All ARM’s Are Not Evil

2011 Mortgage Interest Rates from http://mortgage-x.com/

I just got a great present in the mail!! I was notified of the annual adjustment to the interest rate on my Adjustable Rate Mortgage. It was reduced by 0.5% for the upcoming year and now has the stunning rate of 3.000%.

I originally took out the ARM 10 years ago. It is a 7/1 ARM meaning that the rate was fixed for the first 7 years, and adjusts annually after that point. The rate is based on a defined index with a 2.25% premium.

I chose this mortgage 10 years ago with the idea that it was highly unlikely that I would own this house for 7 years. The longest I had ever lived in a home previously was 4 years. I truly thought that I would have sold and relocated long before the rate ever adjusted.

However, in selecting the loan, I did make sure that future adjustments were based on a defined index and that the high end of the rate scale was capped. Although I didn’t expect to get this far into the term, you never know for sure.

As the loan started to adjust, I watched the market. With interest rates in steady decline, I have seen no reason to refinance. I will refinance as rates start to rise, which means that I will miss the bottom of the market. Had I already refinanced, I also would have missed the bottom of the market – I think we just got there.  I’ll take a close look next Fall and see if refinancing will be beneficial, or if once again, I will let the rate on my loan adjust.

In the end, the strategy of using an adjustable rate mortgage is going to work well for me. Properly utilized, I don’t think all ARM’s are evil. In the right market conditions, they can be a very useful tool, and I believe there will be a resurgence in their use once interest rates inevitably rise to more historically normal levels. Given the current interest rates, an ARM may be a great product again if your borrowing needs have a short horizon.

After the Tax Incentive

So what was the effect of the First Time Homebuyer Tax Credit? It may still be a bit early to tell, but one phenomenon is easy to identify. The number of properties placed under contract in May 2010 was at its lowest level in years. However, this should not be surprising. Buyers in the market for the first time, or the first time in a long time, had plenty of incentive to get their contracts executed before May. The net effect was to accelerate what would normally have been May contracts into April.

If this were indeed the case, then April contract should have been at an all time high. And, yes, they were. April’s new contract numbers are larger than they had been in recent memory, validating the “hurry up” mentality in the market.

But this does not answer the larger question of whether or not the First Time Home Buyer Tax Credit achieved its purpose. The purpose was to stabalize the housing market and housing prices across the country by adding pruchase demand to the economy. The increased demand fueld by the tax credit should have placed housing prices in check. If this incentive had achieved its purpose, housing markets would stabalize and the incentive could be removed. The US government decided that the end of April was a good point to check this correction.

I think it will be late summer to early fall before we get a true reading on the full effect. I hope it worked, but I have the sinking feeling that it did not run for quite long enough. Jobs reports continue to be suspect with claims that the private sector is now paying the lowest percentage of wages since the Great Depression. This does not bode well for increased housing sales. Bully for the average American, savings rates are rising across the country, indicating that people have learned at leasst a partial lesson for the time being. However, that too means that large expenditures are being placed on hold.

I believe the housing market in total will continue to be fragile. But what about your home? What if you have to move?

The news can get better. While the housing market is fragile, it is also starved for quality product. I can’t tell you how disappointed I am with many of the homes that I tour. There are a number of inexpensive repairs that can be done to a house to get it ready to bring to market. New carpet and paint, a deep cleaning and decluttering, inexpensive cosmetic updates, cleaning the yard, timming the bushes, removing debris, etc.

If you need to sell, please give me a call. I would be happy to schedule a walk-through and show you some of the easy things that will make your home sell quickly, even in a less robust market.

For those inclined to move up, this remains the best of markets to increase your home size.

Dallas County Taxable Home Values Decrease

Here’s a Spring present for all you homeowners. As usual, the Dallas Central Appraisal District (DCAD) is lagging the market. Just as real estate values and activity are increasing, The Dallas Central Appraisal District has announced that sixty percent (60%) of homeowners will see a decrease in their taxable property value this year – YEAH! That means that most of us will be receiving a decrease in our property tax bill for 2010. Enjoy the break – I believe it will reverse next year!!

The Dallas Central Appraisal District also stated that approximately twenty percent (20%) of home values will rise. I suspect a number of these are homes which had permitted improvements accomplished over the last year, or are recent sales of previously undervalued real estate. The final twenty percent (20%) of values will remain constant.

That’s a fairly substantial move for the Appraisal Distict to have made, adjusting the values of about eighty percent (80%) of the homes in Dallas County.

For a complete report on this issue, please see the Dallas Morning News article.

