Rates have been in the basement for a few years, historically speaking.  Fixed 30-year mortgage rates now are less than a third of what they were in the early 1980s.  From our home ownership experience over the past ten years, the rates have just gotten better each time, from our first 30-year mortgage in 2001, to our refinance in 2005 (1% less to a 15-year mortgage, maybe only a slight gain there since 15-year mortgages are cheaper than 30-year mortgages), to our 30-year mortgage on our new house in 2010 (which was at the same rate as our 15-year refinance in 2005 — a decent gain).  Rates now are even cheaper.

And on top of the low mortgage rates …

As a double bonus (for buyers anyway!) home prices have fallen in many areas over the past four years or so.  We bought our current house at a time when the $6,500 long-time homeowner tax credit was in force.  The expiration of that credit removed some of the support for home sale prices, and we’ve seen home prices in our neighborhood edge down a little bit.  I think that prices still have room to go down.

So, why am I talking about this stuff?  Overall, the conditions for buying a home, if you can, are quite good, and might get even better.  But if you’re in the market, how long do you wait?  I’m not advocating buying a house or not buying a house.  The suitability of buying a house depends on lots of things: career, family situation, location of relatives, location to work, debt load, health, etc.  It’s not only a matter of affording the monthly payment plus all of the taxes, insurance, maintenance, and utilities.

But let’s say that you and your family is indeed ready to buy a house, and can maintain one.  The timing in the story that is your life is ripe to buy a house.  Let’s further say that a beautiful home — the perfect home? — comes on the market.  The asking price is good, maybe even great.  Nothing glaring is there to make you run away screaming.  The pre-qualification letter from the bank comes back with a giant thumbs-up and a smiley-face stamped on it.  Basically, you’ve done your homework, and the house feels right.  It feels like it’s meant for you, and you haven’t even bought the thing yet.

My one piece of advice is not to let the potential of a falling market by itself stop you from getting it now.

Sound silly?  Why am I not suggesting that you try for a bigger bargain?  A few reasons:

1. Odds are that you will be able to get it cheaper, or one very similar to it, within the next couple of years at least.  The housing market is like any market.  It’s difficult to time, and it’s just about impossible to hit at the absolute bottom.  If you come to grips with that, that alleviates a lot of buyer’s remorse.
2. That particular house may not come on the market again for a long time.  This almost happened to the house that we’re in now.  I got my pre-qualification letter, and the next day someone else put a contract on the house.  My wife was upset.  She really liked the house.  I called the listing agent and asked her to please let us know if something fell through on the contract.  Something did fall through, and we were ready the second time around.  But it just as easily could have not fallen through, and we’d be looking again, half-wishing that we had acted sooner.
3. Really good prices don’t last forever.  If the housed truly is priced to sell, it will sell.  If that price (or something a tad lower) is affordable to you — and presumably it is affordable, because you’ve done your homework — then put an offer in.  You’re ready to buy, so buy before someone else does.

If you’re in the market for a home, and want to take advantage of the low rates and low prices, and find a great one that’s affordable (by your standards, not the bank’s), then pull the darn trigger!  The extra enjoyment you’ll get out of owning your house now will be worth it, even if you might have saved $50/month on your mortgage by waiting a couple of years.

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The main criteria are these:

1. You (and your spouse if married) previously owned and used the same main home as your main home for any 5-consecutive-year period during the 8-year period ending on the date you purchased your new main home.
2. You purchased your new main home located in the United States (a) after December 31, 2009, and before May 1, 2010, or (b) After April 30, 2010, and before October 1, 2010, and you entered into a binding contract before May 1, 2010, to purchase the home before July 1, 2010.
3. You aren’t disqualified from claiming the credit for a number of reasons outlined on page 2 of the instructions — mainly revolving around how much expensive the home is, how much you make, and whether you bought it from someone who has a business or family relationship with you.

This is all well and good for us, because we passed this test, and can claim the $6,500 credit.  However, darn it if we don’t actually have to prove and substantiate the claim that we meet the criteria.  I guess the government isn’t up for handing out $6,500 credits to anyone who “claims” to have been a “long-time homeowner” and a “new homebuyer,” wink-wink nudge-nudge.  Ah well.

Here are the requirements for substantiating the credit on your tax return — which has to be physically mailed in, by the way:

• Proof of purchase within the appropriate window. This amount to providing a copy of the properly-executed HUD-1 Settlement Statement.  This shows the date of purchase, the address, the purchase price, and a whole bunch of other stuff related to the various closing costs and the financing obtained.  The IRS instructions recommend signing the form even if there’s no place for a signature on it.
• Proof of previous long-time residency. These papers I had to hunt for a bit.  What needs to be demonstrated is residency for five consecutive years within the eight years prior to the purchase of the new home.  The forms that can be accepted as proof are one of the following: (a) Form 1098 from your lender(s), which are the forms that the lender sends to the IRS (and you) detailing how much mortgage interest you paid for the year; (b) property tax records, which you would have had you been the owner; (c) homeowner’s insurance records.

