Does it matter if you have a $300k mortgage at 5.5% or a $270k mortgage at 6.5%? In the the last few years we’ve seen housing prices skyrocket while mortgage interest rates have remained extremely low. Now that rates are increasing, we’re probably going to see housing prices slipping a little as to keep the relative monthly cost at about the same levels (plus a bit of appreciation) and thus the total payout at the same levels (if you keep the home until you fully pay off the mortgage). Recall that the payment has a principal and an interest component so with interest rates rising, a greater portion of the total payout will shift from the interest column to the principal column. One would anticipate housing prices slip a little, or not rise as quickly, as interest rates rise because buyers don’t have any more money when the rates rise and thus the total monthly price must remain the same.

Assuming a 30 year fixed interest rate mortgage loan:

Mortgage Amount	Interest Rate	Monthly Payment	Total Interest	Total Payments
$300,000	5.50%	$1,703.37	$313,210.13	$613,210.43
$270,000	6.50%	$1,706.58	$344,372.91	$614,372.91
$244,000	7.50%	$1,706.08	$370,193.75	$614,193.75
$194,500	10.0%	$1,706.88	$419,969.90	$614,469.90

Now one would argue that part of that interest will be returned to you each year because of the mortgage interest deduction so to make that comparison (and to make it simplistically) we’ll simply take the difference in interest payments, divide by 4 (assuming a 25% marginal tax rate), and find that the difference is about $7800 over 30 years between the 6.5% and the 5.5% interest rate rows. Granted, the rebate should be heavily skewed towards the front of the loan but it’s a mere $7800 on a six figure loan (2.8%). When you compare the difference between the 10% and 5.5% loan, it’s a more significant $26,689.94 (13.7%).

However, one thing this does illustrate is that the price of the house should fall as interest rates rise because the monthly payment should remain the same for one house. As rates approach 6.5%, one would anticipate that a $300,000 house would sell for only $270,000 and that you shouldn’t worry when it does. This doesn’t bode well for people who are flipping homes and could be why existing home sales have slowed down?

Caveats: This simple math ignores or simplifies a lot of things like how the mortgage is amortized, the type of mortgage (30-year fixed), transaction costs, inflation, etc. I think it’s conceptually right though and if I’m wrong, I’d really like to hear about it.

When I was looking to buy a house, I wrote about how I entirely agreed (but only after going through the process) with the general rule that you should look at six houses before you put down an offer. Today, CNNMoney has an article on getting your financial house in order before bidding and the article’s “hook” got me thinking about how home buying is like dating…

NEW YORK (CNN/Money) - You’ve fallen in love for the first time. Your instincts tell you to follow your heart, make a commitment. But would that be wise? After all, it does cost $400,000.

Take out the last sentence (or depending on where you are, dating could cost you $400k over time) and it’s entirely about dating and relationships, something most people are familiar with. Your first girlfriend/boyfriend is filled with puppy love where you two absolutely adore each other, you didn’t know how you lived before meeting, and all that nice soft sappy stuff. You were happy and content and probably felt complete for the first time in your life. You wanted to spend all your time with that person. Then things don’t work out, you break up, it hits you hard, and you move on. You go on some really good dates and then some really bad dates and eventually you find your match, settle down and live on. That’s usually how it works (not right or wrong, just usual).

When you buy a house, chances are, if your agent understands you, you will probably like one of the first six houses you walk into. It’s your first date and you might have succumbed to bit of puppy love… don’t! You need to keep looking so you can tell the bad dates from the good ones and eventually, as you learn about yourself and what you like about a home, can make a true educated decision about which one you want to spend a significant amount of time in.

What do you think?

