Zillow.com Adds Free Foreclosure Listings

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If you’ve ever tried to research buying a foreclosure or short sale online, you’ve probably found a lot of sites either plastered with ads or charging expensive subscription fees in order to access “exclusive” foreclosure listings. Well, the good news is that real estate site Zillow.com recently announced that it has added nearly 2 million free listings of “pre-market inventory” to its database. (Via Techcrunch.) This includes full addresses and details on pre-foreclosure, foreclosure, and bank-owned properties not included in the usual MLS databases.

You must register to see the foreclosure listings, but it’s free and all you need is an e-mail (name not required). I looked around my neighborhood and found several homes that are in the foreclosure process or already sold via auction, often complete with winning bid amounts. There’s a house down the street that is pretty nice and will be auctioned off live at the county courthouse next Friday; I might attend that auction for the experience. I’m told these are auctions where you need a cashier’s check for the full 6- or 7-figure sale price right on the spot.

Based on my limited understanding, if you want to buy a foreclosure it’s still helpful to work with an experienced real estate professional. Zillow makes their money if you ask them to refer you to a local “foreclosure specialist”. Sounds fair to me, if you don’t already have one in mind. I’ve had friends attempt to buy a bank-owned REO property which sounded like a good deal on paper, but required huge amounts of time and patience. Finding a good rental property always sounds nice in my mind, but I haven’t had much time to pursue it further.

Zillow Map – Percentage of Underwater Homes By Zip Code

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Do you owe more on your house than it’s worth? How many of your neighbors are underwater? Are things brighter in the next zip code over?

Zillow has a very revealing Negative Equity Map that shows the percentage of homes in your area that have negative equity. The numbers are recent, last updated based on Transunion data from the first quarter of 2012.

I checked out the San Francisco Bay Area and saw a lot of red as expected, but also several pockets of lighter colors. More evidence that real estate is local?

I then pulled up the map for Austin, Texas where my sister lives, expecting (based on anecdotal evidence) to see a completely different picture. It’s better, but there are still areas of pain:

Lessons From Micro Units, Small Spaces, and Tiny Houses

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Last week, New York City mayor Bloomberg announced a design competition for new “micro-unit” apartments ranging from 275 to 300 square feet (press release). The goal is to address the increasing demand by smaller households, as the average rent for a studio in Manhattan is now $2,065 a month. Here’s a sample proposed layout:

I’ve always been intrigued by small spaces, from tiny homes that you could buy with P2P loan instead of a mortgage, to the capsule hotels of Tokyo. Even if you don’t live in such a place, I think everyone can still learn from them new ways to use their own space more efficiently.

Go vertical to maximize space.

The NY Post did a profile of a young couple who live in a 240 square-foot studio in Brooklyn Heights. The picture below pretty much includes the entire place, with the ladder leading up to their bedroom:

Just like bunk beds and college dorm design, raising a bed is often the easiest way to get more storage or desk space. This concept doesn’t just apply to beds though. Put new shelving and storage up higher – look for wall space above toilets, above sinks, above your bed headboard, above desks. In your garage or carport, store bicycles and more in the space above your cars.

Buy one thing, get rid of another.

The free gym at my last university was always quite crowded, leading to a “one out, one in” policy where you had to wait for a person to leave before you could enter (also used at nightclubs, or so I’ve heard.). If you want to avoid stuff overload, you should implement the same policy when buying new things. Throw away, donate, or sell. New pants in = old pants out. New toy in = old toy out.

Use creatively-designed furniture.

Raising beds can get tricky for those with physical handicaps. I’ve always like the idea of Murphy wall beds as an alternative, and am thinking of installing one in my current office to be an extra guest bedroom with this DIY kit. There are a lot of other cool multi-tasking furniture out there as well. Some can get pretty expensive, but it may be worth depending on the cost/square feet in your area.

