Satori Alliance | Financial Counseling | Real Estate Investment Products | Financial Guidance Seminars

  Your Mortgage Loan is Going to Reset

Today consumers are concerned about their mortgages and what the future holds, more specifically, what to do with resetting rates and when.  Low interest rates in the mid 4’s to low 5’s, excellent rates by historical standards, have people scrambling to refinance loans with adjustable terms to fixed rate & term product.  Is that really necessary? 

John and Georgia owe $376,000 on their Bay Area home.  This loan, like many issued in the 2000 - 2004 mortgage and real estate boom period, was called a hybrid, containing both fixed rate and adjustable portions.  They have an interest only payment option lasting until 2013, and the monthly payment is $1,763.

Current Loan

The fixed rate portion is about to reset to a 1 year adjustable in August.  The terms of this change are index + margin is their new rate.  The index is the 1 year Treasury Security or CMT, the lifetime margin for the loan is 2.75%.

The clients, worried about John’s work situation are frantically looking for what to do next sampling the marketplace for appealing options.  The problem is everyone they speak to is on the sell for a solution in the form of a new mortgage that will be the:

• Lowest rate
• Lowest cost
• Best loan available
• Lowest monthly payment
• Perfect solution to solve their problems

Call any lender or mortgage broker and you’ll see, this list will go on and on with all the emotional appeal crafted to get you a better loan. 

Suppose John & Georgia settle on the new mortgage in the chart below.  They pay .25 points (1/4 of 1% of their new loan amount), include all costs and expenses totaling about $3,900. into their new loan so they don’t have to write a check at closing, and they get a new 30 year fixed rate loan.  Both the loan balance and monthly payment will be higher.

• They have increased their mortgage and reduced their home equity by $3,900.
• They have increased their monthly payments by $218.75.
• Was this the best option for them?

When I asked this question they said well, we’re not sure about John’s job and we feel better knowing our loan isn’t going to change to something we don’t understand, and besides things are still getting worse aren’t they?

In my next post on Monday I’ll show you the review we did and what their options were. 

Study the data on both the old and new loan and test your knowledge and conclusion.  Then on Monday find out if you would have made the right choice for yourself.

We will also have a special offer lasting 48 hours where you could win a free tri-merge credit report complete with a complimentary consultation and analysis.

See you at Do You Really Need to Refinance - Part 2

She is a school teacher, he is in the technology game, and they just married last year.  They’ve been working on combining two financial household, so the combining of two budgets into one is a struggle, but 90% through it, they see enough to know what monthly payment they can actually afford, and they could prove it to you.  In our coaching sessions we all agreed that saving 10% for their future was the right number.

She brings two properties to the marriage, him none but he does have some debt & minor credit issues that will be solved in the next 30 days.

They have a chance to buy a single family home in Silicon Valley that would have cost $650-750,000 1.5 years ago for about $450 to $475,000 now.

They also have access to low rate teacher financing with 3% down payment, or they could use his no down payment veterans’ loan eligibility.

A wise move they made was to select and agent and begin looking at property on weekends by themselves before they were actually ready.  That way, building the sensibility of what’s available at what price, they will instantly be able to spot the good deals from the average and be ready to make a saleable offer to the sellers.

Again, please tell me, who is buying real estate right now?  It’s your turn, click the comment button and send me a profile of yourself or someone you are working with - 

What do you think?

Let’s Discover Who’s Buying Real Estate

Are YOU buying or are you afraid?

My intent with this series is to build a profile of today’s buyer of real estate.  While that seems simple enough let me first reveal the 500 pound gorilla in the living room?

It seems most people understand prices and interest rates are down.  When you combine that with the large inventory of homes currently for sale in many areas, and desperate sellers, you’ve just described the ultimate buyers market, even FRENZY!

Why then are we all so (the gorilla) SCARED TO BUY?

A theme of mine is not to dwell on the negative so I’ll ask this questions in the positive - Who is buying?

Just what is the profile of buyers who are wise and proactive enough to get themselves some real estate at fire sale prices?

Over the next 4 posts, with your help, we will discover that and maybe, just maybe, we can do our little part to stimulate this economy and help save some folks who really need it.  And, I bet you we’ll learn something!

Please tell me, who is buying real estate right now?  So now it’s your turn, click the comment button and tell me -

What do you think?

  A financing client I’ve worked with for many years asked a difficult question last week.  He is contemplating turning his keys in on a home he purchased 6 years ago as part of his retirement plan.  His main concern how a foreclosure or short sale would impact his credit & if he really needed to be concerned about that with the number of people in situations like his.

For retirement planning purposes, he purchased this home and planned on big appreciation to make up for lost savings in the “Dot Com Bust” of 2000 & 2001.  The property value increased, he refinanced taking out cash to purchase two more properties.  He had a high leverage, high appreciation plan.

My answer was he did need to be concerned and that he would loose between 100 & 150 points in credit score.  Repairing this score will not happen quickly and for a period of at least 7 - 10 years my client will have less access to credit with increased expense for the credit he does get.  This in turn will negatively impact his ability to acquire additional financed assets he might use for retirement.

Although he called to discuss one property, he will soon need to address the other two which are high cost as well.  This strategy works well in rapidly appreciating markets which never last as long as normal or down market.

He would have done much better moving his profits to a lower leveraged property that could carry itself in any market.  That would have been a most powerful move.  Also, the financing on low leverage properties is slowly retired as tenants make their rent payments which increases equity.

Being in real estate and finance for over 30 year and having a degree and background in personal development makes it difficult to confront these kinds of choices when offering advice to clients I’ve known and respected for a long time.

