on your own.  If you don't have an experienced mortgage planner with whom you work, email me and I'll walk you through it.

Kudos to Jeff Kerr at Chitown Living for a terrific analysis of Seller Concessions, the negotiation tactic in which the seller agrees to take a higher sales price and, in exchange, gives the added dollars back to the buyer to help offset closing costs.

From the post:

"In Chicago, closing costs can be a big chunk of change, expecially [sic] City of Chicago Transfer Stamps.  Welcome to Chicago.  Then the question, 'We heard there is a way to roll closing costs into the purchase price.  Is this true?'  And so begins my explanation of how this works."

For a home buyer nervous about paying closing costs, Seller Concessions can be a terrific strategy to reduce the out-of-pocket expenses of buying a home.  Of course, because your purchase price is higher, the monthly mortgage payments are higher, too.

That said, it's typically preferred to finance an additional few thousand dollars as a $10-20 extra in the monthly payment than it is to spend the money up-front.  But, because the sales price is higher, the profits on the sale of the home will be reduced, all things equal.

In either case, liquid money is more valuable today than the promise of money sometime in the future.

If you want to use seller concessions for your home purchase, it is best to talk with your lender and real estate agent before putting an offer in on the home so that it can be planned for.  Just like Jeff said.

From the Wall Street Journal, this chart shows us that since January 2005, as the 10-year Treasury note has increased its yield, so has the simple, ordinary bank 5-year bank CD.

And, although the 10-year treasury note does not control mortgage rates, over long periods of time they tend to have similar paths.

Therefore, we can make a worthwhile connection:

As mortgage rates trend higher, so does the savings rate offered by banks.

This relationship has impact on two sets of people.

The first set is soon-to-be homebuyers that are nervous about interest rates going up between today and the day they lock their mortgage rate.

If the chart is any indication, that worry can be put to rest because if rates are going up, the money in the bank can offset that rise because it's earning more interest all the while.

The second set is the homeowner that actively manages his mortgage debt and works it into a larger set of financial goals.

For people like this, it may make sense to use 5-year ARMs to get lower interest rates than with a 30-year fixed, but then to purchase an offsetting 60-month CD.

• If rates fall during the 5-year term, remortgage down to the lower rate, increasing the interest rate spread between the mortgage and the CD
• If rates rise during the 5-year term, know that all cash-equivalent securities in the portfolio will be earning higher returns

Advanced mortgage planning like this is not for everyone so make sure to speak with a qualified professional first.

Either way, mortgage rates rising aren't always so bad because it tends to brings the bank accounts up with it.

The Chicago Tribune Real Estate section tells us to think twice before choosing 100 percent financing.  The headline is preying on fear and hides some obvious truths about no downpayment loans. 

Unfortunately, many people only read headlines.

Without reading ahead, which of these two scenarios would you prefer:

1. Crash your best friend's car and owe him $20,000.  You pay up today.
2. Crash your best friend's car and owe him $20,000.  You pay up 5 years from now.

Choosing Option #2 is an intuitive decision, and the right one for most people.

To apply this analogy to homeownership, which of these two scenarios would you prefer:

1. Make a $40,000 downpayment on a home today that loses $40,000 in value.  When you sell, you get nothing.
2. Make a $0 downpayment on a home today that loses $40,000 in value.  When you sell in 5 years, you pay $40,000.

Once again, Option #2 in a no brainer.

And yet, the MSM would say that you're making a mistake because it would be bad to owe money when you sell you home.  That's false.  It's better to have that lost money in hand for the next 5 years where you can actually do something with it instead of watching it fetter away as home prices fall.

There are three very important concepts in mortgage planning that get missed by the MSM and it's important that all homeowners recognize them.

1. Your home will gain/lose value independent of your downpayment
2. The larger the downpayment, the less reserves available for an emergency
3. Money in the bank earns interest, money in your mortgage does not

If your home is going to lose value, it's going to lose value.  There's nothing you can do about it and it doesn't change the fact that you're selling at a loss.  In the end, it's just a case of Pay Me Now, or Pay Me Later. 

