Are you unsure? Should I Rent or Buy?

Everyone has different necessities and every situation is different, so it’s impossible to deal with all the factors in one example, such factors must be taken into consideration.
One factor that will be addressed is the cost, which is the most common one. Many of you might already have read about the bubble burst or not, so for the simplicity of this example we’ll just stay neutral with no gain or decline in value. At the end will be added an extra calculation for a small appreciation.

Because for the use of this example we’ll be using income tax deductions, I need reiterate that I am not a tax advisor so you will have to visit your tax person or CPA for an accurate analysis.

Example
Borrowers: Husband and wife in a combined tax bracket (Federal and State) of 45%
Rent: $2500
Purchase price: $750,000
Financing: 100% (borrowers paying closing cost)
Financing type: Interest only 5.5% rate
Monthly mortgage payments: $3438 (interest only)
Monthly tax payments: $781
Monthly insurance payments: $150 (the only non-deductible part of the house payment)
Total house payment: $4369 (interest, tax and insurance)
Deductible part of house payment: $4219 (interest and tax)

By using the 45% combined rate, husband and wife saves $1898 in paying income taxes. Following this example their effective monthly house payment has dropped to $2471 ($4369-$1898=$2471). Compare that to the monthly rent of $2500 (all these figures are illustrative, contact your tax person or CPA)

Now, let say that the home will appreciate 5% per year ($3125 per month), the advantage of buying a home becomes much sweater.

On factor that many homebuyers should be aware of is “payment shock” because in this example they are going from $2500 to $4369. You could ease the burden a little by adjusting your monthly withholding as close as possible to your tax savings. This will help you have more money in hand to make the higher monthly payments. I think this is much beneficial than a tax refund next year, don’t you think?

This example had a monthly tax payment of $781 assuming you have an escrow account with your lender, otherwise you will have to pay 50% of the annual property tax each December and April.

November 28th, 2005 · Filed Under Real Estate Information

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Special Loans Help Low Income First Time Home Buyers Get Into a House

I can help buyers obtain loans with good rates but not even I can help everyone looking to buy a home. I am putting this information here because there are those special cases that need special help like the help provided by special loan programs geared toward low and moderate income first time home buyers as well as teachers looking to purchase a home.
There is a state loan program that has already helped moderate-income buyers get into homes.

The 35yr mortgage, has been around for about 7 month, it offers fixed interest rate for the life of the loan and what makes it even more enticing, it offers interest only payments for the first 5 years. When compared to a traditional 30yr mortgage, it could boost borrowers’ buying power by $50,000 to $100,000.

Not everyone qualifies for this loan: Borrowers must qrualify as first-time home buyers (if you have purchased a home years ago but not owned one for years, you could qualify, check their guidelines), qualify within CalHFA’s income and home price caps, which vary by region.

This loan program offers below the market interest rates (currently around 5.75%), which is very helpful in today’s market that has shown continuous rising of interest rates. With the absence of this loan program many home buyers were already looking to stretch their purchasing power by obtaining riskier loans: interest only loans, variable loans with a 1 to 10 yr fixed rate period. These riskier loans don’t help borrowers build any equity. Borrowers simply hope that they will earn equity on their homes by relying on the hot real estate market. Today, it is a different story because home prices have begun to flatten out this fall after roughly doubling in the past 4 years. There might not be a bubble bursting as many predict but as I explained before we should expect far less appreciation if any in the coming years, but once again let me reiterate that no one can really predict exactly what will happen. If there was a small dive in the real estate market, many homebuyers with riskier loans will be at risk.

The best way for anyone but specially first time home-buyers and working families to build wealth as well as a safe financial future for their family is to get a fixed-rate loan instead of the riskier variable loans and consistently pay down the principal to continue building more equity.

Other types of programs offered by CalHFA are:

Low Income (helps low income families buy a home)
Extra Credit Teacher Program (ECTP loan program geared to help teachers buy a home)
Self-Help Builder Assistance Program (SHBAP)

Remember all these programs have income and home price limitation by regions.

Visit this website for more information:

www.calhfa.ca.gov 800-789-2432

If you are interested in any of these programs give me a call 408-505-6980 & I will put you in contact with a specialist on these loans (Spanish speaking as well)

Other similar programs available are the Acorn Housing programs.

These programs offered have lower interest rates, lower down payments and more.

Visit www.acornhousing.org or call me for more information.

I hope this information will help you if not pass it along to some one that does need it.

