Logan Utah Mortgages and Real Estate: September 2009

I have had a couple of experiences recently that has got me thinking about the various reasons why someone shouldn't make extra payments towards their mortgage.

The first experience occurred a few months ago. A gentleman came into my office trying to get me to sign up to be a vendor for their software which helped people pay their mortgages off early. The basic idea behind this man's product was that somebody will save a ton of money in interest if they put their entire pay check towards the mortgage at the beginning of the month and then use an equity line of credit for monthly expenses. The software (which cost $3,500 by the way) also would tell the client exactly when and how much to add in additional principal payments to the mortgage for optimum savings in interest.

I do not doubt that this strategy works. In fact, it's quite simple to see that this would save somebody thousands of dollars of interest over the life of the loan, which could be a very short amount of time if somebody puts their entire paycheck towards the mortgage. However...

With this salesman, I was initially very impressed with his product and I thought that it would appeal to many people. Saving thousands of dollars in interest on your mortgage would be a big benefit. My second thought was about the opportunity cost of putting that money somewhere else.

The fact is that mortgage debt is the cheapest debt that you will ever have. And with mortgage interest being tax deductible, it's as if the government is subsidizing a 3rd of your mortgage payments (assuming you are in the 33% tax bracket). An interest rate of 6% (rates are much lower than this today) is really more like 4% with the tax deduction.

In 1979 the Dow Jones was at 907.74. As of September 29th, 2009, the Dow Jones is at 9,744. That is an average of 8% a year over the last 30 years. This is including the recent crash in the stock market. Assuming this rate of return continues for the next 30 years, it makes much more sense to fund your retirement than to pay off your mortgage early.

The other experience I had was just yesterday. I was meeting with a client about a refinance. She informed me that she wanted to refinance to a lower interest rate so that she could pay the mortgage off earlier. When I pulled her credit report I noticed that she had about $7,000 in credit card debt on which she told me she was paying an average of 22%.

With this client it was fairly easy to see that it makes much more sense to pay off her credit card debt at 22% interest rather than pay off her mortgage at 5% interest. She agreed and we set some goals for her to do that.

I know that there are some who disagree with me and I can see the merit of the argument that you can't put a price on peace of mind and paying off your house early = peace of mind. Still, in my opinion, if you have disposable income it makes more sense and cents to pay off any other debts first and then apply your disposable income to a ROTH IRA, where you can invest it in just about anything.

In my next blog post I will show you specific examples of how it may be smarter to invest your disposable income rather than put it towards your mortgage.

Nobody likes paying private mortgage insurance. It's one of those monthly fees that feels like money is just going down the drain. It feels that way because It doesn't protect the homeowner. It is strictly for the lender in case the homeowner defaults on their payments and the bank has to foreclose.

Because of the federal "Homeowners Protection Act", which applies to people who bought their homes after July 29th, 1999, there are some rules for lenders as to when they must cancel private mortgage insurance on a loan. The act says that homeowners can ask that the PMI be canceled when they have paid down their loan balance to 80% of the original home value and that the lender must cancel PMI automatically when the homeowner has paid down the loan balance to 78% of the orignal value.

The other way that a homeowner might get their PMI canceled is by getting 20% equity through the appreciation of their home (less likely in this market, although Logan has not depreciated as much as many markets in Utah or the nation) or through home improvements.

If you feel like your home has 20% equity, whether through making payments or home appreciation, there are some steps you can take to get rid of your private mortgage insurance.

      1. The first step would be to look in your original loan documents (the packet that the title company gave you) for information from your lender on the procedures for getting PMI canceled. If you can't find this, I'm sure you can call customer service of your lender to find out the procedures. Usually the first step is requesting the removal in writing. You will want to keep copies of all your correspondence in case you need to take the lender to small claims court.

