Here's an interesting article from Reuters about the mortgage market and expectations on interest rates.
http://www.reuters.com/article/2011/02/11/us-usa-housing-consumer-idUSTRE71A65P20110211
(Reuters) - The Obama Administration's newly unveiled housing finance plan may have clouded the picture for policymakers, lenders and bond buyers, but it made the future for borrowers starkly clear: It's going to cost more to get a home loan.
Mortgages have already become more expensive in recent weeks, as Fannie Mae and Freddie Mac began adding risk fees to almost all of the loans they sponsor. Average rates on 30-year fixed rate-loans have already moved from 4.4 percent in November to 5.2 percent now, according to Mortgage Marvel, a loan comparison web site.
In a much-awaited report released Friday, the administration proposed winding down the role of the two government-sponsored mortgage repackagers and left open for prolonged Washington debate what would remain in their place.
It also called for higher down payments, a lower cap on the amount of mortgage that could be guaranteed and another increase in the fees Freddie and Fannie charge in the short term. All of those measures are likely to steepen the cost of securing a home mortgage.
"Rates are probably on the rise, due to the increases in fees," said Keith
Gumbinger of HSH Associates, a mortgage research firm. "But will the borrowing process get better, faster or easier as a result of reforms? No."If you can effect a transaction now, it's probably not a bad idea," Gumbinger said.
Rates are also likely to rise as the economy improves and the rock-bottom interest rates that have been protected by the Federal Reserve Board edge up.
The rising credit market rates will have a bigger effect on mortgages than the winding down of Freddie and Fannie, said Scott Happ, president of Mortgagebot, a company that builds and runs mortgage web sites.
The cost of loans that are not handled by the guaranteed mortgages and those that aren't guaranteed is roughly 0.6 percentage points now, he said.
RISING RATES, FEWER OPTIONS
It's not just low rates, but also mortgage products that could disappear as reforms worked their way through the system, some analysts believe. The end of U.S. loan program -- one of the options outlined in the White House report -- "almost certainly will lead to fewer long term fixed rate mortgages (and) higher prices," the Consumer Federation of America said in a statement released after the report.
Home loans in Europe and Canada are dominated by variable-rate loans, for example, and it's conceivable that the long-term fixed-rate loan could become much less common -- or even extinct -- in the U.S., if lenders don't want to offer them without guarantees.
A more likely scenario is that fixed-rate loans would remain, but become relatively more costly, said Sam Garcia of Mortgage Daily, a trade publication.
Homeowners who haven't already nailed down long-term low-rate loans may want to jump at the chance with a refinance now, even if it means bringing cash to the table to replenish equity that may have disappeared in the housing market's price decline.
SHORTER DURATIONS, MORE SAVINGS
Some advisers say the best way to save money on a mortgage could be to look at shorter-term financing, instead of focusing on rising rates and fees that they cannot control. The pullback of Federal subsidies might encourage more prudent borrowing.
"The best way to build equity is with a 15-year loan. Within the first five years of the loan, "the additional equity built (compared to a 30-year loan) is really significant," he said.
Short-term borrowers get a rate break, too, since rates on 15-year fixed-rate loans are running almost 0.5 percentage points below the rates on 30-year mortgages.
The biggest impact may be on pricey homes. The ceiling on loans guaranteed by Fannie and Freddie, currently $729,750, is scheduled to drop to $625,500 on October 1. The White House supports that size reduction.
For buyers, it could lead to a jump in offerings on the market as sellers try to get homes sold before the cap takes effect.
(Reporting by Linda Stern; Editing by Richard Satran)
Saturday, February 12, 2011
Wednesday, February 9, 2011
Mortgage Rates: Borrowing Costs Up Five Days in a Row
Now is the time to purchase or refinance your home because it appears rates are headed up.
Here's a good story from Mortgage News Daily
HTTP://WWW.MORTGAGENEWSDAILY.COM/CONSUMER_RATES/198079.ASPX
Mortgage Rates: Borrowing Costs Up Five Days in a Row
BY ADAM QUINONES
Home loan borrowing costs have extended their losing streak to five days. "Best Execution" mortgage rates didn't move higher today though, just the closing costs associated with those quotes.
The "Best Execution" conventional 30 year fixed mortgage rate is still split between 5.125% and 5.25%. If you meet the requirements outlined in the disclaimer below, you should be able to execute a loan commitment at 5.25% with lender credits. 5.125% is on the board in some spots of the country but the permanent buydown isn't worth it to every applicant. We would generally advise the permanent floatdown if you plan to live in your house for longer than 5 years. 5.00% is still out there as well but will definitely require points paid at the closing table. Ask your originator to run a breakeven analysis on any origination points they might require for the permanent float down.
On FHA/VA 30 year fixed "Best Execution" is priced between 4.875% and 5.00% with the same comments above re: the split and closing cost credits. 15 year fixed conventional loans are best priced between 4.25% and 4.375%. Five year ARMS at 3.625-3.75%.
The primary mortgage market is very segmented at the moment because of a pending shift in the production mortgage-backed security coupon in the secondary mortgage market. Some lenders have already shifted while others are taking their time.
"Bext Execution" is the most efficient combination of note rate and points paid at closing. This note rate is determined based on the time it takes to recover the points you paid at closing (discount) vs. the monthly savings of permanently buying down your mortgage rate by 0.125%. When deciding on whether or not to pay points, the borrower must have an idea of how long they intend to keep their mortgage. For more info, ask you originator to explain the findings of their "breakeven analysis" on your permanent rate buydown costs.
Important Mortgage Rate Disclaimer: The "Best Execution" loan pricing quotes shared above are generally seen as the more aggressive side of the primary mortgage market. Loan originators will only be able to offer these rates on conforming loan amounts to very well-qualified borrowers who have a middle FICO score over 740 and enough equity in their home to qualify for a refinance or a large enough savings to cover their down payment and closing costs. If the terms of your loan trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will be higher. If you do not fall into the "perfect borrower" category, make sure you ask your loan originator for an explanation of the characteristics that make your loan more expensive. "No point" loan doesn't mean "no cost" loan. The best 30 year fixed conventional/FHA/VA mortgage rates still include closing costs such as: third party fees + title charges + transfer and recording. Don't forget the intense fiscal frisking that comes along with the underwriting process.