November 21st, 2005 · Filed Under Mortgage - Loan Information

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Real Estate Market Bubble Burst!!??

Well, we’ve heard so much from so many different “experts” but we ask how many print media columnists does it take to create a Real Estate market bubble? They really can’t but they can sure create fear on the consumer of a bursting housing bubble.

Most media are always looking for ways to increase circulation, which would equal to profits therefore any story suggesting a bursting bubble is going to attract readers. Not that they write this articles for the sole purpose of inducing fear on the consumer but don’t let media stories convince you that a bubble will burst or even worst become a self fulfilling prophecy.

Ultimately, the consumer is the one that dictates if there will be a bubble burst in the Real Estate market.

Three important facts that guide property values are:

Supply vs. Demand: If supply of housing is greater than the demand, housing values will drop. If the supply is less than the demand, housing values will rise.

Employment: This should be a no brainer. Solid and growing employment provides income for down payment and house payments.

Interest rates: This is very powerful driver in creating and sustaining property values. When the rates are reasonable, most people are willing to make important investments like purchasing a home. With lenders now offering easier loan programs to qualify, there are now many people able to purchase a home. Now, just because lenders have been offering “generous” programs should not encourage people to go out and obtain any type of loan available. Many loans are dangerous and don’t fit with everyone’s lifestyle and economic situation. Many loan agents have been quick to over qualify borrowers and what’s worst not explain completely the pros and cons of each loan program available.

Rates have been creeping up little by little over the past couple of months and are expected to continue to rise a bit more next year as well.

It could be possible the “bubble” will burst but not likely. The Real Estate market will most likely will slow its rapid ascent, level out and maybe dip a bit. But a big burst? I don’t think so.

Nobody can tell what exactly will happen in 2006 with the Real Estate market or the interest rates. What you can do is get informed and protect yourself against a busting of the bubble. You can sure minimize the damage if there was a burst by planning ahead. How well secured are you in your current job? Your income? Have much equity have tied up with loans? Does the equity you have now along with your savings withstand a dip in your home’s value during the time you anticipate to own it? Don’t stretch your finances by paying a high price for a home just because you’re stubborn and want to have that home.

November 19th, 2005 · Filed Under Real Estate Information

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Credit cards: Different Balance Amounts and Different Interest Rates on The Same Account

We all know that we have to be cautious when we use our credit cards. Here is some more information so you can be more informed and be able to balance your finances.
Banks charge different interest rates (depending on the transaction type) on separate amounts of your total balance in a credit card.

Lets say that you bought something for $500 with your credit card with a special rate of 3%. Later you decided that you could lower your payments on another credit card so you transferred $5000 from another high interest rate credit card to this card with a special interest rate at 4%. Later you decide to buy something else for $1000 but at your normal interest rate on your card of 8%.

With the example above, when you make your monthly payments, the balance with the lowest interest ($500 at 3%) will be paid off first. Until you pay off the balance with the lowest interest ($500 at 3%), all other balances ($5000 & $1000) in this same card will still accumulate interest each month. Once the lowest interest rate amount is paid off you continue to pay off the next one ($5000 at 4%), meanwhile the balance of $1000 at 8% is still accumulating interest.

You can see with this example that paying off a balance of $5000 might take some time to pay off meanwhile you keep accumulating more interest on the other balance with higher interest rates.

Most of us know that if we don’t make our payments on time, the bank can raise the interest rate, well most don’t know that if you are late with payments on one account, other banks that you have credit with can also raise their interest rates even though the late payment was not made to them.

I hope this can be of some help to someone.

November 13th, 2005 · Filed Under Credit Information

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No closing cost? No points? *Be careful* Get informed!

There are many ways of obtaining a loan. One way that has been very popular is paying no closing cost and no points. So you think!

When you apply for a loan, and you decide that you don’t want to pay closing cost or any point to the broker, all these costs are simply added to your note rate. In turn, you will end up getting a higher interest rate than you could have obtained, if you would have paid closing cost and/or points. If you don’t have money to pay for closing cost and/or points and you don’t plan on living in this property for many years, then it might be in your best financial interest not to pay closing cost and/or points. It all depends on your present and future economic situation as well as your plans for staying in your home for the future. This is my professional opinion.

November 13th, 2005 · Filed Under Mortgage - Loan Information, Real Estate & Mortgage FRAUD

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Fixed Rate Loan? Or Variable?

