Searchlight Crusade

McCain Selects Alaska Governor Sarah Palin for Vice President!

Fri, 29 Aug 2008 10:00:00 -0800

Beautiful! I love it! The head fake with Pawlenty had me fooled. McCain chooses Alaska Gov. Sarah Palin as running mate, campaign officials say

John McCain tapped Alaska Gov. Sarah Palin, a conservative who shares his maverick streak, to be the Republican vice presidential running mate on Friday in a startling selection on the eve of the Republican National Convention.

Palin's problems? Her home state is safely GOP, so delivering Alaska doesn't add any electoral votes to the R column there. She's been accused of firing a subordinate because he wouldn't fire her ex brother in law from his state trooper job. She's made enemies within her state GOP for her maverick crusade against corruption and pork. She's light on experience at the level necessary - Governor for two years. Palin's bonuses? She's not in the top spot on the ticket - Nobody ever said Obama wasn't qualified for Vice President, which would give him time to learn what he needs for the top spot, and as young as she is, her experience is still greater than Obama's. The Democrats can't argue that she's too inexperienced without undercutting Obama. Particularly her executive experience is greater than his. Matter of fact, Palin's career reminds me of a certain other young vice presidential candidate. She has a long history of being anti-pork and anti-corruption, being even more willing than John McCain to root it out, even when practiced by Republicans. Given four years as Vice President (or eight) she'd be ideally suited to run for President next cycle. Finally, of course, she may not bring in Alaska's electoral votes, but that's thinking small. She gives McCain a good solid wedge to appeal to not only former Hillary supporters in all fifty states - which will likely move a critical number of states into the R column, but she forever shatters any illusions about Republicans keeping women down. Palin's a working mother - and one of her children has Down's Syndrome, and I think she's the first serving governor to have given birth while in office. I don't think anybody except McCain's inner circle was expecting this. This is masterful political judo on somebody's part in the McCain campaign. Yeah, I think Romney would have brought more credibility to McCain on the economy (far and away the most important issue), but Vice Presidential candidates are selected for their ability to help the presidential candidate win the election. Call McCain-Palin the PUMA slate. Appropriate in a lot of ways, not just from the Democratic, but the Republican side as well. But her selection gives the ticket a lot more, electorally, than it takes away, it forever removes the Democratic ability to slander Republicans as the party of white males, and it sets up a very strong presidential candidacy for her in four (or eight) years, helping secure the future of the Republican party. I have made no bones about the fact that I much prefer John McCain to Barack Obama. This is a move that makes it much more likely that McCain will win the election, barring some weird revelation about Governor Palin. Where Obama chose the ultimate insider, McCain took a risk and went the exact opposite direction. I think it's going to pay off for him. Well done, John McCain and Sarah Palin. UPDATE: Ed Morrissey covers the advantages of Palin wonderfully. Best quote:

Finally, based on all of the above, McCain can remind voters who has the real record of reform. Obama talks a lot about it but has no actual record of reform, and for a running mate, he chose a 35-year Washington insider with all sorts of connections to lobbyists and pork. McCain has fought pork, taken real political risks to fight undue influence of lobbyists, and he picked an outsider who took on her own party -- and won.

Who talks the talk, and who walks the walk?

Magical Thinking About Mortgage Loans

Fri, 29 Aug 2008 09:00:00 -0800

(This is an updated reprint of an article written in February 2007. The Era of Make Believe Loans that made it easier to qualify people for inflated loan amounts ended abruptly a few days later, but the sort of thinking that set people up for later default is still with us) Not very long ago, a woman who was impressed by my website called because she wanted to get pre-qualified for a loan. "Great!" I told her, and proceeded to ask about her income and her monthly obligations and everything else, and came up with a figure of about $220,000 that she could realistically afford. If you're familiar with San Diego, you know that that's a 1 bedroom condo, or maybe a small two bedroom in a not so wonderful area of town. With a Mortgage Credit Certificate, it got to maybe $260,000. If she bought somewhere there was a Locally based first time buyer program, that would add whatever the amount of the program was, but the only one with money actually in the budget was a place she didn't want to live. If we went so far as to go interest only, we might have boosted the base loan amount as high as $300,000. Severe fixers might be had for $350,000 or so - and she had the literature for a brand new $700,000 development. She had her upgrades and drapery all picked out, too. So I tried to be gentle in pointing out that the property appeared to be a bit more than she could afford. Was she grateful? Heck no! She then asked, "How am I supposed to afford a house with that?" She was spitting mad! She acted like I was personally standing there saying "None Shall Pass!" (about a minute and a half in). "Well, if you won't qualify me for a house, I'll go find someone who will!" I'm sure she did find someone to tell her she could have a $700,000 loan if she wanted it. Put negative amortization together with Stated Income or NINA, and there are any number of people out there who will not only keep their mouths shut about the consequences to you, but aid and abet you in staying ignorant about those consequences - at least until they've got their $25,000 commission check. And you know, I can do that loan also, if you don't mind that real interest rate adds $100,000 to what you owe over the course of three years and the payment all of a sudden adjusts to over four times what you can afford, and you lose the property and your credit is ruined for at least ten years. Not to mention the fact that rarely do people allow the mortgage payment to go south on its own. There is no conspiracy keeping you away from home ownership. There is no smoke filled back room deal setting the price of properties such as the one she wanted out of her reach. Lest you be unaware, here in Southern California, we haven't been building enough new housing for the people who want to live here for thirty years now. Those desirable properties are highly priced because they are scarce, and the prices are where they are because that's where the supply of such properties balances the number of people who want them badly enough to pay those prices. Notice that I did not say, "The number of people who can afford those prices." This is intentional. If you want them bad enough, there are lots of loans out there, and at the time, there were lenders eager to make them, such that you could have that dream house - for a while. But the way financing works is like the laws of physics. Specifically, like gravity. It's there, all the time, pulling away, and there is no analog to the ground that holds us up. Think of it as an very tall elevator shaft going both directions from where you start. This month's interest is gravity, pulling you down. What you're paying is like the upward thrust of a rocket, pushing you up. When you make an investment (and a property is an investment), you want to go up, but if pull down is more than thrust up, you start going down instead. Furthermore, we are talking in terms of acceleration, not just velocity. If down is more than up next month, too, you're now going down even faster. And so on and so forth. But the elevator shaft is never infinite going down, and now ask yourself what happens when you're going down, at a speed you've been building up for months and months, and the elevator shaft ends? I've noticed that they usually don't show Wile E. Coyote's impact any more, but what just happened to you makes the time he got caught under the anvil, the lit cannon, and the huge falling rock look like a love tap. Real estate agents don't set prices. The market does that in accordance with supply and demand. In southern California, there's twenty million plus people demanding housing and not enough being built. You want to change this, take it up with politicians. All buyers agents can do is try and find the best bargain out there, while listing agents are trying to get the most possible money. Your budget is your budget. You make what you make. You spend what you spend. Your savings is what you have saved plus what it has made. You can afford more for a home if you make more, spend less, save your money, and invest it effectively. If you don't do these things, you can't afford as much. Indeed, most people kill their budget voluntarily, by spending more than they need to. It isn't my opinion that matters, or anyone else's. All of these are cold hard numbers. You know what you make, you know what you spend. If you could do better, that's something for you and your family to work with. All a loan officer can do is work with the numbers as they are. These numbers give the payments you can afford and your down payment. The rates are what they are. The variations in available rates are smaller than most people think. Actually, the largest difference in rates and their associated costs is how much the loan providers want to make for doing your loan. Not the only difference, but the largest one. The second largest difference is in finding the loan program that is the best fit. When you put all of these factors together, if you come up with variations of more than half a percent for the same loan at the same cost, then I will bet money that either the higher quote wants to gouge you badly, the lower rate is not quoting something they can really deliver, or possibly both. The point is this: If someone working with real numbers says that you can afford $X, any pre-qualification or pre-approval you get that's more than about 5% different should set alarm bells ringing. So now let's revisit Ms. Eyes Bigger Than Her Wallet. She thinks all she has to do is say "Abracadabra!" and the whole thing will work out. But the interest rate is what it is, which means the monthly cost to have that loan is fixed - if she didn't bump it up by wanting something she can't afford. That lender is run by some pretty smart people, who understand all of this extremely well. They have the assistance of some very sharp lawyers in writing those loan contracts. One thing I can absolutely guarantee is that if they don't get their money - all of their money - you will be even unhappier than they are. The upshot is that the vast majority of the people who think they're solving their problems with a wave of some magical wand and the phrase, "Abracadabra!" are in fact doing something Unforgivable to their own financial future, roughly equivalent to pointing that magic wand at their own finances and mangling the pronunciation to "Avada Kedavra" Caveat Emptor Original article here

Links and Minifeatures 2008 08 28 Thursday

Thu, 28 Aug 2008 17:15:00 -0800

Neighborhoods of La Mesa: Connecticut Avenue ********** The Obama campaign is trying to suppress an campaign ad. Indeed, they want to file charges against the man who sponsored it Meanwhile, Obama himself is funneling money to ACORN for advocacy work through a false front. Hope and Change? The introduction of totalitarian (see: China, Hugo Chavez, Robert Mugabe)tricks to intimidate political opponents probably isn't what most of his backers have in mind. ********** Way to stay classy. If Rush Limbaugh or Sean Hannity was saying something like this about Markos Moulitsas, what would the reaction be? ********** Michael Totten: The truth about Georgia Like MIchael Yon, He's supported by reader donations. ********** A classy move by John McCain In a switch, McCain to Obama: "Well done" Congratulating him on becoming the nominee, and spending his own campaign funds to do it. Found it on You Tube ********** This could be indicative: McCain VP possibility cancels Denver appointments

Minnesota Gov. Tim Pawlenty, in Denver to help provide counterattacks against the Democratic Party convention, canceled participation in a news conference and other appearances, a Republican official said. It was unclear whether the cancellation had any significance to McCain's vice presidential search.

