Analysis Tools for Real Estate Planning

Don't let the title of this article scare you; the tools I'm going to talk about are not that difficult to use.

Any time you are making decisions related to real estate you are likely to be making decisions that involve considerable sums of money. It only makes good sense to make the best decision possible.

Banks, mortgage companies, real estate developers all have entire departments dedicated to creating reports, simulations and analyses to help decision makers. In the past, individuals and small business owners were at a severe disadvantage when making decisions. They were forced to make wild guesses while their larger competition was making informed decisions.

Fortunately, it doesn't have to be this way any more. Today, software is readily available that can put an individual or small business in the same league with even the largest bank or development company.

The reason that this is true is that personal computers are so much faster today than they were 10 years ago. My laptop computer can crunch numbers faster than the fastest mainframe computers available to banks in 1994. The ability to crunch numbers is key to making good decisions. The more numbers you crunch the more possibilities you explore and the less likely you are to be caught by surprise by something that the big guys have already considered and planned for.

Unfortunately, software is not a magic bullet. You have to do some work if you want to be able to compete with an organized team of professionals.

Large organizations make decisions based on mathematical models. When you do a few "what if" calculations on the back of a napkin to make a budget for your vacation, you are creating a simple model. More sophisticated models are readily available for real estate, such as the Mortgage Payment & Amortization Calculators at Yahoo. These allow you do calculations in minutes that would take days with a pencil and paper. Being able do calculations easily encourages you to consider more possibilities.

With the tools available at Yahoo you can easily consider a few dozen possibilities. Spending just a couple of hours now can save you thousands of dollars over the course of a 30-year mortgage and requires no special skills or training.

If you are really serious about taking the next step to really put yourself on even ground with the big guys, you need to either develop some skills or pay someone who has them to help you.

The big guys use risk analysis tools such as Crystal Ball to make informed decisions. If you know how to use Microsoft Excel (or are willing to learn) you can build powerful models to help you make decisions. Again, hours invested now will mean thousands of dollars later.

If you know Excel I suggest you get started something less expensive than Crystal Ball such as the Excel Financial Analysis and Modeling tools from Dot XLS Excel Consulting.

TRUTH - IN - LENDING:

Answers To The Most Frequently Asked Questions



What is a Truth-In-Lending Disclosure and why are lenders required to provide it? The disclosure is designed to give you information about the costs of your loan so that you may compare these costs with those of other loan programs or lenders.

What is the Annual Percentage Rate in Box A? The Annual Percentage Rate (A.P.R.) is the cost of your credit expressed as an annual rate. Because you may be paying loan discount points, mortgage insurance, and other prepaid finance charges at closing, the A.P.R. disclosed is often higher than the interest rate on your loan. This A.P.R. can be compared to the A.P.R. on other loan programs to give you a consistent means of comparing rates and programs.

What is the Finance Charge in Box B? The Finance Charge is the cost of credit expressed in dollars. It is the total amount of Interest calculated at the interest rate over the life of the loan, plus Prepaid Finance Charges and the total amount of any required mortgage insurance premiums charged over the life of the loan.

What is the Amount Financed in Box C? The Amount Financed is the loan amount applied for, minus the Prepaid Finance Charges. Prepaid Finance Charges include items paid at or before settlement, such as loan origination, commitment or points, adjusted interest, and initial mortgage insurance premiums. The Amount Financed is lower than the amount you applied for because it represents a NET figure. If you applied for $50,000 and the Prepaid Finance Charges total $2,000, the Amount Financed would be $48,000.

Does this mean I will get a smaller loan than I applied for? No. If your loan is approved in the amount requested, you will receive credit toward your home purchase or refinance for the full amount for which you applied. In the example above, you would receive a $50,000, not a $48,000, loan.

What is the Total of Payments in Box D? This figure represents the total amount you will have paid if you make the minimum required payments for the entire term of the loan. This includes principal, interest and mortgage insurance premiums, but does not include payments for real estate taxes or property insurance premiums.

My Disclosure says that if I pay the loan off early, I will not be entitled to a refund of part of the Finance Charge. What does this mean? This means that you will be charged interest for the period of time in which you used the money loaned to you. Your prepaid finance charges are not refundable, nor are any prepaid interest charges.

Key Words: Truth-In-Lending, TIL, Annual Percentage Rate, APR, A.P.R., Finance Charges, Amount Financed, Net Loan, Net Loan Amount, Total Payments, Principal and Interest, PI, Loan Discount Points, Mortgage Insurance, Prepaid Finance Charges, Loan Origination, Commitment Fee, Discount Points, Mortgage Insurance Premiums, PMI, Principal, Interest, Real Estate Taxes, Property Insurance Premiums, Homeowners Insurance, Hazard Insurance

Do I Need a Good Faith Estimate?

Yes, you need a Good Faith Estimate – often called a GFE. Lot’s of reasons come to mind.

Your mortgage broker and lender must provide a GFE under the requirements of RESPA - the Real Estate Settlement and Procedures Act of 1974.

RESPA deals with the information and disclosures to which you are entitled as a buyer or mortgagor of residential real estate. It is a Federal law and applies to all residential transactions throughout the United States.

A well-prepared GFE will itemize to a reasonable precision what it will cost to close your loan and or purchase.

Be sure that you do not lose sight of an important distinction: The GFE is an estimate, not a firm price list.

The GFE is usually prepared very early in the loan application process, at a time when a number of the items will yet not be known and, therefore, can only be approximated. So it is important when working with the GFE to understand that by the time you get to the closing many of the items will be somewhat different – some more, some less.

At the very least, however, the GFE will give you enough information so that you can plan your closing budget and make other decisions, as well.

Too many borrowers treat the GFE as a price quote to close their loan. This is a serious mistake.

