The Real Estate Ramble

Prices in Fairfax County have been Dropping

2010-10-11T23:34:00.003-04:00

I have updated my statistics blog with data through September 2010. Take a look: http://fairfaxcountystats.blogspot.com/2010/10/slight-dip-as-expected-through.html

Real Estate Retirement Plan

2010-08-04T23:32:00.004-04:00

This is just my personal logic so I invite your comments if you have a counterpoint to this logic. Here is what I have been thinking about: imagine buying three properties in the DC area when you are 25 to 35 years old. Let's say the properties average $250K each and rent for an average of $1500/month and are break even or positive cash flow and you put down about $25K on each one.

So, in very rough numbers, for an investment of $75,000 (not including maintenance costs), if you just hold on to them as rentals and never pay extra on the mortgage, at the end of 30 years, your $75,000 has grown to $750,000, even if the market value doesn't go up. And someone else was paying that mortgage the whole time - you didn't have to put in any extra money! Then, assuming rents went up enough to cover the property taxes and insurance, you can have a running income of $4500/month. Or, you can sell the properties for a price that is 10 times higher than what you bought the property for and keep it as liquid cash.

In reality, there would be maintenance costs and the properties would appreciate over time. I was just trying to provide a simple scheme for the sake of providing a clear idea of what really goes on without all the details to make it confusing.

I think what I have discussed above is why the real estate investment gurus speak of long-term investment in real estate. And this is why the discussions that talk about real estate as a poor investment because it's not clear if it really appreciates when adjusted for inflation, doesn't make sense to me. You don't buy stocks for 10% of the value, right? The leveraging power of mortgages is amazing from an investment perspective and so is the idea that you can get someone else to pay the principal.

Pretty Dramatic Price Increase in Fairfax County Recently

2010-08-04T23:30:00.001-04:00

I've updated the blog that I write for Fairfax County housing statistics. The graph for median sales prices through the end of June is worth checking out - it is pretty dramatic - www.FairfaxCountyStats.blogspot.com

Feel free to comment on the blog - I would love to know what you think!

Thanks,
Sonal

Mini Market Update - Rising Supply

2010-05-28T06:33:00.004-04:00

The tax credit expired about a month ago and we are feeling the effects in the immediate Northern VA market. Housing inventory is sitting around and we are seeing attractive price reductions on regular sales. Meanwhile, sellers are still listing their properties in droves since it is the spring/summer market. So buyers currently have more options than they have during the past year or so. We have yet to see whether or not this is temporary - maybe buyers are in shock from missing the tax credit deadline and will start looking again soon. It's hard to believe that all of those buyers simply disappeared, but hey, I've been wrong before. The media news of interest rates rising in the near future will surely light a fire under buyers but maybe, like all things, it will take an actual rise for people to actually take action! The most likely outcome during the next few months may be a more balanced/reasonable market with some negotiating room for buyers and sellers no longer being able to list really high just because they know buyers are desperate for the tax credit!

Home Buyer Seminar on Thursday, April 29

2010-04-06T17:37:00.002-04:00

I have scheduled the next home buyer seminar for 7:30 PM on Thursday, April 29 in Reston. Please let your friends and colleagues know if they are starting to think about buying a home. There is a lot to know in today's market - it's important to do your homework and this is a great first step. Visit the meetup site to see the topics that will be covered as well as the complete details!

http://www.meetup.com/novahomebuyers/calendar/12866053/

Research the Neighborhood

2010-04-01T14:15:00.006-04:00

A critical part of the home-buying process is to THOROUGHLY research a neighborhood. This is the best way to ensure that you will actually feel at home in your new home. Below I have some tips and links that are key to researching neighborhoods - a must read for first-time home buyers!

The Commute

Although a hassle, the effort is well worth it. Buyers should actually get up early one weekday and practice the commute from the new neighborhood to their workplace during rush hour. This is especially critical in Reston b/c Northern VA is in the top 10 for worst traffic in the nation. It may be a shock if you are coming from another part of the country that had less traffic. This research could drastically affect where you are willing to live. Luckily, I can help you find a home almost anywhere in Northern VA b/c I have lived and worked throughout the area.

If you are using public transportation, put your start and end points into The Washington Metropolitan Area Transit Authority (WMATA) Trip Planner for the fares and transfers that will be required.

For bus travel within Fairfax County, use the Fairfax Connector. The WMATA Trip Planner includes Fairfax Connector routes but you can find bus schedules and more detailed information on this website.

