Week of 2.13.09
Housing Crisis: You Asked, She AnsweredFor our show "Help for the Homeowners?" many of you submitted questions about home ownership for financial guru Manisha Thakor. Read Thakor's answers below.
Question: I bought a new home in August 2008 with a 30-year fixed loan at an APR of 6.25%. Is it worth my time or effort to try and get my home refinanced at a lower APR?
Manisha Thakor (MT): Whether or not to refinance depends upon how long you plan to stay in the house and how much you will save in lower payments because there are costs associated with refinancing and you want to make sure the benefits outweigh them. You can use one of several online refinancing calculators to help you. Here's one from bankrate.com.
Question: My wife and I plan on buying our first home this summer. We make over $110,000 a year and have about $44,000 in debt. With our income and debt, what do you think is a reasonable mortgage amount? And how should I go about finding a real estate agent?
MT: The short answer to your question is this: don't buy until you can put at least 20% down (you can buy for less down but this will give you an added layer of protection) and keep the total purchase price at three times or less than your annual household income. That would mean, in your case, $330,000 or less for the total purchase price of a home. That may be a smaller number than you were expecting to hear, but that's because millions of us Americans bit off way more home than we could chew in the past few years.
As for a real estate agent, I would suggest asking around at work to see if any of your colleagues have had good experiences with local agents. Be sure to interview 2 or 3 of them before making a selection.
Question: In your article "Coping with the Mortgage Mess" you say "there is some talk about a possible government subsidized loan program to help existing and new homeowners lower their monthly payments through lower interest rates." Is this really true?
MT: Some legislators have suggested the government offer subsidized mortgages at rates as low as 4.5%. Our country is in a precarious position and our government is responding in real time as the data comes in. The revised package announced this week does not call for such a provision (it focuses primarily on unfreezing the credit markets). However, the idea is still floating around in Washington, so stay tuned...
Question: We knew we were going to have to pay mortgage insurance because we didn't have 20% down. Then, on the day of our closing, we were told that we also have a 3 year pay-off penalty. Can a mortgage company impose a pay-off penalty and mortgage insurance on the same loan?
MT: Welcome to the horrific, scary, mean world that is the legal fine print. It pains me to tell you that yes, right now this can be done. Many homeowners are in the same position as you and they are understandably angry. Your legal recourse was at the time of signing, to walk away when you saw the pre-payment penalty. But once you agreed to those terms, those are the terms. Thankfully there will likely be much more oversight for financial "products" going forward to provide consumer protection.
Question: My wife and I are non-citizen residents in the U.S. and plan to be here for the next three to four years. We're seriously thinking about buying a house, and selling it at the end of our stay. Do you think this is a good plan?
MT: Homeownership can indeed be a wonderful thing, but it requires time for the math to work itself out. By that I mean that the costs of buying and selling a home can easily add up to 10% of a home's purchase price. So unless you know you're going to be in your home for a good 5-7 years (seven is the national average right now) you are essentially gambling that the price of the house you buy will go up more than the transaction costs. Given your time frame of 3-4 years, I think you'd be much better off renting, staying out of debt, and saving as much as you can in an FDIC insured bank account.
Question: I wish I could refinance, but my bank told me I don't have enough equity because the value of my house is way down. I have a $400,000 first mortgage, a $100,000 second mortgage, and the value of my home is about $350,000 and dropping. I attended a workshop and a company told me they could negotiate with my bank and help me refinance. They'll charge one percent of my total mortgages for this service. Can't I just try to negotiate with my bank directly?
MT: My heart goes out to you. I am hearing stories like this from coast to coast. You absolutely are not alone. The short answer is yes you can talk to your bank directly. Be polite, professional and persistent. As this crisis drags on, banks have become more willing to work with homeowners. Of course, one of the great things about our country is its entrepreneurial spirit (which is what will help lift us out of this mess) and so lots of folks have put up their shingle offering to help facilitate that process... for a fee. Some of these folks are earnest, hard-working, and earning every penny of that fee (taking the hassle off your shoulders and using their contacts to move the process along faster), but some are more interested in the fee than in helping you. I strongly suggest you first try talking to your bank yourself.
Question: I purchased an affordable home 10 years ago with a fixed 30-year mortgage. I was about age 60 then, a single woman, and had a good job at the time but was within 1-2 years of recovery from "clean sweep" bankruptcy. My interest rate is 8.35%. I have hesitated to consider refinancing because of additional fees that might be involved. I have enough savings that I could pay off my mortgage entirely. However, I need to have some work done on the house. I know that just making an inquiry about finances often raises a "red flag" within the credit community, so I'm hesitating. Should I try to refinance?
MT: Kudos to you for digging yourself out of a bad situation and managing your finances to the point that you have options today. Yes, I would check into refinancing. While you're correct that shopping around for credit can sometimes have a negative impact on your credit score, but with your current interest rate and healthy savings nest egg, a rational lender should look favorably at your actions. One possibility is for you to refinance at a lower rate and put a bit of that nest egg—but not all so that you still have a safety net—into the house. For instance, you could take a quarter of your nest egg and use that to lower the total amount of money you are borrowing when you refinance. The resulting lower mortgage balance and hopefully significantly lower interest rate post-refinancing would give you lower monthly costs and you'd still have 75% of your nest egg as a cash cushion, something we all need right now.
Question: My wife and I bought a condo for our daughter to live in while she finished graduate school. We bought it in 2004, she graduated in 2007, and the property has been for sale since May 2008. The property has evaporated our savings and we're in a real pinch. We were just turned down for a refinance of our mortgage on the house we live in and I'm afraid we might lose it. What would happen if I just stop meeting the payments on the condo?
MT: If you stop making payments, the property will be placed in foreclosure. At a minimum, this will severely damage your credit score. However, there is also the possibility that your bank may come to its senses and work with you to renegotiate a payment plan. That would be a win-win. This is a complex question and laws vary by state. As an aid, Foreclosures.com provides information on laws in your state.
Question: You say buyers should only use a 15-year or 30-year fixed rate loan. Doesn't a 5-year adjustable-rate mortgage (ARM) make sense in a market where house values are steady as there are savings from the lower interest rate for the duration?
MT: In theory, yes, but who is to say that a market will stay steady? That's the crux of the issue. If you have a 5-year ARM, what happens in year six when interest rates reset? You will have to be willing to take that risk. Interest rates may be higher or they may be lower. Housing prices may be higher or they may be lower. My concern with ARMs is that individuals must be very disciplined with their finances to ensure that when the rate resets, they are ready. From what I've seen so far, the vast majority of us are not. There are very few black and white answers in finance, but for the average person, the discipline and certainty that comes from a fixed rate mortgage over the long run tends to help people "save themselves from themselves."
Question: Why can't the government force the banks to restore the interest rates to homeowners who are about to lose their homes? After all, some money is better than no money!
MT: Your question is at the heart of the debate about "how to help homeowners" in Washington. As this recession drags on, it appears more and more banks are warming up to this concept, so stay tuned. There are no guarantees, but my gut is that we are going to see much more flexibility on the part of banks nationwide because mass foreclosures hurt everyone.
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