A careful borrower should consider that a low GFE may be an indication that some cost estimates may have been omitted. Do not assume that a higher GFE is committing you to higher closing costs.

It is not in the interest of the mortgage broker or the lender to “high-ball” the GFE. But, it is in your interest to see all the possible costs; and it’s the law that they be disclosed to you.

The reality is that once the closing statement has been prepared, the costs will be what the actual costs are, not those appearing on the GFE.

For example, suppose that in your area appraisal reports generally cost about $200 for a home in your price range. Most mortgage brokers would estimate $200 on the GFE. Whether the appraisal comes in at $175, $200 or, even $225, it will be the actual cost that will appear on the Closing Statement.

The point of all this is that many borrowers who use the GFE as a competitive tool to get some mortgage broker to write a low GFE are working against their own interest.

Wouldn’t you rather have a reasonable GFE, even if it were higher, than one that looks really cheap and then sneaks up on you at the closing table with an additional $1,000 of costs you hadn’t planned on? Think about it. You are dealing with an important transaction, perhaps the largest financial transaction of your lifetime.

Don’t set yourself up for bad surprises; make sure your GFE has the right stuff!

Here are some typical, though by no means universal, costs you may see on your GFE:
Points: If you will be paying points, each point is worth 1% of the loan value. Remember there is an inverse relationship between points and the interest rate on your new loan.
Appraisal: For homes valued up to $250,000; $175 to $300
Credit Report: Varies depending on detail from about $18 to $75 or so
Processing/Underwriting Fees: Varies widely by lender
Items required by lender to be paid in advance: This includes prepaid interest from closing day to the 1st of month after closing, hazard insurance and other items as well.
Reserves Deposited with Lender (Escrows): Hazard insurance premiums, mortgage insurance premiums (if any), and taxes.
Title Charges: Escrow fee, document preparation fee, Notary fees, attorney fees, abstract and title insurance.
Government Recording and Transfer Charges: Recording fees, city/county tax/stamps and state tax/stamps.
Additional Items: Pest inspection, building inspection, survey, and other miscellaneous expenses.

Note that most of the items shown do not have estimates associated with their listing. These are all items that will vary either due to market conditions, the value of the property, area of the country or the size of the mortgage. Most are driven by specific formula or common usage. So, ask your mortgage broker about them.

At the bottom left of the GFE there is a small area where your mortgage broker will summarize the Funds Needed to Close. Go over this area carefully with the broker so that you understand it completely. At the bottom right is a summary showing what your Total Estimated Monthly Payment may be. Again, review this area thoroughly. It’ is a good insight of what your mortgage payment will be.

Finally, if you have received your GFE from a mortgage broker, there will be a statement at the bottom of the form that discloses, as follows: “This Good Faith Estimate is being provided by (name of mortgage brokerage business), a mortgage broker, and no lender has been obtained. A lender will provide you with an additional Good Faith Estimate within three business days of the receipt of your loan application.”

In conclusion, the GFE is probably the first document you will receive from your mortgage broker. You will probably receive it even before he has had the full opportunity to qualify you for a loan program, and certainly before all of the final facts are known about the transaction. So utilize the GFE in the manner of its intent, as a way to get a handle on the costs of the transaction you are anticipating and to judge how best to adapt and prepare yourself for the closing to come.

Good Luck!

--By line TBD

The Appraisal Report / Key Words

Appraisal, Appraisal Report, Current Market Value, Market Vale, Value, Comparable Sales, Comparables, Market Area, Subject, Subject Property, Mortgage Loan, Purchase Property, Purchase Home, Refinance, Refinance Home, Refinance Mortgage, Refinance Property, Mortgage Program, Collateral, Appraiser, Market Conditions, Appraisal Software Programs, Licensed Appraiser, Sticks and Bricks, Hazard Insurance, Homeowner’s Insurance, Property Insurance, Legal Description, Loan Package, Loan Documentation, Documentation, Request Copy of Appraisal, Analysis of Value, Value Analysis, Building Inspection, Contract, Purchase Contract, Contract for Purchase and Sale, As Is.

The Appraisal Report / Will the appraisal substitute for a building inspection?

Absolutely not! The appraisal is a market report, an analysis of value. The appraiser is not qualified to tell you whether the roof is good, the cellar leaks or the foundation is cracked. If you are purchasing a resale home, be sure to have a licensed building inspection firm prepare a report. We recommend an independent building inspection even when purchasing new construction. And one more thing, make sure your Contract for Purchase and Sale gives you the right to have the property inspected, unless you are buying “as is.”

The Appraisal Report / What happens to the appraisal after I close?

An original copy of the appraisal is included in the loan package that goes into your lender’s files. It is part of the loan documentation. You are entitled to a copy of the appraisal, but the rules say that you must request it in writing within 90 days after closing. You will sign a disclosure to that fact as part of your application. Most mortgage brokers can make an arrangement to have an original available for you to keep at the closing. Just ask when you are filling out the loan application.

The Appraisal Report / You should read the appraisal report

Must I? Well, you don’t have to; but you will be missing some really important and interesting information about your property. For instance, at the top of page 2 you will find a brief analysis of what it will take to rebuild the property in today’s market – the “sticks and bricks” value. This analysis may help you with the decision of how much hazard insurance you’ll need.

Other data in the report will cover particulars about the neighborhood, the legal description, a physical description of the property improvements and many other details that are important for you to know. The appraisal will compare your property with three or four others in order to arrive at an accurate estimate of market value. This part of the appraisal is intricate and it really shows off how truly valuable a good appraiser is to your purchase or refinance.

In the report you will find a dimensioned sketch of the property showing the footprint of the improvements so that you have a good idea of the square footage of the building. Also, there will usually be a room dimensions chart, which can be very convenient. Following these parts of the report there will be photographs of the neighborhood, the subject property – inside and out, and the comparable properties – exterior only, followed by the closing remarks and the required appraiser’s certifications credentials.

