Posts

9-14-18: Can we afford this payment?

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Question of the week:  Can we afford this payment?

 

 Answer:  Statistically, yes you can.

 

Statistics dictate the underwriting guidelines when determining how much of a mortgage and housing payment a family can afford to get loan approval to purchase a new home, or refinance an existing home. The key number is the debt-to-income (DTI) ratio which is your new housing payment (mortgage, property taxes, insurance and homeowners association dues if applicable, collectively referred to as PITI) divided by your adjusted gross income (income before taxes). Depending on the loan program this percentage of your total income for your total new debt obligations inclusive of housing payment cannot exceed between 43 and 50% of your gross income. (Note, VA mortgages do not adhere strictly to DTI guidelines for qualifying.)

 

For instance, if you are purchasing a new home and the total housing payment is $3,000 and you have car payment, student loan payment and credit cards with monthly payments reported on your credit report totaling $1275 per month, your total obligations are $4275 per month. If your gross monthly income is $10,000 per month you have a DTI of 42.75%, generally good enough to qualify for most programs.

 

Statistically. The debt-to-income guidelines were created based upon data from millions of property owner’s history of making payments in a timely fashion, and more important those that have not. Mortgage data is analyzed to see the percentage of defaults for debt-to-income ratios and there is a breaking point at which the percentage of defaults become untenable risk for lenders and that is where the DTI guidelines are set. It is important to note that the default data is also analyzed for occupancy, type of property and credit scores among other criteria and this is how rates are priced (sounds like a good question for next week).

 

Back to if you can afford the payment that we have given you which would be approved by underwriting.

 

I tell almost all clients purchasing a new home when we are going through the qualification process, “there are three things that are very true regarding your new home purchase. One, I will not use my savings to purchase the home. Two, I will use my income to help you make the monthly payment. Three, I will not spend any time sleeping or living in your home.” This is to say, while I may feel comfortable with the payment I am giving you for your potential new mortgage, property taxes and insurance, I am not making the payment so it is important that you are comfortable with what you feel you can afford.

 

That said it is also important to stretch a little of your comfort if your comfort level is well below your income ability, unless there are some exceptions. One gauge many first-time buyers, and some move up buyers, use for their new housing payment is what they are currently paying in rent. If you make $10,000 per month and are paying $2200 per month, using the $2200 per month to be what you would like your new housing payment to be you will be looking at homes that are significantly below your ability to qualify, and from my experience frustrated in the homes you will be looking to purchase as few, if any, will feel “right” for you and your family.

 

If the payment I am quoting feels too high for a client I ask that they take a look at where they spend their money, and is this likely to continue once they become homeowners. Purchasing a home is not just purchasing a place to live, it is also entering a new lifestyle, that of homeowner. For most first-time buyers, purchasing a home occurs before they start a family, or with younger children. This changes your lifestyle dramatically and the stability of owning a home and fixing your housing payment pairs perfectly with a growing family. Most meals will be made at home, changing your budget if you eat out a lot. Weekends will likely be spent with the family at different events, games and activities involving the children, which means fewer weekends travelling to the wine country or Vegas.

 

Essentially, is your expectation that your lifestyle and spending habits that make your potential new housing payment seem uncomfortable to remain the same? Chances are very, very high that it will not. When considering your new home and the cost also consider the changes you will be making in your lifestyle, and therefore expenses.

 

Finally, why are you buying a home? Is it to change your life in a positive manner? If so what other changes are you willing to make so you can experience the value of homeownership?

 

Pretty much everything decision in life has trade-offs and consequences, even not making a decision. One area at which I will immodestly say I do very well is explaining to my clients the positives and negatives of the options available to them when purchasing a home. If you think owning a home is not in your budget please contact me so we can discuss your financial situation and options.

 

Have a question? Ask me!

 

August economic data was interesting. The Producer Price Index dropped 0.1% in August, the first month over month decline in 18 months and read by many as a sign that inflation may be easing. Supporting the read was the Consumer Price Index for August that showed prices rose 0.2% for the month, however up only 0.1% for the “core” rate (minus fuel and food). The monthly increase was the fifth straight increase, however the size of the CPI increase lowered the year over year inflation for the core index to 2.2% from 2.4%. Gas and rent were the primary factors putting upward pressure on the index, many other consumer sectors fell, primarily clothing which saw prices drop for the third month in a row—good news if you have growing children. The news is mostly positive for interest rates as any easing of inflation releases pressure for rates to go higher.

 

Retail sales also grew at a slower pace in August from the prior month, however the slow down was not unexpected given the surge in sales in July. Supporting future increases in sales was the Michigan Consumer Sentiment Index which continues to rise, reaching it second  highest level since 2004, and highest since March of this year. Positive consumer sentiment leads to consumer spending, which drives the economy and can lead to higher rates.

 

Rates for Friday September 14, 2018: A large drop in Mortgage Backed Security (MBS) prices in the middle of the week put strong upward pressure on rates. Some easing later in the week saw us with rates this Friday flat from last Friday. I have been asked a lot lately what I thought rates will do, my standard response is that I feel they should be higher than they are currently given the economic data.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.50%             Flat

30 year high-balance conforming                      4.75%      Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

 

Thankfully Hurricane Florence started losing power earlier in the week and when it made landfall this morning in North Carolina had lost enough power to be designated a tropical storm instead of a hurricane. Even with the winds at less power the amount of water that will be dropped in the southeast will be significant, especially if the storm remains in place. As always when nature becomes fierce the Red Cross is there to help residents through the event and after. We are truly fortunate to have such a wonderful organization looking after people negatively impacted around the globe by human and natural acts that displace and harm people.

 

Many communities are also grateful they have a Waffle House or two in their communities. The butt of many jokes, mostly from those not in the Waffle House regions, the company does great work when disasters are about to hit. So great in fact that FEMA follows the company’s “Waffle House Index” to help determine the severity of a storm. Waffle Houses rarely close, they want to stay open as long as possible as the company knows in many communities it may be the only place for residents and emergency personnel to get a meal. The company also assists with employees from other stores in nearby, less effected, regions to go into disaster zones and fill the jobs at Waffle Houses so those employees can take care of their families and situations as a result of the hurricane, tornado or other event.

 

Here is a good article on the Waffle House Index. Just so you know, Stage Yellow probably means no bacon—you can get sausage because it takes up less grill space and takes less time to cook so the restaurant can serve more people faster by taking bacon of the restricted menu.

 

Have a great week,

 

Dennis

9-7-18: Should we pay extra on our mortgage?

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Question of the week:  Should we pay extra on our mortgage?

 

 Answer:  This is a question we answer every few years and it has come up a few times over the past few weeks with different clients as they consider paying extra on their mortgage every month or year to pay it off faster. It is natural to want to pay off debt, get rid of the monthly payment and quit paying a lender interest are the main two reasons.

 

But is paying off your mortgage early the best financial move for you? Here are several items to consider before you commit to paying off your mortgage ahead of schedule.

 

Are you maxing out your contributions to your retirement account? Most Americans are underfunded for their retirement, many of whom own homes. Instead of paying additional principal down on your mortgage I suggest putting it into your retirement account instead for several reasons. First, the money you put into retirement is usually deducted from your taxes (an exception can be if you contribute to a Roth IRA account), whereas the money you pay down on your mortgage is not. Most homeowners in California will have combined state and federal tax rates around 33% of adjusted gross income. If you contribute the $18,500 maximum to a 401(k) ($24,500 if over 50) that is a tax savings of about $6000, pay the same amount down on your mortgage and there is zero tax savings—in fact you will have negative tax savings because…

 

The government pays for part of your mortgage due to the mortgage deduction allowed on state and federal income taxes. You can deduct the amount you pay on your mortgage interest directly from your income for both federal and California state income taxes (there are limits, for married couple $1 million if mortgage used to purchase home was put in place prior to 12/16/17 or you were in contract to purchase home prior to that day; if your current mortgage was a refinance or put in place after 12/16/17 the new limit is interest up to a $850,000 balance). So if you have a $500,000 mortgage with an interest rate of 4% you can deduct $20,000 from your income, saving approximately $6500 in taxes. If you pay down $18,500 on your mortgage you lose approximately $250 in tax savings since your interest payments are lower. Paying down $18,500 on your mortgage instead of putting it into your 401(k) can cost you over $6000 in tax savings.

