Your Favorite Lender's Insights & Perspectives

Beware of Homestead Declaration Scam

2012-01-13T11:30:00.001-08:00

If you have ever purchased or refinanced a house in California, you have most likely received a letter offering to prepare a Declaration of Homestead. This company typically offers to prepare the document for a fee ranging from $25 to $75. If you send the company the amount they request, they will prepare the Homestead Declaration for you and send it back so you can take it to the County Recorder for recording.

This is a "sales letter" and it is designed to scare you into action. The company uses public records (i.e., Grant Deeds, Deeds of Trust, etc...) to obtain your personal information and targets First-Time Homebuyers, due to their inexperience, and presents the offer in a way that the target (the reader) assumes it is legitimate and is something that needs to be completed and paid.

So what is a Homestead Declaration?

A Homestead Declaration is a legal document and process whereby a homeowner can protect the equity in his/her/their property, not the asset value, but the equity, from creditors. Homestead protection is limited to a homeowner's primary residence. The protection can be lost if the homeowner no longer occupies said residence, but is portable and can be relocated to the new primary residence.

Homestead exemption laws prevent the forced sale of a house to meet the demands of creditors. The laws protect the following:

the first $75,000 of house equity for single persons
the first $100,000 of house equity for married couples, or single persons with at least one child
the first $175,000 of house equity for persons over 65 or legally mentally or physically disabled
the first $75,000 of house equity for single persons 55 years of age or older with a gross annual income of not more than $15,000, and
the first $75,000 of house equity for married couples 55 years of age or older with a gross annual income of not more than $20,000

However, there are exceptions, such as mortgages, mechanics liens, and property taxes.

The laws also provide an exemption from property taxes. In California, the first $7,000 of the value of your primary residence is exempt from property taxes. If you need proof, look at your own property tax bill and see for yourself.

You can declare a homestead on your own by filing a one-page document (Homestead Declaration) in the County Recorder's office where your property is located, but it may be redundant since homestead protection is automatic in California.

Consider this article a "heads up" since I am not a lawyer and would not presume to give you legal advice. You may wish to consult with a legal professional for all the details on how this may apply to you. However, perusal of your personal property tax bill may satisfy your curiosity as to whether you are protected or not. My desire is simply to protect you from wasting money on a service that is not only unnecessary, but that you can do for yourself, should you so desire.

What Is Your Ideal Lifestyle?

2012-01-10T09:16:00.000-08:00

As the new year is officially under way I am reminded of a something a close friend of mine said to me, "Most people make a living instead of designing their lives?" While I am not a big fan or advocate of New Year's Resolutions, I do like to contemplate the year that just passed and consider what, if anything, I want to do differently in the year ahead. With that in mind, Who is it important for you to design your ideal life for?

The key is not to prioritize your schedule, but to schedule your priorities. A book that I read some time ago shared this story to make the point.

I attended a seminar once where the instructor was lecturing on time. At one point, he said, "Okay, it's time for a quiz." He reached under the table and pulled out a wide-mouth gallon jar. He set it on the table next to a platter with some fist-sized rocks on it. "How many of these rocks do you think we can get in the jar?" he asked.

After we made our guess, he said, "Okay, let's find out." He set one rock in the jar, then another, and another. I don't remember how many rocks he got in, but he got the jar full. Then he asked, "Is that jar full?" Everybody looked at the rocks and said, "Yes."

Then he said, "Ahhh." He reached under the table and pulled out a bucket of gravel. Then he dumped some gravel in and shook the jar and the gravel went in all the little spaces left by the big rocks. Then he grinned and said once more, "Is the jar full?" By this time we were on to him. "Probably not," we said.

"Good," he replied. And he reached under the table and brought out a bucket of sand. He started dumping the sand in and it went in all the little spaces left by the rocks and the gravel. Once more he looked at us and said, "Is the jar full?" "No!" we all roared.

He said, "Good!" and he grabbed a pitcher of water and began to pour it in. He got something like a quart of water in that jar. Then he said, "Well, what's the point?" Somebody said, "Well, there are gaps, and if you really work at it, you can always fit for more into your life.

"No" he said, "that's not the point. The point is this: If you hadn't put these big rocks in first, would you ever have gotten any of them in?"

That story impacts me each and every time I hear it because it is so applicable to what each of us is doing with our time everyday. We're always trying to fit more activities into the time we have. But what does it matter how much we do if what we're doing isn't what matters most? The big rocks represent what matters most to each of us. Are you scheduling time into your day, week, month, quarter, and year, for the things that matter most to you?

The most powerful influence in your life is what you say to yourself, THAT YOU BELIEVE! Goals are neither right or wrong. They simply get us to take action (or not). So whether you believe in making New Year's Resolutions or not, I challenge you to answer these two questions for yourself;

1) Who is it important for you to design your ideal life for? and

2) What is YOUR Ideal Lifestyle?

If you take just a few minutes and answer these two questions you may very well set yourself on a path and progress toward what you defined as important to you and those you care about. For far too many people, life is "Groundhog Day" and it's high time we snap out of it. As Albert Einstein is credited with saying, "If you do what you've always done, you'll get what you've always got!"

Yet Another Hike In Mortgage Fees For Those Who Wait

2012-01-05T16:31:00.001-08:00

You've Gotta Love The Gov. In December 2011, Congress voted to extend the Payroll Tax Cut. To pay for this tax cut extension, an estimated cost of $33 billion, Congress decided to increase fees on all mortgages starting in early 2012. Fannie Mae and Freddie Mac will increase their loan fees by 0.10% on each loan they insure. That will result in an 0.125% increase in interest rates, which correlates to about $25 to $30 per month on a $250,000 mortgage.

Congress also instructed FHA to increase its monthly mortgage insurance premium by 0.10%. That will result in a $20 per month on a $250,000 mortgage. While the increase won't cause the world to end, it is another installment in the long list of hits the mortgage market, and ultimately YOU, the homeowner and homebuyer, have taken since the housing and mortgage crisis began.

As interest rates have dropped, loan costs have increased, significantly.

In 2008, the government introduced loan-level price adjustments (LLPAs) on all loans
In 2009, the government increased those LLPAs 7 times throughout the end of the year
In 2010, closing costs jumped 37% as banks met government compliance standards
In 2011, the FHA more than doubled monthly mortgage insurance premiums

In fact, the FHA has increased its monthly mortgage insurance premiums 5 times in as many years.

Let's look closely at that $250,000 FHA mortgage to see the cumulative impact of these monthly mortgage insurance premium increases.

In 2008, the monthly mortgage insurance was $100.52
In 2009, the monthly mortgage insurance was $110.57
In 2010, the monthly mortgage insurance was $180.94
In 2011, the monthly mortgage insurance was $231.20
In 2012, the monthly mortgage insurance will be $251.30

That's an increase of $150 per month on the same $250,000 mortgage from 2008 to 2012. This is yet another example that shows how waiting to buy a house or waiting to refinance your mortgage can cost you in ways you may not even realize. I wrote about this in January 2011 in a commentary entitled "Waiting To Purchase a Home Can Cost You." Congress continues to penalize current and new homeowners that are fully qualifying for their respective mortgages to pay for the recklessness of past homeowners and homebuyers.

Each time loan costs rise, it diffuses the effects of falling mortgage rates. Low rates don't matter if high costs wipe them out. Please feel free to contact me at Support@YourFavoriteLender.com if you would like to go over your specific situation.

Why Some Homes Sell Faster

2011-12-17T17:49:00.000-08:00

A recent study by National Renewable Energy Labs found that home powered by a solar system sold 20 percent faster and for 17 percent more money that non-solar homes. Installing energy-efficient features can make your home more appealing to buyers, especially in a down market.

A great tip is to highlight the energy and money saving aspects of your home to prospective buyers in language the average person can relate to. For instance, "our average electricity bill is $8 a month" will mean more to a potential buyer than "our solar panels produce 6 kilowatt hours of electricity per day."

A 2011 study by the National Association of Home Builders showed smaller homes are selling faster than larger homes. One-bedroom homes actually sell 13 percent faster than others and homes with two stories or more took more than 20 percent longer than single story homes.

With the introduction of the Home Valuation Code of Conduct (HVCC) appraisers have become for more conservative, maybe even downright lazy, in their valuations. With no fear of adverse action for low appraisals because they are essentially accountable to no one, it would behoove a seller or Realtor to provide to the buyer's appraiser with important information such as comparable sales, great schools or low crime in the area, in addition to a detailed list of improvements made to the property and the approximate cost of each improvement.

A Canadian study of over 20,000 real estate listings found descriptions that focused more on "curb appeal" or general attractiveness helped a property sell faster than those focusing on value and price.

Describing a property as in "move-in condition" quickened the sale by 12 percent.
Listings with the words "beautiful" or "gorgeous" sold 15 percent faster.
Using the word "landscaping" hastened a sale by 20 percent
Language that conveyed desperation, such as "motivated" or "must sell" took 30 percent longer to sell.
Homes that have been professionally staged sell at least 20 to 40 percent faster than vacant homes.

With homes sitting on the market so long, so many deals falling out of escrow due to low appraisals among other things, and the increased number of closings delayed by a variety of glitches, anything a seller can do to give himself/herself an edge may save a seller a lot of anxiety and headaches.

Borrow Smart Realtor CE Class is a Big Hit!

2011-12-16T22:41:00.000-08:00

On December 15, 2011, I hosted my third Realtor Continuing Education Class and the feedback has been nothing short of amazing. Most of the Realtors that attended the class admitted that they came simply to get the 4 hours of continuing education credit. However, they also admitted that within the first 45 minutes they realized that they were going to get so much more, and that by the end of the 4 hours their knowledge and understanding had been transformed.

Of course, I had to ask if that transformation was a good thing or a bad thing and they responded by saying that they wish they had known this information earlier in their career. It definitely would have changed the advice that they gave their clients as well as changed some of the decisions they made for themselves around real estate and borrowing.

The class was designed to show the role the house plays in creating wealth for their clients, and themselves. The house is the greatest single asset and liability for most Americans and, yet, owning a house can be one of the best tools for creating wealth. It is likely that more wealth will flow through your house than all of your other assets combined. How you manage that wealth and the associated cash flow may well determine whether or not you achieve financial independence.

In the class I cover how the house compares to other investments as it relates to safety, liquidity, rate of return, and tax treatment. House equity, the net value of a house-related investment, is still the most common form of wealth in the United States today. For many of us, it is the first step toward wealth development. Options for managing the wealth in the house can be very confusing, yet that wealth as a percentage of total assets, may still account for a huge proportion of your total net worth.

We discussed in detail the four threats to the wealth in the house, more commonly known as equity, and the four hurdles to accessing that wealth. We also covered how the tax benefits of owning a house really work and explained how wealth in the house has a zero percent rate of return.

Financial institutions tell us to do one thing with our money while they do the complete opposite with the money we blindly give them. Americans are not afraid to borrow money. In fact, we borrow money in record amounts every year. However, it could be argued that our borrowing is not always smart.

If you know a Realtor that you believe would benefit from knowing and understanding this information have them click here for more details or here to reserve a seat.

The next class is:

Date: January 19, 2012
Time: 10:00am to 2:00pm
Location: El Cajon Library
201 E Douglas Avenue
El Cajon, CA 92020

Seating is limited to 20 attendees! The cost is $25.00. Lunch and 4 hours of continuing education credit are included!

To reserve a seat they should go to www.AgentCEClass.com. Click here to view a flyer about the class. Feel free to contact me at (619)994-1110 or e-mail me at SPerkins@NIOFE.org with any questions.

What is the Difference Between Price and Cost?

2011-12-09T11:07:00.000-08:00

In a nutshell, price is what you pay for a product or service at the moment you pay for it, and cost is what you pay for that same product or service over time.

Let's say you decide to go to a store to purchase a TV because you just saw that it was marked down 25%. The amount you paid for the TV is $1,392.11. That is considered the price. When you add a 7.75% sales tax, your adjusted price is $1,500.00.

If you paid cash, then the price and the cost are the same, theoretically. The reason I say theoretically is because there is an opportunity cost that exists, but that is outside the scope of this example.

If you're like most people, you paid for the TV with a credit card, even if only to receive a 15% discount for opening an account with that retailer that day.

The following chart shows that if you financed the $1,500.00 and paid the minimum payment of 4% of the outstanding balance, a fairly standard formula for calculating a minimum payment, your initial monthly payment is $60.00.

Assuming that this is the only purchase you made with that credit card and you made the minimum payment until the balance was paid is full, it would take you 87 months to pay the credit card off. That would mean that you paid $2,274.00 for your TV. This number represents the cost of the TV.

That means that you paid $774.00 ($2,274 - $1,500) in interest over that 87 months. If you purchased that TV at 25% off and the price you paid was $1,392.11, then the original price was $1,740.14 ($1,740.14 - 25%). The 25% discount you received was $348.03, but you paid $774.00 in interest. Not only did you NOT save the 25%, you paid an extra $425.97 ($774.00 - $348.03) for the TV.

The opposite side of the chart shows the results if you had paid $100.00 per month instead of the minimum payment of 4% of the outstanding balance. In that example you would have paid the account off in 18 months and you would have paid back $1,712.00 for the TV. That $1,712.00 would be the cost of the TV. The interest would total $212.00. As we showed before, the 25% off saved you $348.03, but you paid back $212.00 in interest, so the real discount was only $136.03.

Credit has a cost and it can be a rather steep cost. This is just one example. This scenario is played out daily by millions of people all over the world.

Year-End Tax Planning: 10 Things to Keep in Mind

2011-12-08T17:28:00.000-08:00

The window of opportunity for many tax-saving moves closes on December 31. So set aside some time to evaluate your tax situation now, while there's still time to affect your bottom line for the current tax year. With that in mind, here are 10 things to consider as the curtain closes on 2011.

1. Deferring income to 2012 means postponing taxes

Consider opportunities you might have to defer income to 2012. You might be able to delay a year-end bonus, for example. If you're able to push what would have been 2011 income into 2012, you may be able to put off paying income tax on the deferred dollars until next year.

