Debt Strategy Myth: Pay extra on your mortgage

There's once piece of financial advices that always causes me to wonder, "huh?" So many personal finance advice experts always say that you should pay extra or even double on your monthly mortgage payment with the intent of paying it down faster.

I never understand this advice for two reasons. First, if you are struggling with debt, your mortgage is likely to be the lowest interest loan that you have. Your efforts would be better allocated toward eliminating high-interest debt. And second, the interest that you pay on your mortgage loan is tax-deductible. The interest on credit cards and car loans are not tax-deductible.

Ron LoSasso, mortgage consultant at Coors Credit Union, put it like this: "I am not a fan of prepaying the home loan as once that is made the only way to get that money back is to refinance the loan, obtain a home equity line of credit or sell the house."

This is an excellent point. On average most people sell their house 7-10 years. The time spent in a house increases as we get older, but generally speaking we like to move around. There are probably dozens of better ways to use that cash.

Maybe this debt strategy myth of that paying more on your mortgage is a might make sense for somebody, but in my opinion this MYTH is BUSTED.

Good Time to Buy a Second Home

Part of the extension to the First-Time Homebuyers Tax Credit is what’s known as the Move-Up credit. This makes getting a tax credit for buying a home open to just about everyone. It also opens up the possibility of getting started in real estate investing.

The requirements to qualify for the Move-Up credit aren’t that restrictive. Your income needs to be $125,000 or less if you are single or $225,000 if you’re married. The home you buy needs to be valued at $800,000 or less. So, if you’ve been thinking about up-sizing, down-sizing this is the time. Your new purchase must be your intended primary residence, so it’s not the time to think about purchasing a mountain getaway. What the Move-Up credit doesn’t require is that you sell your current home. That’s where the opportunity comes into play.

Consider buying a home to use as your new primary residence and turning your current home into an investment. Before jumping in do note that there are many factors to consider.

1. Depending on the rental market pricing and your monthly mortgage amount, you can potentially cover your monthly mortgage payments and create cash flow.

2. You can allow your property to appreciate as the market returns.

3. Capital Gains—You’ll get a break on Capital Gains at sale if you’ve lived in our home for 2 of the past 5 years. So, if you’ve owned your home for at just a few years then renting for the remainder of 5 years could save you some taxes. Or, if you’ve owned your home longer, you could pull in some passive income for a few years before selling.

4. If you are buying your new home in a different area and end up not being happy, you can return to your previous home.

5. I think you can guess that being a landlord isn’t easy. You’ll have to deal with everything you had as a homeowner, plus tenants.

6. Added tax benefits—Once you become a landlord, it’s a whole new world of tax benefits. If you’re serious about crossing over to the lordship consult a tax advisor.

Of course, ultimately the decision is a financial one. You’ll need to have a healthy cash reserve to pull this off. Still, it’s not impossible especially during this time when there are still great deals on homes.

New Credit Standards Not Really Worth Your Worry

Bankrate.com recently posted Good credit score of past not so good now which opens with the following:
“Those with good credit may well recall being showered with praise by a mortgage broker during the initial purchase for that solid credit score. That was then. This is now.”

The article goes on to warn readers that while you might have sparkling credit it may not be enough to earn you a better lending rate. Reading this article could put fear into the hearts of would be buyers or at least make you feel like things are really spiraling out of your control. But, just how bad is it?

I asked Coors Credit Union Senior Mortgage Consultant, Ron LoSasso for his take on new credit standards.

So, Ron, how worried should buyers be?

He replied, “Although there are now adjustments in the rate due to credit scores the typical
increase is only an 1/8 to the rate. On a $200,000 loan amount this is an increase of the monthly payment of approximately $16.00 per month. Perhaps the cost of one Grande Latte per week.”

While you shouldn’t be scared off by new credit standards, it is helpful to understand how we got here. The new standards are neither arbitrary nor a result of tightened lending. All banks, brokers and credit unions must abide by the same standards. The change came about as Fannie Mae and Freddie Mac, the nation’s two largest lenders, redefined risk after suffering huge losses last year.

So the new standards really don’t affect the lending landscape much. You’ll still be making fair comparisons when shopping for a mortgage. But, as Ron says, “One advantage to coming to a credit union is to compare all loan programs including these agency type loans to the Portfolio
Loans that credit unions may offer.”

Another advantage is that credit union lending is strong. In contrast to many major banks, very few credit unions were burned by foreclosures; therefore they’re still able to give good rates on home loans.

