Recently in Mortgages Category

I thought I'd share this with you as an example of the sort of mind set to beware. This is a real email I received, with identifying information redacted.

I found you through the DELETED web site and I thought you might appreciate the following idea for GENERATING MORE REFINANCE BUSINESS:

What would happen if you sent the following email to your email list of former and prospective clients?



Dear (former or prospective client):

We recently found an interesting 23 minute video on the web that shows you how to Bring MORE MONEY into your Life, OWN YOUR HOME FREE AND CLEAR IN 8-11 YEARS - instead of 30 years, AND SAVE 66% in Total Mortgage Interest. The video is about a computer program called the DELETED (May be a proprietary name). You can view this video by copying either of the addresses below into your browser and press "Enter":


(Please Note: Your default video player will play the video, and your browser will stay blank.)

If you like the idea of bringing more money into your life, if would like to own your home FREE AND CLEAR in 8-11 years - instead of 30 years, and if you would like to save about 66% in total mortgage interest, get back to me at (123) 456-7890. We can make it happen for you.

Best regards,

(They had the gall to sign my name to this abomination!)

Here's WHAT YOU GET OUT OF THIS as a mortgage broker:

If your client wants to go ahead, a HELOC (DM: Home Equity Line of Credit) is required to implement the program, so they will need YOU to arrange an "Advanced" (Home Equity) Line of Credit for them (earning you a fully disclosed HELOC fee). Plus, you will Earn a $900 to $1500 fully disclosed commission for each DELETED you arrange, depending on your cumulative sales of the DELETED Program. All you do is help your client save tens of thousands of dollars (or more) in mortgage interest. They can also pay off credit card and other debts more quickly at the lower (HELOC) interest rate, and be guided step-by-step to become DEBT FREE.

This MMA program is a great RELATIONSHIP BUILDER. It will stimulate discussion with your clients and get you MORE REFINANCE BUSINESS.


As an alternative, if you don't want to send out special emails like this, you certainly talk with people every day who decide NOT to refinance, or NOT to refinance with you. What if you were to ask "one more question"?

FOR EXAMPLE: "By the way, if you don't want to refinance, I know of a way you can bring more money into your life AND own your home FREE AND CLEAR in 8-11 years - instead of 30 years, and save about 66% in total mortgage interest, WITHOUT REFINANCING. Would you like to know HOW to do this? (Yes/No)

(If yes): "Point your browser to DELETED. This will play a 23 minute video that explains how the DELETED works. Will you watch the video? As soon as you've watched it, call me, OK?"


Some clients should not have a HELOC because they do not have the financial discipline to handle easy access to credit responsibly. The factor of financial discipline could be part of your discussion with the client.

In any event, the above email gets you into direct contact with clients you would otherwise NOT connect with, without bringing up the subject of refinancing their loan. This allows you to assess and attempt to meet the client's needs in a perceived context of genuine service.

Sounds good? Get back to me at DELETED for more information and to get started!

Best regards - for increasing prosperity all around,


Offer some brokers a way to make money, and they won't care if it hoses their clients. Others just won't examine the program, because it looks like it helps clients while it makes them money, although in fact it does not help clients.

Their web video wouldn't run, and I wasn't going to lower my computer's security settings for SPAM. But I found their information elsewhere. It's an accelerator program combined with a debt consolidation program. It wasn't much work at all to find.

Lowlights include:

$3500 sign up fee for something that should be free, as it cuts the lender's risk factors significantly. Furthermore, as I wrote in Debunking the Money Merge Account Scam, this cost is literally never recovered, even if you keep the loan until paid off. You will pay the loan off sooner if you simply take the $3500 sign up fee and use it for a one-time direct paydown on the mortgage.

Multi-level marketing scheme. I sign up other folks to sell it, I get paid for their production. Now there is nothing intrinsically wrong with multi-level marketing, but it does serve to inflate costs. Sometimes it is less expensive than retailer's inventory carrying costs and marketing costs, but for financial services it is a dead give away that something is not right here because there are no inventory costs, and they're certainly spending enough money on marketing - $900 to $1500 commission plus over-rides per program sold. What a beautiful idea, to get the suckers to pay for your marketing!

Unrealistically low mortgage balances, and outrageously high assumptions of extras payments under the program. This has the effect of magnifying the apparent benefits. It posits extra payments on the order of what it would take to pay off the loan normally in ten years. In reality, if you could afford that level of payments, you'd have a ten year mortgage or a more expensive house. Your average total benefits will be half a months interest savings on anything deposited. So if you deposit your entire $5000 paycheck and you have a $2000 mortgage payment, that's about half a months interest on $3000. At 6%, that's about $7.50 per month gain. Certainly not worth all the hoopla, is it? Definitely not worth thousands of dollars in sign up fees, not to mention the costs of that Home Equity Line of Credit. Considering the costs involved, you'd do better to ignore the program (which has a monthly cost of more than that), and just send the lender $10 extra per month. As a matter of fact, most of the increased benefits these programs claim has to do with the bank retaining a certain amount that they claim you just end up not spending - and I can do better than 6%, even net of taxes, with that money if I invest it elsewhere. If you can't do better than 6% elsewhere, just add whatever you want to your regular monthly payments when you send your lender their money, and ask them to apply it to principal. You will come out ahead. Not to mention I don't have to take out a second or refinance to get money out of investment accounts if I decide to do something else with it!

And that's the real kicker. There is no benefit to these programs that mortgage consumers cannot do cheaper or better themselves. The real benefits obtained by these programs are comparatively small, and in no way justify sign up expenses of hundreds to thousands of dollars, or monthly fees above $1 or so. Don't waste your money. If your lender will give you one of these for free, that's one way to get five extra dollars or so applied to your loan principal per month. If they want to charge you, don't waste your money on the sign up or the monthly fees. Instead, add whatever the program's fees are to whatever amount you would ordinarily pay, and you'll be ahead of the game.

I keep saying this because it is true: mortgage lenders do not want to compete on price, so they will try offering all kinds of bells and whistles that might appear to be neat stuff but are really a distraction from what's really important. Some very big names are trying to use these to sell much higher rates than people would otherwise be able to get, by distracting people with this shiny new toy of Mortgage Accelerator Programs that don't make nearly the difference that some folks say they do. Take your time and do the math. If you can save a fraction of a percent on the interest rate, or even just cut your closing costs by a thousand dollars because the other lender's trade-off between rate and cost is a little better, you'll be better off going to the other lender. Mortgage Accelerator Programs like this are an expensive waste of your money.

Caveat Emptor

Original article here

This question brought someone to my site:

If my house is going into foreclosure but the house is also in probate, can the lender actually go forward with the foreclosure sale while the house is in probate?

The short answer is yes.

The Trust Deed (or Mortgage Note), that was signed by the now deceased whomever, gives a security interest in the property to that lender in exchange for money. The lender lived up to their end of the bargain. That security interest is valid until the loan is paid off. It is not removed by the death of the person that signed over the security interest.

Probate takes an absolute minimum of nine months. During this time, the court will likely allow those members of your family to continue to live there, but they will not likely approve disposition of the asset except in an emergency, and that emergency is going to cost your heirs money for the courts, and money for the disposition. On the other hand, the lender still needs to get paid according to the terms of the contract, and they are entitled to foreclose if the terms are not being met. I'm not a lawyer, but I've never heard of an estate being permitted to declare bankruptcy, which some living folks use to temporarily stave off foreclosure, almost always to their eventual major detriment. Since the executor is claiming that the estate cannot pay its bills and rarely are dead people earning any more money, declaring bankruptcy would seem like an open and shut case of "the creditors get all of the assets and your heirs get nothing." Probably not what anybody who's part of the situation wants.

There are simple steps possible to avoid probate for major assets. A trust is probably the most flexible of these, in that the trust owns the asset and the successor trustee takes over the management and within the limits of the trust, does what needs to be done without the courts getting involved. Flexible, much cheaper than getting a probate court involved, and your heirs get control right away. But it requires planning ahead (which many people are loath to do, being in denial about the idea of death) and an upfront investment.

Given the fact that there is a loan and a Trust Deed against the property, somebody is going to have to make those payments until the loan is paid off, whether by outright payoff, refinancing, or sale. Given that in the absence of a trust, your heirs probably are not going to have access to any liquid wealth you left either as it is also locked up in probate, the odds are that your heirs are either going to have to come up with the cash out of pocket, or the property is going to be foreclosed upon.

There are some good options. If your heirs are wealthy and have the cash, perhaps some one or combination of them will make the payments in the interim if it's been agreed they will be compensated later. Not likely, I'll admit, and they're likely to drive a bargain for larger eventual replacement. In some instances, the probate judge may agree to taking out a Home Equity Line Of Credit (HELOC) to make the payments, but somebody's going to have to be able to qualify to make the payments, and a dead person is not on the list of options, which means somebody still living is going to have to do it. The rates on these are typically horrendous, and cost a lot more than a little bit of planning.

Another excellent option is life insurance. Life insurance passes (usually) tax free on death outside of probate to a named beneficiary. Therefore, it's available pretty much right away to pay bills and stuff. It's also leveraged money, so a few dollars now buys more dollars when you need them. The difficulty is that you've got to have it beforehand. There's that planning thing rearing it's ugly head again, and the upfront investment of the premium dollars for the life insurance policy. Finally, any money created by this becomes the property of those beneficiaries, and there is no way to compel them to spend the money on bills of the estate. If the beneficiary is the estate, well, the money is locked up in probate again, and you've got to get the probate judge to agree with doing the necessary.