I saw an article today on CNNMoney called the top things homebuyers need to know and I don’t think they tell you enough on some very key and critical points. For example, they give the advice that you should clean up your credit because it’s important in the lending process (it, among other things, determines your interest rate) but it misses a key fact: You shouldn’t be trying to improve your score, you are merely checking for errors and inaccuracies. You can’t improve your score significantly in a month or two, the equation just doesn’t work that way, so don’t look for a magic bullet but do check for errors which can improve your score since the errors should be investigated and removed within thirty days. There are more…

A lot of these “things” are common sense, such as “Don’t buy if you can’t stay put” (#1) and “Hire a home inspector,” (#10) and don’t need much explanation to get the full point across. But here are the ones that need just a tad bit more information.

4. Don’t worry if you can’t put down the usual 20 percent.
This doesn’t mean an option-ARM is what you want (where your monthly payment doesn’t even cover interest), know what you’re getting into when you sign on the dotted line. Don’t buy into the hype of the hot housing market… buy smart, or wait.

5. Buy in a district with good schools.
The idea behind this nugget of advice is that you should be considering your exit strategy. Are you planning on living there a few years and then renting it out? Do you want to live there, sell, and upgrade? Good schools means your target customer base improves to include families with children. If you’re planning on renting it out and earning some income, you probably want to buy a place in a city with young professionals.

6. Get professional help.
You don’t need an agent to find a house, but you need an agent to go over the paperwork, fill out a contract, and does all the legalese stuff to make sure you aren’t getting screwed. Plus, you aren’t paying for the agent, the seller does. Perhaps you can knock off a little from the sale price by going without an agent, but what if you mess up the contract? And if the other guy has an agent, you might get steamrolled later on for something… the agent has to earn that commission right? Don’t go into a gunfight armed with only your wits.

8. Before house hunting, get pre-approved
They don’t stress this enough… if you are not pre-approved, in this blazing hot housing market, you are not even going to be in the race. You could offer tons of money, but its all fairy tale money because the pre-approval proves to the sellers you have enough credibility with a lender that you could get a loan. The pre-approval process will demand you show pay stubs, bank account records, etc; it’s pretty exhaustive. Pre-qualifications (one step before pre-approvals) are worthless, don’t waste your time getting one.

What do you think of my clarifications? Am I totally off-base? I’m very interested to hear your comments on this one.

Well, it’s official, I own a house and my girlfriend’s car is dead. In the coming week or so you might see some posts about our trips to car dealerships, used car owners, and CarMax’s (we went today, it’s a great place). Until then, here’s a recount of Friday’s experience at the closing table with the sellers, their agent, my agent, and the closing agent - a representative of the title company.

At the closing table, all parties get together, sign about a million sheets of paper (many of which are copies of each other), and learning that you owe a few hundred thousand dollars for the next thirty years. Other than that, it’s a pretty stress-less, relaxing experience.

The Settlement Statement, prepared by the Title Company, is the most important document there because it outlines how much money changes hands, why it changes hands, and, if nothing else, it should be triple checked by you. As I mentioned in an earlier article, the Title Company didn’t know I was a first time Maryland homebuyer and so on the Settlement Statement it showed I was to pay my half of the Maryland Transfer Tax (about $750). A quick phone call remedied that. It added a few more sheets to what I needed to sign, but I think the tradeoff was fair

The rent back made things a little more complicated but not much so. The sellers pay whatever it would cost me to live there, so it includes the mortgage (principal + interest), taxes (which includes the Columbia Parks and Recreation Assessment), and HOA fees. Utilities and water remain in their name and we need to transfer them prior to moving in. The sum is then divided by thirty days, always regardless of actual number of days, to calculate a “per diem” basis. The sellers prepaid June and, at the start of July, they will prepay part of July - however long they intend to stay.

I received a large enough gift from my parents that I could pay down a decent portion of the second mortgage and I intend to do so once the sellers move out of the house. I wonder if the larger interest payment they are making now, which is on a larger principal, will carry over to cover some of the interest in subsequent months because I’m paying down the mortgage. I’ll have to look into that and see how the interest-heavy payments work with respect to a declining principal balance. I do know that if I prepay enough to “overpay” the interest, I don’t get anything back.

