As the new year begins, we are welcomed by a real estate market that is going to get tougher and tougher.  Interest rates are on the rise, not just in the United States but globally.  And, just this past Thursday, Susan Bies, noted that it was underwriting practices of lenders that were leading to rises in the number of late mortgage payments.  The risk, she noted, was their fault and they needed to crack down. 

Specifically Bies noted that there was too many instances of lenders combining nontraditional loans (remember the interest only loans I mentioned a week or so ago?!?) and utilizing a “risk layering” practice that put the borrower at risk if the interest rates rose. 

For the borrowers like you and I, it is very important to remember that the more sluggish the housing market is, the more we are at risk.  As the market continues to sink buyers can expect higher risks in the long run and a tougher time obtaining financing in the near future.  This is truly a time when the term “Let the buyer beware” is applicable. 

If you are thinking of purchasing a property this year, you may be concerned about what the market trends are anticipated to be.  I know I am.  So, here is the research I have done.  Throughout the years 2000-2005, at least in the United States, the loan market from extremely good.  As a result of actions taken by the Federal Reserve to revive and stimulate the economy, the borrowing rates for banks hit all time lows.  This of course, had the correct effect, banks borrow money from the reserve bank at next to nothing in fees, and they subsequently reduce the interest rates available to their buyers.  Simple enough. 

In 2006, however, the rates are adjusted slightly and the market starts to slow down and interest rates start to move upward.  So now, here it is year 2007 and the question always is asked — what can we expect this year? 

Well, it is my belief we can expect that the changes we saw in 2006 will continue throughout much of 2007.  Things are going to stay at the slightly moving upward rates — at least for now.  Which means that those people we may think were extremely lucky to get the near nothing interest rates may not be so lucky after all.  After all, they are literally trapped in a situation where there are no real refinancing options available to them without tacking on a substantial amount to their loan due to the higher interest rates.  (Maybe my stalling was really a good thing — probably not — but it is a comforting thought to think while I watch the interest rates crawl skyward).  On the other hand, as the market continues creep up, the activity continues to slow down and/or remain sluggish.  This will eventually cause alarm and the Federal Reserve Bank will have to do something.  Playing with(and in particularly lowering) the interest rates in our economy is akin to a doctor using electric paddles on a failing heart.  It tends to restart things and gets them going back to normal.  Well, at least as normal as the financial world can be. 

Interest Only Loans are making a resurgence in the Home Equity and Home Buyers market.  Some advertisements are touting them as the “new” option, but in reality interest only loans have a very long history.  During the period of the Roaring 20s, interest only loans were the home loan type of choice in the mid-west.  Then, when the Country entered the Great Depression and the bottom fell out of the stock market, lenders found themselves with a lot of foreclosures, most of which had no cash equity value available to them.  At that point, interest only loans were pretty much shelved.

The same things apply to interest only loans today.  Because there is not a way to promote equity in them, and because when the actual mortgage+interest payments begin, they are often way too high to afford; interest only mortgages are not for the average home buyer.  Sure, they serve a purpose in investment situations where a property will not (hopefully) be held for more than 5 years.  But if you are looking for loan options that allow you to gain equity and still have an affordable payment, stay away from the interest only loan product.  It simply is not for you.

When shopping for a mortgage loan, most people simply look at the interest rate.  If it seems reasonable, then that’s good enough for them and they sign the papers.  Sometimes, however, that approach is no better than taking a stack of twenty dollar bills and lighting a match to them.  The outcome is the same — you have lost money forever.  For one thing, the interest rate really doesn’t tell the whole story.  In addition to looking at the interest rate (yes, it is a major component to the decision), it is also important to also look at all other fees associated with the loan.  Specifically, look closely at origination fees, any processing fees, and closing costs.  Most lenders will provide an estimate document that has all these figures clearly spelled out.  This estimate document gives you the information you need in order to comparison shop the loan figures to other lenders.  Remember, this is a HUGE investment, keeping as much of your money as possible should be your first and highest priority.

A good rule of thumb for the origination fee is about 1.2-1.6%.  Closing costs will generally be in the range of 3-4%.  While these costs could be influenced by the location of the property, anything outside these windows should be considered suspect and investigated throroughly. 

The short version of the concept it this – lenders are in the lending business to make money.  Don’t simply assume they are giving you the best deal to get your business — because, truthfully, they may not be.  Competition, at least in this case, can be a very healthy thing for your bottom line.  Don’t hesitate to ask questions and if you don’t get the answers you need or want, pick up your paperwork and move on to the next lender.  Someone will recognize what you are seeking and give give you the service you deserve.  

It is true that plugging into the equity in your home through refinancing your mortgage will wipe out credit card and student loan debt; but, it can create new problems if you keep on spending.  Before taking out an equity loan it is a good idea to take a long, hard look at why you are doing so.  If you are  trying to keep the creditors from breathing at the door or calling on the phone a home equity loan may not be the best solution.  If you are taking the equity loan out to pay credit card debt and other consumer debts, ask yourself “Are you comfortable converting short-term unsecured debt into long-term secured debt?”  You could be risking your home and not really coming to terms with the spending issues that put you in this situation — and that, at least in my eyes, could be a very bad thing. 