What other reason could he have for suddenly canceling appointments? A sudden illness in the family about covers it, and if that were the case, he would have said so. Pawlenty is 47 - the same age as Obama. I think Mitt Romney or California's Duncan Hunter would be better, electorally, and help more in the actual governing, but Pawlenty is more of an outsider (always an asset), and his political agenda isn't quite so hardened. There's also the relative youth factor to consider. Assuming McCain wins and retires after one term, Pawlenty would be just about perfectly placed to succeed him - something Hunter will never do, and Romney would be getting up there in age as well in another 4 to 8 years. ********** Dog Bites Man. Another ACORN fraud in Ohio?

ACORN has a long history of alleged fraud in their registration drives. All of their improprieties have gone to the benefit of Democrats, and Democrats have not stinted on their appreciation. Here in Minnesota, failed gubernatorial candidate Mike Hatch diverted thousands of dollars to ACORN from a lawsuit settlement as Attorney General. Democrats in Congress sent millions to ACORN as part of the economic stimulus plan in February and in the housing bailout bill in April.

********** I expect the cold hard fact to have zero impact on how the economy is reported: Economy grew 3.3% in Q2. Thus far, we have yet to have a single quarter of negative growth, and 3.3% growth is pretty darned good. But certain media groups, determined to paint George Bush as a failure, are spinning everything down. Or could it be that we've just gotten so spoiled by nearly eight years of good economy under George Bush that slower growth feels like a recession? Or (say it softly) are they using the collapsing news business as their metric? ********** Is America Ready To Send Its Political Opponents to Jail? Most totalitarians at least wait until after they're in power to suppress the opposition. More on Obama attempting to suppress information at Q and O ********** They told me if George W. Bush was elected, political dissenters would be marched off to jail in leg irons and denied attorney representation. And they were right! Denver Protesters denied access to attorneys, forced to march in leg shackles The ACLU issued a stinging rebuke to the Denver Police Department Wednesday, alleging that the department may have violated laws and constitutional rights of protesters arrested outside the Democratic National Convention. ********** Speaking of the previous item: Here's what real oppression looks like: Statement from the Family of Imprisoned Opposition Leader, Hassan Baoum

Rent to Own and Lease With Option to Buy

Thu, 28 Aug 2008 07:00:00 -0800

This has always been a portion of the market, but right now, more and more people are emphasizing it, or at least the ones who are able. Actual Rent to Own is rare these days, a sign that the market is being driven by sellers, selling to poorly advised buyers. I can't remember the last time I heard of one happening, because there is an actual ownership interest right away, and the buyer is entitled to a share of the money put into rent, whether or not the deal is actually consummated. On the other hand, Lease Option seems to be a common Idea of the Moment, because the prospective buyer basically gets nothing if they don't want to buy, or if they cannot qualify for the loan. Just like any other purchase contract, everything about these is negotiable, but the basics are thus: Buyer and seller reach a purchase agreement, with the date of actual purchase delayed by some amount of time. In the meantime, the agreement is for for the buyer to rent the property, usually for an above market rent. Part of each payment gets set aside for the buyer's down payment if and when the option is exercised. The difference between Rent to Own and Lease with Option to Buy is that in Rent to Own, a part of each payment is actually due back to the buyer if they decide not to buy, whereas in Lease with Option to buy, that money is just gone if the option to buy is not exercised. Why do this? For the prospective buyer, it's a way to engage in forced savings for a down payment. If rent is $2000 per month, with $1000 being credited to the buyer and $1000 in rent, over a period of two years, you've got a $24,000 down payment, and this is treated exactly like any other down payment, except that the seller already has it, so you only have to come up with the purchase price less this down payment money. This is useful for people with rotten credit and/or poor savings habits, especially if credit is expected to improve withing the time frame of the agreement. It's horridly inefficient, and I've never seen a residential situation where it wasn't better to buy outright, but if you have a problem qualifying for a loan or saving for a down payment, this is one way to go about dealing with that problem. With 100% financing currently dead except for VA loans and a few Municipal first time buyer programs that run out of money at warp speed every time they get a fresh allocation, this is one way for people to get their foot in the door of property. For the seller, it's a way to create a captive purchaser. These buyers have rotten credit and/or zero dollars for a down payment. Nobody else can do business with these buyers, because the buyers will not qualify for the necessary loan. They have Hobson's Choice: This one or none at all. This creates bargaining power for the seller even in the strongest of Buyer's Markets, because most sellers in such markets do not have the ability or willingness to offer a Lease with Option to Buy. They're not as powerful as offering a Seller Carryback, but they definitely give sellers pricing power they would not otherwise have. You can get an above market rent and an above market price, to boot, and the prospective buyers are more motivated than your average tenant to take good care of the property. So why isn't everybody doing them? First of all, the reason the seller has the property on the market is because they want or need to sell now, not two years from now. With either rent to own or Lease with Option to Buy ("Lease Option"), they aren't getting any equity out of the property now to enable them to buy their next property. Furthermore, they've still got all of the expenses of owning that property. Finally, the reason that buyer can't buy anything else is because the most generous assessment of their financial skills possible is "Needs improvement." Bad credit does not, generally speaking, happen like a lightning strike out of a clear blue sky. It happens because they don't pay their bills on time. There are some exceptions - mostly people who had major unexpected medical expenses, but there are limits to how badly one account can hurt your credit. Chances are high that they'll be late with the rent - which is money you're counting on to pay your mortgage, your property taxes, your insurance, etcetera. It takes a certain financial solvency to be able to offer these. Not to mention that until the tenants exercise the option to buy, you still own that property, which means you've got all of the headaches and obligations of being a landlord, or you're going to have to pay someone else to take care of them. Repairs, maintenance, etcetera. For buyers, the prospective pitfalls are even worse. First, you're paying above market rent and agreeing to a price that is usually significantly above the current market. It might be below market when you actually exercise the option, but right now, it's almost certainly a goodly premium over the price that you can get similar properties for - because they're offering something extra that most sellers are not willing or able to offer, and if you didn't need it, you wouldn't be willing to pay for it, right? If you don't exercise the option to buy, the extra rent money you fork out is basically gone. There has to be equity in the agreed upon sales price, and there has to continue to be actual equity. No lender in the known universe is going to approve a short payoff for a Rent to Own or Lease Option, no matter how ironclad your contract. If the current owners lose the property to foreclosure, you're basically SOL. And it wouldn't be the first time sellers pocket the rent while not paying the mortgage, or even taking a cash out refinance. I'm not certain what the law is on this point, but I don't see a way to keep the current owners from doing any of this. It's a good idea to record the option, but that doesn't mean anything if the lender forecloses or is owed more money than the strike price. You can sue, but suing broke people is throwing more money down a black hole from which you're not going to recover it. Finally, and here's the rub that kills a very large proportion of the prospective buyers who enter into these agreements: You're still going to have to qualify for a loan for the rest of the agreed upon purchase price ("strike price") before the option period expires. Usually the market goes up, but sometimes it does go down, and the appraisal is less than the purchase price. If you can't make up the necessary difference between the biggest loan you can get and the strike price, you're not going to be able to buy. For that matter, if interest rates go up significantly, you could find yourself unable to afford the payments on that loan. In fact, these two phenomenon usually go together. Rates go up, therefore payments and cost of interest on the same number of dollars rises. People in the aggregate cannot afford to pay as much for real estate as they could formerly, and therefore, prices fall. Basic economics. There usually is a significant deposit made, as well. Not as much as a regular purchase contract, but just because there's a time delay involved doesn't mean the seller isn't going to demand a deposit they can keep (maybe), or rent to a tenant without a deposit. The rules on whether they can keep a tenant's deposit are also somewhat different and more advantageous to the current owner than California's renter-landlord law generally is (Don't ask me - I'm not a lawyer. I'm mostly parroting what I've been told on this point). The prospective seller is entitled to do all the due diligence than any normal prospective seller or landlord is, and ditto the prospective buyers/tenants. Personally, I would want that inspection contingency period to run the full duration of the option period, and there really isn't an effective loan contingency period, as the owners already have the prospective buyer's money, and most Lease Option contracts are pretty solid upon the point of not getting it back. This point is negotiable, but usually that money has already gone to pay mortgage, property taxes, etcetera. What did I just say about suing broke people? Rent to Own real estate and Lease with Option to Buy real estate are always a risk for both parties. The tricks are myriad, at the very least. This is not something to try without a very sharp agent representing your interests, and as for dual agency in this situation, I have it on excellent authority that slow roasting yourself while basting with acid is less painful for prospective buyers. With that said, if the situation is right and both parties act in good faith, it can be a way to make both sides of such an agreement very happy, when otherwise they would both have been very unhappy. The seller gets an above market price, albeit delayed, and a much improved cash flow in the meantime. The buyers can buy property, where otherwise they would not be able to. Caveat Emptor.