Another option is the named beneficiary Transfer on Death feature of most investment accounts. These also transfer outside of probate to named beneficiaries. Problem is, they require the investment of those dollars beforehand, and they also require that you keep the beneficiaries current, and all of this requires, once again, planning. The money also becomes the property of the beneficiaries, just like life insurance, and if there's no named beneficiary, it gets locked up in probate.

There is no free, no-planning-necessary, magic bullet. I strongly suspect it's all part of the various Lawyers Full Employment Acts, but we've all got to take the system as it exists. At the very least, you've got to do some planning ahead, and an upfront investment is probably going to return itself several times over. Remember, everyone is going to die sometime - I know of precisely zero exceptions thus far in the history of the world. Denial of this simple fact simply digs you in deeper, and puts your heirs in line to have to lose or waste a major portion of what you would have left covering for your deficiency, as is evidenced by the person who asked this question.

Caveat Emptor

Original article here

I went to a "direct from the providers" seminar on credit reports and credit scores.

Some of this information has changed from previous information, and some of it will change in the future. Credit Reporting, FICO scores, and related items are an evolving knowledge, as they figure out how to better predict future performance of potential borrowers.

A FICO score is nothing more or less than a prediction of the likelihood of a particular consumer having a 90 day late in the next 24 months. It is a snapshot, based upon your position and your balances as reported at the exact moment it was run.

I learned a bit more about the various other credit reports besides mortgage. They emphasize different things (naturally) and score differently. Auto scores go to 900, where mortgages range 300 to 850. Landlord tenant screens are different from a mortgage score. Revolving credit screens are different than mortgage screens. Finally, and most important, the "Consumer Screen" reports you get on yourself will always have a higher credit score than the ones mortgage providers run.

What makes up your credit score? Inquiries are 10 percent of your credit score. They only go back twelve months. Whereas I've been informed in the past that additional inquiries will get you zonked, that is not the case currently. Depending upon your length of credit history, after three to five "hard" inquiries in the last twelve months, they quit counting. A hard inquiry is done at your request for reasons of granting credit. Fewer is better. Longer history of credit means they will allow you more inquiries.

Multiple mortgage inquiries, if done within the correct time frames, still only count as one, no matter how many. Automobile inquiries also count differently than other inquiries.

Types of credit used is 10%. They're looking for a reasonable balance between types. The absolute worst type of account to have is from one of those zero interest finance companies. You know the ones, "Buy this sofa now and no payments and no interest for twelve months." People who are broke but need or want stuff now do this, and that's why the hit happens. They are deferring payment on something they can't really afford. You suffer guilt by association.

15 percent is length of credit history. How long you have had revolving accounts divided by the number of revolving accounts you have had. You have three cards that have all been going for thirty years, that's a better picture than five cards of which four are brand new. As far as the credit score is concerned, however, five years is as good as forever.

I've been telling people not to close open accounts. This is confirmed as not a good thing to do. Closing an open account can cause your credit to drop by as much as 80 points in some circumstances. If it doesn't cost you anything, don't close it.

Balances is thirty percent of your score. There are significant hits at fifty and seventy five percent of your credit limit on each card. Significantly, a small balance is a little bit better than zero, even. This is one reason you want to charge something you'd buy anyway to your credit card, just make sure you pay it off when the bill comes. Some credit cards (specifically charge cards in particular, not to mention any specific names of charge card companies where the balance is due in full every month) will report your high balance as being your limit, which can have the effect that you appear to the reporting agency as "maxed out" if you've charged something big. So make certain your credit limit is being accurately reported. If your balance is incorrectly reported, in general the only way to correct it quickly is with a letter from the provider, signed and on their letterhead, saying "Your balance as of (date)is $X"

Payment history is 35 percent of your score. This is divided into three categories: within the last 6 months, 7 to 23 months old, and 24 months or older. If you have had a delinquent credit reported within 6 months, you are getting the full impact in terms of lowering of credit score. Between 7 and 23 months is a lesser impact. Over 24 months is still less impact.

Important: DO NOT PAY OFF OLD COLLECTION ACCOUNTS! It can cause a 100 point drop in your score. Here's why. You owed $X to company A, and five years ago they sent it out for collection. Now you go back and pay it off, and the date it's marked with is TODAY. It's gone from being over two years old to being current as of now, bringing the full impact to bear once more. The one exception to this is a deletion letter. If you get a deletion letter on their letterhead signed by them saying "Please delete this account," you can make it vanish off your credit report as if it never was. Note that you may still have to pay off collection accounts, but do it as a part of escrow, where the loan is done before your credit is hit.

There are tools out there that can be used to analyze and tell you how to improve your score or how best to improve it with a given amount of money.

Bankruptcy: Three things determine what kind of credit score you'll have coming out of bankruptcy. 1) Percentage of trade lines you include in the bankruptcy. More is worse, lower is better. Including half your trade lines will not hurt you nearly so bad as including all your trade lines. 2) Number of inquiries. If you've still got one or two open lines you didn't include, you may not need more after discharge and you won't go apply for more. The poor schmuck who includes everything needs more to start a credit history, and is dinged HARD for each turndown inquiry. 3) Post bankruptcy payment history: if you included everything in the bankruptcy, you have no history until you get more credit. Can you say, "Vicious Circle," boys and girls? No payment history is even worse than a bad payment history, but any reports of delinquencies after bankruptcy hits you much harder than if you were never bankrupt and had a late.

Last individual points:

Rate on credit card does not affect FICO score.

Nor does salary, occupation, employment history, title, or employer, although time in line of work is a separate criterion for mortgage providers.

Credit Repair Services cost a lot of money for things you can do for free.

If you are disputing a medical collection (and only a medical collection) it doesn't count on your score.

Caveat Emptor

Original here

This is something that many folks don't understand about the loan market.

The labels "conforming", "jumbo" or, more accurately, "non-conforming" and "temporary conforming" only apply to so-called "A paper" loans, largely underwritten through Fannie Mae and Freddie Mac standards. The reasons for the labels are that they "conform" to Fannie and Freddie's requirements in all particulars, or that they conform in all respects except loan amount. But Loan to Value ratio, Debt to Income ratio, Time in Line of Work and everything else are according to the standards set down by Fannie and Freddie.

Government loans, VA and FHA, do not have conforming and Jumbo amounts. In the case of the VA loan, it's my understanding that they no longer have an explicit legal limit at all - just a limit on what lenders are willing to do given the limited nature of the guarantee. In the case of the FHA, there is a dollar limit, and it's usually even the same dollar limit at the upper bound as the temporary conforming limit. But to treat this as anything but a coincidence that saves brainwork on the part of the Department of Housing and Urban Development would be incorrect. In point of fact, the "regular" FHA limit is different from the conforming limit. Fannie and Freddie are now part of the government, but it's a different part than the FHA.

Subprime loans have none of this; only pricing and policy breakpoints, usually around $500,000, set by individual lenders.

So why is this such a big deal? You ask. Very simply, conforming loans get the best
tradeoff between rate and cost - what laymen think of as the best rates. It's an ambition worth having to have a conforming loan as opposed to anything else. The relationship between everything else varies over time, but you can expect sub-prime to have the highest rate/cost tradeoffs, while whether government beats non-conforming is time dependent. For about the past 18 months, government has been better, but back in 2003 for instance, non-conforming rates were generally lower than government - one more reason why government loans lost favor for several years. Conforming loans are also consistently available, and the government doesn't get involved. This was kind of a big deal several years ago when it could take four months for the government to process the paperwork needed for their loans. If I was told somebody wanted to buy my property with a government loan, there was quite a while there where I would have preferred another buyer.

Loans underwritten through Fannie and Freddie are also the most common sorts of loans out there, and they had the effect of standardizing the A paper market a couple decades back. When it was every lender for themselves, the standards varied by quite a bit. When they all want to sell to Fannie and Freddie, they all started using Fannie and Freddie's standards. Doing so meant they could loan the same money out several times per year, getting an origination bonus each time, rather than loan out the money and then only as it was repaid could they book the income. They could make far more money originating the loan and selling it to Fannie and Freddie than they could by actually holding it in their own portfolio. So-called "portfolio loans" still exist - large amounts of non-conforming loans end up being portfolio loans, which is one reason why they carry higher rates. When there's a ready, standardized secondary market for loan notes, and lenders can "turn" the money several times per year, they're willing to do the loans for less, which is a win for everybody.

Caveat Emptor

Original article here

Second Trust Deeds are something few real estate loan officers really understand well, mostly because the good ones don't make much money on them. Predatory lending laws in most states, limiting total compensation and total expenses to a given percentage of the loan amount, mean that brokers usually can't make enough to pay their expenses unless there's a first trust deed involved as well. Direct lenders can, because neither the premium they receive on the secondary market nor the interest rate is usually restricted. As a result, many direct lenders can get away with highly inflated rates on second mortgages. Most of the people who approach them won't know any better. I've lost count of the number of fourteen and sixteen percent rates I've seen, when eleven is a rotten rate for a sub-prime borrower. But if you will shop around, second mortgages can be found at surprisingly low rates and surprisingly low cost. If you've got decent credit and a verifiable source of income, fixed rate Home Equity Loans can be had under 8%, and variable rate Home Equity Lines of Credit can be found for 8 to 8.25%. Even sub-prime borrowers can usually find something around 11% if they'll look a little bit.