 

If you are maxing out your retirement contributions, how are you on saving for your children’s college education? As the parent of college freshman and a future college freshman, and someone who has looked at thousands of clients financial statements, I can attest that college expenses have far outpaced most families abilities to save for those expenses. Having gone on several college tours the last few years one common theme from the financial aid offices was that the general threshold for receiving direct aid (i.e. tuition reduction in form of grant from school) is income around $70-80,000, which is great if you live in some parts of the country but not too far above the median income in most parts of California. So unless your children have exceptional talents in some endeavor plan on needing quite a bit of money if you wish to contribute to your children’s college finances. Putting additional money into a 529 College Savings account or other savings instead of paying down your mortgage might be a better allocation of funds. By doing this you are essentially “borrowing” at whatever your mortgage rate is today for use in the future instead of potentially borrowing in the future at what may/probably will be a higher rate.

 

Speaking of your mortgage’s interest rate, is it lower than other debt you have? Credit card debt, auto loans, your own student loans? If you are maxing out your retirement contributions, you do not have to worry about future college expenses but have consumer debt it makes more sense to pay off that higher interest, non-tax deductible debt before paying off your mortgage. It not only makes more sense but it is very good math.

 

Are you planning on selling your home in the future, before the current term of your mortgage is completed and before your over-payment plan would pay off the mortgage? If so you should consider putting the additional funds into savings, investments, even cash. Your home is not worth more, or less, depending on your mortgage balance. Your home’s value is determined by location, size, condition, etc, not by the amount of debt secured by the home. Paying $40,000 down on your mortgage over say five years and then selling it with a $400,000 mortgage balance was a loss of opportunity for those funds to work for you with compound interest and/or dividend reinvestment. There is no compound equity or equity reinvestment in your personal residence, it will be worth what the market dictates when it comes time to sell. Yes, your net proceeds from the sale will be $40,000 more than if you have not paid down the mortgage. At a 4% return on the extra $666 per month you pay on the mortgage over five years would result in over $44,000, 10% more than your net proceeds gain from paying that money into the mortgage.

 

One final consideration, it costs money to get money back out of your home. If you have $100,000 equity and want to access some of it you will either need to refinance, obtain 2nd loan or HELOC, or sell the property, each of which has costs. What if you pay down your mortgage and need money in the future for home improvements, medical emergency or other unexpected life event?

 

All these are factors, and there are more, that you should consider before paying extra down on your mortgage. There are some factors that more strongly support paying off your mortgage early than other, primarily looking at your current income, your projected retirement date and your projected income during retirement. Or you have a property that is a rental with a low enough balance that you can use rental income to accelerate the payoff of the mortgage, again looking at some of the factors above, to have a free and clear investment that gives you more options in the future, such as selling and carrying a large mortgage to defer capital gains and continue to receive income.

 

As with most/all of our questions of the week, before we can answer the question we need answers to more questions—and this particularly the case this week. If you are considering accelerating the principal reduction on your mortgage, please do not hesitate to contact me to discuss your options.

 

Have a question? Ask me!

 

With the center of the news universe seemingly being in the Senate Judiciary Committee hearing room this week, you may need to look a few pages into your daily paper tomorrow to find the employment data released today, or any other news for that matter. The Labor Department announced today that 201,000 jobs were created in August, 204,000 in the private sector. The front-line unemployment rate remained at 3.9%. These pieces of data are positive, but not a big impact on rates as the news was in-line with expectations. What did have a strong impact on rates was the average hourly earnings data which showed an increase of 0.4% in August following the 0.3% gain in July. This puts the annual rate of pay increases at 2.9%, up from 2.7%, the highest rate of increase since June 2009, the month the recession ended. With the consumer price index measuring inflation at 2.9% the average American worker’s income is keeping pace with inflation. The wage data puts upward pressure on rates and more than reinforces future rate hikes from the Fed.

 

Rates for Friday September 7, 2018: After holding on last week following the strong GDP data, rates could not continue to hold following today’s labor market news. More workers getting more pay leads to more spending leads to higher prices which leads to higher interest rates. Today rates popped up on the labor news after remaining flat from Friday to Friday for the past three weeks. Not surprising, the surprise to me is they had not increased sooner. Lock your rate when you can as higher rates are lot more likely in the future.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.50%             Up 0.125%

30 year high-balance conforming                      4.75%      Up 0.125%

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

With age comes experience and practicality. When our fifteen year old refrigerator decided to quit last Wednesday, Leslie and I looked at each other and said, “happy anniversary,” knowing a new fridge was going to be our 24th wedding anniversary present to each other. And sure enough this Tuesday, our anniversary date, a new one was delivered. Not to be completely unromantic I placed a bottle of nice vodka inside the present for her to enjoy. Somehow I don’t think I get away with a kitchen appliance and bottle of vodka for number twenty-five next year….

 

Have a great week,

 

Dennis

8-31-18: Should we buy a rental property?

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Question of the week:  Should we buy a rental property?

 

 Answer:  This is a common question for those of us in the real estate industries, as well as for professionals in other industries such as family attorneys, accountants and financial advisors. Looking to secure a long term investment many families would like to purchase a property to rent out for investment income and long term value appreciation.

 

Is it right for you?

 

As you can imagine, there are several factors to consider before deciding to purchase rental property. Here are some that come to mind, but certainly not a complete list.

 

The first question you must answer is, what are my expectations? Do you want positive monthly cash flow? Are you most concerned about long term appreciation and growth of your initial investment? Do you want a loss on your tax returns to off-set income? Each of these factors can be obtained, but each also has different requirements for how you purchase the property.

 

Positive cash flow can be very challenging in the California, especially if you are in a county that touches the Pacific Ocean. Cash flow is determined by what income the property will generate from rents minus the expenses of ownership: mortgage, taxes, insurance, maintenance and vacancy. Because real estate prices have grown it takes substantial down payment to achieve positive cash flow in most properties. For instance, if you are looking at purchasing a $500,000 home as a rental in an area where the market rents for the property are around $2500 can you achieve positive cash flow? The minimum down for a single family residence non-owner occupied loan is 20%, and today the rate is about 5.125% with that down payment. The monthly PITI is almost $2800—your cash flow is not positive. Putting 25% down the rate drops to 4.875% and your PITI drops to $2500 so you are cash flow neutral before maintenance and upkeep. Before closing costs you have invested $125,000 for neutral cash flow.

 

That said, if the property increases in value an average of 3% for the next five years your property has increased in value about $80,000 so on paper you have seen your initial down payment increase about 65%, from $500,000 to about $580,000. As well you have likely had depreciation on your taxes, that provided you with a loss on your tax returns for the property (if you are eligible to claim real estate losses) which has saved you tens of thousands of dollars in income taxes. So your monthly cash flow is neutral, perhaps slightly negative, but you have seen your investment grow in value and gained cash flow with your tax deductions.

 

Keep in mind the above scenario is based on finding a home for $500,000 in an area that rents for $2500 per month and would increase in value an average of 3% per year over five years. That said it appears this type of scenario checks the boxes for cash flow (after taxes), appreciation and deductions on your tax returns.

 

What are other factors to consider? Costs is a very important consideration. It costs money to purchase real estate, the rule of thumb is about 3% of the purchase price, and it costs money to sell real estate, the rule of thumb is about 8% depending on real estate commissions. So in the above scenario you have about $15,000 on top of your down payment to close the transaction and if you sell at the end of the five years your costs of sale are about $46,000. For your total investment of $140,000 your next gain in equity from the market is about $34,000 which is a  nice 24% return over the five years.

 

Keep in mind that $34,000 will be taxed as capital gains and any depreciation you claimed will be “recaptured”, a fancy term for taxed. Check with your tax preparer but depending on your income the taxes could exceed $10,000.

 

You can avoid the taxes by participating in an IRS tax deferred 1031 exchange, which entails selling the property and having the proceeds transferred to an escrow to purchase another property. You avoid the taxes, but you are not benefiting from the capital appreciation as it has to roll over into another property.

 

One mistake many first time investors, and some experienced, make with investment property is they care too much. Too often they want to purchase property they would want live in, or spend too much money on the property. I have seen clients spend tens of thousands of dollars to upgrade kitchens, bathrooms, floorings, etc, to be of the type and quality they would want, but for tenants who generally do not treat their homes the way they would if they owned it. If you want to get in the real estate rental market as a landlord you must remember that it is a business, you are buying an investment not a home and as such your objective is to provide a clean, safe property for rent. Putting in granite counter tops and solid oak cabinets will not increase the rents you can collect, perhaps it puts you at or near the top of the market for the area you are in, but if the market is $2500 you won’t be able to rent for $3000 just because of the nice kitchen.