The Virginia Railway Express (VRE) is great for commuters from Manassas or Woodbridge to get into Alexandria or DC during peak rush hours.

Visit the Neighborhood

Make sure to drive through the neighborhood in the evening when people are home and kids are playing, etc. When you are at the neighborhood, don't be shy! Speak with a few of the neighbors - introduce yourself as someone that is considering moving into the neighborhood and ask how long they've lived there, what they think of the neighborhood, if they feel safe walking around at night, etc. With some luck, you'll run into the chatty neighbor that will give you the history of the neighborhood as well as the house that is for sale!

Schools

Elementary school ranking correlates very strongly with quality of the neighborhood and therefore prices. If a neighborhood is considered to be a high quality neighborhood, it will be in higher demand which usually means that it will appreciate more quickly during booms and decrease more slowly during busts. It will also tend to sell more quickly when priced right! Of course, there are exceptions; sometimes a really nice neighborhood is part of a low-ranked elementary school district. Perhaps the children go to private schools or perhaps most people in the neighborhood don't have young children. It's up to you to research this if it is important to you!

The VA Department of Education's Report Cards are the best source of school data for Virginia. I usually make a spreadsheet to compare schools in a particular area for my clients.

Here are links for some Northern VA school systems:
Fairfax County Public Schools
Alexandria City Public Schools
Arlington County Public Schools
Falls Church City Public Schools
Loudoun County Public Schools
Prince William County Public Schools
Manassas City Public Schools
Manassas Park City Schools

Here are some links where you can type in an address and it will tell you what schools are associated with that address:
Fairfax County School Boundaries
Loudon County School Boundaries
Alexandria City School Boundaries

Crime

One of the most overlooked research components by new buyers are the crime statistics for the neighborhood. Most police stations have a staff person dedicated to speaking with the public about crime in neighborhoods - you have to call them and it may require persistence to get to the right person but will be well worth the effort in the end. For Fairfax County Police Districts, go to this website - http://www.fairfaxcounty.gov/police/stations/

To see a map-based search of crimes in Fairfax County, visit Fairfax County Crime. To see a map-based search of crimes in Loudoun County, visit Crime Reports. For Alexandria, please visit this link Alexandria Crime Reports Please be aware that these sites may exclude some types of crime, so it is better to speak to the police department rather than relying solely on these websites.

And finally, since VA is legally a "Buyer Beware" state, remember that the burden is on the buyer to research everything prior to closing on the house. Your real estate agent can not make decisions for you about what you are okay with. You should familiarize yourself with what different neighborhoods look like on the Megan's Law Sex Offender Registry so you will have determined what you consider to be average for a neighborhood and what levels are not acceptable for you.

Some of the World's Most Unusual Real Estate

2010-04-01T13:19:00.002-04:00

Here's a great website for those of you into real estate humor: http://lovelylisting.com/

Home Buyer Seminar Wednesday, March 10 7:30 - 9:00 PM

2010-03-02T09:55:00.003-05:00

The seminar will be in Reston and it's free! Great information. See the full details at: http://www.meetup.com/novahomebuyers/calendar/12723780/

Upcoming Changes to FHA Loans

2010-02-25T18:44:00.006-05:00

FHA has taken a big hit in recent years, just as many mortgage organizations have. In order to remain healthy, they have decided to implement some changes in the FHA regulations that will make it a little tougher for borrowers.

The change with the biggest impact, in my opinion, is that borrowers with a credit score under 580 will need to have 10% down - which will make it impossible for some borrowers to purchase a home. Anyone with higher than a 580 credit score can still have a 3.5% downpayment.

Another major change is that the upfront PMI payment will increase from 1.75% to 2.25%. Since most borrowers finance this payment, the impact will be fairly small, in my opinion. For example, for a $300,000 contract price, there would be an additional $1500 financed, which would mean that the monthly payment would increase by $8-$9 per month, assuming an interest rate between 5-6%.

Additionally, the maximum seller paid closing costs will be reduced from 6% to 3%. This could have a large impact in some cases because it could increase the amount of upfront cash that the borrower will need. However, for price points that are typical in Northern VA, 3% should cover all of the borrowers closing costs so that they will only need to bring the downpayment to closing. For borrowers whose reserves are very tight, I might recommend waiting and saving heavily.

Overall, I think any changes that lead to stricter guidelines are good. It is not good for real estate sales, but I truly believe it is good in the long run to make sure people with more money, higher credit scores, and higher reserves, are purchasing homes.

