Bush on the subprime market

If you haven't read/heard Bush's recent address on the subprime mortgage market, I suggest you take a look. While I'm not a Bush fan, I do like his general plan better than, say, Hilliary Clinton's. At least he doesn't just come out and say that he's going to funnel our tax money to pay people's mortgages.

Here are what I think are the highlights:

This market has seen tremendous innovation in recent years, as new lending products make credit available to more people. For the most part, this has been a positive development, and the reason why is millions of families have taken out mortgages to buy their homes

Hmm, but isn't that also why we've got this problem in the first place? There are really only 3 things that make a home (and the loan for it) more affordable and thus increasing homeownership overall.

• 1) Home prices drop
• 2) The loan price drops (lower interest rates)
• 3) The median income increases

None of these happened. The only thing left to do, then, is to extend the repayment period. That means funky loan products. The same products you, Bush, are so happy about created this problem.

This has led some homeowners to take out loans larger than they could afford based on overly-optimistic assumptions about the future performance of the housing market. Others may have been confused by the terms of their loan, or misled by irresponsible lenders. Whatever the reason they chose this kind of mortgage, some borrowers are now unable to make their monthly payments

Well, duh. The whole point of the ARM is to extend the loan period. Same with interest only. You get a low monthly payment for a period, then when you have sufficient equity to lower your LTV ratio and qualify you for a standard fixed. This is of course a nightmarish trap if you can't refinance, because your interest rate hikes to something more reflective of your risk to the lender and suddenly you can't pay the monthly dues. I'm no expert, but that's how I see it. Now instead of a 30 year loan you have a 35 year loan with a 5/25 ARM, thus allowing you to buy a house you can't afford.

You simply can't get more people into homes without either increasing their income or lowering the cost of the house. The math doesn't work. Instead you just encourage people who can't really afford homes to go into perpetual debt just to get one.

the government has got a role to play -- but it is limited. A federal bailout of lenders would only encourage a recurrence of the problem. It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford. Yet there are many American homeowners who could get through this difficult time with a little flexibility from their lenders, or a little help from their government

I agree, but that is the root of the problem: people bought more house than they could logistically afford by using all these stupid loan products. They can negotiate with their lender but it all comes down to this: you owe X dollars, how are you going to pay it back? If you owe more than you can realistically pay back in, say, 30 years with some interest tacked on, you can't afford to stay in your house. Period. There is no room for negotiation, the only thing a lender can do is forgive some of the debt or extend the payback period.

Neither of these looks like a good solution. The first one means we're giving money to people who bought more house than they could afford. How is that fair to everyone else paying their mortgages in full? The second one means that they will be paying even MORE for the house AND will probably NEVER own the thing. Changing the tax code to help them even more sounds like welfare.

This administration will soon issue regulations that require mortgage brokers to fully disclose their fees and closing costs. We're pursuing wrongdoing and fraud in the mortgage industry through the Department of Housing and Urban Development, the Department of Justice, the Federal Trade Commission, and other agencies.

Well good! But the disclosures are already there on the mortgage contract. People who don't understand the terms or the contracts they are signing should hire a lawyer to explain it to them. If they can't afford a lawyer (who would probably charge a few hundred bucks for such a task) how can they afford a home?

So here's a glimpse into his plan, apparently.

Sixteen months ago I sent Congress an FHA modernization bill that would help more homeowners qualify for this insurance by lowering down-payment requirements, by increasing loan limits and providing more flexibility in pricing. These reforms would allow the FHA to reach families that need help, those with low incomes and less-than-perfect credit records or little savings...Congress hasn't acted this year. It would be a good task for Congress to come and get FHA modernization done so that we can help these people refinance their homes, so more people can stay in their homes

Am I reading this right? You made a bunch of reforms that sunk people into loans they can't afford so the solution is to make more reforms to keep them in those homes? If they have bad credit, low incomes, and no savings, they should rent! Build up savings, improve your credit, make more money, then buy a house you can afford. Don't game the system just so someone can have a house without putting in any actual effort to get it.

Homeownership is a splendid goal...when you've earned it.

Reader inquiries: bankrupt mortgages and the Texas car credit

I have been getting a lot of directs to the site with questions input into Google. I thought I would make some comments on the two most common.

First, a common question is "What if my mortgage company goes bankrupt?" - some people, from their searches, seem to think that their mortgage might be forgiven! Actually, it will just be sold to some other bank. Your lender in bankruptcy should send you a letter notifying you of the transfer. In any case, it is up to you to continue making payments to the right place. So if you see your mortgage company about to fold, call them up. If you send the check to the old bank after your mortgage transfers, it won't be applied to your mortgage. The bank might even cash it, leaving you scrambling for 2 payments in a single month while waiting for a refund (because as we all know, once a company gets your money they will drag their feet giving it back). Maybe they are legally required to pass on the check, who knows. If you assume they'd send on the check instead of cashing it just because they are legally required to, I guess you haven't dealt with big banks very often!