Well, that’s about it… the settlement was a breeze. Nick, the mortgage lender, showed up and gave us a bottle of wine in congratulation and we talked about perhaps going to Atlantic City one of these days (he plays poker too). Nick came through on the two week closing deadline, which is what I needed him to do, with good rates too (certainly not the lowest of the low - but competitive with LendingTree at the time). He also gave my girlfriend and me two tickets to Saturday’s Orioles game against Detroit (they lost). All in all, Nick and Equitable Trust were really good to deal with and I recommend them - especially if you’re under a time crunch.

I’m soon going to be a homeowner less than 6 hours if all goes according to plan. There have been a few hiccups along the way including the roofing certification (not good enough), some fees (title insurance is 30% higher than the good faith estimate), and some minor mistakes all around. The only show-stopper is the roofing certification so I’m hopeful all can be resolved for the close at 4pm. On a semi-unrelated note, my girlfriend’s car overheated and was leaking “green and red” fluid which I took to mean coolant and perhaps transmission fluid. You might see a “buying a used car in under a week” article in the near future…

Roofing Certification
I received the roofing certification by fax this morning. Service was performed by Tri-County Roofing & Sheet Metal, Inc. located in Westminister, MD and according to the receipt they did a certification and a repair job. The cracked beam issue I mentioned earlier was repaired - itemized as “sister 2×6x8 to cracked tress,” but there was no mentioned of the FRT (fire retardant treated) activation issue. I called up the company but the estimator was out of the office and they will call me back. We will need to get something in writing before close to get this resolved because I refuse to pay for the repairs. The addendum releasing the home inspection specifically “correct any damage to roof shingles, plywood, and support beams.” It sounds like they corrected the support beam problem but not the plywood problem.

Update: The estimator for the roofing company assured me that the amount of chalky residue was normal for that brand of FRT plywood. The wood itself was in good condition and the roof appeared to have been replaced 10-12 years ago. But, the plywood is only 3/8″ thick, which is to code, and not half-inch - so there will be a little rolling. When the roof was first installed, they hadn’t started using H-braces (braces connecting the tresses, adding stability to the plywood) so it also contributes to the rolling effect. He believes the roof will be stable for at least an additional five years, though that obviously is not guaranteed or warrantied. At least now it sounds like he did look at the FRT and did decide it was in good condition - which is, bottom line, what I needed a certified roofer to do.

Rent Back
The contract stipulates that the seller can remain in the house until July 31st at the latest, paying me my PITI as rent. The PITI works out to be about $65/day so they’ll be prepaying the month of June at close and prepay July later on. The concern I have, which my agent needed to look into, was what about utilities? Since it isn’t specifically called out for in the contract, I will assume they are covering it but double check this at closing.

First Time Maryland Homebuyer’s Tax Break
In my research, I reported that first time buyers in Maryland receive a break on the State Transfer Tax, but the Settlement Statement prepared by my title company, Crown Title Corporation, had me paying my half of the state transfer tax. I shouldn’t have to pay the $750 tax - my agent is going to talk to the title company and get that settled. The title company responded by removing that item from the Settlement Sheet.

Title Insurance
The Good Faith Estimate prepared by the lender stated that the Title Insurance should be around $900. Now, they don’t set that price, they guessed based on the value of the home - but when Crown Title came back and will be charging me $1,200 it raised a red flag. Why is it 30% higher? The insuring company is First American Title Insurance and if their website’s rates are any indication, I would be paying $1,010 for the standard policy and $1,212 for Eagle coverage. So if I have Eagle coverage, this seems fair. If I’m getting standard, it looks like Crown is putting a little money into their pocket. Ultimately, I don’t think I’m getting screwed but I didn’t go into it as informed as I should have been (and as I usually prefer to be). I could’ve shopped around for title companies but that’s how it goes sometimes. The Good Faith Estimate was probably a little low.