I could lay my hands on the 1098s the easiest of the three.  I’ll still need to verify signature requirements for the HUD-1 because mine doesn’t have the sellers’ signatures on it.

But, you know, for $6,500, it’s worth the effort.

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Our mortgage is good, and the balance is going down like gangbusters with the 15-year.  With the lump sum we threw at it during the refinance, and the small amount extra we’re paying toward principal each month, we’ll pay it off completely by 2019 if we do nothing different.

Right now, the rent income, minus property management fees, taxes, insurance, etc., makes the cash flow for the property slightly negative, but considering that now over two-thirds of the mortgage payments are going toward principal — that is, equity in the property — I’m not stressing that much.  (Actually, truth be told, the fact that I have great tenants is the reason that I’m not stressing that much!)

This home went from a consumer good to a big investment asset

If you’ve heard something to the effect that “your home is your biggest investment” then (a) you’re not alone, (b) I have too, and (c) it’s BS.  If you’re living in said home, it’s a consumer good. It’s a roof over your head with four walls, wires and plumbing, glass, and some decorations. It’s hopefully a durable consumer good, but it’s nothing but expenses.  It doesn’t pay dividends.  It doesn’t spin off a shed when the garage decides to make an IPO.  Put another way, if it’s not producing income and serving only as a place to hang your hat, it’s not really an investment asset.

But move out, and bring in a rent-paying tenant, then all of a sudden, golly gosh, that same exact house becomes an investment!  The expenses are still there (and some new ones show up) but there’s income to offset them.  Whether the house is a good investment or a bad investment depends partly on whether the property makes or loses money each month.  Put another way:  Does the property have positive cash flow?

The house became an investment property the day I actively tried to rent the property.  We had already moved out into another home, and had decided to make a try at “the real estate rental thing” with our old house.  The lender for our new mortgage gladly let us keep the old one, so off we went.  We’ve kept the course with both mortgages — the mortgage on our new primary residence, and the old one as it was — for almost a year now.

Has a bad debt become a good debt?

“Good debt” and “bad debt” are commonly used to differentiate income-enhancing use with consumption-driven use.  In many ways, mortgage debt on a primary residence is “bad debt” and is best reduced on an accelerated scale in much the same way that credit card debt should be paid down.  If it’s afforable, a 15-year mortgage is preferable to a 30-year mortgage because the total interest paid is far less with the 15-year mortgage.  That was in fact why we decided to refinance the mortgage on our old house (which we were living in at the time).  We wanted to pay it off faster.

But that pay-it-off-faster mentality is working against the cash flow of the property now that it’s a rental!  Earlier in the post I mentioned that the cash flow was slightly negative for this property.  Again, we’re not stressed out too much about this, but now we’re considering going back the other direction: refinance this mortgage to a 30-year mortgage.  After the costs of refinancing, this could add $300-$400 per month positive cash flow to the rental!  We’d be paying more in interest to the bank, but maintaining the positive cash flow carries as much, or more, weight than paying off the mortgage on the property.  Why?  Because this would let the property be an income-producing asset now rather than in 2019 when the mortgage on the property is paid off.  It would allow the property income itself to build up a cushion for expenses, repairs, etc., rather than us building up and maintaining that cushion out of other areas in our budget.  It would make the property a little more self-sufficient than it was.

Refinance or not, either way would work out.  It just seems like going for the longer-term fixed-rate mortgage and the positive cash flow is the more businesslike way to go.

(Thanks to Fabulously Broke for including this post in the Carnival of Personal Finance!)

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A big part of family finances, of course, centers around debt: credit card debt, car loan debt, student loan debt, and the biggie: mortgage debt.  Mortgages last a long time, and with the easy money policy that began about ten years ago which played a part in driving mortgage rates down to their lowest in over four decades, those mortgages were bigger than ever.

Mortgages are so commonplace that we think of them almost as a mainstay of our financial lives, a class of debt all in themselves.  If we don’t have any other debt, we say with a hint of pride: “We’re debt-free … except for our mortgage.”  (This is the position we’re in.)  Which isn’t really debt-free, but we’re at least hitting a triple and the ball’s almost getting over the back wall, right?

Debt on a primary residence is consumer debt

If our homes are “our biggest investment” then how come so much money goes out the door each month in support of this “investment”?  At best, it’s a durable consumer good with few problems.  At worst, it’s a nightmare of taxes, repairs, nosy neighbors, and bored kids who like hurling raw eggs all over the place.  Probably, it’s somewhere in between.  But it costs, and costs, and then it costs some more.  Unless the house happens to be a multi-family unit, and the rents from the other units pay above and beyond the principal, interest, taxes, insurance, and maintenance, the house isn’t an investment.  It’s an expense, and a big one at that.