The good news is that whatever bank buys your loan will be forced to fulfill the terms you signed with the first bank. Some things, like how they handle extra principle payments may change, so if you are paying down your mortgage make sure to inquire about any new rules. Escrow requirements might also change, but I do not know how the new bank is legally bound to those terms. Insurance requirements might also change, and again I would call the bank and ask. If you do find changes to your loan terms, it might be a good idea to contact an attorney if the bank refuses to play nice. Whatever you do, keep paying your mortgage!

Second, there have been a lot of inquiries about the new Texas car credit coming into effect in December. Some news outlets have been giving slightly incorrect or missing information, so go to the source, http://www.tceq.state.tx.us/. Details can be found here. Only certain counties, in which your vehicle must be registered, apply. San Antonio and El Paso, for example, do not appear to be participating in the program. Please note that this is not a new program. Actually, it has been around since 2001, they are just increasing the voucher value that you can get.

Mortgage loans are hard to come by

With less than perfect credit, mortgage loans are becoming scarce. Even prime mortgages are facing harder scrutiny in underwriting. It is a situation that has been growing slowly over the last couple of years as defaulting subprime loans everywhere hit lenders hard. Foreclosures, I read in a recent news article, are up around 50% now. So it was not surprising to me when a family member of mine called to tell me that getting approved for her mortgage was like trying to squeeze juice from a turnip.

Indeed, this article on the mortgage crisis perfectly described this situation. Some are just not funding any loans, even for those who had been already approved. And no doc loans? Forget it!

Wells Fargo, my mortgage lender, recently took themselves out of the jumbo loan market with a voluntary rate increase that is, needless to say, not competitive. Still others are downsizing their lending departments or getting rid of them altogether. American Home mortgage is in bankruptcy. Another laid off most of its workforce. Countrywide, one of the nations biggest lenders, has seen its stock value crash. The whole picture just looks awful.

I don't like dishing out advice to members of my family, but I did recommend finding an apartment to take time securing a loan. Even in this market, I'm sure you can find something just by taking your time. It just won't be as easy as it used to be. Lenders seem to be looking elsewhere, especially in areas that have been hit hard.

In the meantime, hold on to your houses. Based on a few people's experiences that I know of, its not fun to buy OR to sell right now.

Does "my house" = "my money"?

A comment in one of my articles reviewing a mortgage product got me thinking hard about the way we view our homes. What does a house represent? Sure its our homestead, where we raise our families and build memories. But is it an investment? Is it an asset or liability? Is it an ATM machine? Anonymous wrote:

in the 30 yr, I have to apply for HELOC 2nd or refinance again to get that money (MY MONEY) back!" Thus, I HAVE TO PAY (MORE MONEY)TO GET MY MONEY BACK!

What struck me about this was this idea that the HELOC was allowing us to get back "our money".

Is a house a source of cashflow? Let's look at that for a second. A house worth $200,000. You own it, you may or may not have a mortgage on it (so technically the bank owns most of it), you have (hopefully) "equity" in it. A HELOC is a "Home Equity Line of Credit".

If I buy a house, I've purchased something. The only way to really get my money back is to liquidate it. To sell it. Real estate is an "investment" because unlike just about everything else you buy, its value usually appreciates. So where do equity lines of credit fall in? Well, based on the value vs what I owe on the home, I can take out a loan using my equity as collateral.

How, may I ask, is this any different than going to a pawn shop and taking out a loan with a Rolex as collateral? Is that really "my money"?

It's a fallacy, I think, to regard your equity as money. It's not; it's simply the value of something you own. The only way to cash it out is to liquidate it. Anything else is simply a loan, a loan granted to you based on the presumed ability for you to pay it back because you have a large asset that you can liquidate.

However real liquid assets (cash) sitting in the bank earning interest does not equal a loan, where you pay interest. In fact, by taking out loans on your house instead of saving money and using that as your purchasing power and/or emergency fund, you are killing whatever "investment" your house might represent.

Borrowing money does not build wealth. A house is not an ATM. It is not "your money". When you take out a loan, any loan, you are paying someone else for the privilege. How is that "my money"?

Mortgage accelerator program?

I was a bit skeptical when I read this article about high speed mortgage payoffs. What would they recommend to pay off your mortgage, I wondered?

Apparently, it's some ADB reduction plan on a daily compounded HELOC. A huge red flag went off when it said:

get a variable-rate, home equity line of credit (HELOC) instead of a fixed-rate loan for their first mortgage

Woah, wait a minute. I should get a variable rate revolving loan instead of a traditional mortgage? How is that better?