But, because of the three points highlighted above, the Pay Me Later route is almost always the winner.  Selling your home for a loss could happen to anybody, but if your initial investment was low, it beats selling a home to break even because your savings are already tied up in there.

As with all personal economics, it's important to be disciplined with your dollars and to talk with a person that knows your financial goals before committing to any mortgage plan or another.  The general statements like those found in the Tribune and other media outlets are designed to sell papers, not financial advice.

And sometimes the statements are patently false.

According to Bankrate.com, while most people had money in a liquid account somewhere, only 39% had enough liquid money to last through three months of living expenses.

If we know that 39% of Americans do have three months of savings, then we can reason that 61% of Americans don't.

Now, as a mortgage guy, I find "3 months" to be a coincidental time period.

3 months is the same amount time in which a homeowner can go from being on-time to on the auction block.  3 months of non-payment gives a lender the legal right to foreclose.

The Bankrate.com article talks about the need for liquidity in times of crisis so let's look at two common crises because of accidents:

1. Minor medical problem (short-term disability)
2. Major medical problem (long-term disability)

I am purposefully omitting other losses of income including job loss, or quitting because the former often carries a severance, and the latter is often a planned change for which money is saved as a cushion in advance.  And we've covered divorce once already.

Accidents are called accidents because they are unplanned.  Nobody plans to roll-over their SUV, develop cancer, contract a staph infection, or lose a limb while sporting.  These things just happen to people -- ready or not.  When they do, life gets very expensive.

See, medical insurance covers most medical bills, but not everything.  And disability insurance may not fully re-instate income levels to pre-accident levels.  Liquid funds are what is used for handling full-time nursing care, or retrofitting a home for the disabled, etc.

It's a fact that 1 in 4 people will face a medical problem in their lives that renders them unable to work for at least three months.  That means that 15 percent (61% * 25%) of people completely deplete their reserves and face foreclosures just because they got sick or injured.

Whether you currently have emergency reserves or not, there are a two cautionary steps you can take as a homeowner to protect yourself.

The first step is to create a cushion by opening a Home Equity Line of Credit.  A HELOC gives you the ability to write a check against your existing home equity at any time.  The rates can be higher than on other mortgages, but when a crisis hits, the interest rate sn't so important.

Often, opening a HELOC is free and they tend to carry annual fees of less than $100.  $100 is a small price to pay for an insurance policy against disaster.

The second is to consider disability insurance beyond what is offered at work.  Talk with your personal insurance agent to see if you are a good candidate.  If you don't need it, your agent will tell you, so it's a call worth making.  Again, the goal here is to protect your income and your home.

And the best time to take action is now.

When a person doesn't appear to be a risk, banks and insurance companies will bend over backwards for their business.  When they're sick or injured, however, not so much.

61% of Americans are in a danger zone, but all Americans should be concerned about "accidents".  With careful planning, the collateral damage on yourself and your family can be minimized.

Source
Most Americans Fail the Emergency Funds Test
Bankrate.com, Laura Bruce
June 21, 2006

http://www.bankrate.com/brm/news/sav/20060621a1.asp

Once more, the major media outlets miss the bigger picture.  This time, the story comes from the Chicago Tribune via Money Magazine.

The offending quote:

[New York City financial planner James] Kibler says he likes to see buyers put down at least 10 percent, because they will have a cushion should home prices dip. If you pay $300,000, for example, and need to move after a year, you'll only have to pay off a $270,000 mortgage balance. That gives you the freedom to sell for slightly under what you paid for the house and pay a real estate commission.

I am not trying to pick a fight with a well-known planner, but this is one of the least-informed statements I have read in a long, long time.  Here's the problem with Kibler's statement -- it's right out of Homebuyer Psychology 101.