The Appraisal Report /The Appraiser is a Professional

The appraiser is a state licensed professional who has spent considerable time learning his skills and acquiring the necessary credentials to lawfully prepare appraisal reports. He will physically visit the property to make observations and measurements of the property and its improvements. After the physical inspection, he will return to the office to research market conditions in your area, locate other properties that will serve as suitable comparables and dig out many other important details needed to be included in the appraisal report. Today, most appraisals are prepared with sophisticated computer programs. These programs prepare the report in conformance with the laws and regulations that govern the appraisal business. Your appraisal must be signed by the appraiser and, in some cases, by the appraiser’s supervisor, too. A copy of the appraiser’s state license is generally attached to the report, according to the demands of the lender.

The Appraisal Report / I am using a mortgage to purchase the property.

If you are taking a mortgage loan to purchase or refinance a property, then your lender will insist that you have an appraisal done. What’s more, you will have to pay for it, not the lender. The lender is going to provide you the funds to purchase based on what the appraisal has to say about the property value; it is important that they do not lend you more than is allowed under the mortgage program you are using. So, in order for the lender to accept your collateral, they need an objective appraisal to be assured that they are making a prudent loan.

The Appraisal Report

What is the Appraisal?

The purpose of the appraisal is to secure an independent and knowledgeable statement of a property’s current market value. In the case of residential properties up to 4 units, the appraisal is generally made based on recent comparable sales in the same market area in which the subject (of the appraisal) property is located. If you are purchasing the property for cash, it is not a required item, but a buyer would be imprudent not to have an appraisal done. After all, the appraisal is the only reasonably certain way for you to determine that you are paying an appropriate price.

The Bank Just Sold My Loan, Key Words

Bank sold my loan, Bank sold my mortgage, mortgage market, closing, right to sale, monthly payment, servicing agency, loan number, obligations to new lender, obligations will not change, no right to change terms, loan has been sold, escrow, escrow account, impound, impound account, taxes, property taxes, real estate taxes, insurance, hazard insurance, home owners’ insurance, escrow department, escrow instructions, flood insurance, property tax discount, timely payment of taxes, coupons, remittance coupons, payment coupons, monthly statements, loan balance, remaining loan balance, individual investors, pool, pools, mortgage pool, mortgage pools, securitization, securitize, secondary markets, Ginnie Mae, Fanny Mae, Freddie Mac, Government National Mortgage Association, pass through certificate, pass through certificates, investment broker, nominal interest rate, age of mortgage pool, partially amortized, amortized, banks, mortgage servicing, insurance companies, mutual funds, institutional investors, mortgage backed certificates, mortgage backed pass through certificates, monthly income, monthly principal payments, monthly interest payments, return of principal.

Who Purchases Home Mortgage Loans?

There are lots of buyers – investors we call them – ranging from individuals to large banks, trusts and insurance companies who want or must invest in safe instruments that produce income.

By far the largest group of investors are individuals, folks who may live right next door. If your credit was good at the time your loan was underwritten, it is likely that your lender pooled your loan with other similar loans and then the pool was turned into an investment security – securitized – and made available to investors through major secondary markets like Ginnie Mae; also known as the Government National Mortgage Association. A share of each pool – known as a pass through certificate, can be purchased from your investment broker in face denominations of $25,000. The actual price paid will vary depending on several factors such as the nominal interest rate offered by the pool, the age of the pool and, if you are purchasing an older certificate, how much of its face value has already been amortized. Talk to your investment broker to have all of your questions answered.

Other mortgage investors are banks, especially those that specialize in mortgage servicing, like Wells Fargo Bank. There are many of these throughout the nation. Banks, insurance companies, mutual funds and other institutional investors purchase great quantities of mortgage-backed pass through certificates because of their inherent safety and marketability. All investors must be aware that these securities pay monthly income equaling a proportionate share of the pool’s monthly payoff of principal and interest. This means that over the years an investor will receive principal back as part of the monthly payments – just like a mortgage payment - so that when the certificate matures, the principal has already been returned to the investor. There will be no lump sum return of principal at the time of maturity, as there is, for instance, with a Treasury bond.

By Jay Best

The Bank Just Sold My Loan, I Still Have Coupons from the Old Lender

If your old lender provided coupons for you to attach to the monthly payment, your new lender will provide written information about what to do when remitting payments to them. Coupons have become less used in recent years, having been replaced most often by monthly statements mailed to you by the lender. Go with the flow. Statements are more informative and will usually help you keep track of the remaining balance of your loan. They will also keep you informed each time a payment is made on your behalf from the escrow account, if you have one.

You should stop using the old coupons as of the effective date that the new lender takes possession of your loan. The effective date will be provided in the notice of sale letter you receive. Once you have started making payments to the new lender, it’s okay to trash the old coupons.

The Bank Just Sold My Loan, Should I Do Anything?

Yes, actually, there is one of thing you should do if you are notified that your loan has been sold, especially if your original lender was running an escrow – also know as an impound – account for taxes and insurance for you. As soon as you have been notified of the sale and have been advised of your new loan number, place a call to the new lender’s escrow department. During your call make sure that the new lender has received the escrow instructions from the old lender and is aware of each obligation to be paid from the escrow account – typically property taxes, hazard insurance, flood insurance – and when during the year each is due. Many states offer property owners a discount on their taxes for prompt payment. Make sure that your new lender will timely pay your taxes in order to take advantage of applicable discounts. Besides this telephone call, you should not have to do anything else.