So I read on, and the process sounds pretty simple, if it weren't ridiculously complex. You put all your paychecks into this loan, basically as a payment. Then you pay your bills with the loan. Well, that makes sense if you stick to a budget and make sure that you put more in than you take out. This part got me thinking:

When the account holder deposits a check, the debt immediately falls for a lower balance used to calculate interest. If the paycheck arrives on the first of the month, and the mortgage isn't due until the 28th, the balance falls by the size of the paycheck for all the days between.

Well, that would work if my paychecks came in 2 times a week and all my bills are due at the end of the month. They aren't. They come throughout the month, so my paychecks mostly vanish as soon as they are cashed. My "average daily balance" in the loan, therefore (which is what they are talking about) really doesn't change all that much. As soon as the money goes in, it comes out for a bill. However I do see on large ticket items, like a mortgage that I need to set aside a little bit each week for, that this concept would work.

Then, I remember that this is a variable rate revolving loan. That alone kills the deal for me.

Here's the best part:

The loan is suitable only for borrowers who generally have more money coming in than going out, according to Kern Lewis, a marketing director for CMG Mortgage. Borrowers with negative cash flow would just keep adding to their debt.

But why would I go out and sign up for this complex plan? Couldn't I just save my own money and pay extra towards my low fixed rate mortgage principle? Sounds a heck of a lot easier, and safer than messing with an enormous variable rate revolving loan.

Well, complex programs aside, they give an example of how this thing can help you, so I decided to compare it with just paying down your regular loan.

According to a CMG calculator, a borrower with a $200,000 mortgage, who takes home $2,000 every two weeks and saves 20 percent of net pay could be mortgage-free in 12 years using the accelerator compared with a conventional 30-year fixed rate loan. The interest would also drop by $125,000.

Not enough info here, but okay. Basically you've got a $200k mortgage and you are putting 20% of a $4k monthly income to pay down the principle early.

On an ordinary 30 fixed at 6.5% you'd be looking at paying $225,000 in interest. So according to this article we can save $125k of that interest by paying it early with the rapid-accelerator plan. But if I took that 20%, which is $800 of that particular monthly income, and just apply it to the principle of my fixed every month, I end up only paying $84k in interest, so I'm saving $170k in interest.

We don't have a lot of numbers to work with, but $170k ballpark looks a lot better than $125k. And it doesn't involve taking out more loans or playing games with paychecks and bill payments. What this boils down to is saving 20% of your income and throwing it at your mortgage principle, which you don't need a fancy program to accomplish. So really, I have to ask, what's the point?

Both CMG and Macquarie said their businesses are increasing rapidly. But Gumbinger doubts they'll win a wide clientele. "Other mortgage products have come and died on these shores," he said. "Americans like the old, fixed-rate loans. Oh, we'll take an ARM if we have to but that's not what we prefer. High-end, sophisticated borrowers who are intent on quick amortization will probably support these mortgage accelerator products."

Or maybe Americans can do math? Then again, if they make $4k a month and bought a $200k house, maybe they can't do math!

Home owner's insurance nightmare

My home owner's insurance is a nightmare. I purchased my home two years ago, got the home insurance for around $700 a year. Then a few months later my mortgage company sends me a letter:

Did we forget to mention? You need additional windstorm insurance, we've happily applied some of ours at a hugely inflated rate for the few months since you've owned the house and adjusted your escrow to pay it. If you find your own insurance, let us know. Enjoy your new mortgage payment.

I wrote back complaining that they never told me about windstorm insurance and that I could have signed up for it in the first place, and didn't feel like I should be paying insurance for previous months for a disaster that never happened. Thanks for taking 3 months to bother realizing your mistake, and thanks to the insurance company and the mortgage company for never even mentioning that I needed this insurance. Oh, and thanks for telling me it's my fault and to pound sand when I complain about it.

So I go out and get my own insurance, which is cheaper, but my home owners insurance has still tripled. Our mortgage payment went up $200 (I inquired with a lawyer, btw, and they advised me that there was nothing I could do about it). Nightmare over? Hardly.

6 months later the insurance company that holds my windstorm policy goes bankrupt. So again I'm scrambling to find a new insurance company. I do, but now my insurance rate is again higher by a couple hundred dollars. Again, my mortgage payment (escrow) goes up.

Now my insurance policy is renewing. And apparently the complete lack of any hurricanes for the last 2 years is causing the rates to increase again! I get to pay another $25 a month for home insurance.

I'm going to shop around, but if its anything like the experience I had last year, the place I'm with is already going to have the lowest rate. Which begs the question; how much can we possibly pay in insurance before the citizens begin to riot?

Will poor folks be shut out of the housing market?

Ah, the American dream. Purchase as much house as you possibly can and foreclose 2 years later. Wait, what?

Subprime lenders might be getting a clue, because they've effectively dumped the 2/28 loan. What shocked me is that they claim it is the "most popular loan". Really? When I bought my house 2 years ago, the very idea that I would sign a 30 year loan contract and have no clue what the interest rate could be in a couple of years was ridiculous. Would you sign your mortgage with the interest rate blank and let the lender fill it in later whenever they wanted? No? So why would you let them do it a couple years later? Unless you have a very specific set of circumstances, this is mind-bogglingly stupid.

