Subscribe!Welcome! This blog tracks the real estate market in the Central Shenandoah Valley, featuring market data and analysis, an exploration of common buying and selling questions, and candid commentary on all things real estate.
If you are interested in discussing any of the topics on this blog, or the details of your specific real estate situation, call or e-mail me!
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How to decide whether to refinance |
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 Reproduced with the permission of Mortgage-X.com It's anyone's guess what interest rates might do in the next 3, 6 or 12 months, but rates continue to be historically low. Given these low rates, you may be considering whether it would be worthwhile to refinance. Here's a sample analysis of whether "Bob" should refinance, that might be helpful as you analyze your own scenario. Here's what you need to know about Bob....
One important note --- Bob lowered his payment by $167/month by refinancing not only because he lowered his rate, but also because he extended his remaining loan term from 25 years back up to 30 years. So, bottom line...
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When to buy a loan discount point... |
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 One option you have when obtaining a mortgage is to pay a loan discount point to lower the interest rate on your mortgage. In most cases, a loan discount point will cost 1% of the loan amount, and will lower the interest rate by 0.125% over the life of the loan. For example, on a 30 year, $200,000 loan at 6.5%, with no discount points, your principal and interest payment would be $1,264.14. If, however, you paid one point, the $200,000 loan at 6.375% would require a principal and interest payment of $1,247.74. The cost of the loan discount point would be $2,000, and it would save you $16.40 each month. Thus, it would take 122 months (10 years, 2 months) before you started to realize any savings. However, to take it one step further, we should include the tax benefits of having bought the loan discount point. The $2,000 is tax deductible, thus if you are in the 25% tax bracket, you would have a tax savings of $500, and only need to recoup $1,500 of savings. By including this tax perspective, it would only take 92 months (7 years, 8 months) for you to start seeing savings for having bought the discount point. Bottom line --- in the examples above, if you don't plan to own the house for more than 7-ish years (or 10-ish years), it is likely not worthwhile to buy the loan discount point. | |
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Comparing Good Faith Estimates (GFE's) |
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 I always encourage my buyer clients to talk with at least two lenders. Different lenders offer different loan programs, closing costs, incentives, and more. Often, however, this leads to comparing what can be two very confusing documents --- the good faith estimates from each lender. The Good Faith Estimate is a document intended to outline all of your purchasing costs, and thus is a good document to use when deciding between your two favorite lenders. But it can often be quite difficult to make the comparison because costs can have so many different names on the GFE, and because there are non-lender fees included in these estimates. If you are deciding which lender to use based on closing costs, remember to subtract out all of these costs before you make the comparison:
I hope I haven't complicated things further --- just remember that you should not just look at the bottom line of the Good Faith Estimate when you are comparing lenders. | |
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20% down required on investment properties? |
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I have now heard from several lenders that they cannot lend more than 80% on investment properties. The main issue seems to be that mortgage insurance companies are not willing to issue policies on investment properties any longer. (Most loans with less than a 20% down payment require mortgage insurance.) | |
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Yes, mortgages are still available |
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In talking to people in Harrisonburg and around the state lately, I have heard several people comment about how it is now near impossible to obtain a mortgage to buy a home. This has not been my experience --- I am still seeing most (reasonably qualified) buyers having no problem obtaining a mortgage. A few caveats:
If you are considering buying, don't be scared off by a concern that mortgages are not available. In fact --- in addition to mortgages being available, 30-year fixed rates are very low right now! | |
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Mortgage rates are down --- if you're buying, lock in now! |
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If you have been holding off to lock in an interest rate on your purchase or re-finance, now may be the time! In a report released by Freddie Mac last Friday (9/12/2008), 30-year fixed-rate mortgages now average at 5.93%. That is a significant drop from the prior week's average of 6.35%. Yes, rates could go lower, but we're below 6% again --- which I hadn't thought we'd see for quite a while. If you have any questions, please e-mail me (scott@cbfunkhouser.com) or call me (540-578-0102). I'd be happy to talk things through with you, or to connect you with a qualified lender. | |