Here are some websites with more information about these changes:
HUD Press Release

BTW - I made an earlier post/vent about the no flip rule for FHA loans. Well, this has been lifted for a year - fabulous! Here is the article: HUD No Flip Lift Article

Don't Fall in Love (When Buying Short Sales)

2010-02-22T09:25:00.004-05:00

It is absolutely devastating to wait for a house for five months and then finding out the deal can't happen. Many buyers in this situation will start thinking of the house as their own during the five month wait. The problem is, it's not yours until you have signed all the documents at closing.

Buyers that are looking at short sales need to be very aware of this. The list of things that can go wrong prior to closing are immense, and I feel like I have experienced a good portion of them, unfortunately.

Please, please, please, DO NOT GIVE NOTICE at your rental until you have signed the documents at closing. The extra month or two of rent should be considered part of the price of purchasing a short sale. I am dead serious about this. What is worse - having to pay an extra month or two or rent, or having to scramble to find another place to live if the short sale doesn't work out?

Here are some of the real life scenarios I have experienced so far:

1) The approved price comes back higher than the contract price. This has happened twice with Bank of America short sales. The buyers try to negotiate and come to a middle ground but Bank of America closes the case when they don't accept the original counter offer. Once the case is closed, they have to start over with another appraisal and it will be another three to five months. In one situation, the listing agent didn't even know the case had been closed and the property went to auction. In the other situation, the buyers had given notice at their apartment (that they had lived at for 8 years) so they were not able to wait another three months for approval - they had to find a new lease to sign.

2) The approval comes through for the contract price but the seller has to sign a promissory note for a large amount and refuses to sign. This was truly horrible - the listing agent had worked so hard to get full written approval for THREE trusts in five months. The buyer had done the home inspection and paid for an appraisal when we found out the seller was refusing to sign the approval letters - something about an attorney advising him to file bankruptcy. Since prices started going up after that, that family ended up settling on a townhouse instead of a single family home - which will always be a source of dissatisfaction for them.

3) Fully approved short sale with mold in the home that my client is willing to address using an FHA 203K loan (renovation loan). The listing agent tells us that the sellers have signed my client's offer, but before he sends me the ratified contract, he stops returning my calls. About a week later, he says the bank saw pictures of the mold and wants a cash offer. I write a letter about the renovation loan program and how it works but I never hear from the agent again.

4) Title issues crop up after receiving full approval on the short sale and after the seller has signed the approval letters. Apparently this is not unusual. For one thing, the title exam is not conducted until after the short sale approval comes through. For a second thing, when people stop paying their mortgage, they stop paying everything. So creditors can file a lien against the house for the amount they are owed. The owners don't show up to court for most of these so many of them are default judgments. These judgments are in the name of the owner only and if the owner has a common name, you have to obtain the social of the owner and verify that each judgment belongs to another person with the same name, and not the owner of the property. If it is the owner of the property, then the judgment will have to be paid out of the short sale proceeds(renegotiate with the banks), the owner will have to pay them, or the buyer will have to pay them (which is a little ludicrous). In my particular case, two of the former owners are out of the country and hard to get a hold of (to obtain the SSN) and many of the attorneys that filed the judgments are no longer in business. What a mess! This is still ongoing - I will update this blog if it resolves happily for the buyers.

FHA & Flips

2009-10-21T01:55:00.006-04:00

It is becoming very common for investors to buy properties at auction, sight un-seen, renovate the property within about a month, and place the property on the market. If the renovation is done well, this improves property values and neighborhood quality. So what's the problem?

Unfortunately, although we do have a wonderful $8,000 tax credit available to first-time home buyers, these nicely renovated properties are not available to first-time home buyers with less than 10% downpayment (assuming they have to do an FHA loan). This is because of FHA regulations that say a property must be owned by the owner for 90 days before an FHA buyer can even write an offer on that property.

What is the effect of this 90 day FHA rule? The effect is that everyone but the typical first-time home buyer can buy nicely renovated, move-in ready, properties that are not sold As-Is. All the other affordable properties need a fair amount of renovation. It is truly unfortunate. Who is in charge of this FHA rule and why do they think it is in the buyer's best interest?

Home Buying 101 Seminar Thursday, July 9

2009-06-27T07:29:00.004-04:00

It doesn't matter if you are a first time home buyer or just someone that hasn't bought a home during the past three years. A lot has changed and this seminar will give you a good refresher or intro on the process of buying in the current market.