2. Paying deductible expenses sooner may help you in 2011

Does it make sense for you to accelerate deductions into 2011? If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012.

3. Income tax rates to remain the same in 2012

The same six federal income tax rates that apply in 2011 will apply in 2012. So, depending upon your income, you'll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. And, as in 2011, long-term capital gains and qualifying dividends will continue to be taxed at a maximum rate of 15% in 2012; and if you're in the 10% or 15% tax rate brackets, a special 0% tax rate will generally continue to apply.

4. Is AMT a factor?

If you're subject to the alternative minimum tax (AMT), special rules apply. For example, the AMT rules can effectively disallow a number of itemized deductions, making it a potentially significant consideration when it comes to year-end planning. You're more likely to be subject to AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions. If you've been subject to the AMT in the past, or think that you might be for 2011, you'll want to make sure that you understand how the AMT rules might affect you.

5. IRA and retirement plan contributions

Employer-sponsored retirement plans like 401(k) plans and traditional IRAs (if you qualify to make deductible contributions) present an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) aren't deductible, so there's no tax benefit for 2011--they're still worth considering, though, because qualified distributions are free from federal income tax. The window to make 2011 contributions to your employer plan closes at the end of the year, but you can generally make 2011 contributions to your IRA up to April 17, 2012.

6. Special distribution requirements at age 70½

Once you reach age 70½, you're generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. It's important to make withdrawals by the date required--the end of the year for most individuals. The penalty is steep for failing to do so: 50% of the amount that should have been distributed. Barring additional legislation, 2011 will be the last year to take advantage of a popular provision allowing individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity (these charitable distributions are excluded from your income, and count toward satisfying any RMDs that you would otherwise have to take from your IRA for 2011).

7. Depreciation and expense limits to drop for business owners and the self-employed

If you're a small business owner or a self-employed individual, you're allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011; this "bonus" first-year additional depreciation deduction will drop to 50% for property acquired and placed in service during 2012. For 2011, the maximum amount that can be expensed under IRC Section 179 is $500,000, but in 2012 the limit will drop to $139,000.

8. Last chance to deduct energy-efficient home improvements

This is the last year you'll be able to claim a credit for energy-efficient improvements you make to your home (up to 10% of the cost of qualifying property). Improvements can include a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of energy-efficient furnaces and hot water boilers. However, there's a lifetime credit cap of $500 ($200 for windows). So, if you've claimed the credit in the past--in one or more years since 2005--you're only entitled to the difference between the current cap and the amount you've claimed in the past.

9. Other expiring provisions

Barring additional legislation, this is the last year that you'll be able to elect to deduct state and local general sales tax in lieu of state and local income tax, if you itemize deductions. This also will be the last year for both the above-the-line deduction for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals.

10. Get help

Making effective year-end moves requires a solid understanding of the rules that are in effect for both 2011 and 2012. It also requires a comprehensive grasp of your overall financial situation. A financial professional can help you evaluate potential opportunities, and can keep you apprised of any last-minute legislative changes.

GAO Says Income Annuities May Be A Good Retirement Option

2011-12-06T14:16:00.000-08:00

The U.S. Government Accountability Office (GAO) reports that financial experts typically recommend that middle-net-worth retirees use a portion of their savings to buy an income annuity (immediate annuity) to help meet necessary retirement expenses. The report, Ensuring Income Throughout Retirement Requires Difficult Choices, finds that while Social Security continues to be the primary source of fixed income in retirement, it is not enough to meet the income needs of most retirees. Also, the shift from employer-sponsored defined benefit pension plans to defined contribution plans, coupled with increasing life expectancies, is forcing retirees to assume more responsibility for managing their savings to ensure that they have sufficient income throughout retirement. An income annuity is an alternative to self-managing savings that offers retirees a steady source of income they won't outlive.

Why income annuities?

Generally, an income annuity, also referred to as an immediate annuity, is issued by an insurance company. It is typically purchased with a single lump sum of money (premium) paid to the issuer in exchange for payments made for life (single life income annuity), or for the joint lives of the annuity owner and his or her spouse or partner (joint and survivor income annuity). Payments generally begin no later than one year from the date the issuer receives the premium. The GAO report suggests income annuities:

Help protect retirees against the risk of underperforming investments
Help protect retirees against the risk of outliving their savings (longevity risk)
Help relieve retirees of the task of managing their investments at older ages when their capacity to do so may be diminished, and
Provide a base of guaranteed income that may serve as a dependable "cushion" for retirees who might otherwise spend too little for fear of outliving their assets (guarantees are subject to the claims-paying ability of the annuity issuer)

Why income annuities may not work?

Income annuities aren't for everyone, nor do they work in every situation. Particularly, income annuities may not be appropriate for people:

With predictably shorter-than-normal life expectancies
Who have limited savings, since the funds used to purchase income annuities generally are not available to cover large, unanticipated expenses
Who are concerned about income taxes, since the income from annuities purchased with non-qualified funds is typically taxed as ordinary income, whereas some or all of the investment return on liquidated savings in stocks, bonds, or mutual funds may be taxed at lower capital gains or dividend tax rates
Who want to provide a bequest of their assets at their death

When might an income annuity be appropriate?

The GAO study describes examples when an income annuity may be appropriate. In one scenario, the study suggests that a household with a total net wealth of $350,000 to $370,000, of which $170,000 to $190,000 is savings (and which does not have a defined benefit pension plan), should consider purchasing an income annuity with a portion of their savings. Retirees with defined benefit pension plans should consider an income annuity option rather than taking a lump-sum rollover to an IRA. Conversely, an income annuity may not be as useful for households with significantly greater net wealth or those households with appreciably less net wealth.

Proposals to access annuities and increase financial literacy

Typically, defined contribution plan sponsors do not offer account holders income annuities as an option. In response, the study makes several recommendations to promote the availability of income annuities for defined contribution plan distributions. These proposals include legislation that would require plan sponsors to offer income annuities as a choice to plan participants, or set income annuities as the default election for plan participants when accessing defined contribution plan benefits. The study also recommends options aimed at improving individuals' financial literacy, particularly concerning the risks and available choices for managing income throughout retirement.

Report recommendations

The report seeks to offer options to retirees on how to have an adequate income throughout retirement. Generally, the study suggests that middle-income retirees should consider delaying Social Security retirement benefits at least until full retirement age, consider working longer, draw down savings systematically and strategically (typically at an annual rate of between 3% and 6%), elect an annuity instead of a lump sum withdrawal for employer-sponsored defined benefit plans, and for retirees who don't have a defined benefit plan, purchase an income annuity with some of their savings. To view the report in its entirety, go to www.gao.gov/new.items/d11400.pdf.

If you have questions regarding whether an income annuity is a good option for you or you simply have questions please feel free to contact me at Shawn@YourFavoriteLender.com.

House Values Continue Downward Slide, But At A Slower Pace

2011-12-05T13:18:00.000-08:00

According to the Case-Shiller Home Price Index, the leading measure of U.S. House prices, 18 of the 20 cities the index tracks show a drop in value in September 2011 as compared to September 2010. Only Detroit and Washington DC showed positive rates of change year-over-year.

Equally important is the month-to-month change in value. Only New York, Portland, and Washington DC posted positive gains from August 2011 to September 2011.

The national index posted an annual decline of 3.9%, an improvement over the 5.8% decline posted in the second quarter, which suggests that the pace of decline has slowed. Only 3 cities posted new lows in house values in September 2011; Atlanta, Las Vegas, and Phoenix. Nationally, house prices are back to their 2003 levels.

Living in San Diego, I am most concerned about my local market. Unfortunately, San Diego posted a 0.8% decline from August 2011 to September 2011 and a 5.4% decline since September 2010. Essentially, that means a drop in value of $2,400 on a $300,000 house from August to September and $16,200 from September to September.

The Case-Shiller Home Price Index tracks the price of typical single-family houses located in each metropolitan area provided. Condominiums, multi-family houses, and new construction are not included. Additionally, the data is a quarter old and may not reflect the current market activity. While the index can provide you with a general idea of the housing market, it shouldn't be used as the basis for a decision as to whether or not now is a good time to buy.

It is always best to seek the advice of a local real estate agent you trust because all real estate is local and they are in the best position to provide data relative to your specific purchase, be it a particular city, zip code, neighborhood, or street.

Mortgage Delinquencies Down Nearly 30% From The Peak, But Foreclosure Inventories Up

2011-12-02T22:12:00.000-08:00

A new report by Lender Processing Services, Inc. shows mortgage delinquencies continue their decline, now nearly 30% off their January 2010 peak. Meanwhile, foreclosure inventories are on the rise, reaching an all-time high at the end of October 2011 of 4.29 percent of all active mortgages.

The average days delinquent for loans in foreclosure extended as well, setting a new record of 631 days since last payment, while the average days delinquent for loans 90 or more days past due but not yet in foreclosure decreased for the second consecutive month.

According to LPS, 7.93% of mortgages were delinquent in October 2011, down from 8.09% in September 2011, and down from 9.29% in October 2010.

LPS reports that a record 4.29% of mortgages were in the foreclosure process, up from 4.18% in September 2011, and up from 3.92% in October 2010. That's a total of 12.22% delinquent or in foreclosure. It breaks down as follows:

2.33 million loans less than 90 days delinquent
1.76 million loans 90+ days delinquent
2.21 million loans in foreclosure process

For a total of 6.30 million loans delinquent or in foreclosure in October 2011.

This graph shows the total delinquent and in-foreclosure rates since 1995.

The details in this report suggest slow improvement with the exception of the large number of loans stuck in the foreclosure process.

Is The Housing Market In Recovery Mode?

2011-02-09T15:30:00.000-08:00

You may not want to crack the cork on that Champagne bottle just yet. While the government insists that the housing market is recovering, other, more reliable sources, say otherwise. I have heard and read many stories professing that the housing market is turning around and that we don't have to worry about a double-dip in home values. I'm not convinced.

It is not my intention to be a doomsayer. Simply to be realistic. We can't fix it if we don't know what's broke. It's obvious that the housing market has been in trouble for several years now, but the government manipulating the data and spreading propaganda through the media regarding economic recovery, in general, and the housing market, specifically, only serves to make matters worse and delay true recovery.

The National Association of Realtors says sales of previously owned homes dropped 4.8% to 4.91 million units last year, the lowest level in 13 years. Many economists believe it will take years for home sales to rise to a normal level of around 6 million units a year. Some say home sales in 2011 will be even weaker than 2010 due to more foreclosures and home prices that are likely to keep falling through the first six months of the year.

The Commerce Department says new home sales for all 2010 totaled 321,000, the lowest level in 47 years. New home sales in 2010 dropped 14.4% from the 375,000 homes sold in 2009. It's the fifth consecutive year that sales have declined after hitting record highs for the five previous years during the housing boom. Economists say it could be years before new home sales hit a healthy rate of 600,000 units a year.

While these are national statistics, it is important to remember that California's real estate market was hit harder than most and that these statistics could easily be representative of California exclusively. The bottom-line is that it is going to continue to be a bumpy ride in the housing market during 2011, despite what the media says.

Interest rates are on the rise and purchasing a home now, before rates go up any higher, is still the right thing to do even if home values settle a little further because it may be a very long time before we see interest rates this low again.

Waiting To Purchase a Home Can Cost You

2011-01-17T12:18:00.000-08:00

With interest rates as low as they are and home prices at the lowest level since 2002-2003 there should be a lot more home buying activity than there is. There is no doubt that the $8,000 Homebuyer Tax Credit inspired a lot of aspiring homeowners to accelerate their plans to purchase a home, but there are still a lot of people that got passed by the last time home prices were this low and I don't want to see those same people get passed by again.

What most aspiring homeowners may not realize or simply don't know is that waiting to purchase a home can cost them thousands of dollars or the ability to purchase a home at all. With lending guidelines constantly in flux you never know when a new guideline may disqualify you from buying a home when just days before you were qualified. Something as simple as an increase in the minimum credit score required to qualify for a home loan can end your bid for a home overnight.

Not only have minimum credit score requirements been increased, but debt ratios (the percentage of your income that can be obligated to your total debt payments) have been reduced from 55% to as low as 40%, which can significantly reduce your buying power. The minimum required down payment has been increased from 3% to 3.5% for an FHA loan and there is talk of raising it again to 5%. It has become very difficult, if not impossible to obtain mortgage insurance, which is required when you intend to purchase a home with less than a 20% down payment. Many loan programs have increased reserve requirements and some programs have reduced the amount of the credit a seller can provide to pay a buyer's closing costs.

While changing lending guidelines can have a disastrous effect on your ability to purchase a home, rising interest rates run a very close second to hurting your ability to purchase a home. The combination of rising interest and decreasing debt-ratios can have an exponential effect on your qualifications. Then there's the possibility that as the housing market recovers seller's may be less willing to negotiate on the sales price and/or a credit to cover the buyer's closing costs.

There are countless issues that can come up that can at best interfere with your ability to purchase a home and, at worst, prevent you from buying a home altogether. I recorded a short video that goes into more detail. Click here to view the video.

If you, or anyone you know, is interested in purchasing a home and would like to discuss how today's lending guidelines effect you please feel free to contact me to go over your specific situation by e-mail at Shawn@YourFavoriteLender.com.

A New Assault On Small Business That May Affect You

2010-07-23T08:21:00.000-07:00

I read an interesting article in BusinessWeek magazine entitled "Health-Care Bill Surprise: 1099 Nightmare" the first week of June and I think it is newsworthy enough that I decided to share it with you. It is yet another little gem buried deep in the new healthcare bill. Like the '3.8% "Sales Tax" on Your Home?' this provision is intended to help pay for the new healthcare bill.

The provision will require companies to report to the IRS payments of more than $600 a year to ANY vendor. That means that if your company pays more than $600 to a cell phone provider, a gas station, FedEx, the Post Office, etc... you will have to obtain their tax ID number so you can send each respective company a 1099 for those services. The motivation behind this is to capture the estimated $2 billion or more a year in taxes on income that currently goes unreported by contractors and small businesses.