Professional Referrals in Real Estate and Loans

Wed, 27 Aug 2008 07:00:00 -0800

People ask for referrals all the time, and many folks will stumble all over themselves to provide referrals. Some of them really are excellent providers. Others are not so good, but the person providing the referral has an agenda of their own, and you have to be aware of the possibility. Never give anyone your business without shopping it around just because someone referred you to a certain provider. In many cases, the reason why you are referred to Company X Realty or Company Y Loans has nothing to do with any allegations of them being an efficient, diligent, effective or inexpensive provider of those services. Number one on the list of reasons why people tell you about X Realty or Y Loans is because company X or company Y refers business back to them. This isn't illegal, but when you ask a real estate agent for a referral to a low cost mortgage provider and you get referred to one of the ones that's competing on the basis of consumer name recognition, you should realize that the mortgage providers with national advertising campaigns are not among the low cost providers. For analogous reasons, I usually advise people to stay away from the national realty chains, even if they're not local to me. But I digress. The point is that the person who refers you to this person is effectively getting paid by referring you to them. Not exactly a sterling reason to trust their motivations in making this referral. Indeed, this is one of the ways that lenders in particular avoid competing on price. Ladies and gentlemen, so long as it is the same type loan on the same terms, a loan is a loan is a loan. The only real difference is the tradeoff between rate and cost, or, in other words, price. But lenders do not want to compete on price, because that means they don't make very much money. In fact, they want to avoid competing on price, and the captive audience from referral business is one prime example of how they do it. Joe Realtor sends Jane Lender business because Jane refers business right back to Joe Realtor, and because the client has been told that Jane Lender gives great loans at a great rate, the client doesn't shop loan providers like they might otherwise have done, leaving Jane a freer hand to charge a higher markup. These are not the only reasons why referrals happen. For instance, here in San Diego, many real estate agents will refer to one particular loan officer because they know that loan officer won't tell the client any inconvenient truths, such as, "You cannot really afford this house." They refer to this loan officer because that loan officer will just keep their mouth shut and put the negative amortization loan through, and everybody gets their commission check. But this sort of thing happens in markets where there are affordability issues for the average person. Finally, explicit kickbacks are illegal, and there are limits on how often Joe and Jane can buy each other dinner out or whatever arrangement they have to transfer wealth, but that doesn't mean it doesn't happen sometimes. After all, there aren't any Department of Real Estate employees following Joe and Jane around 24 hours per day, so this kind of stuff gets hidden all the time. I've had more than one blatantly illegal offer of referrals for kickbacks since I've been in the business. Some of these folks are brazen. No, there's no percentage in turning them in, either. This is one of those situations the saying about, "No good deed goes unpunished," was invented for. One guy who did turn someone in years ago told me about the thousands of dollars in legal fees he incurred, plus three years of investigation that shows up on your license as an unresolved complaint. No thank you. Sometimes, you have to content yourself with remaining apart from any illegalities, while warning people that this sort of thing does happen. Caveat Emptor Original article here

What If You Cannot Refinance Later?

Tue, 26 Aug 2008 07:00:00 -0800

People always assume they'll be able to refinance later. Even most of my articles have it as an implicit assumption. But what if you can't refinance later? There are situations where it happens. Many situations, as millions of people are finding out now. Roughly 2% of the new search engine hits I'm getting this past month or so are from people who are looking to refinance into another negative amortization loan. Anyone who hasn't been living in a cave knows that's not going to happen, as Wall Street has finally figured out that they're not good investments. But people don't pay attention to most real estate problems until they're smacked in the face with a cold haddock. With a half million dollar investment on the line, this is roughly equivalent to pigs following a swineherd to the slaughterhouse, but people still do it. It is one thing for an investor who can afford to lose the entire investment to make a bet on the future of the market. If they win, they win. If they lose, the investment may be gone but they've still got a place to sleep for the night. It was a calculated risk where the dice came up snake eyes. Never any fun to have happen, but survivable. Furthermore, in order to be able to win, it must be possible for you lose. It is something entirely different to counsel someone to make a bet they cannot afford to lose. If the consequences of a losing bet include homelessness, bankruptcy and might as well be permanent damage to your credit rating which makes it impossible to get started again, that's a different category of bet. Real Estate loans, done wrong, are a "bet the family future" type bet - on something that nobody involved in the decision making process can control. Not the consumer, not the loan officer, and definitely not the real estate agent who says, "I know someone who can do the loan, and the Payments will be affordable. There are several things that can prevent someone from successfully refinancing. Some of them may be somewhat under consumer control; most of them are not. These include: Time in line of work: You can change employers and not fall afoul of this, but changing from employee to self-employed (or vice versa) can mean you don't qualify. Documentation of income can mess you up more than anything else, often for the same reason that time in line of work does. You were getting a regular paycheck and a W-2, now you've gone to self employed, the clients have been a little slow in paying, and you've been very certain to take all of the legal deductions on your tax form. Good for your tax bill, not so hot for your ability to qualify for a loan, particularly if you've had to put more than usual on credit. Once again, the interest expense for business items may be deductible, but it can also put a huge crimp in your debt to income ratio. Changing from owner occupied to investment property can sink you, particularly with a loan to value ratio over 80 percent. Your employer says you can keep your job, but you've got to move to Timbuktu, which means you can't live here any more. Loan guidelines change over time. This one has been a killer problem for a lot of folks of late, as guidelines have tightened more in the last few months than they loosened in the previous ten years. No more stated income, no more 100% conventional financing, no more 95% conventional financing, as neither PMI companies nor second mortgage lenders will touch it right now. The only way to go above 90% loan to value is FHA, VA, or seller carryback, and even that last may not be acceptable to some lenders, and when you refinance most carryback sellers expect to be paid in full. Even the down payment assistance programs are essentially dead (They officially die September 30th). Even if you are one of the folks who still theoretically have significant equity, you may not be able to refinance into something sustainable. Then there are market problems. If the property has lost value from when you bought, you may owe more than the property is worth. More than a year ago, I wrote about what a pain it is to refinance when you're upside down, as well as the fact that it's not likely to be an improvement over what you've already got. I wrote Losing Property Value with Highly Leveraged Properties in March 2006 (updated just a few months ago), when people were still in denial about the problem, or thinking it was somebody else's problem. But the problem is always a possibility, and it's no respecter of anyone's stress level. Life is what happens while you're making other plans. With this in mind, at least for your own principal residence, you want to have a sustainable, fully amortized loan in place, with a fixed period of at least five years. Actually, I'd be more comfortable with shorter fixed periods now that the air is out of the market. Even if we do lose a little bit more, which I don't think we will here locally, by the time three years are up, values are very likely to be at least 20% higher - and you will have paid down the loan by several thousand dollars. But most people who chose shorter fixed period loans, or Option ARMS (which have no fixed period at all) was the low initial payment allowed them to appear to qualify for the loan for a more expensive property than they could really afford. This is precisely the reverse of how it needs to be done: Figure your purchase price budget using an available thirty year fixed rate loan, and then if you want a loan with a shorter fixed period in order to save interest and closing costs, you still want to stay within the same purchase budget, not choose a loan because that's the only way you can afford the payments on this property that's way beyond your budget. Lest you now have figured it out yet, that's a recipe for personal disaster of a sort that takes many years to recover from, and some people never do recover from it. For this reason, having an unsustainable loan, where the payments are going to adjust to something you cannot afford later, can change the answer to "Is it a good idea to refinance?" from "No - the available tradeoffs between rate and cost don't save me any money (or don't save enough)" to "Yes - I need to move to a more sustainable loan, and if I don't do it now, I may not be able to qualify later." If the market value of the property may be ripe for deflation, if your employment or income may become unstable or undocumentable, if your payments are predictably going to adjust to something unaffordable within two to three years - in all of those situations I have advised people that refinancing may not put them into what appears to be a better situation now, but if they wait, their current loan is going to become unaffordable and there is a serious chance they will not be able to qualify for another loan when it does. Sometimes the situation can be as simple as loan guidelines are likely to tighten up later - I predicted the demise of 100% conventional financing as a consequence of market deflation over three years ago. Being temporarily "upside down" on your mortgage or having insufficient equity to refinance well under current guidelines is not a big deal if your loan is a fixed rate fully amortized loan, or even a medium term hybrid ARM. The loan is in place, on terms that you can handle. You keep on making those payments, your lender is happy, your pocketbook can handle it, your loan balance decreases, and prices will come back - sooner than a lot of people think, in the current media hullabaloo. In a year, or two, or three, you'll have equity, be able to sell for a profit, your job or income will be stable and documentable again, and the rough patch will be behind you. It's what happens when you need to refinance now and can't that gets folks into trouble. Caveat Emptor

Links and Minifeatures 2008 08 25 Monday

Mon, 25 Aug 2008 15:40:00 -0800

Carnival of Real Estate ********** This is what political repression looks like: Imprisoned journalist denied insulin and family visits ********** Obama introduces running mate Biden At 3 in the morning, via text message, Obama chooses Joe Biden to be his running mate. And here I really thought Obama's experimentation with recreational drugs was decades in the past. This seems to be evidence that I was wrong. Joe Biden has a paper and video trail decades long of saying stupid things, politically incorrect things, and things that just plain piss people off. Not to mention he's about as "insider" as it comes, and has all the lobbyist ties that the opposition research folks over at the RNC will love. If I were trying to come up with a pick for Obama's VP that says his campaign rhetoric of "hope and change" really is as empty and fake as everybody suspects, I couldn't have come up with one as good as Joe Biden. And if I was looking for a Vice Presidential choice that told anyone who pays attention to actions that any move to the center I pretend to make in the general election is an act, Joe Biden (after Obama, one of the most left wing senators) would show up second or third on that list, too. Yeah, I favor McCain. But this was a stupid, unforced error on Obama's part. He had at least half a dozen better choices available to him. I'm still wondering if Hillary has a couple hundred convention floor aces (aka superdelegates who have only been pretending to be Obama supporters) up her sleeve. But if I were a Democratic supporter, that's what I'd be praying for right now, instead of wondering. ********** If you're a dog lover, particularly a dachshund lover, these folks will shortly have a large number available, due to a puppy mill raid. HT: Don Surber

Negotiation Basics: On What to Offer and Whether to Offer

Mon, 25 Aug 2008 07:00:00 -0800

Dan, Okay, so now I'm in the process of just making an offer on a house and it's already getting confusing despite all my reading. It would have been worse has I not spent all this time reading but just when I think I have a solid grasp of this process something else springs up. The agent is saying that with the offer we have to say who the lender is and if we change lenders we have to ask the seller for permission, basically, since it's a part of the offer. Is that normal? It's a short sale (seems like everything we look at is!) and on the home there are two loans. This is what I heard from the sellers agent. The first lender signs off on just about any offer (and so far I'm told there are offers all the way to $189k) because for the most part they're going to get all their money back. The second lender has not signed off on any offer so far but the sellers agent says if you offer X (it's $199k in this case) they'll take it. First of all, how can the sellers agent even go into details like that? (And he told ME because I called him after I talked to our agent because I couldn't believe she knew all those details about first and second loans and what the second lender would settle with.) Second, how would he know how much they would settle for and third, why would that lender tell anyone what the lowest they would take is? Seems to me this is all speculation on what that second lender might do. Okay, so the asking price is $199k and my agent knows we have about 3.5% saved, that's it! So we go and get pre-approvals from lenders for $200k. So far so good. Then we find a house we like and the asking price is $199k. And we lean that if we offer the asking price chances are it'll get accepted (usually we learn that there are 3 offers already and we need to offer more . . . yes, even in the down market!). Once I finally get over the fears and decide to do it the agent tells me we should offer $204,500 to cover closing costs. WHAT? I'm confused again. Any light you can shed will be greatly appreciated.

