Should You Buy Points or Not?

 

Make sure you understand what points are.  Points (or discount points) are simply pre-paid interest.  One point amounts to 1% of the total mortgage.  If you have a $100,000 mortgage, one point costs $1,000.  That's pretty much all there is to it.

 

So why would anyone want to "pre-pay" interest?

 

You pre-pay interest to get a lower interest rate for the life of your loan.  And because points are pre-paid interest, you can, in most cases, deduct them from your taxes in the year you pay the points.  That's a nice one-time tax benefit!

 

To find out if buying points will pay off for your situation, here's some simple math you can do:

Let's assume you are considering two options on the day you want to lock your mortgage interest rate:

• a 5.25% mortgage interest rate that costs you one point.
• a 6% mortgage interest rate that costs you zero points.

 

In this scenario, you would pay 0.75% (3/4 of 1%) less interest on your mortgage each year with the 5.25% option. To get this rate, you have to buy one point upfront.  Divide the total points paid (one, in the example here) by the difference in rate (0.75) which, in this example equals 1.33 (one divided by 0.75).  This is the number of years it will take you to break even from your investment in points.  In months, this would be 16.

 

So, it would take you 16 months to recoup your pre-paid interest money (regardless of your mortgage amount - it's the same whether you have a $100,000 or a $250,000 mortgage) and from then on you would enjoy your low 5.25% for the duration of your remaining mortgage.  If you think you will be in your home more than 16 months, you’re saving money from that point forward.

 

 

 

Owning vs. Renting: Still Not Even Close

 

U.S. house prices "likely would have to fall considerably" to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists.

 

The study, which doesn't necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year.  House prices would have to fall further if the adjustment took place more quickly.

 

The study tracks rents and home prices back to 1960 and found annual rents fluctuated at around 5% to 5.25% of home prices until 1995.  At the end of that year, the average monthly rent was about $553 (or about $6,600 a year) and the average home price was about $134,000.

 

But starting in 1996, home prices started to grow much more rapidly than rents.  By the end of 2006, they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818.  That drove the annual rent/price ratio down to 3.48%.

 

That means the rent/price ratio is about a third below its long-term average.  To return to normal would require some combination of falling prices and rising rents.  The paper suggests house prices would need to fall about 3% a year, if rents grew in line with their 4% average annual growth this decade.

 

If you're renting now and wonder whether it would be smarter to buy now than rent, contact us for a complete analysis of your individual situation.

 

 

 

Some Home Improvements Are Worth Skipping

 

Homeowners aren't recouping as many improvement costs as they could in recent years, according to a recent study by Remodeling magazine.  In fact, real-estate agents advise clients not to overdo it, regardless of what the local market conditions are like.

 

To keep costs down and spend remodeling dollars wisely, consider the following tips:

 

1. Ask for advice.

Before making any remodeling plans, clear your home of clutter and rent a storage unit, if necessary, to hold extra stuff while the home is on the market.  Then, get some advice from a local real-estate agent on how the home stacks up against the competition.

 

Cleaning the carpets, painting the walls and removing wallpaper are common fixes. It is wise to budget for these tasks before putting money aside for more expensive projects.

 

2. Dig deeper.

It also could pay to look below the surface by getting a home inspection before even listing the property for sale.  That way, problems that could hold up a sale are addressed in advance.

 

Some estimate that for every dollar of perceived defect, buyers want a $2 to $3 discount.  If that's true, it might pay to spend $2,500 to replace an old furnace before a buyer demands $5000 off for them to have to replace it.

 

Also, replacing something as necessary as a furnace helps create a favorable perception of how well a seller took care of the home.  If there is a problem with an essential element of the house, a buyer might think, "If that was neglected, what else was?"

 

3. Look outside.

Pay attention to exterior details like the condition of siding and windows.

 

According to Remodeling magazine's 2007 Cost Vs. Value Report, a wooden-window replacement recovers on average 81.2% of its cost at resale, and siding replacement recovers on average 83.2% of its cost.  The payoff for those projects is much better than for an upgrade that a buyer might not need.  A home-office remodeling, for example, recovers only 57% of its cost on average.  The estimates are national averages for midrange homes, not upscale ones.

