On the heels of our recent mortgage refinance, we’ve been inundated with mortgage-related junk mail. Among the most common pitches that we receive are offers for bi-weekly* mortgage payment programs.
Almost without fail, these missives are disguised as official-looking notices proclaiming things like “NOTICE OF INTEREST OVERPAYMENT.” They also list the lender’s name at the top, though they indicate in a footnote that it’s listed “for reference only,” and that they have no relationship with the lender. Rather, your loan information “was obtained through public record.” Clearly, these folks want to get your attention, and they don’t mind mis-leading you along the way. [more]
The following is a guest post by Lynnae of Being Frugal. If you like what you see here, please consider subscribing to her RSS feed.
I was watching the show Property Virgins for the first time the other night, and I was shocked at what I heard on that show. Let me give you a rundown…
The buyer was a single woman who wanted the best quality in a house, but didn’t want to spend a lot of money. She knew exactly what she wanted and how much she wanted to pay, and she wasn’t willing to budge much on either issue.
The property expert seemed nice enough, and she was a saint for dealing with the opinionated buyer, but halfway through the show, she said something that stopped me cold. She had just shown the buyer a home that was brand new and had everything the buyer wanted. The problem? It was $40,000 more than the buyer wanted to pay.
The ensuing conversation went something like this. These aren’t exact quotes, but you’ll get the idea.
Expert: The price on this property is $240,000.
Buyer: What? I definitely can’t afford that!
Expert: That’s about $1700 a month, not including insurance and HOA fees.
Buyer: The insurance and HOA fees are extra? I really can’t afford that. This is what I want, but I’m not paying that price.
Expert: Well, there is another option. We can do a 35 year loan and bring your payments down to $1500 a month.
Buyer: That’s just so much money! I can’t take on that much debt! (I was cheering for her at this point).
Expert, talking privately to the camera: She’s only thinking about the big number here. She can easily afford the monthly payment. That’s what she should be looking at… Whether or not she can afford the monthly payment.
That’s the point at which my jaw dropped open. She shouldn’t consider the total cost? Are you kidding me? I’m no expert, and I don’t own a home yet, but there are a few rules I’m going to stick to when I do buy.
Know What You Can Afford
When I finally take the plunge to buy a house, I’m going to figure out how much I can easily afford per month. If the bank tells me I can afford to put 30% of my income toward my mortgage payment, but I know I can only fit a payment of 25% into my budget, I’m going to figure out my target price based on what I think. I’ll figure out the approximate amount of insurance, taxes, and any other fees, and work that into the number as well. I’ll also decide what mortgage terms I want. A fixed rate, 15 year mortgage would be ideal. From there, I’ll come up with a target house price. And I won’t look at anything more expensive.
Human emotions are powerful, and when we see something we really want, we can often talk ourselves into buying it, even if we can’t really afford it. The amount of credit card debt in this country is indicative of that. I’m not going to put myself into a situation where I might be enticed into making a stupid decision that will cost me for the next 30 years.
Never Look at a House Before You Know the Price
I couldn’t believe the buyer even walked into that house without knowing how much it cost! She set herself up for disaster. As predicted, she fell in love with the house, and deeply desired to buy it, even though she couldn’t afford it. That made her vulnerable to taking on a less than ideal mortgage. I imagine that’s how many people got caught up in the mortgage crisis we have today.
Be Willing to Do Some Work
After looking at house #2 (the dream house), the buyer was shown a third house. It was a modern house, like she wanted, but it needed a little work. It was bargain priced at $174,000 and, for an additional $30k, the buyer could do enough work to bring the house up to her standards. But our naive buyer balked at the thought of doing the work.
Take Time to Think If You’re Unsure
A tactic that the property expert used on the buyer was to tell her that the properties were flying off the market like hotcakes. She kept stressing that the buyer needed to make a decision quickly, or avoid losing the property. While that may be true, if you’re hesitating about signing on the dotted line for any reason, take time to think it over. It’s better to lose out on a property than to make a $200,000 mistake. There will always be other properties, but once you buy a house, it’s difficult to undo your mistake.
So what did the buyer end up doing?
Much to my chagrin, our buyer went with expensive house #2. She negotiated the price down to $233,000, and she went with a 35 year loan. If it were me, I would have taken house #3 and gotten the same quality of home for $33,000 less. It just makes better financial sense.
