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. 

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. 

While overall home prices are dropping fast and furious, resales were up in October, which is good news for those selling their homes.

The basic lesson we can take away from all of this is that “trends” don’t really mean as much as what is actually happening in your area, with the kind of home you’re looking to buy or sell.

In some areas, home prices are still rising, while in other areas, they’re flat, and in yet other areas, they’ve been plunging.

It’s like not counting your chickens before they hatch. Watch what home markets in your area are actually doing.

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. 

For the first time in 13 years, home prices are falling. This is Bad news for those getting ready to sell. If you have a lot of equity, now might be the best time to get it out and invest it in something stable and liquid with a real rate of return, rather than seeing your equity disappear with lower home prices.

However,  if you’re getting ready to buy your first home, falling home prices are great for you, and will allow you to buy more home, for the same money, than you might have gotten even a few months ago. You’ll definitely want to take advantage of falling prices if you’re currently looking for a home.

Whether this is good news for you or bad, it’s also a reminder to keep abreast of what’s going on in the housing market, as an owner or a prospective buyer.

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.

If you’ve ever owned a home in Australia, you might be familiar with mortgage accelerator loans. Now they’ve come to the U.S.

The way this works is, you deposit your paycheck into a special account. Every dime of it. Then, you use that account to pay your expenses, and every dime you don’t spend, goes to pay principle on your mortgage.

I’m not sure this is the best way to prepay a mortgage. I’m not even sure that prepaying a mortgage is really a good idea; I’ve been doing a lot of research on the topic and realize that prepaying does not protect you from foreclosure, where saving that money in a contingency fund could.

But that aside, if you want to prepay your mortgage, this is an interesting way of doing it.