Mortgages: January 2013 Archives

Many people think that mortgage interest works like rent: paid in advance before you live in the property for the month.

This is not the case.

Mortgage interest is paid in arrears. As you begin the month, interest begins accruing. It accrues throughout the month, and the payment is due at the beginning of the following month. The reason for this is that the interest is unearned until you have actually borrowed the money throughout the month. You could win the lottery, write a best seller, sign a contract a with professional sports team, or any number of other farfetched but real possibilities for suddenly acquiring a windfall of cash enabling you to pay that loan off. You could also refinance, in which case that lender is only entitled to the interest from the days you had their loan.

When you refinance, however, or even when you take out an initial purchase money loan, you will generally be required to pay the interest for the remainder of the month on that new loan in advance. The reason for this is quite simple administrative - it gives the lender some time to set all the bookkeeping on that account up, gives them a full month at least between initializing the loan and the time any money should be hitting their account in payment of that debt.

So when you refinance, you make an upfront payment to the old lender for the part of the month they held your loan during the month, and to the new lender for the time they held your loan. Say the new loan funds and pays off the old loan on June 15th. You will pay the interest from June 1st to 15th to the old lender, and from June 15th though the 30th to the new lender. You never, ever, get a free month, because interest never stops, at least so long as you owe the money. In point of fact, I tell people to think of it as making their normal payment early, as in this case they're writing the check they normally would have written July 1st two weeks early on June 15th. It's really just the interest owed, but since most folks don't keep their loan more than a few years, there usually isn't a large proportion of principal in their regular payment anyway. Therefore, if you think of it as your regular payment, paid early, it'll usually be a little bit less. There are usually one or two days of overlapping interest, which is why most escrow officers won't request funds on a Friday. You don't want to be paying interest on two loans over the weekend to no good purpose.

So why do lenders use the "skip a month of payments!" come on? Some will even use, "Skip two payments!" Because a new loan is being originated, they can (generally) roll that money into the balance on your new loan where you not only pay the money, but you pay interest on it for as long as you owe that money. Make you feel all warm and cuddly? Didn't think so. Anyone who uses the "skip a payment!" promise to get you to refinance has just told you point blank that they're a dishonest crook. However, since most people don't know how to translate loan officer speak into English, they get away with it disgustingly often. The state of financial education in this country is a national disgrace. Of course, it's to the benefit of certain political groups to have voters believing that there is such a thing as a free lunch.

You never really skip a loan payment when you refinance. If you try, all you're really doing is adding it to your balance. You can decide to pay your balance down at loan inception and pay closing costs out of pocket, and while an accountant or financial planner will generally tell you there are better uses for the money, it can be a very smart thing to do if your circumstances are right for it.

Caveat Emptor

Original article here

You've probably heard the horror stories, and I've mentioned the possibility more than once. Some unsuspecting person is looking at properties beyond their price range, and it therefore has all kinds of attractive features that properties which are in their price range do not have. They are just about to regretfully but firmly put the notion of buying this particular property out of their heads when the Real Estate agent whispers seductively, "I can see that you want it, so let me show you how you can afford it!"

There are all kinds of reasons why this happens. Bigger commission check for the bigger sale certainly is one, but a far bigger concern to most of the predators who do this is that it's an easy immediate sale. Instead of having to take those folks around to dozens more properties that are in their price range (and perhaps lose them to some other agent taking advantage of an opportunity in the meantime), while the clients agonize about the trade-offs of linoleum versus carpet in the bathroom and kitchen, and maybe if they'll keep looking just a little while longer they'll find one that is perfect despite the market, so they're not going to make an offer today, thank you very much, this predator has shown them the equivalent of the holy grail, provided the clients do not understand the downsides of the loan that is necessary to procure that property.

There is a reason why I advise people shopping for a property to make a budget based upon what they can afford based upon current rates on 30 year fixed rate loans costing no more than one point total, or at the very most a fully amortized 5/1 ARM, and stick to it (It's actually harder to qualify for the 5/1, due to lower debt to income ratio guidelines). That's the maximum price you will offer - end of discussion. Even if you, the client, end up applying for another type of loan that has lower payments, if you could make the payment on a thirty year fixed rate loan, you are pretty certain you are not getting in over your head. But shop by sales price, not payment. It's not like the sharks haven't figured out that suckers shop by payment - so don't be a sucker. "Creative financing" has become so pervasive and so varied that shopping by the payment the real estate agent has posted, or tells you about, is severely hazardous to your financial health. Maximum purchase price you are willing to consider should be the most important thing buyers discuss with their agents, and the budget must be quoted in terms of purchase price, not monthly payment. There are too many games that can be played with monthly payment, and just when I think I have them all covered, another one pops up.

Indeed, the very head of the list of reasons why buyers should fire an agent is that the agent showed them a property which can not reasonably be gotten for the sales price limit they told the agent about. You tell me that your limit is $320,000, it might be okay to show you a property listing for $340,000 or even $350,000 if buyers have enough power to bargain it down to the agreed maximum and are willing to walk away if they can't. In a seller's market, of course, it would likely rule out anything where the ask is over $325,000. But if the agent show you a property listing for $450,000, simply ask to be taken home or back to your vehicle immediately, and then inform them that their services are no longer required and that you desire them to make no further efforts to contact you. Were I shopping for a property, I would demand to know the asking prices before I went, and not only fire the agent but also refuse to go if they cannot show me why they think this property can be obtained for the total cost limits we have agreed upon. Not monthly payment limits, sales price.

So what loans should not be used to purchase a property? Well keep in mind that this list assumes that your loan providers are telling the truth about the kind of loan they are working on for you, an assumption that, judging by a dozen or so different e-mails I've gotten from people who were scammed, is increasingly iffy. Furthermore, if you are a real financial and loan expert, there are reasons why these warnings may not apply, particularly if the property in question is investment property, but those sorts of experts should know the exceptions, should not be looking to this website for advice, and are always able to accept the financial consequences of not following these guidelines (in other words, they have the ability to absorb the losses).

The absolute head of the list, the loan that should never be used for purchase of a primary residence is the negative amortization loan. Known by many other friendly sounding names such as "pick a pay", "Option ARM", "COFI loan," "MTA loan," and "1% loan" (which it is not), this loan is a truly horrible choice for the vast majority of the population (99%+). It was only approved by regulators to service a very small niche market, and if you are a member of that niche market, chances are that your Option ARM will not be approved by the lender! This loan is usually sold strictly on the basis of the fact that the minimum payment is lower than any other type of loan, making it look like clients can afford a loan that they cannot, in fact, afford. This low payment is based upon a low nominal, or "in name only" rate that is not the real rate the money is accumulating interest at. In fact, the real rate that you are being charged is currently at least 1.5 percent above equivalent rates for thirty year fixed rate loans, as well as being month to month variable. How often do you think people who are being fully informed of the loan would agree to accept a rate a full 1.5 percent higher on a fully variable loan than what they would have gotten on a thirty year fixed rate mortgage, and with a prepayment penalty also? The lenders pay very high yield spreads for doing these loans, and the bond market pays even higher premiums, so many lenders push them hard, and many wholesalers push them even harder. Despite being warned that I was not interested in any loans that feature negative amortization, three new potential wholesalers had gotten themselves thrown out of my office in the month prior to originally writing this. I guess they weren't interested - or able - to compete with other lenders on real loans. Fortunately, now that the chickens have come home to roost on this "Nightmare Mortgage," very few lenders are quite so eager - or even willing - to offer them. The lenders lost a blortload of money on them, investors aren't buying the bonds, and the federal government has made them very difficult to sell. I hope that continues because the absurdly low percentage of people who saved their homes after signing up for a negative amortization loan is completely unacceptable. And although this loan is gone now, I'm leaving it in because I thought it had been permanently staked through the heart in the early 1990s too.

The Interest only 2/28 does have one redeeming factor, as compared to the negative amortization loan: At least your balance isn't getting higher every month. With the average loan around here being about $400,000, a rate of 5.5% would have the payment being $1833. But if that's all you can afford, what happens in two years when the rate adjusts and it starts amortizing, and if the market stays right where it is today, the payment goes to $2771, an increase of 51%? You haven't paid the principal down. There's a pre-payment penalty stopping you from selling or refinancing until it does adjust. If prices have appreciated enough to pay the costs of selling you might not come out so bad, but what if they haven't, or if prices have actually gone down? This is not the sort of bet that someone with a fiduciary relationship should make, as real estate prices increasing in two years is not something you can make a risk free bet on. Millions of people are finding that out right now.

The next loan on the list is the 3/27 Interest Only. This does offer you one more year to get your act together and start making more money to make the payments with than the 2/28. The downside is that it actually adjust higher due to the increased interest only period. In the example above, the payment would adjust to $2804, an increase of just under 53%. This also means you have another year for the value of the property to do the historically normal thing and appreciate a little. Still doesn't mean it's a bet somebody with a fiduciary responsibility should be making with your finances.

The scamster's new favorite substitute for the essentially extinct negative amortization is the buydown, because it allows them to quote a lower payment and a lower interest rate, because they can pretend that the initial rate and payment are what is important. Most suckers will only look at now, and be far less concerned with a year or two down the line ("and maybe the horse will learn to sing"). Make no mistake - that rate and payment will rise in one year, and will almost always rise again in two. So not only are you stuck with what's probably a higher loan rate than you can otherwise get, but you paid good money - more than you will recover - for that temporarily lowered rate.