      2. The second step would include an appraisal if you are requesting the removal based on the appreciation of your home. Make sure to ask the lender if they have a list of appraisers to choose from. Many lenders won't accept appraisals from just any appraiser. The appraisal will cost you anywhere from $350 to $400; Not very much considering that most people in Logan, Utah would save anywhere from $500 to $1,500 per year by getting rid of the private mortgage insurance on their loan. If you aren't sure about the value of your home and you don't want to risk $400, call a Logan Utah Realtor to give you a CMA (Comparative Market Analysis) which is the next best thing to an appraisal. Most will charge you about $20. You will still have to do a full appraisal to get rid of PMI but this way you will have an idea of what your home is worth before forking out $400.

      3. If you have an interest rate that is currently higher than the going rate you might consider a refinance to get rid of your PMI and to lower your interest rate. If the home has 20% equity, you won't have to have PMI on the new mortgage.

If your lender refuses to remove your PMI you should write firm but polite letters with evidence that you do indeed have the 20% equity requirement. Some lenders do have clauses in the loan documents that state PMI must remain on the loan for a minimum time period. In these cases, you are probably out of luck if you haven't been in the home long enough. Many lenders take a long time to process the requests because it just doesn't benefit them that much to get rid of your PMI. It's a sad but true reality.

If you have an FHA loan, I'm afraid you will pay mortgage insurance for a minimum of 5 years, no matter what your equity in the home might be.

Getting rid of your PMI does not have to be a long tough battle. With the right steps and if you meet the lenders guidelines for removal, it could be a stress free process. Just be patient and prepared to meet the lenders requirements.

I am going to make a bold statement: The "FHA Energy Efficient Mortgage" is the most underused and under appreciated loan products available in the mortgage world today. And the biggest reason is that very few people know about it. Thus, I write this blog post to inform the misinformed on one of the coolest (no pun intended) loan products out there.

The skinny on the FHA Energy Efficient Mortgage (EEM for short): The EEM is a way for buyers to upgrade the energy efficient products of the home (e.g heat and air conditioning, water heaters, windows, insulation, etc.) with an "add on" loan of up to 5% of the sales price. The idea is that you will save more money with the upgrades than the increased monthly payments from the higher loan amount.

Here is an example of how it works: So you find a great deal on a home that has lots of potential but also has a boiler from 1920, a rusty wood stove, a water heater from the Carter era, single pane aluminum windows that let the fresh air in, and sawdust insulation in the attic (i actually had sawdust insulation in my first house!) that has a better chance of starting a fire than actually insulating anything. This is where the EEM comes into play.

Let's say the purchase price is $100,000. You put 3.5% down to bring the loan amount to $96,500 (There is also upfront mortgage insurance of 1.75% but for the sake of focusing on the benefit of the EEM we will exclude it here). From the very start of the loan process you tell your lender that you want the EEM "add on" to upgrade the energy efficiency of the home. Your lender will then order a HERS report (Home Energy Rating System) from an FHA approved inspector. He does an audit on the home for its energy efficiency and will come up with some potential improvements and the estimated monthly savings for each.

The audit might say that new double pane windows will save the homeowner $30/month in heating costs or that 12 more inches of insulation in the attic will save the homeowner $15/month. The borrower will then get to choose which improvements they would like performed up to a cost of 5% of the purchase price. They might choose to just add the insulation which might cost $500.00. The money goes into an escrow account which is designated for the repairs which are done after closing. This $500 "add on" to the mortgage will raise the monthly payments by about $3/month but it will save the homeowners $15/month. Pretty sweet..right?!

The other nice thing about the EEM is that you don't have to qualify for the extra money because the lender realizes that it is saving you money. In fact, you may be able to qualify for a bigger loan because of the EEM.

  I know that in my city Logan, Utah that there are hundreds of homes and homeowners that   would benefit from an EEM. They just didn't know about it. One last thing...You don't have to purchase a home to take advantage of the EEM. You can do it through a regular refinance or a streamline FHA refinance. Give me a call if you have any more questions about it.