I don't know much about your market and its current state. Some things are appropriate in some buyer's markets, but will only get the door slammed in your face in seller's markets. On the other hand, some things are necessary in seller's markets, but are giving away far too much in buyer's markets, and there is an entire continuum between buyer's markets and seller's markets. Handling offers and negotiations in a manner inappropriate for the current market will pretty much guarantee failure, either by asking for something so outrageous that the door metaphorically gets slammed in your face, or by giving away all sorts of things including money that there is no need for. To know what is and is not appropriate, you need an agent who knows your local market, who's willing to really work on your behalf, not just fax offers back and forth. As far as the lender goes, I have NEVER named a buyer's lender in a purchase offer, and I'm not about to start, for precisely that reason - and the fact that its none of the seller's business. But it might conceivably be part of the standard contract in your state, for reasons I don't understand, being a California boy. Some state laws are a bit, shall we say, different? On the other hand, some lawyers I'm aware of could build a serious case that this particular item, however, is a RESPA violation, which is federal law and applies everywhere in the US. It's easy to figure out approximately how much they owe. The original dollar amount of existing liens is public record, everywhere in the US. From there, you can make a pretty good estimate of how much they owe. Not that it's generally a good idea to focus on what is owed. Whether it's free and clear, or upside down, the property is only as valuable to you as it is. You're not going to pay $400,000 for a property that's only worth $200,000 if they're upside down. Neither is there any reason to be willing to pay less if they own it free and clear. It's still worth what it's worth, and failing to understand that, by either the seller or the buyer, is a recipe for failure. Buyers do not care what a seller "would like to get," and sellers don't care about what a buyer can afford except as it applies to the question, "Can they afford this property?" A short sale is a short sale is a short sale. Unless there are reasons like "pretty much everything is a short sale", buyers should avoid short sales. Even done right, it's a month and a half or more process of the lender trying to beat everyone up for more money by wielding a VETO. If you do decide that you want that particular property badly enough to fight through the short sale process, I wouldn't start by accommodating the lender. They're still going to try to beat you up, only they're starting from a better point for them and a worse one for you. As far as over offer to cover seller paid closing costs: We do live in a net world. Are you asking for seller paid closing costs? You shouldn't if you don't need to, but if you are, it's kind of like an equation. If X, a price they will accept on an offer without seller paid closing costs, equals $200k, then X plus $5000 for closing costs is $205k. Actually, since they pay commissions on the higher amount, you should feel lucky if they agree to a price that doesn't add anything more than the closing costs cost them. The critical questions I usually ask are: Suppose you get it at that price. Happy or sad? Suppose you don't get it at that price, but someone overbids you marginally and does. Angry, or don't care? Finally, how many real competitors for your business are there? Is this property head and shoulders above everything else with a comparable asking price, or are there hundreds of others just as good, that you could just as easily make an offer on and be happy with? The answers to these questions will help a good agent determine what a good offer is, and what it isn't. A bad offer can poison the well, and a too good offer gives away too much. You want the property on the best terms possible, but you do want the property. If you're a flipper looking to score on a low ball offer, you don't care if you poison the well (you're pretty going to walk away if they're not desperate enough to take the first offer or something close), but pretty much everyone else does. From your email, I'm getting suspicious there's some tendency on behalf of that particular agent to inflate the price so they get paid more, and possibly even collusion. But there's no way to be certain, and no way to tell that it's even the way to bet without knowing more about your market. Only another agent in your market would know about that, which is one reason why any specific negotiating advice you're going to read in a forum with a national audience is so much wasted breath at best. There are possible exceptions to everything I've written in this article, and I know what they are and where they would be applicable, but it all has to do with a given local market at a given temporary time or specific situations where you're going to be getting something extra in exchange for giving up something that isn't normal. For anything beyond a particular local market under particular market conditions that apply in a very time limited fashion, detailing these would be so much wasted space on the page. All of this is one more reason you want a good buyer's agent on your side before you start looking at property. Dual Agency is a recipe for disaster for buyers. Caveat Emptor

Negotiations After the Purchase Contract: Seller's Allowances and Fixing Problems

Sun, 24 Aug 2008 07:00:00 -0800

I had made a request to repair that included $3700 credit for closing costs. I wanted to get things done like safety issues and more critical maintenance issues done. Our estimate said that it would be about $4900 to do all the maintenance we were looking for. The seller was doing a bit, but not all. The seller apparently balked at giving us any credit. He felt they conceded all they could. Anyway, my agent convinced them to at least counter. I was a bit angry at the initial balk. (the emotion part of the deal). After the initial anger, I went looking for problems and found one that frightened me. My agent had given me the inspection report from the seller's purchase of the home six years ago. There were things on there that were still a problem two years later. Primarily, high water pressure in the house (with the dire warnings of damage to pipes and fixtures as the potential side affect). Secondly, ants. The report six years ago had mentioned ants. Every time I looked at the house, (we visited it 5 times), I always saw ants not many usually only 1 sometimes 2. So, my residual anger ballooned these concerns way up. My ignorance was on the pipes. I have since talked to one plumber and an extended family member who is a retired contractor, home builder and home inspector. It was his comments that alleviated my fears about the pipes and allowed me to calm down a bit. He basically said, "Wow, six years of a pressure test - and it passed. Great! We usually only do two hours." He also said, get a regulator on it, but you shouldn't have a problem. So, emotions, ignorance and too much time to think - nearly killed the deal.

Sometimes, people get all worked up over the little stuff. On the other hand, sometimes people don't get worked up when they should. This person wasn't clear, but I'd get upset if my agent tried to placate me with a six year old inspection. If it's just compare and contrast with a brand new inspection, fine. But if someone else paid that inspector, they may not have any responsibility to you, and you want them to be responsible to you. I wouldn't accept the inspection that the previous prospective buyer had done. Sometimes, agents trying to make sure a transaction goes through will try to give you an existing inspection, because they know what problems that will show. This is always the hallmark of a commission grabber, and you should fire them. Then start looking for something else. An inspection around here will almost always reveal some defect which wasn't dealt with in the first round of negotiations that resulted in the purchase contract. Usually, they're dinky little stuff. Replace one light bulb, brace the water heater, maybe replace the garbage disposal. Sometimes, however, it is major work: rotting substructure to the roof, foundation damage, etcetera. It does not matter if it is major or minor. It needs to be fixed. The way I usually explain minor stuff to sellers is, "You don't want to lose a $500,000 sale over $30 in repair work, do you?" It does sound rather silly, doesn't it? If it's major, it still needs to be fixed. Here's a new defect in your property that causes it to be worth less than the agreed upon price. You can often get the buyer to accept the property for a lesser price - estimated cost of repairs plus an allowance for them being the person who has to deal with it. You're not getting out of major repairs on the cheap unless the buyer's agent hoses their clients. I want a reliable contractor out there to give my buyers an estimate for major repairs, and you'll find that's about par for the course. As the seller, you can have your choice between fixing it, giving them an allowance that makes your buyer happy, or losing the transaction. Lest you think, "I'll just forget about that prospective buyer," even in seller's markets the next one that comes along is likely to find exactly the same set of defects and want exactly the same set of repairs, which is going to cost - you guessed it - pretty much the same amount of money. The only differences are one, in the meantime, you've spent some money on your mortgage, taxes, etcetera, and two, the earlier offer is usually the better one. In other words, same situation, but you're out more money. Somebody's going to ask about "as is" sales. They really don't make much difference to this fact. I'm not going to let a buyer put in an offer on an "as is" property without an inspection contingency. The inspection shows something major that we didn't already know about, the choice is going to be give us an allowance, fix the problem, or lose the transaction. It's only an actual "as is" sale if the inspection doesn't reveal anything new and major. Matter of fact, selling "as is" is a red flag that tells me the seller probably knows about something major, unless it's a lender-owned property. If it is lender owned, "as is" and "without warranty" are the ways that business is done. Otherwise, it really doesn't mean a lot beyond that you are indicating that you would rather give an allowance at close of escrow than pay for repairs. For buyers, you don't need to freak out about every last little thing. If you're getting a screaming deal, the fact that you need to put a handrail up in the stairway at a cost of a couple hundred bucks shouldn't cause you to pull out of the deal. If the owner doesn't want to make repairs, be willing to accept the cost plus something reasonable to represent your time and the decreased utility in the meantime. Don't demand triple the cost of major repairs unless you really are going to have to spend that much sitting in hotels and eating out until the work is done. A reliable contractor is your best friend in subsequent negotiations. First off, it should tell you what it really is going to cost. If they've said that it's going to cost $7500 to fix, that's better information than any agent or inspector can give you. This does wonders for peace of mind, knowing that it's going to be $7500 to fix the problem after you're in title, not $75,000. An allowance for construction work from the seller can be a great opportunity if you've got some cash left in your pocket after the sale. For example, if you're going to have to replace the green board in the bathroom anyway, it doesn't cost that much more to add some nice updates and upgrades. An extra $500 for better materials can really go a long way. When you go to sell, more money in your pocket. In the meantime, a much nicer bathroom. Even more to the point, one much more aligned with your personal tastes. Every negotiation after the initial purchase contract is at least as dependent upon the good will of both parties as the initial purchase contract. If one party or the other thinks they got the worst of the initial negotiations, you can expect that to be reflected in how far they are willing to go for you when the inspection reveals defects. You want the person on the other side of the transaction to be thinking they get a decent bargain, one that they would make again. That way, they won't want to blow it off before it happens, by being unreasonable about the repair negotiations. Yes, this is one more reason that you want a buyer's agent to help with negotiations. Caveat Emptor Original article here

