Mortgage Rate News

One of the more interesting mortgage trends right now is that of selling homes for $1 (hat tip: Xin Lu at Wisebread). It may seem like a great deal at first, but as with all “deals”, it is important to consider the possibility of hidden and additional costs.

Homes for $1

There are several states, cities and even the federal government that offers homes for $1. In terms of the federal government, these $1 homes are meant to help fulfill a need for affordable housing. Here is what the department of Housing and Urban Development (HUD) says about its Dollar Homes program:

By selling vacant homes for $1 after six months on the market, HUD makes it possible for communities to fix up the homes and put them to good use at a considerable savings. The newly occupied homes can then act as catalysts for neighborhood revitalization, attracting new residents and businesses to an area.

This is an interesting idea, and it might work in many cases. But before you get excited about buying a home for $1, consider the following:

• Many of these homes have been stripped of everything of value. You will have to replace things like wiring and bathroom and kitchen fixtures.
• Some of these homes are fit only for demolition.
• In some places, you only buy the home, not the land, so you have to move the home.
• The location may be less than desirable, and if things don’t improve in the neighborhood, you may have a hard time selling.

It is important to carefully consider the true costs associated with any “bargain” — $1 homes included.

Tags: buy home $1, Dollar Homes program, home mortgage loan, mortgage loan blog,
HUD, Housing and Urban Development, real estate tips

You have probably heard of cash out home equity loans. In these arrangements, you take a home equity loan out on your home for more than you owe on the home. For example: you owe $130,000, and you get a home equity loan for $150,000. You pocket the difference of $20,000 in cash.

However, home equity loans are getting hard to come by. With home values dropping and mortgage lenders tightening their standards, it is no surprise that getting cash out home equity loans is becoming more difficult.

But, you ask, how will the banks make the money on interest?

A good question. Enter the cash back mortgage.

Basically, you put a “down payment” on your home, and then, at closing, you get your “down payment” back. Granted, this is a home mortgage trend mostly seen in Canada, where there is a crackdown on $0 down mortgages and other lending practices that got the U.S. into the mortgage market mess. But one never knows where the next home mortgage trend in the U.S. will come from.

Here is what Million Dollar Journey points out about the cash back mortgage:

For the “privilege” of keeping the $10,000 down payment in the home buyers pocket, the higher interest rate will cost an extra $18,096.34 in 5 short years. It’s no wonder that banks are quick to offer this type of product, it’s cash back in their pockets. To put this in perspective, if the $10,000 cash back was invested, it would take an annual return of 23% (before tax) over 5 years to break even.

It would not surprise me if something similar started happening here in the U.S. I can see where mortgage lenders would find a good marketing hook: “You get a better interest rate for making a down payment, but you get that money back!”

Tags: home equity loans, home equity, home mortgage loan, home mortgage trend,
Canadian mortgage trend, mortgage lenders, home values

Today there are a couple of points of interest pertaining to the mortgage market. The first bit of news that interests me is further losses by Fannie Mae. The other is on the somewhat-related topic of a technicality in the housing relief bill.

Fannie Mae posts huge losses

It’s not wholly unexpected. Freddie Mac announced large Quarter 2 losses, and a cut to its dividend. So it was rather unsurprising that Fannie Mae is in the same boat. Fannie is cutting its own dividend by 86 percent, and has posted massive losses as well.

The outlook for Fannie Mae (and Freddie Mac — it’s almost as though one analysis works for them both) continues to be bleak. Fannie expects 2008 to end on a rather low note, with credit-related losses peaking. Fannie is also “managing” its balance sheet in order to preserve the small amounts of capital remaining. (In a side note: Fannie and Freddie have terrible capitalization. The decades old assumption of a government guaranty has enabled the company to gain investors that would normally shun such poor capitalization.)

At any rate, Fannie appears to be trying to avoid having to run to the government for help, but the company may be merely delaying the inevitable.

Buying a house and the housing relief bill

The recently passed housing relief bill allows for a tax credit for first-time homebuyers. The idea is that you get 10% of the price or $7,500, whichever is lower. (Seriously? How many of us are buying a $750,000 home right now?) Here’s the other issue, reports Ren at Accounting Solver:

The tax credit has to be repaid 2 years after the purchase. At the tax credit of $7500, the resulting average increase in your tax bill for 15 years will be $500.

Um, wow. Maybe first-time homebuyers would be advised to avoid the tax credit after all, and just focus on the interest rate and property tax benefits that are already offered.

Tags: mortgage market news, mortgage market, home mortgage loan, housing relief bill,
Fannie Mae, Freddie Mac, buying a home