Archive for November, 2007

What Every Homeowner Should Know Before Paying Additional Principal To The Mortgage

David Kosmecki | November 30, 2007 in Uncategorized | Comments (0)

Have you ever thought about your Freedom Point?

“Freedom Point” is one of the more important concepts in mortgage planning and yet it gets surprisingly little attention.

As its name implies, Freedom Point is the particular date when a homeowner's liquid assets exceed his debts. At the Freedom Point, paying off a mortgage transforms from an obligation to a strategic financial planning decision.

My duty as a Mortgage Planner is to help my clients reach their Freedom Point as quickly and efficiently as possible. I achieve this by helping homeowners to make informed liability and mortgage decisions.

In my playbook, there are two very basic — and very different — approaches to accelerating a Freedom Point.

  1. Prepay the mortgage by sending extra principal payments to the bank monthly, or annually
  2. Leverage a “low payment” mortgage program and then invest the difference between the low payment and the payment of a 30-year amortized loan in an interest bearing account

Let’s look at Method #1 in a chart:

The Mortgage Coach : Prepaying a mortgage helps pay the loan off faster

In Method #1, a homeowner pursues a safe and predictable plan of attack on his $400,000 home loan. By over-paying the mortgage each month by $250 (as shown in the “30 Yr Redux” column), the 30-year fixed mortgage is paid in full and the homeowner reaches his Freedom Point in 23.3 years.

In eliminating 6.7 years off the mortgage, the homeowner saved $131,788 in mortgage interest payments.

Not too shabby!

Now, using Method #2, the homeowner uses a low-payment mortgage such as a 5-year ARM with interest only payments, or a 30-year fixed mortgage with 10-year interest only payments. But, he also calculates what the “full” mortgage payment would be if the loan was not interest only.

The difference in the two payments is invested and then managed in interest-bearing accounts.

In other words, instead of paying principal to the mortgage company, the homeowner pays the principal to himself and earns interest on it.

Let’s look at the chart for Method #2:

The Mortgage Coach : You may reach your Freedom Point more quickly by making interest only payments and investing the principal

In financial terms, this is called “compounding” and is the main reason why money in the bank is better than money under your mattress. The longer the bank holds your money, the more interest it earns over time.

Because of compounding interest, the homeowner using Method #2 reaches his Freedom Point in just 22.6 years.

Why Method #2 may accelerate the Freedom Point is a matter of simple mathematics. If properly managed, the homeowner's accumulation fund will earn interest, and then the interest earned will itself earn interest.

But there’s an additional benefit for homeowners using Method #2.

Having an “accumulation fund” provides additional liquidity. With money sitting in a bank account (and available at a moment’s notice), a homeowner has more financial options in the event of a life emergency such as job loss or illness.

By contrast, extra principal paid into a mortgage is not recoverable without a remortgage.

And now it gets interesting.

Once a homeowner reaches his Freedom Point using Method #2, he holds power over his finances and is leveraging his home to the fullest. Because a properly-managed interest-bearing account is virtually risk-free, the homeowner can now choose to:

  1. Use the accumulation fund to pay off his home in full
  2. Leave the accumulation fund alone and continue to earn compounded interest on it

These choices would not be available using Method #1. Remember, when a person pays extra mortgage principal to the bank, those dollars are considered “locked up” unless the homeowner chooses to remortgage his home.

So, which Freedom Point strategy is best for you?

It all depends on your personal savings discipline, short- and long-term goals, investment rate of return and current financial situation.

A key starting point, though, is to sit down with a qualified mortgage planner to do a Freedom Point Review. Annually, your mortgage planner should monitor your progress and help you to make adjustments to your plan, as needed.

Reaching your Freedom Point is all about goal-setting, having a plan, and making informed decisions. If you’re not confident that your current mortgage planner can help you make informed decisions to accelerate your Freedom Point, please call me or email me anytime.

What If The Energy Company Paid YOU Each Month?

David Kosmecki | in Uncategorized | Comments (0)

This 30-second video posted to YouTube and shows a home’s electric meter running backwards after installing solar panels.

The meter runs backwards because the home is putting more power into the electric grid than it is taking out for itself.

With energy costs expected to rise sharply this winter and the costs of “going green” coming down, it may make sense to evaluate whether solar panels are a good fit for your home.

There’s still that up-front cost, but then there’s the thrill of watching that meter run backwards. Each clockwise tick is lowering your monthly energy bill and could possibly even eliminate it.