The next type of loan to be wary of is anything stated income or even lesser levels of documentation (NINA or "no ratio" loans). These loans are great and wonderful if you really are making that money and really can make those payments, but don't let the temptation to buy a more expensive property lead you to exaggerate what you really make, or allow a loan officer to exaggerate what you really make, in order to qualify for the loan. Remember, you are still going to have to make those payments, and if you can't, the bad things that will happen more than counterbalance the nicest thing that might happen. Again, millions of people are discovering this right now. As of this update, I know of no loan providers offering a stated income loan. The downside to this is that the people stated income was designed to serve now can't get a loan at all. The upside is that people it's inappropriate for can't be seduced into something that's most likely going to ruin their financial future.

Somewhat less dangerous are interest only loans with a longer term or extended amortization loans. A five, seven, or ten year interest only period, while much more endurable than a two or three, is still not a certain bet of making a profit. Same thing with a forty or fifty year amortization loan. Given the way the rate structure is applied by most lenders, these loans are given out by lenders wishing to cover questionable lending practices to people who do not qualify for interest only loans according to bond market guidelines. Still, if it's got a good long fixed period of at least five years, you are paying the balance down and it's a reasonable bet that you will be able to sell for a profit before the adjustment hits. Not a certain bet, but a reasonable one, as in "the odds of making a profit or being able to refinance on more favorable terms before the payment becomes something you cannot afford are definitely on your side."

The ordinary 2/28 and 3/27 are dangerous enough for most fully informed adults. Using the interest only examples above, the 5.5% rate actually becomes 5.25% fully amortized, as it's a less risky loan for the lender. The initial payment becomes $2208, which does pay the loan down some, but then the payment becomes $2691 (in the case of the 2/28) or $2678 (3/27) holding the market constant as it sits and keeping other background assumptions constant. If you cannot afford these smaller jumps when they happen, at least you've got several thousand dollars that you have paid the principal down to use for closing costs on the new loan or towards the costs of selling, but be aware that the market is never reliable in its fluctuations over a short period of time, and using these loans for a purchase can and many times has meant that when the fixed period ran out, those people who choose these loans are in the unenviable position of being unable to afford their current payments, being unable to refinance, and being unable to sell for enough to break even when you consider the costs of selling.

There is nothing really wrong if you can afford the thirty year fixed rate loan but deliberately choose some other loan. I do this myself to save money on interest charges, which is the real major cost of the loan, but as narrow as the gap in rates was when I originally wrote this, even I might have chosen a thirty year fixed rate loan if I had needed to refinance. It's not being able to afford the sustainable loan that will kill you. If not a thirty year fixed rate loan, at least a fully amortizing ARM with a fixed period of at least five years. I do like the 5/1 ARM, however, and rates for it are once again becoming attractive - as in significantly lower than the thirty year fixed rate loan.

The most important things about any loan is the interest you are being charged for the money you are borrowing, how long it lasts, and the cost in dollars of getting that loan done, not a lower minimum payment that, certain as gravity, has a gotcha! engraved on it that will cause you to regret getting that loan. Unfortunately, we cannot go back to the past with information we learn in the future, and real estate loans are especially unforgiving of borrowers who do not understand the future implications of their current loan decisions.

As a final note, I have structured this essay around the loan to purchase a property, but the arguments work just as strongly and just as universally for so-called "cash out" refinances as they do for purchase money loans.

Caveat Emptor

Original here

When I wrote explaining why borrowers should consider a 5/1 ARM, because the tradeoff between rate and cost is lower for that loan, and most people don't keep their loans 5 years anyway, so having a likely need to refinance 5 years out is not an additional cost for most people with mortgages.

Costs for a loan break into two categories: The cost to get the loan done ("closing costs"). This pays for everything that needs to happen so that the loan gets done. These costs may vary from place to place, but they are absolutely mandatory - they are going to get paid. For instance, on a $400,000 refinance with full escrow, my clients are going to pay $2945 in closing costs, when you really include everything. Many lenders will try to pretend some or all of the closing costs don't exist in order to get people to sign up, but they do. I can save some money with virtual escrow in some cases, but $2945 is real. The proof is that I can put it in writing and guarantee not to go over. Lenders don't want to do this, but if they're not willing to put it in writing that they'll pay anything over that, the reason is because they know it's going to be more when it comes down to it at the end of the loan.

The other cost is the cost for the rate. There is always a tradeoff between rate and cost. If you want the lower rate, it is going to cost you more money. If you are willing to accept a higher rate, you can save money on the cost for the rate, to the point where it can reduce or eliminate the closing costs you're going to have to pay. Zero Cost Real Estate Loans exist - I've done dozens. I love them because they save my clients money.

NOTE: Since I wrote this Congress has changed the law to discriminate against brokers by making Yield Spread legally a cost of the loan, despite the fact that it adds zero to the amount the consumer pays and in fact can mean that what the loan actually costs the consumer is reduced. So technically, a broker can no longer deliver a zero cost loan. However, we can deliver a loan where you don't actually pay any money - either out of pocket or through increased loan balance. A matter of semantics and sounds to your average cynical but uneducated consumer like I'm weaseling in order to hose them later. If not for the law meant to confuse matters, it would be easier and more straightforward for consumers to understand. Thank Barney Frank and Christopher Dodd for "protecting" you.

You can lump the loan provider's profit in with the costs for the rate, as origination points, or in with the cost of the loan, as an origination fee, and pay it via Yield spread (if you're a broker) or even (in the case of a direct lender or correspondent) hide it in the fact that you're going to make a huge profit selling that loan on the secondary market, but I guarantee you it's going to get paid somehow. Nobody does loans for free, for the same reason you wouldn't work if you didn't get paid.

These costs are going to get paid. End of discussion. The costs are slightly different in states with different laws, but necessary costs are going to get paid. They can get paid out of pocket or they can get paid by rolling them into your loan balance but they are going to get paid. Most people don't understand loan costs which aren't paid by cash, and think that they are somehow "free", but that is not the case. Not only did you pay it, but it increases the dollar cost of any points you may pay, you're going to pay interest on it, and (less importantly) it's going to increase your payment amount.

The genesis of this whole thing was a guy I thought I had talked into a 5/1 ARM when I originally wrote this (rates are lower now). I went through this whole process of explaining why the rate/cost tradeoff for a 30 year fixed rate loan was not going to help him, and then a couple days later, he called me saying he'd found a thirty year fixed rate loan at 5.5, saving him three quarters of a percent on the interest rate and almost $400 on the payment. Remember that at the time, I had 5.5 available as well (rates are lower at this update). So I'm going to keep that exact same table:

The problem with the rate of 5.5% is that for a $600,000 loan, those closing costs are going up to $3475 (lender and third party costs are higher above the conforming limit) in order to get the loan done, and at the time, based upon current loan amount, 2.6 points would cost $16,100 and change. But he had gone to a loan officer who did his math as if that $19,585 (my loan quote at that time for that rate - I suspect the competitor's was higher) was going to magically disappear like one of a David Copperfield's illusions. He calculated payments and savings as if there were no costs - based upon the current balance and new interest rate and amortization period. Of course, this makes it look like the client was saving a lot of money $382 off the payment and three quarters of a percent off the rate, give him a whole new thirty years to pay off the loan, and pretend the costs of the loan aren't going to happen to get the guy to sign up. You'd think that somebody who reads this website every day would know better, but that does not appear to have been the case. In point of fact, the competing loan officer still has not told the guy how much his closing costs are or how much that 5.5% rate is going to cost him through him. I'll bet it's more than I would charge, but I don't know.

Psychologically speaking, what the competing loan officer is doing is smart. Because there's incomplete information available to the prospect, and I'm straightforwardly admitting how much it's going to cost (which is a lot, as most people who aren't billionaires or politicians think about money), an indefinite, uncertain number sounds like it might be less, even though it won't end up that way. Furthermore, by pretending costs don't exist, he has raised the possibility in the client's mind that there won't be any, because most people don't know how much lenders can legally lowball. There will be costs,and I'm willing to put my money where my mouth is that I have honestly represented mine. If this other loan officer could really deliver that loan at a cost lower than I can, there would be no reason for him to prevaricate, obfuscate, or attempt to confuse the issue. I've written before about how you can't compare loans without specific numbers, and there is no doubt in my mind that this other loan officer knows what those numbers really are - he just doesn't want to share that information, and the way our public consciousness about loans works, he can most often get away with it. It's still scummy behavior, and takes advantages of loopholes in the disclosure laws to practice bait and switch, knowing that when the deception comes to light (at closing) most people won't notice, and most of those who do notice will want to be done so badly they'll sign on the dotted line anyway.

Now what's really going to happen in 99% plus of all cases is that the costs are going to get rolled into the balance of the loan. The client certainly isn't going to be prepared to pay them "out of pocket" if they're not expecting those costs. So here's what happens: The client ends up with a new loan balance of $619,585 (Probably higher, because they're likely to roll the prepaid interest in as well, and quite likely the money to seed the impound account, but I'll limit myself to actual costs). In fact, the difference in payment drops to $290 when you consider cost, and $115 of that difference is directly attributable to starting over on the loan period, stretching out the repayment period to an entirely new thirty year schedule of payments (even though he was only two years in), completely debunking any serious consideration of payment as a reason to refinance. But lets compare cost of money, in the form upfront costs ($19,585 to get the new loan, versus zero to keep the loan he's got) and ongoing interest charges ($3125 per month on the existing loan, versus $2840 per month on the new loan). In this case, you're essentially spending nearly $20,000 in order to save $285 per month on interest. Straight line division has that taking sixty-nine months to break even. Actual computation of the progress of the respective loans cuts a month off that, to sixty eight months. As compared to a national mean time between refinances of 28 months, and this particular prospect is currently looking to refinance after less than that. In good conscience, I cannot recommend a loan where it's going to take him almost six years to break even, and by not considering the costs involved in getting that rate, he's setting himself up to waste probably half or more of the nearly $20,000 it's going to cost him to get that loan.