"Welcome Home Own in Logan" is a $7,500 subsidy or grant for first time home buyers in the city of Logan, Utah. It can be used for a down payment and/or closing costs. It turns into a grant if the home is owned for 10 years. It must be repaid if the home is sold, if the mortgage is refinanced, or the home is rented out in the first 10 years.

To be eligible for the program you must be a first time home buyer which is defined as someone that hasn't owned a home for 3 years, those that own a mobile home that is not on a permanent foundation, those that own or lease a condo, and also those that are a displaced spouse.

Also with this program there are some income limitations. To be eligible for the program applicants can not make more than 80% of the HUD median income guidelines for Cache County. As of the date of this blog post, applicants can't make more than $44,400 to be eligible for the program.

Applicants must also attend a workshop for first time home buyers. In Cache County this workshop is provided by the Family Life Center of Utah State University. They can be reached at 435-797-7224 for questions or to register. I have attended and taught this class and I recommend it to buyers that don't even qualify for the grant.

Also, applicants must provide at least $500 of their own funds towards the purchase of the home.

To sum things up, to qualify for the $7,500 Welcome Home Own in Logan grant you must:

     1. Be a first time home buyer
     2. Earn no more than $44,400 per year
     3. Attend a First Time Home Buyer Workshop
     4. Apply at least $500 of your own funds to the purchase of the home
     5. Buy a single family residence within Logan city limits

This grant would be on top of the $8,000 tax credit that the government is offering to first time home buyers and on top of the Utah Home Run Grant 2 if you are buying a newly constructed home. Please feel free to call me at 435-770-2709 if you have any questions about this grant or any others you have heard about.

Why live in Logan, Utah? Here are 10 reasons!...

1. Utah State University: The University is Cache Valley's largest employer and a huge part of the economy. It has a beautiful campus and boasts some of the best programs in the state. I might be biased but I went to Utah State and had an amazing experience.

2. Stable economy:  Some people might say it's because we live in a bubble but I think it's because we are smarter than everybody else :)

3. Low Crime Rate: Logan is a safe place to live. Many people don't even lock their doors at night.

4. Great fishing!: If you like to fish, you will love Cache Valley. There are tons of rivers, lakes, and fishing holes with some of the best fishing in the state.

5. The Mountains: If you can't appreciate the beautiful scenery that Cache Valley has to offer than you don't have a pulse. When the leaves begin to change towards the end of September, a trip through Logan Canyon is a must.

6. Golfing: Cache Valley has some of the best golf courses in the state and nation. Birch Creek was recently named one of the best public golf courses in the nation.

7. Aggie Basketball: Stew Morrill and the Utah State Aggies have been one of the best shows in town for the past 10 years. Their arena, the Spectrum, sells out on a regular basis and boasts one of the craziest student sections in the country.

8. Demolition Derby: Ok...not really a good reason to live anywhere, but Logan does have some sweet demolition derby.

9. Aggie Ice cream: Aggie ice cream is a must stop for all visitors to Logan. It is the best ice cream in the state, bar none.

10. Welcome Home Own in Logan: This is a $7,500 grant for first time home buyers. Give me a call at 435-755-2177 to see if you qualify for this grant.

These are just a few of the reasons that make Logan and Cache Valley, Utah such a great place to live.  Me and my wife moved here about 7 years ago and have loved it ever since. It's a great place to raise a family and make a living. If you have any questions about living in Logan, give me a call at 435-770-2709. I'd be happy to answer any questions you might have.

Shopping for a mortgage can be confusing and counterproductive if you don't know what you are doing. If you are shopping for a mortgage in Logan, Cache Valley, or Utah, there are a few tips that you should know to simplify the process and to help you truly find the best deal. In no particular order...

Tip #1: Do your shopping on the same day! Interest rates change every day and sometimes several times a day. If you can, do all of your shopping within a time period of a few hours.

