The Mortgage Porter

Financing a "Kiddie Condo" for your College Student

A few weeks ago, I helped a Kent couple purchase a condominium located in Seattle for their daughter to live in while she attends college at Seattle University. They were prequalifed with their credit union, however the credit union was treating the transaction as if it were an investment property even though the couple (we'll call them Mr. and Mrs. Kent) were not going to rent the property.

You see most lenders require that a home be located at least 50 miles away before it can qualify as a second home.  The city of Kent is just over 20 miles away from Seattle. Some lenders may even require that a second home meet conditions that one would consider a "vacation" property. It can really boil down to the underwriters interpretation of the actual scenario.  If a home does not qualify to be treated as a second home, then it's likely to be considered an investment property which has higher interest rates, closing costs and tougher underwriting criteria.  

The Family Opportunity Mortgage is a special Fannie Mae/Freddie Mac program that we have available at Mortgage Master Service Corporation. It allows for this type of scenario to be treated as a second home as long as:

• the property is a reasonable distance from the parent's home
• the parents may not own a second (or vacation) home near the subject property
• the child is enrolled in a nearby college
• the property may not be rented or used as an investment property
• the child occupies the property for a minimum of one year

We were able to provide Mr. and Mrs. Kent with an "owner occupied" rate for the condo they purchased for their daughter where the credit union could only offer a non-owner occupied rate.

Here's what the difference would look like based on today's pricing for a condo* based on a sales price of $435,000 with an 80%* loan to value (down payment of $87,000) and 740 or higher mid-credit scores:

Family Opportunity Mortgage:

30 Year Fixed: 4.625% (apr 4.790).  Principal and interest payment (P&I) = $1789.

15 Year Fixed: 3.750% (apr 3.962).  P&I = $2531.

Non-Owner Occupied/Investment Property: 

30 Year Fixed:  5.125% (apr 5.311).  P&I = $1895.

15 Year Fixed: 4.250% (apr 4.489).  P&I = $2618.

*NOTE: Condo's have a "hit to fee" of 0.75% with conventional pricing if the loan to value is over 75% or the mortgage term is over 15 years.  An additional 5% down also helps with pricing when you are financing an investment property.

Here is the same scenario as above except with 25% down payment ($108,750):

Family Opportunity Mortgage:

30 Year Fixed: 4.375% (apr 4.544).  Principal and interest payment (P&I) = $1738.

15 Year Fixed: 3.750% (apr 3.970).  P&I = $2373.

Non-Owner Occupied/Investment Property: 

30 Year Fixed:  4.750% (apr 4.900).  P&I = $1815.

15 Year Fixed: 4.125% (apr 4.426).  P&I = $2434.

Mortgage rates quoted are effective as of 8:00 a.m. June 2, 2011.  Rates can and do change often.  For your personal rate quote on a home located anywhere in Washington, please contact me.

Student Loans: Subprime Financing of the Future?

My son is getting ready to start college this fall and although I've done my best to plan and save to help out for his education, I'm not able to foot the entire cost. Like many parents, the 529 I've been religiously plunking away at was butchered when our markets crashed... I've continued plunking every month to this account but it's really a drop in the bucket. I'm very proud of him and he has earned a nice academic scholarship that will help go towards the expense.  He's going to have to take out some student loans and it's something I'm not thrilled about. 

I recently watched a show on CNBC about the student loan crisis and it has me very very concerned.  It's appalling how much it smacks of the subprime crisis.  Some of the stories on the show revealed how predatory some of the student loan companies and some colleges can be when they have a young student wanting "the American dream" and I'm not talking about home ownership, I'm referring to a college education.  Many justify the huge expense because payments are deferred and they believe they'll graduate with employers knocking down their doors.  Some students use their student loan money to buy pizza, beer...even go on a shoe shopping spree.  I understand that students need money for food, but should this be financed?  If they are receiving "student loan money" for essential food, should they only be allowed to use credits on campus?   I'm rambling....

I plan on sharing some of my personal thoughts, experiences and opinions as I venture down this road with my son.  I'll also address how student loans can impact borrowers when they on obtaining a mortgage: first time home buyers.