But I Picked My Lender Because We Have a Long Relationship

I understand how you feel. But, the short answer is, “Too bad.” The fact remains that you now have a new lender and the remittance envelopes have a new address. You may even have a new loan number. The important news is that your obligations to the new lender are exactly what they were to the last one; and, those obligations will not change. The new lender has purchased your mortgage “as-is” and does not have the right to change any of its terms. So, do not worry that the new lender will have some surprises for you now, or down the road.

The Bank Just Sold My Loan, Now What?

A Letter from the Postman

For some time virtually all lenders have included a clause in their mortgage paperwork giving them the right to sell your loan to another investor. Such a sale has important ramifications on the operation of the mortgage markets and aids to continually infuse these markets with new cash so that new mortgage loans can be made. At the time you signed the paperwork closing your loan, the lender’s right to sale was disclosed and you acknowledged the disclosure in writing. Typically, the way you find out that your loan has been sold is by mail. The impact on you is negligible, usually requiring only that your monthly payment will now be sent to a new address, payable to the new investor or his servicing agency.

Adjustable Rate Mortgages / Keywords

Adjustable Rate Mortgage, ARM, residential loans, residential financing, adjustment caps, life-of-loan adjustment caps, prepayment penalties, penalties, fixed-rate loan, fixed-rate mortgage, fixed rate, variable rate loans, variable rate, refinance, purchase, long-term rates, short-term rates, index, indices, margin, variable, upside down, amortize, amortization, COFI, COFI loan, Federal Reserve, Federal Reserve 11th Distract Cost of Funds Index, LIBOR, London Inter-bank Offering Rate, 6-month LIBOR, initial interest rate, initial rate, periodic interest rate, periodic rate, variable index, margin, fixed margin, mortgage note, mortgage broker, prepayment penalty, prepayment features, prepayment, prepayment options.

Adjustable Rate Mortgages / The Bottom Line

ARM loans are quite well understood these days. So the general problem of misinformation that existed in the early days is pretty much cleared up. Still, if you have a question, keep asking until you have an answer that you understand.

The old “upside down” problems have been removed from most forms of ARM mortgages. Remember, the clarifying feature of an ARM is that it has moving parts, so don’t assume. Always ask, “Can I get upside down with this loan?” The answer will be only one word: yes or no.

Finally, be sure to ask about the pre-payment feature of the ARM you are considering. You may see various pre-payment provisions and options. Discuss these with your mortgage broker and make a decision suitable to your circumstance.

By Jay Best

Adjustable Rate Mortgages / The Modern Adjustable Rate Loan

The modern ARM contains features, which eliminate the problems discussed above, and then some. Today, ARM loans generally provide for periodic adjustment that cannot exceed a stated annual or semi-annual adjustment cap. The most common periodic caps are 2% annually or 1% semi-annually. Also, these loans now feature a life-of-loan adjustment cap, usually 6%.

Every ARM loan interest rate is pegged to some widely known index. I’ve already mentioned the 1-year Treasury Constant Maturity Index. Others are used as well. You may hear references to the COFI (pronounced coffee) loan, an ARM based on the Federal Reserve 11th District Cost Of Funds Index. Another is the LIBOR ARM, based on the 6-month London Inter-bank Offering Rate, and so on. Some indices are more stable than others, so speak to your mortgage broker about which loan would be most useful to you. The initial interest rate on your loan may be set somewhat artificially low, but each subsequent adjustment – periodic rate - will be based on the then variable index on which your loan is pegged plus a fixed amount - the margin - established by your lender, as stated in your mortgage note.

Here’s an example:
Your loan has a periodic cap of 2% per year and a life-of-loan cap of 6%. But let’s see what happens if in a given year the index rate for your loan rises 3%. One might presume that the rate on your loan could then be adjusted by the 3%. But no, your annual periodic cap is 2%; so, your rate would be adjusted up by 2% only. Exploring the example further, a rising index rate over reaches a point greater than the 6% life-of-loan cap. In this scenario the life-of-loan adjustment limitation prohibit your interest rate to exceed your original rate + 6%.

Adjustable Rate Mortgages/Moving Parts, Something New in all the World

The big thing about mortgage lending up until the advent of the ARM was that mortgages had no moving parts. Everything about them was stable; the interest rate was stable, the monthly payment was stable and the term – years to completion was stable, too. And, it was the long-term stability of the fixed-rate mortgage that was making its cost - interest rate - so high in the market of that time.

So, here’s the theory. If we can convert the mortgage rate commitment from long term to short term, then the loan interest rate could be pegged to a short-term rate or index (say the 1-year Treasury Constant Maturity Index). Read that again. Make sure you’ve got it. Such a development would make long-term loans available at something like short-term rates – at least in the early years of the loan. This is a good thing.

Adjustable Rate Mortgages

When I was a younger I was warned, “Never buy an annuity.” But, many years later, after becoming involved in the financial services industry, I watched as annuities underwent dramatic improvements in structure. They were reinvented into much safer and productive investment devices; and, now that old cautionary saw about avoiding them is rarely heard.

The Adjustable Rate Mortgage (ARM) has had a similar history, so, some of it bears retelling. ARM loans first became available to residential borrowers around 1980, or so. It was a time of high interest rates and the banking and real estate industries needed a better way to provide residential funding. That better way came to be known as the adjustable rate mortgage. There was much excitement, especially among real restate brokers who were having trouble selling homes in the strong interest rate market, and were ballyhooed by lenders as better than sliced bread. There were structural problems, however, mostly having to do with annual adjustment caps, life-of-loan adjustment caps and prepayment penalties. If asked, I would – and did - caution any potential borrower to avoid using an ARM.

