BM418 Day 11 Summary
Spring 2012
Day 11 Objectives
Following are the Answers to Questions II on home buying
How are mortgage brokers paid?
Mortgage brokers make money three ways:
Origination fees: These are the costs and profits on making the loan
Discount Points: These are payments to lower the Loan interest rate
Backend bonus: These are bonuses paid to the mortgage broker if they get a higher interest rate than the lender requires
How do I know when to refinance my home?
Calculate the IRR, Breakeven Analysis and Total Cost Analysis
If all three are positive, the refinance; two, likely; and one, do not refinance.
What happens when good credit marries bad credit?
There are five main options:
1. Buy the house as co-owners and co-borrowers
2. Have “good-credit” buy the house alone
3. Have “good-credit” buy the home using a “no-income verification” mortgage (if available)
4. Have a third party with good credit replace the “bad-credit” as the co-borrower
5. Improve “bad-credit’s” credit score
What about prepayment penalties? What should I know?
Understand prepayment penalties are generally for 2nd and subprime mortgages
Realize that there are both hard and soft prepayment penalties
Avoid them if you can
What’s the lowdown on buying down or paying discount points?
Calculate your IRR and your breakeven point in months. If your IRR is greater than your risk-free rate, then do it.
For your breakeven point, divide the cost of your discount points (C) by your savings (B). If your breakeven is less than 4 years, it may be a good idea, 5-7 years, be careful, and greater than 7 years, it is likely very questionable
How do I make sure that brokers give what they promise, i.e., no bait and switch?
Hold them accountable for their closing and other costs by seeing the complete (not summary) Good Faith Estimate and comparing it to final closing costs
Hold them accountable for the interest rate that they promise by having them show you their “Rate Lock Commitment sheet” to make sure it is consistent with what they promise.
How much of a percentage should I pay for a down payment?
First, fulfill the covenants of the loan, and second, make sure you have an adequate Emergency Fund after all closing costs are paid
Should I pay off the loan early or stick to the loan schedule?
While there are some tax benefits, you are paying interest instead of earning it with a mortgage even after tax benefits
Is a 15 or 30 year loan better?
While there are some tax benefits to a mortgage, you are paying interest instead of earning it. My inclination is to pay it off sooner while at the same time saving for retirement and other goals
Do I have to pay Private Mortgage Insurance (PMI)?
Yes if you have a FHA loan or a conventional loan with an LTV ratio of greater than 80%. Pay PMI only if required, and then get rid of it as soon as your equity in your home is greater than 20%
How do I know whether to rent versus buy?
There are a number of websites which can help with this analysis. One student shared this one with me.
How easy is it to refinance a home with an interest only mortgage?
Assuming your equity is greater than the value of the loan, it is the same as with a traditional mortgage
What is a short-sell?
A short-sell is where a lender allows a property to be sold for a loss. It requires a borrower who wishes to sell and a lender who decides that selling at a loss is a preferable alternative to the risks and costs of foreclosure
If a person is upside down in their mortgage, can they still refinance?
If the entire mortgage is the first, then likely no
If there is a first and a second mortgage, and the value of the home is significantly greater than the first mortgage, you may be able to refinance because the first has the claim on the home
What do you think about purchasing distressed properties out of state?
Real estate investing is difficult enough in your own state. I do not recommend doing it out of state
If you move from your first house, do you recommend keeping it as a rental?
Unless you have lots of time and money, real estate investing is a difficult and time consuming activity
Are you willing to take on the hassles of real estate investing and renters?
If the offer is not accepted, is the earnest money returned?
Yes
What is your recommendation on your first house?
This depends on what is available in your area, what is available in your price range, and what you are willing to do
Answer those three questions and you will likely answer this question
Can you review the home buying process?
See the slides
What type of account should you use to save for your down payment?
Depends on your time frame
Should we buy when the market is low?
Yes if you can afford it
How do you balance current home size and family need?
Be wise and know yourself.
Spiritual Thought
I got the idea to run the marathon from my home teacher, who, with his wife, ran their first marathon at age 55. My wife and I sat by this couple just three weeks before the race at stake conference, and the wife shared with us their experiences and suggestions for our race. It was a wonderful time to get together with this wonderful couple who meant a lot to us and who inspired us to better things.
Before we left, I heard that she was diagnosed with blood cancer. We remembered her in our prayers over the weekend. On Monday when I returned to the office, I learned that she passed away. On my way home I was listening to Conference Talks from last year when Elder Uchtdorf said:
“If we devote ourselves to the pursuit of worldly wealth and the glitter of public recognition at the expense of our families and our spiritual growth, we will discover soon enough that we have made a fool’s bargain. The righteous work we do within the walls of our homes is most sacred; its benefits are eternal in nature. It cannot be delegated.