Any tips from parents of college grads?

The Importance of Having a Will

My father passed away last December after a battle with skin cancer and COPD.  He was not a financially wealthy man.  He was rich with love from his daughters, grandchildren, family and friends.  I'm not sure if he was being optimistic or was in denial about his health, he never created a will despite his failing health.

A few weeks after we buried Dad, I went to his bank to see what I was suppose to do.  At the very least, I wanted them to know that he was no longer living and to close the account to prevent any charges or activity that should no longer be happening.  The person who "helped" me wouldn't even speak to me without a will.  In fact, he hinted that if I opened an account, it might be easier to assist me.  I was so upset and emotional that I stormed out.  I was looking for guidance and received nothing...silly me.

If you don't create a will, then the State of Washington has specific laws as to what will happen with any real or personl property and who will be the beneficiary of the estate.  This is referred to as "intestate".   Dad's "estate" is probably is not enough to hire an attorney over.  If there's anything to help reimburse the cost of his burial, we'll be pleasantly surprised.   

By the way, this site has been the most helpful that I've found so far with trying to figure out what to do: This site has been probably the most helpful that I've found so far regarding Dad's estate:  http://www.wa-probate.com/

If you're drafting or updating your will, you may want to consider an estate planner or attorney who specializes in this matter to help you determine if you need a trust and to avoid possible death taxes. 

Please take time to create a will for you and your loved ones.  Make sure your wishes are honored and let someone know where your will is.  If you have a will, when was the last time you updated it?   Please don't leave this matter up to Washington State laws.  If my Dad would have had a will, I believe this issue would have been easily resolved by now.

Are Mortgage Points Tax Deductible?

It's that time of year when people are thinking about their income taxes and many who bought a home last year are wondering what the can deduct on their income taxes.  Let me start by stating:  I am not a tax advisor;  I am a NMLS Licensed Mortgage Originator.  Please review your tax scenarios with your CPA or professional tax advisor.

A mortgage point is a percentage of the loan amount and is used to reduce the mortgage interest rate.  A mortgage priced with zero points has a higher rate than a mortgage priced with a point.  Typically, but not always, one point (1 percent of your loan amount) equates to 0.25% in interest rate.  Points are prepaid interest, and like the interest your pay on your home mortgage, are currently deductible for your primary residence.   

If you paid points to purchase the home you live in (owner occupied/primary residence), you may deduct the full point on your itemized 1040.  If you paid points for a refinance, the point must be deducted over the term of the loan.   However if your refinance was for home improvement, you may be able to deduct the full point instead of spreading over the life of the loan. 

If you purchased a second home and paid points, the points may be deducted over the life of the loan (similar to a refi that was not obtained for home improvement). 

If the seller paid for your points when you purchased your home, you may be able to deduct them as well as long as the transaction meets IRS guidelines.

For more information on what is required for points to be deductible, see IRS Publication 936: Mortgage Interest Deductions page 5.

In order to claim these deductions, you will need to itemize your tax return.  Tax Form 1098 will disclose the mortgage interest paid and the deductible points paid.  You may also want to review your HUD-1 Settlement Statement to see an itemized list of closing costs and points paid. 

Don't forget, the due date for your 2010 Federal Income Tax Returns (and requests for extensions) is on April 18, 2011 this year.

President Obama Declares April National Financial Literacy Month

Recently President Obama declared April as National Financial Literacy Month.  

In recent years, our Nation's financial system has grown increasingly complex.  This has left too many Americans behind, unable to build a secure financial future for themselves and their families.  During National Financial Literacy Month, we recommit to teaching ourselves and our children about the basics of financial education.

I've always felt that financial education should be taught in high school.  I'm not talking home-ec, at least not the the home-ec I attended at Hazen High School where I grew up in Renton, where we made up incomes and came up with a rough budget.  I'm talking about a detailed course where students would focus on the benefits and consequences of credit and debt.

I think it's great that the President is bringing attention to Financial Literacy.  During the subprime era of mortgage, I met with people who wanted to buy a home because their friend or co-worker just did.  They had no idea what financial responsibilities coincide with owning a home.  They often wanted to buy as much as they could be qualified for based on guidelines at that time even if the mortgage payment or program was not suitable. 