Refinancing When The Rates Are Higher

Sat, 23 Aug 2008 07:00:00 -0800

All too often, these days, I have to tell desperate people who've found me on the internet some bad news. Nobody can match the rates they've got at a price worth doing. This is just a sample of what I've seen:

I bought a house in DELETED in Aug 04. It was my first house, and I was pumped about it. Now, it's become a liability. I want to leave soon, and pursue an (advanced degree). I've been extensively preparing for my (test), and I expect to qualify for some 'almost top-tier' schools out east. So what do I do with my house? Bad market = hard for me to sell. I am looking to rent my house out. The largest hurdle comes from the fact that DELETED has very low rents, and very high housing prices. To give you an idea, a typical 4-plex has a yearly NOI of around 5% of the total property cost. Yeah, a 5% return. My mortgage (I'll detail it later) costs $1500/month (PITI). Market rent is about $1k-$1200/mo. I looked at other mortgages, but it seems to me that most brokers are a waste of oxygen. You say what you need, and then they offer you a loan that makes them the most commission. I had a few people try to talk me into a Neg AM/option ARM loan. I did some math... Total waste of money. What I need is something to lower my payment while I hedge my position. Rents are increasing, and I believe that the market will be less of a buyers market in a few years. I am working with a mentor and put together a Lease to Own deal, which may solve my issues, but I would like a Plan B. My house is worth no less than $268k (zillow estimate, I think it's low. $275k would be better) I owe ~$253k I have an 80/20. The 80 is 5.125% interest only for 5 years, then goes ARM on me. The 20 is a HELOC currently at 10.125%. My FICO is between 750-775. The property is located at DELETED. It is a normal detached house. This would only be a refinance for a few years, until I can sell the property in a better market, but if a locked option presents itself, I would continue to rent that place forever! I don't need any cash out money, but I will take any available, because I am getting around 10% return on my Funds.

Now this particular person makes some errors in his thinking and in the email, but they're forgivable in non-professionals. The meat of the matter is that he, like so many, cannot afford the current payments under the new circumstances. This guy has a 5.125% interest only loan. When I originally wrote this article in February 2007, I could just barely do that with one lender for something north of four points, and could not do 5.00 at all. Even if adding roughly $15,000 to his loan amount was worth keeping the same interest rate a little longer, just the fact of adding $15,000 to his loan is going to raise his payments. At this update, I don't know of any lenders offering the rate at all. In this case, like so many, there literally was and is no loan I can do for this person that's worth the cost of doing it. I could cut his payment for a while with a negative amortization loan, but only at the cost of raising his real interest rate about 3%, which means it's really costing him about $6000 per year extra, while sticking him with a prepayment penalty in the area of $8,000. A classic case of pay me now, keep paying me, and pay me later, too. Well, I couldn't do that to anyone, much less someone wearing the uniform in times of war, as this man is. Even if this guy had been in California, I would have told him the same thing I did: There's no loan out there that will help him in the classical sense of the word help. What he needs is cash flow and time. A negative amortization loan would provide that, but at a much higher cost later - too steep for me to believe it's worth paying. A lower interest rate or longer amortization or even interest only might help some people, but none of those options make sense for someone who has already got 5.125% interest only. I could have tied 5.125 by adding over four points plus closing costs to his loan, but I don't need to consult my rate sheets or get out the calculator to know that adding $15,000 to break even on the interest rate is not going to really help him. Now, this is not to say that refinancing into a higher rate is never justified. If it was going to do something he needed it to do and it makes sense in other ways, yes, I can see it. For instance, if he was going bankrupt due to some bills, but consolidation would prevent that from happening, it might be the lesser of two evils. But that doesn't appear to be the case. Now when his loan hits its first adjustment, chances are pretty much 100% that I'll be able to do something worth the cost of doing it. Until then, however (or rates drop enough), the fact is he's better off sticking with what he's got right now. But that adjustment would be to roughly 7.25% if it happened right now. Whatever it is, the way that rate adjustments work is underlying index plus a set margin, determined by your contract. Lenders think of hybrid ARMs as teaser rates; they're always offering rates less than the index plus the margin to start with. Which is one reason to be careful with hybrid ARMs. I love them, I do them for myself; but they will go up when they adjust if you keep them that long. This man is only one of millions out there in similar situations. I can't speak to his specifics, but there were lots of people who bought with loans such that they could only afford the payment interest only or worse. The fact of the matter is that they were poorly advised, or not advised at all if they kept everything quiet and never told the person who might have warned them. They probably should not have bought the property they did, but somebody talked them into it. In most cases, it was someone with a fiduciary responsibility to them who should have known better. I don't have a problem with interest only loans as purchase money. I do have a problem with negative amortization loans as purchase money for a primary residence. Interest only, though, can be okay if they can afford the fully amortized payment but choose not to. For instance, this gentleman could have afforded more, but was getting a better return on his money elsewhere. Sophisticated user and all that. He knew the risks going in, and chose to take them. For those who were advised of the risks and chose to take them, that's what risk means and why you get the payoff for taking it when you win - because sometimes you lose. However fantastic an investment real estate is, it is not a risk free investment, and sometimes the bet does go sour. Members of the real estate profession were doing all they could to push rapidly appreciating prices, and members of the loan profession were doing everything in their power to aid and abet. Both groups were pushing past results to illustrate future performance, and I saw or heard the phrase, "nobody loses money on real estate," so often and in so many places I even stopped getting angry at it for a while (You can't stay angry all the time). Both groups were pushing people into bigger and bigger loans for bigger and bigger properties, and more and stronger bidding wars, and rationalizing it on any basis that happened to be convenient and hadn't been debunked in the client's presence within the last fifteen minutes. Once again, I'm embarrassed by members of my professions, and not just for their self-avaricious advice to the unwary, but also for their limited understanding of economics and markets. Trusted professionals are supposed to know better. People with fiduciary relationships are supposed to know better. People earning thousands of dollars more for their "expertise" per transaction should definitely know better. So what do you do if your payment goes up, and the best rates available to you don't help the situation enough? Sell for what you can get. Right now, this is a really rotten thing. Many markets are in the tank completely. If you don't need to sell, you shouldn't be in the market when there's thirty sellers per buyer. That being said, if you can't make the payment, selling is the least bad alternative available to you. Even a short sale is not as bad as being foreclosed upon, and if you don't make the payments somehow, foreclosure is going to happen. It's only a question of when. You want to have sold before that happens. There are a very few exceptions. But pretending that you are one of them when you're not is a good way to take a very bad situation and make it worse. The first rule of getting out of holes is to stop digging, and denial digs deeper than anything else. Please, if you're in such a hole, don't keep digging. Or at least start digging out rather than deeper. Caveat Emptor Original article here

Links and Minifeatures 2008 08 22 Friday

Fri, 22 Aug 2008 16:40:00 -0800

San Diego Special Edition ********** Another entry in my neighborhoods series is up: Neighborhoods of La Mesa: Griffen Park (Murray Street) ********** Sad, but true: My most popular article the last two months solid has been Deficiency Judgments: Recourse Loans vs. Non-Recourse Loans. I write most of this site hoping that people will do a little bit of research before undertaking a half million dollar transaction. Judging by the search terms, that does not appear to be the case. Getting Out of Paying Pre-Payment Penalties is another perennial favorite, and the search terms I get that lead to that aren't any happier. Did nobody teach these people the old saw about an ounce of prevention? In real estate, it's a gross understatement. ********** Victor Davis Hanson lays the smackdown on an expatriate with rose colored glasses towards his adoptive country. ********** Absolutely vile. These were living, viable infants, alive but discarded with the trash. I think abortion needs to be legal, but once they're outside of the mother and alive, there's another term that needs to be used for killing them or allowing them to die of neglect. "Abortion" only applies when they are still within the mother. ********** While we're at it, if this is a departure from politics as usual, I don't like direction it's going A nexus of cronyism at UC Medical Center? ********** You want repression? They'll show you repression

