Tag Archives: Brooklyn Law School

Down in ARMs

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TheStreet.com quoted me in Top 5 Lowest 7-Year ARM Rates. It opens,

U.S. mortgage rates have continued to decline in the aftermath of the Brexit vote, low Treasury rates and stagnant economy, giving potential homeowners an opportunity to save money because of the dip.

The current market conditions give homeowners in the U.S. an opportunity to take advantage of the continuation of low mortgage rates since the Federal Reserve has not increased interest rates.

But, how do you snag the absolute lowest rates, especially if you don’t plan on staying in your first home for more than seven years and are learning toward 7/1 adjustable rate mortgages (ARMs)?

The 7-year ARMs are attractive to consumers, especially first-time homebuyers, because the interest rates are lower, helping you save more money each month compared to the traditional 30-year mortgage.

“You get what amounts to a fixed rate mortgage, but at a lower rate than the traditional 30-year fixed,” said Greg McBride, chief financial analyst of Bankrate, a North Palm Beach, Fla.-based financial content company.

While lower monthly payments are appealing, the interest rates reset after seven years, and it can be difficult to determine how much they will increase.

“If your timetable changes, then you may want to reconsider the loan you have,” he said. “You don’t want to be in the position of facing rising monthly payments that squeeze your budget or jeopardize your ability to afford your own home.”

Consumers on fixed incomes and saddled with student loans and credit card debt might opt for a 30-year fixed rate mortgage, because it represents “permanent payment affordability,” McBride said. The principal and interest will never change, because it is a fixed rate and can be easier to budget.

“It may not always be the optimal choice, but it is the safest choice,” he said.

Adjustable rate mortgages can still be beneficial if homeowners take advantage of the savings each month and allocate it towards paying down debt or into an emergency fund.

“Even if you’re still holding the 7-year ARM at the end of seven years, that doesn’t automatically turn it into a bad decision,” McBride said. “You will have banked seven years of savings relative to the fixed rate mortgage that can help you absorb any payment increases until you refinance or sell the home.”

Many consumers gravitate toward the 30-year mortgage, because the payments are stable and have been very low, said Jonathan Smoke, chief economist for Realtor.com, a Santa Clara, Calif.-based real estate company. Others are seeking the 7-year ARM, because they are more likely to qualify for a mortgage.

Mortgage activity so far in 2016 reveals that only 3% of mortgages have had shorter rate terms, according to Realtor.com’s analysis of purchase mortgage activity. Hybrid term mortgages such as the 7/1 ARM typically increase in share when “mortgage rates rise because the shorter fixed term offers a lower rate, often between 40 and 100 basis points,” he said. “The lower rate translates into a lower payment for the duration of the initial term, which is seven years.”

Each lender utilizes a benchmark such as a the 10-year U.S. Treasury or LIBOR rate and a margin, which is “what is added to the benchmark to determine your new rate,” Smoke said. The loans also have a cap on how high any single rate change can be and also a ceiling on how high the rate can ever be, he said.

At the end of the seven years, homeowners can choose to refinance to a lower fixed rate, but need to budget for the closing costs.

A lower rate upfront can be favorable for younger homeowners, but examining the ceiling rate and how it will impact your monthly payments is crucial.

“A mortgage broker or lender can help you walk through scenarios to determine if your timeline could benefit,” Smoke said. “To help calm any nerves about just how high your payment could go, ask yourself if you are willing to exchange the initial seven year savings for how long you might keep that mortgage after the seven-year period is up.”

Paying the premium for the peace of mind that your payments will remain static means that if interest rates rise several percentages in the next few years, you won’t be faced with having to consider the lower rate options or lower priced homes and/or more money down, he said.

“That’s why hybrids will likely become more popular in the future compared to how little they are used today,” Smoke said.

Since people have a tendency to change homes every seven years on average, a 7/1 ARM could be a good option because the savings can be substantial, said David Reiss, a law professor at Brooklyn Law School in N.Y.

“Even if you are not planning to move now, the future may bring changes such as divorce, frail relatives, job loss or new job opportunities,” he said. “Some people like the certainty of the 30-year fixed rate mortgages, but it is worth calculating just how much that certainty will cost you.”