The following types of questions will be addressed:

•Who qualifies for the $8,000 tax credit?
•What are the low and no down payment options available?

•Does it make sense financially for me to purchase a home in Northern VA?
•What should I do 6 months before I start looking for a home?
•How much money will I need to buy a home?
•How is the monthly mortgage payment calculated?
•How do I buy in today's new world of bank-owned, short sales, and regular?
•Any questions that you may have!

Click on Coming Events at www.UniquelyRestonHomes.com for more details, directions, and registration information.

VHDA Home Buyer Tax Credit Plus - New Zero Downpayment Program

2009-06-27T06:37:00.008-04:00

There are many wonderful people in Northern VA that do not make enough to gather substantial savings for home ownership - teachers, policemen, firemen are some of the folks that come to mind. Let's face it, homes are very expensive in this area - the difference between housing expense and salary is smaller here than in most of the country.

VHDA creates programs with these folks in mind - zero downpayment programs! The Home Buyer Tax Credit Plus has just been announced by VHDA. Combine this program with seller-paid closing costs and you are talking about buying a house for almost nothing upfront. Get your real estate agent and loan officer to help you figure out how to negotiate this.

This program is not directly tied to the tax credit, but it anticipates that the buyer will receive the tax credit within the coming year. Obtain a primary FHA loan of 96.5% and a second loan from VHDA of up to 5%. The best part is that the second loan doesn't require principal or interest payments for the first 12 months. The second loan is unsecured - VHDA is taking a risk for you! If you don't pay off the second loan within the first 12 months, it will be amortized starting in the 13th month at the same interest rate as the first loan and over 29 years. You must close on the house before Nov. 30, 2009 and meet the VHDA income and loan amount maximums.

The 5% can be higher than the maximum tax credit of $8,000 so the buyer must make a calculated decision about this. Also, keep in mind that the buyer may not receive the full $8,000. It is the buyer's responsibility to determine what kind of tax credit he/she will receive.

The interest rate may be slightly higher for VHDA - so this is ideal for people who can afford the monthly payment but cannot afford the upfront costs of buying a home.

Contact me with your questions about anything I have discussed here - this is just an overview and does not cover every circumstance.

More information about the VHDA program at: VHDA Tax Credit Plus Flyer

Hope for Homeowners Program

2008-11-03T23:53:00.004-05:00

This program offers struggling homeowners an opportunity to refinance their upside-down mortgages to a principal amount closer to current market value. It was signed into law and is effective as of Oct. 1, 2008. It seems like it could get sticky since the lender has the power to decide if they want to participate.

At any rate, I have heard very little media buzz about this program. If you have had any experience with this program, please share in the comments section.

Below are two links on the HUD website describing the program.
Fact Sheet
FAQ

Reston September Stats

2008-11-03T23:16:00.005-05:00

I will report from time to time on sales statistics for Reston based on data from our local multiple listing service, MRIS.

Investment 101 Seminar

2008-06-25T17:04:00.006-04:00

On the evening of Tuesday, July 1, I will be conducting an educational seminar for first-time investors in residential real estate. The focus will be on long-term investment (not flipping) - holding on to the property until the next seller's market comes up. The seminar will be in Reston. Please sign-up on the meetup site for free and RSVP there if you are interested.

http://realestate.meetup.com/1143/

Pricing of REOs vs. Short Sales

2008-04-06T09:08:00.002-04:00

I had a client ask me if the price goes up or down when a short sale becomes an REO. This is an excellent question. Also, a lot of people seem to think there is a relationship between the amount owed on a home and the list price. This can be true for a short sale, but is not part of the consideration for pricing an REO.

Pricing for an REO is a combination of an appraiser's opinion of the value, a real estate agent's comparable market analysis (CMA), and the bank's final decision based on these inputs. Therefore, pricing for an REO is essentially done solely on the basis of the market value. In a way, from a real estate agent's perspective, the bank is the ideal seller-client - because they listen to our assessment of a good list price to sell the property quickly. The property is generally priced competitively (lower than comps) because the bank wants their property to be the first to sell in the neighborhood. It is also priced lower if the condition of the property is poor. However, the bank is dependent on the real estate agent and appraiser to be its eyes and ears - the bank's asset manager does not come out to see the property. Therefore, the smart real estate agents recommend a very aggressive price and do generally see the payoff of a quick sale (less than 60 days).