The paperwork nightmare coming to small businesses is going to be huge because now the staff is going to have to track the company expenses in a brand new way; by how much is spent with each vendor. What if a small business doesn't have a staff or enough staff to keep up with this? This provision will impose extra costs on business owners who, in turn, have to pass this extra cost on to the consumer via higher prices, which is not likely in the current economic environment, or the business will simply have to absorb the cost and make less profit.

If you don't own a small business you may glance at this and decide it doesn't affect or concern you and skip reading it. However, it could very well affect you going forward and here's how. If you pay for child care, under current law, you have to provide the IRS with the child care provider's Social Security number or tax ID. Why? So that the IRS can make sure that the child care provider is reporting their income. How about the fact that you have to provide the IRS with the Social Security number for each child you plan to claim as a dependent on your taxes? You have to prove to the IRS that you have children so you can claim them as dependents. It's just another example of the government putting an extra burden on those who do things right to catch those who do things wrong.

So where am I going with this? Is it possible that the IRS will take this 1099 provision and bring it down to the consumer level? They have with child care. What will you do if the IRS starts requiring you to track every business that you spend $600 or more with? Do you have a housekeeper? Do you pay him or her more that $600 per year? Do you have a yard maintenance service? Do you pay him or her more than $600 per year? Do you spend more than $600 per year on your cell phone? Gas? Auto maintenance? The list goes on.

Do you know how to fill out a 1099? Do you know where to get a 1099? Do you track your expenses close enough to know who you need to send a 1099 to? This bill essentially forces every single businessperson to become a watchdog for the IRS. Is it so hard to believe that the next step could be to make you and I watchdogs as well? Remember what Nancy Pelosi said? "You are just going to have to pass the bill so you can find out what's in it!" Are you liking it so far? I would love to hear your thoughts. Feel free to comment below.

A 3.8% “Sales Tax” On Your Home?

2010-07-14T16:07:00.000-07:00

Buried deep in the new health care law is a new and little known tax of 3.8% on the sale of your home. It is actually a tax on “unearned” net investment income, but I’ll get to that in a minute. Unfortunately, there is not much information out there about this new tax and, consequently, most of it is misinformation or outright misrepresentation.

You may have already seen an e-mail alluding to this new tax. The e-mail states that if you sell your $400,000 home you will have to pay $15,200, or 3.8%, in tax on that sale. I’m not sure whether this is an example of misinformation or misrepresentation, but this post will clear up the confusion once and for all. The truth is that only a tiny percentage of home sellers will pay the tax, but it doesn’t change the fact that this is a new tax above and beyond the existing capital gains tax.

The “Medicare Tax,” as it is called, takes effect January 1, 2013. The revenues generated from this tax will be allocated to the Medicare Trust Fund, which is part of the Social Security System, and is designed to decrease the shortage that currently exists.

As I already mentioned, the tax will apply to what is referred to as “unearned” income. Unearned income is income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. Income derived from the sale of a home is considered capital gains. Under current tax law, any gain from the sale of a principal residence that is less than $250,000 for individuals or $500,000 for married couples may be excluded from the capital gains tax. According to the IRS, to qualify for the $250k/$500k exclusion, a seller must have owned the home for at least two years, with few exceptions, and lived in the home as a primary residence for at least two years out of the last five years prior to the sale. The capital gains tax and the new “Medicare Tax” would apply only to any gain realized that is more than the $250,000/$500,000.

While the law imposes a 3.8% tax on the capital gains over the $250k/$500k exclusions in an effort to make the “wealthy” pay, the exclusion only applies to primary residences. There are a lot of “not so wealthy” individuals who own rental property, vacation property (second home) or vacant land. These properties are not shielded from this 3.8% tax increase.

Let’s look at two examples:

1) Take an “empty nester” couple with combined income of over $250,000 a year who sell their $1 million primary residence to move to smaller quarters. If they cleared $600,000 on the sale, they would be taxed on the $100,000 of profit (the amount over the $500,000 exclusion). Their “Medicare Tax” on the sale would amount to $3,800 ($100,000 x 3.8%) over and above the usual capital gains tax.

2) Take a single executive making $210,000 a year who sells his $300,000 ski condo for a $50,000 profit. His/her tax on the sale of that vacation home would amount to $1,900 ($50,000 x 3.8%), in addition to the usual capital gains tax.

The situation is similar in the case where someone owns a rental property. The rents received and the profit from a sale are taxed. However, the income from these sources are reduced by any expenses associated with earning that income. Thus, in the case of rents, the taxable amount would be the gross rents minus all expenses (including depreciation) incurred in operating the rental property.

Who will be subject to the new tax? “High Income” taxpayers. In this law a high income earner is defined as a “single” person with an Adjusted Gross Income (AGI) of $200,000, a married couple filing a joint return with an AGI of $250,000, or a married couple filing separately with AGI of $125,000. These income levels are even more important when you consider that they are not indexed for inflation. That means that over time more and more people may become subject to this tax, just like happened with the Alternative Minimum Tax. Over time a person’s income typically increases. Someone making $75,000 today may be making $125,000 in ten years or less. If the spouse also works they could see themselves making more than $250,000 and now be subject to a tax that was supposedly not designed to apply to them.

Hopefully, this explanation of the “Medicare Tax” is clear and easy to understand. If you have any questions please feel free to call me or comment below.

How Will You Celebrate the Fourth of July?

2010-06-29T10:14:00.000-07:00

Last week I mailed out a letter entitled "A Tribute to America," which is a speech written and given by economist Barry Asmus by Presidential request. I hope you enjoyed that Tribute as much as I did.

Now I would like to share a great BLOG post by a Mentor of mine, Andy Andrews. In it he shares how his family celebrated the Fourth of July and I think you'll enjoy his insights as much as I did. To see the original BLOG post click here.

Tuesday, June 29, 2010
Letter to the Editor

This morning, I am looking at a “letter to the editor” that I cut from our local newspaper. It’s been professionally framed and I’m deciding where in my office it should hang. As I sit at my desk, looking for the perfect spot, I am thinking about our upcoming holiday. . .

When I was growing up, the 4th of July wasn’t just an excuse for a long weekend. Do you remember? The 4th of July was one of the “big four” holidays and uniquely celebrated. Thanksgivings held lavish feasts. Christmas was for hot chocolate and a manger and we actually got to put a tree inside the house. Easter meant new shoes for church. New shoes that mama liked and I didn’t. But Independence Day was totally different. Firecrackers and homemade ice cream. Ribs on the grill. We spent long summer evenings at the lake or a swimming pool or even in our own backyard.

I noticed then that everything about “the Fourth” was more relaxed. Daddy cooked. Mama laughed with her friends, who walked around in baggy Bermuda shorts drinking lemonade out of that special pitcher that was “just for the adults” while we caught fireflies or hit sweet gum balls over the fence with a wiffle bat. Mae Mae and Granddaddy were always there. So were my other grandparents, Nana and Daddy Mac.

Families—sometime whole neighborhoods—would gather, pausing to connect in a way that seems almost embarrassing now. Grandmothers fed kids they didn’t even know from their own plates after they’d already had the spoon in their mouth and shushed anyone who dared object. One daddy might teach another daddy’s boy how to stand when he held a bat or how to make a sound with only his hand and an armpit. Children fell off swing-sets and cried like their legs had been cut off, but nobody threatened to sue anybody or even acted mad.

Later, when it was completely dark . . . when we were tired of catching frogs under the street lights, when the big kids had said goodbye and left in their cars to do whatever big kids did in their cars . . . a lot later, after all the “black-cats” and bottle-rockets and cherry bombs were used up, after the little kids had burned all their sparklers . . . much, much later, when the cicadas were droning in the darkness . . . the grown-ups gathered together.

It always seemed an impromptu moment to me, but it happened every 4th of July, so maybe it wasn’t. The location varied (“maybe over there, by the side of the house to catch the breeze”) but we kids could hear the adults closing a lazy circle as the aluminum lawn chairs scraped across the concrete driveway.

Lighters flared and more lemonade was passed around as we crept closer to the proceedings. It was a fact, known by all kids and passed down through generations of kid-dom, that if we could just stay quiet—snuggle in close to the bare, sunburned legs of our mamas and daddies and stay still—they wouldn’t make us leave. No one would tell us to go to bed. Sometimes, if we waited long enough—lying there on the cool concrete in our damp bathing suits, smelling like chlorine and barbeque sauce—we got to hear our grandparents talk about the time “during the war”.

Quietly, they would “remember out loud” about crackly newscasts from Europe and victory gardens and the ways folks helped each other here at home. They talked about places like Italy and France and Saipan. I remember Saipan because that was where Timmy Underwood’s granddaddy had fought. It was a neat word to me. Saipan. I remember saying it several times when I heard it just because it was so unusual. Saipan. Saipan. It seemed dark and wet and mysterious.

Sometimes, we fell asleep there with somebody’s grandma propping her worn out bare foot on our backs or legs as we listened to their soft, old voices drifting through the hot summer night, fireworks booming in the distance. Saipan seemed far away.

It’s even farther away now. My boys, Austin and Adam, eight and ten, lost their last grandparent this year when Polly’s mom—Patsy Jones—passed away. The true stories of our Greatest Generation are fading now as their souls leave this earth. There no longer seems to be time or even a desire for families and neighbors to gather and love and listen to each other. Our backyards are barricaded with prefab fences, our front yards don’t welcome visitors with porches anymore, and our old people have been silenced, taking their stories—historical perspective; lessons that could save our lives—to their graves.

As an amateur historian, I know how easy it is for history itself to be rewritten. Those with any agenda at all can shift and change an event to make it fit the point of their movies or books or stories. Knowing this, my wife and I are purposing to insure that our boys grow up with a unique perspective in today’s society—the unvarnished truth. Without it, how, I ask you, can our children make a future that is bright and pure?

This Fourth of July, I urge us all to take advantage of the lives and wisdom in our very midst before it is too late. In our neighborhoods, let’s endeavor to find the eighty-something year old Billy Stimpsons or Cliff Callaways or Violet Cowdens (who flew a P-51 Mustang during the war) and give our children the opportunity to learn from the best among us.

Let us encourage our older friends to tell our kids what it still means to them when someone salutes our flag. We need to ask questions in front of our children. Were you scared? Why did you fight for our country? How did people act when you got home?

Back to that “letter to the editor” which is resting for the moment beside my keyboard . . . At present, it has been prepared for my office. To inspire me. To encourage me. But really, I framed it for my boys.

When I am gone, I want them to remember the truth about those who went before. I want them to know that one can choose the way in which we live our lives and fight for that right if he must . . . that one can choose to sacrifice time or money or life itself so that our families or another person whom we might never know may prosper. I want my boys to be grounded in the simple examples contained in the wisdom of their grandparents. That includes the words they choose to use as adults.

And that’s why I framed the letter to the editor. It is just one tiny piece of truth that has been forgotten already. One day, it will be important for my boys to read and understand.

You can read that letter here.

Happy Fourth of July!

Your friend,

Andy

© 2009-2010, Andy Andrews. Used by Permission. Originally posted on www.AndyAndrews.com.

If you enjoyed this post you may also wish to view the "How Will You Celebrate the Fourth of July?" post I wrote in 2008. Click here to view.

I wish you and yours a safe and Happy Fourth of July.

Your Favorite Lender, Shawn Perkins

Are You Ready For The Coming Rise In Interest Rates?

2009-12-29T15:09:00.000-08:00

For the past two weeks interest rates have been trending upward. That's the bad news. What's worse is that interest rates will continue to rise throughout 2010 and beyond. Back in January 2009 the Federal Reserve, which is neither Federal nor a reserve, announced that they intend to drive interest rates to 4.5% on 30-year fixed rate loans. Since the Federal Reserve doesn't set mortgage interest rates they did the only thing they can do, which is begin purchasing Mortgage-Backed Securities.

Interest rates on mortgages are determined by the buying and selling of Mortgage-Backed Securities offered by Fannie Mae, Freddie Mac, and FHA. The more of these mortgage bonds that are purchased the lower mortgage interest rates go. However, the converse is true as well. If the mortgage bonds for sale do not get purchased then interest rates will trend up as a result.

Up until August 2007 a great deal of the Mortgage-Backed Securities offered for sale were purchased by foreign investors such as China, Japan, England, Australia, etc... They purchased upwards of 50% to 60% of the mortgage bonds on a fairly consistent basis. However, as the housing and mortgage crisis hit full stride the appetite for Mortgage-Backed Securities began to wane and interest rates began to rise. Foreign participation dropped to about 20% to 30% which hit interest rates pretty hard.

The government and the Federal Reserve knew that a housing and economic recovery was not likely in a higher interest rate environment and that is what prompted the Federal Reserve to come up with its plan to purchase Mortgage-Backed Securities. The strategy worked throughout 2009 but is coming to an end. The program was approved to purchase $1.25 TRILLION in mortgage bonds through March 2010 and year-to-date the Fed has purchased about $1.07 TRILLION. That leaves them with about $180 BILLION of the original amount for purchasing mortgage bonds through March. The Fed has purchased on average $20 BILLION per week and will be scaling that back weekly until the program expires. At the last Federal Open Market Committee meeting the Fed said that they will not be extending the program. That means that unless foreign participation picks back up interest rates will continue to rise to where they should have been all year.

All of this is a long way to warn you that higher interest rates are coming and if you want to take advantage of the current interest rate environment you should move quickly. If you have any interest in refinancing you should call right away before the interest rates move any higher and make it so there is no benefit in refinancing. If you are interested in purchasing a home you should accelerate your home search so you can benefit from both the lower interest rates and the Homebuyer Tax Credit currently available to those that qualify.

Please feel free to contact me with any questions or comments. I can be reached by e-mail at Shawn@YourFavoriteLender.com.

The HomeBuyer Tax Credit Gets Extended and Expanded

2009-11-09T17:20:00.000-08:00

The Homebuyer Tax Credit jumped its final hurdle on Friday, November 6, 2009, as the President signed a bill to extend the tax credit through June 30, 2010. The bill also opens up opportunities for non-first-time homebuyers as well.