Second (and Third) Mortgages come in two basic flavors. If you get the proceeds all at once, they are typically fixed rate Home Equity Loans. These are essentially traditional loans. There are also Home Equity Lines of Credit, where you are approved for up to a certain amount, and you can take distributions any time during a draw period that varies from five to ten years in length. These work more like credit cards, albeit secured by real estate so you do get better rates. You pay interest only on the the outstanding balance at any given time. If you pay it down during the draw period, you can then take it out again.

Once upon a time, both products typically had all of the closing costs that first mortgages did. In the last few years, this has changed, largely driven by competition from credit unions, and I always suspected that second mortgages was why the banking industry was lobbying for restricting credit union membership a few years ago.

There are also two styles of obtaining a second mortgage. "Stand Alone" Second Trust Deeds are done on their own; when they are done in conjunction with a First Trust Deed, they are called "Piggyback" loans. With their popularization as a way of avoiding Private Mortgage Insurance (PMI) on low down payment purchases, pretty much every lender in my database does piggyback seconds. However, only about half will do stand alone seconds. With the regulations the way they are, even the higher interest rates are not attractive enough to get them to do the loan, because it takes basically the same amount of work.

Because "piggybacks" are done in conjunction with first mortgages, everybody wants them and everybody does them. Additional lender charges can be small to non-existent. They benefit from having the first done at the same time, and since all that work has already been done for the first, the additional work is kind of minimal. Whether they're a broker or direct lender, they make enough on the first that they don't have to charge as much for a second.

Good "stand alones" are harder to find. For instance, here in California, predatory lending laws limit both total broker compensation and total costs of the loan to six percent, but it still costs about $3500 to do the loan unless the lender relaxes one or more of the traditional requirements. For brokers, this means that they can't pay for it via a higher rate to the consumer, either. If the loan is $50,000, $3500 is seven percent of the loan amount. If brokers try to make it up via yield spread, Section 32 of the Real Estate Code limiting total broker compensation to six percent kicks in, and they cannot do it because real costs exceed what they are legally allowed to make. Note that this limitation does not apply to direct lenders, as their eventual premium on the secondary market is not regulated, and the amount of interest they receive if they hold the note is only subject to very weak governance rules. Upshot: Stand alone second mortgages, unlike first mortgages, are a very hard area for brokers to compete well in. I've got a couple internet based lenders for higher loan amounts (about $75,000 and up), but for smaller loans than that I will usually tell folks straight up that credit unions are likely to give a better deal than I can. For first mortgages, or firsts with piggyback seconds, that situation is reversed.

In some certain situations, due to the low cost of doing second mortgages, I can actually get a client a better loan by doing a purchase money loan under a program traditionally associated with stand alone second trust deeds. With some credit unions and major lenders offering them at 8% or even under, and up to $500,000 with minimal paperwork requirements and low to zero closing costs to the client, it can be a good way to get someone who cannot qualify full documentation anyway enough money a loan for a low end property, particularly if they are making a substantial down payment. If you're buying a $150,000 condo, avoiding the $3500 to $4000 for closing costs associated with a first mortgage can cut your effective interest rate for a loan you keep two to three years by about one percent.

One final note for this update: Right now second mortgages are only going up to about ninety percent loan to value ratio, period. Absolutely nobody is doing them for situations with less than 10% equity. I was saying until recently that the only way to get a loan with less than ten percent down payment was a single loan with PMI, but even first mortgages above 90% of value are rare, not subject to much competition right now, and even so they will not go above 95% of value, leaving government guaranteed loans (VA and FHA) as the only way to reliably get low down payment loans. Many municipalities also have first time buyer assistance that takes the form of a second trust deed, but the budget for those programs is notoriously limited.

Caveat Emptor

Original article here

This was originally from February 2007. The situation as to what loans are available has changed quite a bit since then, but the underlying advice is and will remain sound.

Shortly after the original article, things started downhill for lenders very quickly, something I'd been predicting since before I started this website, and about as difficult to predict as gravity. This was when most would-be Wile E. Coyotes looked down, but I'd seen it coming, it was only a matter of time. The lending market having the effect it does upon the real estate market, this had the effect of removing the veneer of believability even for the gullible.

On the other hand, that was then, this is now. The one constant about the real estate market is that it changes - and it usually takes a while for people to catch on because people, especially people who aren't in the industry, think what has happened recently will continue.

Hello Mr. Melson, Let me start off by saying that I am a big fan of your "Searchlight Crusade" website. I happened upon it a while back after I had already purchased my house. I've found a lot of useful information and I try to refer my friends and family to your site when they ask me home-buying/mortgage questions.

I am emailing you because I am considering a refinance. Just a little background info: I purchased a 3bedroom/2bath 1183 sq ft home in DELETED for $323,000 in Nov 2004. I am a DELETED with a credit score of 801. My wife is a part time DELETED with a credit score of 814.

I put no money down. I have my mortgage split into two loans (80/20). My first mortgage is $259K interest only with a rate of 5.375 fixed for 5 years with a payment of $1157.42. My second loan is about $64K HELOC interest only with what seems to be a monthly adjustable rate with my payments now close to $600. Both loans do not have a prepayment penalty. I've only been paying the interest every month. We plan to stay in the home for at least another three years (we are from out of state and might move back there when my son goes to high school - he's currently in the 5th grade). There is a possibility we might stay in DELETED at which point we're likely to stay in the house.

I was thinking about refinancing my HELOC so that the rate would be fixed. I spoke with my lender and I was offered a 15 yr loan with a fixed rate of 7.5% with a payment "around $600" with a prepayment penalty before 5 years.

Based on recent sales, my house is worth about $350K. Because of this I was told I could not refinance both loans into one.

Do you think it would be worth it to refinance. If so, what type of loan should I do? Or should I figure out if I'm staying in DELETED or moving back?

Any advice would be greatly appreciated.

I would love to give you my business if you know of anything that will work in my situation.

My first reaction was that there is no way anyone should accept a HELOC with a five year pre-payment penalty such as described.

You are going to need to refinance your first in November 2009 if not sooner. When that happens, there are going to be issues with subordination which are likely to cause you to want to pay your new second off, especially as the lender you mention has a policy of no subordinations.

This is an excellent question. Truthfully, an 8.00 or 8.25 percent Home Equity Loan (usually 30 year amortization, with the balance due at the end of 15 years in a balloon payment) will likely do better for you. Now my calculator says that a 30 due in 15 at 7.5 will have a fully amortized payment of $447.50, while a 15 year payoff is $593.29. Don't accept approximate payments, even as a quote - exact numbers tell you far too much about what's really going on. Also, you are and should remain at or below 95% Comprehensive Loan to Value (CLTV), which makes a difference on rate.

Some seconds have smaller penalties, so that may modify the answer. For instance, one lender I do a fair amount of business with has a very low closing cost second with a $500 prepayment penalty, in effect for three years. The cost to buy it off? $500. Either one of these, combined with the costs they assume, is still far less than the closing costs of most comparable loans. However, the standard prepayment penalty would be 80% of six months interest, or about $1920. Assuming you refinance in exactly three years, that boosts your effective rate by one full percent.

Now I'm happy to do whatever "stand alone" seconds come my way, a "stand alone" second trust deed being one where the primary mortgage is not being refinanced at the same time, as opposed to a "piggyback" where there is both a first and a second trust deed. However, the truth is that the best source for "stand alone" second mortgages is usually a credit union. I've got a couple of internet based lenders that are very competitive for high dollar value seconds, but for stand alone seconds below $75,000, credit unions rule. It was more cost effective to do our second with my wife's credit union than to do it myself. Just has to do with the mechanics of how brokers and correspondents are set up and the way that most second trust deed lenders work.

Now you do have to be able to make those payments. But what you should really be paying attention to is the total cost of the money. How much in closing costs you have to pay to get the loan done, plus how much the loan is going to cost you in interest every month. It was only a couple of years ago that most traditional lenders would charge the same closing costs for a stand alone second that they would for a primary mortgage. For a $64,000 second, that $3500 in closing costs is almost 5.5% before you get to the actual interest charge - the equivalent of a 1.8% surcharge to the rate, assuming you kept it three years. You're better off taking a 9.5% rate that carries no closing costs than you are with an 8% rate that carries traditional ones, and that's not even considering the fact that you still owe most, if not all of that extra $3500, when you go to sell your house or refinance.

The situation, luckily for borrowers, has changed. Many lenders have very low cost stand-alone second trust deed programs, whether you are looking for a fixed rate home equity loan (HEL) or a flexible Home Equity Line of Credit (HELOC). The rates are higher than first trust deed loans, but the requirements are lower. Because the rates are higher, lenders are competing for these loans, with credit unions leading the charge. If there's a first mortgage involved, things are different. Most credit unions don't really have the resources to handle first trust deeds, with dollar values having appreciated the way they have. So they partner with major commercial banks, becoming essentially dedicated brokers for first mortgages, while competing ever harder for second mortgages in their own right. Nonetheless, because lenders want second trust deed loans, the result of their competing with each other has been a drastic drop in closing costs for second trust deeds over the past few years.

Caveat Emptor

Original article here

A while ago I did an article entitled Debt Consolidation Refinance - Doing it Wrong vs. Doing it Right. It's a good article, if I do say so myself. Nonetheless, I think there's more to say on the subject, not just from a point of view of cranking some numbers, but on a meta level as well.

