Friday, September 25, 2015

Should You Put More Money Down?

The notion of making a larger down payment is often floated by clients looking to best position themselves financially whilst buying a house. Spending 200 or even 300 thousand dollars is a daunting task for most people. The answer to query posed by the title of this article is not as simple as it seems. Many factors effect a person's finances and everyone is bit different. But there are some solid guidelines that can be applied to help determine if a big down payment is the best course of action.

The first thing to remember is that a word like "big" is relative. What is a big down payment. 3%, 5%, 10%, 20%? In the mortgage world 20% is a big down payment. If a borrower puts down 20% they generally avoid paying for mortgage insurance. This is a strong motivator for many people that are sitting on a large sum of cash. Mortgage insurance protects the lender from loss should the house default. The mortgage insurance pays the bank the difference between what the borrower put down and 20%. So if a borrower puts down 10%, the mortgage insurance pays the bank 10% if the borrow defaults, giving the bank the money they would have had if the borrower had put down the full 20%. The down payment protects the lender from loss in a default that happens early in the loan cycle. Since interest is paid largely up front if a borrower defaults in the first five years there is a good chance the bank would lose money without a 20% down payment. The insurance protects the bank, not the borrower.

If a buyer is able to put down 20% with out risking financial stability, then avoiding mortgage insurance can be a pretty big deal. Depending on the size of the loan it could easily save $100-$200 a month on the payment. Many borrowers however do not have that kind of cash. If they do, it could be the only cash they have in reserve. Having cash reserves is very important to financial stability. There is a point at which putting less down is beneficial. Right now mortgage interest rates are ridiculously low. Borrowing an extra $10,000 at a tax deductible 3.75% could be a better bet than giving up that $10,000 in cash reserves. Talking to a tax pro is always recommended when buying a house.

Before putting more money down it is well advised to carefully consider the advantages of more or less down payment. Every situation is different, but sometimes less is more!

Friday, September 11, 2015

Lenders Follow the Money, Very Closely!

If you are buying a house and using a mortgage loan it is very important to follow the direction of the Loan Officer even when it seems redundant or even stupid. Ever since the 2008-09 crash the government has been putting banks beneath an ever watchful eye of regulators and under the oppressive thumb of the government. Every significant deposit or withdrawal into any account the borrower uses is carefully analyzed. The bank needs to know where the money came from and where it went.

Make no mistake about it, the bank will kill your deal and leave you standing at the proverbial altar with out so much as a Dear John letter if they can't "follow" the money trail to a happy place. by all means do not hide money under the mattress! Cash that magically appears from fairy dust will kill your deal faster than Superman saves Lois Lane.

Any funds used in the transaction should be well seasoned, in the account for several months or deposited from reliable traceable sources such as a payroll check, government agency, insurance company, pension fund, etc. Any larger deposits or withdrawals totaling more than a couple hundred dollars should be logged by the borrower so they can explain to the bank if needed. Also any funds used for the purchase of the home should be taken from the same account the borrower has reported to the lender. No funds should ever be sourced from an account the lender has not vetted.

So in short, your moving and decide to have a garage sale. You do well selling off your unwanted junk. You net a cool and crisp $600. So you deposit the cash into your account. Keep a log of where that $600 came from. A loan underwriter is trained to assume that anything unknown is corrupt. Did ISIS give you that $600? Did your uncle give it to you because you can't really afford to buy this house? Do you moonlight as cat-burglar and this was the loot money? I am not kidding. They are very concerned about the comings and goings of your finances. Remember they are about to loan you hundreds of thousands of dollars based on your promise to pay them back. You are going to have complete control over the very asset that is collateralizing the loan. It is serious business and it is not difficult to comply, but you must comply if you want to play in their vault.

Unfortunately we had some loose regulations prior to 2008 that lead some people and companies to be dishonest and deceitful in their business practices. This helped create a very bad financial collapse that cost the American taxpayers dearly. As is typical with government, there was a gross overreaction that has lead to somewhat oppressive regulations that now create a new series of headaches for the American people.

It is very important to understand the age old adage "Those that have the money, make the rules". Banks have the money and if you want their cash, you play by their rules. The banks have to play by the government rules for a similar reason.

So be mindful and get your dream house.

Friday, September 4, 2015

Analysts Backing Off Rate Hike Predictions

I have been perusing through the financial news and scouring for hints of what the outlook over the next few years is shaping up to look like for our mortgage rates. The trend in thought has been that these historic low rates were primed for a rise. But many professionals are backing off the dire short term conclusion that rates will spike and taking a more status-quo view, at least through the end of 2016 and into portions of 2017.

Of course this all lies under the presumption that significant economic events do not alter the financial markets. A disruptive war, major shift in national and or world politics, etc. Ah, the future it is just so gray and fuzzy isn't it? This is why I have been harping on the notion that people take advantage of the current low rates and mild rising market to get a home before it is priced out of reach and while the rates are so favorable.

Historically rates have been as high as 17% and as low as they are now. Here is a chart from Showing average annual rates since 1964.

Looking at the chart one can quickly see that this is a great time to take out a mortgage! Understand that these figures represent the average rate issued by banks over the course of each year on the chart. Actual rates move around regularly and may be adjusted up or down based on the individual loan and the borrower's credentials.

There are still some financial gurus that feel the government may be pressured into moving away form the strong loan guarantees they have been making since the crash in 2009. The presidential election next year could determine the path rates will take over the next few years. They really have nowhere to go but up as we are very near the historic low. Odds favor an increase over a decrease and even if there is a decrease it could go much lower than it already has. Conditions support a positive purchase decision. Since the future is always cloudy one should consider the conditions today which are still quite favorable for buyers.