While the tax credit has been extended it now has two deadlines instead of just the one. The first deadline states that the homebuyer has to sign a purchase agreement by April 30, 2010. The second deadline states that the homebuyer must close by Jun 30, 2010.

For those in the armed forces and persons stationed outside the United States on official duty for 90 days during the period from January 1, 2009 and before May 1, 2010 eligibility is extended for binding contracts signed by April 30, 2011 but must close by June 30, 2011.

Although increasing the tax credit to $15,000 was proposed, the maximum allowable tax credit remains at $8,000. Something added to this bill that wasn't there in the two previous bills is a maximum purchase price of $800,000. The homebuyer still has to occupy the property as their primary residence for the three years following the purchase or they must repay the tax credit in full.

Qualifying for the tax credit became a little easier for higher income homebuyers due to an increase in the income restrictions. Previously the income restrictions were $75,000 for single filers and $150,000 for joint filers. Those limits were increased to $125,000 for single filers and $225,000 for joint filers. The tax credit is reduced incrementally above $125,000 and $225,000, respectively and eliminated at $145,000 and $245,000, respectively.

Now that I've addressed the extension of the tax credit, I would like to move to the expansion of the tax credit. Those who currently own a home now and would like to purchase a different home are now able to take advantage of the tax credit. To qualify the current homeowner must have owned and occupied a primary residence for a period of five consecutive years during the last eight years. The tax credit available to a qualified homeowner is $6,500 instead of the $8,000 available to the first-time homebuyer. As a point of clarification, I think it is important to note that the new home does not have to cost more than the current home.

The tax credit remains a credit, which differs from a tax deduction in a very significant way. A tax deduction is a reduction of the amount of income one pays taxes on. A tax credit is a dollar for dollar reduction of the tax owed. If the homebuyer owes less than $8,000 in taxes the homebuyer will receive the difference in a refund (i.e., If your tax bill is $4,000, you will now owe zero and receive a refund of $4,000).

While the tax credit has served to increase homebuying activity since its inception, Congress realized that to allow the tax credit to expire now could slow the momentum enjoyed to this point. The mix of phenominally low interest rates, reduced home prices, home sellers and lenders willing to pay closing costs, and the huge tax credit make this the best time in 10 years to buy a home. Who do you know who could and should take advantage of this awesome opportunity? I would be honored if you would refer them to me. I can be reached on my mobile number at (619)994-1110 or by e-mail at Shawn@YourFavoriteLender.com.

Do You Really Have Til November 30, 2009 To Benefit From The Tax Credit?

2009-10-12T17:14:00.000-07:00

As I've reminded you of many times, the $8,000 First-Time Homebuyer Tax Credit is set to expire on November 30, 2009. I am not trying to beat a dead horse but in order to claim the tax credit, the IRS requires you to close on or before that date. December 1, 2009 is too late. But should that be the date a first-time homebuyer sets his/her/their calendar by?

I would suggest not targeting November 30, 2009. The biggest reason is that there are no do-overs. If you do not close by November 30 , 2009, you lose. If anything goes wrong, as is usually the case in a real estate transaction, you just missed out on $8,000. That's a pretty expensive oops! Making a problem more likely to happen is the fact that recently the County Recorder of San Diego County modified its recording guidelines to eliminate funding a loan and recording the Deed on the same day, except on the last day of a given month. Since every other first-time homebuyer is targeting that date there is a strong chance that many first-time homebuyers will be very dissappointed and wish they had the advance notice you are getting.

The optimal time for closing your home purchase just might be the week of November 16th to build in the proper cushion for potential delays. And the earlier in the week, the better. To further understand why, let's start with the fact that home sales volume is through the roof. New home sales data and existing home sales data have been very strong and first-time homebuyers account for nearly 1/3 of all transactions.

It is reasonable to conclude, threrefore, that with the combination of low homes prices, record low interest rates, and the $8,000 tax credit, buyer interest will remain strong all the way through the November 30, 2009 deadline. You should plan now to avoid the panic of missing out on the tax credit.

Now let's consider the calendar.

November 30, 2009 is the Monday after Thanksgiving weekend.
November 28-29, 2009 is a weekend. No closings on weekends.
November 27, 2009 is the Friday after Thanksgiving; an unofficial holiday.
November 26, 2009 is Thanksgiving. No closings.
November 25, 2009 is the day before Thanksgiving; typically a "half-day."

So, that backs the November 30, 2009 first-time homebuyer tax credit deadline up by 6 days to Tuesday, November 24, 2009. That would mean that your loan has to fund on Monday, November 23 in order to record on Tuesday. That may workout okay for you depending on whether or not something goes wrong and how long it will take to fix the problem. With your closing date set for the week of the 16th you'll meet your tax credit deadline with plenty of time to spare.

This commentary may prove to be completely unnecessary if Congress extends the First-Time Homebuyer Tax Credit, but if Congress elects not to extend the tax credit it may save you $8,000. Good luck and happy house hunting.

$8,000 First-Time Homebuyer Tax Credit Extension?

2009-10-09T10:57:00.000-07:00

On October 8, 2009 the House of Representatives voted 416 to 0 to pass the Service Members Home Ownership Tax Act of 2009 which extends the current $8,000 first-time homebuyer tax credit for another 12 months for members of the military, Foreign Service, and Intelligence Corps who served at least three months of qualified overseas duty in 2009. The current program is set to expire on November 30, 2009. In my opinion there is definitely justification for extending the credit to members of the military and the like because serving abroad for our country obviously makes it very difficult for those members to look for a house and take advantage of the program. At the moment the bill has passed only the House of Representatives so it is not law yet. But once the bill or some variation thereof passes the Senate it will be sent on to the President to be signed into law. As for the current first-time homebuyer tax credit, which is set to expire on November 30, 2009, there are discussions about extending the credit an additional six months. The problem is that there are several versions of the extension of the tax credit being proposed. The first, and most likely to pass, is simply the extension of the existing tax credit for an additional six months. However, there are proposals to extend the tax credit another year, to make the tax credit available to ALL homebuyers, not just first-time buyers and, lastly, to increase the credit to $15,000. While these other variations are fine to propose, the concern that I have is that they are a distraction from the real issue, which is simply extending the credit so that the momentum in the housing market continues. If the decision is whether or not to extend the existing tax credit then the answer is simply yes or no. What these other proposals do is take the focus off of just extending the tax credit and now create a whole new discussion and debate about whether these other proposals make sense. The $15,000 tax credit proposal has already been voted down in the past as was making the tax credit available to ALL homebuyers. This economy needs the momentum of the housing market to continue forward otherwise we risk undoing much of the progress that we have made due to the tax credit. The focus should be on 1) whether to extend the tax credit at all, and 2) for how long (i.e., 6 months or 1 year). I will keep you informed of any developments as I find out about them so stay tuned.

Buy Now or Risk Higher Prices!

2009-07-31T13:28:00.000-07:00

As we approach the end of our summer break from school you will likely see real estate activity pick up. There are still a lot of homebuyers out there and most people don't like to move during the school year, especially if their kids have to change schools. People just don't want to disrupt their kids routines and they're absolutely correct. So those interested in buying a home will likely ramp up their efforts to close on that home and get moved in before the new school year begins, which is just 5 or 6 weeks from now for most of us.

This increase in buying activity will also help stabilize the housing market even more. The Case-Shiller Home Price Index, which tracks home prices in 20 of the nation's most populace cities, indicates that for the fourth consecutive month the pace at which home prices declined slowed considerably. What this means to you is that if you now know this information, it is likely that the short sale and foreclosure lenders know it also. This means that we may see lenders less willing to pay a buyer's closing costs because they see a recovery in the works.

That recovery is also evidenced by an ongoing decrease in the inventory of homes for sale. It appears that the combination of low home values, low interest rates and the $8,000 First-Time Homebuyer Tax Credit are working to stabilize the housing market. Let me encourage you to download the report I wrote called "Understanding the First-Time Homebuyer Tax Credit", which explains how the $8,000 Tax Credit works. Read it for yourself and give it to those you believe would benefit from knowing this credit is available to them.

It has been said that over 60% of first-time homebuyers don't even know the tax credit exists and adding to the pick up in activity will be the rush to buy a home prior to the expiration of the tax credit. I have included a countdown timer in the upper right-hand corner of this blog and my website www.YourFavoriteLender.com to remind homebuyers how much time they have left. For those that miss the boat, they will have lost out on an $8,000 gift from the government for doing something they intended to do anyway. Please help me get the word out about the tax credit.

To recap, there are several dynamics in motion right now that make now the best time to buy a home. They are as follows: 1) The lowest home prices seen in years
2) The lowest interest rates seen in years
3) The first-time homebuyer tax credit and that it expires November 30, 2009
4) As lenders and sellers perceive that a bottom is forming they will be less inclined to agree to a credit to the buyer for closing costs
5) Decreasing inventory of homes for sale feeds the lenders and sellers belief that the bottom is here leading to #4
6) An abundance of homebuyers competing for a decreasing inventory of homes for sale These six points show the market moving in a direction that benefits the buyer less and less. It is very likely that months from now or years from now as you look back on this time in the real estate market you will see that this was the best time you could have pulled the trigger on buying a home.

What You Need To Know About The Current Real Estate Market - Part III

2009-07-24T22:25:00.000-07:00

Typically, the real estate market is either neutral, controlled by the seller or controlled by the buyer. However, in today's market we are dealing with an anomaly not seen since the early '90s; The Short Sale! In this commentary I will cover details of a market controlled by a new player; The Lender.

In part I of this commentary I described the characteristics of a seller's market, which is what we experienced from about 2002 to 2007. A seller's market typically results in rapid home price appreciation and many buyers are unable to buy because they are simply priced out of the market.

In part II of this commentary I described the characteristics of a buyer's market, which we began to experience in late 2007. But that lasted just a year or so, until lenders became the sole decision maker in a very high percentage of home sales due to short sales and foreclosures.

A lender's market resembles and shares characteristics of both a buyer's and a seller's market, yet has some of its own distinctive characteristics, as evidenced by the following:
1) An abundance of homes for sale, giving buyers greater options
2) An abundance of interested, qualified and active homebuyers
In this case, the dynamics of supply and demand are tilted on their side because there are plenty of homes for sale and plenty of buyers ready, willing, and able to buy them.
3) Real estate agents and lenders tend to list homes for sale for significantly less than the homes actual value in order to generate multiple offers
4) Virtually every home has multiple offers; some as many as 40 offers
5) Homes tend to sell for more, and sometimes significantly more, than the asking or list price
6) Offers to purchase can require multiple approvals; first is acceptance by the seller of the home, and in the case of a short sale, a second approval by the lender(s)
7) Lender approval on a short sale can take several months, leading to a great deal of frustration for the buyer, the real estate agent, and the buyer's lender
8) Homes are offered in "as-is" condition
8a) Termite inspections are routinely excluded
8b) Requests from the buyer for repairs are denied
9) Lenders tend to dictate the terms of the purchase contract
9a) Lenders tend to shy away from FHA and VA offers (I will cover this in more detail in a future commentary)
9b) A disproportionate amount of all cash offers, which tend to be real estate investors either looking to fix up the home and flip it for a profit or hold until the market rebounds
9c) Lenders will entertain a credit to the buyer for closing costs, though there are certain lenders that simply refuse to pay the buyer's costs due to some "company policy"
9d) Lenders rarely entertain contingent offers, which are offers contingent upon the buyer finding a buyer for their own home. This isn't typically a problem in today's market because most home sales are to first-time buyers
9e) Time frames for appraisal and loan approval contingencies, currently 17 days from date of acceptance, are strictly adhered to, if not shortened or removed entirely
9f) Contractual deadlines, while not strictly adhered to, are taken seriously
9g) If contractual deadlines are extended, fines can be imposed and can range from $50 to $200 per day until the transaction closes
9h) Earnest money deposits tend to be increased 10) Whether the home is a short sale or a foreclosure, the buyer's offer must include, at a minimum, a letter of qualification or even approval from a lender, and, in many cases, the buyer is forced to speak with a "preferred lender" of the short sale or foreclosure lender to determine the buyer's ability to perform There you have it; the major differences between a seller's market, a buyer's market, and, the newly defined, lender's market. While the seller's market and the buyer's market have characteristics almost exactly opposite one another, the lender's market exhibits characteristics of each, but has some very unique characteristics of its own.

My conclusion is that we are currently in a lender's market, but one where the buyer still plays a major role. I hope you found this information helpful.

What You Need To Know About The Current Real Estate Market - Part II

2009-07-24T21:17:00.000-07:00

In my last commentary I posed the question "Who is in control in the current market?" I then described the characteristics typically found in a seller's market and in this commentary I will describe the characteristics typically found in a buyer's market.

A buyer's market is typically characterized by the following:
1) An abundance of homes for sale, giving buyers greater options
2) A limited number of interested, qualified, and active homebuyers
In this case, the dynamics of supply and demand puts the buyer in charge because there are a lot of home sellers competing for a limited number of homebuyers.
3) Multiple offers on a home for sale is either very rare or non-existent
4) Homes tend to sell for less than the asking or list price
5) Homes tend to sit on the market for an extended period of time
6) The buyer tends to dictate the terms of the real estate purchase contract
6a) Sellers will entertain any and all offers, whether FHA, VA, or conventional
6b) Seller credits to cover the buyer's closing costs are very common
6c) Sellers will entertain contingent offers, which are offers contingent on the buyer finding a buyer for their own home
6d) Time frames for appraisal and loan approval contingencies are typically extended beyond the contractual 17 days or not removed until closing, although a seller can still cancel the transaction and keep the buyer's deposit
6e) Earnest money deposits can be minimal
6f) Contractual deadlines become more of a guideline or target than a hard fast rule
6g) The extension of contractual deadlines, if necessary, tend to be granted without penalty
7) Requests for repairs can be both lengthy and costly to the seller
While this list is meant to be exhaustive, it certainly doesn't cover every circumstance that constitutes a buyer's market. In the next commentary I will describe characteristics of a new player in the real estate market. One that is changing the dynamics of the market and frustrating a lot of people in the process.