It’s worth watching those 30 seconds again.

Buyers, You Will Pay More For A Home Than The Agreed-Upon Purchase Price

David Kosmecki | November 29, 2007 in Uncategorized | Comments (0)

Home buyers sometimes forget to add closing costs into the purchase price of a home

In real estate, the true cost of buying a home is always higher than the home’s purchase price itself.

This is because of service charges from governments, lenders, and title/escrow companies.

Because there is no such thing as “typical” closing costs because each home purchase is different, home buyers should remember that the actual cost to purchase a home is a mathematical formula:

(Home Purchase Price) + (Closing Costs) = (True Cost To Purchase Home)

So, if a home is purchased for $250,000 and the costs are $5,000, the true cost to purchase the home is $255,000.

If the buyer is using a mortgage to finance the home, the mortgage is not based on the true cost, however. It’s based on the home’s purchase price. This means that a person making a 20% downpayment is actually paying 20% plus whatever closing costs are listed on the final settlement statement.

Therefore, the home buyer’s required cash at closing would be 20% of $250,000 ($50,000), plus $5,000 in closing costs. That adds up to $55,000, or 22 percent of the purchase price.

That said, the monies required at closing are usually reduced by credits paid from the seller to the buyer. We’re going to ignore them for purposes of discussion because these types of offsets are inconsistent and can vary wildly from purchase to purchase.

They come in the form of “seller tax credits” and/or “seller concessions” and we’ll cover those two concepts another day.

For purposes of good planning, though, buyers should always be conscious of how closing costs can impact their bottom line on a purchase.

If making the expected downpayment based on the purchase price is a stretch, making the downpayment plus the closing costs may be an impossibility.

Market Update – November 28, 2007

David Kosmecki | November 28, 2007 in Uncategorized | Comments (0)

Risks favor: Floating

Current Price of FNMA 6.0% Bond: $101.31, +16bp

The markets are on the move this morning, partly in response to comments made by New York Fed Vice Chairman Donald Kohn. He said, “In my view, these (financial) uncertainties require flexible and pragmatic policymaking – nimble is the adjective I used a few weeks ago. In the conduct of monetary policy, as Chairman Bernanke has emphasized, we will act as needed to foster both price stability and full employment.'

The markets interpreted the “nimble” comment as confirmation that the Fed will indeed cut rates once again at their December 11th meeting, and both Stocks and Bonds moved higher in response.

In economic report headlines, Durable Goods Orders for October were reported at -0.4%, which was lower than expectations of 0.0%. And when excluding a 16.1% rise in volatile defense spending, Durable Orders actually dropped by -0.9%, due to weakening demand for high tech goods. Overall this was a weak report, and a positive for Bonds.

Existing Home Sales for October dropped 1.2% to a 4.97 million pace, the lowest since 1999. The inventory of unsold homes rose by 1.9% to 4.45 million, representing a 10.8 month supply, the highest since 1999. Additionally, the year-over-year median sales price dropped by 5.1% to $207,800, the largest decline ever recorded. While this is tough news for those seeking to sell their home, the good news for our home buying clients is that there remains a wide selection of homes to choose from at bargain prices, combined with the still very low interest rates we can offer at this time.

At 2:00pm ET today, the Fed will release its “Beige Book” reporting on the current state of the economy. The Beige Book is produced about two weeks ahead of each Fed Meeting, and could be a market mover later today.

Technically, Bond prices have undergone some serious volatility over the past several days. The Bond struggled to hold above support at $101.12 yesterday, and has bounced higher off this level so far today, putting us in a Floating stance for now.

Why You Should Remain In “Ready Position” For Your Mortgage Rate

David Kosmecki | in Uncategorized | Comments (0)

Easy come, easy go.

There was a strong rally Monday afternoon in the mortgage bond market. It was sudden and furious, mostly coming on in the last 60 minutes of trading.

When markets closed, mortgage rates for conforming home loans were grazing their lowest levels in nearly two years.

It lasted overnight and into the early hours of the morning.

Then, several news pieces later, the financial markets turned.

By 8:30 A.M. ET Tuesday, the rally from Monday had been erased completely; mortgage rates were up by as much as 0.375% in some cases before the clocks struck noon on Wall Street.

The rally had been reversed.

Instances like this illustrate how financial market volatility can impact homeowners. A 0.250% change in rate, for example, equates to roughly $16.50 for every $100,000 financed on an amortizing loan. It’s $20.83 for an interest only loan.