OUR GUIDANCE FROM YESTERDAY STILL APPLIES TODAY: We do expect borrowing costs to rise before a sustainable recovery rally is considered in the secondary mortgage market. We anticipate the first real chance for notable improvements will be seen on Thursday.
What MUST be considered BEFORE one thinks about capitalizing on a rates recovery?
1. WHAT DO YOU NEED? Rates might not recover as much as you want/need.
2. WHEN DO YOU NEED IT BY? Rates might not recover as fast as you want/need.
3. HOW DO YOU HANDLE STRESS? Are you ready for MORE VOLATILITY in the bond market
Here's a good story from Mortgage News Daily
HTTP://WWW.MORTGAGENEWSDAILY.COM/CONSUMER_RATES/198079.ASPX
Mortgage Rates: Borrowing Costs Up Five Days in a Row
BY ADAM QUINONES
Home loan borrowing costs have extended their losing streak to five days. "Best Execution" mortgage rates didn't move higher today though, just the closing costs associated with those quotes.
The "Best Execution" conventional 30 year fixed mortgage rate is still split between 5.125% and 5.25%. If you meet the requirements outlined in the disclaimer below, you should be able to execute a loan commitment at 5.25% with lender credits. 5.125% is on the board in some spots of the country but the permanent buydown isn't worth it to every applicant. We would generally advise the permanent floatdown if you plan to live in your house for longer than 5 years. 5.00% is still out there as well but will definitely require points paid at the closing table. Ask your originator to run a breakeven analysis on any origination points they might require for the permanent float down.
On FHA/VA 30 year fixed "Best Execution" is priced between 4.875% and 5.00% with the same comments above re: the split and closing cost credits. 15 year fixed conventional loans are best priced between 4.25% and 4.375%. Five year ARMS at 3.625-3.75%.
The primary mortgage market is very segmented at the moment because of a pending shift in the production mortgage-backed security coupon in the secondary mortgage market. Some lenders have already shifted while others are taking their time.
"Bext Execution" is the most efficient combination of note rate and points paid at closing. This note rate is determined based on the time it takes to recover the points you paid at closing (discount) vs. the monthly savings of permanently buying down your mortgage rate by 0.125%. When deciding on whether or not to pay points, the borrower must have an idea of how long they intend to keep their mortgage. For more info, ask you originator to explain the findings of their "breakeven analysis" on your permanent rate buydown costs.
Important Mortgage Rate Disclaimer: The "Best Execution" loan pricing quotes shared above are generally seen as the more aggressive side of the primary mortgage market. Loan originators will only be able to offer these rates on conforming loan amounts to very well-qualified borrowers who have a middle FICO score over 740 and enough equity in their home to qualify for a refinance or a large enough savings to cover their down payment and closing costs. If the terms of your loan trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will be higher. If you do not fall into the "perfect borrower" category, make sure you ask your loan originator for an explanation of the characteristics that make your loan more expensive. "No point" loan doesn't mean "no cost" loan. The best 30 year fixed conventional/FHA/VA mortgage rates still include closing costs such as: third party fees + title charges + transfer and recording. Don't forget the intense fiscal frisking that comes along with the underwriting process.
OUR GUIDANCE FROM YESTERDAY STILL APPLIES TODAY: We do expect borrowing costs to rise before a sustainable recovery rally is considered in the secondary mortgage market. We anticipate the first real chance for notable improvements will be seen on Thursday.
What MUST be considered BEFORE one thinks about capitalizing on a rates recovery?
1. WHAT DO YOU NEED? Rates might not recover as much as you want/need.
2. WHEN DO YOU NEED IT BY? Rates might not recover as fast as you want/need.
3. HOW DO YOU HANDLE STRESS? Are you ready for MORE VOLATILITY in the bond market
Sunday, February 6, 2011
Averting another mortgage crisis
Here's a good article from the Washington Post.
http://www.washingtonpost.com/wp-dyn/content/article/2011/02/06/AR2011020603413.html
THE DODD-FRANK financial overhaul law required the Obama administration to produce a plan by no later than Jan. 31 for reforming the nation's mortgage finance system, which is dominated by the crippled government-sponsored enterprises (GSEs) known as Fannie Mae and Freddie Mac. Fannie and Freddie, currently operating under direct federal control, back about 90 percent of all new U.S. mortgages, but their taxpayer-covered losses have hit $150 billion - and are rising. Their combined debt, guaranteed by taxpayers and held in large part by China and Japan, is more than $1.5 trillion. But the administration still hasn't come out with anything, though we're told it's forthcoming.
Meanwhile, let us take a shot. The first question is why the United States might need a government role in securitizing mortgages in the first place. For many years, during the long reign of Fannie and Freddie, the answer was: to promote homeownership by keeping home mortgage finance cheap and available, even during the economy's cyclical downturns. Only a government backstop, the argument goes, can compensate lenders for the risk of lending to homeowners at a fixed rate for 30 years in a world where rates fluctuate. Homeownership does help instill thrifty habits and solidify communities, but it can be taken too far. And, in recent decades, it was. Along with other policies such as the home mortgage interest deduction and credit allocation goals for borrowers with low incomes, the GSEs helped fuel unsustainable over-investment in housing.
How unsustainable? The national homeownership rate today has slipped back to its 1998 level, according to the Census Bureau. In terms of building community, etc., it's as if the past 13 years never happened, except for the catastrophic losses to taxpayers - and home buyers. It might be more accurate to say that federal housing policy has helped destroy communities.