 

Which brings me to the most popular way most families obtain their first piece of rental property: convert your existing home to a rental when you purchase your next home. This has many advantages. First, you save on closing costs. Second, you do not need a cash investment for the purchase of the property—though you will need one for the purchase of your new home. Third, the loan is already in place and likely at a lower rate than the current market for non-owner-occupied financing. Fourth, if you sell the property within three years of converting it to a rental you probably can avoid capital gains tax should the property appreciate.

 

Should you purchase a property for rental income and investment? The answer requires a lot of thought and research as to the short and long-term consequences. Before you make the decision consult with your tax preparer and investigate other options with the money you would be investing.  Compare possible rates of return in cash flow and appreciation, costs of acquisition and divestment, on-going costs of maintenance and loss of income, and the potential tax liabilities.

 

I am happy to be part of your investigation by running numbers and scenarios for different sales prices, down payments and types of properties if you are considering purchasing rental property.

 

Have a question? Ask me!

 

Lots of major economic news this week. On Tuesday the Conference Board reported that consumer confidence is at its highest level since October 2000. The higher confidence is supported by increases in personal spending and earnings in July. Spending increased 0.4%, the fifth month in a row for the primary economic engine for the country. The increase in spending was greater than the increase in personal incomes, which rose 0.3% in July, causing a slight downtick in the savings rate. The higher earnings, increased spending and tighter labor market caused prices measured by the PCE index to increase 2.3% in July, the highest level in six years. More importantly the index used by the Federal Reserve to gauge inflation, the PCE price index stripped of energy and food to reach 2.0%. The different pieces of data are each supportive of higher interest rates and collectively provide a strong push for higher rates.

 

Also putting upward pressure on rates, was the revision of 2nd quarter Gross Domestic Product released this week showing growth of 4.2%, revised upward from the initial report of 4.1%. A combination of tax cuts and consumer spending pushed corporate profits higher for the quarter helping push GDP growth.

 

Rates for Friday August 31, 2018: My economic training and experience is telling me that rates should have gone up this week based on the data. They are flat from last Friday, and have remained flat since the first Friday in August. Investors are tempering their decisions on bonds and mortgages waiting to see if a big shoe drops from the White House on tariffs with China and other nations. Earlier this week there was an apparent understanding with Mexico to revise our trade agreements, perhaps the same can occur with Canada, which would alter NAFTA. We will see how those negotiations and others go. If the result is positive in regards to no tariff wars and updated agreements we will definitely see rates go up–absent some other major issue or crisis.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.50%               Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

 

To slightly change the famous Alice Cooper song, Schools In ‘Til Summer. Our Long Beach Poly junior was a bit grumpy in the early hours of Wednesday morning seeing the wrong side of seven o’clock for the first time in months, I’m sure she was the only teenager or younger in the city in that frame of mind.

 

Hoping all your students have a successful year!

 

Have a great weekend,

 

Dennis

8-24-18: Do you have a will and trust? If yes, please read on. If no, please read on.

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Question of the week:  Do you have a will and trust? If yes, please read on. If no, please read on.

 

 Answer:  What did Prince and Aretha Franklin have in common besides prolific performers and writers? Both of these musical icons passed away without a will or trust. There could be many reasons why. Prince, who passed away suddenly, perhaps he thought he had more time to live and prepare an estate plan. Aretha could not have had such thoughts as she had been diagnosed with pancreatic cancer several years ago, a disease which median survival rate of one year or less. Now the attorneys in Minnesota and Michigan have a tremendous amount of work as they represent various potential heirs to large estates. Who gets the real estate, the rights to their royalties, family heirlooms and memorabilia?

 

Why they had no plans for their estates baffles the mind of anyone in the legal and financial industries who spend their careers encouraging their clients to have plans for their families and estates for when the inevitable happens.

 

There are many objections that many individuals and families raise for not preparing a will and or trust, some of the most common are, “I am still young,” “I do not own enough to worry about having a will,” “my family will know what to do.” Instead of “objections,” I should have said “excuses” as none of these are valid reasons not to have an estate plan that includes at minimum a will and ideally a will and trust.

 

If you have children you must, not “should” but must, have a legal written directive as to who will take care of your children should both parents become incapacitated, i.e. hit by a bus while on vacation in Mazatlan. A family consists of mom, dad and three children ages 12, 9 and 6. Mom and dad are on a long ski weekend in Utah and tragically killed in an avalanche. They each have two siblings. Where will the children live? Can they be kept together? What will happen with the home the family owned, who receives the proceeds? They had life insurance with only each other named as beneficiaries, how are those proceeds divided and ensure the children benefit? Eventually all these questions will be answered, but it will be expensive and the state, i.e. the courts, will be making the decisions for the family. It will take a lot of time and money at a time when everyone, especially the children will be deep in grief.

 

Will your family know what to do? What if your sister and your spouse’s sister do not get along and both feel they should be the guardians of your children should something tragic happen? How does that play out?  “Bob told me we would get the children and raise them.” “Well Susie told me we would get the children and raise them.” The children have lost both parents and now will be in the middle of a legal fight between their aunts.

 

Even if you do not have a home or significant assets, you should have a will and ideally a trust. The will determines how your assets are divided upon your passing, the trust determines whether the bulk of your assets are transferred as you wish or if the bulk, or majority, of your assets will go through probate and potentially be subject to higher taxes, leaving less for your intended heirs.

 

Age is not a consideration. While statistics indicate that you should live into your late seventies as that is the life expectancy in the United States, one must consider the key word in the phrase “life expectancy.” Accidents and diseases happen to people of all ages. Whether you are 28 or 78 it is strongly advised you have a plan in place that protects your assets for your heirs and dictates what happens to those assets.

 

Once you have a plan make sure you keep it current. Did you prepare your will and trust when your children were in elementary school and now one or more are over the age of 18? Did you prepare your plan more than five, ten, fifteen years ago? Laws have changed, especially in California regarding inheritance and trusts, is yours compatible with current laws?

 

I have too many clients who when I ask if they have a trust say, “We keep planning on doing this…” Well, no you haven’t been planning on doing it, you have avoided doing it. Planning is sitting down with an attorney and discussing all the issues and matters that need to be addressed, saying you need to do it is not planning.

 

Every family needs to have an estate plan, and most single adults as well. A proper comprehensive plan will cost a bit of money. For those who want to save money, or get a “deal” or “bargain,” keep in mind that you will never know if your trust and estate plan was properly prepared or was able to fulfill your intentions. But your family will know and the legacy you do not want to leave is them having to spend significant time and resources with attorneys and the courts because you wanted to save money when creating your estate plan.

 

Being an adult, a responsible adult, comes with responsibilities. Many of those responsibilities cost money. There are many areas where it is advised you do not scrimp, save or look for deals. Some that come to mind for you and your family are brain surgery, an unlicensed electrician re-wiring your home, or a car seat for your baby. Add to this list estate planning. Scrimp, save money or look for deals when it comes to the $5 daily Starbucks purchase, the eating lunch out every day, buying a new car every two years, flying business class, don’t try to get by on the cheap when planning your estate when the results will have tremendous impact on your heirs, and ultimately your legacy with your family.

 

Don’t be Prince or Aretha.

 

Need someone to talk to? Call  or email me.

 

Off my soapbox.

 

Have a question? Ask me!

 

Home sales softened in July. Data from the California Association of Realtors and the National Association of Realtors show existing home sales have softened in the number of sales and/or prices.  Nationally existing home sales dipped 0.7% in July from June and the annual rate dipped to the lowest level since February 2016. More locally, sales of existing single family homes in California dropped 0.9% from June to July and 3.4% from July 2017 to July 2018, the statewide single family median price was down 1.9% month over month and up 7.6% from last July. Even more locally…sales in Los Angeles County were down 20.3% for the month and down 0.9% for the year, the median priced home in July was $597,520, up 2% for the month and 5.5% for the year. Moving south to Orange County 5.8% fewer homes sold in July from June and 1.4% fewer than July 2017. The median Orange County home sold for $829,000, down 0.8% from June and up 5.6% from a year ago. Inventory is still very low which has the impact of restricting the number of sales and putting upward pressure on prices as long as there is demand—which there appears to be as the median homeowners in Los Angeles and Orange Counties “made” $31,280 and $44,000 respectively with the price increases from last year.  Between the higher prices and rates up around one-half of one percent (0.50%) from last July those who have been waiting to purchase a home have cost themselves quite a bit of money.

 

Rates for Friday August 24, 2018: Not a lot of economic news to move rates this week and all the domestic political talk did not impact markets. Looking ahead to next week there is potential for some rate impacting news, primarily the first revision of second quarter GDP and personal income and spending report which includes the inflation data the Fed uses for rates. If GDP is adjusted significantly higher and/or the inflation number comes in higher than June’s 0.4% price increase rates could bump up. Neither of these is expected to be reported, keyword “expected.”

