Mortgage Bites :: SoundBiteBlog.com

Increasingly Rich and I are responding to email questions from SoundBiteBlog readers. In the past we have answered each question by return email. Because our readers are asking some very interesting and pertinent questions about real estate in Washington, we have decided to answer some of them right here on the blog. In August we received 23 different real estate related questions on a variety of subjects from “why do sellers hate va buyers” to the question below. Rich and I believe that if one reader has a question, it’s probable that other readers have the same question. So, we’ll be trying to answer as many questions as we can on SoundBiteBlog each month.

“Mark, I looked you up because I need some information I hope you can help me with. I would like more information on purchasing a new home. We still own our other house but need more spcae. We do not know if we want to keep the house we have and rent it out or if we need to sell it to buy a new home. I do not know how it works if we choose to keep our house now.”

LM — Bremerton, WA

Growing your wealth with real estate

If you can relate to this question, congratulations! You are on your way towards building a Real Estate “Portfolio”. Almost all of America’s most affluent people are heavily invested it real estate. It is a cornerstone of many asset-building strategies. Real estate investments are historically stable and safe. Kitsap County real estate in particular has shown itself to be the perfect wealth-building vehicle for many Washington homeowners.

The thought of owning two homes in Kitsap County can be exciting. The thought of having two mortgages on the other hand can be rather intimidating. One of the first questions many folks ask is “Will the bank allow me to have two mortgages at the same time?”. The answer fortunately, is “yes”. Banks are just careful about how they decide who can afford additional debt and who may be venturing too far into dangerous financial territory.

The criteria an underwriter uses to establish an approvable new loan is fairly simple. The borrower is allowed to count rental income. But they are not allowed to count all of the rental income. This creates a safety margin that keeps both the borrower and the bank out of trouble. Consider the following example to see how it works.

• The old loan balance – $155000
• The old loan payment – $1200 / month
• Taxes – $150 / month
• Insurance – $50 / month
• The projected rental income – $1300 / month
• The projected monthly loss – ($100 / month)

Many people would be happy to have real estate in their portfolio with this scenario. The annual tax benefits more than offset the negative cash flow each month. In addition, the property will continue to increase in value over time. Now take a look at how an underwriter will view this same scenario while building in a financial safety net.

• The old loan balance – $155000
• The old loan payment – $1200 / month
• Taxes – $150 / month
• Insurance – $50 / month
• The projected rental income – $1300 / month
• Less a vacancy factor of 25% – ($325 / month)
• The projected monthly loss – ($425 / month)

This “paper loss” of $425 each month is then applied against the borrowers gross income just like a car payment or student loan would be. If the borrower has enough income to handle a new mortgage payment, plus all their other financial obligations and the $425 loss, the new mortgage is likely to be approved. The 25% that an underwriter subtracts from the gross rental income is intended to compensate for any vacancies, repairs to the property, maintenance on the property and unexpected expenses. Some loan programs will allow more than 75% of the rental income to be counted, but they are uncommon (and riskier for both the bank and the borrower).

Even if this $425 per month loss raises a borrowers debt-to-income ratio too high to allow a loan approval, it may still be possible to keep the old house as a rental and buy a new home to live in. There may be a $425 car payment that could be paid off by refinancing the old home prior to making it a rental. Or credit card debt could be eliminated with a refinance. Each situation is different. If you are considering becoming a landlord, your favorite loan office will be able to compare different possible solutions for you.

Keep in mind that the underwriter will require proof that you have a new tenant. The homeowner will need to provide a copy of a lease agreement or a rental agreement as part of the loan approval conditions.

Insurance and the old lender.

There are a couple of additional items to check before making a decision like this one. The first item is to check with your insurance agent to see if the insurance policy you have on the home currently will need to be altered if the home becomes a rental. The insurance premium is likely to be higher for a rental than it was when the house was your personal residence.

If you live in a neighborhood with an active Homeowners Association, check your CC&R’s (codes, covenants and restrictions) to make sure you are not restricted from turning your home into a rental. 

And finally, it is wise to dig out the old mortgage on the property and read it carefully. It is very possible that you are required to let the lender know that you are moving out of the home. When the original loan was approved, it was approved under the belief that you would be living in the home as your primary residence. If the situation changes, the lender will probably have a clause in the mortgage document requiring you to let them know of the change. As a homeowner you have the right to do what you want with your asset (the home), but the lender also has the right to protect its investment. A loan on a rental property is riskier for the lender.

Bookmark this article to:

Posted in Bremerton WA Real Estate, Miscellaneous, Mortgage Bites | No Comments »

Tags: Bremerton WA Real Estate, kitsap investment property financing, Mortgage Bites

As many of you may know, Buckwheat and I are members of ActiveRain, a very large and popular real estate networking platform with over 40,000 members nationwide.