By all account responsible & caring people, this older couple is facing a dilemma that will impact their life in ways they cannot anticipate completely.

That is the purpose of this writing and my request to you, my readers.  Please offer your advice and comment on impacts you see they should consider before making their decision.

This couple in their late 50’s, have raised 3 children all of whom live in Silicon Valley with their families. They have a modest home in a safe and quiet neighborhood that has held its value well in these turbulent times.  Their credit is excellent, they have little credit card debt and most of their savings has been consumed during the recent economic downturn through lack of work.

In the high times when real estate appreciating was exciting and financing was freely available to even those with poor qualifications, they purchased a 6 month old property in California and put it up for rent with a reputable agency they still have and have developed a close relationship with.  Tenants moved in and are still there today paying the same rent since the beginning.

Expenses exceed income for this couple and all that can be cut has been they tell me and now it’s time for the decision to stop making payments they can no longer afford. Since the rent does not cover their expense and the debt on this property is 1/3 again as much as the value of the property, the bleeding must stop.  By all calculations & the best of estimates it will be years before the value returns to a level our couple could sell just to break even, losing even more along the way.

So I ask you the question, if a short sale to the current tenants doesn’t work, should they simply stop making payments on this property and turn in their keys?

Do you see other options for them to consider?

If they do this, what impacts should they expect now and in their future?

I like this story, it makes us all think about what’s right and proper.

Jason called me on Tuesday this week asking for some advice on whether he should lend a friend of his some money.  The friend (who we’ll call Sam) it seems has several properties that are worth less than the mortgage amounts he owes.  Several are rented, and Sam’s income from them is less than his payments.  Yes he did buy them in the past few years when everybody was doing the same and yes he figured values would continue to climb as they were at the time he purchased them.  They didn’t, unwise investment assumption for Silicon Valley real estate or for that matter property anywhere.

In his search for cash flow relief and to stop the burn rate of his dwindling savings, Sam hears about ‘Loan Modifications’.  He investigates and finds an attorney backed modification company, one of many appearing on the landscape of public opportunities for the financially stretched, and is told he may be able to reduce the financing on all of his properties to 80% of CURRENT value.  WOW!  Sam does some quick numbers in his head and figures that would make his property positive cash flow and reduce his debt by nearly 50%.  Sam has a good high paying job in a profession that will not experience lay-offs any time soon, and has excellent credit.  By the way, the money Jason was asked to lend Sam was the $14,000. the modification company requested to “see what could be done”, no promises but if it didn’t all turn out Sam would get a refund.

 In his book Capitalism and Freedom, Milton Friedman asserts that the great achievement of capitalism has not been the accumulation of property or wealth but rather the opportunity men and women have to develop and improve themselves.  He further states that great advances have never come from centralized government edicts or direction but come from individual genius or even minority beliefs within a social climate that promotes variety and diversity for all.

Let’s define integrity as being whole and complete inside, or with a background of, a context or way of being in life that produces workability for all involved.

And we’ll consider ethics a philosophy encompassing right conduct and good living behaviors where at best all benefit, and at least nobody is harmed.

INTEGRITY AND/OR ETHICS appropriate, you make the call!

If the lenders agree to reduce Sam’s mortgages and possibly even his interest rates, they take a big hit financially.  Would you do it if you were Sam?  Is this a break in integrity or ethics?

What if the lender passes the losses on to our central government as part of our recent bail out plan.  Would you do it if you were Sam?  Is this a break in integrity or ethics?

Would you lend the money to Sam if you were Jason?  Is this a break in integrity or ethics?

MY BUSINESS:

Being committed to transforming peoples experience of personal finances I confront more & more issues like these every day.  They are difficult to advise but my yardstick is always does anybody get hurt or loose as a result of my advice and more important, will my client win?

Please give me your thoughts & let’s discuss it.

Dan

They really are and also notoriously inefficient.  Factor this into soaring energy costs, and you’ve got a good reason to transform a drafty fireplace into an efficient heating source.

What makes traditional fireplaces inefficient?  Hot air rises, thus much of the air heated by the fire escapes through the chimney.  When a fireplace isn’t in use, the draft pulls conditioned air from your home making your heating system work harder and energy bills rise.

How can you improve fireplace efficiency?  Take measures to reduce heat loss via the chimney and to direct more heat into your home.  Here are a few strategies:

Dampers:  Most fireplaces have a throat damper - an iron plate that controls airflow.  When the fireplace isn’t being used, keep the damper closed.  And consider replacing it with a top sealing damper which mounts at the top of the chimney and seals tightly to eliminate drafts.

Firebacks:  A cast iron or stainless steel fireback on the rear fireplace wall helps to radiate heat outward.  And firebacks usually feature decorative designs that can enhance your home decor.

Doors:  Tempered glass doors with adjustable air openings help maximize efficiency when your fireplace is in use.  When it’s not, close the fireplace doors to keep warm air in your home.

Grate Heaters:  These units are alternatives to conventional fireplace grates.  They pull in air, heat it, and blow the heated air into the room.  Some are even equipped with thermostats to automatically turn the fan on and off.

Inserts:  Gas or wood-burning inserts are insulated systems that burn more efficiently and create greater heat output.  Note: The EPA recommends that you have a certified technician install a wood-burning insert.  Also check emission requirements in your area and have your chimney inspected and cleaned before installation.

As always, I appreciate the opportunity to provide energy-saving tips.  This edition happens to arrive on a spare-the-air day so don’t experiment with burning today.  Boost the efficiency of your fireplace so that it generates increased warmth as well as holiday ambiance at a lower cost too.

Thank you to a long time colleague Steven Larson for the inspiration for this post