More from President Obama's proclamation:

The new Consumer Financial Protection Agency I have proposed will ensure ordinary Americans get clear and concise financial information.... While our Government has a critical role to play in protecting consumers and promoting financial literacy, we are each responsible for understanding basic concepts....

I wonder what is an "ordinary American" and what if you're not an "ordinary American"?  In his proclamation, he also talks about how our "recent economic crisis was the result of irresponsible actions on Wall Street and everyday choices on Main Street" and includes "large banks [that] speculated recklessly".  His list of who's at fault no where includes our Congress who mandated that Fannie Mae, Freddie Mac and FHA create programs or different guidelines to help more Americans buy homes. 

From the Wall Street Journal:

Fannie and Freddie retained the support of many in Congress, particularly Democrats, and they were allowed to continue unrestrained. Rep. Barney Frank (D., Mass), for example, now the chair of the House Financial Services Committee, openly described the "arrangement" with the GSEs at a committee hearing on GSE reform in 2003: "Fannie Mae and Freddie Mac have played a very useful role in helping to make housing more affordable . . . a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing." The hint to Fannie and Freddie was obvious: Concentrate on affordable housing and, despite your problems, your congressional support is secure.

But I digress...

President Obama is promoting a website they've created for financial literacy which appears to be an assortment of various government links organized on one site.   It' looks like it's well meaning advice but I'm not sure it's the best or most practical advice--very similar to HUD's book on buying and financing your home.  The site also has information that is very biased, in my opinion, about financial tools such as reverse mortgages, which are not right for everyone but when used in the right situation, can make a huge difference for the better in a seniors life.  I also found some information about credit repair that would potentially provide the result a consumer would be looking for.

I highly recommend that you subscribe to Get Rich Slowly.  This is a fantastic blog that is packed full of common sense financial information on getting out of debt and building your savings.  J.D. Roth's blog was recently named the most inspiring money blog by Money Magazine.

Washington State's Department of Financial Institutions also has a blog that you may find interesting:  Money Talks.  I'm a new subscriber to this blog and so far, the information seems very good.   In fact, it was from DFI's blog that I learned about the Twitter hashtag for April's Financial Literacy Month: #FinLit10. 

Of course I hope you're a subscriber to my blog, The Mortgage Porter.  I don't only write about mortgages or post interest rates on my blog, you'll also find quite a bit of information about credit scoringwhich impacts your life every day.  I cover other topics too.  You can subscribe in the upper right corner by entering your email address and you can un-subscribe anytime.

During April, I'll share information in recognition of National Financial Literacy Month...actually I hope that's what I've been doing at Mortgage Porter for the last couple of years!

Game plan for preparing to buy a home when you're credit score is low

I don't blame anyone for wanting to own a home.  Sometimes when I meet with clients and review their current scenario, a game plan needs to be created so they can work on getting themselves into a better position to buy a home.  The last thing anyone wants is to cram themselves into a mortgage they cannot afford or to commit to a long term payment when they don't have a great track record of making payments on time. Some times a plan may take 6 months or a year or longer before someone is ready to buy a home.

I have someone with low credit scores who wants to buy a home.   She knows she will probably be a candidate for FHA financing because she has little down payment and her credit.  Although FHA is not as persnickety about credits scores as conventional financing, they scrutinize credit history: especially the last 12 months.

This person has a few late payments this year, the last one being as recent as August.  FHA financing is most likely out of the question for her until August next year assuming she does not make any other late payments between now and then. She can work on her credit for the next 10-12 months (until she has 12 months since her last late payment).   She doesn't have any collections but she does have a few small accounts that are "maxed out". 

• Credit card "A" with a balance of $477 and a limit of $500.
• Credit card "B" with a balance of $323 and a limit of $300.
• Credit card "C" with a balance of $215 and a limit of $300.