What You Need To Know About The Current Real Estate Market - Part I

2009-07-22T17:13:00.000-07:00

This is the first in a series of related commentaries I am writing about the current real estate market, which will be chock full of valuable, enlightening, and relevant information you need to know regardless of whether you are buying, selling, or neither.

Let's begin by asking a question. "Who is in control in the current market?" In other words, Are we in a seller's market or a buyer's market? The best way to answer these questions is to first consider the signs of each of these markets.

A seller's market is typically characterized by the following: 1) A limited number of homes for sale
2) A large pool of interested, qualified, and active homebuyers
In this case, the dynamics of supply and demand puts the seller in charge because there are a lot of buyers fighting over a limited supply of homes.
3) Virtually every home seller entertains multiple offers
4) Homes tend to sell for more than the asking or list price
5) Homes tend to sell rather quickly
6) The seller is the decision maker and tends to dictate the terms of the real estate purchase contract
6a) Sellers are reluctant to consider FHA and VA offers (I will cover this in more detail in another commentary)
6b) Sellers are unwilling to agree to a credit to the buyer for closing costs
6c) Sellers are less willing to entertain contingent offers, which are offers contingent upon the buyer finding a buyer for their own home
6d) Time frames for appraisal and loan approval contingencies, currently 17 days from the date of acceptance, are shortened or removed entirely
6e) Earnest money deposits tend to be increased
6f) Contractual deadlines tend to be strictly adhered to and, if not met, the transaction can be canceled and buyers' deposit becomes the property of the seller
6g) If contractual deadlines are extended, fines can be imposed and can range from $50 to $200 per day until the transaction closes 7) Requests from the buyer for repairs are denied as properties tend to sell "as-is"
While this list is meant to be exhaustive, it certainly doesn't cover every circumstance that constitutes a seller's market. In the next commentary I will cover the characteristics of a buyer's market.

What is a "Short Sale?"

2009-07-13T15:00:00.000-07:00

There appears to be a lot of confusion out there about short sales so I thought I would take a few minutes and explain what a short sale is.

I believe the confusion stems from people in the real estate industry using industry "lingo" or terminology in conversations with people outside the real estate industry. Every industry has its own lingo and each of us needs to be aware of that as we talk with others about our respective industries. To be fair though, it isn't limited to just industry. Have you tried to communicate with a teenager via text message? I'm not even sure they are using letters in the English language.

Anyhow, contrary to popular belief, a short sale has nothing to do with a particular time frame. In fact, if you've ever been involved in a short sale you can attest to the fact that a short sale is anything but short. A short sale can take anywhere between 60 - 180 days, and that's if it happens at all.

A short sale, quite simply, is any home for sale where the total combined mortgages or loans on the property exceeds the current value of said home and the seller is unable to pay the shortage. For example, a homeowner that has a first mortgage for $300,000 and a second mortgage or home equity line of credit for $100,000 owes a total of $400,000 on the home. If he/she decides to sell the property and it is determined that the current value is $325,000 the seller of the property would have to write a check for $75,000 plus the real estate commissions ad closing costs. If the seller was unable to raise that kind of money then he/she would approach the current owner of the outstanding loan(s) on the property and ask that one or both lenders accept less money than is actually owed to them in order to allow the seller to complete the sale of the property. Not only would the lender(s) be accepting less money but they would be paying the real estate commissions and the closing costs.

That is the definition of a short sale in a nutshell.

"Monetizing" the First-Time Homebuyer Tax Credit

2009-06-12T19:23:00.000-07:00

After much ado, on May 29, 2009, the Department of Housing and Urban Development issued Mortgagee Letter 2009-15, which opens the door for homebuyers who are eligible for the $8,000 First-Time Homebuyer Tax Credit to use the tax credit as a down payment, to buy down the interest rate, or pay closing costs.

Before you start the celebration, let me explain how this will work. There are two methods for converting the $8,000 First-Time Homebuyer Tax Credit into "cash."

The first method is via secondary financing (second mortgage) equal to the tax credit. The following conditions apply:

a) The tax credit advance, when combined with the FHA-insured first mortgage may not result in cash back to the homebuyer;
b) The second mortgage may not exceed the total amount needed for the down payment, closing costs, and prepaid expenses;
c) Secondary financing may be "soft" (silent) or require a monthly payment. Soft or silent means that no repayment is necessary if certain conditions are met;
d) If a payment is required, it must be included in the homebuyers qualifying debt ratios and ,when combined with the first mortgage, cannot exceed the homebuyers' reasonable ability to pay;
e) Payments must be deferred for at least 36 months to not be included in the qualifying debt ratios;
f) The secondary financing may not require a balloon payment before ten years.

For the tax credit to be eligible to be used as any portion or all of the down payment it must be via secondary financing provided by state or local housing finance agencies, government agencies, or certain FHA-approved non-profit groups. Unfortunately, as of the typing of this blog post there is no agency or non-profit organization providing the secondary financing for California. I will notify you via another blog post if I hear of any agency or non-profit providing secondary financing but I wouldn't get my hopes up. For one, the First-Time Homebuyer Tax Credit is set to expire on December 1, 2009. And two, I predict that it will work like other programs of this nature, which is on a first come, first served basis, be underfunded, and require the homebuyer to be in escrow prior to applying for the tax credit advance.

The second method method allows FHA-approved lenders and FHA-approved non-profit organizations as well as Federal, state, and local government agencies to purchase the tax credit from the homebuyer and works a lot like a payday advance. A fee will likely be charged to access the tax credit advance. The following conditions apply:

a) The amount of money provided on behalf of the homebuyer may not exceed the anticipated tax credit due the homebuyer based on the computations of IRS Form 5405;
b) The homebuyer must submit a signed certification that the tax credit is not subject to or obligated to some other unpaid indebtedness (i.e., another debt owed to the government);
c) Any fees charged by an organization or agency for the purchase of the tax credit are to be no more than 2.5% of the anticipated tax credit (i.e., $8,000 to be refunded, with all fee considered, the homebuyer should receive not less than $7,800 for the sale of the tax credit);
d) The tax credit funds may not be used to meet the 3.5% minimum down payment, but may be used as additional down payment, buying down the interest rate, or other closing costs.

Under this option, the homebuyer must still come up with the required minimum 3.5% down payment using their own funds, a gift from a family member, or a combination of the two. Unfortunately, as stated above, as of the typing of this blog post there is no agency or non-profit organization purchasing the tax credit for California. I will notify you via another blog post if I hear of any agency or non-profit purchasing the tax credit.

By the way, non-profits that receive fees from sellers cannot provide down payment assistance under this program.

I hope this blog post brings a little clarity to the circumstances in which the First-Time Homebuyer Tax Credit can be utilized to aid in the purchase of a home versus waiting to receive the tax credit months after purchasing a home.

The Credit Cardholders' Bill of Rights and YOU

2009-06-10T18:56:00.000-07:00

The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 is now law and it puts forth some very valuable protection for credit card holders. While no person or business forces another person or business to apply for and open a credit card account, credit card companies have been taking advantage of the fine print in their contracts and charging cardholders outrageous fees and making "anytime, any reason" interest rate increases for far too long.

While I am a staunch free market capitalist and I believe that both people and businesses should accept the consequences of their decisions, whether good or bad, the introduction of the Universal Default Clause, among other tactics, has opened the door to a $15 Billion goldmine of fee income that most cardholders aren't even aware of. I think you'll agree that the following list of guidelines in the new Credit Card Act is both JUST and long overdue.

1) Credit card issuers must notify cardholders in writing at least 45 days prior to any change in the annual percentage rate (APR). If the cardholder elects to cancel the account before the effective date of the increase, the cancellation cannot be considered a default on the account and cannot trigger an obligation to immediately repay the account in full.
2) Credit card issuers are prohibited from increasing APRs that apply to existing balances unless specific conditions apply. An APR may be increased only if a) the index on which the rate is based changes, b) it is a promotional rate that has expired, c) a cardholder fails to comply with a hardship workout plan, or d) the account falls 60 days past due.
3) If a rate increase is triggered by a cardholder falling 60 days past due on the account, the cardholders' APR will be restored to what it was before the increase once the cardholder has made timely minimum payments for six consecutive months.
4) If different APRs apply to separate portions of an outstanding balance, the amount of any payment beyond the minimum payment due must be applied to the portion of the balance with the highest APR.
5) Credit card issuers can no longer increase a cardholders' interest rate on an existing balance on credit card "A" due to negative activity on credit card "B", as is currently the case.
6) Credit card issuers are prohibited from imposing interest charges on any portion of a balance that is paid by the due date.
7) Credit card issuers are required to mail credit card statements at least 21 days before the bill is due (current requirement is 14 days).
8) Cardholders must be given the option of having a fixed credit limit that cannot be exceeded and credit card issuers cannot charge over-the-limit fees on cardholders with fixed limits. This makes the ability to exceed an established credit card limit and opt-in election.
9) Credit card issuers are prohibited from charging interest on credit card transaction fees, such as late fees and over-the-limit fees.
10) If the payment due date is a date when a credit card issuer does not receive or accept payments by mail (e.g., weekends and holidays), the creditor cannot treat a payment received on the next business date as a late payment.
11) Credit card issuers are prohibited from charging a fee to allow a cardholder to pay a credit card debt, whether the payment is made by mail, telephone, electronic transfer, or otherwise.
12) Credit card issuers are required, when soliciting persons under the age of 21, to obtain an application that contains either a) the signature of a parent, guardian, or other qualified individual willing to take financial responsibility for the debt, b) information indicating an independent means of repaying any credit extended, or c) proof that the applicant has completed a certified financial literacy or financial education course.

There is more to the bill than listed here but I have chosen to cover the more beneficial elements. To read the full text of the bill click here. The only unfortunate thing about the bill is that it doesn't take effect for 9 months after its passage on May 27, 2009.

Making Home Affordable Is Law

2009-03-07T18:48:00.000-08:00

The Making Home Affordable Program has been passed into law and an expected 7 to 9 million homeowners should benefit from it. There are two ways for at-risk homeowners to benefit. The first is the Home Affordable Refinance and the second is the Home Affordable Modification.

The Home Affordable Refinance program will be available to homeowners with a good payment history on their existing Fannie Mae or Freddie Mac mortgage. Under this program homeowners will be eligible to refinance up to 105% of their current home value to today's lower mortgage rates. This program ends in June 2010.

For those that don't qualify for the Home Affordable Refinance program there is the Home Affordable Modification Program. The servicers of these loans are encouraged to work with homeowners to modify their mortgages so that at-risk homeowners can better afford their payments. Institutions that received TARP (Troubled-Asset-Relief-Program) money are required to work with homeowners whose loans they service.

The modification program is available to those who live in their homes and took out their mortgage prior to January 1, 2009. Modifications can be done through this program until December 31, 2012 and a homeowner can only modify his or her loan once.
The loan servicer will first seek to reduce the interest rate (subject to a rate floor of 2%). Then, if necessary, the lender will seek to extend the term of the mortgage up to a maximum of 40 years. Finally, as a last resort, the lender can forgive a portion of the mortgage owed in order to achieve a goal of a mortgage payment that represents 31% of the homeowners' gross monthly income.

Key distinctions to remember are as follows:

The loan must be a Fannie Mae or Freddie Mac loan.
All refinances or modifications require full documentation of income.
The home must be occupied by the homeowner. No investment properties allowed.
Loan payments must be current with no past late payments allowed.

There are more provisions to the program than I covered here and I enourage you to visit my Borrow Smart website at www.iborrowsmart.com/sperkins for all the details. Just click here to go to the website where you will find NIFE (National Institute of Financial Education) Classes you can view and listen to that give all the details you will need including guidelines and qualifications you can download. As always feel free to call me or e-mail me with any questions.

California Comes Up With Its Own Homebuyer Tax Credit

2009-03-02T14:18:00.000-08:00

Not to be outdone by the Feds, the Governator, Arnold Schwarzenegger, signed into law California's own homebuyer tax credit. There are several distinctive differences between the two homebuyer tax credits as I will point out.

The California Homebuyer Tax Credit is open to ALL homebuyers, not just first-time homebuyers. However, it is limited to homebuyers purchasing a home that has never been occupied. In other words, NEW CONSTRUCTION ONLY. The credit is available on purchases made between March 1, 2009 and March 1, 2010.

The tax credit is equal to 5% of the purchase price with a maximum credit of $10,000. However, the California tax credit can ONLY be used to offset your actual tax bill. Additionally, the credit is paid in three equal and annual installments of $3,333 for the first three years of homeownership and can never exceed the tax owed. For example, if you owe $4,000 in tax, your credit is $3,333 and you still owe the other $667. However, if you owe $2,333, then the credit is $2,333 and you lose the other $1,000 because at the time of this update there is no carryover provision. No repayment of the tax credit is necessary as long as the home purchased is the homebuyer's primary residence for at least two years. The Federal Homebuyer Tax Credit allows the homebuyer to receive the credit whether taxes are owed or not, but any tax owed must be paid first and the homebuyer must live in the property for three years.

There is NO income restriction like there is in the Federal program, which has a phase out of the credit for singles making more than $75,000 and married couples making more than $150,000.

First-time homebuyers purchasing a new construction home in California would be able to take advantage of both tax credits for a total credit of $18,000 provided they met both state and federal limitations.

Personally, I think this is a bad idea. It is really nothing more than the Governor pandering to the home building industry. The home builders want this credit so they can unload all of the homes they built that didn't sell before the correction. But they also want to use it as a means to finish building the tracts that they started and couldn't finish before the correction.

Who stands to benefit from adding more homes to an already overbuilt state? This is a simple supply and demand issue and keeping builders building when we need to clear out the overabundance of home we have now makes no sense. I guess the good news is that some in the construction field can go back to work but the credit should be made available to all if the goal is to get the economy back on its feet.

The Homebuyer Tax Credit of 2009

2009-02-28T19:07:00.000-08:00

In the new stimulus package President Obama signed into law, among other things, is a new version of the homebuyer tax credit for 2009. There are some very noteworthy improvements as compared to the 2008 credit.

