Buying real estate using a trust

 Loan Guidelines, Residential Mortgage  Comments Off on Buying real estate using a trust
Sep 232015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

For financial planning purposes, homeowners occasionally choose to hold their property in a trust. I’ve had this situation arise several times recently, so it’s a good time to review some of the conventional loan guidelines concerning ownership in a trust.

Fannie Mae and Freddie Mac are in the business of lending money secured by real estate. Thus, they must be able to foreclose on the real estate in case the borrower defaults. Thus, a trust used in connection with a conventional loan must be a revocable trust, also known as a family trust. This guideline, revocable as opposed to irrevocable trust, probably stops more loans involving trusts than any other.

Also of consequence is that the grantor of the trust must be a natural person and must be a trustee, and the primary beneficiary must be the grantor. The income and assets of the grantor are used to qualify for the mortgage, and the grantor is liable for repayment of the mortgage.

Finally, it’s important to remember that Fannie and Freddie still do not allow borrowers to title property in a corporation’s name, even a single-member LLC. This is true even if the borrower agrees to be personally liable for the mortgage.

Rate update: Fed adds new act to its juggling routine

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Fed adds new act to its juggling routine
Sep 222015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The Federal Reserve didn’t just postpone a rate hike last Thurs. It appeared to give itself a new job description, and in the process, introduced new uncertainly into the markets.

The Fed has a dual mandate to try to maximize employment and keep inflation in check. On Thurs, the Fed said it now is concerned about global growth prospects and market stability.

Granted, both may affect the Fed’s original mandates, but identifying them as influencing the Fed’s rate decision is, well, interesting. And what really got markets moving last week was the Fed’s gloomy assessment of global growth. While markets have noticed disappointing growth headlines, the Fed statement caught everyone by surprise and has them thinking is it really this bad?

So where does this leave us? If the global economy is tanking, rates should improve. The Fed said it still wants to hike rates before the end of the year, but that seems unlikely given its new focus on global growth. On the other hand, the most recent jobs data has shown a slight untick in wages. Should that continue, US inflationary pressures could build even as global pressures relax. Any hint of inflation could send rates up quickly.

That leaves us right back in the previous rate range with no clear direction for higher or lower rates. If you haven’t locked your mortgage rate, float cautiously.

Fannie Mae wants to give you money

 Loan Programs, Residential Mortgage  Comments Off on Fannie Mae wants to give you money
Sep 182015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

If you’re a 1st-time homebuyer, Fannie Mae wants to give you money – that is, if you buy a HomePath home. Fannie uses its HomePath program to dispose of properties it has recovered through foreclosure. Fannie will give qualified 1st-time homebuyers up to 3% of the purchase price to pay for closing costs.

In order to qualify, homebuyers must not have owned a home in the last 3 years (which Fannie defines as a 1st-time homebuyer) and plan to live in the home. Additionally, homebuyers must complete on a homebuyer education course. The 4-1/2 hour course is completely online and covers the complexities and responsibilities of homeownership.

If you want to take advantage of the assistance, keep in mind you must complete the course before you make an offer on a HomePath home. The course costs $75, but Fannie will reimburse the fee at closing.

Click here for the course sign-up and additional program information.

Could fewer cash sales be good 1st-time homebuyers?

 Investment, Real Estate Market, Residential Mortgage  Comments Off on Could fewer cash sales be good 1st-time homebuyers?
Sep 162015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Based on the most recent data from Corelogic, cash sales of homes fell for the 29th consecutive month in May to 31.9% of total sales, which represents the lowest share since 2008. The percentage of cash sales peaked in Jan 2011 at 46.5%. Prior to the housing crisis, cash sales averaged about 25% of the market.

While this statistic may reflect a healing housing market on a national level, it’s interesting to view the data on a more local level. Cash sales still represent almost half of all sales in FL, GA, NY, and NJ. Given that the strengthening dollar is dissuading cash sales to foreign buyers, it’s likely these elevated percentages still indicate distress in these markets. In TX, the share of cash sales has dropped to 28%.

One positive takeaway from declining cash sales is it may indicate less competition from investors for a tight housing inventory. Given that investors tend to purchase lower-priced homes, this may open up more inventory for first-time homebuyers.

How will the Fed meeting affect mortgage rates?

 Interest Rates, Residential Mortgage  Comments Off on How will the Fed meeting affect mortgage rates?
Sep 142015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Fed week is finally here. The Federal Reserve will decide this week whether to raise short-term interest rates. Markets are pricing in only a 28% chance of the Fed raising rates, and the consensus of economists is that the Fed won’t pull the trigger. So, how does this affect mortgage rates?

Until the Fed’s announcement on Thurs, I don’t expect rates to move too much absent some unexpected happening. Markets are in wait-mode. This prediction is a little risky because this week provides some important economic reports, including retail sales and consumer inflation numbers. Should either of these be very strong, rates could trickle higher in anticipation of a Fed rate hike.

If the Fed doesn’t hike short-term rates on Thurs, we could see a short relief rally, meaning lower mortgage rates, but I think it will be very short and rather shallow. Markets generally don’t expect a hike now, and they’ll just start anticipating the next Fed meeting.