Preparing for the Closing Meeting
I don’t think I can explain the final step (what to bring and what I will be doing) as clearly as this site has:

• What documents should I expect to sign at my closing?
• What do I need to do to prepare for Closing?

I called up Geico, with whom I have an automobile insurance policy, to see about getting homeowner’s insurance because I’ll need a policy in place before we close on Friday. I was basically completely unprepared for the battery of questions the CSR asked me but we struggled through it and came up with a quote on a $295,000 policy with a $500 deductible of $843/year. I’ll be sure to compare that rate with other insurers but $70/month seemed reasonable to me at first glance but I have no experience with homeowner’s insurance. However, I probably answered some of the questions inaccurately so if you’re going to get a quote, here are the questions you should have answers to:

These were sent to me in an email by the CSR, who worked for Travelers (underwrites policies for Geico):
Here is a list of questions of good to know information because they will probably ask this of you.

• Address of home
• County
• Year of construction
• Type of construction
• Square footage of home
• Type of roof material
• Condition of roof (Excellent, Good, Fair)
• Type of heat (Oil, gas, electric, other)
• Any form of alternate heat (woodstove, kerosene heater, or electric space heater)
• Distance to fire hydrant (in feet)
• Distance to fire department (in miles)
• Is there a garage?
• Is there a porch, deck, breezeway attached? What dimensions?
• Security/protective devices:
• Deadbolt locks?
• Are there smoke detectors?
• Do you own a fire extinguisher?
• If home is older than 1990
  • Year roof was replaced or original
  • Year heating was updated or original
• Electrical service- circuit breaker or fuse box?
• Purchase price/Current coverage amount
• If purchase price- contact person for lender, phone # and if possible, fax #

I hope that comprehensive list is helpful for someone so you don’t sound like a dope when you call in.

One company I’ve been told we should check out is Liberty Mutual because they give discounts to my alma mater. I’ll probably give them and perhaps one other company a call just to get an idea of the quality of the $843 quote.

One of the concerns when we “won” the house for $295k, when it was listed very low at $270k, was that the home would appraise at under the purchase price. In the event that you purchase a home and it is appraised for under the purchase price, the buyer must come up with the difference. The reason is if you were to default on the loan, the lender will forecloses on the home and sell it. If the home is worth less than the loan it will sell for less than the amount of the loan and the bank loses money, that’s why you have to make up the difference in cold hard cash. Luckily for me, the house was appraised at $299k so the nightmare scenario of an under-appraisal didn’t materialize.
In Search of a Home
I called up my mortgage consultant (lender), Nick, to ensure that everything was progressing smoothly and that he needed all the information required of me. I was pretty sure he would’ve called me if there was anything he needed but it is better to be safe than sorry. He assured me that everything was on track and we are going to meet the deadline of closing next Friday (May 27th). This was also when he told me about the appraised value of my new (to me!) home.

As for the roof concerns, after faxing the request off to the seller agent, we received signed confirmation that the sellers (who have been accommodating and extremely polite the one time I met them) agreed to the request. A roofer will begin the repairs on Monday, May 23rd, and we will have a final walkthrough on Thursday, May 26th, a day before closing. While I am concerned that we didn’t spell out specifically what needed repair, the roofer must give us a certification (I will have to research what that means exactly) after the work is complete.

Finally, I have to look into the logistics of how the rent back will work and getting home owner’s insurance. The rent back agreement is that they’d cover my mortgage, taxes, and insurance so I have to double check what will come out of my pocket.

So close…

At 9am last Saturday, I met with the home inspector to go through my new home. Overall, the inspection went well with the exception of the roof - which was reported as being “repaired” 8 to 10 years ago. The inspector, Chris from Home Check, was extremely thorough and seemed to know his stuff. At times I felt like he was almost too “doomsday”-ish but that’s better than the other extreme, a lackluster inspection followed by the cashing of my check. While he couldn’t look into walls, he pointed out every single possible fault or trouble area to a level of detail I didn’t expect but welcomed readily. While I don’t know how much experience a typical home inspector has, he had been doing it for five years and my house was the first on his list of three that day (he never does more than three, cuts down on fatigue and quality of work). He was a quirky guy but good to work with.