Does this prove that all government intervention is bound to fail or merely that the Fannie-Freddie model was flawed? The GSEs were government-chartered, which gave them access to cheap capital based on the assumption by investors that they would be bailed out in a crisis; yet they were also privately owned, which drove them to maximize profits. In short, they had both the incentive and the capacity to take on excessive risk. One proposal for reforming, but not ending, government-backed securitization would abolish the GSEs and replace them with private firms that would package and sell mortgage-backed securities with an explicit government guarantee. The firms would pay the federal government for the guarantee; those fees, in turn, would fill a crisis bailout fund that distressed entities could draw on if their own reserves ran out. The institutions would serve only "prime" borrowers - those with high credit scores and plenty of equity.
This concept, various iterations of which are circulating on Capitol Hill, the think tanks and K Street, is an improvement over Fannie and Freddie in that it replaces a murky public-private nexus with transparent rules. But there's a problem, as the GSEs' current top regulator, Edward J. DeMarco, told Congress in September: "First, the presumption behind the need for an explicit federal guarantee is that the market either cannot evaluate and price the tail risk of mortgage default . . . or cannot manage that amount of mortgage credit risk on its own. But we might ask whether there is reason to believe that the government will do better? If the government backstop is underpriced, taxpayers eventually may foot the bill again." Indeed, the experience of Fannie and Freddie, which organized a fearsome lobby to protect and expand their business, suggests that the new government-backed system will quickly come under interest-group pressure to reduce the guarantee fee, steer liquidity to "underserved" groups and otherwise loosen taxpayer protections - all in the name of "the American dream."
More fundamentally, this alternative does not address the question of why government should insulate housing, alone among all market sectors, from the vagaries of the business cycle. True, partly as a consequence of federal policy, home equity represents the bulk of household wealth in America; removing government backing entirely might erode it even further. Yet other countries have high rates of homeownership without government-backed mortgage securitization. If government doesn't steer capital into housing, the capital doesn't disappear; it could fund other job-creating businesses.
Congress and the administration should not settle for a second-best solution. To be sure, immediately ending Fannie and Freddie would be impractical, given the fragile market's dependence on them. But they can and should be shrunken and broken up gradually over several years, with their bad assets liquidated by the government and their good ones sold at a profit to the private sector. Thereafter, financial institutions would be free to hold loans in their portfolios or to securitize whatever loans investors want to buy - subject to the discipline of the marketplace and tight federal regulation of mortgage underwriting. Government aid to low-income home buyers would be limited to the Federal Housing Administration, whose activities are on-budget and transparent.
There are risks in this approach, of course: Big banks that entered the securitization business would get bigger, perhaps "too big to fail." But we prefer the potential risks of privatization to the proven risks of government-backed mortgage securitization. Indeed, no one is suggesting a pure "free market" approach. There should still be not only tough underwriting rules but also requirements that loan securitizers maintain adequate capital and retain some of the mortgages they securitize on their own books.
Advertised as a way to stabilize the housing market, government-backed mortgage securitization ended up distorting and destabilizing it. The resulting misallocation of resources - evident not only in today's massive bailout of Fannie and Freddie but also in the vast quantities of land, water and energy wasted on suburban sprawl from Las Vegas to Fort Lauderdale - is a true American tragedy. Today's housing crisis is an opportunity to make sure nothing like it ever happens again.
http://www.washingtonpost.com/wp-dyn/content/article/2011/02/06/AR2011020603413.html
THE DODD-FRANK financial overhaul law required the Obama administration to produce a plan by no later than Jan. 31 for reforming the nation's mortgage finance system, which is dominated by the crippled government-sponsored enterprises (GSEs) known as Fannie Mae and Freddie Mac. Fannie and Freddie, currently operating under direct federal control, back about 90 percent of all new U.S. mortgages, but their taxpayer-covered losses have hit $150 billion - and are rising. Their combined debt, guaranteed by taxpayers and held in large part by China and Japan, is more than $1.5 trillion. But the administration still hasn't come out with anything, though we're told it's forthcoming.
Meanwhile, let us take a shot. The first question is why the United States might need a government role in securitizing mortgages in the first place. For many years, during the long reign of Fannie and Freddie, the answer was: to promote homeownership by keeping home mortgage finance cheap and available, even during the economy's cyclical downturns. Only a government backstop, the argument goes, can compensate lenders for the risk of lending to homeowners at a fixed rate for 30 years in a world where rates fluctuate. Homeownership does help instill thrifty habits and solidify communities, but it can be taken too far. And, in recent decades, it was. Along with other policies such as the home mortgage interest deduction and credit allocation goals for borrowers with low incomes, the GSEs helped fuel unsustainable over-investment in housing.
How unsustainable? The national homeownership rate today has slipped back to its 1998 level, according to the Census Bureau. In terms of building community, etc., it's as if the past 13 years never happened, except for the catastrophic losses to taxpayers - and home buyers. It might be more accurate to say that federal housing policy has helped destroy communities.
Does this prove that all government intervention is bound to fail or merely that the Fannie-Freddie model was flawed? The GSEs were government-chartered, which gave them access to cheap capital based on the assumption by investors that they would be bailed out in a crisis; yet they were also privately owned, which drove them to maximize profits. In short, they had both the incentive and the capacity to take on excessive risk. One proposal for reforming, but not ending, government-backed securitization would abolish the GSEs and replace them with private firms that would package and sell mortgage-backed securities with an explicit government guarantee. The firms would pay the federal government for the guarantee; those fees, in turn, would fill a crisis bailout fund that distressed entities could draw on if their own reserves ran out. The institutions would serve only "prime" borrowers - those with high credit scores and plenty of equity.
This concept, various iterations of which are circulating on Capitol Hill, the think tanks and K Street, is an improvement over Fannie and Freddie in that it replaces a murky public-private nexus with transparent rules. But there's a problem, as the GSEs' current top regulator, Edward J. DeMarco, told Congress in September: "First, the presumption behind the need for an explicit federal guarantee is that the market either cannot evaluate and price the tail risk of mortgage default . . . or cannot manage that amount of mortgage credit risk on its own. But we might ask whether there is reason to believe that the government will do better? If the government backstop is underpriced, taxpayers eventually may foot the bill again." Indeed, the experience of Fannie and Freddie, which organized a fearsome lobby to protect and expand their business, suggests that the new government-backed system will quickly come under interest-group pressure to reduce the guarantee fee, steer liquidity to "underserved" groups and otherwise loosen taxpayer protections - all in the name of "the American dream."