In fact, if this prospect were to refinance again in 28 months (once again, national median time), he would have spent $19,585 in order to save himself $7847. That doesn't sound like a good deal to me, and it shouldn't sound like a good deal to you. But here's the real kicker: The balance of the loan he refinances in two years is $19,250 higher. Let's assume it takes a low rate, rather than a cash out refinance to lure him into refinancing again, so he gets a 5% loan to refinance again. The extra $19,250 he owes will continue to cost him money, even thought the benefits of the refinance he is considering end when he refinances again or sells the property. At 5% for a putative future loan, that $19,250 extra he owes will cost him $962.50 per year extra on the new loan. Even if he sells in order to buy something else, that's $19,250 the client needs to borrow, and pay interest on, that he otherwise would not. Even if the client waits a full five years to refinance again, he's only saved roughly $16,400 in interest, and the additional balance owed on the new loan has actually increased slightly, to $19,280 (Remember, he's two years into the existing loan, hence $115 of phantom payment savings which keeps reducing his balance if he keeps paying it)

Failing to consider the fact that most people are not going to keep their new loan as long as they think they will is the gift that keeps on giving - to lenders. I run across people in their forties and fifties who have done this, all unsuspecting, half a dozen times or more, running up eighty to a hundred thousand dollars in debt for nothing but the cost of refinancing, and at 6% interest, that's $4800 to $6000 per year they're spending in interest on that debt. A more careful analysis says that the calculus of refinancing should emphasize finding a rate that helps you for a lower cost, but that's not the way lenders get paid the secondary market premium, and that's not the way that loan officers get paid to do lots of loans. Therefore, if you find someone who will go over these numbers with you and tell you it's not a good idea to refinance when it isn't, that loan officer is quite a valuable treasure because they're going to keep you from wasting all that money to no good purpose. (Here's one guy who will for my California readers)

A good rule of thumb is that if a zero cost loan won't put you into a better situation, it is unlikely that paying costs and points to get the rate down is really going to help you either. You are unlikely to recover those costs and points before you sell or refinance your property. If a loan that's free doesn't buy you a better loan than you've got, then the current tradeoff between rate and cost isn't favorable to refinance. There may be reasons to do so anyway - cash out, ARM adjustment, etcetera, but chances are against you getting a rate that is enough better to justify the cost. When you consider how often most people refinance or even actually sell and move, it's hard to make a case for anything other than low cost loans and hybrid ARMs. I understand the people who want the security of a fixed rate loan and a low fixed rate - especially with the loan qualification standards as fussy as they currently are. But that rate, especially, is likely to come with a cost that they will never recover before they voluntarily let the lender off the hook. Good mortgage advice takes this into account, with the net result that the folks don't end up in debt to the tune of $80,000 to $100,000 extra, and spending thousands of dollars per year just on interest for money they shouldn't owe in the first place. No, they never wrote a check for it, but it's money they spent, and if they had needed to write a check for it, they probably wouldn't have spent the money in the first place. Kind of like having a credit card with a balance owing of $80,000 or more, just for the unrecovered costs of refinancing, but people don't realize it because it's not broken out of the total cost and balance of their mortgage, and nobody educates them as to where they would be if they hadn't made these mistakes. I try to teach my clients what they need to know to avoid that situation, so they don't find themselves victimized by it.

Caveat Emptor

Original article here

Yet that is exactly what you want them to do.

To avoid competing on price, they have all kinds of distractions they offer to make life more convenient, but not cheaper. They offer automatic payment options, the convenience of having your mortgage at your corner financial institution, biweekly payments, mortgage accelerators, and even negative amortization loans, which offer the apparent benefit of lower payments, which many uneducated consumers believe is price, at the price of a much higher interest rate than you would otherwise be able to get, which is the price the lender really cares about, and the one you should also.

There is always a trade-off between rate and cost for a given type of loan. That doesn't mean that different lenders won't have different trade-offs. Some are less willing to compete on price than others, so they tell you about how great their service is, how you are such a difficult loan that nobody else can do, or how easy their paperwork is, or how easy their loans are to qualify for. As a matter of fact, the lender with the easiest paperwork and loosest qualification standards will usually have the highest price trade-off, because their loans are statistically more likely to default, and therefore have to bring in a higher interest rate in order to have the same return.

Just like branding in the world of consumer products, which is also in effect for mortgages (why else would National Megabank be spending all that money for commercials? They expect to make a profit on it!), all of these little extra bells and whistles increases the price they can charge consumers for their loans, which is to say, the rate that you get, and the cost to get that rate.

So long as the terms are comparable, a loan is a loan is a loan. Provided that it has no hidden gotchas, a 5.875% thirty year fixed rate loan is exactly the same loan from National Megabank as it is from the Lender You Have Never Heard Of. No pre-payment penalty, and lower costs for the same rate? That's the lender I'll choose. It should be the same one you choose as well. It doesn't matter to me what name I make the check out to, or what address I put on the envelope. It shouldn't matter what routing symbol you put on the automatic payment, either, if that's what floats your boat. Lower rate for the same cost on the same loan? Same situation. Everything else is window dressing.

(Okay, it doesn't often matter to me. There are lenders that I'll bet you've heard of where I won't place my client's loans no matter how good the price due to some issues with their lending practices. But those lenders trend heavily to be the ones with massive consumer ad campaigns that don't really try very hard for broker generated business, anyway, because brokers learn to stay away from them fast. Nor are they usually competitive on price, because they're aiming for the "consumers shopping by name recognition" market).

So how do you force lenders to compete based on price? It's actually very simple. Ignore all of the stuff that they try to distract you with, like low payments for a while or mortgage accelerators or biweekly payment programs. Those are bait, and they serve the same purpose as bait: To get you to take the hook. Think about the things that happen to the fish after it takes the hook. That's you, if you take the hook. Concentrate on the type of loan, the rate, and the cost to get that loan. Here is a list of Questions You Should Ask Prospective Loan Providers. Ask all of them with every conversation you have about what is the right loan for you, and the best rate and cost they can deliver on that type of loan. After you have settled on one loan with one provider, it is then okay to ask about the bells and whistles that lenders (and every other sales organization) love to distract you with. If you want auto-pay, or biweekly payments, or a mortgage accelerator, these are just as much in the lender's best interest to offer you as they are convenient for you to have. I wouldn't pay for them, but many people think they're nice to have, and that's fine. Just don't let them distract you from what's really important: The price of the money you're buying.

Caveat Emptor

Original here

This visitor came from a search engine on this search:

amortization of real estate loans early payoff based on a lump sum payment

This is one of the smart things you can do. Not necessarily the smartest, mind you, but smart. Unless you have a pre-payment penalty, you can always pay more than your minimum payment, and often even with a penalty. The question is if there's a better way to get a return on that money, whether by paying down a higher interest debt or by investing the money in a new asset. If you owe thousands of dollars on a credit card at twenty-four percent when your mortgage is at six, why would you want to pay down a tax deductible six percent instead of a non-deductible twenty four?

Similarly, if you can earn ten percent somewhere else with the money, why do you want to pay your six percent loan down? Net of taxes, a six percent loan costs you about 4.5 percent, depending upon your tax bracket. Even if the return is not tax deferred, the net return on ten percent averages somewhere over seven percent for most folks. Say you are in the twenty-eight percent tax bracket and the ten percent is completely taxed every year. A lump sum of $10,000 will over the course of 15 years turn into $28,374 if invested. If it's fully tax deferred, it turns into $41,772. For comparison with other numbers later on in the essay, at twenty-seven years the numbers are $65,352 and $131,099, respectively. Not half bad.

Suppose you've got the cash flow to instead buy another property? That puts the power of leverage to work for you, and if you can rent out one of your properties or something, possibly multiply your money by a factor of ten within a few years. When you put ten percent down, and your new property appreciates ten percent while giving you a few dollars per month of cash flow, that's smart investing. At seven percent annual appreciation (historical average), you've doubled your purchase price in a little over ten years. A three hundred thousand dollar property will likely be a six hundred thousand dollar property in about ten years (It's just numbers), while you've paid the loan down from $270,000 to about $226,000. Even if your expenses of selling are seven percent, your gross is $558,000, less the $226,000 you've paid the loan down to, and you've come away from the property with $332,000, not counting those few dollars per month you netted after paying your expenses. Sure there are places and properties that don't pencil out, and being a landlord is a headache, but as you can see the potential rewards are substantial if it does "pencil out".

Now, let's say you do this every nine years on a three to one split, and 1031 Exchange the first two at least. After nine years you have $281,267 pre-tax, net in your 1031 account. You then turn around and buy three $600,000 properties. You end up with three loans of about $506,000 each. Assuming net zero cash flow on the properties, after nine more years, you have three loans at $434,100, netting you $1,775,286 into your 1031 accounts, which you then roll into three more properties each at $1.2 million purchase price. Your loans are $1,000,000 each, but you rent them for enough money to break even on expenses. After nine years, you sell all of these properties, and end up with just a little under $10,750,000 net of sales costs in your pocket before tax, which at long term capital gains rates (15%) nets you $9.13 million or thereabouts. Now, you did start with three times as much money, and nobody in their right mind sells off nine highly appreciated properties in one year, and you did have the headaches of being a landlord on an increasingly widespread basis for those twenty-seven years, but this illustrates the money to be made for the same investment. Patience and leverage working for you over time are far more powerful than any quick flip.