For short sales, pricing gets a little more complicated. Originally, it seemed the pricing was based on the listing agent conferring with the bank on the amount that the bank agrees to forgive of the debt. Unfortunately, this usually resulted in prices that were above market value and the short sales weren't selling. Lately, it seems that the listing agents are pricing to be the lowest in the marketplace by far - the goal seems to be to get multiple offers in the door. Once an offer comes in, the agent is able to submit the short sale package to the bank and get the bank to start the process of pricing the property. It seems that the bank will sometimes come back with a higher price than the list price. However, maybe some banks are changing their procedures and agreeing to lower prices now based on an evaluation of their bottom line loss after a short sale vs. a foreclosure/REO. Foreclosure is very expensive for the bank. It seems that the second trust lender frequently completely loses out with a short sale.

So, the answer to the initial question is really - it can vary. Sometimes the short sale is priced almost ridiculously low so the market value of the bank sale is a higher price. Sometimes the short sale is priced based on the amount of the remaining debt so the market value of the bank sale is a lower price.

Foreclosure Caravan

2008-04-02T14:18:00.013-04:00

There are some great deals out there - but the process of buying a foreclosed property might be daunting for some. Come and take a look at 6-8 properties in Reston/Herndon on Saturday, May 3 at 10am and learn the ins and outs of buying short sales, foreclosures, and REOs.

Visit the meetup site for complete details and to RSVP. Join the group if you might be interested in this or future real estate seminars.

http://realestate.meetup.com/1143/

Short Sales, Foreclosures, REOs

2008-02-21T06:34:00.009-05:00

There are a lot of new terms that are being thrown about the real estate world lately so I thought I'd do a post to define Short Sale, Foreclosure, and REO.

A Short Sale occurs when the owner of a property is having trouble making their mortgage payments and they find a real estate agent to list the property for less than the amount they still owe AND negotiate with the lenders that are involved to agree to this. This is PRE-FORECLOSURE. Short sales are becoming more popular with banks and real estate agents. However, if you are interested in a property that is listed as a short sale or "third party approval," make sure you have an agent that has worked with them before or has access to another agent or broker that has experience with short sales. There is a lot of additional language (protections for the buyer) that should be written into an offer for a short sale - the standard addendums for this have not yet been developed by the realtor associations. As a buyer, you should only be looking at short sales if your situation allows you the flexibility to wait indefinitely for one, two, or three months before you even know if the deal is going to fly with the bank. It also seems to me that these properties are being priced a little too aggressively - I suspect the buyer may be in for a nasty surprise after the one-three month wait period when the bank says they can't possibly accept such a low amount for that home. The reason that these transactions take so long and are so frustrating is because most of the time, the bank will not start to do their analysis until AFTER an offer is received on the property. Once an offer is received, the seller should ratify the offer, and the ratified offer gets sent to the bank along with the evidence of hardship package. Then, the bank will start their process of getting the appraiser out to the property, doing their market analysis, and getting the approval of all the investors involved in the loan. Sometimes, the listing agent has a relationship with the bank and will get a pre-approval of the list price from the bank. But most of the time, the list price is just designed to get that first offer on the property.

A foreclosure is a legal term and process. I personally know the least about this because it doesn't generally involve the real estate agent. This is the actual legal process when the house is taken away from the mortgagor who has failed to make his payments. The bank must provide a specific number of required notices to the mortgagor based on VA law before foreclosing on a property. Then, in Virginia, an auction at the courthouse steps must be held - which usually involves calling out a lot of properties fairly rapidly. There is also a required amount of advertising involved for the auction written into VA law. However, practically speaking, it can be very difficult to track down when the auction is occurring for a particular property. You have to find the attorney that is handling it and they can tell you. I think these foreclosure auctions would be much more successful if there was a statewide system made available to the public where you could see when and where particular properties were up for auction.

An REO is a Real-Estate Owned property. This is also referred to as a Bank Owned property. This is what happens when the auction at the courthouse steps did not have any bids that were high enough so the original bank essentially buys the property back via a trustee's deed. This is POST-FORECLOSURE. I have a lot of experience with these from the buyer and seller side of things. This is where buyers are getting the deals and the transactions are fairly easy to deal with. It is almost like a regular sale except the seller is not an individual but a corporation - which usually just means that the response times are a few days longer and there is more red tape in general. There are some differences written into VA law as well - no property disclosure/disclaimer is required and no HOA docs are required in the case of a bank sale after foreclosure. These properties are generally priced very attractively to start. And in the current market, banks still expect to negotiate with the buyers. I don't think it's usually the huge price knock-offs that people are convinced they can get away with - the bank usually negotiates up from the low-ball offers. There are addendums that the banks add to these transactions to protect themselves and they generally have a title company that they will do business with for the settlement. However, there is statutory law in VA that says the purchaser always has the right to choose the title company. I suspect that some of the bank addenda may have to change if this was ever challenged in a court of law.