Recently, we launched a contest to encourage quality consumer-oriented blog articles on the network. Our 1st Round yielded some really excellent writing from the Real Estate Agents/Broker members. The 2nd Round this past week from among our Loan Officer/Mortgage Lender members raised the bar even higher on quality content articles for consumers.

As part of the spoils, we promised to publish the winning articles here on SoundBiteBlog.

And so, without any further ado, here are the 2nd Round Winners and their respective articles:

3rd Place:     Jason Price, Owner of Knightlines Mortgage Services, LLC, in Altoona, Florida. His 3rd Place submission was entitled, “The Best Mortgage is a Fixed Rate Mortgage.”

2nd Place:     Brian Brady, Managing Director with World Wide Credit Corporation in San Diego, California. His 2nd Place entry was, “ARMs don’t Kill Houses, Loan Hacks Kill Houses!”

1st Place:     Jason Sardi, a Loan Officer with First Choice Equity Group in the Lehigh Valley of Pennsylvania. His 1st Place article was “They Gave Me a Band-Aid and Now I need Stitches!”

Congratulations to all of the 2nd Round Winners and to all who participated!

In two weeks, we’ll publish the winners of Round Three from the Professional Staging members of ActiveRain.

Bookmark this article to:

Posted in Mortgage Bites, Real Estate Bites | 1 Comment »

This is America where the Need for Speed is ingrained from childhood. As children, we want faster bikes and faster Playstations. In our teen years, it’s faster cars and faster computers. And, as adults we want faster promotions, quicker increases in our credit limits and quicker pay raises. Eventually, we all have a day when we decide what we want more than anything else is Faster Equity Accumulation in our home!

The Good

Enter Equity Acceleration Programs. These programs are a masterpiece of marketing. They target the American need for speed promising to shave years off your mortgage and saving you tens of thousands of dollars in the meantime. Both of these goals are worthwhile. And there is nothing wrong with effective advertising. This article is not meant to imply that Equity Acceleration Programs are all bad. They are not all bad. They are poorly explained and even more poorly understood. As with many of the articles on SoundBiteBlog, this article’s intent is to explain the risks (yes, there are significant risks) and expose that the average consumer can accomplish the same goals in the same amount of time, for less money by avoiding the most heavily promoted Acceleration Programs available today. In short, the goals are worthy, the sales pitch is suspect.

The Bad

Equity Acceleration Programs are often explained in a misleading fashion. Rarely is a consumer told boldly that they are trading their nice, safe fixed rate first mortgage for an Adjustable Rate Line of Credit! The reason for this deception is obvious. It’s old news that interest rates are rising. It’s old news that they are expected to continue to rise in the near future. This old news causes anxiety in many borrowers and because of that anxiety, many loan originators are glossing over the part about an Adjustable Rate, preferring to concentrate most of their explanation on the exciting prospect of paying off a loan in a shorter period of time regardless of how it is done.

Fuzzy math seems to play a big part in an Equity Acceleration presentation. I have listened to two of these presentations in the last couple of months. The more aggressive presentation spent considerable time attempting to convince me that my (imaginary) 6.125% Fixed Rate Mortgage, was actually costing me 65%! My questions about interest rates vs. A.P.R. and how RESPA regulations affect us all, were quickly bypassed and never answered. Shock tactics are normal from what I can see.

The realities of these programs are these. You are going to trade your current mortgage (often an attractive fixed rate) for a new Line of Credit (also a mortgage) with an adjustable rate. You will then “deposit” your entire pay check into this “account” each pay period. Payment of all your normal bills is made from the “account” as you would normally pay them. Presto, abracadabra and your new mortgage will pay off years earlier than it would have! This mathematical magic was explained to me as follows. When you deposit your paycheck, you are temporarily reducing your mortgage balance. This temporary reduction reduces the amount of interest that is charged thereby making a drastic change in the overall amount of interest that accumulates on the loan.

The first flaw in the sales presentation for Equity Acceleration Programs is the fact they ignore how most of us pay our bills. Like my mother taught me to years ago, I pay my bills first on payday along with making my deposit to savings. The result of paying my bills immediately is that my new mortgage is only “temporarily reduced” for a very temporary time indeed. The amount of interest saved by reducing my mortgage balance by a few thousand dollars for 2 days is pretty insignificant. AND I had to trade my fixed rate mortgage for an adjustable rate to do it! The positive effect is more than offset by that fact as soon as interest rates rise and my new mortgage rises with them.

Another flaw is that because this is not an actual depository account, you will never be able to earn interest on your deposits. Remember, it’s a line of credit (a debt) not a savings account or a checking account that pays interest. Therefore, money that you could have accumulated by using the same theory with your existing accounts will be lost.