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.50%               Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

 

Long time readers of the Weekly Rate & Market Update, actually original readers received the first year or so of the update monthly, have tangentially watched our daughters grow up. When I started the WR&MU our oldest was probably in kindergarten and youngest in pre-school. Tomorrow Leslie and our oldest board a JetBlue aircraft early in the morning and head to Boston where our daughter will be moving into her dorm room at Boston University to start her freshman year. Seems like a long time ago I was writing in this space about tooth fairies and braces, while also seeming like yesterday. Go Terriers!

 

Have a great weekend,

 

Dennis

8-17-18: We are retired, how do we qualify for a mortgage?

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Question of the week:  We are retired, how do we qualify for a mortgage?

 

 Answer:  It may be my client base is aging, or it may be that I am fortunate to have more retirees referred to me for assistance with their mortgages, it is probably both, but we are funding exponentially more mortgages for retirees every year. Qualifying income for loan approval is a bit more challenging for retirees than for a younger couple with both spouses working “regular,” salaried jobs. Back to our question, how do we qualify?

 

It is important to note that the vast majority of mortgages are “QRM” designated loan products. Qualified Residential Mortgages came about after the Dodd-Frank Act was signed into law in June 2010 by President Obama. The purpose of the QRM designation was to ensure that banks either funded mortgages for applicants that could prove the ability to make the monthly payments, i.e. show income that supports the mortgage payment. If lenders fund a loan that does not fit the QRM criteria the lender must retain at least 5% of the total non-QRM mortgages they fund, or in the parlance of the times, have skin in the game and face loss if mortgages default.

 

Simply put, a 30 year fixed rate mortgage through Fannie Mae, Freddie Mac or most jumbo loans, is a QRM designated product and as such applicants must prove they have the ability to make monthly payments.

 

Many retirees have multiple sources of income plus assets. Our objective when working with retirees purchasing a new home or refinancing an existing one is to put together a mortgage package that shows “ability to repay” under the guidelines for qualifying income as set for by Fannie/Freddie or the jumbo investors using the available income and assets.

 

Some income is easy to show, prove and qualify. First and foremost is social security income, which is easy to verify as recipients receive a letter detailing the benefit, almost all social security payments are made via automatic deposit into recipient’s checking account and finally the total benefit received and the taxable amount of the benefit are seen on tax returns. Constant, continuing and verifiable, social security income is as good as it gets for qualifying income for a mortgage.

 

Pension income from a prior employer or union is another excellent source of qualifiable income for retirees for the same reasons as social security: there is usually a benefits statement indicating the annual income, it is reported on tax returns and it shows on your bank statements. A few wrinkles for some lenders, are showing you have received the income for the prior six months and/or verifying it will continue for at least three years. It is rare, but there are some pension plans where recipients are paid only ten, fifteen, twenty, etc…years after retirement.

 

Another constant and continuing source of income for some retirees are monthly or payments from an annuity or life insurance policy. This income can be used by verifying the amount, that the income received will be a regular amount and that there is sufficient assets in the policy to ensure payments for at least three more years.

 

A primary source of income for retirees are drawing down of assets from retirement or investment accounts. The two different types of accounts are handled differently by different types of loan products and lenders.

 

The most common asset owned by retirees is some type of retirement account, generally an IRA that consists of funds accumulated while working and paid tax free into a 401(k) or other type of retirement account. One of the best parts of the U.S. tax code is the ability to make tax free contributions to a qualified retirement account while you are working, meaning the income you divert to the qualified account is not taxed as income. In addition, as your account grows through compound interest, dividend reinvestment and capital growth. Because the account grows with no taxes being paid, when you do withdraw funds from the account they are taxed as ordinary income. Also, because you have not paid taxes on the funds the government feels that at some point taxes should be paid so when you turn 70 ½ and have a qualified retirement account you must begin taking “Required Minimum Withdraws” (RMD) from the account. There is a formula that is used based on your age and account balance that determines the RMD you must take each year. These withdraws, or payments, from your retirement account are taxed. And they also can be used for qualifying income for mortgage purposes.

 

Some retirees only take the RMD from their retirement account(s), others set up a regular monthly, quarterly or annual payment that is greater than their RMD as their expenses exceed what they would receive by just withdrawing the required minimum. If you have a regular withdraw amount established that amount is what most lenders use as qualifying income provided you can prove the amount is constant and also that you have at least three years of withdraws in your retirement account using a formula.

 

One last potential source of income we will discuss in detail is if you have a large amount in cash or investment accounts that are not retirement accounts but money you saved, inherited or are the proceeds from the sale of other assets. In certain instances we can use a process called “asset depletion.” Asset depletion guidelines enable us to take a percentage of these assets and then divide by the total number of months in your applied for mortgage to obtain a monthly income amount. For instance if after going through the calculation process to determine how much of your account is eligible for qualifying income we arrive at  $360,000 of your investment account is eligible for income. You are applying for a 30 year mortgage, which is 360 months. We divide the $360,000 eligible amount by the 360 months of payments and credit you with $1000 per month for income for your mortgage application.

 

Some other sources of income for retirees are rental income, distributions from an inherited IRA or annuity or income from employment—perhaps some consulting work you do ten to fifteen hours a week or filling your time as a greeter at WalMart or working at the library.

 

Finally, if you want, or need, to sell your current home and purchase a new one or refinance your existing home and are not able to qualify for a traditional mortgage, I suggest you explore a reverse mortgage if you are eligible. This is a topic I have covered in the past and will revisit next week as I feel it is an excellent financial tool for many homeowners.

 

If you are retired, or someone you know is, and are wondering what options you may have regarding your current mortgage situation or perhaps downsizing to a new home, please contact me to review your financial information and determine how you can qualify for a new mortgage and how much that mortgage might be.

 

Have a question? Ask me!

 

Seventy percent. That is the estimated amount that consumer spending contributes to our nation’s economy. Based on retail sales numbers from July the third quarter could be another quarter of strong growth as spending increased 0.5% in July from June, which was 0.2% higher than May’s spending after being revised down from the original 0.5% estimate last month. Since consumer spending is the biggest factor in our economy strong retail sales mean a strong economy which means higher rates.

 

More for less. Another sector of the economy showed very strong growth in the 2nd quarter: productivity, which was up 2.9%, the biggest gain in more than three years. Not seeming to benefit from the increase were the workers creating the output as the amount of time workers worked increased just under 2%. Showing the biggest increase in four years was output, the goods and service produced, which jumped 4.8% in the quarter. Productivity is output (4.8%) less hours worked (1.9%) totaling the 2.9% growth. The lower rate of growth in hours worked compared to the growth in output is a result of the very tight labor markets, it is easier to increase the hours of existing workers than it is to hire new workers to increase output. This formula can only last for so long however as there is a limit to the amount of output a static set of workers can produce. The news is negative for interest rates.

 

Rates for Friday August 17, 2018: Rates hung on to last week’s dip this week. Shrugging off the positive economic news, investors are a bit concerned with some of the economic news from China and Turkey, and of course very cautious due to the tariff issue still hanging about.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.50%               Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

 

Big Friday night as many top high school programs kickoff their season tonight. With both the girls going to Long Beach Poly, and the older being in the marching band for four years, I have come to really enjoy the Friday night games and atmosphere. We are fortunate in Southern California to have so many great schools that have rich traditions in academics and athletics. If you are a high school sports fan, I hope your teams have great seasons with competitive contests, no injuries and growth for the young men and women participating.

 

Have a great weekend,

 

Dennis

8-10-18: It takes so much money to purchase a home, what are some ideas for saving money?

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Question of the week:  It takes so much money to purchase a home, what are some ideas for saving money?

 

 Answer:  Two of the hardest things to do are lose weight and save money. Both objectives require the same habits, or routines, to be successful. You need to be committed to your goal, dedicated to your plan to be successful; commitment plus dedication equals success. How disciplined you are with your behavior will determine the time frame for achieving your goal, which should be a very realistic part of your goal—not only what you want to achieve but when you want to achieve it.

 

Saving money is pretty simple, just like losing weight. To lose weight you need to be more active than you are now with the same diet, or eat less with the same amount of activity and ideally you are both, more active and eat less. As you begin to achieve success and enjoy the feeling you change your activity to be more physically challenging, and you change your diet to intake fewer calories and also better calories, i.e. more healthy foods and beverages.