The termite guy just seemed to walk around the house, poke his head in a few places, bang on a few walls, and write up a report. The gist of the report was: remove any rotting wood and ensure that the mulch in the front of the house was low enough so that termites couldn’t start up families in it and migrate into the house. The seller told us that the house had been treated with termite prevention a while back but no one has since reported of any problems with termites. I’ll just pitch the rotting firewood and be on my way.

The home appraisal guy just walked around the house and was generally very anti-social. The lender, who setup the appraisal, said he’d run around $350. He was in and out before anyone really knew he was there.

Now… the roof issues. There were three main problems:

1. The filters for the vents in the roof were clogged (the inspector said we should just pitch the filters all-together) and so the attic was getting too hot. The high temperature had activated the FRT (fire retardant treatment) in the wood, evidenced by a white chalky residue on the wood, because the wood thought it might be on fire. The net result of the chemical activation was that the wood was now weakened and possibly rotting.
2. The plywood under boards, to which the shingles are nailed to, were showing signs of weakness. Some were weak because of the FRT activation and some were weak because of age. One was very obviously sagging.
3. One of the support beams appeared to have a cut in it and needed additional support. The inspector said to get a certified roofer in there to check it out and fix it - specifically ask for a through-bolt (where you put the bolt through the beam) instead of just nailing some boards onto it for support.

Outside of the roof, there were only some minor cracks that needed filling (to prevent water damage) and some other minor areas that needed a bit of attention. The water heater needed a new anode rod, an upstairs door needing to be hinged better, etc. Nothing serious that would be a deal breaker.

I faxed the home inspection report over to my agent and we decided to ask the seller to repair the damage to the roof. According to him, the seller is obligated to repair up to 2% of the value of the home because of the contract and I seriously doubt the repairs will cost more than $6,000. Specifically, the request will read:

As a result of the home Inspection:

Have a licensed roofer evaluate and correct any damage to roof shingles, plywood, and support beams. Seller to provide buyer with roofing cert.

Buyer hereby releases the home inspection contingency

Also, I uploaded all the pictures I have of the property to Flickr, if you’re interested check them out here. (the pictures are in no particular order and the dog is just their dog, I thought he looked cute)

I can almost smell it!

One of the requirements in the contract for my home is that I secure a loan within two weeks - this is doable when you are working with a local lender who also works fast, hard, and well. Last night, I met with a “Mortgage Consultant” by the name of Nicholas Elko with Equitable Trust Mortgage Corporation, a local lender here in Baltimore. Nick is a solid guy who is very personable, knowledgeable, and gave me confidence he could get me the loan in two weeks. Now, the real meat of the story when you talk about mortgages is the rate and the fees. Nick could be the smartest, hardest working, and friendliest guy ever but if the rates suck, I would still feel like I was being taken advantage of (I did not and would wholeheartedly recommend Equitable and Nick to anyone in Maryland looking for a loan). In a 80/10/10, I’ll be getting 5.875% on my first and 7.5% on my second… both rates seem competitive with the market averages.

What does 80/10/10 mean? That means I’ll be borrowing 80% of the value of the home as a first mortgage, 10% as a second mortgage, and putting 10% down. It’ll be a 30 year fixed loan on both and the bottom line is I’ll be putting out about $1920 a month for the principal, interest, taxes, insurance (PITI), CPRA (parks fees) and HOA. That value is agreeable to me, despite being $1400 higher than my current rent payment. Yikes.