Those kinds of savings add up over time.

Americans are not in the market for new homes or new home loans every day, but when we are, it can be profitable to pay attention to markets and be ready to act on a moment’s notice.

The markets won’t “put rates on hold” for you while you make up your mind so that moment — whenever it may come — could represent tremendous savings long-term on a home loan. Be ready to act.

Market Update – November 27, 2007

David Kosmecki | November 27, 2007 in Uncategorized | Comments (0)

Risks favor: Floating with a finger on the lock trigger

Current Price of FNMA 6.0% Bond: $101.19, -19bp

There was no lack of volatility during the past 24 hours, prompting a double alert day! The first was to float, and the second was to lock after improved pricing. After busting through a ceiling of resistance, the unleashed Bond raged higher and reached its best level of the year. But the advance was halted exactly on the next ceiling – a double top, which represented highs from 2-years ago. Bonds quickly bounced lower and prices are currently 34bp below yesterday’s high. Take a look at the Bond Chart in a two-year view…it is amazing to see how prices have created a big “W” and are now pausing exactly at the two-year resistance level.

The big news so far this morning comes from Citigroup, which announced it received a $7.5 billion infusion of capital from the Abu Dhabi Investment Authority. The investment in Citigroup by Abu Dhabi's investment fund will provide Citigroup with much needed capital to offset their large losses from the sub-prime mortgage holdings. This news appears to be helping Stocks so far today, as Abu Dhabi’s investment suggests that this might be a good time to start “bottom-fishing” and buying Stocks. Stronger stocks are causing some selling in Bonds.

Also helping Stocks – Goldman Sachs is forecasting the Fed will have to continue to cut interest rates by 150bp, due to the credit crisis. They are increasing their probability of a recession to 43% from 30% and are projecting the Fed Funds rate will fall to 3.0% by mid-2008.

If the Fed does indeed cut this sharply and it leads to inflation, Bonds will not respond favorably. We think the Fed wants to and will cut as long as inflation stays in check. We’ll get a read on the Fed’s inflation gauge this Friday with the PCE Report

The New York Federal Reserve Bank announced it would conduct a series of special repurchase agreements beginning tomorrow, by injecting $8 billion worth of liquidity into the market. The Bank will purchase a combination of mortgage-backed securities, agency securities, and Treasury Bonds. The reason for the New York Fed's unusual repurchase agreement is to ensure adequate liquidity through the end of this year in response to increasing money market funding pressures.

We don’t expect these repurchase agreements by the Fed to have a big impact on Mortgage Bond pricing, but it is worth noting what measures the Fed is taking to ensure liquidity in the markets and help calm fears amongst investors.

Consumer Confidence for November was reported at 87.3, which was below expectations of 91.5 and the worst reading since October 2005. This ugly reading is not much of a surprise as the media has almost become a constant stream of negativity about the mortgage and housing market. This may be a good time for us to remind clients that 30-year fixed rates are below 6%, providing a great opportunity to save money and solve some of the issues drawn out in the media.

It was announced today that the conforming loan limit for 2008 will remain at $417,000.

Mortgage Bonds are attempting to stay above support at $101.12. Should prices fall beneath this level, the Bond could fall to the 25-day Moving Average at 100.83 or another 36bp lower. Yesterday’s double alert day seemed to secure the best pricing available in the past two days. So long as prices can remain above the floor at $101.12, we will cautiously float today.

It’s A Good Time To Buy — But Not For The Reasons You May Think

David Kosmecki | in Uncategorized | Comments (0)

Banks are approving fewer mortgage applications because of mortgage-related losses.

Since November 1, the following banks have written-down at least $1 billion in their respective loan portfolios:

  • Bank of America
  • Barclays
  • Bear Stearns
  • Citigroup
  • HSBC
  • Morgan Stanley
  • Wachovia
  • Wells Fargo

This is a big deal to people in the market for a home loan because when banks repeatedly take mortgage-related losses, it can lead to major risk aversion — even for “good” borrowers.

It’s one reason why mortgages are more difficult for which to qualify than in months past. Banks would rather pass on an “avergage” mortgage application rather than be stuck with a potentially “bad” loan.

If banks continue down this path throughout 2008, it means that buyers eligible for home loan financing today may actually be ineligible tomorrow. It could also mean that a home under contract may never close because the buyer’s approval could be disqualified before the closing date is reached.