What's a consumer looking to refinance to do, they ask?

Mortgage brokers and loan officers say borrowers who need to refinance their subprime mortgages still have options -- just not as many. Some lenders might still offer 2/28 and 3/27 ARMs, although the rates might be high -- possibly into the double digits.

Um, how about a 30 year fixed. How about a 15 year fixed! Why, why, why, would you sign a contract without any idea what the interest rate is going to be? Here's an idea, sell your house. If you can't pay the mortgage without ridiculous terms, you obviously can't afford to live there.

One banker says its "old school again". How is a 5/25 or a 40 fixed "old school"? My grandparents would have laughed all the way out the front door if faced with a contract like that (I can't say my parents because, well, sorry mom and dad but your generation doesn't have the best record of making good financial decisions).

"Some families are going to have to make ugly decisions," a banker says, by cutting back on spending or, in the worst case, losing the home in foreclosure.

I disagree with this "poor me, my mortgage is going up and I'm going to lose my house!" because they did it to themselves.

At the end of March, almost 16 percent of subprime ARMs were at least 30 days past due, according to the Mortgage Bankers Association. That's high, and the default rate is bound to get even worse as subprime ARMs reset over the next couple of years.

No kidding. Could it just be that ARMs altogether are a stupid product? Maybe? Right up there with home equity loans, in my opinion.

Fortunately, Washington Mutual (WaMu) appears to have been hit with the "well, duh" stick:

WaMu announced other changes in the way it underwrites subprime mortgages. All subprime borrowers will have to document their income instead of merely stating it without providing proof, and taxes and insurance must be included in their monthly payments.

Not to worry though, if you have a great credit score, the bank will still give you a loan for whatever you want without any consideration of you actually paying it back, and you can do your small part to drive the housing crash. Really, is xeroxing a copy of your W2 so hard?

Does a mortgage eliminate the benefits of investing in real estate?

Is real estate really a good investment? I had a few minutes free and used zillow.com and bankrate's mortgage calculator to run some numbers. I picked a house in my neighborhood that was around 10 years old and had an average price today compared to the other homes in my neighborhood.

The home was originally purchased for $110,000 in 1999. With a standard fixed 30 year mortgage at a reasonable 6% interest, your monthly payment would be $660. Today if you were to sell the house, it is supposed to be worth $156k. Last year (home prices have gone down a bit in my area - and will get worse as there are so many homes on the market now! my neighborhood is FULL of for sale signs, but anyway) the home was work $160k, the highest in a 10 year period. I'll go with $160 assuming you sold it in 2006 and got the best possible price so far.

Your profit would be $50k minus 5% sales commission or so, leaving you with $42k in your pocket. Assuming you didn't put down a large down payment, the interest you paid to the bank for 7 years was $44,001. You lost $2k in your "investment" even though your house value went up $50k.

So, what do you think? Unless you pay cash (so your savings earn you interest while waiting to buy and your house value isn't eaten up by the money you're paying the bank while you own) isn't mortgaged real estate a pretty bad investment, without seriously high appraisals? Maybe like the appraisals we were seeing until recently?

Just a thought.

Reverse Mortgages

The pros and cons of reverse mortgages. What is a reverse mortgage? It is a loan available to home owners ages 62 and up, that taps into home equity to provide a monthly or lump sum payout. The main difference between a reverse mortgage and a regular home equity loan however is that the payment is deferred until the homeowner dies or otherwise leaves or sells the property. Like any mortgage however, you still pay interest. In other words, you purchase a home with a 30 year mortgage, pay interest for 30 years until it is paid off, then you do a reverse mortgage on it and pay interest again, and then the home goes to the bank.

Added on to the loan is mortgage insurance, because if at the time of sale when the bank is ready to offload the property that you've kindly paid twice the interest for, it may end up eating the difference if the property value is less than the value of the home. That could certainly happen with the housing collapse we are in now.

The biggest problem with these loans? Fees. You end up paying huge up-front costs compared to a traditional mortgage or equity loan in addition to closing costs. After that, you can draw out the equity and it plus interest is added to the principle of the loan. If you decide to leave early, the bank takes the house and sells it and gives you anything left over.

Another major problem is that bank can also take the house if the homeowner leaves for a period of time specified in the loan. With continuing health problems of the senior citizen with the loan, this could mean they could lose their house while in an extended, yet temporary stay at a hospital or nursing facility.

My opinion of this type of loan? Avoid it, and do everything you can before you end up in this situation to avoid it.

Finally - mortgage rates by credit score

I was looking for this information when I was purchasing a house. I knew what my score was, and I knew what the "prime" interest rate was. What I didn't know was the average rate I should expect to get based on what my score was.

