California Current

on August 28, 2008

. 5 Comments

Home Equity Lines of Credit have grown quite popular and are starting to become the norm for second mortgages nowadays. However, with home values still dropping in California, HELOCs have been consistently feeling the pressure. But a recent six-page letter from the Fed has now put lenders guilty of freezing HELOCs back in the hot seat.

Why the Cold Shoulder

Since HELOCs are issued as a line of credit instead of a typical loan, lenders reserve the ability to cut off this line and essentially freeze the loan. Due to a combination of bad loans and slipping home values, lenders such as WaMu and BofA have been freezing a sizeable amount of HELOCs lately. From a lenders perspective, this reduces the risk of such loans from defaulting because of dropping home values.

For those who pay their bills on time and are considered “credible borrowers”, this can be incredibly frustrating as it seems you were promised a loan and now it is being taken away. More importantly, this freeze can actually cause a serious financial hardship - home repairs, medical bills, and other needs are all put on hold as this source of cash is now taken away.

So what do we do? Well in California fashion, we complain- and now the Fed has responded.

The Warning to Lenders

Here is a quick highlight of the six-page letter issued by the Office of Thrift Supervision

Lenders can’t generalize the freeze of HELOCs for “broad geographic areas”
They must evaluate each loan individually, instead of making blanket assumptions
A freeze below the outstanding limit cannot result in a higher payment for the borrower
If the condition that resulted with a freeze is fixed, lenders can’t charge a fee to restore the credit line

What This Means for You

While it is OK to freeze a HELOC, lenders will now have to pay more attention when they do freeze a line of credit. Whether they will from now on is another story. But here are a few things you should keep in mind:

“An ounce of prevention is worth a pound of cure.” As lenders find ways to reduce their risk in existing HELOCs, you can expect standards and guidelines to make it tougher to obtain new HELOCs.
Lenders aren’t just doing this for themselves. In a way, some of these freezes are truly warranted. With a loan based on values during the “bubble years”, it is easy for a homeowner to dig themselves into negative equity territory.
A HELOC is a line of credit and should be considered “potential” money. If you don’t want to deal with the risk of losing this credit line, explore the options of a traditional second mortgage.
Lastly, but most important - in this economy, think conservatively. A frozen line of credit can be tough, but an upside down mortgage can be devastating.

What do you have to say? Leave a comment, I’d like to hear what you’re thinking and others might too.

1) Have you experienced a frozen HELOC?

2) Do you know others who have?

(17 votes, average: 4.88 out of 5)

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Next Move for Fed Fund Rate Will Be an Increase

Published

on August 27, 2008

. 2 Comments

Earlier this month, I mentioned that the Fed was likely to hold the benchmark interest rate steady at two percent for the rest of 2008. However, after analyzing the minutes of the Federal Open Market Committee today, I want to introduce one caveat to potential buyers and borrowers in the market; the Fed’s next move is anticipated to be an increase.

The Expectation
We’ve seen it with home prices, and we will see it happen to the fed fund rate - except in this case, we have nowhere to go but “up”. Since Bernanke’s last campaign to get a hold of this credit crunch, the benchmark rate has been held steady at two percent. But as policy makers expect to make a move to eventually slow down inflation, we should expect the fed fund rate to slowly climb back up.

Now according to a report by Bloomberg, analysts predict a “92 percent probability that rates will stay steady during the next FOMC on September 16 and a 83 percent probability for the October 28-29 meeting.” So while most agree that the increase will not be anytime this year, the increase would not come as a surprise if it rates increased in the beginning of next year.

Your Assessment
First, figure out how this expectation will soon affect you - yes, I’m talking about those HELOCs. I’ve mentioned it before, but this benchmark rate has a direct effect on your interest rate which means higher monthly payments. As a result, if you were considering a HELOC, you should definitely keep in mind this piece of news and analyze the recent trends of this key rate. While this volatility is expected among HELOCs, take advantage of this knowledge beforehand to carefully plan your next financial steps.

To learn more about HELOCs, such as how they are issued and structured, be sure to check out my post from last week.

(8 votes, average: 4.88 out of 5)

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HELOC vs. Traditional Second - Which is Right for You?

Published

on August 24, 2008

. 2 Comments

Last week I gave you 5 reasons why a HELOC still makes sense, but today I’m going to revisit a homeowner’s option when it comes to finding a second mortgage. The two main options available are a traditional second-lien mortgage and the ever popular HELOC. But before settling down with either loan, it’s important to find out what each option has to offer you.

