Home Finances
Greg McBride, Senior Financial Analyst for Bankrate.com
Bostondotcom: Welcome to the chat with Greg McBride, Senior Financial Analyst for Bankrate.com. Please start submitting your questions on home financing.
Want2buy__Guest_: I'm trying to save for a house and would ideally like to buy something either buy the end of this year or spring of 2008. If I don't hae the required 20% down for the downpayment do you recommend waiting to purchase something until I do, paying PMI, or taking out a piggy-back loan to cover the difference?
Greg_McBride: You can certainly buy a home with less than 20 percent down payment. Strive to save 10 percent for a downpayment, though you can still buy with 5 percent down. The more you put down, the lower will be your PMI premiums. Subject to income limitations, PMI can be deductible for borrowers that take out loans this year. That must be renewed by Congress beyond 2007. I'm not a big fan of piggybacks because it means saddling yourself to 2 loan payments for 10-15 years.
Amanda__Guest_: Is there ever a time when foreclosure is a good idea? We are upside down in our home in Cleveland. Job opportunities are bleak, the real estate market is awful. We can't sell but we can't afford our mortgage, property taxes and home maintenance anymore.
Greg_McBride: Foreclosure is truly a last resort. I certainly hope you have expressed your situation to your lender, as they also have an incentive to work with you. Perhaps they can work out a payment arrangement with you, or restructure the loan in such a way that you can stay in the home. If not, however, see what can be worked out with the lender. If staying in the home is not an option, then consider a deed in lieu of foreclosure where you surrender the deed to the lender so that they don't foreclose. Or you do what is known as a short sale, where you sell the home and whatever proceeds are generated go to the lender. In either instance, make sure the lender is on board with this and won't come after you for any deficiency balance. You don't want that hanging over your head.
SueB33__Guest_: Hi Greg, I was wondering what the outlook was for mortgage rates for the rest of year?
Greg_McBride: The outlook for mortgage rates is very good. It is unlikely that mortgage rates will rise by any significant measure through the balance of 2007, unless inflation gets out of hand or investors start dumping the dollar. Rates could potentially drop if the economy were to weaken suddenly, but be careful what you wish for. Bottom line, this is a year where mortgage rates will be very conducive to buying or refinancing. For first time buyers in particular, you can take 6 months to boost savings, pay down debt, and shore up your credit before taking the leap into homeownership knowing that home prices and mortgage rates won't run away from you in the interim.
SueB33__Guest_: I have owned my condo for 2 years. I have 2 loans - 1) 5 year fixed interest only at 5.5% and 2) this smaller loan is at 6.5%. I am thinking of selling in a year. Does refinancing make sense for me?
Greg_McBride: A 1 year timeframe is too short to recoup the costs of refinancing. The rates you have on both loans are very competitive, so unless you're facing a sharp upward adjustment this year, there is no need to worry about refinancing. If you are, but plan to sell in a year, just make sure you can handle the higher payments between now and then. If not, consider moving up your timetable so you can sell before higher payments become a problem.
Want2buy__Guest_: Watching the news lately there has been a lot of talk about foreclosures. In your opinion do you think purchasing a home on a foreclosure is beneficial? I've done some research and you can get a home for a great deal but there seems to be a lot of chance with buying this way?
Greg_McBride: I think those stories of buying some mansion on the courthouse steps for $100 are way overblown. Yeah, sure, and I just saw Elvis. Here are a couple things to keep in mind. First, buying a foreclosure at deep discount may indicate a hefty lien on the property because of the defaulted mortgage by the previous owner. Another thing is that you could have a substantial fixer upper on your hands. Let's face it, someone facing foreclosure isn't exactly out mowing the yard every Saturday. Some have even been known (gasp!) to trash the place. With foreclosures or anything else, buyer beware.
mfh__Guest_: Are there any risks in taking out a HELOC and not using it (just having it there for security)?
Greg_McBride: No risks really but I will give you a few things to look out for. Make sure there is not a minimum draw requirement...this basically means that the lender requires you do borrow a certain amount of money at closing. That clearly is not for you. Also, watch out for any annual fees or inactivity fees. You may have to pay an annual fee just to have the line open even if you don't use it, but shop around for the best terms. Many people have an unused home equity line just in case of unplanned expenses or a job loss. However, there is no substitute for a liquid emergency savings account of 3-6 months worth of expenses. Even if you open the line of credit, work to boost the savings cushion so you don't find yourself loading up the line of credit when you can least afford to, such as after a job loss or disability.