Here it is! A chart from bankrate showing just that.

Credit score	Interest rate	Monthly payment	Savings earned if score was high**
760-850	6.274%	$1,019	0
700-759	6.496%	$1,042	$8,627
660-699	6.780%	$1,073	$19,788
620-659	7.590%	$1,164	$52,336
580-619	8.905%	$1,316	$107,234
500-579	9.899%	$1,436	$150,192

I did shop around and went with the bank offering the lowest rate. That should have protected me against getting a poor rate, but it really didn't. When every lender gives you a high rate and one gives you a lower one, you tend to believe that the score you have matches the rate you are getting. It really didn't, and I am paying a higher rate than I believe I deserve. It may be time to start shopping around for a refinance, though I hate to go through the process again, and I'd hate to pay closing fees. Still, over the long term of the mortgage (I am assuming at worst case that I will not be able to pay it off as early as I would prefer) it will save me significantly over the long run.

Mortgage scams

I can only describe this as a scam. I also expect to see more of these in the future from different lenders trying to bring more paying customers to their home lending divisions. With all of the media hype surrounding skyrocketing subprime foreclosures, it is no surprise that other lenders (even some who are neck deep in financial troubles themselves) are going to start marketing to secure homeowners; those with fixed loans and solid payment histories.

According to the article, GMAC was sending letters to those with mortgages telling them that refinancing to a safe lender was the way to avoid getting trapped in a company that may go bankrupt due to their overextended subprime loans.

The problem is that it is a blatant lie. If your mortgage company goes bankrupt, any loans you have with them would be sold to another bank. Funny thing is, the bank doesn't have to go bankrupt to do this, it can sell your loan to another company anyway. It happens all the time.

Look out for future mailings you might receive that will vary from this particular scam. If anything, keep to the #1 rule. If its unsolicited, it goes in the shredder.

Dangers of Home Equity Loans

In a recent Bankrate.com article, Dave Ramsey talks about the dangers of home equity loans. I found this to be a fantastic read, and it's rare that I find someone who doesn't believe in home equity loans.

As for myself, I don't believe in them either, because I do not feel that risking your most valuable asset, your most important one at that, is worth the benefit of a slightly lower interest rate. Read Ramsey's full article, but the meat of it is that he believes that home equity loans lull people into a false sense that they've paid off their debt, when really they've just moved it somewhere else.

I often hear this humorous phrase, 'I paid off my credit card debt with a home equity loan.' That's humorous because you didn't pay off anything, you just moved it. It just has a new name.

And although he doesn't say it outright, the amortized interest on a 30 year loan for your Disney vacation and steak dinner is going to cost you far more than a higher simple compound interest credit card.

The problem, he says, is our behavior regarding debt. Once our debt vanishes into our mortgage and our of our mind, people continue to accumulate debt.

The figures that we're seeing are that about 80 percent of the people that move their credit card debt onto a home equity loan don't change their habits and continue to go into debt further.

Worse, it seems Ramsey feels from his experience that people do not fully understand the terms of their home equity loans.

They don't know if they've got a variable rate; they don't know if they have to requalify credit-wise every one or two years.

Perhaps they assume the terms are the same as their original mortgage? Of course, this isn't true. A home equity loan is a separate loan that simply uses the value of your house as collateral.

when they start tapping that because everyone at the bank is telling them what a great idea it is, when they turn their biggest asset into their greatest liability

All math and consumer debt behavior aside, this is the single most important reason why I think home equity loans are evil. They put at risk the most important 'necessity' you have. Losing a home can be the biggest financial disaster you can face.

Home improvements? Vacations? Repairs? This country has fallen in love with debt and easy credit. More debt is not the answer.

You don't need to go on vacation unless you can pay for it. If you have a home repair, in almost every case, that home repair is not an emergency situation. We put a nice patio with a screened-in porch on the back of our home a couple of years ago. We just saved up and paid for it, same with the vacation...When it comes to consolidating your debt, in almost every case mathematically, but certainly from a behavior modification standpoint, you're much better off to pay those debts separate from your home.

I have not read much from Dave, but I'll be keeping an eye out for his articles.

People think I'm a freak because I don't believe in these loans and stuff

I for one find it refreshing that someone is speaking out about these loans.

Home equity loans: Are you kidding?

I hate home equity loans. A few people are going to argue with me on this one, but let me offer a little perspective first. I see a home (at least, your primary residence) as a home, not an investment. There is nothing that could convince me to sacrifice the security that I have in my home. To me, equity is security. The more equity I have, the more security I have. That is why my personal goal is to become debt free including my mortgage. I want to own my home free and clear. Unfortunately, thanks to the laws of our government (the same government that years ago encouraged banks to sign subprime loans in order to increase home ownership and diversity) allows them to take my home away for nonpayment of taxes whether I own it or not.