We continue to save up for that down payment so that we can “own our own home,” when it’s against the odds that we ever will truly own it.

Would you sell your house and rent in order to be completely debt-free?

That’s what Frank over at The Happy Rock has done.  He sold his house, and now rents.  He tells No Credit Needed with more than a little hint of pride: “We are 100% debt free.” Including the mortgage.  They owe no one on this earth anything.

Frankly, this is a step that would be a very hard sell for a lot of people, including my family.  On the face of it, it’s humbling — possibly humiliating? — to go back to renting after owning, with or without debt.  All of a sudden there are restrictions on what can be done in the living space.  I know it would not be at all pleasant if we had to do this.

But that would be a problem with me, not a problem with renting.  I floated the idea past my wife four years ago when we could have sold our previous house for more than we can today, and she would have gone along with renting for a while, but there would have been a deadline.  Whether selling and renting would have worked out in our favor or not, we will never know, but the desire to stay in the house won.  I didn’t argue too much about it.

In the end, there are a number of ways to financial peace and happiness, and being completely debt-free, even if it means not owning a house, is certainly one of those ways, and I commend Frank for turning his back on “financial business as usual” to live this lifestyle.

What factors drive you to own a home (and a mortgage) or not?  Are you where you want to be in this regard?

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Someone over at Basically Money was planning to do a mortgage refinance from a 30-year fixed-rate at 5% to a 5/1 adjustable rate mortgage at 2.7%.

As I read this, some baby koalas were dismembered.

A 30-year fixed-rate mortgage at anything close to today’s rates (5% counts as close) is a great inflation hedge, and it puts all of the interest rate risk on the lender (where it belongs).  Adjustable-rate mortgages, on the other hand, do just that: they adjust with the market, which takes into account price rises due to inflation just by its nature.

The person asking the question already has the good mortgage, and is looking to trade it in for one that in most cases is not nearly as good.  To boot, he’s trading this good mortgage in at a time when mortgage rates are at multi-decade lows.  Mortgage rates have almost no more downside, and plenty of upside.

He can come out ahead with this deal if he gets rid of the mortgage close to the time the teaser rate expires.  Then he will have paid back the refinance costs (which, frankly, sound atrocious) and maybe saved a bit on interest.  But if he holds on to it after the five years, the rate can float and sink with the market, and since the level now is somewhere between low tide and drought, it will do a lot more floating than sinking.

In short, if he holds on, he’ll be really sorry that he has the ARM.

I and another user tried to explain this to him.  I hope he listens.  This could end up being a very expensive mistake.

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I’ve read a few of them, not because I’m a particularly fast reader but because they’re super-quick reads.  Truth in advertising: it even says so on the spines.  The ones I’ve read so far are The Skinny On Time Management, The Skinny On Credit Cards, and The Skinny On The Housing Crisis.

I enjoyed reading these books for a few reasons:

• There isn’t a lot of filler. I’ve read some other book series aimed at beginners, and parts of them got tedious because the pace was too slow.  (I don’t need a full chapter explaining how to open a Microsoft Access database, thank you very much.)  Not so with these books.
• The key points are hit. I wasn’t a beginner on the topics that I read about, so I know that he hit all of the important points.  The key points were summarized in the back pages, so if I wanted a shortened short version, I got that, too.
• There’s an appropriate mix of story, facts, quotes, action items, and humor. Not too hot, or too cold.  Just right.  Other books I’ve read were a little much on story.  The story was there in the books, but the plot and the jokes were subordinate to the material, which is what I think is desirable in books aiming to convey information.
• The text is easy to read both in the way it’s printed, and in the way it’s written.
• There were a number of suggestions in each book for further reading. The books open doors to deeper understanding of the topics.  He points toward books and authors that go into more depth.

Jim Randel shows that you don’t need (a) a lot of pages or (b) a fine arts degree to cover the basics of a topic.  To give the skinny on it, if you will.

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Meanwhile, in other parts of Bank of America, foreclosures are being halted all over the country to make sure that documentation related to foreclosures was filled out properly.

So is Bank of America being schizophrenic in its foreclosure dealings?  Not at all.  It’s completely self-consistent.  Here’s why.

In the case of the local man who drowned, there was virtually nothing else for them to do except foreclose, as his wife could not afford the payments herself.  Waterfront property has location going for it, so it would likely go more easily than other properties.  It was in the bank’s best interest to sell that property.  It stood out amongst competing properties.

On the other hand, the foreclosures of many other properties have been halted because there may be serious problems – criminal ones, even – with the paperwork.  Since these problems have been brought to light, doing nothing to verify the correctness of the paperwork would be negligent.  So, it was in the bank’s best interest not to sell these properties.