And the final flaw in these presentations becomes apparent when you consider how long it will take to recapture the cost of the new loan itself. You didn’t think these were loans without fees did you? No, like every other mortgage you have applied for, there are fees involved. Someone will need to appraise the home. Someone will need to do a Title Search and approve Title Insurance. And the list goes on. Each service includes a fee. All the normal mortgage fees will apply and they will add up to thousands of dollars. It will take a long time to save enough with the new mortgage to simply break even after these fees.

The Ugly

The biggest advantage to many Equity Acceleration Programs is to the Lender and the Loan Officer. Let’s be pragmatic for a moment. When was the last time you saw anyone advertising anything they were not going to profit from? These programs are no different. The Lender will be make a profit on each and every one and the Loan Originator will be paid for finding another client. There is nothing inherently wrong with that. Each time I have applied for a new mortgage, I knew that Loan Officer would get paid and the Lender would make a profit. Don’t forget, this is just another mortgage and it works like all the others. Loan Originators do not work for free. Lenders work for a profit. The market has gotten very difficult for Loan Originators and many are looking for new, creative ways to generate new loans. Lenders are rolling out “new” creative loan programs and dusting off old ones.

Caveat Emptor, “let the buyer beware”, is a phrase to keep in mind if you are tempted by a good sales pitch. Remember, you are buying a product. You may have just heard about the best product, or you may have just heard the best sales presentation.

The Do-It-Yourself Equity Accelaration Program

If you spend lots of time with a calculator in your hand like I do (occupational hazard), you get in the habit of running “What If” scenarios. It can be addicting to look at how much money we can save by tweaking the numbers in our personal finances. What if I move $2500 to this credit card account over here? What if I send an additional $125 each month in on my mortgage. What if I send that same $125 in on my car payment? You get the picture. This kind of thinking will drive some people to visions of Tequila and others chase the possibilities with all the fascination of a new video game.

What you will find running “What If” scenarios is that there are ways to shave years off your mortgage and save thousand of dollars without having to create a budjet that leaves you depressed for lack of fun money.

Here’s just one idea of many. Rather than opting for an Equity Acceleration Program that will cost you money, open a savings account or a checking account that pays interest. The last time I checked, Boeing Employees Credit Union was open to anyone living in Washington State and had a savings account that paid 5.5%. Now that makes all kinds of sense! Keep your nice, low interest rate, fixed rate mortgage alone. Open a high yield savings or checking account and follow the same principals as the Equity Programs. Deposit your paycheck into it and pay your bills out of it. Make some interest for yourself.

But don’t trade your fixed rate loan for an adjustable rate line of credit without understanding the risk you are taking. Very few Equity Acceleration Programs benefit the borrower as much as they benefit the Lender and the Loan Officer.

Bookmark this article to:

Posted in Bainbridge Island Real Estate, Bite Me Blogs, Bremerton WA Real Estate, Gig Harbor Real Estate, Miscellaneous, Mortgage Bites, Port Orchard Real Estate, Poulsbo Real Estate, Silverdale WA Real Estate | 10 Comments »

Tags: bremerton-mortgage, equity acceleration programs, heloc, home equity line of credit, kingston wa mortgage, kitsap-mortgage, lender-washington, port-orchard-mortgage, poulsbo-mortgage, seabeck-mortgage, seattle real estate blog, soundbiteblog.com, washington-real-estate-blog

The Kitsap County real estate market in particular, and the Washington real estate market in general are getting better for real estate buyers and tougher for real estate sellers. There are a variety of reasons for this and it is nothing unusual. The real estate market goes up and the real estate market goes down. It’s the nature of any market to move in both directions over time.

Falling mortgage interest rates in the past few years have allowed real estate values to rise significantly. As prices have risen, the number of potential real estate buyers have diminished. This is due in part to the fact that some families simply do not qualify for the higher priced properties. AND, as the number of qualified buyers dwindles, real estate that is listed for sale, sits on the market for longer and longer periods of time, waiting to sell.

This dynamic allows real estate buyers to get more aggressive with their negotiations. Good for the buyer; hard on the seller. Real estate sellers, faced with the prospect of receiving less money for their home or investment property, naturally want to know that the potential buyer can actually purchase. Rich’s article on the subject of Earnest Money, addresses one of the tactics for proving a buyer is serious about buying. This article addresses a way to prove a buyer can purchase.

Improve the odds of getting your offer accepted with a Pre-Approval Letter.

Your chance of being viewed as a Serious Buyer skyrockets when the seller and the Listing Agent are presented with tangible proof that you, as a buyer, prepared for this transaction in advance. The Pre-Approval letter indicates that you have taken the time to sit with a mortgage professional, discuss the details of your financial situation, applied with a Lender and been approved by that Lender, before looking at homes.

Pre-approval and pre-qualification are two entirely different processes.