The 2008 tax credit, which was part of the Housing and Economic Recovery Act, gave first-time hombuyers a $7,500 tax credit if they purchased a home between April 9, 2008 and June 30, 2009. The new tax credit, which is part of the American Recovery and Reinvestment Act of 2009, increases the tax credit to $8,000 and is for home purchases that take place between January 1, 2009 and November 30, 2009.

The 2008 tax credit was an interest free loan from the government which would be repaid in $500 installments over 15 years. The 2009 tax credit does not have to be repaid. There is no change to the first-time homebuyer requirement. To take advantage of the credit a homebuyer must not have owned a home in the last three years, with few exceptions.

The remaining provisions are essentially the same. The homebuyer must occupy the home as their primary residence for at least three years, with few exceptions. There is still a phase out of the tax credit for singles making more than $75,000 and married couples making more than $150,000 and no tax credit for singles making $95,000 and couples making $170,000.

The tax credit is just that, a credit. A tax credit differs from a tax deduction in a very significant way. A tax deduction is a reduction of the amount of income one pays taxes on. A tax credit is a dollar for dollar reduction of the tax owed. If the homebuyer owes less than $8,000 in taxes the homebuyer will receive the difference in a refund (i.e., If your tax bill is $4,000, you will now owe zero and receive a refund of $4,000).

The homebuyer tax credit is an amazing move on the part of the government to stimulate the housing market. This credit should provide more than enough incentive for aspiring homeowners sitting on the fence about buying a home. The mix of phenominally low interest rates, reduced home prices, home sellers and lenders willing to pay closing costs, and the huge tax credit make this the best time in 10 years to buy a home. Who do you know who could and should take advantage of this awesome opportunity? I would be honored if you would refer them to me. I can be reached on my mobile number at (619)994-1110 or by e-mail at Shawn@YourFavoriteLender.com.

New Homebuyer Education Workshop Is A Hit!

2009-02-06T16:24:00.000-08:00

On January 31, 2009, I hosted my first Homebuyer Education Workshop. I have contended for a long time that the current "housing crisis" is really an affordability issue. Lenders were so crazy and loose with the lending guidelines that virtually anybody and everybody who ever considered owning a house bought one even if it was only to flip it a short while later.

All of that competition flooding the market, known as high demand, caused house prices to go through the roof. It didn't take long for house prices to become unaffordable for the remaining interested buyers and the spiral downward began.

Now house prices have become very affordable again for many aspiring homeowners and word is finally getting out that it is time to buy. There are many amazing deals to be had out there. However, so we don't have a repeat of this housing crisis I have created a Homebuyer Education Workshop. In this workshop I provide attendees everything they need to know to confidently buy their own home. The real estate and mortgage markets have changed significantly in the last year and will continue to change going forward.

I know that buying a home can be complicated, which is why I designed this workshop. Anyone who chooses to attend will have a clear understanding of the current real estate market and gain answers to the following questions:

Can you qualify for a loan? If so, what are the steps?
How does owning a home compare to renting?
What are the significant tax advantages to owning a home?
Are tax advantages the only reason to own a home?
How does the $7,500 government incentive for first-time buyers benefit you?
What loan programs are available today?
How much of a down payment do you need?
Why is your credit score worth thousands of dollars and how you can improve and protect it?
and much, much, more!

Seven aspiring homeowners showed up that Saturday and the feedback was awesome. For all intents and purposes I put on seven events that morning because each person that attended left with their own understanding of the materials and concepts presented. And each one said how glad they were that they attended because the information was relevant and timely and gave them confidence in moving forward with buying a home of their own.

I intend on hosting a Homebuyer Education Workshop each month and ultimately every two weeks. I believe anybody interested in buying a home should go through this type of educational workshop. If more people did maybe we wouldn't have the housing problems we're having right now.

If you have any family members, friends, or work associates that are interested in becoming homeowners I would be honored if you would refer them to my FREE Homebuyer Education workshop. I will let you know when the next one is as soon as I set the date, time and location.

Can You Benefit From Refinancing?

2009-01-30T20:16:00.000-08:00

Unless you've been on another planet the last few weeks, chances are you've heard the buzz about mortgage interest rates dipping to record lows recently. Finally, something to help us, the average American right? Maybe. Let me set the stage.

The good news is interest rates are very low right now. The bad news is qualifying for a mortgage has changed dramatically over the last two years. In order to qualify for the lowest rates available you need to meet all of the following criteria:

Credit score of 740 or higher
At least 20% equity
Income documentation (NO "state income" loans anymore)
To take cash out, you must have at least 30% equity

Clearly these requirements don't pertain to most people. It doesn't mean that refinancing doesn't make sense; it simply means that you need to take the interest rates being touted by the media with a grain of salt!

Are interest rates going to go lower? Should you wait to refinance?

One thing I know for sure is that if you try to "hit the bottom," you will miss it. We only know what the bottom was when we're looking back at it.

The "chatter" several weeks ago was that interest rates were going to hit 4.5% on a 30-year fixed mortgage. That hasn't happened and there is no guarantee that it will.
Let's get on the phone and discuss the specifics of your situation to determine what, if anything, can be done to improve your situation.
Interest rates are very volatile right now. The wild swings you are seeing in the stock market are also happening in the bond market, which drives mortgage rates. The interest rate dips that we see usually last only hours, so if you are not ready you'll miss it.

If you think you want to refinance, but need a specific interest rate for it to make sense, you should gather your documentation and contact me to get your approval in motion so that if the interest rate you are targeting becomes available I can lock it in. In order for this to be possible, your loan will need to be approved so that I can lock it if your target is hit.

Unfortunately loans have gotten more expensive than before. It is virtually impossible to do a zero point loan today. All of the government intervention and regulation has taken its toll on the mortgage industry and it is only going to get worse.

The process of obtaining a loan has changed. You will certainly have a different experience than you've had in the past. As I mentioned earlier, qualifying for a mortgage today is much stricter these days so you will have to provide more documentation than you did before.

The value of your home will most likely be the wild card. While I can certainly get an estimate of the value prior to moving forward, until the actual appraisal is complete I won't know if I can complete the refinance. Unfortunately, you may have to pay for an appraisal and find out you cannot obtain a loan after all.

Most importantly, 70% of the people who used to be in the mortgage industry are gone. What that means is there is a big capacity problem right now - there aren't enough processors, underwriters, doc drawers, closers, etc... to handle the volume that has come in lately. Transactions that used to take 30 days are taking closer to 60 days.

I will do everything I can to make this a painless experience but I will need your help. We need to move forward quickly. Interest rates will not stay this low for very long. They are artificially low right now because the Fed is buying mortgage bonds, which it vows to do until June 2009. Once the Fed stops buying mortgage bonds interest rates will go up. Call me at (619)574-6545 so we can discuss your specific situation.

Raising Taxes Will Cripple An Already Fragile Economy

2008-10-28T12:05:00.000-07:00

As I'm sure you are painfully aware, the economy is in serious trouble. Lately the stock market is in constant turmoil with more daily volatility than we've ever seen. The bond market, which drives interest rates, is going through the same type of daily turmoil. House values are still in the twilight zone and government bailouts aren't having quite the effect they were supposed to. At least in the timeframe they were supposed to. Unemployment is on the rise. Blah, blah, blah...

So why would anyone want to raise taxes in an already fragile environment? When are people going to understand that higher taxes stifle growth? In a higher tax environment, obviously many of us will pay higher taxes. But we will also pay more for the goods and services we use on a daily basis because businesses will not absorb the higher taxes they have to pay. They will simply pass the higher taxes on to their customers, us, via higher prices. A double-whammy we just can' afford.

Here is a quote that sums it up nicely. "Given current economic conditions, if Americans elect a presidential candidate who will raise taxes instead of lower them, the economy probably will not rebound by spring 2009 as it otherwise would, Steve Forbes, editor-in-chief of Forbes magazine said. Click here http://www.cnsnews.com/public/content/article.aspx?RsrcID=38138 to view the article.

So who is talking about raising taxes? No one, right? Both candidates are claiming to cut taxes. But who is telling the truth and who is omitting the truth? If you take a few minutes to read an article posted on American Thinker at http://www.americanthinker.com/2008/10/senator_obamas_four_tax_increa.html, you'll surely find out. It is a worthwhile read and I highly encourage you to take the time.

Just in case you don't have the time to read the article I will gladly summarize. On January 1, 2011 the Bush tax cuts of 2001 and 2003 are set to lapse and thus return to the level they were in 2000 if they are not renewed or made permanent. Whether you are a Bush supporter or not, you have benefited from them whether you believe it or not. The media tells you that only the rich benefited so I am providing you a link so you can see if you benefited or not. Go to http://www.moneychimp.com/features/tax_brackets.htm and input your income for any tax year you wish and then compare that to the tax you would have paid in the year 2000, which is what the tax rates will return to if they are allowed to lapse.

Senator McCain, like him or not, vows to make the Bush tax cuts permanent and even lower taxes further. Lower taxes spur economic growth. Companies can expand, which will require them to higher more people. Americans get to keep more of the money they earn, which can then be used to buy the things they want or need and, ultimately, stimulates the economy.

Senator Obama, on the other hand, vows to let the Bush tax cuts lapse, thus rasing taxes. In the American Thinker article Ned Barnett says, "Senator Obama claims that letting a tax cut lapse - allowing the rates to return to a higher level - is not actually a "tax increase." It's just a lapsing of a tax cut.

Do you see the difference?

Neither do I!"

Senator Obama gets around the raising taxes issue because technically he did not raise the taxes. The cuts simply lapsed because he chose not to renew them. He claims that 95% of Americans will get a tax cut under his plan but fails to mention that up to 40% of Americans don't pay income taxes. How do you cut taxes for someone who doesn't pay taxes? You give them money anyway, which, simply put, is WELFARE.

The bottom line is that we cannot afford a tax increase even if it is a passive increase. Obviously, there are other issues to consider and it is not my intent to turn this into a political debate. I simply want to shed some light on a very important issue facing us all as we go forward.

How Taxes Work

2008-10-22T12:55:00.000-07:00

Here is an oldie but a goodie that I thought would be appropriate to share again because it is a VERY simple way to understand how taxes work.

Suppose that every day, ten men go out for dinner together. The bill for all ten men comes to $100. If they pay their bill the way we pay our taxes, it would go something like this.

The first four men, the poorest, would pay nothing; the fifth would pay $1, the sixth would pay $3, the seventh would pay $7, the eighth would pay $12, the ninth would pay $18, and the tenth man, the richest, would pay $59. That's what they decide to do.

The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement until one day, the owner threw the men a curve ball. In tax lingo it's called a tax cut. "Since you are all such good customers," the owner said, "I'm going to reduce the cost of your daily meal by $20." So now dinner for the ten men costs only $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six men, the paying customers? How could they divvy up the $20 windfall so that everyone would get his "fair share?"

The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would end up being PAID to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man's bill the way we pay our taxes and he proceeded to work out the amounts each should pay.

It was determined that the fifth man would pay nothing, the sixth man would pitch in $2, the seventh would pay $5, the eighth would pay $9, the ninth would pay $12, leaving the tenth man with a bill of $52 instead of his earlier $59.

Each of the six men were better off than before and the first four men continued to eat for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man. "But he, pointing to the tenth man, got $7." "Yeah, that's right," exclaimed the fifth man, "I only saved a dollar too. It's unfair that he got seven times more than me!"

"That's true!" shouted the seventh man. "Why should he get $7 benefit when I only got $2? The wealthy get all the breaks!" "Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late, something very important. They were FIFTY-TWO DOLLARS short of paying the bill! Imagine that!

And that, boys and girls, journalists and college instructors, is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. Where would that leave the rest of us?

Unfortunately, most taxing authorities do not seem to grasp this rather straight-forward logic!

The Housing Crisis Revisited

2008-10-20T14:00:00.000-07:00

I decided to write this new post to my blog because I am beyond fed up listening to the mainstream media place the blame for the current housing crisis firmly on the shoulders of President Bush. While I concede that he is part of the problem, let me give you a little history lesson.

In 1999 the Clinton Administration began pressuring Fannie Mae to expand mortgage loans among low and moderate income people. Fannie Mae also felt pressure from stock holders to maintain its phenomenal growth. There was an article written in The New York Times in September 1999 about this that states that "Fannie Mae does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make loans to people with less-than-stellar credit ratings." For your viewing pleasure click here to read the article written by The New York Times entitled "Fannie Mae Eases Credit To Aid Mortgage Lending," which details the actions.

The Clinton Administration, just like every administration, simply wanted to expand the homeownership rate in America. But they added a twist. They chose to target low to moderate-income borrowers. The administration wanted to increase homeownership rates for a variety of reasons, not the least of which was to expand the economy. A strong housing market affects every sector of the economy. When people own homes they tend to fix them up so companies like Home Depot, Lowes and Dixieline benefit. When people have equity, like the last bull housing market provided, they tend to remodel so contractors and the like benefit. Those same homeowners like to drive new cars and in many cases cars they could not otherwise afford to own, except through equity lines of credit and cashout refinances. They also enjoy their hobbies such as going to the river and going to the desert as well as family vacations to exotic places. In order to fully enjoy the experience they need toy haulers for their dune buggies, quads, motorcycles, jet skiis, boats, etc...

There are other businesses that benefit as well like the restaurant industry and the retail industry. I am the first to admit that when times were "roaring" along I was eating out quite a bit with the family. I was also indulging myself with a big screen TV, vacation place in Cabo, and slew of other goodies I didn't really need. But I digress.

The action encouraged by the Clinton Administration extended mortgages to individuals whose incomes, credit ratings and savings were not good enough to qualify for conventional loans. They go on to say that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites. The proposed goal was that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers.

I'm not entirely convinced that this should be a goal. We shouldn't be focusing on increasing homeownership rates among any particular class. It seems to me we should be focusing on making loans to those that qualify and have good credit. If that excludes a few people from the homeownership pool then so be it. If an aspiring homeowners' credit rating prevents them from buying a home right now, then they have something to work toward. If they cannot afford to buy a home due to income then they have something to work toward.

The article goes on to warn that "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a governement rescue similar to that of the savings and loan industry in the 1980s."