The bottom line is, if you’re a new buyer, do your research. Don’t blindly trust the “experts”. Their job is to sell you a house, so they can make a commission. Though I’m sure there are many honest and helpful realtors out there, they do have a financial interest in making a sale. It’s always wise to figure out what’s best for your financial situation on your own, rather than trust someone else to do it for you.
As a followup to my earlier note about refinancing our mortgage, I wanted to point out an interesting way of looking at things…
In the comments to that post, Laura brought up the concept of the mortgage “crossover point,” which is the point at which you are paying more toward principal than toward mortgage interest.
In looking at the amortization table for our original and new mortgage, I realized that this is a very powerful concept. Here’s a breakdown:
Under the terms of our old mortgage, and assuming no pre-payments, it would’ve taken 231 months, or 19.25 years, to reach the mortgage crossover point. Given that we were 21 months into our mortgage, that means it would be another 17.5 years before getting there.
Of course, we were were overpaying our mortgage every month, so we would’ve reached the crossover point much sooner. Those payments notwithstanding, however, we were still looking at a relatively long time horizon before our money was working more for us than for the bank.
What about the new mortgage? As it turns out, it will take just over 10 months to reach the mortgage crossover point. So, ignoring the possibility of mortgage pre-payments, we’ll reach the crossover point in January of 2009. Not bad at all.
This is just a quick note to say that we closed on our mortgage refinance yesterday, and are now the proud new owners of a 15 year, fixed-rate mortgage at 4.875%.
For the sake of comparison, we were 21 months into a 30 year fixed rate mortgage at 6.375%. The original balance on this loan was $175,000 and we had a total of roughly $370,000 in remaining payments (including interest, but ignoring pre-payments). In contrast, the new mortgage (we refinanced a total of $170,000) will cost us roughly $240,000 (including interest, but again ignoring pre-payments). The closing costs were minimal in that we had no lenders fees, just title-related costs.
The bad news (for you guys, not us) is that we came close to nailing the very bottom of the recent valley in mortgage interest rates. We could’ve eaked out another 0.125% or so by waiting a day, but rates spiked the day after that, and haven’t come back down since. As things currently stand, 15 year fixed-rate mortgages are in the neighborhood of 5.625% and 30 year rates are around 6.125%. Thus, you won’t be able to match the sort of deal that we got unless rates fall precipitously.
After nearly pulling the trigger and refinancing our home last spring, we finally decided to go ahead and pull the trigger on a refi yesterday. We’re currently about 1.5 years into a 30 year fixed mortgage at 6.375% (yes, rates bumped up right around the time we moved in 2006). Besides getting a lower rate, we’ve been thinking about moving to a shorter term (15 years instead of 30 years). [more]
“If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” - J. Paul Getty
Unless you’ve been living under a rock, you’ve no doubt heard that the White House has plans for a subprime bailout. In order to stem the tide of foreclosures, the Bush administration has unveiled plans to freeze the ultra-low teaser rates that were dangled in front of borrowers that shouldn’t have been lent money in the first place. [more]
Last week I saw an interesting interview with Alan Greenspan, former Chairman of the Federal Reserve Board, on The Today Show. He has a new book out, and thus appears to be making the rounds in support of its release. While I can’t cover everything he said in painstaking detail, I did jot down a few of the more interesting tidbits… [more]
A reader recently wrote in with what he termed a “complex question” about creative strategies for debt reduction.
My wife and I have FICO scores around 750. We have about $28K of debt on top of $238K in two mortgages (191K & 47K). The first is at 5.75% for another 5 years, while the second is at 11.25%. I just thought about loaning ourselves the $28K from our 401K in order to pay that portion of the debt off (temporarily), closing all open credit lines, then applying for AmEx cards that offer 4.99% lifetime rate on balance transfers in order to balance transfer back the $28K plus some of the second mortgage. Now the questions… How long would the loan be necessary before applying for the cards to ensure maximum credit from AMEX? How much credit might we expect?
First of all, it’s nearly impossible to predict how long it will take to secure new cards and get the balance transfer to come through. In fact, nothing is guaranteed, so there’s a risk of not being able to get enough new credit to pull this off. [more]
It’s fairly well know that if you’re not at least 59-1/2 years old, you can’t generally take a distribution from your traditional or Roth IRA (or SEP-IRA, for that matter) without incurring a 10% penalty (note that Roth IRA contributions can be withdrawn at any time, for any reason, without incurring a penalty). There are, however, a number of exceptions to this rule, and one of them has to do with buying a home. [more]