The most concrete lure of debt consolidation refinance is cash flow. Specifically, lower payments. The trap is that you are spreading principal payments over a much longer time. You refinance your home to pay off your car loan. Instead of paying the car off over three or five years, now you're paying it off over thirty. Instead of having it paid off when you go to buy another car, you still owe most of what you borrowed, and unless you saved the cash in the meantime, now you're layering more debt on top of what you already owe. So instead of having a paid off $25,000 automobile that's still worth $10,000 and no debt, you now have the forgoing plus $20,000 of debt that you still owe, and you are still paying interest on, on a car that you aren't going to get any more use out of. The fact that the security is your home rather than the vehicle changes nothing except the exact terms of the loan. You added $25,000 to your balance and $20,000 of it is still there, you're still making payments on it, and you are still paying interest on it.

Low payment is one of the best ways to sucker people into doing stupid things that I know of. Maybe that explains why I'm not rich; I want to figure out whether I'm actually helping the situation, and by the time I've worked it through, the folks are off calling the guy who's selling them the Option ARM who doesn't mention downsides or what is really important. As far as I can tell, low payment is the entire advantage of renting, for crying out loud. People think in terms of cash flow while flushing their financial future down the toilet in the name of lower payments.

There is a reason why that Statement of Cash Flow is the least important of the financial statements corporations are required to file, and Wall Street only discusses cash flow when there's something wrong with a company. Unless they've got a large proportion of clients that don't pay their bills, the Income Statement is a lot more important. Corporations don't think of their facilities only in terms of the payments on their loans. Neither should you.

When you pay off a loan, of whatever nature, you are essentially transferring money from one pocket to another. Furthermore, once you have paid it off, you are no longer paying interest - the real cost of the money - on the balance. It's only the interest charge that you are really paying and that is costing you money. Paying off principal is paying yourself. Stretching the loan term from three years to thirty does not alter the amount of principal you pay, but it does greatly increase the amount of interest you pay. Even if you cut the interest rate from 10% to 6% and get a tax deduction to boot. Paying attention to payments is for suckers. You have to be able to make your payment, as I've said before, but so long as the payment is one you can make, concentrate on the real cost of the money - interest rate - and the cost of the loan, or how much you have to spend in order to get the loan funded. Weigh this against the benefits and how long those benefits last.

If all you are paying attention to is cash flow, and you consolidate your debt because it lowers your payment so that you can spend more money, don't be surprised if you find yourself in the same situation a little while down the line. This is a real world illustration of the law of diminishing returns. Each time you do it, you dig yourself in deeper, and there is less additional spending needed to get you to the point where you have to consolidate again. You consolidate your $1500 house payment and $40,000 in debt, and your new payment is $1800. Then you consolidate that and $30,000 in debt, and your new payment is $2100. Then you consolidate that and $20,000, and your new payment is $2400. What do you do when you can't consolidate any more, and you can't afford the payments, either?

If, on the other hand, you consolidate because it lowers your cost of interest and gets you a tax break and you still keep making the same payments as before, then you're miles ahead. If you're using debt consolidation to lower your payment, you are doing it wrong. If your choices are bankruptcy or debt consolidation, well, if you've got a nice stable home loan that you're not going to need to refinance for a couple of years, I might actually consider bankruptcy, particularly if I only need to shed one or two lines of credit. Obviously, talk to bankruptcy attorney first, but once you've rolled it into your home loan, those higher costs are a part of your life for as long as you own the property and haven't paid the loan off. If you can't afford them and you're a serial consolidator, eventually you're going to get to point where you lose the property.

If you consolidate in order to cut your interest costs, and you don't roll excessive loan fees in to your balance, and you keep making the same payment as before and don't take on any more debt until the balance on your home loan is at least as low as it was before you consolidated, then you come out ahead. Way ahead. You're a little bit ahead due to the lowered costs of interest, and you're a little bit further ahead due to the tax break from interest on home loans, and after you get to the point where you were before, every payment you make without adding new debt pays off much more of your balance. In my original Debt Consolidation Refinance article, I used the example of rolling $75,000 debt into a preexisting $300,000 mortgage. It raised the minimum payment for the mortgage by about $400 and cut the overall minimum payment by $1100. If that minimum payment is the reason you did it, you just hosed yourself. But if you cut your overall cost of interest, and kept making the same payments, you've accelerated your payoff schedule. Make the same payments as before, and you're even in less time than it would have taken to pay the consumer credit down. Keep making those same payments after you've brought yourself even, and it can pay the entire debt load off in half the time or less that your home loan would have taken. Even if you don't make it all the way to zero before you need another car, debt consolidation can set you years ahead in just a few months - but only after you have paid your balance down to where it was before. If you don't get your balance down farther than that before you refinance again, you're cutting your own throat.

In short, debt consolidation refinance is not some magic wand to get out of debt free. There are pitfalls into which the overwhelming majority of people fall, because they consolidate debt for the wrong reasons, and afterwards, they keep doing it again and again until some disaster happens and they lose the property. However, correctly handled, it can significantly enhance your financial situation. Whether it helps or hurts you depends upon how you handle it.

Caveat Emptor

Original here

what is a underwriter final "sign off" on the conditions
First off, it needs to be mentioned that a good loan officer gathers information and puts a full package, with all of the information an underwriter should need, before submitting the package to the underwriter. That's how you get loans through quick and clean. Give the underwriters all of the information you know they're going to need right up front.

Some clients (and a large proportion of loan officers) don't understand this. They want to hang back and see if the basic loan will be approved before they do "all of this work." This is a good way to have to work much harder on the loan. Give it all to them in one shot, and they only look at your file once. You get a nice clean approval. The issue is that every time that underwriter looks at your file, there is a chance they will find something else that they want documented, some little piece of the picture they are uncomfortable with. The underwriter can always add more conditions. The cleaner the package, however, the less likely it is that they will.

When I first wrote this, there were some matters it was okay and routine to bring in later. No longer. Packages not submitted complete get put on hold - lenders won't give conditional approvals to incomplete files any longer. You used to be able to submit without appraisal or title report if they weren't ready yet when you were otherwise ready to submit. It can delay a file while the appraiser contracted under HVCC takes their own sweet time, but lenders will no longer consider incomplete files.

Even if the file is complete, it's important to make sure it's really complete. If the underwriter asks for another set of paystubs, the underwriter will look at the file again once they get them, and if the income they document is even one penny less than the initial survey of the file, they will underwrite the whole thing again. A good loan officer submits complete packages, so the file only gets looked at once.

But every loan officer gets asked for additional conditions from time to time. With the best will in the world, sometimes they are going to miss something that the underwriter is going to want to see in this particular instance. Again, since first I wrote this, underwriters have gotten a lot pickier. I don't think I've even heard of a loan approved without unforeseeable demands from an underwriter in the last couple years. The principle stands: Give them everything you know they are going to want right up front.

Loan conditions fall into two categories: "Prior to documents" and "prior to funding". "Prior to docs" conditions are related to "Do you qualify for the loan?" type stuff. Income documentation, property taxes, existing insurance for refinances, verification of mortgage, rents, employment, deposits, all of that good sort of stuff. Also appraisal, title commitment, etcetera. If there's something missing in the loan package, or a real question about borrower qualification, it should be a "prior to docs" condition. These conditions should be taken care of between the loan officer and the underwriter. The underwriter tells the loan officer what needs to be produced in order to approve the loan, and the loan officer goes and gets it. If the loan officer can't produce it, there is no loan.

This is not to say that a good loan officer can't necessarily think of another way to get the loan approved. Indeed, that's a significant part of being a good loan officer, almost as big as knowing what loans won't be approved, and not submitting a loan that won't be approved. This last is a big game with many loan providers, by the way. They get you to sign up with quotes they know you won't qualify for, but when the loan is turned down (or, more commonly, the conditional commitment asks for something that the situation can't qualify for), they then tell you about the loan they should have told you about in the first place. Pretty sneaky, huh?

Getting back to the underwriter's conditions, a good loan officer knows how to work with alternatives. But at the bottom line, the loan officer has to come up with something that the underwriter will approve. It is the underwriter who has final authority. They write the loan commitment, which is the only thing that commits the money. In fact, most loan commitments are conditional upon additional requirements. The only universal to getting these conditions signed off is that the underwriter has to agree they have been met. As the underwriter agrees that the conditions have been met, one by one, the loan gets closer to final approval.

When the last prior to docs condition is satisfied, the loan officer orders loan documents. It used to be that this was also when many of the less ethical of them actually lock the loan quote in with the lender. Due to changes in the lending environment, it is now very costly to loan officers and future clients to lock a loan before they know it will close. An ironclad rule is that if it isn't locked with the lender, it's not real, but lenders are now charging so much for failing to deliver locked loans that there isn't a realistic alternative - one borrower changing their mind can effectively eliminate a broker's ability to use a particular lender.

When the loan documents arrive, the borrowers sign them with a notary and that's when the rescission clock begins. There is no federal right of rescission on investment property, and none on purchases, but on owner occupied refinancing, there is (Some states may expand on the federal minimums).

At this point we still have "prior to funding" conditions to deal with. "Prior to funding" should be reserved almost exclusively for procedural matters, and should be taken care of primarily between the escrow officer and loan funder. There are always going to be procedural conditions prior to funding, but many lenders are now moving more and more conditions to "prior to funding" as opposed to "prior to docs". Why? Because once you sign documents, you're more heavily committed. Psychologically, once most people sign loan documents they think they're all done. This is not, in fact, the case. Legally, once the right of rescission, if any, expires, you are locked in with that lender unless/until they decide your loan cannot be funded. Once rescission expires, you no longer have the ability to call the whole thing off. You are stuck.

