Mortgage Backed Securities

The SF Gate published an article yesterday regarding Mortgage Backed Securities and an overview on current credit conditions and how it affects housing markets. Check it out HERE.

Is the Worst Over for Credit Markets?

Recently, I came across this article on CNN Money that I felt was a great one for our Savoir Faire readers to take a look at. You can follow the link HERE.

Mortgage 101 - 1st of a 3 Part Series

by Jana Mannina
I spend the better portion of each day discussing interest rates. You can’t believe how often I am asked “So, what are the rates?” over dinner, over drinks, at a baptism- you name it, I’ve been asked there. It’s gotten so bad that I have actually resorted to using the term Domestic-Engineer (aka House-Wife) when questioned about my occupation in a social setting. While the interest rates are an important factor of our overall financial plans, they are not what make or break our financial success. What seems to have the most dramatic effect on financial success is simply overspending and being misinformed about the importance of financial planning, including mortgage planning. I come to you with this piece of advice: just because you can, doesn’t mean that you should. I thought this edition would be a good place to give a little Mortgage Planning 101 and answer a few FAQ’s as a prelude for issues to come.

I am sure by now you are all aware of some of the different loan programs available. These programs have dwindled significantly in light of the sub-prime mortgage fall-out and as a result of default and subsequent foreclosures. You might ask how this happens in a market that is still leading the nation in home sales and appreciation. With median home prices in the Bay Area up near and over the $1,000,000 mark, and a fairly consistent annual appreciation on property when held as a long-term investment, how it is even remotely possible to get into such a financially grave state of affairs. It is actually quite easy and many homeowners and homebuyers have no idea what they are getting themselves into because they simply don’t speak the mortgage language or have a trusted mortgage planner to help them understand it (and strategize using the potential outcomes as a guide.) Unlike the days of our parents and grandparents, the old rule of thumb that a mortgage is 2-4-years of your annual salary is long gone. For most of us, it is more like 8-10-years of our salaries or more.

A 30–Year fixed isn’t necessarily as friendly as it may seem at first glance. The interest rates are usually higher and the monthly payments are as well. This is a great loan for security, or for your “forever house” but there is a price tag on that added-security. Fortunately, loan programs have been created over the years to remedy this very problem. I’d like to introduce you to some of my favorites, the 5/1, 7/1 and 10/1 ARM. First, the term ARM, or better written as A.R.M., simply means adjustable rate mortgage. Doesn’t the word “adjustable” sound terrifying? Yes, when preceded by the word “monthly”. When you see what appears to be an improper fraction such as 5/1 it can be taken to mean that the interest rate is fixed for 5 years and after that, it will adjust once annually.

It is entirely different than a 5-year Fixed Pay Option which is never expressed as a fraction and will be discussed later. These ARM’s are a great tool for strategizing and executing your financial plan. They have the capability of: 1) allowing for easier qualification without using alternative income documentation; 2) lower interest rates; 3) help with monthly cash-flow by offering such features as an Interest Only Option allowing the borrower to pay just the interest that is due rather than the principal as well. ARMS are cutting edge tools that when used appropriately can really help borrowers achieve their long-term financial goal of wealth.

The semantic battle continues between the honest and the dishonest lender with the under-informed borrower. Let’s talk about the terms Interest Only Option versus Negative Amortization. The term interest only means exactly how it sounds: the borrower is required to make a payment of AT LEAST the interest due for the month. It is an option rather than a requirement. If the borrower wants to make a contribution towards principal it is completely acceptable, and in, fact this option allows the borrower to pay more towards principal than would normally be paid in a fully-amortizing loan thus increasing the opportunity to pay down the balance of the loan. These loans come with specified periods of time the borrower can make the interest only payment. Typically, they are available in 1/1, 3/1, 5/1, 7/1, 10/1 and even a 30-Year fixed with a 10-Year Interest Only option. The interest only period for the ARMS is usually equal to the number of years the rate is fixed for. On the other side of the spectrum is an option that wears many colors and names. It is an invaluable tool again, when used appropriately, but it is perhaps the most dangerous and carries the highest potential for financial demise it is most commonly known as a Pay Option ARM or simply an Option ARM. Whenever you see the words 5-Year fixed at 1%- look again. It’s not what you think. This Option ARM allows the borrower to defer interest whereby increasing their principal balance. Yikes! Each month the borrower has a varying number of payment options; most commonly a minimum payment, an interest only payment, and a fully amortizing payment (principal and interest). These rates are much higher than a standard 5/1 ARM and even a 30-Year fixed. Why do people take them? For the minimum payment option. If you borrow $1,000,000 and you pay 1% which is all that is required for the first 60 months, you would be paying $3216.40 per month. The actual interest payment due is upwards of $6562.50. You would be deferring $3,346 per month thus adding $40,153 to your principal balance per year! You can easily see the difference. Option ARMS were used in recent years to get borrowers into homes they had no means of affording. They qualified by making the minimum 1% payment, but as appreciation has slowed and principal balances have grown, it leaves the borrower with little equity and with even fewer options of recuperating their initial down-payment.

Check back next month for part 2!

How To Sell In A Buyer's Market - Applicable to Bay Area?

MSN has a great article about how to sell your home in a Buyer's market. However, I would not say that the Bay Area is a Buyer's market whatsoever, with homes still going for over asking and with multiple offers. There is however, some great tips and advice for anyone looking to sell their home regardless of market conditions. Click Here to visit.