What I Learned From the House with the White Picket Fence

white picket fence2The first house I bought as a young, single woman was a smelly little house with stained floors, dingy walls, and a stove covered in black baked-on gunk. Part of the roof was rotten, and the refrigerator was disgusting. It was ugly for sure, but it was all I could afford with my pre-approval of $80,000. The best thing it had going for it was the charming white picket fence.

Before you feel sorry for me, let me state that this turned out to be one of the best real estate purchases I ever made. Here’s why.

Ten Things I Learned From My Ugly House

  1. After ripping up the dog-stained carpet, I discovered the hardwood floors were permanently damaged. There went my vision of having beautiful hardwoods as I couldn’t afford to replace them. It was much cheaper to install a nice wall-to-wall carpet.
  2. Fresh paint in a light neutral color completely brightened up the home. My daughter chose pale pink for her bedroom, and my son wanted green. Letting them choose their bedroom colors gave them a sense of personal ownership in the new house.
  3. It made more sense to have the disgusting appliances hauled to the dump than to try to renovate them. New appliances made me feel like I had a new kitchen even though the cabinets and counter tops were the same.
  4. I splurged on pretty light switch covers and I could not believe how many compliments I got on those little things.
  5. Before my loan could close, the lender required the seller to replace the rotten roof. (It showed up on the appraisal report.) This delayed the closing of my loan, but it was worth the inconvenience. (Thanks again, Mom, for letting me crash at your place for a month after I had to be out of my apartment.)
  6. I chose an FHA Adjustable Rate Mortgage. This turned out to be a very smart choice, because I saved a significant amount of money on my payments for the three years I was there. Because this wasn’t my dream home, I knew I wouldn’t live there a long time, so taking a 30-year fixed rate would not have made sense. Why pay more interest than needed?
  7. Because I got a lower interest rate with the ARM, my payments paid down the principal balance faster. Thus, when I sold the house three years later, my loan pay-off was smaller and I netted more profit than I would have if I’d taken the fixed rate mortgage.
  8. It doesn’t take a dream house to be happy. I discovered a great deal of satisfaction by cleaning up that little house. When my friends came to visit, they exclaimed, “What a cute house!” And it was.
  9. If the bedroom window won’t open on a hot summer night, don’t give it a little smack with your hand. I tried that and my hand went right through the glass, which cut my wrist pretty badly. It took a bath towel to stop the bleeding. Fortunately, 9-1-1 sent out a handsome fireman to wrap me up and take me in for stitches.
  10. A smelly, little house can bring in a nice profit after you clean it up and live there for three years. I sold the house for $125,000. After subtracting the money I put into the  house and subtracting the payments I’d made, I calculated that I earned over $300 per month just for living there.

How’s that for a happy ending?


If rates are low, why am I paying so much?

interest rate house  I received this question from Maria today:

Q: I have an adjustable mortgage and my current interest rate is 9.375%. Why would this not decrease considering we are at a low national average?

A: That is a good question Maria, and one a lot of people have. There are two reasons why your rate could be 9.375% when today’s fixed rate is only 3.5%.

First, it depends on what your margin is. If you have a high margin, you’ll have a high interest rate, no matter how low rates go. I’ll explain.

An adjustable rate mortgage has a margin as well as the index it is based on. Let’s say your loan is based on the index called LIBOR (London Inter-Bank Offered Rate), the most common index used for adjustable rate mortgages. Today, the LIBOR rate is 0.48%.  Your margin is added to that rate to determine what your interest rate is. If your margin is 9%, then your rate would be 9.48%. WOW, that is a high rate!
And it’s pretty close to what you are paying.

You can see the importance of paying attention to what your margin is when you take out an adjustable rate mortgage (ARM).

The second reason why your rate is so high could be the floor. Every adjustable rate has a start rate and a floor. The start rate is the interest rate you start out at. The floor is the bottom your interest rate is allowed to go.

A lot of subprime ARMs were written with the start rate the same as the floor.  If your start rate was 9.375% and the floor is the same as the start rate, your interest rate can never go below 9.375%, no matter what. OUCH, that hurts a lot when rates go down!

You can see the importance of also paying attention to what the floor is on an ARM.

Unfortunately, a lot of smooth-talking loan sharks sold ARMS with bad terms, which earned them high commissions. The higher the margin was on an ARM, the higher commission the loan officer earned. In Mortgage Rip-Offs and Money Savers, I tell a story about a loan officer who made $40,000 commission on one ARM that had a high margin and a prepayment penalty. And by the way, if you haven’t read this book yet, go check out the reader feedback and pick up a copy. It’s a real eye-opener.

The Truth-in-Lending form shows you all the terms of your ARM, including: start rate, index, margin, floor, and cap (the maximum interest rate). Back in the subprime heyday, a lot of loan officers never bothered to send customers–or should I say victims?–the TIL. Or, they sent the TIL, but it was left blank. A proper TIL for an adjustable loan is supposed to show you a worse case scenario of how your loan can change.

By the time borrowers got to the signing table and finally got to see a proper Truth-in-Lending for the first time, they glossed over it and signed away without paying any attention. Of course, it didn’t help that some of these signers distracted people with jokes and gossip and other conversation while they were signing.

Get out your TIL from the stack of papers you signed. Look at the figures for the margin and floor. That will tell you why you’re paying almost 5% higher than today’s rate. Also look to see if there is a prepayment penalty; and if so, when it expires. If you don’t have a prepay penalty in place now, you definitely want to look into refinancing.

Folks, before you or someone you care about signs for a mortgage, take a couple days to read Mortgage Rip-Offs and Money Savers. It could save you thousands, if not tens of thousands, of dollars as well as a lot of stress and grief.

New Law Coming for Adjustable Rate Loans

Adjustable rate  Are you nervous or confused about what’s going to happen with your adjustable rate mortgage (ARM)? The Consumer Financial Protection Bureau set nine new laws in place this month. One of these laws is designed to help home owners who have an ARM so that they aren’t shocked when their rate goes up.

In the past, too many borrowers didn’t understand their loans and were taken by surprise when their monthly payments increased. They discovered they could no longer afford to live in their homes, and we all know what happened after that. The CFPB aims to prevent another mass foreclosure disaster.

The new law states that lenders must send you a notice between 210 and 240 days before your first interest rate adjustment. This notice should give you an estimate of what your new rate and payment will be.

In addition, the lender must send you a notice between 60 and 120 days before a payment change. This is different than the above, because if the interest rate hasn’t changed, your payment will not change. Or, if the interest rate changed slightly but your loan balance is lower, your payment might not change. With an ARM, your new payment is calculated using the interest rate and your current balance. This is why people with an ARM can see their payment go down as their balance gets paid off.

Currently, the law states lenders have to provide you when an annual notice that posts the new interest rate, but not the payment. If you want to know how your new payment in advance of receiving the bill, you have to go hunting for an amortization calculator–not very convenient.

I am pleased with this new law. But because there is a compliance period after a new law being enacted, lenders have until February 2014 to comply. Let’s hope most of them jump on board sooner.

In future posts, I will discuss additional new laws. Feel free to subscribe. I make posts on Mondays and occasionally on another day as well.