Yearly Archives for 2008

I know there are lots of people out there who are thinking about buying a house but struggling at the starting line. The headlines on the news are screaming: INTEREST RATES ARE HISTORICALLY LOW!! IF YOU’RE NOT BUYING NOW YOU’RE AN IDIOT!! And you don’t want to be an idiot. You want to be a ‘smart buyer’. You want to get into the market at the ‘right time’. But you have just no clue where to start.

It’s complicated to get from the purchase price of the house to a monthly payment you can afford. How do you know when $200,000 is less than or equal to the $1500 a month you’re currently paying in rent?

I spoke with a new client (a first time buyer) last night who knows he wants to buy, knows he wants three bedrooms, knows he wants to live in the East Valley, but that’s pretty much it. My standard Realtor response to clients like this is to refer them to a lender who can prequalify them and give them all of the payment information they are looking for. Generally, I do this to save both them and me time. If they are serious enough about purchasing to contact me, then it’s in both of our interests to discover as quickly as possible if this is a viable option, and what price range we should be looking in.

That said, I know there are people out there who are afraid to call a mortgage professional. I get the fear. The fear comes from the idea that you will call the mortgage professional and give him all of your information (social security number, date of birth, income, debts, etc) and that he will put it all in his computer and then laugh at you. He will laugh and laugh and say, “What? You think we will give you money? Yeah right. Have a nice day, loser!’

I understand this fear because I have it. I was TERRIFIED to call a mortgage company when we bought our first house six years ago; as in, sick-to-my-stomach, pale and clammy, terrified. And even though I know mortgage reps personally, and I’ve been dealing with mortgages and money and all of this on a daily basis now for the last four years, this fear has not totally left me. Our new house is closing in less than a week, and I got the call yesterday that we received final mortgage funding approval and I was ridiculously relieved. I had this irrational fear that they were going to call me at the last minute and say, ‘Psyc!!’

So this post is for those mortgage-phobes like me. Here is a general breakdown of purchase price to monthly payment, to give you a better idea of what you can ‘afford’ (keeping in mind that credit and income are also a factor).

Let’s take for example this little cutie:

This is a home currently listed in Mesa for exactly $200,000 (yay, big round numbers!). Let’s pretend, just for the sake of argument that you wanted to buy this home for asking price. You are a first time buyer with not a huge amount of cash. You want to get into this house with as little out of pocket money as possible, and you want to know how much it will cost you on a monthly basis. And away we go:

As a first time buyer, the current mortgage restrictions require you to put down at least 3.5% of the purchase price. You can, however, ask the seller to pay for your closing costs. Therefore, when you come to the closing table, you will need a check for: $7000.

Your mortgage will be for $200,000 minus your down payment of $7000, or $193,000.

Five monthly fees come together to make up your mortgage payment.

1. P&I – Principle and Interest, which are the payments to the bank for your loan.
2. Home Owner’s Insurance – Generally paid to the bank on a monthly basis and the bank pays to the home owner’s insurance company on a biannually basis.
3. Taxes – Also paid monthly to the bank, who pays the government twice a year.
4. PMI – Private mortgage insurance (sometimes called MIP, for mortgage insurance premium), which is to insure the bank against you defaulting on your loan. This is required if you don’t put down at least 20% of the purchase price.
5. HOA – Home owner’s association, this is the only fee that is not paid to the bank and may not be applicable. But most banks will figure it in when they are putting together your costs because most homes in Arizona come with a home owner’s association.

Back to the cute little Mesa house for $200,000. Let’s break down the monthly payment.

Today, according to Wells Fargo the interest rate for a 30-year fixed FHA loan is 5.5%. According to this mortgage calculator the monthly P&I on that loan will be $1095.83.

Homeowner’s insurance should be less than $40 per month on a house of this size.

According to the tax records for this home, the taxes for 2008 were $1037.82, so the monthly taxes would be $86.49.

PMI for this home should be less than $80 per month.