I am not advocating that this is the Clinton Administration's fault. Only that they opened the door rather wide. Bush played a role in the debacle as well. He was asleep at the wheel, perfectly content to watch homeownership rates rise, without regard for what the consequences of what such loose policy could lead to. Certainly Franklin Raines, Chris Dodd, Barney Frank, et al, have dirty hands as well. There were signs as well as warnings from many high ranking people and they were ignored because times were good. But, as the saying goes, all good things must come to an end.

There are MANY to blame for the housing crisis, not the least of which is the American public. As convenient as it is to blame the government, Wall Street, the lenders, the loan officers, the Realtors, etc... The American public has to shoulder its share of the responsibility as well. People wanted to own a home so much that they took on payments they couldn't afford, even if they could initially, and loans they didn't understand. We wanted to believe that we could borrow $500,000 for only $1,268 per month so much that we didn't ask any questions. I know you've heard the saying "If it sounds too good to be true then it probably is." When and why did we forget that? Just sharing a few thoughts.

So The Government Takes Over Fannie and Freddie – Why Should I Care?

2008-09-10T17:59:00.000-07:00

As you’ve no doubt heard by now, on Sunday, the United States Treasury announced that it will take control of Fannie Mae and Freddie Mac. The reason stated for the take over is the government feels they will no longer be able to meet their mission statement, which is to provide liquidity, stability, and affordability to the mortgage and housing markets.

This will benefit both homeowners and aspiring homeowners alike by lowering interest rates. In an earlier article entitled Fed Rate Cuts Don’t Necessarily Mean Lower Mortgage Rates I explained how Fannie Mae and Freddie Mac mortgage bonds affect mortgage rates so I won’t go into that again, but it is important to note that the biggest purchasers of mortgage-backed securities, which drive mortgage rates, are foreign investors. For the last 6 months or so foreign investors have been less interested in buying mortgage bonds due to the current state of our housing market and level of delinquency and foreclosure. When the demand for mortgage bonds goes down, the price of mortgage bonds drops and interest rates rise. Foreign investors are concerned that they won’t get their money back, let alone the interest they are expecting.

In order to restore confidence in mortgage bonds, back in July 2008 Treasury Secretary, Henry Paulson, announced that the Treasury would guarantee all debt repayments of the two mortgage giants. That announcement seemed to make investors feel better and the purchase of mortgage bonds resumed. However, not at the pace the government expected. Foreign investors generally purchase about 65% to 75% of the bonds in an auction and since the first of the year that number has been more like 40% to 50%. When bond auctions are dealing with billions of dollars, that is a significant drop and one that Fannie Mae and Freddie Mac can’t afford. Fannie and Freddie issue mortgage bonds today to pay off mortgage bonds that mature today from an earlier purchase. The old rob Peter to pay Paul philosophy.

Sunday’s action by the Treasury was really nothing more than a way to guarantee the guarantee. It’s like this. If I owe you $100,000 and you are concerned about whether or not I can pay you back, will you continue to loan me money? What if the United Stated Treasury tells you that they will pay back all the money I owe you plus interest? Are you still concerned about loaning me money? Maybe, but certainly not as concerned. Now, if the government takes over my note with you for the $100,000 are you concerned about getting your money back? You shouldn’t be because one thing that the United Stated government has never done is fail to pay back a debt. That is essentially what happened in this take over.

Now, any investors, whether foreign or domestic, can rest assured that their investment is safe and will more than likely purchase more and more mortgage bonds, which will potentially drive mortgage rates down. I say potentially because there are other economic factors that drive mortgage rates, but on Sunday’s news alone mortgage rates dropped by as much as 0.375% on conforming loan amounts (those under $417,000). Some predict we could see an overall drop in interest rates of as much as a 1%. That sounds a little generous to me but only time will tell.

I do expect the tightening of lending guidelines to continue so it will still be more difficult to obtain a mortgage, which isn’t necessarily a bad thing. It’s just that there won’t be a shortage of money available to borrow, as there has been over the last year or so, which can serve to drive mortgage rates higher as well.

This is good news and is just one more step in the right direction on the road to recovery of the housing market. The only thing that will save this market is house sales and making more money available at lower interest rates will certainly increase house purchase activity going forward, which will then stabilize house values, restore a little confidence and bring an end to this current downturn in the market.

What the Housing and Economic Recovery Act of 2008 Means to You – Part I

2008-08-21T11:48:00.000-07:00

On Wednesday, July 30, 2008, President Bush signed into law the Housing and Economic Recovery Act of 2008 (HERA). It is 694 pages and in lieu of boring you to death I have decided to write a few short summaries of the more important changes that may affect you.

The First-Time Homebuyer Tax Credit is probably of greatest interest and will likely benefit the most people.

First-time buyers will receive a $7,500 tax credit if they purchase a home between April 9, 2008 and July 1, 2009. Notice that the credit it is retroactive.

There are several important nuances here that you should know.

A first-time homebuyer is someone who has not owned a principal residence during the 3-year period ending on the date of the purchase of a new principal residence.
The property being purchased cannot be purchased from a relative.
Married couples with incomes less than $150,000 qualify for the entire tax credit. The tax credit phases out for married couples with incomes between $150,000 and $170,000. Couples with incomes exceeding $170,000 do not qualify for the tax credit.
A single person with an income less than $75,000 will qualify for the entire tax credit. The tax credit phases out for singles with incomes between $75,000 and $95,000. Singles with incomes exceeding $95,000 do not qualify for the tax credit.
Under NO circumstances will the credit exceed $7,500.

The tax credit is really an interest-free loan from the government that must be paid back over fifteen years, in increments of $500 a year, beginning the with the taxable year following the taxable year in which the principal residence was purchased.

If you die, your heirs do not have to pay back the remaining balance.
If you sell your home before fifteen years have passed and your home’s appreciation is less than the amount you have to pay back, the loan is forgiven.
If you turn your home into a rental or investment property, you must pay back the balance due in that taxable year.
If you sell the primary residence before the end of the taxable year in which you purchase it then no credit is allowed.

I hope this summary has provided you with an understanding of how this particular section of the Act actually works and how it may apply to you.

How Will You Celebrate the Fourth of July?

2008-07-02T20:13:00.000-07:00

As we celebrate the Fourth of July this year we should take at least a few minutes to think about what we are really celebrating. Are we simply enjoying a paid day off or are we actually celebrating the independence of this great country? And make no mistake, America is still the greatest country in the history of the world despite what our politicians, the media, and many of our fellow citizens would have us believe.

Today I read an article that appeared in the Philadelphia Inquirer entitled “A Not-So-Glorious Fourth – U.S. Atrocities Are Unworthy of Our Heritage.” In it the author says, and I quote, “This year, America doesn’t deserve to celebrate its birthday. This Fourth of July should be a day of quiet and atonement. For we have sinned. We have failed to pay attention. We’ve settled for lame excuses. We’ve spit on the memory of those who did that brave, brave thing in Philadelphia 232 years ago. The America those men founded should never torture a prisoner. The America they founded should never imprison people for years without charge or hearing.” He goes on to blame the torturers, the government, and you and I. “We were so busy. Soccer practice at 6. A credit card balance to fret. The final vote on Idol. We’ve lost respect. We’ve shamed the memory of Jefferson, Adams and Franklin.” Click here to read the entire article.

I couldn’t disagree with the author more. He has appointed himself judge, jury and executioner and is prosecuting America and its’ citizens because of a single "policy." I think this guy is full of crap but that’s a topic for another conversation.

I believe we have much to celebrate this Fourth of July and I’ve come across a radio address done in 1973 by Gordon Sinclair, a Canadian Radio Commentator, that says why we have much to celebrate better than anything I can say.

Click the play button to watch a 5-minute video of Gordon Sinclair giving his radio address entitled “The Americans.”

Click here for a complete transcript of the radio address.

After reading this transcript or watching an actual broadcast one has to wonder if this was written or recorded in 1973 or just last week. It is amazing to me that 35 years have elapsed yet nothing has changed. In 1973 someone wrote “The aftermath of the Vietnam War resulted in a world-wide sell-off of American investments, prices tumbled, and the U.S. economy was in trouble. The war had also divided the American people, and at home and abroad it seemed everyone was lambasting the United States.” While prices are not tumbling, I think you can see the correlation. Especially after watching the address or reading the transcript.

On the evening of May 15th, 1984, following a regular day’s broadcasting, Gordon Sinclair suffered a heart attack. He died on May 17th. Upon hearing of his death, President of the United States, Ronald Reagan said, “I know I speak for all Americans in saying the radio editorial Gordon wrote in 1973 praising the accomplishments of the United States was a wonderful inspiration. It was not only critics abroad who forgot this nation’s many great achievements, but even critics here at home. Gordon Sinclair reminded us to take pride in our nation’s fundamental values.”

So my challenge to you is to take the 5 minutes to watch and listen to the radio address. Really listen and take a moment to be proud you are an American. Not an African-American, Mexican-American, Asian-American or whatever other politically correct title has been thrown about. Let’s just celebrate being Americans.

Have a safe, fun and happy Fourth of July.

Shawn R Perkins
Your Favorite Lender

New Fee Matrix Drives Mortgage Rates Higher Comparatively Speaking

2008-06-02T11:18:00.000-07:00

In an earlier article entitled "Fed Rate Cuts Don't Necessary Mean Lower Mortgage Rates" I answered the question "what are mortgage rates based on?" and that answer, in short, is mortgage-backed securities.

This article is intended to introduce you to a new factor that will affect interest rates and that is the risk-based loan-level pricing adjustment matrix. If you think this isn't important and that it won't affect you, think again!

In December 2007 Fannie Mae & Freddie Mac introduced a new fee called the "adverse market fee", which added 1/4 point (0.25%) fee to all Fannie Mae & Freddie Mac loan products. That means that a zero point loan just became a 1/4 point loan and translates to an extra $1,000 in fee for a $400,000 loan. Not long after they came out with the adverse market fee they introduced the risk-based loan-level pricing adjustment matrix.

You are probably thinking who is Fannie Mae & Freddie Mac and how does this affect me? They are quasi-government agencies that purchase conventional mortgage loans on the secondary mortgage market in order to provide liquidity to lenders so they can make more loans. Since Fannie Mae & Freddie Mac buy the loans it stands to reason that they get to make the rules.

The following matrix only applies to those loans purchased by Fannie Mae & Freddie Mac although the few investors that remain that don't sell their loans to Fannie Mae & Freddie Mac follow a similar, if not the same, matrix.

In order to read the matrix simply find the intersection of your credit score range and loan-to-value range, which is your current loan balance divided by your current home value. The number in the box at that intersection is the mandatory fee that Fannie Mae & Freddie Mac adds to the standard pricing schedule.

The fee is calculated as follows:

(Loan Size x Price Adjustment)/100 = (Mandatory Fee)

For example: ($400,000 x 1.25)/100 = $5,000

The good news is the mandatory fee doesn't have to be paid out of your pocket. Besides the fact that most lenders will allow you to finance the fee, provided you have enough equity to do so, most mortgage lenders will trade 1 point (1.000%) in fee for a 1/4 point (0.250%) in interest rate. This means that if your interest rate is 6.00% and the mandatory fee is 1 point, you can accept a 6.250% interest rate and skip the loan-level pricing adjustment in its entirety. These added fees are making mortgages vastly more expensive or interest rates dramatically higher for lower credit score borrowers.

There is a similar matrix that applies to cash out refinance loans and is in addition to the above-mentioned matrix.

In order to read the matrix simply find the intersection of your credit score range and loan-to-value range. The number in the box at that intersection is the mandatory fee that Fannie Mae & Freddie Mac adds to the standard pricing schedule.

These new fee schedules have been added to mitigate the increased risk Fannie Mae & Freddie Mac are subject to as a result of the current lending environment and, quite frankly, it's only going to get more difficult. I expect new, more stringent, rules to come out regarding condominiums, as they already have gotten more stringent for 2-4 units. So, if you have considered restructuring your mortgage I would suggest you begin the process sooner instead of later because you may find it very difficult or impossible to refinance going forward.

For an excellent explanation of how this situation developed I have included the following 5-minute video clip created by a mentor of mine. If you take the time to watch it you will understand what actually occurred to get us to where we are today.

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Borrowing From Your 401(k) Could Be Hazardous To Your Wealth

2008-05-19T11:30:00.000-07:00

Borrowing from your 401(k) plan should be your last resort, not your first. Ideally, you will never touch your retirement funds, allowing them to grow continuously until you retire. But we don't live in an ideal world! With home prices falling and lenders tightening credit, an increasing number of Americans are borrowing money from their 401(k) retirement plans. In the long run, the disadvantages clearly outweigh the advantages.

Taking loans against a 401(k) plan is allowed by law, but an employer is not required by law to allow it. If offered, an employer must adhere to some very strict and detailed guidelines on making and administering a loan. The statutes governing plan loans place no restrictions on what the need or use will be for loans, but an employer can restrict the reasons for loans. Some plans charge fees when you borrow from your 401(k). Plans can charge a one-time fee, a maintenance fee, or a combination or the two.

There are several advantages to a 401(k) loan over other types of loans. A plan participant can borrow up to half of their vested balance, but no more than $50,000. There is no credit check and no qualifying, although you may need a spouse to sign a consent form. You may receive the loan in a matter of days and have up to five years to pay the money back, except when the funds are borrowed for the purchase of a residence, in which case you may have up to 15 years.

You pay interest on the amount borrowed - often the "prime rate" plus one or two percentage points. Interest proceeds then become part of the borrower's plan balance. There is a popular misconception that paying back a plan loan is like paying yourself. While it is true that you are paying yourself interest, when you borrow money from yourself you are simply replacing the interest you would already be receiving from someone else with interest payments from yourself. Paying yourself interest is sound advice when it is an alternative to paying someone else interest, but not as an alternative to receiving interest from someone else.

You repay the loan through automatic payroll deduction with after-tax dollars, plus you lose the compounded interest that you would have received if you had left the money alone because the amount that you borrow is subtracted from the principal balance. You have no flexibility in changing the payment terms of your loan. You also get taxed twice - once when repaying the loan with after-tax dollars, and a second time when the money is withdrawn at retirement.