When Should Millennials Buy?

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SelfLender’s personal finance blog quoted me in When Should You Start Worrying About Buying A House? It opens,

If you’re a young person, then you’re probably already familiar with the fact that younger generations are more hesitant to purchase a home than previous generations.

Times are much different than when your parents were worrying about buying a house for the first time. In the “olden days,” the traditional life plan was set in stone: get married, buy a house, raise a family.

Fortunately (or unfortunately), young people aren’t jumping into homeownership within the same timeline as the generations before did, which is causing a stir amongst the real estate and financial industries.

What’s more bothersome is that many young people are having trouble gauging when they should actually start worrying about becoming a homeowner.

The answer is: it depends.

Figuring out when to buy a house is different for everyone. There is no set age that signals the right time. There are, however, financial and lifestyle signals that will help you make an educated decision on when you should, if at all, purchase a home.

The following is our rough guide to figuring out if homeownership is right for you or if you should continue renting.

Homeownership is Long Term

Purchasing a home is not for everyone. Especially for people who like to move and travel. Unless you’re able to pay for your house outright in cash, then purchasing a home might not be a good idea for someone who has been known to move around frequently.

Lauryn Williams, four-time Olympian and owner of Worth-winning.com, a financial planning company for young professionals and professional athletes, says that millennials love traveling and moving around. Just take a browse through Instagram and count the amount of selfies in exotic locations.

“My tip would be not to buy a home, because it seems to be ‘the next logical’ step in life,” says Williams. “Think about your lifestyle and whether homeownership is truly for you.”

You need to think long term about whether or not you’ll be in the same place that you’re buying your house.

Maybe you don’t travel much, but is your current job security good enough to keep you in one location for more than a few years? What if you get a better job offer that would require you to move?

The traditional career path in America is to graduate school, find a company and stay with that company for your entire life, which is not the case today. Millennials are more likely to switch jobs than previous generations.

“When people are thinking about settling down for five or more years in one location, they should start to seriously think about owning over renting,” says David Reiss, a Professor of Law at Brooklyn Law School.

Mortgage Market Forecast

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OnCourseLearning.com’s new financial services blog quoted me in Mortgage Rates Likely to Remain Low for Foreseeable Future. It opens,

In the weeks since the United Kingdom voted to leave the European Union, previously low interest rates have fallen to near historically low levels.

For the week ending Aug. 25, a 30-year fixed rate mortgage averaged 3.43%, just slightly above the record low of 3.31% established in 2012. At the same time a year ago, the average mortgage rate for a 30-year fixed rate mortgage was 3.84%, according to Freddie Mac.

The drop in interest rates appears to be drawing more homeowners into the mortgage market. Freddie Mac now expects 2016 loan originations to reach $2 trillion, the highest level since 2012.

Market Uncertainty

While markets have calmed since the Brexit vote in late June, the Mortgage Bankers Association cautioned in a July 14 Economic and Mortgage Finance commentary that the actual “terms and conditions of the exit will continue to destabilize markets.”

Global economic uncertainty, oil price fluctuations, slow economic growth and the potential for interest rate hikes suggest market instability will likely continue for some time, experts said. As a result, most analysts expect interest rates will remain low, at least in the short term.

“Those who have been betting on increasing interest rates have been wrong for a long time now,” said David Reiss, professor of law at Brooklyn Law School and research director of its Center for Urban Business Entrepreneurship. He believes rates likely will remain low “over the next six to 12 months, partially driven by a further reduction in spreads between Treasury yields and mortgage rates.”

Greg McBride, chief financial analyst for Bankrate.com, a personal finance website, expects “the backdrop of slow global economic growth, low inflation, and negative interest rates elsewhere will keep demand for U.S. bonds high, and mortgage rates [below] 4% in the foreseeable future.”

In July, Freddie Mac predicted the 30-year rate won’t top 3.6% in 2016, or 4% in 2017.

Lending Opportunities

The low-interest rates have created new opportunities for lenders. Refinance bids recently reached their highest level in three years.

