How Can I Get THe Best DealOn A Home? Where Do I Start? Part 4

How can I get the best deal on a home? Where do I start? Part 4

 

It is essential that you understand some of the pitfalls of mortgage loans when making the determination as to which is the best loan for you.  You should be very familiar with

each loan program that you are considering.

 

In the rather lengthy Part 3 we discussed several loans, how they work and where some of the pitfalls are for each.  Naturally, you should discuss these loans with your loan

consultant in detail.  Make sure you are completely comfortable before making the final decision.

 

The last loan that will be discussed is the “Pick-A-Pay” or the “Pay-Option-Arm.”  This type of loan offers the greatest number of options for the borrower.  Each month they can decide to:

 

    1) Pay the fully amortized (paying principal and interest payment for a 15 year payment period.  (The highest dollar payment.)

 

    2) Pay the fully amortized (paying principal and interest) payment for a 30 year payment period. (The Gold Standard for loans.)

 

    3) Pay the interest only (the original principal remains the same) payment.  (A lower monthly payment.)

 

    4) Pay a “teaser” interest payment, far below the market interest rate which will not even cover the monthly interest for the loan principal.  With this option, the difference between this “teaser” payment and what you actually owe is added to the outstanding loan balance EACH MONTH.  This phenomenon is known as negative amortization. 

 

Depending on the lender, once the principal balance reaches 110% to 125% of the original loan balance, the loan recasts. That means that all the rules change and your payment takes a giant leap upward.

 

Another issue is that the interest rates are adjustable and tied to a financial index. The borrower has no idea what is going to happen to their interest rate.  There are caps involved but the caps allow interest rates that result in frighteningly high

payments.

 

If we go back to our $ 250,000 loan amount used in Part 3 and maintain the 6% interest rate, the four payments would look like this:

 

                1)  15 year fully amortized payment……..$ 2109.64

 

                2)  30 year fully amortized payment………$ 1498.99

 

                3)  30 year Interest only payment………….$ 1250.00

                       (remember with this one you are NOT paying down the principal!)

 

                4)  2% Teaser Rate payment………………….$   416.67

                      (The difference between this payment and the $ 1498.99 above is added to your loan total EACH MONTH.)

 

                After two years of this payment history your principal would be $ 275,975.68, over 110% of the original loan!  When the loan recasts an interest rate of 11% is not unlikely.  At that rate your new payment would be $ 2628.18!  That is 175% of the original 30 year fully amortized loan payment. 

 

We are sure that some people in 2004 & 2005 committed to this kind of a loan package knowing that their home value was increasing at astronomical rates and that they could always sell and get out from under that loan obligation if necessary.  Unfortunately, for far too many in this position, property values dropped.  Thus the foreclosure boom.

 

Experience teaches us that risky loans can produce disastrous results.  Negative amortization was attractive bait created by investors to increase their bottom line.  However, it backfired

on both those who committed to those kinds of loans and well as the investors who were trying to take advantage of the market.

 

There are VERY FEW circumstances in which this loan option should be considered.  They have enabled borrowers to purchase homes that they could not have otherwise afforded.  And more often than not, have resulted in serious problems for those borrowers. 

 

In a word:  DON’T!

 

 

Stay tuned for the next Blog in this series.  

 

  

REO SALES DATE FOR EL DORADO HILLS & FOLSOM,CA June 08

Continuing in my quest to learn about the REO sales in the El Dorado Hills and Folsom, CA areas, I present the sales data for June of 2008.  The number or REO properties in the selected area increased by three, for a total of 30.

Of the 89 homes sold in the selected area in June (down from 125 in May), 30 were REO properties.  This is the first time since I started this study that REO sales exceeded one third of all properties sold.  A number of older REO listings sold in June, increasing the average days-on-market number to 65, 18 more than in May. Eight of the 30 REO properties had been on the market for more than 100 days, three had been on the market more than 200 days.