Traditional Second-Lien Mortgages
Traditional second mortgages are pretty basic and are about as traditional as can be for a mortgage - except that it is in second-lien position. Typically, these loans offer fixed interest rates for the life of the loan making it a much more stable and traditional loan since there will be hardly any surprises. At closing, the borrower receives all the funds in one lump sum payment. You will find that many home buyers will use a traditional second mortgage so they can make a smaller down payment but still avoid paying mortgage insurance.

Key Highlights of the Traditional Second

Fixed interest rates
Stable monthly payments
Receive funds in one-lump sum at closing
Great for immediate needs [debt consolidation, medical bills]

Home Equity Line of Credit [HELOC]
On the other hand, HELOCs are quite similar to the way credit cards are issued. Instead of a loan that is paid out in one lump sum at closing, you are issued a credit line based on the equity of your home. Now, your initial draw could be for the whole amount, but typically most of the credit line is left untouched and saved for the future. In addition, lenders will issue debit cards and checkbooks which will allow you to tap into these funds at a moments notice. No more paperwork or chatting with customer service, your equity is now easier to access than ever. But, HELOCs do come at a certain cost because of this flexibility. Most notably, HELOC interest rates are adjustable since they are tied to the markets Prime Rate. As a result, payments are susceptible to market forces making them much more volatile than traditional seconds.

Key Highlights of HELOCs

Greater flexibility
Great if you are anticipating the need for cash, but don’t need all of it immediately.
You only pay for what you borrow, not the entire credit line
Available for future needs [home improvements or repairs, college tuition, business investments]
Adjustable interest rates tied to Prime Rate
Sucsceptible to HELOC Freezes [frozen credit lines due to declining home values]

Which to Choose
There are no set answers and choosing the best option will largely depend on your financial situation. For those who prefer stability and have no need for an extended credit line, choosing a traditional second mortgage may just be the right choice. On the other hand, HELOCs have grown quite popular because of their increasing flexibility and currently low interest rates. In addition to comparing the aspects of each loan, you want to focus on your needs and your long term plans both for you and your home. For more information, speak to a mortgage broker in your area and read more about qualifying for a home loan today.

(9 votes, average: 4.44 out of 5)

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Tips for the Self Employed Considering a Mortgage Refinance

Published

on August 20, 2008

in Refinance

. 1 Comment

Oh the joys of being self-employed - the flexibility, the freedom, and the write-offs. But as soon as you start shopping for a home loan, you will find that all that flexibility and freedom gets thrown right out the window.

In its place are stacks of paperwork and documentation that your wage-earning counterparts can often avoid; tie this in with the current lending standards and you may just want to throw in the towel already. Well, all hope is not loss, you will just have to work a bit harder and endure a bit more to get your next home loan. But you are self employed, so hard work and patience shouldn’t scare you right?

Why All The Fuss?

Lenders know that your income is quite sensitive. So while you may have made a killing last year, they know there is no guarantee you will do the same this year.
You make how much? Are you sure? One of the benefits of being self-employed is the ability to write off certain deductions and business expenses - and boy do you use it. As a result, your income shrinks significantly on your financial paperwork.
Abuse of stated income and low documentation. Stated Income and Low Doc loans were catered towards the self-employed borrower due to the nature of their income. But because of recent abuse, lenders are now wary to accept such little documentation on their loans nowadays.

Gather Your Documentation. All of it.

Income Verification - Lenders will want to see proof of your self-employment income through two years of tax returns, profit and loss statements.
Asset Verification - If you claim a certain income, lenders will want to see your assets supporting that type of income. Have your bank statements, investment records, and any other savings documents ready on hand. In addition, some lenders may look at your bank statements to see if the cash flow of deposits supports your income as well.

Keep all this in mind months before refinancing so that you will have time to better prepare yourself. I didn’t mention it too much in this post, but your credit and LTV better be in great shape too. The last thing you want is to take additional hits for low credit and little equity. If you were thinking of purchasing a home, start saving for your down payment too - the advertisements you see are typically aimed towards wage earners and lenders will like to see a larger down payment from you. Read more about qualifying for a home loan today.

(8 votes, average: 4.75 out of 5)

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First Time Home Buyers – Don’t Shun the $7500 Tax Credit

Published

on August 19, 2008

in New Home loan

. 2 Comments

So I open up my news feeds yesterday, and in big bold letters I see the title “Beware of the $7500 Tax Credit” on a CNNMoney headline. Even though there is an entire website dedicated to explaining the ins and outs of this new ‘tax credit’, I can’t help but feel that buyers out there must be confused by these warnings and poised critics. So in response, I am going to address some of these issues as well as detail the fundamental elements of this “mystery” tax credit.