Bidding Wars Back?

2008-02-20T18:04:00.017-05:00

Amazingly enough, it seems that bidding wars and escalation addendums are rearing their ugly heads once again - at least in some arenas. I would like to address why I think this is happening, as well as how it affects buyers and sellers.

As we all know, buyers have been waiting and waiting and waiting for the market to hit bottom. Well, it would seem that a lot of buyers are starting to think that the time has arrived - and they are keeping a very sharp eye on new listings and price reductions. I am working with primarily two types of buyers - investors looking for properties in and around $200K and people looking for their dream home for $500K. Both of these types of buyers are looking for the best deal they can possibly get - the biggest home in the nicest condition for the lowest price. And when one of these beauties comes available - the bidding wars are on!

What does this mean for buyers? If you are looking in a popular price and style type, be prepared to have to outbid other buyers. It is not uncommon to go above list price in these situations. Set a maximum and put your bid in, but don't get your heart set on a property or you are asking for a let down. Be prepared to have to bid on multiple properties as well - you can't win 'em all. Does this mean you should avoid searching - probably not. If going above list price by $5K is still $40K lower than what you would have spent the last time you were ready - then you're still getting a deal!

What does this mean for sellers? You will now be able to sell your property - and quickly - if you price it attractively and stage it well. It's probably better to list now, before everyone else decides to list as well in the spring. The sellers have been waiting, too, believe it or not.

Disclaimer - I do not claim to be able to predict the future. The ideas I have discussed here are based on recent direct experience in the Reston/Herndon VA markets only.

If you have any questions about the market or are interested in getting new listings and price reductions automatically e-mailed to you (as frequently as you wish), I would be happy to help you. Just shoot me an e-mail.

Nuts and Bolts of the Monthly Mortgage Payment

2007-06-24T09:53:00.011-04:00

Your mortgage payment consists of PITI - Principle, Interest, Taxes, Insurance. You'll also have to add in your PMI if you have it or your 2nd trust if you have one.

Other monthly expenses which are not included in the mortgage but which should be factored into your budget are HOA/Condo dues and estimated utilities.

Insurance and Taxes

Now, let's go back to PITI. I want to talk about the taxes and insurance first. When you first get your mortgage, the lender has a vested interest in what happens to the house - if you foreclose, etc. - the lender is stuck with your house. For that reason, they don't want to take any chances that the home owner won't pay their taxes and home owner's insurance. So, they divide the yearly amount due by 12 and wrap it into your required monthly mortgage payment. On their side, they hold this money in an escrow account and pay the insurance company and county directly when the insurance and taxes are due. You probably won't receive a bill for either of these things, but if you do, you should let your lender know b/c they have probably already paid it.

Interest and Interest Only Loans

Now, about interest. This is really simple to calculate b/c it's simple interest (he he). You take the principle amount of the loan, multiply by the interest rate (which gives you the yearly amount of interest), and divide by 12 to get the monthly amount.

So, let's say you buy a house for $400,000. You have a 5% downpayment - that's $20,000. And you have a 95% 1st trust - that's a principle of $380,000. The interest rate is 6.5%. So, the interest due in the first month will be $380,000*.065/12 = $2,058.

(Note, for this example, you would also have a PMI or Primary Mortgage Insurance factored into your mortgage - see previous post).

If you have an interest only loan, your mortgage payment will not include any payment toward your principle. But, as with any loan, you have the option to make additional principle payments in any amount at any time. When you do make the principle payments, the amount of your next interest only mortgage payment will be reduced because it will be based on the new, reduced principle amount.

Principle and Amortized Loans

If you have an amortized loan, your mortgage payment will include a principle payment and the sum of principle and interest will be exactly the same each month. The interest portion is still calculated the same way - simple interest. So, what ends up happening is that you pay a lot more interest in the beginning and at some point, you start paying more principle per month than interest.

What happens if you make extra principle payments when you have an amortized loan? It does not reduce the amount of the monthly payment that is due, but it does reduce the life of your loan. So, for example, if you had a 30 year fixed amortized loan, and you consistently made extra principle payment, you may pay off all the principle in 20 years instead of 30 years.