REO properties continue to move briskly.  Multiple offers are very common and buyers now find themselves in a position of having to make offers over the asking price if they want to beat their buyer competition.  This is a considerable change from just a few months ago.  In June 43.3% of the closed REO sales were for amounts over the asking price.  The market has made a large adjustment.

Another change in June was the sold cost-per-square-foot for REO properties compared to the same number for all properties sold.  There was only an 8% savings.  Over the past months the savings ranged from 11% – 14%.

The data follows.  My apologies for the data alignment. 

Folsom/El Dorado Hills Sold REO Properties   June 2008       
                           Original             Listing Price                                 SP as %                 SP as %
           DOM         Listing Price      at Time of Offer     Sold Price       Original Price       Final Price
1  Fol   113          $339,900.00      $315,900.00        $275,000.00      80.91%                87.05%
2  Fol     56          $305,900.00      $289,900.00        $278,000.00      90.88%                95.90%
3  Fol     48          $319,900.00      $289,900.00        $289,900.00      90.62%              100.00%
4 EDH    30          $285,500.00      $285,500.00        $300,000.00    105.08%              105.08%
5 Fol    235          $294,900.00      $294,900.00        $305,000.00    103.42%              103.42%
6 EDH      4          $334,900.00      $334,900.00        $334,900.00    100.00%              100.00%
7 EDH    53          $383,900.00      $344,900.00        $350,000.00       91.17%              101.48%
8 EDH    65          $420,000.00      $385,000.00        $366,000.00       87.14%                95.06%
9  Fol     51          $420,000.00      $389,000.00        $370,000.00       88.10%                95.12%
10 Fol    19          $395,000.00      $395,000.00        $376,000.00       95.19%                95.19%
11 EDH   87         $414,900.00      $399,900.00        $380,000.00       91.59%                95.02%
12 Fol      9          $414,900.00      $429,000.00        $395,000.00       95.20%                92.07%
13 EDH 114         $445,000.00      $404,500.00        $408,000.00       91.69%              100.87%
14 EDH     5         $425,000.00      $425,000.00        $425,000.00     100.00%              100.00%
15 Fol     64         $529,900.00      $529,900.00        $450,500.00        85.02%               85.02%
16 EDH 105         $554,000.00      $509,500.00        $475,000.00        85.74%               93.23%
17 EDH 208         $542,000.00       $519,900.00       $477,000.00        88.01%               91.75%
18 EDH   14         $459,000.00       $459,000.00       $485,000.00       105.66%            105.66%
19 EDH     7         $494,900.00       $494,900.00       $500,000.00       101.03%            101.03%
20 EDH   52         $519,900.00       $519,900.00       $514,000.00         98.87%              98.87%
21 EDH   18         $459,900.00       $459,900.00       $525,000.00        114.16%           114.16%
22  Fol   141        $534,900.00       $534,900.00       $540,000.00        100.95%           100.95%
23 EDH  227        $649,000.00       $649,000.00       $620,000.00           95.53%            95.53%
24  Fol     34        $675,000.00       $626,000.00       $630,000.00           93.33%         100.64%
25 EDH      6        $664,900.00       $664,900.00       $664,900.00         100.00%         100.00%
26  Fol     52         $729,900.00       $694,900.00       $665,000.00          91.11%            95.70%
27 EDH  113         $769,900.00       $731,405.00       $725,000.00          94.17%            99.12%
28 EDH    18         $776,000.00       $776,000.00       $765,000.00          98.58%            98.58%
29 EDH    12         $720,000.00       $720,000.00       $800,000.00        111.11%          111.11%
30 EDH    70      $1,023,000.00       $984,900.00       $900,000.00          87.98%            91.38%
  65  Averages    92.5% 95.3%
       
REO Sold Cost Per Square Foot:     $185.00  92.0%  
Total Sold Cost Per Square Foot:     $201.00    
       
Total Number of REO Homes Sold in November for area:      30      33.7% 
Total Number of Homes Sold:                                             89