 

When it comes to saving money you either need to earn more and spend the same, or spend less while earning the same amount. It is generally easier to control your spending than your income but with some willingness to push yourself you can find ways to do both—the weight loss equivalent of waking up at 5:00 a.m. to work out and stop feeding your cookie cravings.

 

Let’s tackle the harder discipline first: increasing income. Absent getting a new job in your current profession that pays more, which is always the best option if available, how can you increase your income?

 

The most obvious way without changing jobs is to look within your company to see if there is available overtime or other duties you can take on for more income. I have found many clients over the years who have told their employers they want to purchase a home and are willing to take on more duties, even if it means more time at work, to earn the funds needed for a down payment. It is not unusual for many employers to have some additional work available, it is cheaper to pay you more and expand your duties than to hire someone else. As you get closer to your goal keep them apprised of your status so they are invested in your success.

 

Do you have a skill that can be monetized? Are you crafty? Using your free time, you can make things to sell on-line or at local shops. Can you write well? Search for companies looking for content for their websites or blogs, for a few years during the market meltdown I wrote for a company that provided content for mortgage blogs and I was writing content for 3-4 mortgage websites. Are you able to work on weekends or evenings? Perhaps pick up some part-time work? I had one client who worked for three years as a night watchman at a manufacturing facility on Friday and Saturday nights and added 25% to his income—which he put right into savings. What time do you have and what skills do you have that can turn into part-time work to add to your savings account.

 

Reducing expenses and putting money into savings is not that hard, it is just a matter of what you are willing to do without. Just like losing weight, am I willing to do without a cookie or two after dinner, or a glass of wine or a beer after work every night, or pasta three to four times a week? If not my chances of success in reaching my weight goal are greatly reduced.

 

Where are you spending money that could be put into savings? Starbucks is one of the biggest drains on savings accounts in our country. Sure, there are other coffeeshops where a lot of money is spent but the ubiquitous white with green logo cups are seemingly in every third or fourth person walking into office buildings every morning. The average cost for most Starbucks coffee only orders is about $4, five mornings a week that is $20, fifty weeks a year that is $1000. Using a coffee maker or French press (easier to make single or two cup servings) costs about $0.20 per cup. I like to start people saving by challenging their “I have to have it…” Starbucks or morning coffeeshop purchase because once that habit is broken a lot of others are easy. Why? Because it completely changes your morning routine, and for most the routine is for the better as they can start their coffee making process while getting dressed or doing something else and save standing in line and waiting for an order in a retail outlet. Saving $1000 towards what is needed to purchase a home does not seem like a lot and it’s easy to say, “I’ll save somewhere else…” but if you can start here then it makes it easy to stop other expenses and convert them to savings.

 

What are you driving? Do you have a car payment? Is it more than two to three percent of your income? If so then you can save a lot of money by changing your car. I drive a 2006 Honda Pilot and have saved a lot of money in car payments over the years, Leslie drives a 2010 Honda Odyssey van, our daughter has a 2001 Infiniti i30. Obviously, we do not need the newest cars with the newest features, because of this we do not have large car payments. When we shuffle cars later this year when our oldest goes to college the plan is for our 16 year old to get my car, my wife to drive the Infinity and me to drive the van; sometime in 2019 we will get a car for Leslie, but a used car to save money and if we decide to finance do so at a lower loan amount.

 

That’s us, we are not car people. I get that there are car people out there who want the latest and greatest. My advice is to get the garage and then the car. Are you worried your friends or co-workers will make fun of you driving a six-year-old vehicle? Tell them you want to buy a house and aren’t willing to compromise saving to purchase something that sits for more than 90% of the day in a parking lot, garage or on the street. If you have a car with a high payment look at what options you have to trade it in and buy down. If you are near the end of the loan keep the car and do not get a new one. If you are leasing talk to the dealer about options to reduce your payments or purchasing a used car with a low loan amount. It is not uncommon for me to meet with clients who have two large car payments that are almost 10% of their gross income who are renting and are short of funds needed to purchase a home. Sell one or both of the cars and get into cheaper payments. Last year I went through the math with a couple and within two weeks sold their less than one year old cars and purchased used cars, they are saving almost $1000 a month in car payments and will be buying in the Spring. Like your morning coffee, your car may be a necessity but how you fill the need may be a luxury.

 

Another big expense item that many do not like to curb is entertainment. Concerts and sporting events are very costly, they can easily cost as much as ten to twenty weeks of Starbucks purchases. It can be tough to tell your friends, “hey we can’t afford to go we want to buy a home,” but good friends will understand, others will try to guilt you into breaking your commitment and dedication. Nights out at expensive restaurants, trips with large airfares and expensive hotels, also have the ability to take a lot out of or put a lot into your savings accounts. Part of your commitment is to forego many fun adventures for the bigger goal, owning your own home.

 

Success requires trade-offs, what are you willing to trade for success? Where are you spending money now that could be reduced or eliminated in order to put more money in your savings account? Most families have no idea where they are spending their money so do not know where they can cut back. Pull out your bank and credit card statements for the past several months—ideally for a year—and categorize all your spending into categories: necessities, which are only housing, food for home and utilities for now, transportation, dining, entertainment, travel, clothing (yes, it is a necessity but it depends on what you are buying and how often). Add up the totals you are spending and you may be surprised at not only how much but where you are spending your money. Then start making reductions and eliminations.

 

If you are married this process needs to be done with no judgment, one spouse may be a clothes horse and the other a car nut; or one buys a lot of very nice wine and the other plays a lot of really good golf courses.

 

Once you are in  your home you can determine if you can, or want to, start adding back some of the spending you have cut during your saving period.

 

It bears repeating: Success requires trade-offs what are you willing to trade to purchase your home?

 

Have a question? Ask me!

 

Spend more, borrow less. That is what consumers have been doing, at least less spending on credit cards. Credit use for revolving credit has been dropping while consumer spending has been growing, interestingly the personal savings rate has been increasing. So consumers are spending their some of their earnings for purchases that have been put on credit cards in the past, and are borrowing on long term loans for large expenditures like autos and college.  This is generally good news for the economy as it shows consumers have a positive outlook for their personal economic future. This is not a big mover for mortgage rates except as it feeds into the overall data on economic strength and outlook.

 

Prices won’t push rates, for now. Following June’s strong increase in the Producer Price Index (up 0.3%) wholesale prices cooled off to no increase, or decrease, in July. Following the increase in June for wholesalers it is little surprise that the Consumer Price Index increased from 0.1% growth in June the CPI increased 0.2% for July. The “core” price increase (no energy or food costs) was up 0.2% for the month and 2.4% year over year, the highest increase in the index since September 2008…the month before the real estate and mortgage market melt-downs. The news is not positive for interest rates, and pretty much cements the Fed increase rates in September—which means those with Home Equity Lines of Credit will see their rates increase by 0.25%, possible but not probably more.

 

Rates for Friday August 10, 2018: Rates improved from last week, primarily because the Treasury $78 billion in U.S. debt that was absorbed rather easily in the market, investors liked the market reaction and rates dipped strongly on Wednesday. The price data mentioned above was somewhat expected, therefore priced into the market, so did not negatively impact mortgage rates. Overall rates have reversed their increase from two weeks ago. The trade tension between the U.S. and trading partners may come to a head next week, causing rates to make a significant move one way or the other—keeping in mind rates generally go up like a rocket and down like a feather. Be cautious.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.50%               Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

 

Channeling Gene Rayburn and the original Match Game, I keep thinking this week, “It has been so hot lately. (Audience, “How hot is it?”) That Mildred’s BLANK melted off.” I have weird thoughts.

 

I have had some inquiries and I will admit to procrastination of a task I need to do but not looking forward to doing. When I had my website rebuilt earlier this year I had not yet learned how to effectively put my Weekly Rate & Market Updates on the site. As well there was a gap in the WR&MU from when they were migrated off my old site to when it went live. My objective this month is to reformat the updates, put a title on them referencing the Question of the Week, and loading up 2018 to date on the site with the new format. Your patience is appreciated and I think this will make the site and updates more useful for research on particular topics of interest for you, your friends, clients and family members.

 

Stay cool and have a great week,

 

Dennis

7-20-18: What is the process for our mortgage application when we purchase a home?

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Question of the week:  What is the process for our mortgage application when we purchase a home?

 

Answer:  Mortgage application packages are very deadline oriented. For a purchase this is because we have a closing date that is agreed upon by the buyer and seller, for a refinance the deadline is when the rate lock expires.

 

Here is a not so detailed look at the timeline on a purchase, much of it is the same as with a refinance.