Veterans: Consider a Zero Down VA Loan

US Military Logos
Link to VA Home Loan Benefits

First, if you have served in the armed forces, thank you for your service! I am proud to have served with the US Navy as both a Surface Warfare Officer and as a recruiter. During my service as a recruiter, I bought my first Dallas home using a VA loan. At closing, I wrote a check that was between $100-200 and got the keys to my brand new home. I also took advantage of a small loan from the Texas Veterans Land Board. Together, these benefits of military service helped me to achieve the dream of home ownership.

I recently received an e-mail with information on obtaining a VA Loan from VA Mortgage Center.com. As they are one of the leading service providers for VA loans, I wanted to share their information with you. Hopefully this will help you achieve the dream of owning a Dallas home.

More than 1.7 million veterans reside in Texas, and about 38,000 live in Bell County where Fort Hood fulfills the role of the largest active duty armored post in the U.S. Yet it’s highly unlikely that all these veterans take advantage of the VA home loan program since less than 10 percent of the nation’s 24 million veterans capitalize on the program.

The VA loan program is one of the last remaining home-buying options that lets borrowers put no money down. Compared to conventional loans, VA home loans tend to offer lower interest rates and eliminate the private monthly mortgage insurance. As a result, borrowing veterans’ monthly payments are greatly reduced.

Fort Hood is full of starter homes that veterans could buy with the help of a VA loan. In 2007 and 2008, homes that cost between $100,000 and $159,999 accounted for 44.3 percent and 45.2 percent of homes sold in the Killeen-Fort Hood area, according to Texas A&M’s Real Estate Center (REC). Even during hard economic times, homes in the Killeen-Temple-Fort Hood area appreciated about 2.5 percent in late 2008 compared to 2007. In the same area, the REC found that the annual average rate for a 15-year fixed mortgage was about 1.2 percent, which is quite borrower-friendly.

By the end of 2008, homes in the U.S. began to depreciate, but Texas’ home values did not, according to the REC. The median house or condominium value in Texas in 2008 was $126,800.

Veterans who want to make use of a VA loan to buy a home in Texas need to confirm their eligibility first. For the most part, veterans who are in one of these categories may have va loan eligibility:

-Military members who’ve served 181 days on active duty or three months during war time
-People who have spent at least six years in the National Guard or Reserves
-Spouses of those killed in the line of duty

The maximum VA loan limit in Texas is $417,000, but it’s important to note that VA does not issue loans, it simply backs about one-quarter of the loan. Because of that insurance, lenders, such as the VA-certified VA Mortgage Center.com, are often happy to help veterans get a loan.

TREC Warns of Real Estate Brokerage Scam

TREC Logo
Texas Real Estate Commission

My Dad always told me that if something seemed too good to be true, it was probably not true. This simple piece of advice has kept me out of many sticky situations. I just received an e-mail from the Texas Real Estate Commission (TREC) warning the public about real estate brokerage scams in the DFW area. I felt compelled to pass the warning along. It is very easy to find out if a person hold a license from the Texas Real Estate Commission – you can look up any persons license number by following this link.

Here is the beginning of the warning message from the Texas Real Estate Commission:

The Texas Real Estate Commission Standards and Enforcement Services Division (TREC) has received complaints against a group of individuals and companies that have been doing business in the Dallas/Fort Worth area. The individuals and companies named in the complaints represent themselves as real estate agents and real estate brokerage companies but do not hold Texas real estate licenses. Owners of real property, tenants, buyers, and investors claim to have lost large sums of money related to the group’s real estate schemes. Among other things, the complainants allege that the group takes and keeps deposits for properties over which they have no authority or no control. They allegedly do not pay rent to property owners on property they claim to manage for those owners, or take large security deposits from tenants and then keep the money. They take deposits or earnest money on properties that they claim are available for a short sale but in reality are days away from foreclosure. Apparently, much of the solicitation of potential victims has been conducted through www.craigslist.com.

For the full article, click here.

Fed’s Mortgage Purchase Near End

The Federal Reserve announced that it will end the purchase program of mortgage backed securities as scheduled this month. I give this three hips and a giant hooray! After providing about $1.25 trillion in economic support, ending this program will force the private sector markets to fill the gap that the Fed has left. And I have all of the confidence in the world that they will do so. However, they will likely not do so at the same returns that the Fed was seeking. Rather, I suspect, the private sector will demand greater yield on their investment than did the US Government.

So what does this mean to the “average Joe” trying to buy a home? I suspect it will mean slightly higher interest rates. If the secondary markets begin demanding a higher return, it is going to force mortgage originators to write at higher rates. I don’t think this rate will have to be dramatically higher, but could be in the range of 500 basis points (0.5 percent). That’s a tough pill to swallow if you’re right on the edge of taking out a loan. If you have the option, I would recommend locking a rate quickly.