To categorize a downpayment as "a cushion" against falling real estate prices is a farce.  The $30,000 is not a cushion -- it's a potential loss. 

Here's why.

If you sell your home for less than you paid for it, then you've lost money on your real estate investment.  This happens irrespective of your initial downpayment.  Making a downpayment to protect yourself against market losses is a broken concept.  This is a simple game of Pay Now, or Pay Later.

There is no real protection from falling real estate prices other than to limit your investment in it.  That means putting no more principal in your home that you absolutely have to because if you sell your home for a loss in a year, there are two scenarios:

1. You liquidated savings accounts last year to make an initial downpayment and that downpayment is used to cover your loss
2. You didn't make a downpayment at all, and you liquidate your savings today to cover your loss

Considering that your savings earn interest in a bank account and your equity earns nothing, Outcome #2 is a better result because Pay Later earns more interest than Pay Now.

The concept of a "cushion" is a pure psychological play, and Kibler should know better.  To that end, so should Money Magazine and the Tribune.

Bloomberg's Caroline Baum says that the banking system's exposure to mortgages is quite high because 43% of first-time home buyers made no down payment in 2005.

If low downpayments are more risky for the banks (as Baum points out), it must be less risky for the homeowner.

As we've said a few times: 100% financing is quite safe for a home buyer.

For homeowners, 100% financing is safe because the home buyer has zero skin the game with respect to the home.  That "downpayment money" may have been earmarked for more important things instead, including:

• Disability insurance because there is a 1 in 4 chance that an injury will render somebody unable to work/earn money for 90 days -- just long enough to default on  a home loan
• Life insurance because a family earning two incomes may be able to afford a home, but the same family with one income may not fare as well
• Furniture because bean bag chairs and M.C. Escher posters are so college
• Savings accounts because life is an endless road of surprises that includes job losses, illness, car repairs, and other money-spending events

All of these options can be more appealing to home buyer than making a downpayment.  Especially if the bank is willing to allow it.

100% financing, though, can be risky to the bank holding the mortgage notes.  If the homeowner defaults, the bank stands to lose more money than if the home owner had some stake (in the form of a downpayment).

If banks are at risk, as Baum says, the key to protecting them is to make sure that homeowners can continue to make make their payment.  That comes through careful financial planning and responsible borrowing.

If homeowners bite off more than is chewable and subsequently default en masse, the system could crumble.

Source
Think Banks Have No Exposure to Mortgages? Think Again
Caroline Baum
Bloomberg.com, Monday, April 17, 2006

http://quote.bloomberg.com/apps/news?pid=10000039&sid=agNJxDCsErEY

Ford announced that it is laying off 30,000 workers.  That means that 30,000 people will lose their ability to make timely mortgage payments very soon.

In the dust of the layoffs, two classes of Ford employees will emerge.

1. The class that set aside an emergency fund for "rainy days" like this, and maybe even worked with a financial planner.
2. The class that didn't.

Both groups must now face the rough months (years?) ahead. 

Some Ford workers will turn to their home's equity for a lifeline, either opening a home equity line of credit or remortgaging their home for "cash out". 

Unfortunately, those loan applications will get denied because banks don't like to lend to people that need money. 

The banks will deny the applications of Ford workers because without a job, the workers have no means by which to pay back the bank. 

No matter how much equity, or how many "extra" payments were made before the job loss, the bank will not approve a mortgage for a homeowner without a job.

Yesterday, Ford's employees could have closed on a new mortgage. 

Today, they can't. 

Not only will home purchase activity stall in Detroit, but millions of dollars in home equity just got trapped on paper.

This story illustrates why it can be prudent for homeowners to:

1. Set up a home equity line of credit just for emergencies
2. Keep equity separated from the home as much as makes sense
3. Have an emergency fund to handle life's curveballs

Banks won't lend to people that need money -- only people that want it.  Plan ahead so that if you ever lose your job, you're not left wondering how you're going to pay your mortgage.