“With mortgage rates having been range-bound for so long, this breakout to the low side has opened the door to refinancing for homeowners who had previously refinanced around 4% or even just below,” McBride said. He expects refinancing demand to continue as long as mortgage rates stay close to 3.5%, but predicts rates may need to drop a bit more to prolong the boom.

Meanwhile, rising home prices are creating more equity, and the MBA expects homeowners to want more cash-out refinancing. In its July 14 report, the MBA raised its 2016 refinance origination forecasts by 10% to $760 billion, replacing its pre-Brexit projection of a decrease.

As rates fall, refinancing becomes attractive earlier for those with outsize mortgages. These jumbo loans are those that exceed $417,000 in most of the country, or $625,000 in high-priced markets like New York and San Francisco, according to a July 7 online article in the Wall Street Journal. With these big loans, lower rates can mean substantial savings.

“Borrowers with larger loans stand to gain more by refinancing, and may not need as large of a rate incentive than borrowers with lower loan balances,” according to the July 14 MBA report. Because more affluent borrowers take out these loans, they generally have fewer delinquencies or foreclosures, and lenders can steer big borrowers to a bank’s other accounts and services. They’re also becoming cheaper: Rates on jumbo loans were at record lows in July, according to the MBA.

Reiss thinks lenders have been somewhat “slow to expand in the jumbo market, and may now gain a leg up over their competitors by doing so.”

Potential Risks

Still, lenders face some risks to profitability, including increased regulatory expenses such as the impact of the Consumer Financial Protection Bureau’s new TRID rule. Most of the pain from the TRID regulations, Reiss said, involve “transition costs for implementing the new regulation, and those costs will decrease over time.”

Free or Treed?

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Realtor.com quoted me in Woman Can’t Live in Her Treehouse Even Though It’s Quite Posh (Take a Look!). It opens,

Most people live in houses, but Shawnee Chasser prefers her tree. In fact, the 65-year-old has been living in her custom-made abode between the forked trunks of an oak and fig tree on her late son’s half-acre property in Biscayne Gardens, FL, for the past 24 years. Hey, if it makes her happy, who cares, right?

Well, it turns out county officials do care, since they’ve deemed the treehouse to be unsafe. They’ve told Chasser to tear the structure down, but she’s flat-out refused—sparking a flurry of commentary nationwide about a controversial topic: How much control do we really have over where and how we live, anyway?

Chasser, at least, believes she has a right to stay put in her treetop chateau—a surprisingly spacious two-story place with a double bed and kitchenette complete with a tiny oven and sink. There’s even a small couch often occupied by Coonie, her pet raccoon.

“I’m not taking anything down,” Chasser told the Miami Herald. “I’ll chain myself to that tree house.” (But what about Coonie?)

Part of a land trust run by Chasser’s daughter, the property also has a cottage and minicamper, but Chasser prefers to rent those out. She also lets people pitch tents on the land to make extra cash to supplement her organic popcorn business.

About a year ago, someone called 311 to complain that Chasser was running the property like a hippie apartment complex. That’s when county code enforcement swung by and issued her a citation for illegally renting out the land, as well as living in a treehouse.

County officials concede that if the treehouse had been built with the proper permits and safety standards, there would be no problem. But, well, it wasn’t. And in an area prone to hurricanes, Chasser is endangering her own life, as well as her guests, officials claim.

As a result, Chasser has paid $3,000 in fines and could face an additional $7,000 in liens. She says she doesn’t have the money to hire engineers to rebuild or retrofit her treehouse to get it up to code, and has filed an appeal.

Although she has plenty of sympathizers, real estate experts are split over the treehouse tumult.

“The government has broad authority to regulate our daily lives in order to protect the health and safety of the people living under it,” insists David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “The fact that someone has been able to operate under the radar does not give them a pass once the government has identified a violation of zoning and building codes.”

Alternative Living Arrangements

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Realtor.com quoted me in Can You Live in a Storage Unit or Van? How Legal These ‘Homes’ Really Are. It opens,

Yes, we know: Finding affordable housing can be tough. Tougher than tough. And that has led people to push the boundaries of what “home” is—living in vans, boxes, and a slew of other stopgap solutions. Call them creative, call them desperate. But can you call them legal?