For the broader market, I think this is a promising move, thus my cheers at the beginning of this post. If the Fed is willing to cease this program, it must have confidence that the private sector will step forward to continue the function. Lacking that confidence, the program would have been extended to ensure that credit markets remained liquid. I take this as a very positive sign that the mortgage markets are healing.

It will be very interesting to see what happens with the first time home buyer tax credit at the end of April. I can feel the demand that this program is generating in the market. Homes that are in the range of both size and price to be attractive to first time home buyers are seeing significantly more demand than larger, more expensive homes. So, a final word of encouragement to those who own small homes and have been thinking about moving up – do it now!

FHA Lending Standards Tighten

FHA logo
Click logo for FHA homepage

Beginning in the spring of 2010 and continuing into the summer, The Federal housing Administration will be tightening the lending policies of one of the most highly sought mortgage loans in the country.  FHA insured loans currently comprise about 30% of all new mortgages originated in the United States, up from only 3% just 3 years ago, cites a recent USA Today article.


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So in a nutshell, here are some of the more relevant changes:

  • Credit Scores increase – to qualify for a 3.5 percent downpayment, the hallmark characteristic of an FHA loan, borrowers must have a credit score of at least 580.  Failing to achieve the 580 mark will not eliminate the possibly of obtaining an FHA loan, but it will increase the required downpayment to 10 percent.
  • The limit on Seller contributions toward closing costs, currently 6 percent of the total sale (a amount generally sufficient to cover most to all of the buyers closing costs), will decrease to 3 percent.  This is a return to a previous standard, and still offers substantial assistance to Buyers, but will in the end require the Buyer to show up with more cash at the closing table in the future than is currently needed.  The purpose of this change is to help contain appraisal values.  When Seller contributions are large, the value of the home must appraise for the sales price of the home plus the Seller contributions.  By reducing the amount of the Seller contributions, the FHA hopes that appraisals will begin to more accurately reflect market conditions.
  • The amount of prepaid mortgage insurance will rise to 2.25 percent, up from the current level of 1.75 percent.

So what’s the desired point behind all of these changes?

The quick answer is that these changes are the next attempt by the FHA to help stabilize the housing market in the United States.  “These changes are overdue,” said David Stevens, the FHA commissioner, speaking to reporters. “FHA has a responsibility to be fiscally sound” and to provide homeowners with “financing that’s going to give them the ability to live in their home long term.”

The Wall Street Journal also reports that the FHA is also announcing a series of measures to boost its ability to police lenders that originate loans with FHA backing, and the agency will ask Congress for greater authority to take action against lenders who originate loans with high rates of default.

Something for the Rest of Us!! – Home Buyer Tax Credit Update

Did you notice the lack of the words “First Time” in the title.  Here’s a little something for those of us who already own a piece of the American dream.  If last year’s tax credit was enough to get first time buyers into the market, let’s hope that this stimulates things even more.

Congress and President Obama have seen fit to extend the Home Buyer Tax Credit into 2010, and they have significantly increased the scope of the incentive.  It is now available to anyone homeowner who meets certain income guidelines and sells their home between Nov 7, 2009 and May 31, 2010.  And the definition of sell is now translated as enter into a contract to sell by May 31, 2010 and close by Jul 31, 2010.

Homebuyer Tax Credit — Revised November 2009

FEATURE Jan. 1 – Nov. 30, 2009
Rules As Enacted
February 2009
Nov. 7 – Apr. 30, 2010
Rules As Enacted
November 2009
First-time Buyer – Amount of Credit $8,000 ($4,000 married filing separate) $8,000 ($4,000 married filing separate)
First-time Buyer – Definition for Eligibility May not have had an interest in a principal residence for 3 years prior to purchase Same
Current Homeowner – Amount of Credit No Provision $6,500 ($3,250 married filing separate)
Effective Date – Current Owner No Provision November 7, 2009
Current Homeowner – Definition for Eligibility No Provision Must have used the home sold or being sold as a principal residence consecutively for 5 of the previous 8 years
Termination of Credit Purchases after November 30, 2009.
(Becomes April 30, 2010 on November 7, 2009)
Purchases after April 30, 2010
Binding Contract Rule None So long as a written binding contract to purchase is in effect on April 30, 2010, the purchaser will have until July 1, 2010 to close
Income Limits (Note: Increased income limits are effective as of November 7, 2009) $75,000 – single
$150,000 – married
Additional $20,000 phase out
$125,000 – single
$225,000 – married
Additional $20,000 phase out
Limitation on Cost of Purchased Home None $800,000
November 7, 2009
Purchase by a Dependent No Provision Ineligible
November 7, 2009
Anti-fraud Rule None Purchaser must attach documentation of purchase to tax return

Source: National Association of Realtors

 

The tax credit to existing homeowners is up to $6,500, so if you were thinking about upgrading the homestead, now is definitely the time to act. Low interest rates, great buys available in the market, and a tax credit to boot – it’s the “perfect storm” for making the move to the larger house, or the incentive to finally downsize into the cozy home, depending on your vantage point of life.