There is a complicated amortization formula that is used to determine the monthly payment that would be required in order to pay off the principle by the end of the loan period. See the link to the wikipedia page for the formula. If you like excel, use the PMT function. And there's a lot of scientific and financial calculators that can do this as well.

I will be happy to provide you with an amortization table for your specific situation if you would like - just say the word.

Here is the link to the wikipedia page on amortization - http://en.wikipedia.org/wiki/Amortization_(business)

Shopping for a Mortgage

2007-06-22T20:37:00.011-04:00

Although I am not a mortgage professional, I do have a detailed understanding of how home mortgages work and I have helped my buyers navigate between the different plans out there to help them decide the best option for them. So here are my thoughts on mortgages and steps to take with your finances up to a year in advance of your home purchase.

A year prior to home purchase

You should check your credit report for errors a minimum of a year before you start looking for a house. You should get all of those errors cleaned up so that your credit score is as high as possible when you do apply for a loan. Your credit score determines your interest rate - the higher the credit score, the lower your interest rate. Keep a close eye on your credit after that and make sure no new errors pop up.

Three months prior to house shopping

Start keeping a detailed record of your income and expenses. Then, use this to get a really clear idea of what type of monthly mortgage payment will be comfortable for you and what types of things you'll have to reduce or cut out if you have that mortgage.

For first time home buyers - you should also go through the exercise of pretending you have that mortgage for these three months. You should put the difference between your rent payment and your expected mortgage payment into a savings account.

Savings

Even after the home purchase, you should have two months of living expenses in savings as an emergency fund. Don't empty the bank for your home purchase. Life is full of unexpected surprises.

A month prior to house shopping

You should have your loan approval in hand before you start looking at homes. This is something that I have often seen buyers overlook or ignore. When you make an offer on a home, your approval letter should be included with the contract. Not only does the offer look unattractive to the seller without an approval letter, but it can be very overwhelming to deal with a contract at the same time as mortgage shopping. I had a buyer that actually backed out on me the night we were supposed to write the offer because he had just started talking to lenders and was thoroughly confused. We ended up writing the offer three days later - after I gave him a crash course on mortgages.

It is best to talk with two or three local lenders and compare their rates and plans. Internet lenders may not know the taxes or other charges that are typical for your particular state and you may end up with a nasty surprise at the last minute. The bottom line is you should work with someone that you can talk with in person. I can provide you with referrals if you would like - I have an especially good one for first time home buyers that are strapped for cash.

ARMs

The 30 year fixed option is not usually the best option for folks in the DC area, unless you are buying your permanent home. A lot of people just compare rates on 30 year fixed mortgages but they are not going to live in that house for 30 years. So, if it is likely that you will move again in a few years, there might be better rates for mortgages with ARMs. This is not an interest only loan. It is a fully amortized loan where the rate is initially fixed for some number of years and can adjust after that. If you move, you would have to obtain a new loan for the new property at new rates regardless. So the only risk with an ARM loan is if major life circumstances prevent you from moving again when you had planned. It is a risk you must carefully consider.

Interest Only Loans

An interest-only loan is one where the required mortgage payment does not include a principle portion. So if only the required payments were made, the only equity in the home would be based on the appreciation of the house value. The nice thing about this loan is that if you do make principle payments, the required monthly payment will decrease which is not true for amortized loans.

If the interest rate is lower on an interest only loan, this might be the best option for someone who has discipline and will make principal payments. It is ideal for someone with fluctuating income or someone who is fairly certain they will be making a lot of money in a few years.

PMI vs. 2nd Trust

If your downpayment is less than 20% of the sales price, you will be required to either pay Primary Mortgage Insurance (PMI) or to have a 2nd trust.

PMI is tax deductible as of 2007 so it is coming back into the market now. There are two types of PMI - the monthly payment option as well as the financed option. The financed option is where you pay a lump sum for the PMI - like $3000. It gets financed into your loan so you don't actually see this. The financed option usually ends up being cheaper for the buyer. As soon as your loan to value ratio is 80%, you can request that the PMI be removed.

The 2nd trust plus downpayment plus 1st trust will equal 100% of the sales price. For example, you may have 5% down, 15% 2nd trust, and 80% 1st trust. The interest rate for the 2nd trust is higher than the 1st because it represents higher risk for the lender. With this option, you must pay the full amount of the 2nd trust, regardless of the house value. Also, you may not be able to borrow money against your house if you have a 2nd trust - people frequently do this for home improvements, etc.