But assuming there are no better alternatives, it is a smart idea to pay down your mortgage. Here's why: Let's say your balance is $270,000 at six percent, and you pay your loan balance down by $10,000. Your regular payment was $1618.78, and it still is, but interest is $1350 of that. Only $268.78 would normally be applied to principal. Yeah, you've just sent them about six months of payments - but it just paid your loan down by three years of principal payments. Assuming you never sell and never refinance and never pay an extra penny again, you will be done in month 324 - saving yourself thirty-six payments for a total savings of $58,276. Not to mention that if you do refinance, you'll pay lower fees. Not in the league of some of the alternatives above, but still a nice return on investment. From a financial management standpoint, it definitely beats just spending the money.

Caveat Emptor

Original here

We got behind on house pymts & it was sent to an attorney for foreclosure.? The attorney has printed a notice in our paper on Oct 9 that it will go up for public action on Nov.16th. We found out we could get financial help on friday. Can we stop this action now without it going up for auction?

This never ceases to amaze me. People have a contract they can't meet, and they don't call the other party to see if anything can be done.

The lenders do NOT want to foreclose on any more properties right now. Actually, this is pretty much a constant of the real estate market. They never want to foreclose; they will only do so when it is apparently the least bad solution to their situation.

To be truthful, you should have called the lender and explained your situation as soon as you knew you were going to be late with a payment. Lenders will always work with anyone to a reasonable extent, but now they're bending over backwards. Foreclosures are 1) bad publicity, 2) bad for their relationship with the secondary loan market, and 3) almost certain to lose them a blortload of money.

Call them this instant (or as soon as they open on Monday) and ask for Loss Mitigation. They will not be as forgiving as if you'd called them right away, but they're still likely to be willing to work something out. Just about anything is better than losing it through foreclosure, I might add, so you be willing to give as much as you can to encourage them. Foreclosures hit them in ways beyond the cash they immediately lose. They don't want to foreclose.

Now, the downsides:

First off, you've waited until you are "in extremis", long past the best time to call the lender. They're quite likely to see your belated request to talk as a last ditch method to delay the inevitable. Lots of folks do precisely this. Had you called earlier and been working with them all along, made agreements and kept them, they'd have evidence you're really doing your best to get them their money. You're not a criminal, but this is the same sort of behavior judges see with convicted criminals at sentencing, faking penitence to avoid jail - then they go right out and do the same thing again.

Payment modifications aren't some kind of magical "make it all better" The lender wants their money, and they're not going to settle for a situation that doesn't turn the loan into what they call a "performing asset." If you borrowed more money than you could really afford, and you aren't able to make at least the interest payments on it at real rates, as many people with negative amortization loans did, then the best modification they'll agree to really isn't going to help you, and you're better off selling the property ASAP, even if you don't get enough for the property to cover what you owe ("short sales").

Bottom line: Please call and ask them. It never hurts to ask. But be mentally prepared if such a modification doesn't really solve your problem. Because you waited until the very end, don't be surprised if their willingness to work with you is limited, but even in such circumstances, they would rather not foreclose if you can show them another course that gives them better prospects for getting more of their money back.

Caveat Emptor

Original article here

That was a question that brought someone to the site and the answer is very simple: they don't give you the loan. You haven't agreed to pay them back, so why should they?

There are two major cases of this, one of which has two sub-cases. The first case is that if it's a purchase money loan. Because you don't get the loan when you don't sign mortgage documents, there may be issues with whether or not the seller is entitled to keep your good faith deposit. Now, if you can come up with the cash to pay the seller from somewhere else, for instance, if you have it sitting around and just would have preferred to get a loan, no worries. You still have the option of hauling out your checkbook, and you can get a loan later, although it will be "cash out" loan which generally has a rate and term trade-off a little bit higher than "purchase money" as well as implications for deductibility. But since most people don't fall into this category - people with the cash lying around - you are probably looking at the unpleasant reality of not having the money to purchase the property. In most cases, the loan contingency has expired, assuming there was one to start with (I used to advise people to apply for a back-up loan, but changes in the loan environment have killed the backup loan). Matter of fact, usually all of the contingencies have expired, leaving you without anything to excuse not consummating the transaction. Therefore, any good faith deposit is at risk, not to mention that the transaction may well be dead. The seller only agreed to give you that exclusive shot to buy the property for so many days. If you want to extend escrow, most sellers will require some additional consideration in the form of cash in order to allow the extension. In fact, many agents and loan officers have gotten very lazy and lackadaisical about deadlines, with potentially severe repercussions to you, their client. Once those contingencies have expired, usually on day seventeen, you typically are stuck. Consult a lawyer for the exceptions, but there really aren't very many. This is one of the many reasons why being successful in real estate is about anticipating possible problems and taking precautions. If you wait until the problem crops up, it's usually too late, and often, the best thing to do is sign the loan documents even though they are nothing like the loan quote that got you to sign up with that company, because otherwise the consequences of not signing are even worse than signing. Many loan companies target the purchase money market with this in mind.

The second major case is if you are refinancing, which leaves you in pretty much the same boat you were in before you started the transaction. You own the property already. You have a loan now. Unless you have a balloon loan coming due, you just continue on with what you were doing before you started the process of refinancing.

There are two major reasons why people refinance: Better terms, or cash out. If you are doing it for better terms, and the new loan doesn't deliver, there pretty much is no reason to sign those documents. This includes if they are actually willing and able to deliver the rate, just not at the cost they indicated when you sign up. There is always a trade-off between rate and cost in mortgage loans. Usually, the lowest rate will not be worth the costs you have to pay to get it, but if they lie about what it really costs to get you to sign up, those final loan documents are going to have a rude surprise if you look at them carefully. All but the worst scamsters will usually deliver that rate and type of loan they talk about. Where they fall short, or actually, go over, is in the costs department, because a loan with $5000 more in costs will likely have a lower payment than the loan where they don't hit you for those extra $5000 in costs, but do give you the rate that the costs they talked about really buys. Most people shop and compare and choose loans by payment. It may be short-sighted and the best way there is to end up with a bad loan, but they do it anyway. They are more likely to bail out of a loan where the monthly payment is $60 more than they were initially told but has the same costs, then they are to back out of a loan where the payment is $40 more because an extra $8000 in costs "somehow" appeared at closing, never mind that the former is probably a better loan for them.

Refinancing for cash out is a more nebulous area. Since it's a refinance loan, you probably don't have a deadline, so you can go back to the beginning and start all over if you want to. Sometimes, however, rates have shifted upwards since you started the process, and so it can be to your advantage to go ahead and reward the company that lied to you in order to get you to sign up. If rates are the same, however, dump that problem provider and see if you can go find someone less dishonest! Furthermore, sometimes people have absolute deadlines as to when they need that cash, or it saves them so much money that they are better off signing those documents anyway, or the improved cash flow means they don't have to declare bankruptcy. Most often, there is plenty of time to go back to the beginning and try again, but there are exceptions. Once again, I used to advise people to apply for back up loans, but neither I nor anyone else can productively do back-up loans any longer due to changes in the lending environment. Meanwhile, all of this rewards the company who lies to get you to sign up - something you really don't want to do.

Now when you don't sign loan documents, if you have put down a deposit with the lender, you are going to lose it. Low cost ethical loan providers who really can deliver what they talk about, and whose rates really are competitive, do not typically ask for deposits, and are willing to work without them if they do ask. They know their rates are competitive, that they intend to deliver what they talked about and that there are any rates significantly better out there. It's only when the company fails one of these tests that they have a real need for a deposit, in order to commit you to their loan.

One more item needs to be covered: Irrelevant documents aren't needed. I don't need anybody except those folks who are getting a negative amortization loan to sign a negative amortization disclosure (assuming I ever did one, which I didn't). The same thing applies to pre-payment penalties. If they don't apply to your loan, they shouldn't be required. If they can't fund your loan without it, there is a reason, so don't sign disclosures you aren't willing to accept the implications of. If you sign a negative amortization disclosure, the legal presumption is going to be that you realized it was a negative amortization loan and accepted it on those terms. Ditto a pre-payment penalty rider. Of late, unscrupulous companies seem to be asking people to sign these after loan funding "for compliance". Consult with your lawyer, but I wouldn't sign them at all. If they were able to fund your loan without them, they are obviously not a necessary part of the loan structure. If not, why did they fund your loan without them? The only "compliance" aspect is to this is complying with them getting paid more money. Admittedly, it's small-minded to refuse to sign the pre-payment rider when you were informed at sign up that the loan had a pre-payment penalty, but bottom line, they shouldn't fund your loan if they aren't willing to accept it as it sits, and that's not the situation most folks are running into. They are asking the questions and being told the answer is "no," only to discover later that the answer was really "yes," but by lying to their prospective customers, some loan providers can get paid large amounts of money and pawn bad loans off on most of their customers.

Caveat Emptor

Original here

This is part and parcel of the system that's abused. Here are sample rates from one A paper lender, picked at random, that were in effect when I originally wrote this. Rates are lower now, but it's a good example nonetheless. These were Fannie and Freddie conforming 30 year fixed rate mortgages with full documentation of the loan. The first number is the cost for a 15 day lock, the second for a 30 day lock, and the third for a 45 day lock. A positive number means it costs that number of discount points to get the rate. A negative number means that the lender will pay that many discount points for a loan done on those terms. Now, I want to make the point that these are wholesale rates, but I didn't feel like translating them to retail. I don't work for free any more than you do, nor does any other loan provider.