That said, it is easy to presume that we never really own our home (well, we don't) we just lease it from someone else. We lease it from a bank at a high cost, we lease it from the government at a low cost. But let's focus on our relationship with the bank here.

Let's say I buy a home and finance $100,000. I pay for 5 years and have around $30,000 in equity (thanks to the principle I've been paying and the appreciation on the home). Now I decide to take the bank up on its offer (aren't they so generous?) to take out an additional home equity loan. I now owe $125,000. I'm still paying interest, I now have two loans so I'm paying more interest, and I've now borrowed more against my home than I bought it for in the first place half a decade ago.

And what do these home equity loans do? If I take the advertisements at the bank as any indication, they go towards home improvements, vacations, debt consolidation.

Home Improvements: Very few home improvements are going to provide a 100+% return. Worse, now that I've financed this home improvement, I have to gain a much higher return to get my money's worth. When I go to sell the house, that improvement simply isn't going to give back what I put into it in the initial payment and the interest thereafter. It's simply not an investment to improve on your house. If you want to do any improvements, you must save for it. You (hopefully) intend to stay in your home for many, many years. It isn't going anywhere, and you have plenty of time to save. Plus, your savings draw interest for you, instead of just making your home improvement that much more expensive.

Vacations: Do I even need to touch on this? It's very simple. Never finance a consumable! This includes gas, food, entertainment, and vacations. You continue to pay interest on the balance for many years after the initial purchase is long gone. What kind of crazy financial plan is that? If you must finance, at least keep it to physical things that retain value and can be sold if you need to pay off your loan.

Debt Consolidation: This is a fine goal, but there are so many different avenues for debt consolidation, I just don't think low-interest equity loans are the answer. You can get a low interest credit card or credit union loan instead. If you are in so much debt that you are considering consolidating, the last thing you want to do is pull out the equity in your home. It could lead to a financial disaster should you ever be forced in a position where you have to sell, and if you do need to do something drastic - like declare bankruptcy - it is still possible to keep your home through the process, something that is much less likely if you cannot afford the payments.

A home purchase should be considered final at the time of closing. Any further decisions regarding the home loan should be focused on reducing the overall principle and total interest that you pay out of the loan. Note, I did not say that changes should be made to lower your monthly payment. That may sound good in your head, but anything that reduces your interest liability and principle is going to reduce your monthly. If your monthly is reduced without those two, it is likely a loan that is going to land you in a financial black hole.

None of this applies to investment properties, which you hopefully won't be living in. But a home is a huge purchase, and you spend a huge amount of money getting into it and financing it. Long-term, any risk to that property is just a bad idea.

15 year mortgages - a great deal!

I am a firm believer in the 15 year mortgage. Our family income was somewhat limited when we purchased our house, so we went with a 30 year fixed. Should we have waited? Possibly, but that's water under the bridge. We did buy a house that we could afford, so I consider that a success.

Here is a brief article touting the benefits of the 15 year loan verses the traditional 30 year. The principle is quite simple, the shorter your loan, the less interest you will pay. In the case of a mortgage (or any other loan for that matter), compound interest works against you.

You can use an amortization calculator such at this one to input your own numbers and compare. Basically on a $100,000 mortgage you can save around $66,861 in interest with a 15 year. But what if you already have a 30 year? The article doesn't say, but you have two options.

First, you can refinance. If you have excellent credit, great debt-income ratio, and a long stable income (job) this might be the best bet. You can refinance your loan into a 15 year and accept a slightly higher monthly payment with a little shopping, paperwork, and cash up front (for all that is holy, do not take out any cash from your equity). The best thing to do is save up for your closing costs, but usually people roll those costs into the principle.

Refinancing:

• One fixed monthly payment
  
• Must have good credit to refinance
  
• Can possibly get a lower rate with a 15 year loan
  
• It costs money to refinance
  

If a few things don't look right to you, for example your credit is not so good...never fear, you can still take advantage of a 15 year loan and pay only a little bit more in interest. If you are in debt (hence bad credit) stop now. All your excess funds should be going to pay off that debt. Out of debt but still rebuilding credit? Good job, you can simply use an amortization prepayment calculator like the one here and pay an extra check to the bank every month. You don't have to do anything to your existing loan, it costs you absolutely nothing (except the extra payment - but that's all to the principle!) and in the case of the $100,000 loan from the About article, you only pay around $3,000 extra total interest by doing it yourself even at your existing rate - assuming you started from month 1, run your own numbers to determine whether the savings would be substantial enough to consider refinancing.

Prepayment:

• No cost to do it
  
• Bad credit okay!
  
• Needs good financial discipline, write 2 checks a month
  
• Not an option for anyone in debt
  

You can get started right now. Calculate what it would take to finish off your loan in 15 years using the second calculator I gave you starting at whatever month you are in your mortgage now and write a check with "APPLY TO PRINCIPLE" in the memo to your mortgage company for the necessary amount. Wouldn't it be great to own your home in 15 years?