This is not to say that an occasional condition can't be moved to "prior to funding." Especially on subordinations. I've saved my clients a lot of money on Rate lock extensions by getting subordination conditions moved to prior to funding so the rescission clock will expire in a timely fashion to fund the loan within the lock period. This is less common now, as lenders want all the ducks in a row before they generate documents, but it never hurts to ask politely.

This is all well and good if the lender told you about everything and actually deliver the loan they said they would, without snags. On the other hand, I have stories. One guy I used to work with had the capper, and the reason he got into the business was he was certain he could do better. He signed documents on a purchase, and a week later - all the while he's expecting to be called with congratulations on a successful purchase any second - they called and told him he had to come up with $10,000 additional money within twenty-four hours, or lose the loan, the property, and the deposit, and be liable for all of the fees. His father had to overnight him cash, which he then took into the bank for a cashier's check.

He is only the most extreme example. The loan is not done until the documents are recorded with the county. Until that happens, the money does not have to come, and even if it does, the lender can pull it back. One procedural thing that happens with literally every loan is a last minute credit check and last minute call to the employer to be certain you still work there. If the borrower has been fired, quit, or has retired, no loan. If the borrower's credit score dropped below underwriting standards, no loan. If the borrower has taken out more credit, the lender will then send the file back to the underwriter to see if they still qualify for the loan with the increased payments. So like I tell folks, until those documents are recorded, don't change anything about your life.

The many less than ethical loan officers don't help matters any. I was selling a property a while back, and the buyer signed documents on Tuesday. If I had been doing the loan, the loan would have funded and the documents recorded the next day. Unfortunately, I wasn't doing the loan. This guy's loan officer had quoted him a loan he couldn't qualify for, and ten days after he signed documents, I got a call saying he could only qualify if I knocked $20,000 off the purchase price. I kept the deposit and went looking for another buyer. This guy learned an expensive lesson. When you sign loan documents, require your loan officer to produce a copy of all outstanding loan conditions. Don't sign until and unless you get it. This guy had signed, and was now locked in with a lender who couldn't fund the loan on conditions he could meet. I had even warned his agent about the problems I saw in the situation (I accepted the offer because I was willing to sell at that price, so I wanted the transaction to go through), but hadn't been believed. So both of us ended up unhappy.

If they give you a copy of all outstanding loan conditions, you should know if you can meet them. If you can't meet them or aren't certain, don't sign. Don't hesitate to ask for explanations. Some of this stuff gets pretty technical, but a good explanation should be easily understandable in plain English. It may be complicated, but there just isn't anything that can't be explained in plain English. If the explanation you get is gobbledygook, you've probably been lied to all along.

Caveat Emptor

Original here

The scope of the problems that exist in the United States consumer mortgage market are huge. Enormously, mind-bogglingly, "How Big Is Space?" type huge. Yet, the problems are almost entirely on a retail level, when one provider works with one consumer. The system as a whole works, and it works extremely well. Consider:

Most consumers in Europe or any other country in the world would trade their loans for yours in a heartbeat. Rates there are typically around nine percent or so. Here, that's a ratty sub-prime rate. Mexican rates start at about fourteen percent. Hard money lenders here can sometimes do better than that.

No matter where you are in the United States, you have ready access to home loan capital. It's considered almost a one of our inalienable rights. Due to our secondary markets, as long as you can meet some pretty basic guidelines, you can find somebody eager to lend to you. You can find very long mortgage terms and very short terms. You can find loans without prepayment penalties, and you can choose to get a lower rate by taking a prepayment penalty. You may end up with something that's not as good as someone else if their situation is better, and the lender wants more money to compensate them for the risk of your loan, but even so, the rates here are better than almost anywhere else in the world.

Consumer protections are also better here than almost anywhere else in the world. There are federal laws that give you time to call off a transaction if you change your mind, disclosure requirements, consumer protections against builders with teeth in them, and a tort system that, if it does go overboard some times, still gives you an excellent chance at recovering what unethical people took from you. Many states (California, for instance) go well beyond mandatory federal consumer protections.

So keep this in mind when you see me or anyone else ranting on and on about the problems with our financial markets here. Consider a capital market willing to loan the average person several years worth of wages. I can get a family making $6000 per month a loan for nearly $400,000 on an A paper 30 year fixed rate basis - most expensive loan there is in the most favorable, hardest to qualify for loan market - no surprises, no prepayment penalties, no "gotchas!" of any kind, and I can do it without hiding or shading the truth in the least. That's more than every dollar they will make for the next five years, and this family is every bit as chased after as the richest person in the world (more actually, because there are more of them). When you stop and think about it, that's a pretty wonderful situation. For all of the rants I make, the unethical things that happen, and the problems that exist in our capital markets, they are pretty damned good, and have chosen a set of tradeoffs that appears to be working better than anywhere else in the world, at any other time in history.

Caveat Emptor

Original here

Loans are declined, or actually, the next thing to it, all the time. It is pretty rare for a loan to be outright rejected; I do not recall ever having had a loan outright rejected. That's a sign of a loan officer who wasn't paying attention to guidelines when the loan was submitted. What happens far more often is that the underwriter puts conditions on it which cannot realistically be met. Documentation for more income than you make is probably the classic example of this. What usually causes this is that the underwriter finds a debt that didn't show up on the credit report and that you didn't tell your loan officer about, and so a loan with a marginal but acceptable Debt to Income Ratio became unacceptable. Or the appraisal comes in low, raising the cost or lowering the cash out due to a higher Loan to Value Ratio than the loan was priced for. Sometimes there is something that can be done about it; sometimes there isn't. If your loan officer can't think of anything to do about it, he'll tell you the loan was rejected. Sometimes they'll tell you that the quote that got you to sign up was rejected, also, but they have this other loan over here "that isn't much more expensive" that you do qualify for. Telling you that a loan was rejected is one of the best ways there is for a loan officer to do bait and switch.

Unfortunately, there really isn't anything you can do to verify that your loan was rejected, as opposed to bait and switched, or just couldn't meet underwriting guidelines. (Whether it had any chance of meeting underwriting guidelines is a subject for many more essays).

The first thing to do is realize that the fact you cannot meet guidelines for the loan that got you to sign up means that it is time to start shopping around again. That loan that got you to sign up does not exist as far as you are concerned. It's not like they are suddenly going to discover that the guidelines allow 5% higher debt to income ratio. If your loan officer is not a complete bozo, they will have gone over alternatives with the underwriter before telling you about the difficulty. If there's something they can do with a little bit more paperwork or a little more income, they're going to ask you if maybe you have the paperwork, or if you make $500 per year in some other fashion. A good loan officer told you about the loan because he believed you would qualify, but you don't. A bad loan officer told you about the loan because he thought he could use it to get you to sign up, and then pull a switch on you once he had the originals of all your paperwork and control of the appraisal that you've already paid for. There really is no good way to tell for sure. In either case, you are back to square one - shopping your loan. I would also think twice about staying with the same loan provider. He's told you about one loan he couldn't do to get you to sign up. Why not two?

So being told you don't qualify for the loan you thought you were going to get is always a sign that you need to start shopping your loan around again. That's why you don't ever give a loan officer your originals of anything. Even if somebody brings me an original, a copy is just fine and I can hand the original back. The only paperwork I need the originals of is the loan paperwork - the application I fill out and have you sign, and the disclosures associated with it. Such is not, unfortunately, the case with many loan providers. Do not ever allow your originals out of your hands. Once they've got them, many loan officers will hold them hostage to prevent you taking your loan elsewhere. It is to be admitted that it's a lot of work to do a loan. But they also dangled something you didn't qualify for in order to get you to sign up. The responsible party for their wasted work is themselves.

I used to encourage back up loans. With changes in the market making it costly to lock loans before we're certain they close, I no longer know anyone who will do back up loans - even I can't afford it any longer. And I also used to ask for a written promise to release your appraisal, but with Home Valuation Code of Conduct, that is no longer permissible. The changes that congress and other regulators have made (mostly in 2008-2010) are not for the benefit of consumers.

I've also dealt with Loan Providers Who Will Pay For Your Appraisal before. One way or another, you are paying for that appraisal. If you think you are getting it for "free", not only will you paying for that appraisal, you are paying for the appraisal of everyone who canceled their loan, too, and a good margin on top of that.

Caveat Emptor

Original here

"what happens to your equity when the bank forecloses" was a question I got.

The answer is that most, if not all, will be dissipated by the foreclosure.

Let's say you own a home currently valued at $500,000, that you owe $200,000 on it, and that you have a 6% loan. Now, for whatever reason, you can't make the payments, and for whatever reason, you don't sell while you have the opportunity before the trustee's auction.

I'm most familiar with California, but expect most other states to be similar. In California, you are going to be four months behind before the Notice of Default happens. So that is four payments of $1200. Furthermore, when you are fifteen days late you owe a 4% penalty, or $48, and when you are thirty days late, the missed payments start accruing interest. So at the point that the Notice of Default is possible, you owe $204,777.83.

From Notice of Default to Notice of Trustee's Sale is another 60 days, but before that happens, the bank is going to hit you with $10,000 to $15,000 in administrative fees for going into default. Check your contract; it's in there. Let's say $12,000, and now you owe $216,777.

Add another two months of delinquent payments, and penalties as of 15 days after. So as of the time the Auction actually happens, you owe $219,447. Furthermore, to make the auction happen, they will charge you about another $15,000. This covers the expenses of making the auction happen, of which the most noteworthy is the appraisal. At this point, you owe $234,447.