More fundamentally, this alternative does not address the question of why government should insulate housing, alone among all market sectors, from the vagaries of the business cycle. True, partly as a consequence of federal policy, home equity represents the bulk of household wealth in America; removing government backing entirely might erode it even further. Yet other countries have high rates of homeownership without government-backed mortgage securitization. If government doesn't steer capital into housing, the capital doesn't disappear; it could fund other job-creating businesses.
Congress and the administration should not settle for a second-best solution. To be sure, immediately ending Fannie and Freddie would be impractical, given the fragile market's dependence on them. But they can and should be shrunken and broken up gradually over several years, with their bad assets liquidated by the government and their good ones sold at a profit to the private sector. Thereafter, financial institutions would be free to hold loans in their portfolios or to securitize whatever loans investors want to buy - subject to the discipline of the marketplace and tight federal regulation of mortgage underwriting. Government aid to low-income home buyers would be limited to the Federal Housing Administration, whose activities are on-budget and transparent.
There are risks in this approach, of course: Big banks that entered the securitization business would get bigger, perhaps "too big to fail." But we prefer the potential risks of privatization to the proven risks of government-backed mortgage securitization. Indeed, no one is suggesting a pure "free market" approach. There should still be not only tough underwriting rules but also requirements that loan securitizers maintain adequate capital and retain some of the mortgages they securitize on their own books.
Advertised as a way to stabilize the housing market, government-backed mortgage securitization ended up distorting and destabilizing it. The resulting misallocation of resources - evident not only in today's massive bailout of Fannie and Freddie but also in the vast quantities of land, water and energy wasted on suburban sprawl from Las Vegas to Fort Lauderdale - is a true American tragedy. Today's housing crisis is an opportunity to make sure nothing like it ever happens again.
Tuesday, February 1, 2011
8 Reasons To Invest In Your Home.
Here's a great article from CNN Money.
http://www.newzfor.me/news/140057238.aspx
Not long ago, you could have your big remodeling project and get your money back too. Owners recouped an average of 87% of home improvement costs at resale in 2005, according to Remodeling magazine.
But by 2010 the magazine had pegged the typical payback at just 60%. Hardly the right time to tackle the new kitchen or master bathroom you've been dreaming of, right?
Not so fast, says Kermit Baker, senior research fellow at Harvard University's Joint Center for Housing Studies.
"In many cases, these projects make more sense now than they did at the height of the market," he said.
Assuming you like what you can't change about your home -- the neighborhood, the school district, the proximity to things that matter to you -- and you're planning on staying for five or more years, improving your home is a smart move. Here's why.
1. Funding is cheap
The current economic climate sweetens the pot for people on solid financial footing.
Should I spend $60,000 to renovate my house?
"The Fed doesn't want you to save -- it wants you to put your dollars into circulation," said Keith Gumbinger, mortgage market analyst at HSH.com.
Today's historically low interest rates mean that most home-equity lines of credit are charging their floor rates (your HELOC's probably is around 3% if you've held it for a couple of years, 4% or 5% if the loan is more recent).
And with the typical bank account and money fund paying far less than 1%, drawing down your savings barely costs you anything in lost income -- just don't jeopardize your safety cushion.
2. Eager contractors are discounting
Although the construction industry rebounded somewhat last year, business is still slow. Remember when getting a contractor to call you back was a challenge?
Now the best pros in town will happily bid on your job -- and they'll probably offer you prices that are 10% to 20% below what you would have paid when real estate was going gangbusters, according to Bernard Markstein, senior economist for the National Association of Home Builders.
3. Materials have come down
The cost of building supplies has tumbled too. Plywood is down 23% since its peak in the mid-2000s. Drywall is off 29%, framing lumber 35%.
Not all raw materials prices have fallen that much: Asphalt roofing, which is made from a petroleum byproduct, is down only 7% over the past two years. Insulation -- which has been in high demand because of energy rebates and high fuel prices -- is down a mere 2% since 2006. Still, on the whole, construction supplies are bargains right now.
4. You'll cut your energy costs
You don't have to hire a green builder to see energy savings from a renovation. In a prewar house in the high-energy-cost Northeast, for example, a standard kitchen remodel could cut your utility expenses by $400 a year thanks to new insulation, windows, and appliances.
Even years of such savings will never come close to covering the project's price tag, but think of your lower electric and heating bills as an annual dividend.
5. Fixing up costs less than trading up
With the median home price down 22% since 2006, you might think this is an opportune time to trade up for the new master bathroom or other modern feature you want. After all, why not buy somebody else's remodeling headache at a discount.
But you can't assume that you'll easily sell your house in this tough market and then find a new place that has the exact features you want (and not a bunch of stuff you don't want). And moving remains far costlier than improving, said John Ranco, past president of the Greater Boston Association of Realtors.
For starters, commissions and fees to sell a $400,000 home could run $25,000.
"You can get a lot of remodeling done for that kind of money," said Ranco. "And that doesn't even include the higher price you're paying for the new house, the moving costs, or the inevitable painting and window treatments the new place will need."
6. You can keep that sub-5% mortgage
As long as you're not underwater and haven't wrecked your credit, you've been able to take advantage of recent rock-bottom interest rates to lock in a fixed-rate mortgage below 5%.
Move several years from now, and you'll have to give up that loan, probably for something in the sixes or sevens, said Harvard's Baker. That's not bad, but it could mean hundreds a month in added interest costs.
"If you can remodel your way into staying put long term, you can hold on to that once-in-a-lifetime rate," says Baker.