The years have sped by and now, after 25 years, ARMs, too, have been reinvented to correct the problems inherent in their original forms. ARM loans are now a perfectly suitable and time-tested loan vehicle for many borrowers and circumstances. In truth, the ARM does not replace the fixed-rate loan; instead, the ARM has become another tool available to borrowers to help make their home purchase or refinance work as efficiently as possible within the borrowers’ situation. There are some cautionary considerations, which I have spoken about in my article entitled, “How Much Home Can I Afford.” Read about it at (insert URL here).

Adjustable Rate Mortgages / So What’s the Problem?

Well, that’s what the old ARM loans did. But they did not perform as well as either lenders or consumers expected for at least 3 reasons that are important. First, lenders were interested in recapturing the higher long-term rate too quickly via the periodic rate adjustments provided for in these loans, thus eliminating the usefulness of the loan structure to many consumers. Second, The ARM was not well understood by loan officers and brokers who were selling it to consumers; so, unfortunately, there was probably a lot of misinformation floating around. And third, it was possible in many ARM programs for the borrower to get “upside down,” which means that the low payments in the early years were insufficient to properly service the debt and amortize the loan, creating a situation in which the loan balance would increase each month – instead of decrease - for a period of years.

As general interest rates continued to rise in the 1980s, the problem was exacerbated by the resulting large adjustments to mortgage rates and monthly payments in ARM loans. There arose a hue and cry, not just from borrowers, but from the lending and real estate industries as well. Something had to be done. Something was.

Major Appliances

One of the best ways to find out about major appliances is to consult a consumer information magazine, like Consumer Reports, that is available in most public libraries. It contains information about specific brands and how to evaluate them, including energy use. There are often great price and quality differences among brands. A more expensive, yet more energy-efficient model may pay for the difference in price rather quickly.

Once you've selected a brand, check the phone book to learn what stores carry this brand, then call at least four of these stores for the prices of specific models. After each store has given you a quote, ask if that's the lowest price they can offer you. This comparison shopping can save you as much as $100 or more.
From renting to owning (and everything related) we hope you've been able to glean a few ideas on how to save money on your housing. And, as always, remember that an investment of time on your part can generate more money in your pocketbook.

Home Improvement

Think of maintaining your home as protecting your investment. Home repairs often cost thousands of dollars and are the subject of frequent complaints. Select from among several well-established, licensed contractors who have submitted written, fixed-price bids for the work. Ask for referrals and check on them. Do not sign any contract that requires full payment before satisfactory completion of the work.

If you choose to do the repairs yourself, be sure you know what you're doing. People often meet with injury and even death when trying to do their own repairs. Get appropriate licenses and permits as necessary. Take a look at how doing it yourself might affect the resale value of your home. More than one home's value has been severely decreased by do-it-yourselfers' projects that didn't quite turn out right! Decide if the money you may save is really worth the time and the risk involved.

Saving Money On Your Housing

Whether you rent or own the place that you live, chances are pretty good that a large portion of income goes to pay for it. You may find yourself wondering how you can save any more money on your housing. What follow are some ideas to help you save money on renting, buying, or improving your home, as well as purchasing major appliances.

Renting a Place to Live
Rental properties (and rates) can vary widely, even in the same area. Do not limit your rental housing search to classified ads or referrals from friends and acquaintances. Select buildings where you would like to live and contact their building manager or owner to see if anything is available. Remember that signing a lease probably obligates you to make all monthly payments for the term of the agreement. As with most other things, weigh the cost of the rent against other factors, like the area, convenience, access, length of contract, etc.

Home Purchase
When purchasing a home you basically have three options-you can use a real estate agent, you can buy a home for sale by the owner, or you can build a new home. Each has its pluses and minuses. A real estate agent can help guide you through the process, and point out good and bad things about the home you are looking to purchase. He/she can help you arrange financing and handle most of the paperwork, as well as arrange for the closing and turning over of the keys, etc. However, you generally (but not always) will pay a higher price because the agent's (usually) 6% commission is figured into the price of the house.

If you choose to use a real estate agent, do not choose the agent who represents the home you are interested in buying. If you do, that agent then has a conflict of interest, representing both buyer and seller, and you generally will pay a higher price. Instead, select a buyer's agent or broker who will represent only you. He/she will be in a better position to negotiate a lower sale price.
Choosing to buy a home for sale by owner may save you money, but will require a lot more time and legwork on your part. You will need to do some research to determine whether or not the home is worth the asking price (information that real estate agents generally have easy access to). You will have to arrange for an appraisal and inspection.

Be sure you fully understand the terms of the seller's agreement before you sign it because you will be legally bound to it. If you are selling your existing home and buying another, make sure the seller's agreement on your new home stipulates that your purchase of that home depends on the sale of your other home. Otherwise you could find yourself making two mortgage payments.

Building a home allows you to get exactly what you want, but beware that not all builders and contractors are the same. Do your homework and get referrals. Check up on them. Building is usually a very lengthy process-be aware that promises to build a home quickly often equate to lesser quality. Finally, also consider that when your house is done, you'll still have all the landscaping to do!
Do not purchase any house until it has been examined by a home inspector that you have selected, preferably one accredited by the American Society of Home Inspectors (ASHI). Make it a part of your seller's agreement that your purchase of the home is dependent upon the outcome of the inspection. That way you'll be able to legally back out if something is wrong, such as termites, mold, structural issues, etc.
When shopping for a mortgage, look for a lender that carries the smallest difference between the interest rate and the Annual Percentage Rate (APR-what you actually pay when you figure in the effects of all the fees). Close on your home during the last two weeks of the month (if you have to finance it). That way you'll have less interest to prepay, also lowering your closing costs.

Why Should I Refinance?

There are many reasons to consider a mortgage refinancing. In today’s American culture, many reasons given are inappropriate; some reasons are useful and cannot be dismissed.