And don’t let the new score standards turn you into a procrastinator. Yes, if you score is poor or even good you should take some time to clean up errors, pay down debt, or other actions to increase your score. But, if you’ve already got an excellent score of say 720 and you’re thinking of eating ramen for a few months to get it up to 740 you could be taking a big gamble You could miss out on current low rates or while you are working to better your score, you’d only be saving a few lattes worth a month.

The best way to prepare for purchasing a home is to get in and speak with a Home Loan Consultant. They can tell whether your score is in need of help or if you should start shopping now.

Coors Credit Union Hires Senior Mortgage Experts

Colorado home sales rose 9.4% in September, overall sales increased 24% since hitting bottom last year. Meanwhile the government not only extended the First Time Homebuyer's Tax Credit, but added in a chance for current home owners to get credit for a home purchase. Combine these actions with crackdowns on lending then if all goes as hoped we'll moving toward a stronger economy.

Coors Credit Union is on top of the game. They've just hired two well-seasoned Senior Mortgage Consultants. These additions will not only help with an increased demand in mortgage loans, but their experience brings a nice depth of knowledge to the Credit Union.

Leslie Larson is working out of the Coors Credit Union Golden office.
Leslie has been working in the mortgage business for the last 24 years where she has been an originator, processor, and closer. Leslie is great because she really works closely with clients and develop relationships with all parties involved to ensure that your mortgage experience goes smoothly. She also knows a lot about FHA, VA and Conventional financing. She is good at helping you choose the program that works best for your situation.

Ron LoSasso works out of the Arvada branch. His real estate career began at Chicago Title & Trust where he worked in both commercial and residential real estate. Eventually Ron opened his own real estate lending firm in Wisconsin. Then later when he moved to Colorado he started First Western Mortgage Company in Louisville. Ron is extremely active in local business and is the current president of the Louisville Chamber of Commerce.

Both Leslie and Ron have a strong knowledge of Jefferson County real estate.

Is Your Mortgage Broker Licensed?

More than half of Colorado's mortgage brokers have had their licenses inactivated because they failed to comply with new education and testing requirements that took effect early last month.

This could be trouble for consumers who are working with brokers who are originating loans. If you’re broker is in this situation and you are in the midst of buying a house, you may not be able to close the sale.

Approximately 4,500 brokers have had their license suspended. About one-third of the licenses were held out of state. The educational requirement is a 40-hour class and test. Brokers will also need to pay a $500 administrative fee. Additionally, brokers are required to complete FBI background checks.

To see if your broker has a current license you can check with the State of Colorado or review this list: http://www.dora.state.co.us/real-estate/mortgage/documents/September2009.xls

How long do need to be employed to qualify for a home loan?

The quick answer to this reader question is that it is preferred to have at least 2 years employment history. But getting a mortgage isn’t quite that cut and dry.

As we all know lenders have been hit hard with blame for the recession. They’ve been required to be more stringent in lending and have become much more cautious. Your income history is one of the best measures they’ve got to ensure that you’ll be able to make your monthly payments, though it still a risk on the lenders part.

Before mortgage lenders can grant you a loan, they of course would like to make sure you can repay them. They’ll need to know:

• your credit history
• your gross income each month
• the amount of money you plan to use as a down payment

The Debt-to-Income Ratio Explained
A big part of the lender’s concern is your debt-to-income ratio. There are two calculations used to determine this number:

Front-End Ratio
This calculation determines how much of your pretax income will go towards your monthly mortgage payment. The mortgage payment figure includes interest, principle, taxes, and insurance and typically should not go over 28% of your gross monthly income.

Annual Salary x 0.28 / 12 (months of the year) = Maximum Housing Expense

Back-End Ratio
This calculation determines the amount of your total gross income that will go to pay all of your other obligations, including the mortgage, other loans, child support, credit card bills, and any other monthly debts. The figure should not exceed more than 36% of your gross income.

Annual Salary x 0.36 / 12 (months of the year) = Maximum Allowable Debt-to-income Ratio

Different lenders will have different requirements for the debt-to-income ratio. For instance, conventional loans — typically a conventional loan from a bank or other mortgage lender — will require no more than 26% to 28% of month gross income for housing costs and not more than 33% to 36% of monthly housing plus debt costs. With an FHA loan, the housing costs should not exceed 29% of the monthly gross income and 41% of the monthly gross income.

And it’s not impossible for self-employed people to get a loan. You’ll just need to show not only that you were gainfully employed, but also what your net income was compared to business expenses. Self-employed people will also need to show a profit-loss statement. If you don’t keep good records of legitimate business expenses, don’t have your taxes professionally prepared, and guesstimate your profits and losses, the loan process could come to a halt very quickly for you.