As you should notice throughout, there is a 0.25 spread in costs between locking in any particular rate for 15 days as opposed to 30, or 30 days as opposed to 45. This is because it costs them money to have the money standing around doing nothing waiting for your loan to fund. The difference in costs between a 15 day lock and a 45 day lock at the same rate is half a point. For most people, the column you want to pay attention to is the thirty day column. Due to regulatory changes, two weeks from lock is probably not enough time to refinance, and even a purchase is iffy. Even if everything is ready to go, the lenders want a final redisclosure 7 days before signing documents, and with the three day right of rescission on refinances it takes another week after signing to actually fund the loan. That's once everything else is ready to go. You want the rate locked as early as practical, or you really have no idea whether it will be available when you get to the end of the process but other changes to the business make it prohibitively expensive to lock your loan at all before you have an underwriting commitment. Many providers work on a "promise the moon and wait and hope" basis, hoping the rates will drop. They get one loan for sure, when they lure you in with a low quote they cannot currently deliver, and if they get lucky and rates drop, you think they walk on water.

Now this is a fairly broad spread rate sheet, as the company was willing to take clients through a large range. On the other hand, at a 5/8ths of an additional point hit for 1/8th percent rate below 5.875, they were telling you that they really would prefer to keep their customer's rates locked in for 30 years above that. On the other hand, since most people dispose of their old loans about every two years, most folks shouldn't want to pay those costs, which will take much more than two years to recoup from the lower rate. It's much the same phenomenon as insurance companies guarding against adverse selection (only those folks who have major health problems buying health insurance, for example).

Which loan is the best for you? Don't know without more specifics. It depends on approximate loan amount, your life plans, your proclivities, and your financial situation.

But the devil is in the details, and one of the worst and most common devils is details is a provider "forgetting" the adjustments. Adjustments generally mean that the loan will be more costly than the basic rate/cost tradeoff outlined above, so "forgetting" to post the adjustments on a Good Faith Estimate is one of the easiest and most effective ways to lie in order to make your loan look more attractive by comparison. Since most providers don't guarantee their estimates, they can do this with basic impunity, but make no mistake - they know what the price is really going to be. If they won't guarantee their estimates, ask them why not. Here are the possibly applicable adjustments for this category:

Loan amount under $60,000: half a point
Loan amount $60k up to $100k: quarter of a point
cash out loan, 70-80% LTV: half a point
cash out loan, 80-90% LTV: three quarters of a point
Investment property 50-75% LTV: one and a half points
Investment property 75-80% LTV: two points
Investment property 80-90% LTV: two and a half points
No Impounds fee: quarter point
2 units 90-95% LTV: half a point
Manufactured home: three quarters of a point (they also have an absolute maximum CLTV of 80%)
Loan distribution
80/15/5 quarter of a point
75/20/5 quarter of a point
Interest only one and one eighths points
if CLTV over 90%: additional quarter point
97 percent of purchase price financed: three quarters of a point
100 percent of purchase price financed: one and a half points
2/1 Buydown two and a half points
Stated income FICO 680-699: half a point
Stated income FICO 700+: quarter of a point
(Stated Income loans are not available from any provider I'm aware of at this update)

So let's see. If you are doing a cash out to 75 percent loan stated income and have a credit score of 690, you add one point to the costs listed above.

If you have an investment property duplex at 90 percent LTV, you would add three points (investment property loans are relatively expensive, as you can see, and it isn't restricted to this lender. They are riskier loans)

Doing 100% financing on a $50,000 home: Two points. (when it was available)

One hopes you get the idea. To leave these out is a tempting omission for the less ethical providers. Just because they are left out does not mean you won't pay them. You will. Usually they will spring them on you with the final closing documents and hope you don't notice. Surprise!

(Between this profession and being a controller for twelve years, people should not wonder why I think that's one of the ugliest words in the language).

Indeed, during my six weeks at the Company Which Shall Remain Nameless, I had no fewer than three screaming arguments with my supervisor over telling prospective clients the truth about adjustments. They didn't want me to. I have this thing about telling clients the truth as best I know it.

Why do they do this? At signup, you have little emotional buy-in. At final loan docs, you are signing so much stuff that even a marginally skilled person who's trying to distract you will be successful a lot of the time. The industry statistics say that over fifty percent literally never notice, at least until much later, after the transaction is irrevocable. And somewhere around eighty five percent of those who notice do just want the process to be over so badly that they will sign anyway, not to mention the fact that in the case of a purchase, they probably don't have any choice at that point. They need the loan to get the house, without which they lose the deposit, and there is no more time remaining in the contract with which to go out and get another loan.

Caveat Emptor

Original here

Right now, due to the problems we had with unsustainable loans, nobody wants to consider anything but a thirty year fixed rate loan. I understand why, especially as I've been preaching the dangers of things like short term adjustable interest only loans and negative amortization loans here for six years now. The trick is one of balance. The negative amortization loan not only has a higher interest rate than other loans (aka cost of money) but you're adding to the balance you owe every month. This has compound interest working against you. If this were not the case, you could afford a better loan (there are no worse ones). For such things as an interest only 2/28, once again you're setting yourself up with a loan that you cannot afford and a short time during which you need to be able to refinance. The balance of that interest only 2/28 may not be growing, but it isn't going down much either. In only two years, you're going to not only need to refinance it, but almost certainly roll a bunch of closing costs into your balance as well. Suppose rates are higher? Suppose prices are lower? These twin facts describe the situation lots of folks are in right now, and my article on Refinancing When You Owe More Than The Home Is Worth is one of my most popular pieces of search engine bait, despite the fact that it is very much in the way of hoping you can make something a little less bad out of a horrible situation. Two years in real estate is fairly short term. Considering a two year window, I'm more certain today than at any time in the last ten years that property values (at least local to me) will be significantly higher two years from now (at least 10%), but confidence in that prediction is only in the 90 to 95% range. Two years just isn't enough time. Like when I was a financial advisor. The market is up in about 72% of all 1 year periods, and a higher percentage of two year periods (I remember 85%, but I'm not certain of that). But over a ten year period, it was a practically sure bet, historically, that the market would be up, and up significantly. The same thing applies to real estate. "Time in" is so much more important than "timing" that they don't even play in the same league. At this update, the government messing with the economy in pursuit of an agenda has managed to make things even worse than they were - and that is no trivial achievement. Eventually, we're going to get adults in Washington and Sacramento, but I have no idea when that will be (and in the case of California voters, what it's going to take to wake them up and the serious question of whether there will be any adults left in the state when they do)

When you get out to five years, I'm as certain as possible that my local market, at least, is going to be up and up significantly. Considering the state of most markets, this is a very reasonable bet. For that matter, it's pretty reasonable at any time, as five years is enough for sentiment of the moment to be outweighed by fundamental facts of the market. Furthermore, most people get at least one substantial raise (or a series of smaller ones) over a five year period, increasing what they can afford. More importantly, in five years with a fully amortized loan, you'll chop some significant money off the balance (about 7% for most mortgages out there), just by making the regular minimum payments. My point is this: you have a smaller balance on a property that is worth more. Your equity situation has improved, and by enough that unless you take significant cash out in one way or another, you're in a strictly improved situation.

What are you giving up by accepting a 5/1 instead of a thirty year fixed rate loan? The answer is twenty five extra years worth of insurance that your rate won't change at the end of your loan, which most borrowers never use anyway. The median time to refinance or sell a property was about 28 months last time I checked (for a while it was down to sixteen months). That's fifty percent above, fifty below. Add another 28 months, and before five years is up, at least seventy five percent of everybody has refinanced or sold. Question: How much good did that extra 25 years of insurance that the rate wouldn't change do these people? Answer: Absolutely none. They let the lender off the hook before that part of the guarantee began.

Let's look at some numbers that were available the day I originally wrote this - the differences are larger at the update. Full documentation, A paper loans, rate/term refinance between 75 and 80% loan to value ratio, with a credit score of 720 (national median).

Now the loan request that started this all off was a $600,000 loan. Here in San Diego, that's less than the temporary Conforming limits (aka Jumbo Conforming, a phrase that makes about as much sense as plastic glass),

(Making certain I emphasize once again the tradeoff between rate and cost for real estate loans)

So, for less than the cost of a 30 year fixed at 5.875%, these clients could have had a 5/1 ARM at 5.25%. For a $600,000 loan - almost to what was called Super Jumbo territory a few months ago. the 30 year fixed costs roughly $14,500 in total costs, the payment is $3635, and interest is about $3009 the first month, assuming all costs are rolled into the loan. The 5/1 costs about $12,700 grand total, the payment is $3386 ($250 less!) and interest is $2686 ($325 less!). You pay the balance down to $556,000 over 5 years if you just make the minimum payment on the 5/1, as opposed to $570,000 if you make that higher minimum payment on the 30 year fixed rate loan. And if you happen to be the sort who makes that payment they could make on the thirty year fixed rate loan, but chose the 5/1 instead, your balance will be down to $547,000. Under such circumstances, even if you refinanced that 5/1 at the same cost, you'll be over $10,000 better off than some hypothetical twin brother who chose the 30 year fixed, even if he didn't refinance which the odds are at least 3:1 against. Given consumer habits in this country, that thirty year fixed looks like a losing bet to me at the usual rate differential between the two loans.