Who is Eligible?

First Time Home Buyers or those who have not owned a home in three years
Individual income must be less than $75,000 and couples with income less than $150,000. Those outside of these income requirements may be eligible for partial credits.

What You Get

A tax credit is issued for 10% of the sale price with a maximum amount of $7500
- Most will qualify for the $7500 tax credit, but if your house is less than $75,000 you will receive up to 10% of the purchase price. (i.e. $65,000 sale = $6500 tax credit)
If the tax credit is less than the taxes you owe, you will pay the difference. If the tax credit is more than the taxes you owe, you will receive a refund.
- If you owe $8500 in taxes and received a $7500 tax credit, you will pay $1000. If you owe $5000 in taxes and received a $6000 tax credit, you will receive $1000

How You Pay it Back. Yes, you do have to pay it back.

Borrowers are required to start paying back the loan after 2 years and it must be paid off within 15 years.
If you sell the home, the remaining balance is paid for with the profits of the sale. If you sell the house at a loss, your remaining balance is forgiven
Essentially, the tax credit is a zero percent loan for 15 years.

So there you have it - hopefully this eases any worries and will serve its purpose of stimulating the appetite for this market. While it still might be intimidating for some, it will be interesting to see how these government incentives play out in the future. For more details and some of the FAQs, be sure to check out the First Time Home Buyer Tax Credit website.

(9 votes, average: 4.56 out of 5)

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Five Simple Reasons Why a HELOC Still Makes Sense

Published

on August 18, 2008

. 3 Comments

Lenders are seem to be putting HELOCs on the back burner as home prices continue to slide, but HELOCs are still great options for those looking to borrow. If you can qualify, here are five common benefits borrowers find in their HELOCs

Low Interest Rates Compared to Credit Cards and Personal Loans
Although HELOC rates are nothing outstanding in the mortgage arena, they are almost spectacular compared to credit cards and personal loans. Consider it a reward for owning a home, but a HELOC can truly save you some cash if you have considerable debt on high interest rate accounts. Just remember though that a HELOC is secured debt whereas credit cards are unsecured debt; so if you default on a HELOC, you do risk losing your home.

Higher Credit Limits
Most people do not have the luxury of having six-figure credit lines but with a HELOC you will enjoy a decent sized credit limit. Granted you have the equity, HELOCs can easily be issued lines nearing $200,000. Now, don’t go crazy just because you have that celebrity style credit line. But, if you have medical bills or home improvements waiting, a HELOC can support you where most credit lines might not be able to.

Tax Deductions
While a HELOC resembles a credit card in the way it is issued and advertised, don’t forget that it is still a regular home loan with mortgage interest. Your individual tax benefits will be unique to your own situation, but mention it to your CPA when taxes are due and claim those deductions. Your deductions will be based on the amount of the HELOC and also how it was used. (i.e. purchase, home improvement, general cash out) Let’s see you try to claim some of that interest from your last credit card statement.

Low Fees
It is common for lenders to offer HELOCs with no application fees or appraisal costs - be sure to also shop around as lenders will offer HELOCs with varying options. By taking out a HELOC, you can save yourself thousands in closing costs and fees by not having to refinance your entire loan.

It’s There When You Need It
When you get a HELOC, you are issued a line of credit and can use this line however you please in the future. So while you might have a $150,000 HELOC, you might have only initially borrowed $15,000; that means you have a remaining $135,000 at the tip of your fingers. This could be great if you were thinking of making home improvements, but weren’t planning on doing so immediately.

So, if you are in the market and can take advantage of some of these key benefits - obtaining a HELOC may just be the right move for you. Read more about shopping for your HELOC.

(6 votes, average: 4.83 out of 5)

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MLS® - Western Hills, Yucca Valley, CA, US

Published

on August 15, 2008

. 0 Comments

House FOR SALE

$850 USD Monthly (For Rent/Lease) - North Long Beach, Long Beach, CA, US

Published

on August 15, 2008

. 0 Comments

House FOR RENT: 1 Bedroom(s) 1 Bathroom(s) 650 sq. ft.

$3,775 USD Monthly (For Rent/Lease) - Friendly Valley, Santa Clarita, CA, US

Published

on August 15, 2008

. 0 Comments

House FOR RENT: 5 Bedroom(s) 4 Bathroom(s)

$1,125 USD Monthly (For Rent/Lease) - North Long Beach, Long Beach, CA, US

Published

on August 15, 2008