Even with our own foreclosure purchase we saw the lender dealing with us as it benefited them.  We were jerked around from the moment we made a verbal offer to within a half-hour of closing.  They were already taking a hit on the property we were buying, so they put as much of the burden on us as possible to reduce their loss.  Again, in their best interest.

It’s of course horrible for a mother and three (soon to be four) children to lose her husband suddenly.  I’m sure there’s substantial support for this family in this time of grief.  But the bank’s foreclosure of the house, and her eviction from it, have nothing to do with the circumstances from which they arose.  Banks cannot take their customers’ problems into account when the rubber meets the road.  Everyone who gets behind on their mortgage payments got there as a consequence of some problem, whether within their control or not.  Banks would lose their shirt if they capitulated with every customer problem.

It appears unfair how this woman was treated, as compared with how the people with “postponed foreclosures” are being treated.  The average time a delinquent Bank of America borrower has been in default is not three months, but eighteen months.  That’s the average, so some of their borrowers have been delinquent even longer than that.  So how can this possibly be fair?  It is fair, since the decision when to foreclose – even if to foreclose – is the bank’s, not the borrower’s.  Borrowers are bound to the terms of their mortgage note, and this gives broad discretion to the lender as to how they handle the situation when payments on the note stop.

Is there anything that Needs To Be Done About This to make things better?  No.  I’d much rather have businesses – banks included – to have the leeway to exercise contracts as markets will bear and as how they see fit.  Restrictions, even if they appear to benefit consumers, will hurt everyone eventually.

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I have a 5-year ARM at 4.5% APR. I can renew the rate at 3.25%. However, the cost of is going to be $800. The current loan value is $156,219. Is it worth it for me to do the rate renew? How long would it take to recoup the $800? I am planning on refinancing at (or selling the home before) the 5th year.

Please, I do not want this to degenerate into a discussion of how ARMs are not good, etc. Let’s just assume I know that a 30/15 year mortgage would have been “smarter”.

I bolded the last section because this person knows the risks involved in taking on an adjustable-rate mortgage instead of a fixed-rate mortgage.  The initial rate is lower, but that’s because after a certain number of years (five in this case) the interest rate floats to a new amount based on the prevailing market rate, and can reset periodically for the rest of the life of the mortgage.  The borrower assumes the interest rate risk instead of the lender.

The questioner discloses that (s)he plans to refinance or move within the initial lock-in period.  But one of the comments beneath the question (by Jim) is interesting:

Despite your note, an ARM is a really good idea for your time frame. Rates are going to be low for a long time.

Rates are going to be low for a long time?  That’s a bold statement.

Mortgage rates are incredibly low now.  Tightened lending standards have decreased demand, and lenders have had to compete for these fewer qualifying borrowers.  Rates have gone down to meet this demand.

Now, how long they’ll stay as low as they are depends on a few things, such as how long the overnight lending rates at the Fed stay low, how long banks continue to have strict lending standards, and how long consumer demand stays low.  Basically, as long as demand for mortgages is low, mortgage rates will remain low, all other factors being equal.

Could demand remain low for months?  Years?  I don’t know.  A recovery would get people borrowing again.  The homebuyer incentives worked while they were active to spur sales, but they’re gone.  It will take something else to see them up again.

Rates are low.  I wouldn’t want to guess when they’re heading up again from their historic bottoms.

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Now, if I still had that mortgage, it would almost be a no-brainer for me to refinance to a 15-year mortgage.  I saw that rates were 3.875% for a fixed 15-year mortgage!  Refinancing my 30-year mortgage with the principal balance at what it would have been at the beginning of year 10, to a 3.875% 15-year mortgage, would have been only $35 more per month!  It would knock six years’ worth of payments off just like that.  That’s telling, because I didn’t have a bad rate to begin with.

You may have seen advertisements in the past for similar low rates (in the low 4% range or even less) but those loans were likely adjustable-rate mortgages.  The advertised rate was a teaser rate, and it was subject to change after a certain number of years.  People with these kinds of mortgage were shouldering interest-rate risk.

The low-4%, even below-4% mortgages available now are extraordinary because they’re fixed-rate.  The difference between fixed-rate and adjustable-rate mortgages is just that:  fixed-rate mortgages cannot vary over the life of the loan!  There is no tease in that rate.  It is the rate!  Fixed-rate mortgages haven’t been this cheap in my lifetime, and I was born in the early 1970s.

Now, this shouldn’t be an excuse to run out to get a house as fast as you can if you aren’t in the market.  But if you are in the market, or if you’re in the market for a refinance, comparing mortgage rates now will likely be very pleasant.  It’s a fixed-rate gift from the cheap money fairy, if you will.

(Thanks to Provident Planning for including this post in the Carnival of Personal Finance!)

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