The appraisal bears special mention. Not only is there zero pressure to get a good value, the bank wants that appraisal to come in nice and low. They want the property to sell at auction, and if nobody bids 90% of the appraisal price, then they own it and have to go through the rigamarole of hiring an agent and selling it. So that appraisal is going to come in as low as is reasonable, to maximize the chance of it selling at auction. Every once in a while questions about low appraisals at trustee sales hit the site. The short answer is Microsoft Standard: "It's not a bug, it's a feature!" and from the bank's point of view, it is. So even though the property might sell for $500,000 in the normal course of things, the appraisal might come in at $440,000, meaning that someone has to bid $396,000 in order to buy the property at auction. The appraisal might be even lower, but let's say $440,000.

If someone bids $396,000 at auction (assuming they actually are able to consummate the transaction), they own the property. Less transfer costs, the bank gets maybe $380,000, of which the note is now for $234,000, and $300,000 of equity has dropped to $146,000.

But that's not usually what happens. What's usually happened is that the owners have financed it out to at least $375,000, hoping to be able to stave off foreclosure, and by similar math, they now owe roughly $425,000. How much do they get when the bank only got $380,000?

If the property doesn't sell at auction, the bank now owns it. Now they have to hire a listing agent, and offer a cooperating buyer's broker percentage, and while the listing agent looks for a buyer, the money owed keeps earning interest. Let's say the property eventually sells for $410,000, and the bank spends 7 to 8 percent of that getting it sold, so that their net is maybe $380,000. Even if you originally owed $200,000, by the time everything is said and done, you might owe $250,000 or more, leaving perhaps $120,000 coming back to the original owner. Keep in mind that in this example, you started with $300,000 of equity (60% of value!) based upon the sales of comparable properties. That's not a typical example. Even before the market decline, the percentage was typically 20% at most. With the market decline we've had, things are even worse than that for most folks.

Getting back to the example, if the owners were to short-circuit the whole process by selling successfully for that same $410,000 (almost 20% less than comparable properties might sell for) before the trustee's sale happens, and if they spend that same 7.5% to get it sold, they get about $380,000, of which they'll get to keep approximately $160,000, more than it is likely they will keep under the best possible outcome if the property went to trustee's sale. It's easy to sell reasonably maintained properties for 18% less than comparable properties are selling for. (Unfortunately, most people over-price their property even in this situation, not realizing how much time is going to hurt them)

So if you cannot afford your payments, and you're looking down the road at a trustee's sale, it is usually in your best interests to get the property sold before that happens. The lenders will generally be as accommodating as they reasonably can if you ask them and keep them in touch with what is going on. They don't make money on foreclosures - they lose large amounts of it even when the sale covers the note. Lenders don't want to foreclose. Thanks to California's Home Equity Sales Contract Act, once the Notice of Default hits, you are unlikely to be able to do business with investors except on an "emergency sale for 60% of value" basis (that being about what the those "Cash for houses" folks offer), so the sooner you act, the more money you will likely come away with.

Caveat Emptor

Original here

Hello, Mr. Melson,

I am one of your legion of fans of your website, having lucked into stumbling upon it by hyperlinking from another site. It is my goal to read EVERY ONE of your archived articles before I buy a house.

Yes, I wish you were here in DELETED, where I'd pay your going rate in a heartbeat to be my non-exclusive buyer's agent; but I must content myself with your archives to learn how to navigate this shark-infested swamp of BUYING A HOUSE. (Unless your services can guide me to such an agent here in DELETED.)

In hopes you can use this for a topic of one of your essays, yes, my husband and I are the proverbial "aging baby-boomers" looking to buy a house with his VA benefits and not interested (so as to be able to sleep nights) in anything but a 30-year fixed mortgage.

What makes us different from others in this category who might be writing to you is that we have no children, no family, no heirs but The Nature Conservancy; and we view our buying rural property as OUR LAST HOME with no relevant consideration for estate taxes, amortization, refinancing, ever paying it off, or any other usual

My question, should you be able to turn this topic into an article about Vietnam-era vets using their VA benefits to buy their final home with absolutely no intention of ever moving again and being able, through employment, disability benefits, and--soon--social security, to make the payments until we shuffle off this mortal coil,


Thank you from the bottom of my heart for your altruism in promoting consumer education on what has to be the most dangerous and confusing transaction any American consumer will ever undertake: BUYING A HOME.


Item the first, payment is trivial to lowball. Let's take a more or less standard example based upon rates back around the time I originally wrote this. I had a thirty year fixed rate loan at 6.00% for two points. Let's say you were buying a $300,000 home, and chose that 6.00% loan. $300,000 at 6.00% is $1847.16 per month. However, that transaction has closing costs of about $3500 in addition to those two points, plus the VA funding fee of half a point if you're not a disabled veteran. This gives a balance of $311,282. and a payment of $1866.30 (VA loans are allowed to roll up to 3% on top of purchase price into the loan). By pretending that $11000 plus doesn't exist, I could quote a lower payment, and most lenders do precisely because people do shop by payment. But you're either going to come up with it out of pocket or pay the higher costs. Actually, in this case, that's about $2300 cash you're going to need to make the transaction happen because you're above the 3% "roll in allowance", that they conveniently neglected to mention. Furthermore, these aren't the only games played with lowballing. Most people are amazed at how much it's possible to legally lowball a mortgage quote. Nor do the new proposed regulations change this. If you're shopping by payment, someone who writes an honest quote on the above is going to look like a more expensive loan than someone charging another point or so, who figures on cannibalizing your Good Faith Deposit and still rolling the maximum 3% into the loan, but pretends this money is going to come from out of the twilight zone. VA loans are just as subject to pretending real fees don't exist as any other loan.

VA do loans have another simplifying feature - they only come in fixed rate loans. I haven't kept close track, but last I knew, it was not allowed to get a VA guarantee on a ARM, hybrid, or balloon loan. This eliminates the trick of them telling you it's a "thirty year loan" while not mentioning that it's not a fixed rate for the entire time. And if you're looking for 100% financing, it's not like the lender is going to substitute something else, given the current lender fear of the market. But it has happened in the past that people were told they were getting a VA loan, but it turned out that wasn't the paperwork they signed.

Last issue on this point, there is the question of whether the rate was really locked, and for how long. Mortgage Loan Rate Locks are for a definite period. The longer you want to lock, the more it costs. So someone who knows it's going to take 45 days and quotes based upon a 45 day lock is going to be at a cost disadvantage to someone who pretends that a 15 day lock is going to be the same, and doesn't actually lock the loan, but lets it float. Six weeks from now when documents are ready, your rate is 6.75% because the market has shifted upwards and your loan was not in fact locked. Alternatively, they locked for 15 days and you ended up paying five or six tenths of a point in extension fees - significantly less that the upfront difference, which is usually about a quarter of a point.

At this update, lenders have made it extremely costly to lock a loan with them and then not fund it. It does not matter why; it only matters that a loan was locked and then had no loan actually funded. The way they discourage this is to levy a surcharge upon all future clients of that loan officer or office for a certain period, meaning you can't compete as well for future clients, so loan officers who want to offer low rates cannot lock until they are pretty certain your loan is actually going to fund. I get regular communications from the home office instructing me as to the consequences of locking a loan and failing to deliver it to the lender.

Item the second: People refinance, far more often than most people believe or are even willing to admit. You think that if you get that 6.00% loan today you're going to be happy forever. But then rates go down to where they can get 5.5% for that same two points, and they refinance. Or somebody comes along and sells them on a 5.5% loan that requires three or four points. There are VA loan companies that go around selling these, and they've got presentations that make it look like a good deal - which they are if you're one of the rare individuals who can resist them in the future. Problem is, they're going to be just as appealing then as they are now, and it's going to be just as good a deal then as it is now - providing you can resist future sales pitches beyond that. Let's look at how much money you've wasted if someone comes along and sells you a refinance a year from now:

Your choices: 6% for two points (plus VA funding and $3500 closing costs) versus 6.5% for zero points (plus VA funding and $3500 closing costs). Balance on loan 1 after 12 months is $307,459 Balance on loan 2 after 12 months is $301,615. You did save $740 in payments with loan 1, or $1150 in interest. The VA streamline does not require an appraisal, and can roll another 3% into your balance, so let's say you can get 5.5% for three points, which means a minimum of 1.5 points out of pocket, but you figure it's worth it to cut your payments. Your balance is now $316,680, and you spent $4700 plus in hard cash, to boot. $21000 plus in financing costs, to keep your payment low. If you get the "no points" loan to start with, your financing costs are $10650 in your balance and about $100 less out of your pocket, or roughly $15,000 - a difference of $6000, which is roughly $35 per month forever.

People really do get into this kind of refinancing loop, and actually it's worse than this because most people roll a month or two of payments in, plus the impound account. They just spend the money from the payment check they don't write and the impound account as well. I once spoke to a guy up in Riverside County who bought for just under $160,000, and the costs of serial VA streamline refinancing had driven his balance up over $230,000. This is real money. If they had just refinanced less often, or for lower costs, their payment would have been almost thirty percent lower, and he would have had sixty to seventy thousand dollars more equity in his property!

Issue the third: What happens in such a situation if you have a need for that money? It's gone. But aging people - particularly without heirs - develop needs for money. For instance, long term care expenses. I wrote a three part series on that quite some time ago, but they are still worth reading. one, two, three (The Republican congress later in 2006 repealed the so-called Waxman Amendment I reference in part two, but most states still do not have a partnership program). And it's not just long term care, either. You may have medical coverage and not need to worry about it, but I assure you that many seniors are not in such happy circumstances. You may be wishing at some point in the future that you had that equity available to you. I've met quite a few who did.