Fixed rate, Balloon, ARM and Hybrid Loans

Fri, 22 Aug 2008 07:00:00 -0800

One of the things that always seems to be aiming to confuse mortgage consumers is advertising based upon whether the loan is fixed rate, and for how long. First, I need to acquaint you with two concepts: amortization and term. The term of the loan is nothing more than how long the loan lasts. How many months or years from the time the documents are signed until it is done. At the end of the term, the loan is over. In some cases, the payoff schedule (or amortization) will not pay the loan off in this amount of time, leaving you with a balance which you must pay off at that time. When this happens, it is known as a "balloon payment." Amortization is the payoff schedule. In other words, if the term was long enough (it isn't always) how long would it take you to pay the loan off with these payments? There are four basic types of loan rate determination out there. The first is the "true" fixed rate loan, the second is the "true" ARM, or Adjustable Rate Mortgage, the third is the hybrid, which starts out fixed but switches to adjustable, and finally, the Balloon. "True" Fixed rate loans have the interest rate fixed for the entire life of the loan. Loan term of a true fixed rate loan is always the same as amortization period. Until you pay it off or refinance, the rate never changes. They are most commonly fixed for thirty years, but are fairly common in fifteen year variety, and widely available in 25, 20, and even 10 year variants, and the 40 year loan appears to be making a comeback. The shorter the period, the lower the rate will be at the same time, but the higher the payment, as you have to get the entire principal paid off in a much shorter period of time. I seem to always use a $270,000 loan amount, so let us consider that. Making and holding a few background constraints constant, a few days ago from a random lender a thirty year fixed rate loan was 6.25% at par (no points, no rebate). The 20 was 6.125, the 15 year 5.75. The 15 sounds like a better deal, right? But where the payment on the 30 year fixed rate loan is $1662.43, the payment on the 20 year fixed rate loan is $1953.88, and the payment on the 15 year loan is $2242.11 So you may not be able to afford the payment on the 15 year loan. (This particular lender doesn't have 25 or 10 year loans.) Some thirty year fixed rate loans are available with interest only for a certain period, usually five years, and then they amortize over the last 25 years of the period. Some people do this because they expect a raise in their income over the next few years, and some just do it for cash flow reasons, planning to sell or refinance before the end of the fifth year. Using the example in the preceding paragraph, this would have you making a monthly payment of $1406.25 for the first five years, then $1781.11 for the last twenty-five. If there is a pre-payment penalty on a thirty year fixed rate loan, it is typically in effect for five years. Considering that over 50% of everybody will refinance or sell within two years, and over 95 percent within five, this is an awfully long time for a pre-payment penalty to be in effect. Practically everyone with a five year pre-payment penalty is going to end up paying it. "True" Adjustable Rate Mortgages, or ARM loans, are adjustable from day one. The interest rate is, from the time the loan starts, always based upon an underlying rate or index, plus a specified margin. There is no fixed period whatsoever on a "true" ARM. This makes them in general hard to sell, because people cannot plan their mortgage payments, and except for the Negative Amortization loan (also known as "Option ARM" or "Pick a Pay") these loans are very rare. (If someone offers you a rate that appears way below market rates, like 1%, they are offering you a Negative Amortization loan. The 1% is a "nominal" or "in name only" rate, the real rate on these is month to month variable from the start based upon an underlying index, making this a "true" ARM.) If there is a prepayment penalty on a "true" ARM, it must therefore be for a longer period than the fixed period, which is zero. You are taking a risk that you will have to pay a pre-payment penalty because the rate did something that you did not anticipate, and you may not be able to afford the payments if the rates change but the penalty is still in effect. Rate adjustments on ARMs can be monthly, quarterly, biannually, or annually, with monthly being most common, including for every Negative Amortization loan I've ever seen. The third category is the hybrid loan. Hybrids are often called Adjustable Rate Mortgages, and most loan officers are really talking about hybrids when they discuss ARMs. You should ask if uncertain, but in general, everybody from the lender on down calls them ARMs (I myself almost always call them ARMs), but when you get down to the technical details, they are a hybrid. Hybrids start out fixed rate for a given period, then become adjustable. The overall term of the loan is usually thirty years, but the forty is becoming more common again for subprime. Unlike Balloons, if you like what they adjust to, you are welcome to keep hybrids for as long as they fit your needs. There is no requirement to refinance a hybrid after the fixed period. Hybrids are widely available with 2, 3, 5, 7 and 10 year initial fixed rate periods, and they may also be available "interest only" for the period of fixed rate at a slightly higher interest rate. Two years fixed is typically a subprime loan, and while five and seven and ten year fixed periods are available from some subprime lenders, they are more commonly "A paper" loans. Three is common both subprime and "A paper". Once they begin adjusting, "A paper" typically (not always!) adjusts once per year, while every hybrid subprime I've ever seen adjusts every six months. WARNING: I often see hybrid loans advertised and quoted as "fixed" rate loans, and you find the fact that they are hybrid ARMs buried in the fine print somewhere. Yes, they are "fixed rate" for X number of years. But this is fundamentally dishonest advertising. This is one of the reasons I keep saying that any time you see the words "Fixed rate," you should immediately ask the question "How long is the rate fixed for?" Please go ahead and ask, for your own protection. Ethical loan officers know that people get sold a bill of goods on this point every day, and so they're not offended. And you don't want to do business with the unethical ones, right? Now, I am a huge fan of hybrid loans myself. When I originally wrote this, I went so far as to say that I would never have a thirty year fixed rate loan on my own home unless the rates do something economically unprecedented, anyway. Well, they did, for about a year I would have strongly considered a thirty year fixed, but that has now changed. You get a lower interest rate because you're not paying for an insurance policy that the rate won't change for thirty years, without jacking up the minimum payment to something you may not be able to afford. Most people voluntarily abandon their thirty year interest rate insurance policy (also known as "Thirty year fixed rate loan") within about two years anyway. So why would I want to spend the money for that policy in the first place, when I'm likely to only use two or three or five of those years? Nonetheless, particularly with subprime loans, you need to be careful. I have seen precisely one subprime loan in my life without a pre-payment penalty, and I've seen a lot of loans (at least thousands, maybe tens of thousands - I wasn't counting at the time - where your average real estate agent has seen maybe a few dozen, and your average bank loan officer maybe a few hundred). Many loan providers, even "A Paper" loan providers will stick you with a three or five year pre-payment penalty on a two year fixed rate loan. Why? Because it increases their commission. So if you take one of these loans, you will have a period of time when you don't know what the rate will be doing, but if you refinance or sell during that period, you will have to pay your lender several thousand extra dollars. This puts many people on the horns of a dilemma - whether to keep making payments they can't afford, or pay the pre-payment penalty. The bank wins either way. One final point about hybrid loans. Once they adjust, they all adjust to the same rate plus the same margin. Unless you need the lower payment to qualify for the loan, it makes no sense to pay three points to buy the rate down on a five year hybrid ARM (or anything else) when it takes eight to ten years to recover the cost of your points. Why? Because you'll never get the money back! When the rate adjusts on the loan you paid three points for (IF you keep it that long), it goes to the same rate as the loan where they paid all of your closing costs. Judging by the evidence, most people don't understand this. The final category of loan that I'm going to discuss here is the Balloon. This is a loan where the amortization is longer than the term. So if the amortization is thirty years, you make payments "as if" it were a thirty year loan, but since the actual term of the loan is shorter, you will have to sell, refinance, or somehow make extra payments to pay it off before the loan term expires. The thing I don't understand is that Balloon rates are typically higher than the comparable hybrid ARM, despite the fact that you either have to come up with a large chunk of cash at the end or sell or refinance prior to that. This makes them a less attractive loan. Furthermore, pre-payment penalties are every bit as common. Balloons are widely available in five and seven year terms with thirty year amortization, and I've seen three and ten, as well. Probably the most common "balloon" loan, though, is for those who do a fixed rate second mortgage, where the best loan available is usually a thirty year amortization with a fifteen year balloon. Since over half of everybody has refinanced within two years anyway, and 95 percent within five, the fact that it's got a fifteen year balloon payment just doesn't affect a whole lot of people, and it shouldn't scare anyone off. WARNING!: I have seen Balloon Loans mis-advertised in the same way as I talked about with hybrid ARMS a few paragraphs ago. I regard this as even more misleading than advertising hybrid's as fixed. Unfortunately, many states do not have good regulations on rate advertising, and in many others, enforcement is lax. When a loan provider advertises, the entire game is to get you to call, and then control what you see and what you learn from that point on. Your best protection from this is to talk to other loan providers. Shop around, compare offers, tell them all about each others' offers. If something is not real, or it has a nasty gotcha!, if you talk to enough people, somebody will likely tell you about it. If you only talk to one person, you're at their mercy. Even if you somehow ask the right question to discover the gotcha!, the people who do this have long practice in distracting you, or answering another question that somehow seems similar enough that you let it go. Caveat Emptor

Original here

The Moment of Truth, Signing Bad Loan Documents and the Right of Rescission

Thu, 21 Aug 2008 07:00:00 -0800

from an email:

I had a mortgage refinance done in 2001. The loan officer did not show up for the closing and I never received a good faith estimate before closing only word of mouth figures. At closing the "fees" were outrageous so I advised the closing attorney for the title co. that I was not comfortable with the terms and I did not want to go through with the refi. He insisted that I sign the paperwork and was adamant that I have a three day right of rescission. I was given a small check at closing which was never cashed. I thought about it and exercised my right of rescission on the same day of the closing and the lender received the rescission form on the third day. I have proof it was received. I even sent the normal payment to my current mortgage company who returned my payment. Then lender funded the loan the very next day and I have been in a battle with them ever since. They have constantly told me they were going to correct the problem to wait and it is now 2008. I never received a normal request for payment only late notices every now and then in which I repeatedly faxed the rescission form over and over again. They held an illegal lien recording for 4 years and my credit was ruined. They tried to foreclose twice in 2003 and 2004 which was unsuccessful. They claimed they never received proof that I rescinded the loan. They even sent me proof that they paid my old mortgage co (date stamp of clearing on the third day), and the check was drawn on the title co. Now they are suing me for the money paid out to my prior mortgage company saying that I owe them money. The suit was filed 4.9 years after the original refi date. They finally cancel the mortgage recording 9 months prior to filing the suit in which I was never made aware of until the suit. I went to the court house to get the proof myself. They now acknowledge that I did rescind the loan but they made a mistake. A 4+ year mistake!!!!! Do they have a right to anything due to the rescission law. The form that I sign says that nothing should have been done prior to three days and if so there was 20 days to correct not 4+ years!!! And they are suing me!! Please any advise you can give would be helpful