If the Fed hikes rates on Thurs, I think we could see an outsized initial reaction with rates rising quickly. However, you must remember that the Fed sets short-term interest rates. Mortgage and other longer-term rates are more in tune with inflation expectations and global economic concerns. For that reason, I think rates could recover within a couple weeks, especially if the Fed reiterates its intention to raise rates very slowly.

The case against the 15y mortgage

 Loan Programs, Residential Mortgage  Comments Off on The case against the 15y mortgage
Sep 102015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Very low interest rates have many people refinancing their 30y mortgages into 15y mortgages. The question is is this a good decision?

The argument in favor of the 15y mortgage is that it allows you to build up equity more quickly. For example, for a $250k mortgage, you would lower your principal balance by over $70k at the end of 5 years if you used a 15y loan. In that same period, you would have built only about $24k of equity with a 30y loan.

But is that equity beneficial? Do you risk being house rich and cash poor?

Let’s continue the example. The principal and interest payment on a $250k 30y loan today would be $1194. For a 15y loan, the payment would be $1757, or $563 more each month. Money is cheap right now. Could you gain greater benefit by investing that $6756 each year in a retirement account?

A further consideration is that mortgage interest currently is tax deductible. During the first year, you’d pay $9920 in interest on the 30y mortgage and only $7930 on the 15y mortgage. The 30y mortgage will provide a larger deduction and one that will last longer into the future. Thus, depending on your tax situation, the IRS may refund you some of that extra interest you paid.

Is an adjustable rate mortgage (ARM) for you? – Part 2

 Loan Programs  Comments Off on Is an adjustable rate mortgage (ARM) for you? – Part 2
Sep 072015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Last time, we examined the risk of payment shock with an adjustable rate mortgage, or ARM, and asked the question why would you consider an ARM?

The answer is to lower your total interest charges. Assuming the rate increases by the maximum amount each year, at the end of 7 years, you’d have paid $57k in interest and have a loan balance of almost $213k with the ARM. With a 30y fixed-rate loan, you’d have paid $70k in interest and have a loan balance of more than $216k. With the ARM, you’d have saved $13k in interest and have about $3500 more equity in your home. In fact, the ARM looks better until sometime in the 9th year.

Thus, the number one reason to use an ARM is you expect to pay off the loan while you’re in the money, by the 9th year in our example. And our example assumes that rates will rise by the maximum amount each year. If rates don’t rise that severely, the ARM will be in the money for a longer period of time.

However, it’s important to remember that even though you’re saving money, if the payment starts rising, it may crimp your style. You may have become accustomed to a lower payment, and your household budget may not allow for the 20% rise that could come with the first adjustment.

If you’re considering an ARM only because the lower payment will help you make ends meet, I encourage you to reassess. Even if the index rate doesn’t increase from today’s level, your payment would rise at the end of 5 years, and the risk of a substantial rise is very real.

Is an adjustable rate mortgage (ARM) right for you?

 Loan Programs  Comments Off on Is an adjustable rate mortgage (ARM) right for you?
Sep 032015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Adjustable rate mortgages, or ARMs, can be attractive because the initial interest rate can be significantly lower than a 30y rate. For example, today’s 5y ARM rate is about 1% lower than the 30y rate. On a $250k mortgage, that lowers the monthly payment by about $150.

ARMs have several characteristics that determine how their rate adjusts. At the end of the fixed term, in this case 5 years, the rate will adjust to an index rate plus a margin. A typical index is the 1y London Interbank Offering Rate, which today was 0.856%. Using a 2.25% margin, if our rate adjusted today, it would adjust to 3.125%.

The number one risk with ARMs is that the interest rate can go up over time. ARMs typically cap the amount the rate can increase each year and how much it can increase over the life of the loan. If our initial rate is 2.75%, and our caps are 2% and 5%, our rate could increase to 7.75% in the 8th year. That would raise the monthly payment by $663.

Given that, why, then, would you even consider an ARM? We’ll search for an answer next time.

Rate update: Dangerous week for floating

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Dangerous week for floating
Sep 012015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Despite the recent wild swings on stock markets, the bond market has remained rather sedate, but this week could change that. This is a jobs report week, and the Federal Reserve has made it clear it’s watching the data and events over the next two weeks to decide whether or not to raise short term interest rates. A strong jobs report typically has the potential to boost interest rates, but this week’s report has the added significance that it could tip the Fed’s hand in favor of a rate hike.

But as I’ve discussed before, in the long run, a Fed rate hike may be meaningless for mortgage rates. Longer-term rates, like mortgage rates, are more sensitive to expectations for growth and inflation. While a Fed rate hike may temporarily boost mortgage rates, once the shock wears off, I think rates are likely to return to their current trend given weakening global growth signals.

In the meantime, if you’re floating your mortgage rate, be cautious. We’ll get several other important economic reports this week in addition to the jobs report. Mortgage rates are resisting reacting to the stock market swoon, which suggests to me that investors don’t want to get caught with rates too low. Strong economic data could convince markets that a Fed rate hike is certain, which could lift rates quickly.