7. Smart projects still add value
In the post-boom era, the rule of thumb for gauging the potential payback from a home improvement is simple: If you're bringing your house in line with similar homes in the area, you'll most likely earn back the lion's share of the cost when you sell. If you're surpassing the neighborhood, you probably won't.
"Remodeling a 10-year-old kitchen because you don't like its style doesn't pay anymore," says Thomas Collimore, director of investor education for the CFA Institute. "But replacing a 1960s kitchen is a different story."
At least for the foreseeable future, buyers will either lowball their bids or pass on your house entirely unless you've already tackled this kind of deferred renovation.
8. You get to enjoy the results
When it comes time to sell your place, chances are you'll probably wind up having to do the sorely needed renovations you didn't take care of earlier. Not only does that add a huge amount of stress to the process of putting a house on the market, but you still end up spending the money (quite possibly when contractor, materials, and borrowing costs are higher).
Why not get the benefits of a new furnace or an updated powder room for you and your family instead of buying them for the house's next owners? And why not do the projects soon so you get as much time as possible to enjoy the results?
Unlike vacations, luxury cars, or other discretionary expenditures, your remodeling project might recoup a significant chunk of its cost someday.
Even so, home improvements aren't purely investment decisions -- you shouldn't redo a kitchen or bathroom in the hopes of making a profit. But if you want to upgrade the quality of your home life and you can afford the cost, it's money well spent.
http://www.newzfor.me/news/140057238.aspx
Not long ago, you could have your big remodeling project and get your money back too. Owners recouped an average of 87% of home improvement costs at resale in 2005, according to Remodeling magazine.
But by 2010 the magazine had pegged the typical payback at just 60%. Hardly the right time to tackle the new kitchen or master bathroom you've been dreaming of, right?
Not so fast, says Kermit Baker, senior research fellow at Harvard University's Joint Center for Housing Studies.
"In many cases, these projects make more sense now than they did at the height of the market," he said.
Assuming you like what you can't change about your home -- the neighborhood, the school district, the proximity to things that matter to you -- and you're planning on staying for five or more years, improving your home is a smart move. Here's why.
1. Funding is cheap
The current economic climate sweetens the pot for people on solid financial footing.
Should I spend $60,000 to renovate my house?
"The Fed doesn't want you to save -- it wants you to put your dollars into circulation," said Keith Gumbinger, mortgage market analyst at HSH.com.
Today's historically low interest rates mean that most home-equity lines of credit are charging their floor rates (your HELOC's probably is around 3% if you've held it for a couple of years, 4% or 5% if the loan is more recent).
And with the typical bank account and money fund paying far less than 1%, drawing down your savings barely costs you anything in lost income -- just don't jeopardize your safety cushion.
2. Eager contractors are discounting
Although the construction industry rebounded somewhat last year, business is still slow. Remember when getting a contractor to call you back was a challenge?
Now the best pros in town will happily bid on your job -- and they'll probably offer you prices that are 10% to 20% below what you would have paid when real estate was going gangbusters, according to Bernard Markstein, senior economist for the National Association of Home Builders.
3. Materials have come down
The cost of building supplies has tumbled too. Plywood is down 23% since its peak in the mid-2000s. Drywall is off 29%, framing lumber 35%.
Not all raw materials prices have fallen that much: Asphalt roofing, which is made from a petroleum byproduct, is down only 7% over the past two years. Insulation -- which has been in high demand because of energy rebates and high fuel prices -- is down a mere 2% since 2006. Still, on the whole, construction supplies are bargains right now.
4. You'll cut your energy costs
You don't have to hire a green builder to see energy savings from a renovation. In a prewar house in the high-energy-cost Northeast, for example, a standard kitchen remodel could cut your utility expenses by $400 a year thanks to new insulation, windows, and appliances.
Even years of such savings will never come close to covering the project's price tag, but think of your lower electric and heating bills as an annual dividend.
5. Fixing up costs less than trading up
With the median home price down 22% since 2006, you might think this is an opportune time to trade up for the new master bathroom or other modern feature you want. After all, why not buy somebody else's remodeling headache at a discount.
But you can't assume that you'll easily sell your house in this tough market and then find a new place that has the exact features you want (and not a bunch of stuff you don't want). And moving remains far costlier than improving, said John Ranco, past president of the Greater Boston Association of Realtors.
For starters, commissions and fees to sell a $400,000 home could run $25,000.
"You can get a lot of remodeling done for that kind of money," said Ranco. "And that doesn't even include the higher price you're paying for the new house, the moving costs, or the inevitable painting and window treatments the new place will need."
6. You can keep that sub-5% mortgage
As long as you're not underwater and haven't wrecked your credit, you've been able to take advantage of recent rock-bottom interest rates to lock in a fixed-rate mortgage below 5%.
Move several years from now, and you'll have to give up that loan, probably for something in the sixes or sevens, said Harvard's Baker. That's not bad, but it could mean hundreds a month in added interest costs.
"If you can remodel your way into staying put long term, you can hold on to that once-in-a-lifetime rate," says Baker.
7. Smart projects still add value
In the post-boom era, the rule of thumb for gauging the potential payback from a home improvement is simple: If you're bringing your house in line with similar homes in the area, you'll most likely earn back the lion's share of the cost when you sell. If you're surpassing the neighborhood, you probably won't.
"Remodeling a 10-year-old kitchen because you don't like its style doesn't pay anymore," says Thomas Collimore, director of investor education for the CFA Institute. "But replacing a 1960s kitchen is a different story."
At least for the foreseeable future, buyers will either lowball their bids or pass on your house entirely unless you've already tackled this kind of deferred renovation.
8. You get to enjoy the results
When it comes time to sell your place, chances are you'll probably wind up having to do the sorely needed renovations you didn't take care of earlier. Not only does that add a huge amount of stress to the process of putting a house on the market, but you still end up spending the money (quite possibly when contractor, materials, and borrowing costs are higher).
Why not get the benefits of a new furnace or an updated powder room for you and your family instead of buying them for the house's next owners? And why not do the projects soon so you get as much time as possible to enjoy the results?