The same numbers apply just as strongly at conforming rates:

The difference between the thirty year fixed and the 5/1 narrows appreciably at the lower cost end of the spectrum. But it's a far cry from the days of last year when sometimes that thirty year fixed rate loan was actually less expensive for the same rate.

Some people are likely to ask about varying periods of ARM. What about a 3/1, for an even lower rate? Ladies and gentlemen, even when rates are normal, the differential is usually less than an eighth of a percent, while you're cutting off 40% of your fixed period guarantee - the period that lets you make all that lovely profit? As for the 7/1 and 10/1, when rates are more normal, there's typically more difference between them and the 5/1 than there is between 3/1 and 5/1 - plus you're getting well past the territory where reasonable fractions of the populace keep their loans without refinancing. You're paying for insurance you're extremely unlikely to need, and hybrid ARM rates are more stable than rates for thirty year fixed rate loans.

A Caveat: Since I originally wrote this, the loan market has changed in some significant ways. Anything except A paper full documentation loans are basically gone right now. This means that if you don't fit into the cookie cutter molds imposed by such loans, getting a loan may be very difficult or even impossible. So if you're self-employed or in an unstable field where income varies widely, you can easily find yourself in a situation where refinancing can be impossible - perhaps for up to two years. Changing from employed to self-employed will also make it difficult to get a loan for two years. So if you're in such a situation rather than (for example) a government employee, I am strongly advising such clients to select thirty year fixed rate loans even though they are more expensive until the current loan market relaxes a bit. Right now the investment markets are very scared of anything but A paper full documentation, and the rating agencies who gave negative amortization loan packages AAA ratings when they should have been at the bottom of whatever rating scale used have no credibility with the investment markets, which means the investment markets aren't investing in anything but A paper, which means nothing but A paper gets institutional funding. (Hard money aka private money loans are still being made - but most people don't have 25-35% equity or more, and don't want to pay 12% plus)

Hybrid ARMs aren't for everyone. If you're going to obsess about your expiring fixed term every night for five years, the difference in daily interest works out to about $10 per night, even for our example with the $600,000 mortgage. My family being able to sleep well is worth $10 per night to me, and I presume it is to you, as well. There is an element of risk here, and there's no pretending there isn't. A very small risk that real estate and loan markets go completely weird in violation of all historical precedent for the next five years, and those choosing the 5/1 are somehow stuck with needing to refinance in a worse situation than when they started in. But I've been saving myself lots of money with the 5/1 for over fifteen years now, in all sorts of markets. Why shouldn't I mention it to other people, including my clients?

Caveat Emptor

Original article here

When it comes to mortgage loans, people get distracted by the darnedest things.

Let's look at Wal-Mart. You think they got to be the largest retailer in the world by making less money than their competition? I assure you that is not the case. In fact, they're legendary in manufacturing circles for using their size as an inducement to get the lowest possible price out of their suppliers. With that leverage - the fact that whether or not Wal-Mart stocks your item will be a significant predictor of your success manufacturing consumer goods - they can get outrageously low prices out of their suppliers. To this, they add all of the economies of scale and function consolidation that they can possibly come up with, to the point where Wal-Mart makes more on the same item than almost any other retailer, let alone the mom and pop store that everyone complains Wal-Mart has driven out of business. How the heck do you think they can afford to build dozens if not hundreds of new "Super Centers" worldwide every year?

Their main attractiveness to consumers is one thing. Price. They deliver whatever it is, from breakfast cereal to makeup to cell phones to automotive supplies at the lowest final price to the consumer. They've also got a huge selection of merchandise so you've only got to make one stop (thereby saving on gas, if you don't count the three gallons you waste getting in and out of the parking lot), but that's not why most consumers go there. They go for price. I may hate the thought of going to stores that are even in the physical vicinity of a Wal-Mart, but you've got to give them respect for what they accomplish.

People don't shop Wal-Mart because Wal-Mart doesn't make anything on the transaction. If that were the case, we'd all be shopping government stores and paying much higher prices. No, people shop Wal-Mart because the total cost, aka purchase price, is lower there even thought they may be making more money per transaction than the Mom and Pop store that used to be a couple blocks over. Lest anyone not understand, this is a good and rational thing, not just for Wal-Mart but (as far as it goes) for society as well.

The same thing should apply to loans. Shop loans by the lowest total cost of money . To know what that is, or even make a reasonable estimate, you've got to have some idea how long you intend to keep the loan. There is always a trade-off between rate and cost, because lenders have to work with the secondary markets, and that's the way the secondary markets are built. Know for a fact you're going to sell the property in two years? Then look at the costs of that loan over a two year period. In such a case, it probably doesn't make sense to choose anything with a fixed period longer than three years, and lowering the closing costs is likely to be more important than getting a lower rate, even if the payment is lower on a lower rate. That's pretty much a textbook case example of higher rate being better because it's got a lower closing cost.

If you're certain that you're going to stay in this property forever, and never ever refinance again, a thirty year fixed rate loan where you spend several discount points buying the rate down will verifiably save you money - if you're right. If you're wrong, and six months from now you're looking to sell and move to the French Riviera (or simply refinance because you need cash out), all that money you spent on points and closing costs was essentially wasted. You're not going to get it back - it's a sunk cost, used to pay the people who do all the work to make a loan happen, and to pay the rich folks who work the secondary mortgage market to give you a lower rate than you could have gotten otherwise. It's not their fault you chose to let them off the hook from that contract you negotiated. You're essentially betting a lot of money upfront that future events will happen the way you believe they will, and if you're right, you reap quite a reward. However, most folks lose this bet, which is why the (rarely followed) admonishment not to pay points for a loan gets repeated so often. That's also why people hedge their bets most of the time, by choosing an alternative that costs less, and therefore risks less, while covering a lot of future possibilities in a decent manner, if not quite perfectly.

All of this is good information to have. But there is one piece of information required of brokers but not direct lenders that distracts consumers from what is really important: How much they're making for this loan. I think it's good information to have out there providing the consumer knows enough not to give it more weight than it deserves. And it really isn't important information, because it does not impact the bottom line to you, the consumer. It's really no more important than knowing where the airplane for your flight just flew in from. The point is that it's going to cost you X number of dollars (and a known amount of time) to get on that plane to where you're going, just like the important thing for consumers about their mortgage loans is that it's going to cost them $X total to get the loan done, and they're going to have an interest rate of Y% that they're going to have to pay for as long as they keep that loan. But if it's important for brokers to disclose how much they're going to make, why isn't the equivalent disclosure required of direct lenders?

The Federal Trade Commission prepared a report, The Effect of Mortgage Broker Compensation Disclosures on Consumers and Competition: A Controlled Experiment. The upshot? Consumers will choose the loan where the company providing it makes less money, or, even more strongly, choose the loan where the company's compensation isn't disclosed at all. I think it's reasonable information for someone to want to know, but if it's important to know the information when you're dealing with a broker, and the government therefore mandates such disclosure, then why isn't it required for direct lenders? (The answer is politics, to put brokers at even more of a psychological disadvantage as far as the average person is concerned. Lenders make a lot more money than brokers, so they have a lot more money to bribe politicians contribute to campaigns). To quote from the report:

If consumers notice and read the compensation disclosure, the resulting consumer confusion and mistaken loan choices will lead a significant proportion of borrowers to pay more for their loans than they would otherwise. The bias against mortgage brokers will put brokers at a competitive disadvantage relative to direct lenders and possibly lead to less competition and higher costs for all mortgage customers.

Focusing upon what the provider makes actually hurts you. If you just focus upon how much the loan officer makes, there's no incentive for them to shop around looking for a better loan. As I've written before, if I can find a better lender for that loan, I can both make more money and offer a better loan. But if you're just going to shop by how much I make, there's no incentive to do that. I make my $X, regardless of whether you get a 30 year fixed at 5% without a prepayment penalty or a 2/28 at 8% with a three year prepayment penalty. There usually isn't that much difference, but the principle is the same. You want your loan person motivated to find you a better loan, which shopping only by how much someone makes frustrates. And if you choose a loan at a higher rate of interest and higher cost just because the company offering it is not legally required to disclose what they make, it doesn't take a genius to figure out that you're doing nothing except hurting yourself. It's the equivalent of passing up the store with the lowest price because the law requires that store (but not their competition) to hang a big sticker on it that says, "The store makes $12.98 if you buy this toaster oven." Me, I like it when people make money from my custom, especially when the bottom line cost is as good or better. It means they're motivated to work hard and do a good job so they get my business again next time I'm in the market. The principal is the same whether it's a big box retailer, a mechanic shop, or a real estate loan.

Finally, at loan sign up, the prospective lender can lie, just as much as any other item, even on the new good faith estimate. The government may tell you they can't lie on the form, but the form itself is effectively lying because what it really means is that it can't change without being redisclosed with a new Good Faith Estimate. Indeed, the government and changes in market conditions are making it more difficult, not less, for consumers to intelligently shop their loans.

The best solution for consumers: Have a real problem solving discussion with prospective loan officers. If you just ask the rate and hang up, the one that low-balls you the most blatantly is likely to get your business, and it will be too late to change when you discover the truth. But if you pay attention to the process they use for putting you into the best situation going forward, then you stand a better chance of discovering their real intentions.

Caveat Emptor

original article here

(This is a reprint from December 15, 2006 that still has quite a bit to offer. There have been market changes which I will talk about but the original stands up well)

Drew over at zillow.com asked me to do a short little Q & A piece for them. It's still there but needs updating for changes in the market.

What are some online resources consumers should be using to find loan rate information?