Alan Greenspan says the housing adjustment is over, or at least the worst of it. Of course, Greenspan is no longer the chair of the Fed, but he does seem to have a finger on the economy’s pulse nonetheless, and we can only hope he’s right this time, too.

Many believe that home-equity loans are the best way to get fast cash when you need/want it.  After all, the interest rate on home equity loans are generally lower than those of credit cards or unsecured personal loans — which is the fast cash solution to most folks.  The interest will be a bit higher than the primary mortgage since this lender is in the back seat of collection should a bankruptcy occur.  Yet, the interest rates on home equity loans still tend to be very favorable because the lender is still insulated with regard to his risk.

So, is there another reason to consider a home-equity loan? 

Some financial and tax advisors would say yes.  Did you realize that any interest you pay on the first $100,000 of a home equity loan is tax deductible?  It is — and this is the good part — it is tax deductibe regardless of how you might have spent the money!  This figure can go up to $1,000,000 if the money you borrow is to put home improvements in place or buy an additional home.

Now, where else can you get full credit off of your taxable income (up to the limits that apply, of course), and still put money in your pocket?  Exactly.  If used right, a home-equity loan can be a slick tax trick — but don’t just take my word for it, talk your own own tax-advisor to get a more comprehensive explanation of the facts. 

In order to qualify for the best mortgage loan, it is important to know (and understand) your loan to value ratio.  This figure is calculated by dividing the balance of your mortgage by the worth (as verified by an appraisal) of your home.  The more equity you have in the property when refinancing, the lower your ratio and the better your interest rate.  Lower ratios essentially equal lower mortgage payments and more savings for you as a property owner. 

Alternatively, if the ratio is high it often flags as high risk to the lender.  High risk equals higher interest rates and higher loan fees.  It can even mean having to purchase alternative mortgage insurance which can be extremely costly to you with no personal benefits whatsoever in return for your payments.  The only thing PMI does is protect the lender — at your expense.   

Knowing your ratio and what it is doing to your refinancing package before you sign the papers could save you some cash. 

As with everything, the concept of valuing homes has now gone internet with websites popping up that advertise their services to provide you with the value of your home based upon past sale prices within the geographical area, trends, this factor times that factor divided by a unknown factor point, blah blah blah.  You get the idea — and to this new trend of services, all I can say to this is Buyer BEWARE.  After looking around my neighborhood, and the neighborhoods of friends and relatives, I see a trend to over-price the values of the properties not just a little bit — but thousands and thousands of dollars.  If I were to sell my house in this very flat and somewhat sludgy market, and put it on for the more than $12,000 extra one of the sites told me I should, the property would more than likely never sell.  In my sister-in-law’ s neighborhood in Burbank, the site put a value on her home that was more then $75k higher than the one she was given just last month when it was placed on the market. 

Certainly, these service sites may have a good concept and purpose – and maybe they will improve in providing accurate information — eventually.  However, in the meantime, my advice to you is to find a local service provider who knows the intimacies associated with your location.  Selling a house in a fickle market is hard enough on its own, doing it with bad information as to asking price is just stupid.  It may cost a bit more to use someone local, but in the long run, it could cost you a whole lot less.

A good friend of mine and a shrewd business professional was looking into refinancing to lock in a lower interest rate — which meant for the same amount of payment more was hitting the principal and less that ever ellusive interest cloud.  It made sense to me.  But, just as the deal was to close, the lender did something that made me wonder — how many others have had this happen?

At the 12th hour of the signing, the lender tried to change the terms of the loan — “to make it go through” he said.  “Not so,” she said.  My friend, because she is a business professional had not only an attorney assisting her with the transaction, but she had the first hand knowledge to recognize the scam that was being played out.  The lender was clearly trying to pad the deal with higher closing costs and some additional insurance for which he was a recommended broker.    He lost the deal — and he now has a complaint with the regulatory agencies to deal with.  When the complaint was made the agency said “This is unfortunately not an isolated incident that has been on the upswing with lenders dealing with single women and minority or elderly populations.  It is as common as online credit card scams.  It is a travesty.”

Not all lenders are bad, but there are those that can only be considered to be predators.  Predatory lending is illegal and unethical.  The predatory lenders relies on the borrowers ignorance and desperation to cloud their  judgment — that’s the only way the scheme will work.  Before you refinance, take time to educate yourself and/or hire a professional to protect your interests and ultimately your investment.   Do your homework and shop around.  Comparison shopping will identify patterns of what the true cost of the refinancing would/should be.  Last, try not to use refinancing as an escape from a bad situation — when desperation or emotions drive your business ventures, it becomes very hard to remain objective enough to protect the investment.  Never act upon something like a home lone or a refinance loan when you feel pressured or rushed.  Take your time, read the documents, do your homework, and protect your money and investment.