Friday Encore: Tales from the Spook House

Welcome to the Friday Encore where you'll get to read a past blog posting that I thought you might not want to miss. Okay, call it a repeat if you want. When necessary the post may be updated with new information or data to keep it relevant. The following was originally posted February, 2008.


Tales from the Spook House
When I was a kid growing up outside of Philadelphia there was an amusement park nestled alongside the Brandywine Creek that we went to often. It was originally built in the early 1900’s but it’s poor placement next to the creek caused it to flood repeatedly and eventually close. I have wonderful memories of the games, rides and duck pond but the thing that attracted me most was the spook house. It never failed to creep me out even after going through it bazillion times.

It may have just been a trailer with some hokey rubber snakes and rickety floor but looking back I had good reason to fear the spook house. Fear is a natural instinct and it’s just nature’s way of protecting us. Right? Heck right! A house is a scary thing.

When you own a house you’re constantly finding some frightening thing. Like coming home to see water running out of your garage. This happened to me a few Christmases ago when we forgot to winterize the swamp cooler. It was raining inside my house—not good. Or when a big truck shows up at 7:00 a.m. on a Saturday delivering a dumpster to your neighbors house. Yeah, they didn’t plan that major excavation. Then there are the gurgles that the heater makes in the wee hours of the morning. The frog with his face smashed up against the window in the basement. I could go on and on, but the mother of all frights has got to be the MORTGAGE.

Unless you’re living blissfully in your parent’s basement with a free supply of toilet paper and a fridge full of food, you’re well aware of the mortgage crises affecting Colorado and the nation. It’s basically the tale of how too many starry-eyed people bought into the crap that a owning your own home is great investment, ignored their small wallets and took the poison apple of questionable mortgage programs. Economists are not expecting a quick turnaround for the housing market in 2008. (well, that prediction came true.)

But don’t let all the bad press frighten you away from buying a home. People have been successfully purchasing own homes for decades—and you can too. All you have to do is trust nature and follow two basic instincts.

Instinct #1: Fear
Fear is good. Personal development gurus are always trying to help people overcome fear. But this basic instinct is often the key to your survival. If you’re in the jungle (or even in the zoo) and you come across a tiger don’t try to overcome your fear and pet the tiger. So if you’re small wallet meets a big house, don’t let the wallet get eaten by the house.

Fear #2: Logic (okay this may not be an “official” instinct but is important)
If something isn’t logical then something’s just not right. Mortgages can be overwhelming even when they are very straightforward like the standard 30-year fixed. That’s mostly because they are often described in terms that are unfamiliar. Before you dive into a mortgage educate yourself. There are tons of books and websites that explain all the terminology and workings of mortgages. If a lender offers you something outside the norm tread with caution. Creative lending is one of the leading contributors to the mound of foreclosures the economy is currently experiencing. Your best bet is to stick with secure lenders that you know you can trust—like you’re credit union. Avoid strip mall no name mortgage shops.

So now after all those years since the close of the spook house I still shiver whenever I see one at a local carnival. But it’s just a little shiver. Cause I’m much stronger now. I’m homeowner and I’ve faced mortgages and home repairs. I know how to look under those rickety floorboards and read through the fine print. I was once afraid, but now I’m fearless and I make my mortgage payment every month.

Be inspired. Save for you’re down payment. Don’t get a mortgage you can’t afford. And don’t be suckered by spooky lending. Fear not. You can own your own home.

Irresponsible Lending Continues

I have a friend who is a single mom of three kids making $30,000 as a preschool teacher and living in an historic house in Gloucester, MA. This summer, right smack in the middle of a housing crisis and finger pointing at irresponsible lending, my friend found her finances giving an uncomfortable squeeze. She went to her bank for a home equity loan. She didn't need to use the loan right away, but wanted it there in case that squeeze became a strangle. She asked the bank for $25,000. Her house is valued at much more than that, but she didn't want to get into a bad debt situation. You know what the bank did? They offered her $400,000.

My friend was shocked. "Are they crazy?" she asked me. She went back to the bank and asked them if they were indeed crazy. She pointed out that she only earns $30,000 and as a preschool teacher isn't likely to earn much more in the future. The bank actually proceeded to argue that the loan was in her best interest. After much back and forth she was finally able to talk them down to the $25,000.

So several things are going on here. Maybe the bank was hoping that she'd eventually default on her loan and they would then gain her historic and valuable house. Or maybe they were only looking at their own loan income. Or maybe they really were crazy. No matter how you look at it this is a fine example of irresponsible lending. The amazing thing is that this behavior that got us into our current economic mess still continues.