None that are any good, as in the sense of providing good relevant information that's applicable to specific cases. There are many loan quote forums that will quote you a rate. They quote you a low rate or a low payment to get you to contact them - and that's all that it is, a teaser. I have literally gone right down the line in two different comparative quote forums, contacting every company and asking for quotes that comply with the standards they are supposed to quote to. Not one company was even prepared to quote me what they were advertising. Nor did the forums themselves do anything when I complained - they are not interested in policing the quotes, as to do so risks losing some hefty income when the companies quit subscribing to their service. The few companies that advertise honest rates that are really available have given up on those forums in disgust - they attract clients in other ways.

Unpopular as this truth may be, you need to shop live loan officers and have real conversations and ask a lot of hard-nosed questions. Here is a list of Questions You Should Ask Prospective Loan Providers. If you want to suggest any additions to this list, I'd love to know.

What should a 1st time home buyer look for when comparing and contrasting loans?

1) Make certain you are really comparing the same type of loan. Asking about the industry standard name for the type of loan contemplated helps. Even if you don't know what it means, the other loan officers you talk to will. 2) There is always a trade off between rate and cost for the same type of loan. One lender's trade offs will be different than another lender's, but you always have a range of choices, even with the same lender. Just because one loan has a lower rate or lower payment doesn't make it a better loan. Find out the total cost of getting that rate, and figure out how long it will take you to recover costs via the lower interest rate. Given how often most people refinance, a higher rate with a higher payment but lower costs is often the better bargain. There is no sense in paying four points for a loan you are only likely to keep for two years.

What is the biggest mistake you see 1st time home buyers make?

Three most common disasters: 1) Buying or wanting a more expensive property than they can afford. When I originally wrote this, any competent loan officer could get you a loan that made it appear you could afford a property that you couldn't. That, more than anything else, was the cause of the meltdown because the folks who got them still had to face the consequences later. Find out what you can really afford with a sustainable loan, and stick to it. Settling for a lesser property is much smarter than buying something you cannot afford. 2) Not shopping around for services. Even if you trust your brother in law the real estate agent, or your sister in law the loan officer, shopping around gives them concrete reason to stay honest. The worst mess I ever cleaned up was caused by someone's favorite uncle trying to make too much money, and the niece was blissfully unaware until her husband brought me into it - six weeks after it should have closed. 3) Believing that because someone puts some numbers onto a Good Faith Estimate ( or Mortgage Loan Disclosure Statement in California, but read the article on the Good Faith Estimate) that they intend to deliver that loan on those terms. This is, unfortunately, not the case in the industry at large. If they do not guarantee their quote in writing at least with regards to closing costs, the Good Faith Estimate (or Mortgage Loan Disclosure Statement) is garbage, along with all of the other standard forms that you get with it. The only form that the law requires to be accurate is the HUD-1, which you do not get, even in preliminary form, until the loan is closing. Big national lending institution everyone has heard of? Doesn't mean a thing. Ask the hard questions, and do not permit yourself to be distracted.

At this update, it has become obvious that the only changes due to the new rules about the new good faith estimate is that the rules for lying to get a consumer to sign up are now a little more byzantine - but that companies who want to do it have the rules for doing so down to a science.

When do 50 year mortgages make sense?

Perversely, rates on 40 year amortizations are usually comparable to interest only, and fifty year amortization rates are usually higher. Nor are any of the these usually a good choice for a purchase money loan. All three are strong indicators that you are trying to buy too expensive a property for your budget. See Common Mistake Number One above.

What do you think about Adjustable Rate Mortgages (ARMs)?

I am a big fan of certain ARMs in most markets. Most of the time, a fully amortized 5/1 ARM will be at least one full percent lower on the rate than a comparably expensive thirty year fixed, and the vast majority of people refinance within five years anyway. Why pay for thirty years worth of insurance that your rate won't change when you're likely to let the lender off the hook within a few years anyway? With that said, however, right now (late November 2006) the spread in rate is only about a quarter of a percent or less between a 5/1 ARM and a thirty year fixed - and at the low cost end of the spectrum, the thirty year fixed may actually be less expensive for the same rate, so I'm recommending thirty year fixed rate loans quite a bit right now.

At this update, the loan market has become enough more constricted that I am less of a fan of hybrid ARMs. Lenders are demanding people who fit their lending profiles perfectly - which is perversely, one of the things that is bankrupting them as with fewer people able to qualify for loans, prices plummet. If something happens to your situation or credit, the lack of alternative markets to the A paper Fannie and Freddie mainstays can easily mean that it is impossible to refinance until your situation improves, which can take two years or more. The spread between thirty year fixed and 5/1 ARMs is back up over three-quarters of a percent, but what happens if someone steals your identity forty months in and you cannot refinance before the loan adjusts?

Is there a certain number people should be looking at when determining if they should refinance?

Forget payment. With no other information to go on, I would bet that someone trying to get you to refinance based upon a low payment was pushing a bad loan, and probably low-balling the payment as well.

Once again, you've got to have a good conversation with the loan officer. Look at the money you will save from the lower interest rate - the interest charges to a loan. If you're saving half a percent on a $400,000 loan, that's $2000 per year. Compare this to the cost, and how long the rate is good for - or how long you're likely to keep it, whichever is less. If the cost is zero - and true zero cost loans do exist - you're ahead from day one. However, if it costs you $12,000, it's going to take you six years to break even, and most folks will never keep the same loan six years in their lives. Since there is no way to know for sure unless your prospective lender will guarantee the quote as to rate, total cost, and type of loan, you need to go in to final signing with the idea firmly in your mind that unless they can show both the cost and the benefit, you're going to walk out without signing. Indeed, many companies are very adept at pretending costs don't exist, and hiding costs at closing. Industry statistics: over half of all potential borrowers won't even notice discrepancies at closing, and of the ones who do, eight to nine out of ten will just sign anyway. This rewards people who lie to get you to sign up. Haul out the HUD-1 form at closing and make certain it conforms to what you were told when you applied. Most HUD-1s don't, and the loan officer knew it wouldn't conform when you signed up. Read the Note carefully also, before you sign.

More questions? I'd love to answer them! Contact me and ask!

Caveat Emptor

Original here

Every once in a while, the subject of assumable loans comes up. An assumable loan is one where the owner of a property has the ability to pass the loan along with the property in a sale. In other words, if they sell a property with a $200,000 assumable loan on it, by assuming the loan, the buyer only has to come up with the difference between that $200,000 and the purchase price. The $200,000 loan is a constant of the situation.

About the only loan that generally has an assumption feature is the VA loan. There are other loans out there that are assumable, but it's a matter of company policy of the lender funding the loan.

Just because a loan is assumable does not mean that any person is acceptable to assume such a loan. The lender has the right to approve or disapprove a loan assumption. The way to bet is that any prospective borrower is going to have to qualify under loan guidelines at least as stringent as the original loan. Mind you, if the rate is higher than the current market, the lender is likely to be somewhat forgiving, but if the rate is lower than current market, the lender has an incentive not to approve the assumption. They may approve it anyway, if the rate still beats the active return on the secondary market. But given the latitude to make their own decision, it's not exactly amazing how often everyone will usually follow their economic best interest.

Even after an assumption gets approved, the original borrower is not off the hook. I don't think I've ever heard of an assumption where there was no recourse to the original borrower. The VA loan has full recourse to the original borrower (and their VA guarantee) for a minimum of two years. This means that those original borrowers aren't going to be able to get another VA loan for at least two years, or at least that they're limited by the amount of their overall VA limit tied up in the assumed loan.

Other than VA loans, loans where there is an assumable option are generally a little higher than the non-assumable competition in terms of the tradeoff between loan rate and costs. This is because assumability is a feature with value. They're giving you something that has value the competition does not - they want some value in return. It's generally not a huge difference, but in the absence of someone asking for an assumable loan, I generally presume lower rate/cost tradeoff is more important to my clients, and I can't remember the last time a wholesaler with assumable loans won that battle.

There is a concrete value to having an assumable loan. Particularly in buyer's markets, they are one more way to get the property sold, and sold at a better price. After all, you have a feature that few other sellers have. The offer to allow someone to assume your loan can help certain kinds of buyers who may not be able to qualify otherwise, It's a narrow niche, but it does exist, and the ability to have any niche of potential buyers to yourself is valuable in a buyer's market. This doesn't say you can ask for way more than the property is worth, it says that you have a tool to lure certain types of buyer, and have a tool to move negotiations in the direction you'd like them to go once there is an offer.

Finally, I should mention that having an assumable loan on the property is in no way a magic wand for buyers. Buyers still need to qualify to make those payments with that lender. Furthermore, assumable loans require that you be in a position to essentially step into the seller's shoes, equity wise. If the property is selling for $350,000 and there's a $200,000 assumable loan on the property, the other $150,000 has to come from somewhere, and second trust deeds aren't currently going above 90% of value, period - not to mention second mortgages have a higher rate. The existing lender is not going to put more money to an existing loan. So even though the mortgage may be legally assumable, it doesn't mean it's necessarily going to work for your transaction.

Caveat Emptor

Original article here

Note: Since this article was originally written, there have been changes in the loan marketplace. The negative amortization loan is no longer available and the damage it did has finally become obvious to everyone with pretense of a functioning brain. Nor are stated income loans available, and what few subprime lenders survive have changed their tune. Nonetheless, it's still a good article for today.

Cold Hard Fact for today: The average Real Estate Agent or Loan Officer is not motivated to tell you that you can't afford your property.