Unlike vacations, luxury cars, or other discretionary expenditures, your remodeling project might recoup a significant chunk of its cost someday.
Even so, home improvements aren't purely investment decisions -- you shouldn't redo a kitchen or bathroom in the hopes of making a profit. But if you want to upgrade the quality of your home life and you can afford the cost, it's money well spent.
Sunday, January 30, 2011
Understand reverse mortgage options
Here's an interesting story regarding Reverse Mortgages, written by Terry Savage of the Sun Times.
http://www.suntimes.com/business/savage/3570534-452/mortgage-reverse-equity-interest-money.html
If you know a senior homeowner who is running out of money, a reverse mortgage might generate enough cash to allow them to stay in their home for many more years. Last fall the Federal Housing Administration created new rules, and opportunities, for lower-cost reverse mortgages. Now that most lenders have launched these new products, it’s worth an updated look.
Reverse mortgage basics
A reverse mortgage turns your home into your pension, either giving you a lump-sum payout from the equity in your home or a fixed monthly check that will keep paying you as long as you live in the home.
This reverse mortgage is available to homeowners age 62 or older who either have paid off their mortgage or have a small remaining balance. The amount you can receive is determined by your age, the value of your home and current interest rates. Basically, the older you are when you take out the reverse mortgage, the more money you can receive — either in a lump sum or monthly payout.
And all the money you withdraw is tax-free, since it is the return of your own capital.
You don’t need a credit check, and you retain title to your home. You won’t have any mortgage payments, although you will be responsible for homeowners insurance, property taxes and upkeep on your home. But you’ll now have a monthly check to pay for those expenses, or a pool of money in the bank to cover emergencies.
Basically, you are just borrowing from yourself — although you will be paying interest on that loan. But the interest is added to the amount of equity taken out of the home. When you sell the home, or die, the amount you have borrowed out of your home’s equity must be repaid from the sale proceeds.
Importantly, you — or your heirs — can never owe more than the home is worth. And you can never be forced out of your home because you’ve “run out” of equity. Eventually, when the home is sold, because you move or die, any proceeds (minus the withdrawals, interest and fees) are returned to you, or your heirs.
If that sounds too good to be true, this is the one product that really is as good as it sounds — if you understand all the details and costs.
Costs and considerations
There are basically two kinds of reverse mortgages, and they are offered by many banks. Since all of these mortgages are insured by the Federal Housing Administration, they must follow the same basic rules — although there could be some differences in cost.
A reverse mortgage is called a HECM loan, which stands for Home Equity Conversion Mortgage. There are two types of loans — the Standard HECM and the newer “HECM Saver.” Each lets you borrow a different percentage of your equity, and each has different fees.
The amount you can borrow on a reverse mortgage depends on the appraised value of your home. But no matter how valuable your home, the FHA has determined that the maximum amount of equity that will be considered for a reverse mortgage in 2011 is $625,500.
The interest paid (taken out of your remaining equity) on both of these loans can be either at a fixed or variable rate. These days, few lenders will promise a fixed monthly payment at a fixed interest rate for the rest of your life. So most loans are variable rate, based on an index set by the FHA, and typically the interest is adjusted monthly. The initial interest rate on the Saver loan is slightly higher than on the Standard loan.
The Standard HECM loan allows you to access more money from your home equity than the Saver HECM, which allows access to about 20 percent less equity. But the Standard requires a 2 percent upfront premium — again taken out of your equity — while the Saver has a tiny .01 percent upfront fee. Both loans also take a monthly insurance premium of 1.25 percent out of your equity to pay for the FHA insurance on these products.
(The FHA insurance protects the lenders, so they don’t lose money. Think about it this way: If the bank promises to pay you $2,000 a month for life in a reverse mortgage, and if you live to be 100, instead of the expected 85, the bank will lose out on the deal. The FHA insurance covers that possibility.)
The one place lenders do compete is in origination fees on these loans. The law allows banks to charge a maximum of $6,000 in origination fees, but many lenders today advertise that they will waive the entire origination fee. (They know they will make money on the loan interest over the years — as long as you don’t live too long.)
Getting started
If you’re interested in knowing what you could get in a reverse mortgage, go to ReverseMortgage.org, and use the online calculator to see what monthly payment or lump sum may be received out of your home. You can also search for reverse mortgage lenders in your area.
In the box here, you can see an example of what you could receive in a reverse mortgage.
Are you still worried about taking money out of your home? It’s understandable if you are because a reverse mortgage is only available to a homeowner who has paid off the mortgage, or has a small remaining balance. If you fall in that category, you’ve been a good saver all your life. So think of it as your home repaying you for all those years of saving.
Before taking out a reverse mortgage you must go through a counseling process to make sure you understand how this works. And as part of that process, the lender must estimate for you how much you will have withdrawn from your equity after three, five and 10 years, and up to the youngest borrower’s 100th birthday, even if the interest rate adjusts upward to the cap. (Important note: On all these adjustable loans, the rate can rise up to 10 percent higher than the initial rate.)
There is one good way to beat the lender on a reverse mortgage. That’s to stay healthy and live in your home for many years, while you keep collecting the money. That’s what I keep telling my own father about the reverse mortgage I organized for him nearly a decade ago. I think it’s an inspiration for him.
And it could be the answer for you, so if you’re planning and hoping to stay in your home for a while, check out a reverse mortgage. Lenders know they are dealing with seniors and their families, so they are set up to patiently explain the process. It doesn’t cost anything to investigate a reverse mortgage and it may pay off big time. That’s the Savage Truth.
Terry Savage is a registered investment adviser.
http://www.suntimes.com/business/savage/3570534-452/mortgage-reverse-equity-interest-money.html
If you know a senior homeowner who is running out of money, a reverse mortgage might generate enough cash to allow them to stay in their home for many more years. Last fall the Federal Housing Administration created new rules, and opportunities, for lower-cost reverse mortgages. Now that most lenders have launched these new products, it’s worth an updated look.