In short, there are a lot of traps lying in wait (or ready to be set) for the people who shop by payment. Whereas if you shop by the tradeoff between rate and cost, Ask the questions you need to ask. The payment is the byproduct of these more important items. Payment is, after all, determined by simple mathematics.

None of this is to say it may not be a good idea to buy the rate down as much as you can. If you have a history of not refinancing for ten years or longer, and you swear a pact in blood not to refinance ever, no matter how good the deal, it is a good idea to buy the rate down with points. It also reduces your cost of money over time, if you keep the loan long enough that you recover the cost of those points. The drawback is that this puts a lot of money into what is effectively a bet that you're not going to sell or refinance for a long time. If something about your situation changes before you've recouped the money, that money you sank into the rate is basically gone.

For most folks, this bet is a very poor one to make. It makes the odds of successfully completing an inside straight look good. The outcome is under your control, but the vast majority of people who make this bet voluntarily let the casino bank off the hook before they've recouped their wager investment. Nonetheless, it is a bet that can work out very well if you are a member of that tiny minority who does keep their loans long enough. In the example referenced above, the borrower who keeps the initial 6% loan the full term and pays it off will pay only $360,583 in interest, versus $389,042 for the 6.5% loan, a difference of $28,458, almost five times the difference in cost of procuring the loan. For your upfront bet investment of about $6200, you get your payment lowered by $61 per month and initial cost of interest by about $96 per month. If you keep the loan the full term of 360 months, you more than get your money back. But for the population in aggregate, that's a money losing investment, as the median time people keep their mortgages is about 28 months. Even if you double that, you're still on the losing end of the wager.

PS I am intentionally not taking into account the time value of money, or the alternative uses for the money, but $6000 invested at 10% per year turns into roughly $105,000 in 30 years, and $34,500 at 6%, which would, by the numbers alone, be another reason not to do it.

Caveat Emptor

Original article here

from an email:

On a related note, I hope you might have some advice for us. My husband and I just sold our condo. But we are NOT buying at the moment. Instead we are renting. (Not sure where we are going to be 6 months out and buying does not sound like a good idea until we are settled again.) So we are spending a small part of the profit off the sale on retiring the only credit card debt we still have and putting the rest in a money market to earn interest until we can use it as a down payment on our next house.

However, with no credit card debt and no mortgage (and one car loan that will be paid off in about a year) I am afraid that by the time we buy a house, we won't be considered good credit risks because of not having loans we are paying on.

We DO have a credit card that we put some charges on and pay off every month. Is that enough? Or is there something else we should be doing now to make sure we remain credit-worthy for a mortgage loan?

We will be renting an apartment. Does that show up on the credit report?

In general you want to have two open lines of credit to have a credit score. This doesn't mean that you necessarily have to have a balance on either of those lines of credit.

What you're doing seems fine and was a good idea when I originally wrote this in late 2005. Now (in 2010) I think that anyone who is in a position to buy and hasn't is crazy. It was a rough market; I probably wouldn't have bought unless I knew I was going to stay (or keep it) five years or more. In general, rent does not show up on a mortgage provider's credit report. It probably will not count as an open line of credit.

The card you use, which I gather is what you use to maintain credit, needs to be an actual credit card, which appears to be the case. If it is a debit card, it doesn't count as a line of credit to determine whether you have two open lines of credit or not. If it is indeed a credit card, you've got one existing line of credit that you've had for a while. Keep it open, keep paying it off every month. This helps your credit score even if you never carry a balance.

However, instead of closing the (other) credit card you have a balance on, may I suggest that you simply pay it off but keep it open? Unless it has a yearly charge just for having it, it costs you nothing to keep it in your safe at home. This gives you another open line of credit, and because you've had it for a while, this is better than a new line of credit (length of possession of open lines is one factor determining credit scores, and over five years is best). You might want to use it once per six months or so just so they don't think you've canceled. As long as it's a regular credit card where if you pay it off within the grace period there is no interest charge, and that's your second open line of credit.

You also currently have an installment payment operative, which is fine as long as you keep paying it on time. Depending upon how much you're getting in interest on the money market, it may behoove you to ask for a payoff. If the money market is getting two percent taxable and you're paying five on the installment debt (not tax deductible), you may wish to consider paying it off. On the other hand, if either of the two above cards is a debit card, this is your second line of credit, so keep it open long enough to get something else.

I live in San Diego, which has several big credit unions, and I've had good experiences having my clients apply for credit cards with most of them (they're also a decent source for second mortgages and home equity lines of credit - that's where they're set up to compete best - but first mortgages I can usually beat them blindfolded, because it's not where they're set up to shine). There are also any number of available offers on the internet, but check out the fine print carefully. Credit Unions may not be absolutely the best credit cards available, but they tend to be shorter on the Gotcha! provisions.

(Internet searches for credit unions in Los Angeles turn up fifty or more; in the Bay area a similar number. You need to do your due diligence and you may not be eligible to join most, but I've found it worth doing as opposed to doing business with the major banks and credit card companies that advertise like mad. The money to advertise doesn't come from nowhere.)

This should help you make informed choices as to what to do given your current situation to maintain two open lines of credit and a good credit score. Please let me know if this does not answer all of your questions or if you have any further questions.

Caveat Emptor

Original here

"How do I remove PMI?" was a question that I got.

First off, a definition. Private Mortgage Insurance, often abbreviated PMI, is an insurance policy that the bank may make you buy in order to get the loan. It is a monthly surcharge based upon a percentage of your entire principal balance. You pay for it, but the bank is the beneficiary. It doesn't make your mortgage payments if you can't, it doesn't keep your credit from being screwed up, and it doesn't even keep you from getting a 1099 for income from loan forgiveness. Net benefit to you: it gets you the loan, and nothing more, ever again.

You can avoid PMI by splitting your loan into two pieces, a first loan for 80% of the value and a second for any remainder. Yes, the rate on the second will be higher, but it will likely save you money starting immediately, not to mention that it's likely to be deductible, whereas PMI is not, in general, deductible. I do not believe that with all the loans I've ever done, I've ever seen one where PMI was preferable to splitting the loan in two, from the client's point of view. Unfortunately, right now second mortgage lenders won't fund loan to value ratios over 90% because they're the ones that lose all the money if they go south.

"With all this against mortgage insurance, why does it still happen?" you ask. This is the critical question. Before the changes regarding second mortgage lenders, it was because lenders usually pay yield spread to brokers or commission to their own loan officers based upon the amount of the first loan. Pay for a second is typically (not always) a small flat amount or zero. Your loan provider makes more money by doing it all as one loan. The loan provider wants to make more money and sticks you with the bill. Doesn't that make your heart glow with gratitude? Didn't think so. But for right now, it's because there are no second mortgages available above 90% comprehensive Loan to Value (CLTV) - and most don't want to go over 80.

You can also refinance to get rid of PMI if you have the equity. Unfortunately, this means all the costs of a refinance and triggering any prepayment penalty there may be. Not optimal, unless the rates are enough better to make it worth the cost.

Now one of the things I keep seeing about PMI is the blank admonishment "don't accept PMI!" Ladies and gentlemen, whether or not you have PMI is determined by your equity situation and loan structure. If you have a single loan over 80% of value, there will be PMI associated with the loan. End of discussion. It can be a separate charge, or it can be built into the rate, and they don't even necessarily have to tell you it's for PMI - but it will be there. If you're in a situation where PMI is needed, shopping around for the lender who doesn't charge PMI is precisely the same as shopping for a liar who will hide it in the accounting.

There are two ways PMI is collected. One is as a separate charge, supplemental to your loan. The second is as an addition to the rate.

The separate charge is never deductible (or at least it wasn't until Congress passed a law temporarily making it deductible), but is easier to remove. Most states, including California, have laws requiring the bank to remove it when a Price Opinion or appraisal say that the Loan to Value Ratio goes below 78 percent (or something similar). Depending upon your state, you may or may not be required to pay for an appraisal, a cost of approximately $400, in order to have it removed. Some states require only a price opinion, others, like California, permit the bank to require an appraisal.

Just because the law says that that the bank can require an appraisal doesn't mean that the bank will require an appraisal. If the loan to value is obviously there, they might just have someone drive by to make certain the house is still basically sound. On the other hand, if loan to value ratio is close to the line, the bank has a responsibility to its shareholders not to increase their exposure to loss unreasonably. So if you just wake up one morning with doubled property values, the bank will likely waive the appraisal. If your market is gradually increasing in value and you're watching it like a hawk and make your request the instant you think the value is there, be prepared to pay for the appraisal. Around here, with PMI on a 90 percent loan being a surcharge of about one and a quarter percent per year on a $500,000 loan, you pay for your appraisal by not having PMI in one month - if you're right. If you're wrong and the appraisal comes in lower, you're just out the money.

Suppose, instead that instead of choosing the surcharge option, you choose to have PMI built into the rate. So instead of a 6.25 percent loan rate, you have a 7.00 percent loan rate. Advantage: it's usually deductible, because it's actual interest on a home loan. Disadvantage: You have to refinance (or sell!) to get out of PMI, because the pricing is built into the loan itself as part of the contract you signed. It is to be noted that by itself, this method is usually cheaper than the monthly surcharge for precisely this reason, because in order to get rid of it you have to pay to refinance, and if there's a prepayment penalty in effect you're likely going to pay that also, and so on and so forth.