Tip #2: Know your credit score beforehand.This is important so that each lender that you talk to doesn't have to run your credit score. In fact, do not let any loan officer run your credit score unless you have made a decision to go with them, as this can hurt your credit score. For a decent rate, with no "hits", most conventional lenders are requiring a score above 720. FHA lenders are requiring minimum credit scores between 620 and 640. You can obtain your credit scores through experian.com, transunion.com, and equifax.com

Tip #3: Shop for the same type of loan. Lenders have different interest rates for their FHA, Conventional, Rural Housing, and other loan products. Make sure that you know beforehand which loan is the best fit for you. Lenders may quote you rates and fees on other products but you should insist that you receive a quote on the loan option that you are shopping.

Tip #4: Insist that the loan officer quote you an interest rate with the same amount of points."points" and interest rates are interrelated. If points are higher, interest rates are lower and vice versa. Choose a certain # of points that you would like the loan officer to include in his/her estimate. Ask them for their "1 point mortgage rate" or their "0 point mortgage rate". Whatever you do, keep the points the same at each lender to give you an accurate comparison.

Tip #5: Shop for the same mortgage rate lock period. Interest rates will change for the length of the lock period. The shorter the lock, the better the rate. Unfortunately, some loan officers might quote you a 15 day lock period to lure you in, knowing that it might take more than that to process the loan. I would recommend you insist on a quote based on either a 30 day or 45 day lock period. Keep the lock period the same with each lender you shop.

Tip #6: Do not complete an application until you have received a good faith estimate. Most loan officers are willing to give you a good faith estimate before you complete a loan application with them. If they are not willing something may be sketchy. You should be able to know what the rate and fees will be before you undress financially for anybody.

Tip #7: Ask the loan officer if you can lock your interest rate today. Your interest rate should be able to be locked on the same day that you complete the loan application. It only takes 15 to 30 minutes to get the automated approval, at which point the loan officer should be able to lock.  Make sure that you know whether the rate you were quoted is locked or "floating".

The majority of first time home buyers that I have worked with over the last few years haven't had much of a choice with the size of their down payment. They usually only had enough for the minimum, which is 3.5% on an FHA loan or no down payment on a Rural Housing or VA loan. However, other clients have ample funds for a down payment and struggle with the question of how much to put down. They wonder if it would be better to put as much down as possible and have a low monthly payment or if it would be better to keep that money and use it for other means.

here are 3 questions that every borrower needs to consider when deciding how much money to put down on a home...

                                                 1. Do I want my money tied up in my home?: Having your money tied up in your home isn't earning you any interest. It's like putting your money in a mattress. With the performance of the stock market and other investments over the past year many would argue that having your money in a mattress is a good thing. However, the value of your home is going to rise and fall regardless of how big the mortgage is. In many parts of the country home values have fallen and large down payments and equity have disappeared.

2. Will I need the cash?:It's impossible to predict all of the crisis that might occur in life. Job losses, illnesses, injuries, marital problems, family problems, etc. could all arise and any of these could require massive amounts of cash. Having your home paid for might be a small consolation if you don't have the cash to take care of these other problems.

3. Should I pay off other debts first?: Mortgage money is cheap. Of all the debt that you might have in your life (e.g. Student loans, car loans, credit cards, a mortgage) your mortgage is most likely the lowest interest rate. Also, unlike most loans, your mortgage is tax deductible. This means that if you are in the 33% combined federal/state income tax bracket, your mortgage is being subsidized by the government by up to a 3rd. Your 6% interest rate is really only 4%. It would be better to pay off your other debts first.

There are some that say that paying off your home should be the top priority before making significant contributions to other investments. If this school of thought helps you sleep better at night, than maybe that is what you should do. It's hard to put a price on peace of mind. There is no right answer that is the same for every borrower. It is going to be different for everybody.  A good loan officer should be able to help you find out what is the best decision for you and your individual goals.