First, most important piece of advice: Get a lawyer. Now. I'm not a lawyer, and even if I was, I wouldn't know law and precedent in your state (which isn't mine, because California's an Escrow and Title state). When you have chosen a lawyer, ask them about grounds for you to sue the mortgage company and whether they'll work on contingency if you can't afford their regular rates. Talk to your lawyer about getting whatever agency handles mortgage licensing in your state involved. Write a formal complaint letter, send it return receipt requested. That way they can't sweep it under the rug. Also talk to your state legislator if you have to, to motivate that agency to move. Sad to say, this is likely very much a case of big trying to push little around because big has the resources to fight and little doesn't. You might want to talk to your lawyer about equalizing that, because big means they also have more to lose. Ask your attorney if it's a good idea to approach a reporter for your local paper. Be careful and listen to your lawyer on what to say and what not to say if you do. One slip in this regard can make things even uglier than they started out. It may be a better idea to let the lawyer do the talking here. Find out if these malefactors been reporting late payments and non-payment to the credit bureaus, in which case you may also have a tort for that. When they have no legal basis to demand payment in the first place, it's defamatory to claim the payment you didn't owe was not made in accordance with the non-existent contract. What they did was reprehensible in all respects, but more common than just about anyone wants to admit. Every loan has this same "Moment of Truth" when the final documents are presented. For some loan practitioners, the truth was told before that, but for many others, it wasn't. It has to do with the timeline involved. They make a promise to get you to sign up now, and most people are shopping multiple lenders, so they tell whatever story they think is sexy enough to get you to sign up with them, knowing that most people won't sign up for a backup loan. Thirty or forty-five days from now, when they actually deliver the loan contract, they're the only ones with a loan ready to go, so your choice is limited to sign that paperwork or don't. At sign up, you have the power and they don't, so they say whatever is necessary to get you to sign up with them, because at loan delivery, they have the power and you don't. Once you have committed to that loan provider, you have essentially signed yourself over into their power, and if they don't deliver the loan they quoted to get you to sign up, there are essentially no bad consequences for them. They still get paid when you sign those papers. Over fifty percent of all borrowers literally never notice the differences, and of those who do, eight to nine out of ten will cave in and sign anyway. Upshot: No matter how bad they lied back on day one, there's still a ninety percent plus chance of getting paid. By contrast, if they don't tell a story that's sexy enough to get you to sign up for their loan, there's a zero percent chance of them getting paid. That's why lenders lie, and no legislation and no regulations currently under consideration will change any of this - all it will change is precisely what they have to do in order to get away with it, which is why you should Ask the hard questions of every single prospective loan provider. You took the time to read the documents carefully, and that's very good. You'd be amazed how many people don't. However, you've got to stick to your guns and refuse to sign. If you had some legal mandate to sign, there would be no point to the right of rescission. What that lawyer was thinking was that if you signed, he got paid, whereas if you didn't sign, he didn't. Disgusting, but probably within whatever code of ethics was theoretically guiding him, as he probably considered the lender to be his client, and not you. I would have told him, "Not going to happen," as I walked out the door. All too often, people want to avoid confrontation and certain personality types can be counted upon to take advantage of it. That the lender funded the loan the next day is not illegal, as far as I'm aware. Failing to rescind the loan when you rescinded, and to rewind it to the situation beforehand, however, is a hard violation of RESPA, which is federal law, and almost certainly state law and regulations as well. This can lose them their ability to do loans at all in your state, and possibly in any state. This is why nobody actually funds refinances where right of rescission is applicable until right of rescission has expired, because doing that is costly, and what happens if your prior lender refuses to reinstate their loan? After all, they got their money, and having done so, are under no obligation I'm aware of to reinstate the loan contract that has now come to a satisfactory conclusion. I actually don't know what happens in such a situation, but the best guess I can make is that the new lender has to carry the loan on the previous terms and can't charge any fees for the loan, either. Basically, the worst of all possible situations for them. None of this is going to be easy. It's pretty stressful, and likely to be costly, but the alternative to fighting this battle is worse. Furthermore, if you persevere and do everything right, you could find yourself ending up in a situation that's much better than the one you're in right now, or even the situation that you started in. They don't have a valid lien, the previous lien was paid off, and they have behaved very badly in ways that are potentially legally actionable. Strict liability might apply to their failure to rescind properly when you did rescind in a timely fashion. Of course, they did willfully violate the law in gross violation of due diligence, so strict liability probably isn't necessary to winning such a case. Once again, though, I'm not a lawyer, only a layperson who's learned enough to be dangerous to anyone who pays attention to me instead of a licensed professional. Consult a lawyer licensed in your state for information you can count on. Caveat Emptor

Links and Minifeatures 2008 08 20 Wednesday

Wed, 20 Aug 2008 16:50:00 -0800

Poll shows McCain in 5-point lead over Obama

"There is no doubt the campaign to discredit Obama is paying off for McCain right now," pollster John Zogby said. "This is a significant ebb for Obama."

It is just one poll, but the problem for Obama is that every one of McCain's criticisms of him has been substantially true. The problem for Obama is that when you're a major party nominee (or presumptive nominee), everything that you've ever done or said is going to be dug up and scrutinized, and there's plenty of documentable trail on Obama to turn away the centrist voters, who hold the balance of power in any election. When it comes right down to it, the only asset Obama has over John McCain is his emotional appeal. It's hard to keep emotions like that in charge for months in the face of a barrage of facts. I'm not getting comfortable though. The Democratic convention hasn't happened yet. Hillary could still be the nominee. Unlike the Republicans, whose delegates were all elected based upon a promise to support a given candidate, the Democratic "superdelegates" are allowed to change their mind, and it wouldn't take very many. These are party insiders, one of Hillary's core support groups. The Dems could be using Obama for a stalking horse, while Hillary gets a long respite from opposition scrutiny. It could have even been planned in individual meetings - and nobody except Hillary and each individual superdelegate knows who they are until and unless they do change their mind and vote for her at the convention. That's a conspiracy that can be kept - for a few months anyway, as only two people know about any given superdelegate, and only one for sure. This boosts Hillary's chance to actually win, as for several months everybody's been focusing on Obama, and it still sets him up as the future face of the Democratic party, giving him automatic frontrunner status when her term is over. I think she's got the brains and confidence to engineer such a thing. I question a lot of things about Madame Hillary, but her intelligence is not among them, and I don't think anyone questions her confidence. The only question is, did she actually do it? We won't know for sure until the convention, and even there, the superdelegates changing their votes could be presented as the result of slipping polls, Obama's miscues, or any one of a number of other things. On the other hand, if Obama wasn't her running mate in such a scenario, the Democrats might do what forty years of Republican outreach have failed to do: Get more minorities to vote Republican. The Democrats aren't competitive if they don't get 70% of the hispanic vote and 90% of the black vote. This also accomplishes something else: Having he vice-presidential nominee give the candidate a large boost due to their own high profile. On the other hand, Hillary isn't nearly so bad as Obama as far as her actual positions. She'd appoint the same sort of judges (the Democratic base would require it), but her administration policies and priorities would be more centrist than Obama's. So even if this gets her elected instead of McCain, it's not the immediate disaster an Obama presidency would be. I'd rather have McCain, of course. But Hillary as Democratic nominee would have the effect of limiting the damage. ********** Russians dig in as pullback drags on in Georgia

Russian forces on Wednesday built a sentry post just 30 miles from the Georgian capital, appearing to dig in to positions deep inside Georgia despite pledges to pull back to areas mandated by a cease-fire signed by both countries.

When somebody tells me they'll do one thing and does something else, I've got a pretty good idea which of the two they really mean.

A top Russian general, meanwhile, said Russia plans to construct nearly a score of checkpoints to be manned by hundreds of soldiers in the so-called "security zone" around the border with South Ossetia.

and one report from someone claiming to be a Georgian corporal

23 Russian tanks, APCS and heavy guns showed up at the base on Tuesday and demanded to be let in. The Georgians refused and the Russians left after a 30-minute standoff but vowed to return after blowing up facilities in the village of Osiauri, he said.

More of the Face of war: The Ethnic Toll in Georgia

Both Russia and Georgia have hurled charges of genocide and ethnic cleansing at each other in the aftermath of the five-day war in the Caucasus

experts work on housing for displaced Georgians

They are primarily sheltered in schools, hospitals and previously abandoned buildings. Most come from the Gori area, where the fighting has been the worst, and the Georgian government hopes they will be able to return home once Russian troops leave, Finance Minister Nika Gilauri said.

********** 149 dead in plane crash at Madrid airport

Spanair Flight JK5022 - bound for the popular Canary Islands off the West African coast during the height of Europe's summer vacation season - sped off the end of the runway, crashed and broke into pieces, reports said.

In other words, pilot error or mechanical failure.