 

Ideally the first step in your mortgage process when purchasing a home is we have detailed conversations and review your records to determine your ability to qualify for a mortgage to purchase at a certain price with a certain amount down. This is the pre-qualification, or pre-approval, stage. We review your income by looking at paystubs and tax documents. We obtain a credit report to see you credit score and confirm your balances and payments on outstanding credit. We look at your asset statements so we know how much we have in funds for down payment, closing costs and reserves if necessary. And we discuss your objective, long term plans and other factors that may influence the amount and type of mortgage that would be ideal for you and your family. This step can take an hour or several days depending on the complexity of your finances or issues we need to address. Next step: Look at houses and write offers.

 

You have your offer accepted and we begin the formal application process. At this stage we complete any information for the loan application so you can sign the application and disclosures. We collect necessary documents supporting income, credit, obligations, funds being used for closing and other items we discuss as necessary. Once we have the signed application and necessary items we lock in your loan rate for a specified period of time that matches your escrow time frame but in 15 day increments (i.e. lock for 30 or 45 days). As well, we communicate with both your agent and the seller’s agent to establish clear lines of communication, confirm who will be the person for the appraiser to contact to set up inspection of the property. We also initiate contact with the escrow officer to make sure s/he and our staff have each other’s contact information as they will be sending a lot of information and documents back and forth. Finally in this stage, we order the appraisal. This stage is generally one to two days depending on how quickly you get the required items to us. Next step: Processing.

 

During the processing period our staff is collecting the necessary information to ensure underwriting will approve your loan as applied for. All your information will be reviewed and verified. During the review our staff will ask questions that may need additional information to support answers: what is this large deposit, there are some statements in the tax return that indicate another business or sources of income to verify. At this time they are also collecting necessary documents for the approval. The appraisal report will be completed and reviewed. We will obtain a copy of the preliminary title report on the property. Escrow will send us the escrow instructions which detail the agreement between you and the seller. We will communicate with your insurance company to ensure there will be sufficient coverage of the property to protect the lender should there be fire or other major damage. Any loose ends or issues that may arise as all this information is collected and reviewed are addressed and the necessary parties are contacted and additional information requested to cover the issue so underwriting will approve the file. The timing for this stage depends on the how quickly others respond to our request for items. If the listing agent puts off the appraisal inspection for a week or ten days that slows us down. If we request additional statements on an account, tax returns on a business entity, source of funds, this can slow us down if the information is not forthcoming. If everything is into us in a very timely manner this step should be about 10 business days. Next step: Underwriting.

 

The mortgage application package, at this point several inches thick (our record is over 1 foot high with clients who had multiple companies and properties resulting in about ten tax returns for various entities). All the documentation, disclosures, reports are then sent to the underwriting department. Once received it is assigned to an underwriter who reviews the file and issues an approval, usually “conditional” approval as the underwriter generally asks for items to complete the file, an updated paystub, a letter of explanation for some issue, clarification on the appraisal, support for continuing income from commissions, overtime or bonus, a myriad of items may come up. The underwriting period is generally two to three business days. Depending on the additional conditions requested the time frame from initial approval to final approval can be as short as 3 to 4 days or considerably longer depending on conditions requested and ability to provide them. Next step: Loan Docs.

 

Once we get the approval and are moving into the final stages of the transaction we will issue to you the Closing Disclosure (or CD). We usually like to issue this via DocuSign as when you acknowledge the CD will start a timer on when you can sign loan documents, which is three days not counting Sundays and holidays. So if we issue the CD on Friday and you open the link and “sign” on Sunday you cannot sign loan documents until Wednesday, if you had signed on Friday you could sign docs on Tuesday. Does one day make a difference? Next step: Funding.

 

The loan documents will be sent to escrow and available for you to sign the day you are eligible to sign after the CD rescission period is up. Escrow will contact you to set up a time to sign in their office, or if more convenient set up a mobile notary. At this time we will know the amount of funds needed to complete the closing of the transaction. Escrow does not take personal checks, the funds for closing need to be either via a cashier’s check or a wire (see important note below). After you sign loan docs and your funds are in escrow we fund the loan. If we have the loan docs in our office in the morning and all is in order we can fund the day we get the loan docs, the time from doc signing to funding can be as short as one day. Next step: Closing.

 

Closing occurs when the deeds are recorded by the title company at the county recorder where the property is located. The grant deed conveying title from the seller to you is recorded first, then the trust deed securing the property as collateral for the mortgage is recorded. Depending on what county you live in recording happens either the same day (Orange County is a same day recording county), or it occurs the next day (Los Angeles County will not allow funding and recording on the same day). This is where that one day difference on the CD can impact closing. Since we cannot fund and record on the same day in some counties we very rarely fund a loan in those counties on a Friday for many reasons, for one you are paying interest for two additional days on a property you do not own. Second, if something happens to the property, or the current owner, we have two loans on the property and two insurance policies (your policy must be in effect before we can fund). As you can imagine this creates several issues that need to be unwound. While something could happen to the property between funding on Wednesday and recording on Thursday, it is less likely than something happening between funding Friday and recording Monday. So the closing step is either same day or next day. Next step: Move In!

 

NOTE, VERY IMPORTANT! There has been a wire fraud scheme occurring with real estate closings. The scam works like this. You are in escrow to purchase a property and you receive an email from what looks like your escrow officer. It is instructing you to wire your funds for closing and provides the necessary information. The email has the escrow company’s email address, signature on the email looks the same and by all accounts is from the escrow company. This email will come near closing but before funds are usually asked for from escrow. What has occurred is that at some point your email was hacked, it could have been last month or last year or even longer ago. The hackers run your emails through their filters which are set to look for keywords in your emails, such as “escrow,” “mortgage,” “purchase home,” etc. When any keyword occurs the account is monitored to determine is you are engaging in a real estate transaction. The next step is to determine who is who in the communications and then spoof the email account for the closing agent, i.e. escrow, and send you the email requesting you wire the funds into the scammers account. Do not reply to the email, do not send the funds to the account listed in the email and do not call the number listed in the email as chances are it is not the escrow company you are using. Before sending funds call the escrow officer from the number printed on the escrow instructions you have, or by getting the number from us or your agent, and verify the amount of funds required and ask them to send you an email with the wire instructions, then call back to verify the information is correct.

 

As you can see the time frame for closing an escrow on a purchase can be 30 days or a little less, or longer depending on everyone having the information needed and requested and providing it in a very timely fashion. Closing times are dependent on many actors all performing together and when needed.

 

Have a question? Ask me!

 

Consumers appear to be happy. Retail sales for June were reported on Monday and showed a 0.5% increase from the prior month. This is good news, what was pretty incredible news was that May retail sales were revised upward 0.5% for a total increase of 1.3% from April, that is a very rare number to reach. Auto sales had strong months in May and June, up almost 1% each month, and restaurants also showed strong increases, up 1.5% in May and 2.6% in June. This news indicates consumers willing to increase their discretionary spending, what’s more discretionary than eating out instead of at home? The news is somewhat negative for rates as higher consumer spending supports stronger economic growth, which leads to higher interest rates.

 

Historic is the word to describe yesterday’s jobless claims report. Last week 207,000 initial jobless claims were filed, the lowest weekly amount since December 1969. Continuing jobless claims, as sign of length of unemployment, are at 1.738 million which is at a level last seen in the early 1970s. The news is interest rate unfriendly as a tight labor market can, should, lead to some wage inflation which will lead to higher interest rates.

 

Rates for Friday July 20, 2018:  The economic data suggests rates should be higher than they are, especially with the Fed selling off billions of dollars of mortgages and bonds every month. However investors, who ultimately control interest rates, do not look at just American economic data when making their decisions on what to buy and sell for long range profits, the also look at foreign economies, and as importantly domestic and international politics. It is the latter that has investors holding onto their fixed return investments (i.e. mortgages and bonds) as a hedge against some major event that could trigger a run on bonds and therefore lower rates. It is a strange set of market circumstances we have been experiencing. Thankfully we have benefited from flat rates for the past two months.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.500%             Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

We have been down to one kid in the house since early in the month as the younger one is spending her annual month in Minnesota at camp, unfortunately for the older one she is basically termed out this year and must spend the summer at home. It has been nice to have her home with us since she leaves in 4-5 weeks to Boston for college and then we will be a one kid home for a few years before the younger ones decides to leave as well. We are in that period when our oldest is still our daughter and little girl but our relationship is slowly transitioning to daughter and adult. Certainly a unique summer for our family, and one that we will fondly remember for years to come. I hope you and your family are having a great, and unique, summer as well!

 

Have a great week,

 

Dennis

7-13-18: How do inquiries impact my credit score?