SueB33__Guest_: Purchasing a home is obviously a huge undertaking. Where to live, commute times, community, taxes etc. If you are not positive you will be somewhere for 5 years, but you want to get a much home as financially possible....what kinds of loans make the most sense?
Greg_McBride: If your time horizon is less than 5 years, then the loan to consider is a 5/1 ARM. This offers a fixed rate for 5 years before becoming adjustable. If your timetable pans out, it functions as a fixed rate loan. But let me also say this, if you're not sure about having the home for 5 years, you may not want to buy. After all the transaction costs of buying and then selling that home could devour any profit you see from appreciation. For short time horizons, it is better to continue renting and look to build wealth through other means such as taking advantage of tax favored retirement savings plans and saving money consistently.
mke__Guest_: Greg - i have a 2nd home on the Cape that is worth about 500,000. It is 3 bedrooms and I have been thinking of adding a master suite to the first floor. Should I refinance to do this or do an equity loan or line? My current rate is 5.875 with about 24 years left on the 30 year mortgage of 140,000. Thanks.
Greg_McBride: It really depends on how much you expect to spend. From an interest rate standpoint, particularly if the addition will be say, $50,000, refinancing would look like a winner. But also consider this: those costs are likely to be incurred in stages so a home equity line might be a flexible alternative. You borrow what you need, when you need it, and you also have the convenience of tailoring payments to your monthly cash flow. What the home equity line lacks in interest rate (currently over 8%) it makes up for in flexibility.
ZVending__Guest_: Hi Greg, I am going to be purchasing a home soon and am looking to pay it off within 5 years, what's the best mortgage to get? And how reluctant are lenders to do shorter term mortgages?
Greg_McBride: Lenders aren't necessarily reluctant to do shorter term mortgages, but they are often reluctant to do small mortgages in terms of dollar amount. Loans such as a 10-year fixed are widely available, offer lower rates than the 15, 20, or 30 year fixed rate loans, and have no prepayment penalty so you can pay it off over time. Opt for a fixed rate and make sure there is no prepayment penalty so you can pay it off whenever you wish.
mcg__Guest_: Greg - My husband and I bought a home with 5% down two years ago - we have a 30 year fixed at 5.875% (350K) and a HELOC for 70K at some high variable rate (I think 8% now?). In two years, we have not made a single dent in the HELOC - and any extra money we have goes to student loans. We want to refinance to put both loans into one - perhaps even a 20 year mortgage, but not sure the value of our house has really gone up. Assuming the value is same/similar - is there anything we could do to get right of our HELOC?
Greg_McBride: If you have some equity in the property, you could refinance it into one loan. But you will then subject yourself to mortgage insurance costs that you don't currently have and you will lose the payment flexibility that the HELOC offers you. For example, you haven't made a dent in the HELOC because you've been making interest only payments. That is a flexibility you have that will be lost if you refinance into one mortgage. Also, are you sure you can handle the higher monthly payments, especially if you refinance into a 20-year fixed rate loan. Keep in mind, the HELOC rate is variable so it could pull back if the Fed later cuts rates. That flexibility is worth something, especially if much of your income has been consumed by student loan and other debt payments. The closing costs to refinance into one loan would be several thousand dollars and you'd end up with a higher rate on your first mortgage.
snott__Guest_: hello Greg, I'm a 30 yr. old, single, own a condo, I have some savings in an ING account, and several mutual funds, my questions is what is a good benchmark for what i should have in savings/funds, I really have no baseline for comparison to know whether I'm doing good, bad, or somewhere in between, thanx
Greg_McBride: You should have 3-6 months worth of expenses in a liquid, risk free account such as your savings account. If not, then have money directly deposited from every paycheck to work towards that. While there is no benchmark for where you should be in accumulating assets, I do recommend that you use an online calculator to figure how much you'll need in retirement. That is a good starting point for helping you map out your financial future and the strategy to get you there.
Greg_McBride: Well, that's all the time we have for today folks. Thank you all for your questions. Please visit Bankrate.com for more information on all of the subjects we discussed in today's chat, plus many more. Thank you!
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