1. The first thing she should do is focus on getting card "B" under the limit of $300.  She's getting whammo'd with her credit scores for being extended beyond what her credit limit is with this account (in addition to being maxed out).   She should at least pay it down enough to make sure that her interest fees won't keep popping her over her limit.
2. Next she should select one of her two smallest cards to pay down to at least just below 50% of her card limit.   Card "C" would only take about $65 to bring her debt down to 50% of the line limit (300 x 50% = $150).
3. Then pay down the next card to at least 50% of the limit.  "Card B" will take $150 (assuming she's paid the extra $23 that has pushed her over the limit) to be at 50% of the credit line limit.
4. Credit card "A" will take a little extra cash at $227. (500 limit x 50% = $250.  477 - 250 = 227).

She needs to keep her credit below 50% of the credit line at the very minimum.  I know I said FHA is not as picky as conventional.  However, you do want your credit scores above 600 in order to receive better pricing (620 and higher is even better).

Not only will this help her with qualifying for FHA financing, she's probably also paying higher insurance rates due to her current credit scores. 

She has a decent income and no savings.   She needs to use this time of working on her credit to also build up her reserves.  Not only for what the lender will require (3.5% minimum down payment for FHA as of January 1, 2009); but for her sake should her income change or issues arise, she should have a minimum of 6 months worth of living expenses saved (FHA does not require this, I'm suggesting it).

She has been considering homes priced around $275,000.  FHA's minimum required investment for this home next year will be $9,625.  The seller can pay the remaining closing costs and prepaids as long as she has met the above requirement (which can be a gift or loan from family members)--this would need to be negotiated in the purchase and sale agreement. 

The proposed mortgage payment would be around $2,000 (including taxes, home owners insurance and mortgage insurance).  This is $700 more per month than what she is currently paying for rent.  Once she has corrected her credit, she should practice making a $2000 mortgage payment by paying the difference ($700) into a savings account that she leaves untouched for her down payment and to hopefully create a savings cushion.  $12,000 in savings would be ideal (6 months of mortgage payment) but not required.   If she has no savings, it will take her just over a year to pay $700 per month to come up with the down payment (9625 divided by 700 = 13.75).  Another 17 months to have a savings cushion of $12,000. 

I know this isn't instant gratification.  It is developing responsible financial habits.  There are expenses to owning a home beyond renting.  One of my last homes required a new roof just months after moving in to the tune of $15,000.  Savings has always been important and it's even more true in our current economy.

She's all ready moving in the right direction by contacting a Mortgage Professional who is interested in her long term financial well-being and is willing to help her create a game plan.

Check out my related article:  Getting on Track to Buy Your First Home. 

Cheap Gas and The Mortgage Porter Quarterly

Hat tip to Larry for sharing this link with me on where to find the cheapest gas by zip code.   I've published more tips on how to ease the pain at the gas pump in my latest issue of The Mortgage Porter Quarterly, 2nd Issue 2008 which should be arriving in mail boxes soon. 

This issue features:

• FHA is Back and Better than Ever
• Tips for Beating High Gas Prices
• What's New with Rhonda (me)
• Credit Card Crackdown Making Headlines
• A recipe for Thai Lettuce Wraps
• Coupon towards Closing Costs

With every issue of The Mortgage Porter, I recommend that readers check their credit utilizing one of the three bureaus via www.annualcreditreport.com.   Since The Mortgage Porter is currently published 3x per year, I rotate the bureau and in this issue, I suggest you check your credit utilizing your annual free Equifax report.

If you're a Washington State homeowner (present or future) who would like to be added to my mailing list, please contact me with your name and full address.

Gimme Five! Comparing Today's 5 Year ARM to a 30 Year Fixed

There is currently about a 0.75% difference in rate between the conforming 30 year fixed and 5/1 ARM and 0.625% in rate with conforming-jumbo loans.  Is that enough for you to opt for an adjustable rate mortgage?

Beyond the obvious question: "how long do you plan on retaining the mortgage or staying in your home?"   Here are some other stats to consider based on rates I quoted Friday morning using a purchase of $500,000 with a loan amount of $400,000.   The closing costs on both loans are identical.

30 year fixed at 5.75% (APR 5.902%) has a principal and interest payment of $2,334.