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Question of the week:  How do inquiries impact my credit score?

 

Answer:  A lot or not at all.

 

Quite frequently we have new clients tell us, “don’t run a credit report because I don’t want it to hurt my score.”

 

My response is, “First I cannot give you a solid pre-qualification and absolutely no pre-approval without running my own report, and second it will not impact your score unless you have had several inquiries recently—have you been speaking with other mortgage professionals and have any of them run reports and if so when?”

 

Conventional wisdom is that credit inquiries push down your credit score, so when you need credit just by applying your score drops, which may mean a higher rate or credit denial.

 

Conventional wisdom is not always right, especially when it comes to credit reports. Let’s take a look at when credit inquiries do harm your score and when they do not.

 

If you are applying for several credit cards, department store cards or signature lines of credit the chances are your credit score will be negatively impacted. If you are applying for one such item of credit your score will most likely not be impacted at all. The credit score programs have in their algorithms risk factors and if they are told that you are making several inquiries to obtain revolving, easy to access credit that activity is a high credit risk—it is evident you are searching for funds from many sources. What if you apply for two department store cards and two credit cards within two weeks. You could very quickly have access to several thousand, tens of thousands, of dollars in credit. If you already have several open credit accounts with high balances compared to credit limits these inquiries will push your score down considerably.

 

If you have some open credit accounts and the balances are not very high compared to available credit and you apply for a new credit card, say one that will give you airline points so you can leverage your purchases for plane tickets to visit your kid at college, if this is the only revolving credit inquiry on your credit report then your score will not, should not, be impacted.

 

What about purchasing a home? We routinely see credit inquiries on our clients’ credit reports from other mortgage lenders, usually over the past month or so, and these inquiries do not generally impact the credit score. I say generally because if there are more than five or six there could be an impact but not necessarily. As a rule three or four, or fewer, inquiries for home loans will not impact your credit.

 

The reason for this is that it is not unusual for someone looking to obtain a mortgage, either for home purchase or refinance, to call more than one lender (unless they call Stratis Financial which is usually the last call needed). This behavior is programmed into the credit score software, so if there are multiple inquiries from mortgage companies in a somewhat short time frame, about 4 weeks or so, your credit score is not impacted.

 

The same is true about auto loans. Many people speak to many car dealers, who run reports themselves or through different banks, looking for auto loans and these inquiries are treated similarly to mortgage inquiries.

 

If you have multiple inquiries for long term debt obligations, like home or auto loans, you credit score will likely not be impacted, if you have multiple inquiries for revolving credit your credit score will likely be impacted negatively.

 

Have a question? Ask me!

 

Pressure, no pressure, was the impact on interest rates with the price data released this week. On Wednesday the Producer Price Index for June was released and the data put pressure on rates to increase as wholesale prices increased 0.3% for the month and were up 3.4% from last June (2.8% when food and energy are stripped from the data, called the “core” rate). This strong data for prices caused great anticipation for the Consumer Price Index data release the following day. Would the stronger PPI figures show inflation for consumers beyond what the Federal Reserve would prefer? No, the CPI data did not show a significant increase in prices in June, putting Fed interest rate decision makers at ease. Month over month prices rose a scant 0.1% for you across the economy’s basket of goods and services and the generic American consumer paid 2.9% more than in June 2016 (2.3% using the core rate). This data was met with a bit of a sigh, and a shrug. Looking ahead, will the June wholesale price increase bleed into July for consumers resulting in higher rates? We will on August 10th when that data is released.

 

Rates for Friday July 13, 2018:  A tame week in the rate markets with not a lot of movement, so little that rates are the same as last Friday. We like a flat market!

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.500%             Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

 

While we have had some significant summer heat early in July, we are still a week away from the Dog Days of Summer, which officially begin on Sunday, July 22nd and end on Thursday, August 23rd. Wait, there are official Dog Days of Summer? Yup. Based on ancient Roman and Greek astronomy, the time when the star Sirius (the star that is the nose of the constellation Canis Major) rises in the morning before the sun. This year Sirius will rise before the sun starting next Sunday and ending on August 24th (the sunrise after August 23rd).

 

In those times the period of the dog days were not looked forward to as it was during this period when sickness, war and catastrophes would occur—perhaps coincidence, perhaps not!

 

Have a great week,

 

Dennis

7-6-18: When should we have our credit report pulled when exploring the purchase of a new home?

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Question of the week:  When should we have our credit report pulled when exploring the purchase of a new home?

 

Answer: “We got a copy of our credit report on-line, can you just use that?” This is usually the question that precipitates our question of the week.

 

When should you have a credit report pulled? Our most common answer to the Question of the Week is, “that depends…” and it applies in this case as well.

 

Many people are fearful of having credit reports run because they are concerned the inquiry will hurt their credit score. As a result, when we ask them somewhat generically, how is your credit history, they often reply that they recently obtained a report on-line and would like us to use that for their pre-qualification and approval.

 

If we are in the very preliminary stages of the qualification process, using a generic report from one of the free on-line services can be helpful, but we will not issue a pre-approval or a strong prequalification recommendation unless we are able to obtain our own report.

 

Why?

 

Because. (I’m a dad so I get to answer “why” questions with “because.”

 

We need our own report for several reasons. First and foremost, our reports are what are known as “tri-merge” reports, meaning they include the data from the three main credit reporting bureaus, Equifax, TransUnion and Experian. This will provide us with a very complete credit history and with credit scores from the three bureaus so we know which score will be used for qualifying and rate pricing (we use the middle score, if two or more borrowers we use the lowest middle score).

 

Second, not all credit companies report to all bureaus. We have seen many “clean” reports over the years provided by one credit bureau and then when we pull our tri-merge items appear that were reported to one of the other bureaus. For instance, you obtain a report from Equifax and it shows your car and student loans, credit card balance and history with a late payment from Macys in 2013. That is pretty good. However, when we pull our report there is a collection from a medical bill in 2013 that showing unpaid that reported to both TransUnion and Experian. Suddenly we have an issue to deal with we did not know about. As well, the collection will give you a lower score on the bureaus reporting it than the one that did not, how much lower? Does it knock us out of the program we want to use? Does it change the rate significantly?

 

Back to our question of the week, when should we have the tri-merge report pulled?

 

It depends on where you are in the process. Are you just starting the process of purchasing your new home? You have really looked yet but have been talking about it and want to see where to begin, how to begin, what needs to be done to begin? If that is the case you are likely going to be some time away from actively engaging in the process, in which case we will probably speak in generalities, broad strokes, and begin prepping for the full on assault on the housing market.

 

 

If in our initial conversation you make some statements or provide some answers that leads me to believe we might have some issues creep onto the credit report I would suggest we pull a report to get a starting point and see if we have any work to do. What might come up that would lead us to want to pull a report? You are divorced—how did the credit separation go? Are you still linked to your ex-spouse on any open accounts? You mention you had a medical issue in the past that took some time to resolve—did any accounts go to collection? You are self-employed and had to change tax preparers as you were not satisfied with his/her performance—were there unpaid taxes that became a lien? There are several variables that thirty years’ experience can hear and suggest a credit report.

 

One thing we consider when strategizing the credit report is that after sixty days lenders will want a new report to make sure nothing has changed. If we pulled a report May 5th, and you are still looking for a home today, do we pull a new report them?

 

Probably not. Once we pull our initial report we tend to stick with that for as long as we can. In the current market it can, and does, take some buyers several months to find the home they want, and can, buy and have their offer accepted. If we did pull a report in May, or even April, and you write an offer this weekend, as part of my pre-approval package I would include the information form that May, or April, report and advise that we do not want to pull reports every sixty days to reduce inquiries with your credit bureaus and one of the conditions of the seller’s acceptance of your offer can be my providing updated information on your credit scores and ability to qualify within 24-48 hours using a fresh report.

 

On the one hand we do like to limit the number of reports we pull. On the other hand we have to have the tri-merge report to know exactly what we are going to be dealing with for qualifying and approval.

 

When is the best time to have your credit report pulled? Just before we are in “go mode” for a home purchase and will be writing offers, or if you think there may be some issue from the past that could have an impact or be an issue we need to deal with.

 

Next week we look at credit inquiries and their impact on your credit score.

 

Have a question? Ask me!

 

 

Words and numbers impact rates. Words released by the Federal Reserve Open Market Committee (FOMC) from their last meeting in June when it raised rates by 0.25% indicate Fed members see labor markets continuing to tighten and inflation should retain its 2% level in the near future. Concerns about the future were expressed as short-term rates are approaching long term rates, what is known as a flattening yield curve. This rate behavior often coincides with a recession—is the Fed predicting one? Not exactly but keeping an eye on data that often does. The minutes gave some relief to investors anticipating higher rates in the short term as the minutes were somewhat rate friendly.