Pre-approval is (in theory at least) much stronger. The pre-qualification process entails meeting with a mortgage professional and discussing your financial situation to determine:

• how much you can borrow
• how much you want to borrow
• what kind of roadblocks may need to be addressed
• what kinds of loan programs are availabe
• current interest rates
• what the loan will cost you

This is all valuable information needed by any prospective real estate buyer. But, it is not meant to prove that you can purchase. This meeting is a starting point for borrowers. Savvy real estate sellers and their Listing Agents are well aware of the difference between a pre-qualification and a pre-approval. Pre-qualification indicates some organizational skills on the buyer’s part. Pre-Approval indicates much more than that!

Loan officers don’t approve loans!

Just as Realtors® don’t approve acceptance of offers, loan officers don’t approve loans. Lenders approve loans. In both cases, the Realtor® and the Loan Officer are acting as facilitators of the transaction. Neither of them has the authority to legally bind the parties they represent.

A Pre-Approval Letter is such a strong buyer’s tool because it means that a Lender has reviewed the buyer’s application and supporting documentation (pay stubs, bank statements, W2′s etc.). In addition, the Lender has agreed in writing, that they will loan money to the buyer if they find an acceptable property. Loan officers can confirm to a buyer that they will be able to get a loan. The Lender will confirm that the buyer is actually approved for a  loan. This approval will have loan conditions to satisfy, but it is a real approval. The predominant condition will of course be that the buyer finds a piece of acceptable  real estate! Pre-approvals are issued without an address.

If you wish to be viewed as a Serious Real Estate Buyer, have your Pre-Approval Letter in-hand before shopping. The selling agent will take you more seriously. The listing agent will take you more seriously. The seller will take you more seriously. A pre-approval letter puts you in the driver’s seat when you are ready to negotiate.

Bookmark this article to:

Posted in Bainbridge Island Real Estate, Bremerton WA Real Estate, Buyers, Gig Harbor Real Estate, Miscellaneous, Mortgage Bites, Port Orchard Real Estate, Poulsbo Real Estate, Silverdale WA Real Estate | 4 Comments »

Shock and dismay are quickly followed by anger as a homeowner reads the official-looking letter from the mortgage company instructing him to make a higher payment. Did somebody lie to him? Did he somehow sign up for an Adjustable Rate Mortgage when he thought he was getting a Fixed Rate? There must be a mistake, right?

No, nobody lied. Here’s what has happened.

On the day a homeowner signs loan documents for the purchase of his or her new home, a payment is presented. The majority of  mortgage loans that are set up in the U.S. include money for Property Taxes on the home and Hazard Insurance for the dwelling. These are called PITI payments. PITI simply means Principle, Interest, Taxes and Insurance. Each month, the portion of the payment for taxes and insurance, is set aside by the mortgage lender in an Escrow Account. This money (in theory) adds up each month until it is time for the property taxes to be paid, or the insurance premium to be renewed. At those times, the mortgage lender sends the correct amount of money to either the County for property taxes or to the Insurance Company. The escrow account is depleted to pay these expenses and the process begins all over again for the new year.

The great thing about a PITI payment is the fact that the homeowner never has to be concerned with budgeting for the annual Property Tax liability or the Insurance Premium renewals. It is both a convenience for the borrower and a safeguard for the mortgage company. The mortgage company does not need to worry about a foreclosure due to unpaid Property Taxes or a house that burned down because of unpaid Homeowners Insurance.

The unnerving thing about a PITI payment is the letter in the mail stating the mortgage payment is going up. The payment must increase from time to time to cover the increasing cost of Property Taxes and Homeowners Insurance. Just like eveything else from gasoline to lumber, Taxes and Insurance prices are subject to change. And, they will change.

Experience borrowers are not surprised to receive this notification. They have seen it before. New homeowners though, are often very upset to receive this type of letter. If you have received a letter like this, read it carefully first. You will probably find the payment is rising for the reasons above. If the letter is difficult to understand (many are), call your Loan Officer first. That is what he/she is there for. Information about your mortgage is available to you after you move in! If you Loan Officer notices something unusual about the letter, he/she will let you know and can guide you to the person or organization to sort out the problem.

But remember, when the Property Taxes and the Homeowners Insurance Premium rise, the mortgage payment will have to follow. The mortgage company must collect enough money to pay these bills for you next year. The Fixed Rate mortgage that you signed up for is only guarantying that the Interest Rate will not change. The mortgage company cannot control expenses like Property Taxes and Insurance Premiums.

Bookmark this article to:

Posted in Bremerton WA Real Estate, Gig Harbor Real Estate, Miscellaneous, Mortgage Bites, Port Orchard Real Estate, Poulsbo Real Estate, Silverdale WA Real Estate | 2 Comments »

Tags: bremerton mortgages, kitsap mortgages, piti, port orchard mortgages, poulsbo mortgages, silverdale mortgages