And wouldn't that mortgage payment look great earning 5-8% interest for you instead of going to the bank?

Why pay more?

I was having a discussion with my wife last night and the subject of our debt and mortgage came up. My interest was further peaked on this topic when I saw a blog article from Might Bargain Hunter regarding an unusual fixed mortgage. From my perspective, borrowing money is a necessary evil. Why pay more for a product than its advertised price if you don't have to? Mortgages, unlike other debt, have the distinction of being tax deductible. But again, why would I pay two or three times the value of my home to a bank just to keep a couple thousand of my pay from the IRS?

We talked a bit about our mortgage, and how much we would save if we just paid $100 extra. Our escrow account adjusted last month - we had a shortage because of an insurance fiasco (long story) and now are paying $50 less a month since the escrow account has now balanced out and is paid up in full. Instead of reabsorbing that into our spending, I've kept paying the bank an extra check with instructions to apply it to the principle. It's only $50 a month but it's better than nothing. And why not? We were already accustomed to saving the full mortgage payment and it doesn't affect our budget to continue doing so. Further, it saves us tens of thousands of dollars.

My wife was shocked to hear how much we would save in interest by paying just $100 extra, and how early we would have the house paid for. Imagine investing that mortgage payment, I told her. With our current savings plans (which at present will already give us a million by the time we reach 65) we would be able to invest and save that mortgage payment for another 10 years, ending our payment to ourselves and letting the money sit and stew for another 10 years until retirement and we'd have another quarter million, a good $50k more than we'd have if we just invested that $100 every month for the next 40 years. A little less if you include the extra taxes we'll be paying for the 10 years without a mortgage.

Borrowing money isn't in our best interests. We want to pay cash for everything that we can, which is one reason why we are not going to stop paying our car payment after our current auto loan is paid off. We'll save it for our next vehicle. That alone will save us thousands. And our mortgage? Why pay more when we don't have to? Even if we just broke even by paying early as opposed to investing the extra money now, we have the satisfaction of owning our home outright.

Banks make enough from real estate anyway. Since the average person moves something like every 5-7 years, all those young 30 year amortized loans raking in interest off the same home as it is passed on from owner to owner is a perpetual income for the banking industry.

I'd rather give extra money to the government. At least they build roads.

Are realtors necessary?

When we bought our house in 2005, we had absolutely no idea what we were doing. As first home buyers all we knew was what we had been paying in rent, and monthly that seemed like a great amount to base our new mortgage payment on. We went to a realtor who showed us a few houses and gave us a website to look them up on our own. Once on the web, things finally started rolling into place.

The Internet is a vast resource for finding information about home ownership and mortgages. Although you often have to wade through the obvious advertisements, there is some genuine information that is written for your benefit. The real costs of buying a home are not quite so obvious to the first home buyer, when you often forget about taxes, association dues, insurance (which can vary wildly geographically), etc. Then comes the process of actually purchasing the house.

Our first job was to find a mortgage. We went to several different banks and I discovered one important thing: they're all filthy liars. After swimming through the "teaser" muck designed to bait and switch us, 2 banks were giving us the best deal in what they call a good faith estimate. What they don't tell you is that after you've had your credit run, all your income and expenses scrutinized, and negotiated back and forth about interest rates and terms...it doesn't mean anything because it all goes to another department entirely - underwriting - that has their own say. Nothing is firm until you get a HUD1 (I believe that was the document title), approved by their underwriting. The good faith estimate is, while full of useful information, about as useful contract-wise as the big banner outside the bank's front door.

It was also interesting to look back at the negotiating process now that we've been assaulted with reports on subprime loans and not-so-great loans. One broker didn't give us a decent rate, so we bailed and went with a commercial bank. They also tried to fit us into poor loans, but they weren't pushy. He mentioned "interest-only" and quoted a monthly payment. I responded with, "are you kidding me?" We insisted on 30-year fixed, with intent to refinance into a 15-year fixed and a lower rate as our income/credit improved (my wife and I were only 2-3 years out of college). They still sent us a GFA with an ARM option in addition to the one we asked for. So really, I can see why some people fell for the hype. These iffy loans were being pushed hard.

So finally we got an acceptable GFA, and our housing search continued. The Internet was again the best tool ever! We could search all kinds of houses, get detailed information on them, and compare. Our spending limit was $130k (though the bank had approved us for $150k) and in 10-15 year old suburbs. Several houses we found had good schools, downtown access, clean streets, etc. You might be wondering at this point where our realtor was.

We had to call him up to ask him to meet us at the houses to let us see them. He was the one with the keys. Once we found a house we liked, we put in an offer and it was accepted. But our negotiating wasn't done yet. You need to put a deposit down, hire inspectors, and then negotiate any repairs. If they refuse, and you don't want to buy the house because of a potential major problem, you could be out a couple thousand already. And don't forget, now that you've found your house the bank has to send everything through underwriting. Again.