 

The data supported the Fed’s assessment.  Our monthly First Friday Labor Department release of employment data happened this morning and most of the data supports the Fed’s course of two more rate increases this year. The economy added 213,000 jobs in June, over 202,000 in the private sector. As well the labor force grew by 601,000 in June. This increase in the job force caused the headline unemployment rate to increase for the first time in a long time from 3.8% in May to 4.0% in June. The increase is result of the growing work force, i.e. more people seeking employment, and the labor participation rate (percentage of individuals eligible for work who are working, or participating in the workforce) increasing from 62.7% to 62.9%. This news is rate neutral to the extent most people who follow this sort of thing anticipated numbers close to what was released. The number that caused some pause was the earnings portion of the report as wages grew 0.2% for the month and are up 2.7% from last June. This relative slack increase in earnings as employment grows indicates more workers are seeking work enabling employers to hold wages steady. This removes some concerns about inflation being driven by wages, and is rate friendly.

 

Rates for Friday July 8, 2018:  Our last recession ended in June 2009, it would certainly seem a course correction for the economy is long over-due as we start our tenth year of economic growth. That is just back drop for the political and economic issues that are impacting domestic and international economies that have more and more economists and investors starting to look at the horizon for signs of an economic downturn. When economies slow down or go into recession interest rates either lead in anticipation, or follow. The possibility now being brought up more and more of not whether but when the next recession will occur puts a bit of a parachute on rates trying to climb.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.500%             Down 0.125%

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

How messed up is your internal calendar? Mine was out of whack all through June for whatever reason, I’m blaming school being let out and my routine being thrown off. Now starting the month with a holiday smack in the middle of the week has me really thrown off. Did we get two Mondays and two Fridays this week? I need a Tuesday and/or Thursday thrown in once in a while—but that does not mean I advocate for our Independence Day celebration and holiday to become a mandated Monday holiday with different dates every year a la Labor and Memorial Days.

 

I hope you enjoyed your celebrations on the 4th, our family did.

 

Have a great week,

 

Dennis

6-29-18: Why have I received a lot of solicitations for mortgages recently?

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Question of the week:  Why have I received a lot of solicitations for mortgages recently?

 

Answer: Because the credit companies sell your information to credit companies.

 

Data mining and selling has been in the news a lot in the past year, mostly centered on Facebook and other social media companies. But selling data is not new. It is a huge, and often sole, revenue source for many companies that do business on the internet. The major credit agencies are no different and have contracts with credit providers for many types of credit, mortgages, auto loans, credit cards, student loans, to provide the credit information for consumers who have credit reports run by companies within their industry. If you apply for a credit card from a department store you can expect to get credit card offers in the mail. If you apply for an auto loan you can expect to get offers for auto loans.

 

If you apply for a mortgage…here is what happens in our case.

 

When we run credit reports we use a company, Funding Suite, that provides us a detailed report with data from the three major agencies, Equifax, Experian and TransUnion. When these companies see that there was an inquiry on your account from a mortgage company processing an application for a residential mortgage that triggers their algorithms. Sifting through the data on location, balances, payments and most importantly your credit score, the agency sends you information to mortgage companies that have paid them for data that meets certain parameters.

 

The mortgage company purchasing the data processes the information and sends contact information to their marketing department and contact is initiated.

 

We have learned a loophole that works some, not all but some, of the time by masking your application on the initial inquiry as for a non-residential mortgage, but that dodge is being figured out by the programmers and data is still being sold.

 

There is good news. You can stop the solicitations by opting out of receiving offers from credit providers. Click on this link. At this site, OptOutPrescreen.com, you can choose to opt out of receiving offers for five years, or permanently, or if you want to receive offers for credit cards, auto loans, etc you can choose to opt-in to receive offers. As the site shows, there are some advantages to receiving offers that you may want to consider before opting out of all offers.

 

When you receive any type of unsolicited credit offer please keep in mind the primary purpose of the solicitation is to get you to reply, then it is a numbers game for the credit company to convert a certain percentage of responses into applications and then a percentage of those into new accounts. Because of this the initial marketing message is *certain conditions apply; meaning the rate/terms on the offer are usually not what will be offered.

 

Next week we will discuss when you should have a credit report pulled when exploring the purchase of a new home.

 

 

Have a question? Ask me!

 

 

There is no shortage of news that impacts mortgage rates. Consumer spending is approximately 60-70% of our economy, so data on consumer confidence impacts interest rates. In May the Consumer Confidence Index dipped slightly, mostly on the expectations component of the index (how consumers expect their future economic well-being to be), likely due to concern over how the tariff impositions around the globe in reaction to President Trump’s initiate new tariffs for products imported to the United States, most notably steel. The dip was very small so no impact on mortgage rates, but a warning that future confidence could slip further which would be positive for rates.

 

The third and final revision to 1st Quarter GDP revised economic growth from January through March was down from 2.2% to 2.0%. This news on its own would be positive for rates, however with the revision to economic growth was a revision to price data, i.e. inflation. The core price index (prices less food and energy) showed an increase from 1.9% to 2.2%. With prices increasing more than 2% the expectation is for rates to increase as well.

 

This morning we had what I consider the most important economic data release for the week: Personal Income and Spending. As mentioned above consumer behavior is by far the most important factor in our national economy, ergo what consumers earn and spend is vital information for investors and planners. In May wages increased 0.4%, a strong increase that was in line with expectations. With the increase in earnings it is no surprise that spending increased as well, which it did with consumers spending 0.2% more in May than in April. The increase in spending was modest, especially in light of the earning increase. With earnings growth outpacing spending growth it is follows that personal spending should increase and it did rise 0.2% to a rate of 3.2%. Are consumers spending for future large purchases or for future rainy day?

 

The number in the income and spending data that is very rate related was the price index in the report, showing core prices are up 2.0% in May, right at the Federal Reserve’s price target. It is a major moment for the Fed as it has been chasing 2% inflation for a decade and now it appears it has been reached. If this inflation rate holds it means the Fed does not need to worry about stimulating the economy but instead turns to focus on inflation and keeping it in check. This means higher interest rates.

 

Rates for Friday June 29, 2018: While economics and political science are two different fields they are intimately connected. Does government policy shape economic activity or does economic activity shape policy? The answer is yes. Each influences the other in the short, medium and long term. We are seeing this in our current markets as the economic data should lead to higher interest rates for consumers, but public policy has led to rates experiencing a slight dip in the past month and prevented rates from increasing. So despite positive economic news that should put upward pressure on rates, despite billions of dollars of U.S. Treasury debt on the market plus billions more being sold by the Fed from its Treasury and mortgage holdings we have seen rates behaving contrary to what fundamental economic principles dictate. Investors concerned with global economic slowing have been selling stocks and purchasing long term fixed rate investments, i.e. bonds and mortgages, which has countered current economic data. In this environment there is little stability for the future of rates and the advise remains to lock when you can. If public policy on tariffs changes rates will increase suddenly, and as we have seen in the past year and a half policy can change quickly and unexpectedly.

 

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.625%             Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

Throughout our nation’s history there have been deep disagreements on policy, which means solutions to problems. The arguments between factions when the Declaration of Independence was being written and voted upon by the Second Continental Congress were very personal and filled with rhetoric—these men were debating if they should vote to be considered traitors. After the Revolution there were intense debates, very nasty attacks via anonymous writings in pamphlets and papers centered on the Constitution and how, or whether, the states would come together with a federal government. Throughout our history there have been issues that have created deep philosophical and ideological differences, that these disagreements continue today should not be a surprise to anyone, and in fact are somewhat healthy for our Republic.

 

Next week is Independence Day and as I do every year I encourage everyone to read the Declaration of Independence. Most Americans know, or should know, the beginning of the document, “When in the course of human events…” and the most famous line, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among those are Life, Liberty and the pursuit of Happiness.” The latter is, in my opinion, perhaps the most important sentences every put forward for a vote by a governing body for it is the foundation of a nation and its laws.

 

Much less known, but very important is the final sentence in the Declaration, for it cemented the commitment of those in the Congress to not only the Declaration, but also each other. It is, again in my opinion, the same sentiments under which millions of Americans have volunteered to serve in our armed services to enable our nation to exist and continue to evolve with ever growing liberty and freedom.

 

Celebrate our nation’s founding next week, as well celebrate the differences that have and will continue to have that make our nation the greatest in human history.

 

Have a great week,

 

Dennis