 

4. Spend time in the bathroom.

Freshening up the bathroom doesn't have to be expensive, but it could be important.

 

It's most important for the bathroom to be clean, but sellers should also consider replacing the fixtures, tub, sink and toilet — if they need it.  Replace cracked tiles and curled linoleum.

 

The replacements don't have to be expensive.  A toilet can cost less than $250, and it is recommended that you consider taller, handicap replacement toilets to appeal to an aging population.

 

5. Keep it small in the kitchen.

The other room that often sells a house is the kitchen, but it might be best to keep renovations modest.  Remodeling magazine's report found that homeowners could recover 83% of the cost of a minor kitchen remodel at resale, compared with 78.1% of a major kitchen remodel.

 

Use caution when thinking about replacing refrigerators, stoves or dishwashers.  Buyers considering remodeling the kitchen will likely have their own preferences.

 

Along those same lines, sellers should replace a countertop if it is crumbling but not if its only fault is that it is outdated.  Even then, seriously consider material costs: There is no need to update to granite unless the competition has granite countertops as well.

 

 

 

Stop the Foreclosure Process

 

It is estimated that more than 3 million homes will be foreclosed through 2009.  This is worse than what happened during the Great Depression.  Reasons for this are many, but put simply, homeowners have allowed themselves to get into mortgages they couldn't really afford.  Predatory loan processes used by lenders have only made what is a tough situation that much worse.  If you find yourself in the situation that you can't pay your mortgage or are on your way there, then you should waste no time taking steps to remedy the problem.  Here are some ways to stop the process:

 

Debt Counseling

There are numerous companies who will provide debt-counseling services.  They will work with your lenders to get a modified payment plan and also can advise you on refinancing or selling your home.  Keep in mind the bank that owns the mortgage could be willing to work with you to prevent the foreclosure because the bank is not interested in having to maintain an empty house.

 

Loan Consolidation

There are a number of foreclosure loan companies that will give you a FREE consultation on your current situation.  You should skip past the companies that ask a fee for this service.  These companies can provide the three possible solutions:

1. Provide private or institutional lenders to assist the homeowner.  In this solution you will get a new loan.  To do this you will need to be able to show you can make the payments.  If your credit is currently bruised this may not be the solution for you.

2. Be released from the responsibility of the property.  This is done by having investors buy out your position in the home.  If you are in the situation of not being able to make the payments then this could be a good option for you.

3. Get a short-term loan so you can reinstate your loan.  This solution will stop the foreclosure process fast and get the creditors to stop calling.  However if you are already in the situation where you can't make your payments then doing this is probably not the solution for you.

 

If you are in the stressful situation of foreclosure or pre-foreclosure then you need to take action.  The above methods may give you a good start at stopping the process.  The sooner you take action the better.  The absolute worst thing you can do is just stop making payments on your mortgage and not contacting your lender to try and work out a payment catch-up plan.

 

 

Home Inspections - What You Must know

 

So you've found the house you think you want to purchase, now you need to make certain to have the home properly inspected.  If you are planning on getting a mortgage loan, the lender will require an appraisal.  Keep in mind that an appraisal is not the same as a home inspection.  An appraisal helps the lender determine whether or not your home purchase is a smart investment, an inspection will help you find out if there are any problems with the home that need to be addressed before you complete the transaction.

 

If you do discover problems with the home, these issues should be addressed before you sign any agreements to purchase the home.  For example, you might negotiate a lower price for the home because of the problems it has.  Or, you may negotiate to complete the purchase only after the current homeowner has remedied the problems.

 

There are several different types of additional inspections you'll need to have completed before you can close on the house.  For example, the house will need to pass a termite inspection, a structural inspection, and an inspection of the well and the septic if you do not receive city services.  If the home does not pass these inspections, the lender likely will not go through with the loan.

 

Whatver you do, never ever ever let anyone talk you out of obtaining a complete home inspection before you hand over your hard earned money to buy real estate.