So if your loan is more than eighty percent of the value of your property, you can expect to pay PMI, although it is avoidable by splitting the loan into an 80 percent first and a second for the remainder if you can find someone willing to do it, and you're likely much better off for doing so. If you're already stuck with it, contact your lender for steps to remove it providing you think the value has increased enough. If you suspect the lender is not abiding by the law, contact your state's Department of Real Estate, although lenders not abiding by the law is both stupid and, in my experience, rare. It's usually the consumer that doesn't understand the law.

Caveat Emptor

Original here

If you haven't heard about the thirty year fixed rate mortgage, welcome to planet Earth and I hope we can be friends.

The thirty year fixed rate loan seems to be the holy grail of all mortgages. It's what everyone wants, and what they're calling about when they call me to talk about refinancing a loan.

Well, it is secure, and it is something you can count upon today, tomorrow, and next week, etcetera, until the mortgage will theoretically be paid off.

The problems are three fold: First, it is the most expensive loan out there. It always has had the highest rate of any loan available, and always will (Except for the 40 year loan which was making a comeback for no particularly good reason). This means you are paying more in interest charges every month for this loan. Second, according to data gathered by our government, the majority of the public will refinance or move every two to three years, whether they need to or not, paying again for benefits they paid for last time, and didn't use. This is essentially paying for 30 years of insurance your rate won't change, and then buying another 30-year policy two years down the road, then another two years after that, etcetera. Finally, because it is always the highest rate and this is what everyone wants, many mortgage providers will play games with their quote. They will quote you a rate on a "thirty year loan", meaning that it amortizes over thirty years, not that the rate is fixed the whole time. Or they'll even call it a "thirty year fixed rate" loan, but the rate is only fixed for two or three years. Every time you hear either phrase, the question "How long is the rate fixed for?" should automatically pop into your mind and proceed from there out of your mouth.

The fact of the matter is that there are other loans out there that most people would be better off considering. In the top of the loan ladder "A Paper" world, there are thirty-year loans that are fixed for three, five, seven, and ten years, as well as interest only variants and shorter-term loans (25, 20, 15, 10, and even 5 year loans). The shorter-term loans tend to be fixed for the whole length, but of course they require higher payments.

Until recently, I personally would never have considered a 30 year fixed rate loan for myself, and here's why. First, the available rates go up and down like a roller coaster. They are the most volatile rates out there. Given that I will lock it as soon as I decide I want it, it's still subject to more variations that any other loan type. Back when I bought my first place, thirty year fixed rate loans were running around ten and a half percent. Five years before that, they were fourteen percent and up. Second, having some mortgage history, I can tell you I refinance about every five years. Why would I want to pay for thirty years of insurance when I'm only going to use about five?

Even In the summer of 2003, when I could do a 30 year fixed rate mortgage at 5 percent without any points, I could do a 5 year ARM (fixed for five years, then goes adjustable for the rest of thirty) for four percent on the same terms. Rates are even lower at this update, but that's because the market is sick and few people can qualify, and ARMs still have a lower rate because the bank isn't potentially tying their money up for thirty years at a low rate when inflation is expected to take off within a few years.

I keep using a $270,000 mortgage as my default here, so let's compare. The 30 year fixed rate loan gives you a payment of $1449, of which $1125 is interest and $324 is principal. The five-year fixed rate loan gives me a payment of $1289, of which $900 is principal and $389 is principal. I saved $225 in interest the first month and have a payment that is $160 lower, while actually paying $65 more in principal. What's not to like? If I keep it the full five years, I pay $51,549 in interest, pay down $25,791 off my balance if I never pay an extra dollar, as opposed to paying $64,903 in interest on the thirty year fixed rate loan, while only paying down $22,062 of my balance - and I've got $13,500 in my pocket, as well as the $13,300 in interest expense I've saved and $3700 lower balance. If I choose the five-year ARM and make the thirty-year fixed-rate payment, I cut my interest expense to $50,539 while paying off $36,426 of principal (remember, every time I pay extra principal it cuts what I owe, and so on the amount of interest I pay next month.). If I then pay $3500 to refinance, adding it to my balance, I have saved many times that amount. I still only owe $237,074, as opposed to the 30 year fixed rate loan, which has a balance of $247,938. That's over $10,800 off my balance I've saved myself, plus over $14,300 in interest expense, simply by realizing that I'm likely to refinance every five years. And the available ARM rates are more stable as well as lower. From the first, I haven't had one with a rate that wasn't in the sixes or lower. Finally, if I watch the rates and like what I see and so I don't refinance, I'm perfectly welcome to keep the loan. And all of this presumes that the person who gets the thirty-year fixed rate loan doesn't refinance or sell the home, which is not likely to be the case. Statistically, the median mortgage is less than two years old, and less than 5 percent are five years old or more.

At rates prevailing when I first wrote this, I could get the same loans at 5.75 and 5.125 percent (without points), respectively - which was at that time about the narrowest I've ever seen the gap. Assuming a $270,000 loan, for the 30 year fixed rate loan that gives a payment of $1576, which five years out means that I have paid just under $74,996 of interest, $19542 of principal and have a balance of $250,457. If I choose the 5 year ARM, my payment is $1470, so if I keep it five years I've paid $66,581 in interest, $21,626 in principal, and my balance is $248,373. Plus I've kept $6300 in my pocket, or alternatively, if I used the $106 per month to pay down my loan, I've only paid $65,713 in interest, have paid $28,826 in principal, and have a balance of $241,174. Even if I then add $3500 in order to refinance and the thirty year fixed rate does not, I'm still ahead $5700 on my balance plus the $9200 in interest I've saved, and the chances of the person who chose the thirty year fixed rate loan not having refinanced is less than 5%.

ARM mortgages are not for everyone. If you're certain you are never going to sell and never going to refinance, it makes a certain amount to sense to go for the thirty year fixed rate loan. And of course, if you're going to lie in bed awake every night worrying about it, the savings work out to a few dollars a day and my sleep is worth more than that to me, and so I'm going to presume it is to you, as well.

The final factor is the current paranoia of the loan market. I do not believe it's going to last, but even people with long term jobs and businesses are finding it difficult to refinance under some circumstances - most notably if they're in a group that gets a lot of deductions on their taxes due to business expenses. There has got to be a niche created to serve such people, and I believe that there will be, but I don't know when and it isn't here yet. The last such niche, Stated Income Loans, was horribly abused, but right now as much as 20% of the population has difficulty persuading lenders they can make the same payments they've been making on time for years, and that percentage is rising as career W-2 type jobs travel in the direction of the Dodo and Great Auk, being displaced by self employed or 1099 contract positions. If you are among this group and can qualify now, a thirty year fixed rate mortgage is something you should strongly consider.

Furthermore, investors are cutting their own throats with their current overemphasis upon safety, which is why rates are so low. When nobody who's not in the perfect situation can qualify for the loan, the current situation amounts to too much money chasing too few borrowers, with wonderful consequences for those who are in a position to qualify. High supply low effective demand for money means low price, or in plain english, low interest rates that can be locked in for 30 years. I seriously doubt we're going to see sub 5% rates on real 30 year fixed rate loans ever again once the market normalizes.

But what most people should be trying to do is cut interest expense while not adding any more than necessary to the loan balance. As I've gone into elsewhere, money added to your balance sticks around an awful long time, usually long after you've sold or refinanced, and you end up paying interest on it, as well.

So even though various unethical loan providers tend to quote you rates on loans that aren't really what you are looking for if you want a thirty year fixed rate loan, in normal times they're actually doing you a favor in an oblique and unintentional way, and somebody who is up front about offering you a choice between the thirty year fixed rate loan and an ARM is quite likely trying to help you. Consider how long most people are likely to live in their home (average is about nine years right now), how long they're likely to go between refinancings (less than three years), and your own mindset. It is quite likely you can save a lot of money on ARMs. Why pay a higher interest rate in order to buy thirty years of insurance that your rate won't change, when you're likely to voluntarily abandon it about two years from now anyway? Why not just buy less insurance in the first place?

Caveat Emptor

UPDATE: I had someone question the numbers in the paragraph comparing the 4% 5/1 ARM against the 5% 30 year fixed rate loan, both of which were available at the same time in the summer of 2003. Now I have had it pointed out to me that I made a mistake in calculations somewhere. The numbers for interest and balance savings are correct, but those for payment savings are $9623, not counting the time value of money. Your savings are not the sum of the three numbers. It depends upon your point of view as to which is most important to you. The interest savings on one hand and the dollars in your pocket plus lowered balance on the other are essentially the same dollars. They are two sides of the same coin. It's just a question of what you're most interested in. Not that $13,000 plus is chump change, even on this scale, and no matter how you look at it, you're $13,000 plus to the good. You've either got $9623 in payment savings plus $3670 in lowered balance, both of which are "in your pocket" in one sense or the other. You wrote checks totaling $9623 less, and you've got $3670 in lowered balance, which translates to increased equity - not to mention that you're not paying interest on it any longer. Or you could look at it as simply 13,000 plus in interest you didn't pay. Most folks will lose some of the interest in the form of taxes they don't pay, but 1) That's never dollar for dollar and 2) I wasn't going that deep when I wrote this article.

UPDATE 2: We have also had a period since then where there was only about a quarter of a point difference in cost between 5/1s and thirty year fixed rate loans - with 7/1s and 10/1s being more expensive than the fixed rate loan at the same rate. In that situation, as I said at the time, it makes sense to get the thirty year fixed. Why not if it's essentially the same rate for the same cost? But that sort of narrow rate gap is not typical, and it has since widened back out considerably.

Original here

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