According to the MLS, the HOA fees for this house are $32 per month.

So to recap:

1. P&I – $1095.83
2. Home owner’s insurance – $40
3. Taxes – $86.49
4. PMI – $80
5. HOA – $32

For a grand total of approximately: $1334.32 monthly payment and $7000 out of pocket at close of escrow.

Obviously this is just a general example. HOA fees can vary greatly, depending on what the community offers. PMI and home owner’s insurance depend heavily on the company contracted. Taxes depend on the city and the size and value of the home. P&I is greatly affected by interest rates. At least this gives you an idea and understanding of costs.

For more specific information, call your lender!! I swear, it’s silly to be scared. I’m silly. Don’t be like me.

One of the big stories in the financial news today (that didn’t involved the car companies asking for LOTS of money) was the one about 4.5% mortgage interest rates.

I heard talk of this from a couple of sources before I actually went out and found the articles to read for myself. Most of the talk was in the, “Check it out, soon you’ll be able to get a home loan for 4.5%!” and, “Hey, who cares what your interest rate will be on your new home will be when you buy it, just refi for 4.5% after you close!”

When I actually went and read the articles, it was apparent that there was a little more to all of this than, Woo!!! Awesomely low interest rates!

I also gave Matt, my mortgage guy a call to run through it all with him; which was quite an enlightening experience. I came away from all of this research with the sense that everyone has more questions than answers about this entire proposal.

To begin with, the entire idea that the government will ‘set’ mortgage interest rates at 4.5% is revolutionary and extremely complicated. Currently, the government does not set interest rate, the market does. Rates can be affected by things the government does (dropping the prime rate, for one), but individual lenders who actually loan the money are the ones who dictate what they will charge you to borrow the money.

So how can the government force lenders to set their rates at what they want? Will they offer bailout program money to the banks who participate? Will they further insure loans taken at this rate?

The other bit of info floating around has been the idea that this interest rate may not apply to refinances, because the intention is to stimulate home purchases to reduce the current national surplus of houses.

Right now lenders do not differentiate between home purchases and refinances when setting interest rates. So again, how will this work? Will everything change? And how long will it take to implement all of this?

And the biggest question of all: Will they actually pass this idea? And will it stimulate the housing market?

So… everyone needs to sit tight for a little while and see what’s actually going to happen before getting any hopes set on things like interest rates lower than they’ve been in 45 years. And that is what I’m going to do for now.

I’m putting together another guest-blogger spot on my site. This one is going to be done by Matt Harshey, my office’s in-house lender with Century 21 Mortgage. Here’s his info about the mortgage market this week:

Due to the Thanksgiving holiday-shortened week, the economic calendar served up a veritable smorgasbord of economic news, setting the table for some bond-friendly trading. Wednesday’s news continued to show the economy is a train-wreck with weekly jobless claims at recessionary levels; personal spending falling by 1%, the largest since the 9/11 terrorist attacks; durable goods orders dropping by 6.2% , the most in 2 years. All of this was bond-friendly causing rates to drop from last week. The stock market finished higher with the DOW & S&P 500 both moving up for the fourth consecutive session after enough investors went bottom fishing for bargains. Recent market action suggests we may be seeing the beginning of a bear market rally that could extend into the first quarter of 2009. With this in mind, it’s very important to take advantage of the recent rate dip we have experienced. As you know from the past rate drops, these drops can be short-lived with rates spiking higher in a matter of minutes. If you currently have clients that are looking to purchase, it’s important to lock in while rates are again at historical levels. The last time rates were this low they lasted for 1 day in January of this year, before that you would have to go back to July, 2003. Floating for a lower rate is like gambling, when it’s gone, it’s gone. Lock in while you are ahead. I will be available all week and this weekend to answer any of your questions or inquiries, do not hesitate to contact me.

To get contact Matt:

480-636-6782 Mobile
480-452-1775 eFax
matthew.harshey@mortgagefamily.com