In upcoming posts, I’ll examine some financial strategies for accessing this tax credit during the course of your transaction. Stay tuned…

Did the First Time Home Buyer Tax Credit Work?

As 2009 draws to a close, I am wondering how well the first time home buyer tax credit worked this year. Rather than simply speculate, I will look to market numbers to answer the question. According to the National Association of Realtors (NAR), first time home buyers accounted for 47 percent of all real estate transactions that were completed thus far in 2009. That figure represents an all time high percentage of first time home buyers, eclipsing the mark of 41 percent that was seen last year and the previous record high of 44 percent in 1991.

Money Picture
Up to $8000 coming back to First Time Home Buyers

Paul Bishop, NAR Vice President of Research notes, “It’s interesting to note the last cyclical peak of first-time home buyers was during the last noteworthy economic downturn, with first-time buyers starting the chain reaction that led the nation out of recession.” Well, I’m all for pulling out of the recession, so I sure hope that an upward trend of home sales continues in 2010.

In addition to the tax credit received by first time home buyers in 2009, there were additional factors that contributed to the increase in the number of first time home buyers. Interest rates were phenomenally low throughout the year. I would hope that they remain low through the next year, but prolonged periods of interest rates this low have not often been observed in our economic history. Additionally, home prices in many areas fell during the past year. So, bottom line, there was a product “on sale” with very cheap financing that someone (Uncle Sam) was paying the consumer to buy. Sounds like a good recipe for success. To those first time home buyers who purchased a home in 2009, congratulations! To find out if, and how much, tax credit you received, click here.

First Time Home Buyer

Although it may seem counter-intuitive, I believe that now is an excellent time for first time home buyers in Dallas to enter the market. Many entry level homes are available at great prices in Dallas, especially if you are a first time home buyer that can do a few repairs. The number of foreclosure properties in Dallas is increasing, but these properties frequently come with a few warts. Given that the last occupant could not afford the mortgage, it is likely that they could not afford to keep up with repairs either. However, with a little TLC, Dallas homes can be spectacular again. They are all at a discount price for first time home buyers in Dallas.

Dream House Sketch
Live Your Dreams!!

So how do you go about buying a home in Dallas as a first time home buyer? How do you know if you are getting a good deal? How do you get it financed? How does the closing process actually work? How do I obtain good advice when being a first time home buyer? All of these are great questions, and the answer to most of them is “don’t do what I did when I was a first time home buyer in Dallas.” Here’s my story…

Young and relatively new to Dallas, I was ready to be a first time home buyer. A US Navy officer at the time, I knew that I could obtain financing through the VA and have little out of pocket cost. I walked into a local real estate office in and announced that I was ready to be a first time home buyer in Dallas. I was soon signing a long term representation agreement with an agent that turned out not to know very much. It was up to me to figure things out, and I made some rather large mistakes (bought a house about 300 yards from the Dallas county line. Had I crossed over the line, taxes and car insurance would have been significantly cheaper).

So here are my recommendations to any first time home buyers . First, work with a seasoned agent or broker that has years rather than minutes of experience about Dallas real estate. Get to know them before signing a long term agreement, and then only sign an agreement if you have a way out. Don’t get yourself tied up for six months. Good agents will always have clauses that will release you from the agreement. Also, if you are a first time home buyer in Dallas make sure that you really trust the person you are working with. Watch the way that they present information and ask questions until you can determine whether or not they seem knowledgeable and trustworthy. If you can get a reference from a friend, do so. If the references you use are provided by the agent, ask them hard questions.

Second, if you are a first time home buyer in Dallas get yourself qualified for a mortgage before you start a serious search. This will let you know what you can afford. No sense looking at $750,000 homes if you only qualify for a $200,000 mortgage as a first time home buyer. When it comes time to make an offer, you are going to have to prove to the seller that you can obtain financing before they will accept the offer. Going through the qualification process early as a first time home buyer in Dallas will help throughout the process.

Finally, think about the things that are really important to your life, and find a home near them. Being a first time home buyer, I purchased in the outer Dallas suburbs, but my life never moved out there. All of our friends and social events were in Dallas. Being a first time home buyer, I could have afforded to pay a higher mortgage in exchange for the fuel and wear and tear that I put on my cars.

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