Well, that all depends on the specifics. Check out this list of alternative living arrangements people have tried to see what leg you can stand on if the cops show up at your door.

Can you live in a storage unit?

At face value, it would seem like this one could work, especially for the types of storage units that are more freestanding as opposed to those housed in multifloor buildings. And, more than a few homeless people have tried it. But, owing to ordinances and a lack of amenities, this one is considered a straight no-go.

“Most of the time, building codes are there for your protection, and storage units aren’t built for human habitation: There won’t be two means of egress, plumbing, or electricity, and ventilation may be an issue,” says attorney Robert Pellegrini, whose law firm, PK Boston, assists its clients with residential zoning and permitting. There’s also no kitchen, bathroom, or windows.

Bottom line: It’s illegal and possibly dangerous.

Can you live in a van?

A house on wheels? Yes, living in your car or van has become a bit of a thing in pricey-but-young areas like Silicon Valley. But doing so requires some fancy maneuvering.

“There are certainly modifications that you’d want to make to a typical van. But if you don’t run up against vagrancy regulations, there are plenty of Wal-Mart parking lots around for you to call home,” says Pellegrini. “I’d suggest a safe deposit box and better-than-average auto security, but this is definitely doable—just ask all the baby boomers driving around the country in their RVs.”

The trick is to find venues that don’t consider van living illegal.

“Many jurisdictions do not allow people to sleep in public, and this has sometimes been interpreted to include sleeping in a vehicle,” says David Reiss, academic program director for Brooklyn Law School’s Center for Urban Business Entrepreneurship.

For example, in Beaverton, OR, you can’t park a vehicular residence in a commercial lot overnight, but in Boise, ID, you can as long as you have permission from the owner.

To check the status of where you are, do an internet search for “public sleeping + [your current location]” and see what comes up, or look at this report from the National Law Center on Homelessness and Poverty (there is a list of places where it’s OK to sleep in public starting on Page 165).

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Can you live in a box?

Could you build a wooden box in the living room of a friend’s apartment—like in the recent case of an illustrator in San Francisco, CA, who did just that? It became a national story when the city’s chief housing inspector got wind of the box abode and put up a fuss.

“In the San Francisco case, it doesn’t seem that this artist’s box violated local laws,” says Reiss. “Safety investigators are going to be less interested in how people choose to live within their own legal apartments than in how landlords might choose to split up an apartment to jam more and more people in it.”

In other words, if you put one more roommate in your apartment in a wooden box, OK. But if you were to put 10 of those boxes in an apartment and try to rent them out? Well, safety investigators might balk.

Still, it’s not completely unlikely someone might try that.

“Now, more than ever, people are looking for ways to offset the skyrocketing costs of living,” says Pellegrini. “I predict that people’s resourcefulness and practicality will stretch the definition of ‘home’ in order to make ends meet.”

Mortgages for Borderline Borrowers

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BiggerPockets.com quoted me in 7 Mortgage Qualification Tips for Borderline Borrowers. It opens,

It’s super easy to qualify for a mortgage when you have an 800 credit score, a six-figure salary, no debt, and 20% to put down. But that isn’t everyone’s story.

It’s far more difficult to be approved with a 620 credit score, a low five-figure salary, some outstanding debt, a car loan, and 3% for the down payment. You can still qualify, but it’s a LOT more difficult. And you’re not going to be getting the lowest rate around.

I asked some experts for their mortgage qualifying tips for borrowers who run the highest risk of being turned down. Here’s what they had to say:

7 Mortgage Qualification Tips for Borderline Borrowers

Go FHA

“Applicants with a low credit scores should be sure to look for lenders who offer FHA-insured mortgages. The FHA will insure mortgages with lower credit scores than most others will accept. Borrowers with small savings should look for lenders with low-down-payment requirements. Again, an FHA-insured lender may be the right match, but Fannie Mae and Freddie Mac also have programs with low down payment requirements, so applicants should ask their lenders about those as well,” says David Reiss, a Law Professor at Brooklyn Law School who also writes at REFinBlog.com.