5/1 ARM at 5.000% (APR 6.759%) has a principal and interest payment of $2,147.  This is a monthly savings of $187.

The 5/1 ARM is fixed for 60 months and will then the rate is re-calculated.   The 5/1 used in this scenario is a 5/1 LIBOR with a margin of 2.25% and caps of 5/2/5.   For now, lets review your savings over the 60 month period.

The 5/1 ARM will save $11,220 over the 30 year in five years in payment alone. 

30 year fixed at 5 years has paid $28,951 towards principal and has an estimated balance of $371,049.   $111,106 has been paid towards interest (no benefit towards your prinicpal, however it may be a tax benefit).

5/1 ARM at 60 months has paid $32,663 towards principal and has an estimated remaining balance of $367,337.   $96,228 has been paid towards interest.

Over a five year period, the net (interest) savings of the 5/1 ARM over the 30 year fixed assuming you do not make any additional payments towards principal is $14,878.

So what happens if someone decides to select a 5/1 ARM and 60 months later, they're keeping the home?  They can refinance or not based on what the current market and what their finacial plans are.  The monthly savings over 60 months is plenty to cover the typical cost of a refinance ($2000-$2500) assuming rates are not favorable enough to opt for a "no cost refi".

If you decide to retain the mortgage, you will add the margin of 2.25% to the current 1 Year LIBOR rate when your mortgage is adusting.  (As of today, the 1 Year LIBOR is around 3.067%).   Your mortgage is reamortized based on the remaining term (25 years at the first adjustment).   The caps with this particular ARM are 5/2/5 meaning that the highest your rate can adjust is to a steep 10% and the lowest your rate will be at the first adjustment is 2.25%.   That's a huge range and whatever your rate will be depends entirely on LIBOR.   Some 5 year ARMS offer caps of 2/2/6 which would limit the first adjustment to 2%--the initial rate is typically slightly higher.   Do learn exactly what your cap, margin and index are before you accept any adjustable rate mortgage.

I suggest considering the following:

What is your risk tolerance?  Will having a mortgage with the potential to adjust in 5 years give you a rash or cause you to lose sleep at night? 

How long do you plan on staying in the home or retaining the mortgage?  If you have a tendancy to refinance when rates improve or if this is a home (such as a starter home) where you may not keep it for 5 years, you may want to consider the ARM. 

Picture your life and where you and your family may be five years from now.   Is your income stable or growing?  Do you have retirement in your sights?

How disiplined are you?  $187 per month could make an impact on paying off non-tax preferred debt, paying down principal or building your savings.  Pay yourself the $187 per month in an interest bearing account at 3% and you'll have $12,000 more in 60 months in addition to the other savings.

Regardless of what program you select for your mortgage...the choice is yours and it is your responsibility to learn as much as you can about the program--ask questions! 

Do you have an existing mortgage you're unsure of?  Has your loan originator left the mortgage industry?  I'm happy to help Washington State home owners with their mortgage needs--including reviewing your existing financing, such as ARMS.  My mortgage adoption program does not require any refinancing or new mortgage.

You've Got 'til Midnight to File Your Taxes

The only Post Office in the Seattle area opened until midnight is located at 15250 32nd Avenue South (map).   And if you need to file an extension, you can find that here.

Hat Tip to West Seattle Blog.

The Mortgage Porter Quarterly

The first issue for 2008 of The Mortgage Porter Quarterly is being mailed starting this weekend. 

This snail-mail newsletter features:

• Your Credit: Tips to Score Big
• Last Minute Tax Changes for 2007
• What's New with Rhonda (a true read if you're having troubles falling asleep)
• My (and my hubby's) favorite recipe for Huevos Rancheros (pictured above).  YES...I made that. 
• My Mortgage Adoption Campaign
• Credit Check Up (this issue, I recommend visiting www.annualcreditreport.com and pulling your free copy from Experian.  (You're allowed 1 free copy from each bureau annually).
• And much, much more.

Would you like to be on my snail-mail list and receive The Mortgage Porter Quarterly? 

Confession:  it's really not a quarterly.  I only mail this out three times a year (currently).  I didn't want to call my newsletter "The Mortgage Porter Thirdly".