In order to compare the two, you should do a side-by-side of how much is going toward principle and how much is tax deductible interest/PMI for each plan. I have spreadsheets that I use to do this that I would be happy to share with you.

Summary

Depending on whether you have a limited monthly payment you can afford, whether you are planning on moving within a few years, your risk tolerance, and/or whether you are just trying to put the maximum amount of principle toward your house every month and the least amount of interest/PMI, you will need to decide on the mortgage plan that is best for you.

I highly recommend being cautious in order to avoid financial stress in the future. You should decide on a maximum monthly payment and stick with it during your home search. AND, your maximum monthly payment should not be at the top edge of what you can really afford or require a significant lifestyle change if that will be difficult for you.

No one can predict the future - you can't know if your house will appreciate significantly by the time you are ready to sell or if it will be a buyer's market or seller's market or what life circumstances will cause you to have to sell.

Please feel free to e-mail me or post a comment if you have questions or would like to discuss any of these topics further.

Why Real Estate?

2007-04-14T21:20:00.008-04:00

How did a girl that was interested in Peace Corps and saving the world and who thought that there was something inherently wrong with amassing a lot of money... decide to become a real estate agent?

Well, here's the (long) summary, if you're interested.

There were three careers that I was considering after college - teaching high school, being a therapist, or being Mother Theresa (well, at least saving the world in a similar manner). Despite my intentions, I somehow ended up being a systems analyst with a LOT of responsibility. The years flew by and I spent a lot more time working than I should have.

At some point, I got married, and we bought a house. Well, the house turned out to be a "welcome to reality" trigger. Having a mortgage for the first time can really hurt - neither me nor my husband were money-savers. We went out to eat a lot, we saw shows and we also gave generously to charities. I now understood why a lot of people didn't donate much to charities - guess things like kids and a mortgage can really put a damper on that. I think both of us started thinking about money in a different way.

At some point, I also started thinking about what I wanted to accomplish with my life. Having attained a leadership position at work, I had a lot of confidence in my abilities and in the ability of one person to make a difference. So how could I really use my knowledge and skills to make a difference in the world? I figured I could actually make the biggest impact by being in charge of things, maybe starting a non-profit. But at the least, by having a lot of money and the decision-making power over where that money goes. How does one make a lot of money? By starting one's own business.

I wasn't too particular about what business it was as long as it didn't involve harming animals and I could afford the initial investment. After all, I was doing a business because it was a means to an end. In reality, it didn't appeal to me to do a business because it didn't seem like there was any purpose to it other than to make money. I mean, if you're programming or doing research, you're really using your brain, you're being challenged and making use of what you learned in school. I just didn't have the same level of respect for running a business. But, it was going to help me accomplish my bigger goals in life so I felt I needed to do it. Real estate was an easy choice since my parents had both had their license at some point and there was a small time and financial investment required - low-hanging fruit.

Thus began a life-changing journey. Compared to a corporate job, it is incredibly empowering to start your own business. If you slack off at your job occasionally, it doesn't really matter. But in your own business, slacking off directly lowers the amount of money you will make. Everything is up to you. This is so profound. You really have to clean up your act and work out all those personal issues that get in the way of your own productivity.

As I got more and more training in real estate and learned more about what it takes to be successful in this business, I really started to respect good agents. They go above and beyond to ease the process for their clients. I started to embrace the work. It turned out to be exactly in line with my motivation factors. You see, I love pleasing people. At work, it was always the things that someone was waiting for and really needed that I really got motivated about.

Also, since the software that I used at my job was proprietary and a bit buggy and a bit under-documented, I had learned to be very creative and to doggedly search for work arounds and solutions. I found that I loved applying this to people's home searches and seller's preferences for price and terms.

The other thing that weighed on my mind was the perception I had that real estate agents were just money-hungry, unethical folk. In the public mind, it seemed like people weren't even really clear on what real estate agents did. When I started, I had this perception as well. But over time, I started to see how I could run my business in a very ethical manner AND help people with the biggest investment of their lives.

So a year and a half after I got my license, I decided being a real estate agent was truly right for me and I quit my job. Hallelujah!

By the way, I donate a percentage of every commission to a mutually agreeable cause. 2007 is the YEAR OF THE SCHOOL - I ask my clients to choose a (preferably local) school for a donation on their behalf. This is tax-deductible for my clients.