In general, refinancing a mortgage is done to accomplish one or more generic goals. These include: improvement the interest rate currently being borne under the old mortgage, shortening the term (years to go until the loan is paid off) or to “cash out” some of the equity (the excess of market value over the mortgage debt) that has been built up in the property. Any one of these reasons is salutary, and should be done if the numbers indicate an economic advantage to do so.

In truth, refinancing for rate usually means a change in term. Therefore, such a transaction is widely known as a “rate and term” refinance. Rate and term can be combined with a “cash out” transaction, so long as there is enough equity in the property to permit the lending of additional money.

Here’s an example:
In 1990 Jon and Alice purchased a new home for $100,000, paid down $20,000 and took a 30-year mortgage for $80,000.

At that time, they were able to get an interest rate of 8.75%. Their mortgage payment on that loan was $629.36 per month for 360 months (principal and interest – also known as P&I) .

Now, in 2004, they find that their home is now worth $290,000 and that the remaining balance they owe on the old mortgage is only $64,920. The house being worth $290,000, minus the balance on the mortgage of $64,920, they are delighted to realize that their original $20,000 equity is now worth $225,080!

Jon and Alice speak to their mortgage broker and discover that they now can refinance the remaining balance at 5.875% and reduce their payment to $384.03 per month.
They are excited with the improvement, but also discover that the amortization period (the number of years it will take to pay off the loan) gets reset to 30 years.

A little concerned, they call the mortgage broker again and find out that by doing the refinance anyway, they will save $58,431 in interest over the next 30 years compared to the remaining interest that will be owed on the old loan. “Now that’s better,” agrees Alice.

So, what have we learned? Refinancing can be very helpful.

A word of caution: A mortgage loan is a long-term obligation.

Common sense would tell us to use it for a long-term purpose. Like buying a home.
In our example, Jon and Alice have been fortunate and their equity has grown dramatically over the years. They can now borrow some of their equity for a suitable reason. Like a remodeling or building a swimming pool. And, as long as they are refinancing for rate and term, they might take this opportunity to borrow some of their equity to cover the expense of such a project.

A word of caution: In most cases, the bank will not ask why you are borrowing the extra money in a “cash out” loan.

The bank already has the collateral they need, a lien on your home. You must rely upon your own good sense to act appropriately.

Here are some examples of bad uses of home equity:
Investing in the stock market
Buying a car
Going on vacation
Using home equity for current living expenses

Here are some examples of good uses of home equity:
Substantial home improvement projects
Investing in an established self-owned business
Higher education expenses
The choice will be yours. Borrow wisely.

Do I Need a Good Faith Estimate?

Yes, you need a Good Faith Estimate – often called a GFE. Lot’s of reasons come to mind.

Your mortgage broker and lender must provide a GFE under the requirements of RESPA - the Real Estate Settlement and Procedures Act of 1974.

RESPA deals with the information and disclosures to which you are entitled as a buyer or mortgagor of residential real estate. It is a Federal law and applies to all residential transactions throughout the United States.

A well-prepared GFE will itemize to a reasonable precision what it will cost to close your loan and or purchase.
Be sure that you do not lose sight of this important distinction: The GFE is an estimate, not a firm price list.

The GFE is usually prepared very early in the loan application process, a time when a number of the items will not be known and, therefore, can only be approximated. So it is important when working with the GFE to understand that by the time you get to the closing many of the items will be somewhat different – some more, some less.

At the very least, however, the GFE will give you enough information so that you can plan your closing budget and make other decisions, as well.
Too many borrowers treat the GFE as a price quote to close their loan. This is a serious mistake.
A careful borrower should consider that a low GFE as an indication that some costs may have been omitted. Do not assume that a higher GFE is committing you to higher closing costs.
It is not in the interest of the mortgage broker or the lender to “high-ball” the GFE. But, it is in your interest to see all the possible costs; and it’s the law that they be disclosed to you.
The reality is that once the closing statement has been prepared, the costs will be what the actual costs are, not those appearing on the GFE.

For example, suppose that in your area appraisal reports generally cost about $200 for a home in your price range. Most mortgage brokers would estimate $200 on the GFE. Whether the appraisal comes in at $175, $200 or, even $225, it will be the actual cost that will appear on the Closing Statement.

The point of all this is that many borrowers who use the GFE as a competitive tool to get some mortgage broker to write a low GFE are working against their own interest.
Wouldn’t you rather have a reasonable GFE, even if it were higher, than one that looks really cheap and then sneaks up on you at the closing table with an additional $1,000 of costs you hadn’t anticipated? Think about it. You are dealing with an important transaction, perhaps the largest financial transaction of your lifetime.

Don’t set yourself up for bad surprises; make sure your GFE has the right stuff!

Here are some typical, though by no means universal, costs you may see on your GFE:
Points: If you will be paying points, each point is worth 1% of the loan value. Points are often negotiable. And remember there is an inverse relationship between points and the interest rate on your new loan.
Appraisal: For homes valued up to $250,000; $175 to $250
Credit Report: Varies depending on detail from about $18 to $75
Processing/Underwriting Fees: Varies from $300 to $700
Items required by lender to be paid in advance: This includes prepaid interest from closing day to beginning of next month, Hazard Insurance and other items as well.
Reserves Deposited with Lender (Escrows): Hazard Insurance Premiums, Mortgage Insurance Premiums (if any), and Taxes.
Title Charges: Escrow Fee, Document Fee, Notary Fees, Attorney Fees and Title Insurance.
Government Recording and Transfer Charges: Recording Fees, City/County Tax/Stamps and State Tax/Stamps.
Additional Items: Pest Inspection, Building Inspection, Survey, and other miscellaneous expenses.
Note that many of the items shown do not have estimates associated with their listing. These are all items that will vary either due to market conditions, the value of the property or the size of the mortgage. Most are driven by specific formula or common usage. So, ask your mortgage broker about them.
At the bottom left of the GFE there is a small area where your mortgage broker will summarize the Funds Needed to Close. Go over this area carefully with the broker so that you understand it completely. At the bottom right is a summary showing what your Total Estimated Monthly Payment may be. Again, review this area thoroughly. It’ is a good insight of what your mortgage payment will be.