Freddie Mae and Fannie Mac: How did we get here?

To understand where you are you must first know where you started. So with the big announcement yesterday that the government will take over struggling Fannie Mae and Freddie Mac let’s review what these entities are and why they were created.

But first a statement from Treasury Secretary Henry Paulson: “Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance."

The Federal National Mortgage Association, nicknamed Fannie Mae, was created in 1938 as part of President Roosevelt's New Deal when private lenders were reluctant to invest in loans for homes. To encourage home ownership, Fannie Mae provided local banks with federal money to finance mortgages. Fannie Mae operated a lot like a national savings and loan, allowing local banks to charge low interest rates on mortgages. Because of the financial support that Fannie Mae received from the U.S. Government it was able to borrow money from foreign investors at low interest rates. This allowed Fannie Mae to provide fixed interest rate mortgages with low down payments to home buyers. Thus Fannie Mae profited from the difference between the interest rates homeowners paid and what foreign lenders charged. Fannie Mae also quickly became queen of the secondary mortgage market.

For thirty years Fannie Mae held a monopoly over the secondary mortgage market. Then 1968 changed things. Fiscal pressures created by the Vietnam War caused President Johnson to privatize Fannie Mae and remove it from the national budget. That’s when Fannie Mae became a GSE. A GSE, or government sponsored enterprise, is privately owned and operated by shareholders, but protected financially by the support of the Federal Government. These government protections include access to a line of credit through the U.S. Treasury, exemption from state and local income taxes and exemption from SEC oversight. To further squelch Fannie Mae’s hold on the market, the Federal Home Mortgage Corporation, nicknamed Freddie Mac—another GSE was created in 1970.

The decades that followed were amazingly fruitful for Fannie and Freddie and it appeared that they would live happily ever after. Together they enjoyed total assets 45 percent greater than that of the nation's largest bank. But their debt also climbed to 46 percent of the current national debt. It is this combination of rapid growth and over leveraging that has lead to the current concerns of Congress, the Justice Department and the SEC with regards to the financial practices of these GSEs. Additionally accounting scandals have plagued Freddie Mac.
Fannie Mae and Freddie Mac are the only two Fortune 500 companies that are not required to inform the public of financial difficulties. If either should collapse, U.S. taxpayers could be held responsible for hundreds of billions of dollars in outstanding debts.

And that, friends, is how we got to the government takeover announced on Sunday. What will be the next piece of the story?

Bankrate.com reports credit unions are strong

photo by lord_bute

This weekend I had a nice opportunity to spend time around a backyard campfire with some former credit union colleagues. It was fun to just sit under the stars and listen to the crickets play their background music, but inevitably conversation had to turn to the common denominator between us--credit union business. As in any business there is always that struggle to market services and get more customers. But for once the old school way of credit unions is getting attention. Today Bankrate.com is running the headline Credit unions weather tough market. And just as my friends and I were discussing part of this is because of the way credit unions handle mortgage loans.

Here's what Bankrate.com had to say:

Data from the Credit Union National Association, or CUNA, a national trade association serving credit unions, show some interesting numbers at a time when the financial markets were struggling.

• Fixed-rate first mortgages increased $6.3 billion (annualized rate of 24.21 percent) during the first quarter 2008 compared with same period in 2007.
• Adjustable-rate first mortgages increased $2.3 billion (annualized rate of 12.04 percent) during the first quarter 2008 compared with the same period in 2007.
• Aggregate loan delinquency decreased slightly from 0.93 percent to 0.91 percent of total loans outstanding.
• Delinquent real estate loans in federally insured credit unions increased from 0.67 percent at year-end 2007 to 0.70 percent through first quarter 2008.

"For the first three months of 2008, loan originations by credit unions went up dramatically vis-à-vis where they were historically," says Walter O'Haire, senior analyst in the banking group at financial consulting firm Celent. "The large lenders still dominate, but credit unions went from having less than 2 percent of the first-mortgage market share to over 3 percent versus the first quarter of 2007.

Here's a summary of some of the things my friends said:

It's harder to get a mortgage loan now that banks have tightened up their policies...credit unions have always been more careful about who they give loans...people are finding credit unions are easier to work with right now...credit union mortgages are stable...the financial business is tough all around right now, but credit unions are doing well in the mortgage business...credit unions do have some foreclosures, but they are more rare.

Sorry guys, but anything is fair game for the blog and readers should know that credit union staffers trust in their credit unions.