If you’re a home buyer and your profile is not “ideal” to a bank, now may be a good time to write a contract because your mortgage options may get more thin very, very soon.

Market Update – November 26,2007

David Kosmecki | November 26, 2007 in Uncategorized | Comments (0)

Risks favor: Floating

Current Price of FNMA 6.0% Bond: $101.12, +3bp

Mortgage Bonds are currently trading at their best levels of 2007 at $101.12. While this is good to hear, the bond touched this exact same high about a month ago and was turned lower. Back on October 24th and 25th the FNMA 6% Bond hit $101.12 as a high both days before heading lower – eventually prices dropped 70bp over the next two weeks. Will Bonds suffer the same fate this time around? Much depends on the news of the week, but the stage will be set by how the Bond reacts to the current battle between the Bulls and Bears over the current ceiling. Bulls attack with horns in an upward motion – that’s why a move higher is called “Bullish”, and Bears attack with claws in a downward motion – hence the name “Bearish”. Currently, Bond Bulls are trying to break through the ceiling, while the Bears are trying to hold the line and push Bonds back. Let’s see where the Bond closes and who wins the battle – it can tell us a lot about the direction of prices this week.

Early indications show last Friday, also known as “Black Friday”, retail sales were stronger than expected. This is a good kick-off to the Holiday shopping season. And tomorrow the Consumer Confidence number will give us some indication of how the consumer feels going into this important time for the retail sector.

The Week In Review (November 26, 2007) : What To Watch For

David Kosmecki | in Uncategorized | Comments (0)

In a holiday-shortened trading week, mortgage rates finished the week slightly improved.

But, because many traders had left early for Thanksgiving, matching buyers and sellers at any given price proved to be an exercise. Mortgage rates bounced wildly as a result.

Between now and the New Year, expect the same volatility. Fewer market players means less stability in mortgage bond prices and, therefore, in mortgage rates.

This week, markets have a plethora of data to digest, plus they will be speculating about the outcome of this year’s Holiday Shopping season. With more spending by shoppers, fears of a recession should wane, stabilizing mortgage rates somewhat.

On Tuesday, we’ll see the Existing Home Sales report for October. There’s nothing that should surprise us here — the real estate story has been beaten to a pulp in the papers. Any figure below 5 million, though, will likely spark talk of a recession. That could be bad for mortgage rates.

The same can be said for Thursday’s New Home Sales report. Remember that the difference between existing sales and new sales is that Existing Home Sales measures homes sold by a “homeowner”; New Home Sales measures homes sold by a developer/builder.

Then, on Friday, we’ll be treated to the Federal Reserve’s favorite inflationary measure — the Personal Consumption Expenditures (PCE). PCE is expected to show 1.8 percent year-over-year growth, a figure generally believed to be neutral. If PCE surprises to the high-side, expect mortgage rates to rise on fears of inflation.

Black Friday Trivia

David Kosmecki | November 23, 2007 in Uncategorized | Comments (0)

Today is “Black Friday”, a day that many Americans get started on their Holiday Season shopping.

Did you know? The earliest known reference to “Black Friday” is November 29, 1975. The term was mentioned in two separate articles, both with Philadelphia timelines. Therefore, the term Black Friday is believed to have originated in Philadelphia.

Did you know? “Black Friday” was originally named with deference to other stressful and chaotic days such as Black Tuesday (the day of the 1929 stock market crash.

Store aisles were jammed. Escalators were nonstop people. It was the first day of the Christmas shopping season and despite the economy, folks here went on a buying spree. . . . . “That’s why the bus drivers and cab drivers call today ‘Black Friday,’” a sales manager at Gimbels said as she watched a traffic cop trying to control a crowd of jaywalkers. “They think in terms of headaches it gives them.”

Did you know? The generally accepted meaning of “Black Friday” changed November 26, 1982. On that day, ABC News reported that Black Friday is the day that retailers’ ledgers go from red ink to black ink, signaling profit. If this were true, companies like Wal-Mart and Target would show losses in the first three quarters of the years. They don’t.

Did you know? Black Friday is not the busiest shopping day of the year. #1 is usually the Saturday prior to Christmas.

If you’re out shopping today on Black Friday, remember to set a budget and stay within it. Good luck!

Purdue University News Service
“Christmas Shopping Facts and Figures”
Press Release, Nov. 22, 2000

Black Friday (Shopping)