Finally, if you have received your GFE from a mortgage broker, there will be a statement at the bottom of the form that discloses, as follows: “This Good Faith Estimate is being provided by (name of mortgage brokerage business), a mortgage broker, and no lender has been obtained. A lender will provide you with an additional Good Faith Estimate within three business days of the receipt of your loan application.”

In conclusion, the GFE is probably the first document you will receive from your mortgage broker. You will probably receive it even before he has had the full opportunity to qualify you for a loan program, and certainly before all of the final facts are known about the transaction. So utilize the GFE in the manner of its intent, as a way to get a handle on the costs of the transaction you are anticipating and to judge how best to adapt and prepare yourself for the closing to come.

Good Luck!

The Mortgage Application

This article will take you through the basics of filling out a mortgage application.

If you are applying for a residential loan to purchase or refinance either a single-family home, townhouse, condominium or multi-family residence up to four units, you will be filling out a form known as a Universal Residential Loan Application, generally referred to as a Form 1003 - or just plain 1003.

The 1003 is the basic data-gathering tool for the mortgage industry. An understanding of how the data will be used is necessary to respond appropriately to all of its questions.
A cautionary first sentence at the top of the 1003 reads, “This application is designed to be completed by the applicant(s) with the lender’s assistance.” You should take this notice seriously and seek skilled help from a mortgage broker to complete the form.

Revisit the Budget Often

Revisit your budget periodically. Review your expenses. See what's working and what isn't. Rework the numbers as necessary. If you are single, this should be pretty easy. However, if you are married, you may have one or two incomes in your household; both people should know where the money is going, regardless of who is earning it.

Finally, remember that budgets are not set in stone. You are in control, not your money. Make it a goal to live within your budget. You can do it!

Track Your Income And Expenses

Whether it's daily or weekly, or just every few days, you need sit down and enter your expenses into your tracking method. If you put it off too long it will become too overwhelming and you'll give up.
Devoting just a few minutes a day is a lot better than three hours at the end of the month! Keeping close track of your expenses will also help you to stay in line with your budget. You'll be more aware of your money and more careful not to spend what you don't have.

Remember to collect receipts for everything, especially things you buy with cash. This will make tracking a lot easier. If a receipt has purchases that fall into more than one category, divide them up accordingly.

Establish Spending Amounts

Review the income and expenses that you gathered. Put the expenses into the categories you have established so you can see where you've been spending. Total them and compare them to your income. How have you been doing? If you're overspending, determine where you can cut.

Establish new budget amounts for the time period you have chosen based on past expenses. Remember also to budget for quarterly, semi-annual, or annual expenses. (Example: you pay your car insurance every 6 months; divide that payment by 6 and budget that amount every month; put it aside where it won't be spent!)

Try to be flexible in your budgeting. Budgeting every last penny you earn may not be the best course because there are always unpredictable expenses that pop up. Be sure to budget some savings, even if all you can save is $5 a month. It's great to get into the habit of paying yourself first.

Establish Categories

Select categories that fit your needs. Some people like just a few categories, some use a multitude of categories, others use subcategories. It really depends on how detail-oriented you want to be. General categories might include: auto, house, food, medical, insurance, utilities, etc. Specific categories (usually best as subcategories) could include: auto-insurance, fuel, maintenance; food-groceries, takeout, dining out; etc. You can always add or remove categories or subcategories later.

Choose a Tracking Method

Choose a method for tracking expenses (and income, if desired). Simple Joe offers the Expense Tracker PC software as an easy and user-friendly way to track expenses (see http://www.simplejoe.com/expensetracker/index.htm).

Quicken and MS Money are also good tools if you are pretty computer literate. You can also set up a spreadsheet program, if that's something you enjoy doing.
You can even use good old pencil and paper.
Do whatever will be easiest for you to maintain.

Determine the Time Frame

Decide if you want to budget weekly, by the paycheck, monthly, quarterly, etc. How often you get paid may heavily influence this decision. Most people just budget by the month. Remember that you may have some expenses that happen quarterly, semi-annually, or even annually, things like insurance or car registration. You'll need to plan accordingly (see Step 5).

Get started!

Step 1: Where to Start
There are two essential things that you need to know when preparing a budget: what comes in and what goes out. Now that's an oversimplification, of course, but that's all a budget is-income and expenses.

Start by assembling past paycheck stubs, dividend receipts, etc., to determine your income. A survey of the previous three months is usually good enough to establish this.

Next assemble two to three months worth of expenses. Get all of your bills together, your checkbook register, receipts, etc.

Setting Up A Budget

Few things strike more fear into the hearts of people than setting up a budget. We all know we need one, a few of us actually have one, and fewer still manage to live within it. Why is it so intimidating?

Maybe it seems like such an overwhelming task that you don't even want to start thinking about it. Maybe you don't actually know where to start. Maybe you think that it will require hours and hours to do.

Maybe you're afraid of your money; after all, it seems to pretty much rule your life-you may get up thinking about it and go to bed thinking about it. Whatever your reason, now is the time to start!

Learn How to Bank Like a Banker

The business of banking has changed dramatically over the last decade. Because the cost of doing business the old-fashioned way is no longer effective, banks are interested in changing their customers' behavior by encouraging electronic banking alternatives whenever possible. They have done this by charging high fees for services that were once free. If you pay $200 or more in annual fees for banking, it's time to do some competitive shopping.