Variable rate loans: The interest rates in these loans are lower compared to fixed rates (not so much lower now that the rates on short term loans have been creeping up close to tong term rates). The payments are lower while the interest rate does not go up drastically and/or frequently. You have loans with options to make interest only payments, which will keep your monthly payments lower. Other options are loans that offer you a minimum payment as low as 1%. This type of loan is very dangerous and you could end up having negative amortization with the minimum payment option. Other options are obtaining a variable loan with a fixed rate period of 2-3-5-7-10 years. At the end of the fixed rate period, the loan goes back to variable. An ARM loan is a good idea if you don’t plan on living in your home for a long time and you have plans to move after a couple of years. In this situation an ARM loan with a fixed rate period might be a good idea.

Fixed rate loans: The interest rates you get are higher than ARM rates. The payments will be the same for the term of the loan 15-30-40 years. This will give you the advantage of always knowing what your payment will be and maintaining the same rate even if interest rates may go up. The monthly payments are higher than the monthly payments on an ARM loan because they require you to make payments that will cover interest and principal payments. The principal of the loan is reduced with every monthly payment. Since you are lowering the principal of the loan your “equity” grows a lot faster. The first years of payments made are applied more towards your amortized interest than the principal but as the years go by, the payments made are applied more towards your principal than the amortized interest.

November 13th, 2005 · Filed Under Mortgage - Loan Information

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Realtors Warn Borrowers About Risk of Specialty Loans

The NAR (National Association of Realtors) warned homebuyers about the risks of specialty mortgages that offer low initial payments.

The real-estate trade group joins the Federal Reserve Board and bank regulators who have been speaking out recently about the possibility that these types of loans could lead to trouble, an increase in defaults. These types of loans help buyers qualify to purchase a home in high-cost areas when otherwise couldn’t have been able to afford them.

The Realtors group said home buyers “may not realize that monthly payments on some types of specialty mortgages can increase by as much as 50% or more when the introductory period ends.

These specialty mortgages in question include interest only loans with rates that adjust periodically based on fluctuations in the interest-rate index. Another popular type of loan is known as Option ARM (I explained the basics in my previous blog). When a borrower chooses to make the minimum payment option, the balance of the loan grows, negative amortization.

California has had many borrowers acquire these types of loans because home prices have soared. The danger lays when homes become harder to sell and loans more difficult to refinance if the housing market drops.

These types of loans have been over-marketed and oversold specially in the Hispanic community where many borrowers put their trust on their mortgage broker and don’t bother to get an explanation of the risks these loans carry.

November 13th, 2005 · Filed Under Mortgage - Loan Information

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Loans With 1% Minimum Payment? *Be careful* Get Informed!

These types of loans are called “option arms” and they are variable. Borrowers, who choose to make the minimum payment, accumulate deferred interest also called “negative amortization”. This type of loans best serves financially savvy borrowers with fluctuating income, financially sophisticated borrowers who understand the rewards and risks of a hands-on approach to cash management.

This type of loan has 4 options of payment. Lets say the loan is for $360,000 at 6% on the note and the 1-month teaser of 1%.

Option 1: Minimum payment: This payment is calculated with the 1-month teaser rate of 1%. The minimum payment required is only $1,157.90. With this option the principal of the loan will increase with time.
Option 2. Interest only: This payment, $1,800.00, only covers the interest payments at 6%. The principal of the loan does not reduce with time but doest not grow either compared to the minimum payment.
Option 3 Fully 30 year amortized payment brings your principal lower each year. The payment is $2,158.38 at 6%
Option 4 Fully 15 year amortized payment brings your principal lower each year. The payment is $3,037.89 at 6%

When you make the minimum payment, the difference between the minimum payment $1,157.90 and $1,800 accrued interest is added to your loan balance as deferred interest (negative amortization). Each month the index, and therefore the interest rate changes therefore the difference between the two payments could get bigger and therefore added to the principal.

The minimum payment remains fixed for one year, at which time it will increase by 7.5%, and continue to do so for each year for the first five years. The first year the minimum payment is $1,157.90, year two, $1244.74, year three $1,338.10, year four $1,438.46 and $1,546.34 for year five.

At the end of five years or if the loan balance reaches 115%, of the original amount ($360,000) whichever occurs first, the minimum payment and interest only payment option go away. You must make payments necessary to amortize the loan over the remaining twenty-five years. And since the interest rate changes each month, the payments will also change.

November 13th, 2005 · Filed Under Mortgage - Loan Information, Real Estate & Mortgage FRAUD

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