Approved doesn't always mean approved. More negotiating with the bank.

If you've never bought a house before, you don't know what a headache this is. Imagine knowing nothing about cars and going into a dealership to buy one...you talk to the salesman, but imagine trying to talk to the engineer to built the thing about the design of the engine. To a first home buyer, a mortgage contract (and realtor contract, title contract, disclosure, inspection, survey) looks like a splayed open V8. I'm pretty sure it's overly complicated on purpose, because this forces the consumer to rely on the people who are taking his or her money to make sure that they are getting the best deal.

Even after doing weeks of research on the Internet I was still pretty confused about the whole thing. Much of it made sense, the technical parts of it, but what really boggled me was "am I really getting the best deal?". There's no site that lets you put in your FICO scores and spits out the interest rate you should be getting (and if they do, it's probably from a lender site with those bait-and-switch teaser rates). It's all clouded in mystery.

Needless to say we purchased the house with a loan we liked and a payment we could afford, a small down payment, and within our spending limit. Where's our realtor again? Right, he set up the title company for us (and I'm sure enjoyed a nice kickback from that). He also sat there when we signed all the paperwork. We left and never heard from him again. He made a few thousand for maybe a dozen hours of work. Not bad.

What I questioned was why I was paying this guy for? He talked to the seller realtor, got all the contracts together but...couldn't I have easily done that myself? I searched for the house, found the house, dealt with the inspections and found a lender. I felt like a family in a silly feud with one person in the middle passing conversation to another - to whom they are not speaking but can hear them loud and clear.

With all the hub-bub over mortgages and, possibly, an initiative to simplify the process, are realtors going to become unnecessary? Or will they be luxuries for those unwilling to do the work themselves? I can easily see doing all the work without much extra effort. One would think that some crafty entrepreneur would come up with a way to search for and buy a house - right down to finding a lender, title company, and contacting the seller - without anyone in the middle. It would be nice not to pay 6% of your selling price for people to pass along the conversation.

Foreclosures: How the middle class suffers

Isn't it great how one hand of the government can cause a problem, while the other hand is left to clean it up? It's not your representative who ends up footing the bill; it's you, the taxpayer.

Subprime loans are hot in the media right now. A little too hot, but our mainstream media turning a small issue into a hysterical frenzy should be old news by now. Foreclosures in subprime loans have risen almost 50% from last year (source: CNN.com) and while that may make the casual reader frantic let me remind you we are talking about a very small percentage of the total homes out there. Remember a 50% increase to 1% is still only 1.5%. But that doesn't make for a headliner.

Still, we regular consumers have to keep an eye on these subprime loans, primarily because the mortgage companies who issued them are crying foul to the government and asking for a bailout. Whenever an "essential service industry" asks the government for a bailout, you'd better be paying attention...because they're very likely to get it.

Guess who will be paying for that? Yep: you and me.

The problem began when mortgage companies were encouraged by uncle Sam to start writing these loans. A disproportionate number of minorities and low-income families were being effectively driven out of the market because they couldn't qualify for traditional loans. What's the solution? Apparently it was to lower the requirements for getting a loan. Enter the subprime loan, a whole host of new mortgage types that came with huge fees, teaser rates, no deposits and quite often no verification of income.

It was all well and good. Home ownership increased, particularly in the low-income and minority sectors...the problem that I see is that these mortgage companies were so interested in getting people into their homes that they forgot their main goal is to keep them there. Banks earn money by drawing interest for long periods of time. They don't make much by making several thousand dollars and eating the rest of the principle when the house goes into default 2 years later.

What also happened is that consumers who had already fallen for the credit card trap were driven into these loans, sometimes from their stable traditional mortgages to consolidate high interest debt. Money Magazine reported that the largest chunk of these subprime loans (around 30% as I recall) were refinances. Home owners saw their houses skyrocket in value, saw rock bottom interest rate mortgages thrown at their feet, and the dollar signs lit up in their eyes.

Now it's a given that if the government bails out these loans the cost is going to land on the home owners who aren't in this situation. CNN reports the costs will be $120 billion. And if they don't? Interest rates will rise, foreclosures will create a huge surplus of cheap homes and drive down values around them (as if we need more cheap homes saturating the market - thanks KB).

Do I have a solution? Of course not, I'm no economist. Should the government bail out these mortgage companies? I don't know. But what I do hope is that this will be a lesson for the future. Regardless of how good your politically-correct policies may look on paper, it doesn't make sense to give loans to people without any hope to make the payments, let alone pay it off. If our national credit card debt is any indication, consumers just aren't capable of making smart financial decisions with complex loan models. The bottom line: artificially improving the American dream, owning a home, doesn't do anyone any good if it turns into the nightmare we have now.