Before becoming furious with your bank, it may be that the products you're using no longer meet your personal needs. If you have an established relationship with your bank, inquire about the other types of lower-cost checking and savings account products.

By understanding the rationale of why a bank charges fees for different services will allow you to be a savvy banking customer. If human contact is required to serve you, such as a teller or personal banker, this is very expensive for the bank. The incentive is for banks to encourage more high-tech, "low-touch" methods of meeting your needs. This is accomplished by servicing as many customers as possible with automated telephone services, cash machines, and online self-service banking.

Since the bank needs to train their employees, provide a paycheck and benefits, pay for the branch building, in some cases supply uniforms etc., it is conceivable that your one banking transaction per pay period could cost the bank $3 or more for your one banking transaction.

If you conduct your banking via an automated telephone system, the cost of this type of transaction is much less expensive. However, if you then require assistance from a telephone banker, the price goes from $1 for the automated process to as much as $2 for human contact. For the same reasons stated above, the training, location, computer equipment, etc. become more expensive when human interaction is needed.

Now it is clear why electronic banking methods are preferred by financial institutions. In fact, most banks are rewarding their customers with lower fees the more the customer does his/her banking electronically. For example, even though Automatic Teller Machines (ATMs) costs the bank around $100,000 each plus the cost of the computer network and maintenance, the cost of these type of transactions drop to $0.50 - $1 each. Not only are these machines more cost effective, the 24-hour availability to customers is very convenient.

With the ease and convenience of Automatic Clearing House (ACH) payments, this "checkless" process drops the price to around $0.25 each. And finally, the Internet drops the expense even further to less than $0.10 a transaction. I realize that there is still some fear of banking electronically, but the security that banks have instilled with computer technology far surpasses the current security of traditional banking methods. If you lose your checkbook and wallet, the cost and worry of canceling these checks is very tedious. It's very possible that a thief could forge your name and deplete your accounts in a matter of hours. The sophisticated computer technology, however, although not perfect, has a far more secure system to protect you and your money.

Avoid being the bank's best customer. Attempt to cut your annual bank fees in half by educating yourself. Inquire about the options and products available to you with your banker. By asking about the alternative banking methods, you may find that your bank fees will drop considerably.

If desired, subscribe to a credit monitoring service.

If you're really worried about identity theft, consider subscribing to a credit monitoring service. They will regularly notify you of your credit status and anything suspicious that might be going on.

Make a list and check it twice.
Make list of all your credit card numbers, banking account numbers, and driver's license number with their customer service numbers and keep them in a safe place. That way you'll have a starting place if something should happen to you. Remember, the more vigilant we all are, the more protected we all are.

Be aware of the opportunities to steal your information.

Think of all the places that store your personal information, such as the offices of doctors, dentists, accountants, loan officers, health insurance, schools, courts, etc. Ask them how they protect your information. Request that they shred anything with personal information on it when disposing of it.

Keep your wallet or purse in a safe place at work; not all of your fellow coworkers are trustworthy. Be aware of the "Good Samaritan" scheme where your missing wallet is returned (after one of your several credit cards is removed; you have so many that you probably won't notice!). Only carry a minimum number of cards and identification with you.

Technology doesn't beat everything.

Don't give out personal information over cellular/mobile/wireless phones, or cordless phones. (This includes telephone banking.) Their radio frequencies can be easily intercepted, overheard, and hacked.

Surfing the internet puts you at risk from hackers breaking into your system; consider purchasing a "firewall" program to protect your computer from outside access. When divulging personal information on the internet (for example, when making a purchase) always look for privacy policies and the little "lock" symbol that indicates your information is secure.

Don't use your email address for user IDs on websites; there are "robots" that specifically search for this on sites like eBay to try and trick you into divulging your personal information. You may receive an official-looking email asking you to "verify" or "update" your information. Remember that anyone who already has your information will not ask you to verify it. Always be suspicious of such tactics. The same goes for people who call you and claim to be somebody like a bill collector, government agent, utility worker, etc. If in doubt, call the company they appear to be representing.

If you use a laptop computer use a strong password (combination of upper/lower-case letters, numbers, symbols); don't use automatic login; always log off when finished; and don't store financial information on it unless absolutely necessary.

When disposing of your personal computer, deleting your personal information usually isn't enough. Use a "wipe" utility program to render files unrecoverable.

Make the post office your ally.

Deposit outgoing mail at your local post office or in a locked post office drop box. Thieves actually patrol neighborhoods, stealing mail out of mailboxes. A little acid wash, and voila!, they change the amount and the person being paid. Don't give them the chance! If you're going out of town, have the post office put a hold on your mail. Consider getting a post office box or ask your post office about getting a key-operated community mailbox for your neighborhood.

Shred everything with your information on it.

All those credit card applications you receive in the mail and throw away are an open invitation for someone to open an account in your name. Invest in a good cross-cut shredder and shred all documents with any financial information on them, including credit card receipts. Then put the remnants in the yuckiest, ickiest trash you've got to discourage dumpster-divers from stealing them and putting them back together.

Protect passwords and PINs.

Always protect your passwords and PINs from being seen by others, especially at ATMs. Don't write them down and carry them with you. Do not store passwords on your computer's hard drive. If you need to write them down, store them somewhere else. Passwords should be hard to discover (bad choices: mother's maiden name, birthdates, last 4 digits of SSN or phone number, or a series of consecutive numbers). When possible use a mix of upper- and lower-case letters, numbers, and symbols.

Protect your Social Security number.

Many companies ask for your Social Security number (SSN) to use for recordkeeping. Ask if you can substitute a different number. This is especially true of driver's licenses and health insurance cards. Never give out your SSN to anyone over the phone or internet if you did not initiate the contact. Don't carry your Social Security card with you and don't have your SSN preprinted on your checks (or your phone number either).