Mortgage Rate, Points, and Closing Costs

Wed, 20 Aug 2008 07:00:00 -0800

Everybody knows that you want the lowest rate, and everybody knows that you don't want to pay any money you don't have to, in order to get it. However, not everybody makes the connection that it is always a tradeoff between the two. At any given point in time, each home lender has its own set of tradeoffs in place. There are two components to the costs of a loan: Closing costs and points. Points have to do with the cost of the money. Closing costs relate to the work that has to be performed in order to get the loan done. These are not junk fees, although junk fees do happen. Let us consider for a moment the home loan. You want to buy a home for your family, but don't have enough cash. Without somebody willing to loan you the difference, you cannot buy. You check with your family, your friends, your neighbors and they're all tapped out (or say they are). But there's a bank over there willing to loan it if you meet their terms. The banks are not being altruists, of course. They're making a good chunk of change for doing so. But you would not believe the amount of complaints I hear out sympathetically about how this evil horrible bank is charging all this money and making people jump through all these hoops to get this money ("They want a pay stub! Actually they want two pay stubs! What is the problem with these nazis?"). Fact is that this bank is doing you a favor, risking hundreds of thousands of dollars on you so that you can own a home for your family. They are doing something for you that all of your friends and family were unwilling or unable to do: loan you the money to buy a home. I'd say that puts them pretty high on my "nifty list", not "Nazis", but it's your life. When you think about it, they're doing you a favor by making certain you can afford the payments on the loan (It's more than many agents and many loan officers will do), as well as insuring that if something goes wrong and you can't afford the loan, they'll get most of their money back. Real Estate is not sold on a whim. Recently, another agent in my office had a listing of an $800,000 home. The family involved makes about $60,000 a year. Their interest alone was 76% of their gross pay, never mind property taxes and insurance. An unscrupulous agent sold them the house based upon the ability to flip it whenever they wanted, and found them a similar loan agent to get them a negative amortization loan so they've got about fifteen hundred dollars a month being added to their mortgage and they still can't make the payment. But real estate is not like stock; you can't sell it at will. The market cooled just a little bit. They lost their entire investment before they even came to us, and they came to our office to get it sold before worse things happened, and we did everything that could be done, and still nobody wanted to buy it until the price was reduced. There's a lot of this out there. You would likely be amazed at the loans a competent loan officer can qualify you for, even today, and that if you understood what you were getting into, you'd drag them into the sunlight and run a wooden stake through their hearts before running away, instead of believing them to be your friend. I'd get an extra client a week, at least, if I didn't sit down with the people to find out what they can really afford before I showed them the $800,000 house that's going to get me paid a Huge Pile Of Money, when I really should be telling them about 2 or 3 bedroom condominiums, or even telling them to continue renting. It's hard to get a client enthusiastic about a 900 square foot 2 bedroom condo when someone else is showing them a 5 bedroom 2800 square foot House! With It's Own Yard! No Shared Walls! and telling them they Know Someone Who Can Get The Loan! Well, I can get them the loan, too, if they really want it, but it really doesn't help them if they can't make the payments. The world will catch up to those other agents and loan officers, and I put a certain value on staying in business. Getting back to the issue of closing costs, there is work that has to be done before you get your loan. The people who do that work are entitled to be paid. You don't work for free. They're not going to work for free. As I have covered elsewhere, realistic closing costs without junk fees are about $3400, and can easily be higher. The bank is not just going to absorb these costs because they're going to make money off the loan. They have money, and if you want them to loan it to you, you need to meet their conditions. Each home loan, whether the lender intends to sell it or not, has a value on the secondary market. They also cost the lender a certain amount (they have to pay for all money they lend, whether by borrowing or by opportunity cost). Based upon these two facts, the lender sets a level of discount points or rebate for each rate for each type of loan. When you pay discount points, you are actually paying the lender money in order to buy a rate that you would not otherwise be able to get. When there is a rebate, it means that the lender will pay out money for a loan done on those terms. A rebate can be thought of as a negative discount, and vice versa. Whatever the level it is set at by the lender, there's going to be an additional margin so that the broker or loan officer can get paid, even if the loan officer is an employee of that lender. This margin is not necessarily smaller by going direct to a lender - actually a broker usually has a better margin than that lender's own loan officers. As I say elsewhere, the supermarket banks often have their best rates posted, and I'm usually getting someone a better loan (lower cost/rate tradeoff) with the same lender. But within a given type of loan, the lender always sets the loan discount higher for the lowest rate. The lower the rate, the higher the discount and the higher the rate the lower the discount. Choose the lowest rate, and pay not only closing costs but the highest discount as well. Whether it's coming out of your checkbook or being added to your mortgage, you are still paying it. Choose a somewhat higher rate, and there will be no discount points, just closing costs. There's a name for this rate where there's no points but no rebate; it's called par. Rates below par involve discount points, rates above par will get you some or all of your closing costs paid by the bank or broker. Many people will want the lowest rate; after all that has the lowest payment. But it is (or should be) the client's choice, not a choice made for them by the loan officer. It's actually easier to qualify for lower rates, because the payment is lower. However these lower rates can be costly, because the fact is that the median mortgage in this country is about two years, and fewer than 5% of all loans are less than 5 years old. This means there's a 50% chance you've refinanced (or sold and bought a new home) within two years, and over 95% within 5 years. The exact numbers vary over time, but I see no reason for these consumer habits to change. Furthermore, I'm a consumer, and so are you. There are people who bought a place and paid off their 30 year loan and now own the property free and clear, but they are rare these days. Much more common is the person who bought their house in the 1970s, has refinanced ten or twelve or fourteen times, and now owes ten times the original purchase price. More common yet is the person who's on the third, fourth, or fifth house since then. You might be one of the first group, or you might not be, pretend you are, and be hurting only yourself. It's likely to be a costly illusion. Let's look at three different 30-year fixed rate loans. All of them start from needing $270,000 in loan money. Loan 1 gets a 5.5% rate, but has to pay two points to get it, so his loan balance starts at $270,000 plus $3400 plus two points, or $278,980. He paid $8980 to get his loan. Loan 2 gets a 6% rate at par, and his loan balance starts at $273,400, because he only had to pay $3400 to get the loan. Finally, Loan 3 chooses a 6.5% loan where all closing costs are paid for him by the bank or broker. His loan balance starts at $270,000. Your first month interest with Loan 1 is $1278.66, and principal paid is 305.36, on a payment of $1584.02. Loan 2 pays $1367.00 interest and $272.17 principal with a loan payment of $1639.17. Loan 3 is going to pay interest of $1462.50, principal of $244.08, and have a total payment of $1706.58. So far, it's looking like Loan 1 is the best of all possible loans, right? But look two years down the line when 50 percent of these people have refinanced or sold:

Loan
Interest paid
Principal Paid
Balance
Interest difference
Balance difference
Net $

Loan 1
$30288.21
$7728.21
$271251.79
$-2130.05
$+4773.36
$-2643.31

Loan 2
$32418.26
$6921.84
$266478.16
$0
$0
$0

Loan 3
$34720.18
$6237.83
$263762.17
$2301.92
$-2715.99
$+414.07

Remember, the original balance was $270,000. Loan 1 has paid $2130 less in interest the Loan 2, while Loan 3 has paid $2301.92 more. Furthermore, Loan 1 has paid down $7728 in principal, while Loan 2 has only paid down $6921 and Loan 3 still less at $6237. It's really looking like Loan 1 was the best choice. But remember, 50% of all loans have refinanced or sold within two years. When you refinance or sell, the benefits you paid money to get stop. But the costs to get those benefits are sunk on the front end, and you're not getting them back. Look at the balance of Loan 1. The person who chose this still owes $271,251 - $1251 than they did before they chose the loan in the first place. Furthermore, his balance is $4773 higher than loan 2, and even though he paid $2130 less in interest, he's still $2643 worse off. Furthermore, whether he refinances or sells and rolls the proceeds over into a new property, the new loan is going to be for $4773 more money than Loan 2's new loan. Assume everybody got a really fantastic new loan at 5%. Loan 1 is going to have to pay $238 more per year to start with in interest expense for his new loan, simply because his remaining balance on the old loan was higher. Loan 3 is in even better shape than Loan 2. He's paid $2301.92 more in interest, but his balance is $2715.99 lower, for a net benefit over loan 2 of $414, not to mention that his interest costs on his new loan will be almost $136 lower simply because his starting balance is lower. Now let's look 5 years out, when over 95% of the people will have sold or refinanced.

Loan
Interest paid
Principal Paid
Balance
Interest difference
balance difference
net $

Loan 1
$74007.65
$21033.41
$257946.59
$-5353.23
$+3535.98
$+1817.25

Loan 2
$79360.88
$18989.39
$254410.61
$0
$0
$0

Loan 3
$85144.66
$17250.36
$252749.63
$+5783.79
$-1600.98
$-4122.80

At this point, Loan 1 has saved $5353 in interest relative to Loan 2, while Loan 3 has spent $5783 more. Loan 1 has cut his balance difference to $3535 more than Loan 2, so he looks like he's ahead! Furthermore, Loan 3 is really lagging, having paid $5783 more in interest although the difference in balance is only $1660 to his good. Well, loan 2 is ahead of loan 3 pretty much permanently at this point. Assuming all three refinance or sell and buy a new property with a 5% loan right now, Loan 3 is only going to get back $83 per year of the $4122.80 he's down relative to Loan 2. Especially considered on a time value of money, that's permanent. But despite Loan 1 being ahead of Loan 2 right now, Loan 2 will get back almost $177 per year. Ten years on, assuming a ver low 5% rate, loan 2 is back to even, and most of us are going to be property holders the rest of our lives. Consider also that 95% of the people who chose loan 1 NEVER got this far - they never broke even in the first place. The point I'm trying to get across is that money you roll into your balance hangs around a very long time. And you're sinking potentially many thousands of dollars into a bet that most people lose. Yes, if you keep the loan long enough, the lower rates (at least for thirty year fixed rate loans) will pretty much always pay for themselves, several times over in many cases. The other point I'm trying to make is that most people don't keep their loan long enough for the benefits to pay for their costs to get those benefits. As a final consideration, consider what happens if one year later interest rates are one-half percent lower. I can get Loan 3 the same loan that Loan 2 has for zero cost. He's got the same interest rate as Loan 2, whom I can't help right now, but a lower balance - neither one of his loans cost him anything. And it has happened that the rates dropped down to where I could get someone 5.5% on a thirty year fixed rate loan for zero - lender pays me enough to pay all the closing costs. Net to them, zip. Suppose rates do this again. I call Loan 2 and Loan 3, and now they've both got 5.5 %, but this doesn't help Loan 1. Now Loan 2 has the same as Loan 1, while only adding $3400 to his balance to get it, as opposed to Loan 1 adding nearly $9000, and Loan 3 has the same loan without adding a dime to his balance. Who's in the best position? Caveat Emptor Original here mortgage real estate consumer education