For the agent you are trying to talk people out of a property after they have already fallen in love with it, and then the argument becomes, "Why did you show it to me?". Let's face it, if it's higher in price, it should have features that lower priced properties do not, and it should have fewer things that consumers do not want. Indeed, one of the easiest and most common ways unethical real estate agents sell properties is by showing you several lower priced properties, fixers which lack those attractive extras, then show you the blinged out immaculate property while whispering sweet nothings like, "I can show you how you can afford the payments!" (which is not the same as being able to afford the property!)

All agents learn that by telling the client "no," or anything that sounds like "no," they are likely to lose that business. Good ones know that putting a client into something beyond their budget is a good way to have the transaction come back to haunt them. But for most, the temptation of the easy sale that made itself if too strong. They want that commission check. Nothing wrong with commission checks. If they provide real value to the client, they are a way of showing the world that you have done something valuable, same as a doctor, carpenter, or computer programmer. It's when you use your position of trust to sabotage them that problems start - and the agent who causes a client problems should experience problems. Many agents have not been around long enough to understand flat or declining markets. In truth, I wasn't in the business the last time we had one, either. But I am old enough to remember, and careful enough by nature that I refuse to assume that a rapidly rising market will save my bacon, as many agents have become used to.

And for the foreseeable future, rapidly rising markets are unlikely to save anybody's bacon, because the market isn't going to be rising rapidly until all the distressed inventory has cleared. Inventory is high, long term rates are set to rise, and we're just seeing a wave of problems caused by over-the-top practices of the last few years. I think we're past the price decline locally, at least as far as properties that are actually selling, but conditions aren't there for a return to the market we had most of the last decade.

Lest you be wondering, the loan officer is even more unlikely to counsel you on whether you can really afford the property. Between Stated Income, Negative Amortization Loans, and loans that are both of these, you can get anybody with an income and a not too putrid credit score into the property. In fact, I heard some real howls of outrage from certain brokers when lenders tightened their recourse on brokers in 2006. Even so, the paycheck is now and certain, the risk of default vague and indefinite, and for most loan officers, there's another concern as well.

You see, most loan officers cultivate some friends who are real estate agents, and that's how they get their business. That agent brings them business because they have a history of getting the loan through, so that agent gets paid. Sometimes they may have their hand out for a referral fee as well, but the important thing for you to know as a consumer is that referral you get from an agent to a loan officer has nothing to do with how great their rates are, and everything to do with how creative they are in getting some sort of loan approved so that agent gets paid for the house they think they just sold. Tell just one prospect who has made an offer on their dream house that there is an issue with being able to really afford that loan, and the word will get around the real estate community in no time. Result: For causing one agent to not get paid, Joe Loan Officer not only will not get any referrals from them in the future, if the client does find Joe Loan Officer on their own, the agents are going to do their best to talk them away from Joe, who, from their point of view, "stole their paycheck" by telling the client that they really could not afford the loan that was necessary to make the transaction work! Even if they took that transaction to some other loan officer who got it closed, Jane Realtor doesn't want her clients to have anything to do with Joe, lest she lose another potential commission check!

So what can you, the consumer, do about this? Well, I can't tell you all about the special cases, and I lack the programming capability to embed a spreadsheet and loan calculator. But I can give you some good general rules of comparison, and guidelines laid down by lenders as to whether or not you can actually afford that loan.

Start with your total monthly gross income. Assuming you printed this out, write that number here:

Notes:
A: use fully indexed rate for qualification purposes. This means the underlying index plus the margin after it adjusts, assuming current values.

B: If interest only, use fully amortized rate for qualification purposes.

Any four function calculator will do this much. This is the largest number you will qualify with. As you should be able to see, it's more difficult to qualify for A paper, even though that is where you want to be. But we're not done. This is total housing and debt service, the so-called "back end ratio." So from that number, you need to subtract your monthly debt service: Car payments and other installments, and minimum credit card payments. You pay this much already. You obviously cannot afford to pay it out for housing also - that would be double counting! Your lender won't believe you can afford to spend the same dollar twice.

So add up your credit card, car payment, and other monthly debt obligations. Subtract it from your numbers for back end ratios, computed above. This will give you a set of five numbers that tells what you can afford for housing costs, depending upon how far you want to go. But we're not done! This is total cost of housing; the so-called "PITI payment." It includes not only principal and interest on the loan, but also property taxes, homeowner's insurance, Condominium Association dues, and Mello-Roos assessment districts (or their equivalent outside of California, if applicable). So from this, you need to subtract all of the known stuff or stuff you can make a close approximation on, like Association dues and insurance and taxes, to arrive at how much of a loan you can afford. Please note that for Negative Amortization Loans, loan officers may use the minimum payment for qualification, but you are still being charged the real interest rate! Still, it should become obvious as to why Negative Amortization loans were so popular in high priced areas. Not only would the lenders pay between 3.5 to 4 percent commission for them, not only do they allow lower payments to be quoted, but they make it look like you qualify for a bigger loan than you can afford, which means the real estate agent gets a bigger commission from selling you a more expensive property, and the loan officer gets paid more, also, because now you have applied for a larger loan! I have heard every rationalization under the sun from loan officers and real estate agents on this score, but they are still inappropriate for the vast majority of people who have them. I can get a better interest rate on a better loan for less cost, every time, but then I have to tell the client about the full amount they are really being charged every month, and they might have to content themselves with a less expensive property, meaning that real estate agent is going to have to do some real work. Go out onto the web and look for some loan calculators (Auto loans use slightly different assumptions, so don't use those calculators), or if you have a financial calculator, use it! Use the real interest rates that are available, and if the number you get comes out much higher than your quoted payment, they are trying to snooker you with a negative amortization loan. There is no magic about loans, and a healthy skepticism will help you prevent problems from happening in the first place.

Now add the down payment you intend to make to the loan you can afford, and that tells you whether or not you can afford the property. If you can't, don't make that offer. If you're already in escrow, do what is necessary to get out. I'd rather forfeit a deposit now than a much larger amount later. And if you already own it but can't afford it, the time to sell is now.

Caveat Emptor

Original here

Question from an e-mail:

Hi, I have a question about mortgages. My boyfriend and I are looking to buy a home, and since I have recently quit my job he would be the primary applicant. He makes $44k and we are looking at houses about $150k. We both have very good credit although I have some debt. I am wondering though what kind of rate we are going to get since he recently graduated and just started his job about a month ago. Is that going to affect the rate of the mortgage or how much he can qualify for, and by how much? Also, I have a small business that has been running for about a year and a half - it made a good bit of money last year, about $55k, and is still making some (albeit less now than it was last year.) Would it be worth it for me to co-apply, based on that income, since I don't have a salaried job currently? If I am not on the mortgage, I will sign a lease to him. We are going to put about $10,000 down. Thanks!

First off, let me briefly explain that unless someone has either truly putrid credit or large monthly payments that kill the debt to income ratio, there just isn't a reason to leave someone off a loan. So what if John is a househusband or Jane is a housewife with no income? They're still part of that marriage partnership, and the same applies (minus the word marriage) if the folks involved aren't married. Gays (with or without civil unions) and cohabiting straights are exactly the same as married folks except that I have to put them on separate applications instead of applying on the same sheet of paper, and if they're committed to each other, well isn't that what being a committed partner is all about - sharing benefits as well as responsibilities? In other words, ownership of the property and indebtedness for the loan.

Depending upon your situation, however, if you sign the lease it may actually help the boyfriend qualify more than your income would if you were on the loan. Leases that fulfill lender requirements generally aren't scrutinized for the ability of the lessee to pay, where if you were on the loan, the money that the lender would believe you could contribute might not pass scrutiny.

Now, let's look at the individual situations.

You are the more clear cut candidate. You have no current salaried income from employment, but you do have a side business with historic, documentable income. If you'd been doing it for two years, you'd have two years in current line of work and the ability to use that income all in one fell swoop. The way that is measured is monthly income averaged over the previous two years, as reported on your federal income tax forms. However, at this point all you have is one year. Still, it's worth submitting, because $4150 per month over one year isn't chicken feed. If you can show some income in the business for the previous year, and evidence of when you started, they're likely to average it over the full two years leaving you with a minimum of about $2100 per month to add into the gross income kitty. After all, it's a going concern, you're still doing it and nobody fires owners.

Furthermore, if you can get a job and a paystub in your previous field of employment before you apply for that loan, now you're employed over two years in the same line of work, simply with a gap in employment. When they average that out, it'll be a bit of a hit, but you'll still get substantial credit for your employment income.

Your boyfriend is a bit less cut and dried, especially at this update. When I first wrote this, if he was in the profession for which he was was granted the degree (for instance, a doctor or nurse when he was studying medicine), then it was pretty easy to get credit for the time in line of work. He was in medicine, he just wasn't getting paid until recently. It was never written into A paper guidelines that I'm aware of, but lender guidelines had some common sense to them. With the tightening of what the secondary market for loans will accept and the federal regulatory screws however, this is now becoming more difficult to get approved. Lenders want to see the stipulated period of actual documentable income.

If the boyfriend is in an profession unrelated to the course of study, he's just going to have to wait until he has his two years in. There's no history of involvement, and people get jobs in various fields all the time that it turns out they can't - or won't - continue in. For example, sales. That's fine, but the lenders don't want to get caught by default when they leave the field and can't make mortgage payments.

So I can see possible situations arising out of what you describe that could have either one of you primary on the loan, or completely unable to do the loan without resorting to subprime financing. Each individual situation can turn upon some very fine points, kind of like theology or law.

Caveat Emptor

Original article here