Reverse mortgage basics
A reverse mortgage turns your home into your pension, either giving you a lump-sum payout from the equity in your home or a fixed monthly check that will keep paying you as long as you live in the home.
This reverse mortgage is available to homeowners age 62 or older who either have paid off their mortgage or have a small remaining balance. The amount you can receive is determined by your age, the value of your home and current interest rates. Basically, the older you are when you take out the reverse mortgage, the more money you can receive — either in a lump sum or monthly payout.
And all the money you withdraw is tax-free, since it is the return of your own capital.
You don’t need a credit check, and you retain title to your home. You won’t have any mortgage payments, although you will be responsible for homeowners insurance, property taxes and upkeep on your home. But you’ll now have a monthly check to pay for those expenses, or a pool of money in the bank to cover emergencies.
Basically, you are just borrowing from yourself — although you will be paying interest on that loan. But the interest is added to the amount of equity taken out of the home. When you sell the home, or die, the amount you have borrowed out of your home’s equity must be repaid from the sale proceeds.
Importantly, you — or your heirs — can never owe more than the home is worth. And you can never be forced out of your home because you’ve “run out” of equity. Eventually, when the home is sold, because you move or die, any proceeds (minus the withdrawals, interest and fees) are returned to you, or your heirs.
If that sounds too good to be true, this is the one product that really is as good as it sounds — if you understand all the details and costs.
Costs and considerations
There are basically two kinds of reverse mortgages, and they are offered by many banks. Since all of these mortgages are insured by the Federal Housing Administration, they must follow the same basic rules — although there could be some differences in cost.
A reverse mortgage is called a HECM loan, which stands for Home Equity Conversion Mortgage. There are two types of loans — the Standard HECM and the newer “HECM Saver.” Each lets you borrow a different percentage of your equity, and each has different fees.
The amount you can borrow on a reverse mortgage depends on the appraised value of your home. But no matter how valuable your home, the FHA has determined that the maximum amount of equity that will be considered for a reverse mortgage in 2011 is $625,500.
The interest paid (taken out of your remaining equity) on both of these loans can be either at a fixed or variable rate. These days, few lenders will promise a fixed monthly payment at a fixed interest rate for the rest of your life. So most loans are variable rate, based on an index set by the FHA, and typically the interest is adjusted monthly. The initial interest rate on the Saver loan is slightly higher than on the Standard loan.
The Standard HECM loan allows you to access more money from your home equity than the Saver HECM, which allows access to about 20 percent less equity. But the Standard requires a 2 percent upfront premium — again taken out of your equity — while the Saver has a tiny .01 percent upfront fee. Both loans also take a monthly insurance premium of 1.25 percent out of your equity to pay for the FHA insurance on these products.
(The FHA insurance protects the lenders, so they don’t lose money. Think about it this way: If the bank promises to pay you $2,000 a month for life in a reverse mortgage, and if you live to be 100, instead of the expected 85, the bank will lose out on the deal. The FHA insurance covers that possibility.)
The one place lenders do compete is in origination fees on these loans. The law allows banks to charge a maximum of $6,000 in origination fees, but many lenders today advertise that they will waive the entire origination fee. (They know they will make money on the loan interest over the years — as long as you don’t live too long.)
Getting started
If you’re interested in knowing what you could get in a reverse mortgage, go to ReverseMortgage.org, and use the online calculator to see what monthly payment or lump sum may be received out of your home. You can also search for reverse mortgage lenders in your area.
In the box here, you can see an example of what you could receive in a reverse mortgage.
Are you still worried about taking money out of your home? It’s understandable if you are because a reverse mortgage is only available to a homeowner who has paid off the mortgage, or has a small remaining balance. If you fall in that category, you’ve been a good saver all your life. So think of it as your home repaying you for all those years of saving.
Before taking out a reverse mortgage you must go through a counseling process to make sure you understand how this works. And as part of that process, the lender must estimate for you how much you will have withdrawn from your equity after three, five and 10 years, and up to the youngest borrower’s 100th birthday, even if the interest rate adjusts upward to the cap. (Important note: On all these adjustable loans, the rate can rise up to 10 percent higher than the initial rate.)
There is one good way to beat the lender on a reverse mortgage. That’s to stay healthy and live in your home for many years, while you keep collecting the money. That’s what I keep telling my own father about the reverse mortgage I organized for him nearly a decade ago. I think it’s an inspiration for him.
And it could be the answer for you, so if you’re planning and hoping to stay in your home for a while, check out a reverse mortgage. Lenders know they are dealing with seniors and their families, so they are set up to patiently explain the process. It doesn’t cost anything to investigate a reverse mortgage and it may pay off big time. That’s the Savage Truth.
Terry Savage is a registered investment adviser.
Saturday, January 29, 2011
Consumer Confidence Is Rising.
Here's an interesting story about rising consumer confidence.
http://www.foxnews.com/us/2011/01/25/consumer-confidence-index-hits-month-high-1679412010/
Consumer Confidence Index hits 8-month high
WASHINGTON – Consumer confidence hit an eight-month high in January. The increase suggests the rising spirits that fueled a holiday shopping boom are carrying over into the new year as people feel better about the job market.
The Conference Board said Tuesday its Consumer Confidence Index climbed to 60.6 this month from 53.3 in December.
While confidence is still far from the 90 that signals a healthy consumer mindset, the January improvement was better than expected. Some economists said the big tax relief package Congress passed in late December may have helped.
"So much for a ho-hum January," said Jennifer Lee, senior economist at BMO Capital Markets. "The signing of the stimulus bill and all that it is intended to bring is buoying sentiment."
The $858 billion package extended the Bush-era tax relief at all income levels for two years, provided tax breaks for businesses and reduced Social Security payroll taxes by 2 percentage points this year. The Social Security reduction will mean an estimated $1,000 in additional after-tax income for the average family, according to White House estimates.