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Price Points: estimating housing payments... |
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I often have conversations with people considering their first home purchase who want to first get an idea of how much they would have to pay for housing on a monthly basis. I have devised an Excel mortgage calculator that I can use to give them a rough idea, or I recommend that they call a lender to get pre-approved. | |
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Getting Ready To Buy -- Loan Pre-qualification |
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 In almost all circumstances, buyers should pre-qualify for a mortgage before starting to look for a home.What is pre-qualification? In short, it means providing basic financial information to a lender so they can give you a preliminary indication of how much money they are willing to lend you for the purchase of a home. What is a lender? A lender can be either a bank, a mortgage company, or a mortgage broker. A bank offers banking services and accounts as well as offering loans. A mortgage company is just in the business of making loans. A mortgage broker contacts multiple "funding sources" on behalf of a home buyer to find the best loan. How hard is it to get "pre-qualified"? It is not difficult at all --- in fact, it can be done over the phone in about 30 minutes. Alternatively, you can set up an appointment with a lender to get "pre-qualified." What is the lender doing when they pre-qualify me? They will be inquiring as to your income, expenses, assets and liabilities. How much do you make per month from your job, and any other income sources? What monthly payments do you already have, such as a car loan, or credit card payments? What other assets do you own, such as a car, boat, additional residence, etc? What other debt do you have, such as another mortgage, personal loans, etc? After having collected this information, they will look at your credit score, and your "debt ratios". What is a "debt ratio"? This is a comparison of your potential monthly housing costs and your monthly income. Some programs, for example, don't like to see more than 28% of your gross monthly income going towards housing expenses. What is the difference between "pre-qualified" and "pre-approved"? This varies from lender to lender, but my general understanding of the distinction is that a pre-approval involves submitting all of your information to an "automated underwriting program" to be able to give you a Fannie Mae or Freddie Mac pre-approval. Why should I pre-qualify first? Having been pre-qualified for a mortgage gives you a realistic idea of how much of a mortgage you can obtain, or want to obtain. This will guide us as we set your home search criteria, so that we are not considering homes that would not be possible for you to purchase. There might be a difference between what I can get, and what I want to get? Absolutely! I have frequently run into situations where a lender will tell my client that they can borrow an amount that would lead to a monthly payment that the borrower is not at all comfortable making. Sometimes the limit is set by the limit from the lender, and sometimes the limit is set by the comfort level of the borrower. How many lenders should I talk to? To start, just talk to one lender to get a general idea of how much money you can borrow for your home purchase. Then, when we have found a home for you to purchase, you can check with multiple lenders to make sure you are getting the best loan terms (interest rate, closing costs, etc). There are likely tens or hundreds of other questions that I could have addressed here. Feel free to ask other questions in the comments of this post, or by e-mailing me at scott@cbfunkhouser.com. I am not a lender myself, but I have become quite familiar with the lending process through assisting many real estate clients in analyzing mortgage options over the years. | |
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Change Is Here . . . We Must Adapt! |
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Slower Home Sales . . . Fewer Mortgage Options . . . Appreciation Remains, But . . . | |
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There are quite a few local and national changes occurring right now that greatly affect buyers and sellers. Let's contemplate how we must prepare and adjust. |
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The Best of Lenders, The Worst of Lenders |
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 After (just about) five years in real estate, and many transactions with many lenders, I have finally discovered that with the best of lenders, and with the worst of lenders, the experience for my clients can still be fantastic, or terrible!The root of the problem is the many variables involved with a loan, for example:
Scenario #1 --- $300k (+/-) purchase, 80% financing, loan application to closing in approximately 14 days, absolutely no issues in the entire process. Amazing! Scenario #2 --- $100k (+/-) purchase, 100% financing, down payment assistance program, loan application to closing in approximately 35 days (even though 21 was promised), an absolute nightmare with more and more, and more documentation and paperwork requested from the loan underwriter and loan closer up until the closing day. Many of my buyer clients ask for recommendations on which lender they should select in order to make it a smooth and successful purchase. I do indeed have lenders that I recommend. However --- even with one of the stellar lenders I recommend, a buyer can have a terrible financing process, as a result of the underwriter, closer, appraiser, program requirements, etc. And . . . even if you don't select one of the lenders that I recommend, you can absolutely have a fantastic financing process. | |
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100% Financing (and then some) From A Local Lender |
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A few weeks ago I was lamenting the fact that 100% finance seemed to be sailing out to sea --- never to be available again for first-time buyers (or otherwise).  However, just this past week, Debbie Huntley at SunTrust Mortgage informed me of quite a few 100% (plus) financing programs that are indeed still available . . . Lender Paid Mortgage Insurance --- 100% Financing
VHDA/FHA/PLUS --- 102.75% Financing
80/15/5 COMBO Loan
So, fear not --- even if you don't have a down payment (or even closing costs), if you have good credit and steady income, you are likely to be able to obtain 100% financing after all! | |
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Who Pays The Closing Costs? |
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 Some buyers make offers including a condition that the seller pay all or some of the closing costs.Some sellers offer the incentive of seller-paid closing costs to try to entice buyers. What's really going on here? There are a few ways to look at it:
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PMI -- Is It Good, or Evil?? |
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I am frequently asked whether PMI (private mortgage insurance) is a good thing, or something to avoid. To start with --- private mortgage insurance is an insurance policy that protects the lender in the event that a borrower stops making payments, the lender has to foreclose, and they can't recoup all of their costs. Despite the fact that the lender is the beneficiary of the insurance policy . . . you guessed it, the borrower gets to pay for the policy! PMI is required (by most lenders) for any mortgage where the loan-to-value ratio is greater than 80%. In other words --- if you have less than a 20% down payment, you will likely have to pay PMI. PMI is typically paid on a monthly basis --- with every mortgage payment. However, with most lenders, you can avoid paying PMI by paying a slightly higher interest rate. Don't be fooled --- the intent and result are essentially the same. When a borrower has to finance more than 80% of the purchase price, a lender is a bit more worried about their future ability and likelihood to repay than if they are financing 80% or less. The lender mitigates this risk by taking out an insurance policy, and having the borrower pay for it. The policy can either be paid for (by the borrower) each month, or up front. Thus the option of either paying every month, or over the life of the loan (in the form of a slightly higher interest rate). I suggest that most of my clients pay the PMI each month. Typically, the monthly payments are about the same regardless of whether you pay PMI each month (with a lower rate), or do not pay PMI (and have a higher rate). So . . .
One final note --- if you have monthly PMI costs, at some point you will want to have that part of your payment removed. Before you hire an appraiser to appraise the property and prove that your loan balance is less than 80% of the appraised value, check with your bank on their process. Many banks have a list of appraisers that are acceptable for this process, and some banks insist that they generate the appraisal request. | |
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Where, Oh Where, Has 100% Financing Gone? |
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 A few months ago, most lenders stopped offering "80/20" loans --- an 80% first mortgage combined with a 20% second mortgage.Last week, VHDA suspended their 100% loan programs! I have always sent first time buyers to lenders that offer VHDA financing programs. These programs offer below-market rates for first time home buyers, with flexible financing up to 103%. However --- as of April 1, 2008, these 100% loan programs will be suspended (i.e. not available) until further notice. The explanation, in an e-mail from Michele Watson (Director of Homeownership Programs, VHDA) was that it is "...an effort to best utilize our resources, maintain adequate long term funding for our loan programs and to mitigate the risk to our borrowers and VHDA..." There are still some 100% options, but as the number of programs dwindle, it will become increasingly harder to finance a home purchase, especially for first time buyers. Some remaining options include:
And if you're looking, below are several lenders I would recommend that you talk to, about 100% financing, or otherwise:
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Hint: Avoid Loan Froad |
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 What exactly is "loan fraud," or "mortgage fraud"?A few examples, per the FBI are:
The long and the short of it --- don't participate in loan fraud --- it is a criminal act. | |
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Deciding To Refinance |
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Mortgage interest rates have continued to decrease over the past year (much to my surprise). Once again, some homeowners are wondering whether it might make sense for them to refinance. While there are many factors to consider when making such a decision, here's one way perspective that might help you decide whether to proceed . . . The theory: With the assumption that you are not trying to pull out equity via a refinance, you need to determine how long it will take for the monthly cost savings (with a lower interest rate) to exceed the cost of refinancing. How it works out: You bought a $300,000 house three years ago for $300,000 with a $50,000 downpayment. Thus, the original loan was for $250,000 --- but the balance is now down to $240,000. The interest rate on the loan is 6.25%, which made the principal and interest payment $1,539 per month. Today's rate of 5.625% looks good to you, but the closing costs will be $3,500 -- which you would have to finance because of your current cash flow situation. The new loan would be $243,500 (old balance + closing costs), financed at 5.625% over 30 years, which makes the new principal and interest payment $1,402 per month. When it makes sense: In the scenario above, many people would immediately jump at the opportunity to save $137 per month ($1,539 - $1,402). However, bear in mind that it will take 26 months for the monthly savings to pay off. That is to say that since you paid $3,500 of closing costs in order to refinance, it won't be until the 26th month ($3,500 / $137) that you actually see a net gain for your decision. Thus, in this scenario, if you know you were going to stay at least two years, it would make sense to refinance --- but not if you thought it was likely that you would sell sooner. Your scenario: There may be more variables in your situation than I mentioned above. Perhaps there is a second mortgage with a variable rate, for example. I'd be happy to help you with calculating when it would make sense to refinance, or you can contact a lender to get a similar analysis. Just remember --- even if you are lowering your rate, it doesn't always make sense to refinance! | |
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"The Fed" Lowers Rates Yet Again! |
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Yesterday "The Fed," or The Federal Reserve, lowered the federal funds rate by 0.75% --- from 4.25% down to 3.50%. Generally speaking, reducing this rate leads to more economic activity, as it lowers the interest rate for money loaned between banks overnight.  What will it mean for real estate in Harrisonburg and Rockingham County? First, it is important to realize that a 0.75% decrease in the federal funds rate will not equate to a 0.75% reduction in interest rates that home buyers will obtain for their real estate purchases. However -- for most home equity lines, homeowners will see a reduction in their payment as the prime rate decreases. | |
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The Changing Mortgage Market |
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80/20 mortgages with a second mortgage covering the 20% down payment . . . adjustable rate mortgages to provide lower interest rates and payments . . . interest only mortgages to lower monthly payments even further . . . step-up mortgages with lower introductory rates . . . sub-prime mortgages for poor credit or high risk borrowers. This loosening of lending standards has led to an increase in mortgage delinquencies, and as indicated by the graph above, most of this increase has been with subprime borrowers. However, these recent changes in the mortgage market affect all borrowers: fewer programs, for example the disappearance (largely) of 80/20 loans . . . increased standards such as credit scores, cash reserves, debt limits . . . increased scrutiny in the underwriting process, delaying closings . . . Understanding these trends in the mortgage market will help you to make more educated decisions about when to buy, and how to fi nance your purchase. | |
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Over the last decade, many flexible financing solutions have been introduced:Scott Rogers
Coldwell Banker
Funkhouser Realtors
540-578-0102
scott@cbfunkhouser.com
Licensed in the
Commonwealth of Virginia
Scott --
I prefer doing no cost refinances. You pay maybe 3/4% higher rate, but lender eats the cost of the loan. By doing this I can refinance again any time I want so long as the new rate is lower than my current. I am surprised that more people don't do this or that this approach is not recommended more widely. There are reputable lenders around doing this.
November 11, 2008 2:35 pm
Tom --- to clarify, if market rates are 3/4% lower than your current rate, then you can refinance, correct?
Makes sense!
November 11, 2008 2:51 pm
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