So, let's say your monthly payment is $300 and you're in a 28% Federal tax bracket. You'll have to make $416 in gross earnings to have enough left after taxes to make the $300 payment. Interest paid on the 401(k) loan is not tax-deductible even if you borrowed the money to purchase a residence.

If you default on a 401(k) loan, you will receive a Form 1099 from the plan because the government considers the defaulted balance a taxable withdrawal. You will be charged Federal and State taxes on the outstanding balance plus a 10% penalty if you are under 59 1/2 years of age.

The biggest disadvantage is the following: If you leave your job, even if it is not your choice to leave, the 401(k) loan comes due and typically must be repaid within 30 to 90 days. If you cannot pay the loan in full you will be charged Federal and State taxes on the outstanding balance plus a 10% penalty if you are under 59 1/2 years of age.

Another disadvantage is the temptation to reduce or eliminate the amount you are contributing to the plan because you now have a loan payment, which will reduce your long term retirement account balance. If you stop contributing while you have an outstanding 401(k) loan, you will also miss out on the company match, provided your company offers a match.

Lastly, when you apply for a mortgage, current lending guidelines state that any 401(k)loan payments will be counted as a debt and included in your debt ratios and any outstanding loans will be subtracted from the your vested 401(k) account value for reserve purposes.

The bottom-line is if you are considering borrowing from your 401(k) make sure you understand the consequences, both good and bad.

Are You Paying Too Much In Property Taxes?

2008-05-07T16:19:00.000-07:00

Did you know that over the last eight years, property taxes have actually outpaced even inflation? Those rising taxes – combined with the recent plateau in house values in some areas – means you may be paying more than your fair share.

If you purchased your house or completed construction on your house since 2004, it is possible and very likely that you are paying too much for your property taxes. Some people who purchased in 2003 may even be affected. The current decline in house values is affecting everyone but some areas are affected more than others.

Under Proposition 13, property taxes can be increased annually by no more than 2% to account for increases in your property’s value due to inflation. Shortly after Proposition 13 was passed, Proposition 8 was passed, which allows a temporary reduction in property tax assessments. Under Proposition 8, a temporary reduction in assessed value can be made when the market value falls below the current assessed value. This is an important distinction because the assessed value may not be the same as the market value. Many counties use a formula which uses a percentage of market value to determine assessed value. Your property’s assessed value is shown in the upper right hand corner of your current tax bill as “Net Taxable Value.”

In practical terms, and with the history of real estate appreciation, most assessed values in San Diego County are well below even current market value. Realistically, this will only affect those property owners who purchased their property at the height of the current real estate market.

If you believe your property’s market value has fallen below its current assessed value you should file an Application for Review of Assessment with the Assessor’s Office as soon possible but no later than May 30, 2008. Click here for easy access to the required forms. Submitting an appeal is generally a fairly simple process, but make sure to take the time to fill out all forms in advance and be prepared with your documentation if there is an in-person hearing that needs to take place. My understanding is that due to the high volume of requests the Assessor’s Office will be notifying property owners in early July of the results of their request.

You can mail or drop off the completed forms to the San Diego County Tax Assessor at 1600 Pacific Highway, Room 103, San Diego, CA, 92101.

A word of caution: If you appeal for a lowered assessment and it is determined by the board that the current market value of your property is actually greater than your current assessed value they can increase your property taxes. The bottom-line here is to compare your current market value to the current assessed value on your tax bill to determine if you are even a candidate before you take any action.

Your appeal must be based on the market value of your property as of January 1 of the year in which you are filing. For example, if you file your appeal in 2008, your appeal must be based on the market value of your property as of January 1, 2008. An application must be filed for each year you disagree with the assessor’s value, even if you have a decline in value appeal pending for a prior year.

If you need current comparable sales to your house you are welcome to send me an e-mail to Shawn@YourFavoriteLender.com with the address in question and I will be happy to forward them to you. You may need to submit proof of the decline in value to the assessor along with your request.

If your appeal is successful, the new assessed value will be used to determine your property taxes for the year appealed. The new assessed value of your property, however, does not automatically become the value for the following year. The assessor is required to review your property’s value annually once a decline in value has been determined. He or she will compare your property’s market value with its base year value plus adjustments for inflation. The base year value is the value of your property at the time of the change in ownership from the seller to you or at the completion of construction. The assessor is required to assess your property at the lower of those two values.

According to the National Taxpayers Union, about 33% of property tax appeals succeed! Taking the time to review the accuracy of your tax bill could easily save hundreds of dollars per year, adding up to thousands of dollars during the time that you own your house. Please feel free to contact me at (619)574-6545 for more information on this money-saving tip.

There are numerous private businesses and individuals mailing solicitations to property owners offering their assistance in this process for a fee ranging from $175 to $300. While you are at liberty to use a company if you wish, you can apply for this reduction yourself at no cost by simply filing the application.

The Equity Line of Credit: Safety Net or Web of Deception?

2008-04-03T11:38:00.000-07:00

As many of you may have found out recently, a Home Equity Line Of Credit (HELOC) is not the safety net you may have thought it was. Many homeowners with an equity line have received a letter from the lender who holds their HELOC informing them of the following (click on the document to view larger text):

Worse than this is the fact that some lines of credit were completely frozen (click on the document to view larger text).

You are probably asking, how can they do that? Believe it or not, it is in the fine print. My own HELOC agreement states the following (click on the document to view larger text):

The only lines that were reduced or frozen were lines of credit that had an available balance. Lenders wanted to reduce or eliminate homeowners’ access to their equity through their existing equity lines.

Homeowners who had maxed out their HELOCs were not affected by this. Whether they used the HELOC to pay off debt, pay for a remodel project or simply extracted the wealth to protect it and keep it safe and liquid, their lines were left intact because there was nothing to freeze.

Homeowners who had been relying on their HELOCs no longer have access to them. I’ve heard stories of homeowners who were in the middle of a home improvement project and were unable to pay their contractors because they were using their equity line to fund the project. People who were using their equity line as an emergency reserve or fallback plan in the event of a job loss or sudden financial hardship were also adversely affected.

For some of the lenders there is a dispute process but essentially that consists of you paying for a new appraisal ordered through an appraiser that the lender chooses. If the value is determined to have dropped in accordance with the lenders assessment then you are simply out the money. If, however, the appraisal does show the value is higher than what the lender determined it was they still reserve the right to refuse to restore the line of credit to its original amount, which doesn't sound like much of a dispute process, and you are still out the money for the appraisal.

If you are one of the fortunate few that have a HELOC that has not been reduced or frozen you may not want to take a chance that the lender won’t suddenly decide to follow the other lenders that have done just that and send you a letter. I can assure you that it is not typically the kind of news received with a smile. My advice is to look closely at your financial situation and decide whether or not it makes sense for you to borrow the max available to you and put it in a savings account just in case. Yes, I am aware that it comes with a monthly payment but as your equity continues to lose its value wouldn’t it be better to preserve and protect what you have left of it before you end up needing it? Besides, with the Fed lowering rates as they have and will likely continue doing, HELOCs are one of the few instruments positively impacted with a corresponding drop in rate and payment.

In times of uncertainty, one thing is certain. Cash is King!!!

Ric Edelman, author of The Truth About Money says, “A proper financial plan plans for the worst and hopes for the best.” The saying “it’s better to have money and not need it than to need money and not be able to get to it” has never rang so true.

House rich and cash poor is not an option in these changing and trying times. Life happens and you need to be prepared.

The only way to protect your equity and keep it safe is to keep it separated, liquid and accessible. I will talk about profitable equity management in a future article.

Fed Rate Cuts Don’t Necessarily Mean Lower Mortgage Rates

2008-03-18T21:19:00.000-07:00

So the Fed cuts rates another 0.75%. Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Federal Reserve can only control the Fed Funds Rate and the Discount Rate. The Fed Funds Rate is the rate at which banks can borrow money from one another on an overnight basis. The Discount Rate, on the other hand, is the rate at which banks can borrow money directly from the Fed on an overnight basis (now a 30 day basis). This is very different from mortgage rates.

A mortgage rate can be in effect for 30 years. A rate that is set by the Fed can change from one day to another. This is a counter-intuitive relationship for most people because when they hear that the Fed is lowering rates, they instinctively think it means mortgage rates.

The Federal Reserve uses the Fed Funds Rate and the Discount Rate to both stimulate and slow down the economy. The Fed watches trends in new jobs, new unemployment filings, worker productivity, wages, housing, both resale and new construction, and inflation at the consumer and producer level.

The Federal Reserve is trying to maintain a “healthy” economy. If the economy is growing too fast the Fed will raise rates to slow down economic growth. If the economy is slowing down, as it is currently, the Fed will cut rates, and sometimes aggressively, in an attempt to stimulate economic growth.

So what are mortgage rates based on? The answer is mortgage-backed bonds known as Mortgage-Backed Securities (MBS). How these bonds issued by Fannie Mae and Freddie Mac perform will determine the direction of mortgage rates.

It is not necessarily what the Fed does that affects mortgage rates, it’s how the Nasdaq and the broader stock market interprets the Fed’s action and policy statement that will ultimately influence the direction of mortgage rates. This is because money managers and mutual fund companies typically keep funds in either stocks or bonds with very little in cash. If stocks are in favor, money is pulled from bonds, causing bond prices to drop and interest rates to rise. When stocks are being sold off, the money is then parked into bonds, which improves bond prices and causes interest rates to decline.

If the Fed Funds Rate and mortgage rates were truly related, the chart shown here wouldn’t show them going in opposite directions – all three lines would move in tandem.

Fed rate cuts can fuel inflation, because lower rates just serve to make it more attractive to buy and finance goods and services. If the economy grows too fast, as has been the case for the last five or so years, inflation can become a problem for the consumer (you and me).

The Federal Reserve is doing all it can to keep this country from going into a recession. While the Fed normally seeks a balance between economic growth and inflation, in this case the Fed has essentially decided to sacrifice inflation to save the economy. That is not to say that the Fed is turning a blind eye to inflation. They are just focusing more attention on keeping the economy from slipping into a recession. There is a concern about the possibility of Stagflation. Those who remember Nixon remember Stagflation. This is a situation where the economy stalls and inflation rises simultaneously. In other words, people are losing jobs, making less money, and spending more to buy the basic necessities of life because of inflation.

I wouldn’t want to be Ben Bernanke is these trying times. To summarize, Fed rate cuts do not necessarily equal lower mortgage rates. There are a variety of factors that influence mortgage rates and it is important for people to know that so they don't wait for the next Fed rate cut to refinance or purchase and miss the boat because what they thought to be true turned out not to be.

Want To Be More Conservative With Your Mortgage Financing? Make A Smaller Downpayment!

2008-03-12T21:33:00.000-07:00

Equity investments (a.k.a. downpayments) in Real Estate earn a 0% Return On Investment (ROI). Surprised? Well, let's understand the math: Assuming a 5% annual rate of appreciation, a home purchased for $400,000 will appreciate to $420,000 in one year. If the homeowner originally invested $80,000, or 20%, theoretically, the ROI is 25%. This is true because it appears that the initial $80,000 downpayment yielded $20,000 in equity appreciation. However, it is important to note that the $80,000 had nothing to do with the $20,000 appreciation.

If the homeowner had not invested the $80,000, the home would still be worth $420,000 in one year. In this instance, the ROI is infinite because the homeowner invested nothing and yet received the same $20,000 in appreciation. However, we must take into account that the rate of borrowing will be higher in this example because there is no downpayment.

Using a 7.00% Home Equity Line of Credit (HELOC) to finance the $80,000, the payment will be $5,600 in Year 1. The second example yields a return of at least 357% because the $5,600 additional payment yielded the $20,000 in appreciation.

There are other ROI considerations for the homeowner. A home is a non-liquid asset, meaning that once the homebuyer's money is invested in the home, there is a real cost to extracting the money as cash.

The initial $80,000 investment, therefore, is "lost" -- tied up in equity until the homebuyer sells, refinances, or takes out a HELOC.

Not only is the initial $80,000 investment earning 0% return for the homeowner, it is unavailable for other investments which could be earning 2% as a Money Market Mutual Fund, 5% as a Certificate of Deposit, or even higher returns with other instruments.

Therefore, the opportunity cost of making a downpayment is further depleting ROI for homeowners.

A "conservative" person will read this argument and say, "That's too risky. I am too conservative to make small downpayment."

I can buy that argument, but those two sentences are not related at all.

A true "conservative" person will recognize that the smaller the amount of downpayment, the larger the risk that the bank is taking. As the homebuyer's downpayment shrinks, so does his personal exposure.

"What if the property depreciates! Then I'll be exposed!" they'll say next.

That's true, but if the property depreciates, there is no advantage to your initial equity investment anyway. I'm sorry, but Out of sight, Out of mind is no way to manage your equity investments and finances.

The reality is the conservative financing option is to make smaller downpayments. In doing so, you push risk to a third party -- the bank! -- and you remain very liquid.

Liquidity is the true goal of a conservative investor.

I am not arguing against making downpayments on properties, for the record. But, for people who claim that Real Estate is an investment, they should treat it as such. This is consistent with my philosophy that a mortgage should be one component of a larger (managed) financial plan.

The advantages to making an equity investment in property is that the resultant monthly mortgage payment is lower. If a homebuyer's monthly cash flow is low, but their investment capital is high, there is an argument for putting 20% or even more into the property. There is also tremendous psychological inertia to overcome with respect to putting less than 20% into a property. Some people just won't hear it any other way.

That's fine -- different strokes for different folks!

Okay, with all of this said, there is actually a return on the equity investment. That return is the money saved by not paying interest on the higher loan amount if no downpayment is made. That means that the homebuyer saved an amount equal to the interest rate on the loan, or 7.00% in this case. So which is the more conservative strategy; 1) Investing a large downpayment to secure a lower monthly mortgage payment, leaving little money in reserves, or 2) Investing very little or no downpayment, paying a slightly higher monthly mortgage payment and leaving a large reserve to cover the increased payment as well as life's inevitable unscheduled emergencies?