Oh, and you know how Bankrate always lists the lowest rates available? Try to get one of them - you probably never will. Those rates are like teasers for movies, they show you all the awesome action scenes and never any of the super cheesy and badly acted romance scenes guys hate. They’re also from little no-name banks in random little towns nowhere near you. I don’t know about going to a local lender that isn’t actually local to you. Anyway, I’m digressing…

Remember when I talked about LendingTree charging me $995 for loan related fees? How did a local lender compare? They came in at far less. Let us compare:

Expense	LendingTree	Equitable
Tax Service Fee	$45	$80
Underwriting Fee	$375	$150
Processing Fee	$375	$375
Document Preparation Fee	$175	n/a
Credit Report	$25	$45
Flood Certification	n/a	$18
Total	$995	$668

Those fees are only related to the first mortgage, on the second the only fees are a $200 Processing Fee and the $18 Flood Certification Fee - I can only imagine what the LendingTree fees would be on the second mortgage. So with Equitable Trust I’ll be saving at least $327 on the loan related fees even though it’ll be a rush job, which is 32.8% discount.

After you add in a whole bunch of other non-loan related costs, Maryland’s cut of the action, prepaid taxes, insurance, and taxes - my final dollar amount is $9,893 ($7,227 of it being “closing costs”). That means my closing costs will be 2.45% of the value of my home, in light with expectations and every metric I’ve heard (3%).

A reader, risk, noted that he knew of a 15 year fixed rate on the second mortgage of 5.99% (this was before the recent quarter point bump). The second 10 I have now is a 30 year fixed rate but the disparity in rates appears significant. Using DinkyTown’s calculator, the monthly payment of the second loan at 7.5% (my rate) will be $206.27 with the total payment being $74,254.85. At a 15 year 5.99% rate, it’s a payment of $248.75 with a total payment of $44.779.86! While the monthly payment isn’t significantly different ($42), the total payout is $30,000 apart in interest!

I’ll have to call up Nick tomorrow and ask what rate I would get if I only had a 15 year loan on the second. In all fairness, I asked for 30 fixed but never specified what I wanted on the smaller loan (I didn’t even think about it). Plus, we had a talk about the loans and he said Equitable typically sells the loan after a little while because of their asset size. With under $100M in assets, they live off selling the loans to bigger outfits, so they get paid for the legwork. I mean they will get paid based on the loan but it’s not like that interest goes into their pockets. If they were pocketing the $30,000 difference, it might be a red light.

Between when I first wrote this post and now when I publish, I talked to Nick. When I drop it to 15 year loan my rate is the same, 7.5%, which is a difference of $5,000 over the life of the loan. My payment jumps to around $275 a month… my plan is just to keep it 30 and make the larger payments. With my rate being the same, it will make no difference.

Why wouldn’t I just keep the loan as is and prepay? Since you pay more interest up front, you are making interest payments forward on what you’ve loaned (I don’t know if the terminology is correct) even if you pay it down faster later on. I’ll talk to him tomorrow and we can sort it all out, it probably won’t make much of a difference given the size of the loan and how I do plan to pay it off faster.

Les Christie, a CNNMoney staff writer, reported today that the U.S. residential real estate markets remained hot in the first quarter of 2005. The National Association of Realtors, which recently came under fire because of commission policies, reported that of 136 metro areas, 66 experienced double digit jumps, including where I live - the Washington (DC/MD/VA) region. The full list is here and Baltimore, MD notched a 6.9% increase in Q1.

What does that mean to me? Well it means the possibility that I bought at the peak of the bubble still exists (this data is for Q1 and we’re smack in the middle of Q2) but I’m not terribly concerned. Part of that is because someone was willing to pay far more for the house and the home is in an area with good schools. Either way, hopefully these percentage increase keep coming…

I’ll be meeting with a local lender at 5:30 to go over some paperwork and check out the mortgage loan rates. I’m under the gun because I need to get a mortgage loan approved within two weeks. The credit check/score has already been pulled and this guy hasn’t made any indication it’s going to be a problem so I feel as if I’m in good shape. The ballpark rates he’s quoted sound reasonable. The home inspection will be Saturday morning, within the limits of the counteroffer, and the appraisal should be done within the next few days.