Other analysts suggested that the recent gains in the stock market and improving labor market conditions were trumping higher gasoline prices and falling home prices. The Standard & Poor's/Case-Shiller 20-city index showed home prices falling in most of America's largest cities and hitting their lowest point since the housing bust in eight markets.
"The recovery in stock prices and the beginnings of an improvement in the labor market are making people feel better about the economy," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
The January confidence figure was the highest last May's 62.7. At that time, consumer attitudes were improving as economic growth seemed to be taking off. However, the economy stalled in the summer, and so did confidence.
Confidence has been depressed by unemployment that surged during the country's worst recession since the 1930s and has stayed stubbornly high even though the downturn ended in June 2009. Confidence has not been above 90 since the recession began in December 2007.
In the Conference Board survey, the percentage of people surveyed who felt jobs were hard to get fell slightly to 43.4 percent from 46 percent in December. The share who expected to see more jobs six months from now rose to 16 percent from 14.2 percent.
That finding supported a separate report Monday from the National Association for Business Economics that showed the number of firms expressing positive views on hiring had climbed to the highest level in 12 years.
While confidence has stayed weak since the recession ended in summer 2009, consumer spending has been picking up. During the 2010 holiday shopping season, sales increased at the fastest rate in six years.
Economists are hoping that consumer confidence will keep rising in 2011 as the economy improves and unemployment declines.
Employers added 1.1 million jobs for all of 2010, but the nation still has 7.2 million fewer jobs than it did in December 2007, when the recession began. Many economists expect the nation will create twice as many jobs this year as it did last year as economic growth picks up.
The Conference Board confidence index was based on answers to questions from a survey of 5,000 U.S. households taken through Jan. 18.
http://www.foxnews.com/us/2011/01/25/consumer-confidence-index-hits-month-high-1679412010/
Consumer Confidence Index hits 8-month high
WASHINGTON – Consumer confidence hit an eight-month high in January. The increase suggests the rising spirits that fueled a holiday shopping boom are carrying over into the new year as people feel better about the job market.
The Conference Board said Tuesday its Consumer Confidence Index climbed to 60.6 this month from 53.3 in December.
While confidence is still far from the 90 that signals a healthy consumer mindset, the January improvement was better than expected. Some economists said the big tax relief package Congress passed in late December may have helped.
"So much for a ho-hum January," said Jennifer Lee, senior economist at BMO Capital Markets. "The signing of the stimulus bill and all that it is intended to bring is buoying sentiment."
The $858 billion package extended the Bush-era tax relief at all income levels for two years, provided tax breaks for businesses and reduced Social Security payroll taxes by 2 percentage points this year. The Social Security reduction will mean an estimated $1,000 in additional after-tax income for the average family, according to White House estimates.
Other analysts suggested that the recent gains in the stock market and improving labor market conditions were trumping higher gasoline prices and falling home prices. The Standard & Poor's/Case-Shiller 20-city index showed home prices falling in most of America's largest cities and hitting their lowest point since the housing bust in eight markets.
"The recovery in stock prices and the beginnings of an improvement in the labor market are making people feel better about the economy," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
The January confidence figure was the highest last May's 62.7. At that time, consumer attitudes were improving as economic growth seemed to be taking off. However, the economy stalled in the summer, and so did confidence.
Confidence has been depressed by unemployment that surged during the country's worst recession since the 1930s and has stayed stubbornly high even though the downturn ended in June 2009. Confidence has not been above 90 since the recession began in December 2007.
In the Conference Board survey, the percentage of people surveyed who felt jobs were hard to get fell slightly to 43.4 percent from 46 percent in December. The share who expected to see more jobs six months from now rose to 16 percent from 14.2 percent.
That finding supported a separate report Monday from the National Association for Business Economics that showed the number of firms expressing positive views on hiring had climbed to the highest level in 12 years.
While confidence has stayed weak since the recession ended in summer 2009, consumer spending has been picking up. During the 2010 holiday shopping season, sales increased at the fastest rate in six years.
Economists are hoping that consumer confidence will keep rising in 2011 as the economy improves and unemployment declines.
Employers added 1.1 million jobs for all of 2010, but the nation still has 7.2 million fewer jobs than it did in December 2007, when the recession began. Many economists expect the nation will create twice as many jobs this year as it did last year as economic growth picks up.
The Conference Board confidence index was based on answers to questions from a survey of 5,000 U.S. households taken through Jan. 18.
Sunday, January 23, 2011
Something to be aware of if you received the $8,000 tax credit.
The two subsequent homebuyer credit programs enacted by Congress — $8,000 for first-time purchasers and $6,500 for repeat buyers — did not require repayments. But both programs came with strict rules that experts believe will add to revenues collected by the IRS during the years 2011 through 2013.
For instance, Congress required that credits claimed under the $8,000 and $6,500 legislation be repaid if the owners do not continually use their house as a principal residence for 36 months after the purchase. Say you took the $8,000 credit on your 2009 federal tax filing but then decided to sell the house or turn it into a rental investment in 2011. Guess what? Ka-ching! You owe the government $8,000 the day you make that move — and the IRS says it has increasingly sophisticated audit programs to detect such transactions and to sniff out frauds and other rule violations requiring paybacks and even penalties.
Here's a link to the entire story from the LA Times:
http://www.latimes.com/business/la-fi-harney-20110123,0,69868.story?track=rss
For instance, Congress required that credits claimed under the $8,000 and $6,500 legislation be repaid if the owners do not continually use their house as a principal residence for 36 months after the purchase. Say you took the $8,000 credit on your 2009 federal tax filing but then decided to sell the house or turn it into a rental investment in 2011. Guess what? Ka-ching! You owe the government $8,000 the day you make that move — and the IRS says it has increasingly sophisticated audit programs to detect such transactions and to sniff out frauds and other rule violations requiring paybacks and even penalties.
Here's a link to the entire story from the LA Times:
http://www.latimes.com/business/la-fi-harney-20110123,0,69868.story?track=rss
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