J.D. Crowe, President of Southeast Mortgage of Georgia agrees. “Those with less-than-ideal credit scores sometimes have home loan options through the Federal Housing Administration. The FHA works with approved lenders to help applicants who have lower credit scores and small down payments, and can offer as much as 96.5% financing.”

You can find the other six tips here.

 

Low, Low, Low Mortgage Rates

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TheStreet.com quoted me in Top 5 Lowest 15-Year Mortgage Rates. It opens,

U.S. mortgage rates have continued to decline in the aftermath of the Brexit vote, low Treasury rates and the stagnant economy, giving potential homeowners an opportunity to save money because of the dip.

The current market conditions give homeowners in the U.S. an opportunity to take advantage of the continuation of low mortgage rates since the Federal Reserve has not increased interest rates.

But, how do you snag the absolute lowest rates?

How to Get a Low Rate

Low mortgage rates can play a large factor in homeowners’ ability to save tens of thousands of dollars in interest. Even a 1% difference in the mortgage rate can save a homeowner $40,000 over 30 years for a mortgage valued at $200,000. Having a top notch credit score plays a critical factor in determining what interest rate lenders will offer consumers, but other issues such as the amount of your down payment also impact it.

A high credit score is the key to ensuring that borrowers receive a low mortgage rate. Here’s a quick rundown of what the numbers mean – a score of anything below 620 ranks as poor, 620 to 699 is fair, 700 to 749 is good and anything over 750 is excellent. Think carefully before canceling a credit card with a long, positive history, but decrease your debt. One of the biggest factors which impact your credit score is your credit utilization rate.

Many potential homeowners focus only on the interest rate or the monthly payment. The APR or annual percentage rate gives you a better idea of the true cost of borrowing money, which includes all the fees and points for the loan.

The origination fee or points is charged by a lender to process a loan. This fee shows up on your good faith estimate (GFE) as one item called the origination charge. However, the origination fee can be made up of a few different fees such as: processing fees, underwriting fees and an origination charge.

Homeowners who are able to afford a 20% down payment do not have to pay private mortgage insurance (PMI), which costs another 0.5% to 1.0% and can tack on more money each month. Having at least 20% in equity shows lenders that there is a lower chance of the individual defaulting on the loan.

Choosing Between 15-year and 30-year Mortgages

Obtaining a 15-year fixed rate mortgage instead of a traditional 30-year mortgage means homeowners can save thousands of dollars in interest. One drawback of a 15-year mortgage is that consumers will be locked into higher monthly compared to a traditional 30-year mortgage or a 5-year or 7-year adjustable rate mortgage, “which could put the squeeze on homeowners when times are tight,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.

Many households would not benefit from a 15-year mortgage because it “does more to limit their financial flexibility than to enhance it,” said Greg McBride, chief financial analyst of Bankrate, a North Palm Beach, Fla.-based financial content company.

“Locking into higher monthly payments makes the household budget tighter and for what?,” he said “So you can pay down a low, fixed rate loan? On an after tax, after-inflation basis you’re essentially borrowing for free.”

McBride suggests that this strategy does not bode well for homeowners, especially if they are not paying down their higher interest rate debts and maximizing their tax-advantaged retirement savings options such as IRAs and 401(k)s.

“Even then, you might be better off investing your money elsewhere than tying up more of your wealth in the most illiquid asset you have – your home,” he said. “Just 28% of American households have a sufficient emergency savings cushion, so why the hurry to pay off a low, fixed rate, tax deductible debt. Money in the bank will pay the bills, home equity will not.”

The current economic situation has pushed down rates with 15-year mortgages becoming “relatively more attractive” than even 5-year adjustable rate mortgages (ARMs) over the last year, said David Reiss, a law professor at the Brooklyn Law School in New York. Last week Freddie Mac announced the average 15-year mortgage rate was 2.74% and the average for the 5-year ARM was 2.75%.

“These rates are virtually the same,” he said. “A year ago, the 15-year was relatively more expensive than the 5-year by about 0.16%. If you can swing the higher principal payments for the 15-year mortgage you will be getting about as good an interest rate as you could hope for.”