Here’s a cool video from a previous post on Resource Furniture:

Here’s another video of an apartment in Hong Kong that uses sliding walls to transform one big room into either a bathroom, kitchen, living room, or a bedroom. Very innovative, and all in 32 square meters (~345 square feet).

Who Really Owns My Mortgage?

Have you ever wondered who really owns your mortgage note? You pay your mortgage each month, but where do those payments end up? Perhaps you’re thinking of obtaining a loan modification or refinance through the Home Affordable Refinance Program (HARP), Home Affordable Modification Program (HAMP), or other program under the Making Home Affordable (MHA) umbrella. Or maybe you’ve read that banks are foreclosing on people without proper records and want to know if anyone out there actually can show you your original mortgage note.

First, remember that the loan owner isn’t necessarily the same as your loan servicer. Your loan servicer is the company that sends you mortgage statements, takes your payments each month, and if you have an escrow account, pays your homeowner’s insurance and property tax bills. So where do you start looking?

  • Ask the servicer. They are legally obligated to tell you the name, address, and telephone number of the owner of your loan as shown in their records. It may be a good idea to ask them in writing officially with a “qualified witten request” via certified mail while keeping a log of your communications. The name of your servicer should be on your mortgage statement, but you can also use the MERS link below.
  • Original lender. Your loan may have never been sold, and still kept as a “portfolio loan” with the original lender. What a concept!
  • Fannie Mae. In reality, many loans are sold to FNMA aka “Fannie Mae”. See Fannie Mae loan lookup tool.
  • Freddie Mac. Similar story with Federal Home Loan Mortgage Corporation (FHLMC) aka “Freddie Mac”. See Freddie Mac loan lookup tool.
  • Mortgage Electronic Registration Systems, Inc. (MERS) is a big online registry designed to replace the costly process of publicly recording mortgage ownership at the local government level with a private electronic version that allows the swapping of mortgages with no friction at all. MERS tracks both the servicing rights and ownership of mortgage loans in the United States, although the accuracy has been called into question. See MERS ServiceID lookup tool. You can also call them at 888-679-6377.

Provident Funding Mortgage Refinance Review

We finally signed the closing documents on our most recent mortgage refinance. We ended up going through the same local mortgage broker who linked us up with Provident Funding, which is apparently one of the largest private lenders in the country. Before going through them, I read some reviews online and the main complaint seemed to be that their underwriting was overly strict. I decided to go with them anyway because:

  1. They had the lowest rates at the time for a no-cost refi,
  2. With such high loan volume, I figured I should expect some complaints based just on the numbers (happy people rarely leave lender reviews),
  3. We are very qualified for the loan so it shouldn’t matter anyway. Our loan-to-value ratio was well under 50%, much less than the 80% that most loans require. Great credit score, good income.
  4. We trusted our broker to help guide us through the process.

So how did it go? One reviewer described the loan approval process as “cookie cutter” and a “gauntlet”, and I think that is a very apt description. The underwriting is very robotic and inflexible. For example, my wife already has plenty of stable, W-2 income to support the loan by herself. I decided to keep my name off the application explicitly to keep things simple since I have both W-2 and 1099 income. Yet, Provident still required proof that the “excess” income on our tax returns was connected to me and not my wife. Why would you care where the extra income came from?

Another example is regarding bank statements. I understand the need for historical bank statements, but any deposit or withdrawal over something like $5,000 needed full documentation as to source and reason. Never mind what our total balances were. If they don’t like the reason, it is grounds for denial. This is annoying, especially if you move money around a lot like I do. The really stupid part? I finally discovered that the bank doesn’t even need to be the deposit source for your paycheck. In that case, since they don’t care about long-term balance history but instead want the appearance of blandness, I luckily had lots of bank accounts to choose from and simply chose the “cleanest” one to finally satisfy them.

In addition, the bank account that you submit the statement for is the one that you need to fund closing costs via cashier’s check. I suppose this proves you own it? The only bad news was that my “clean” account was an online bank, so I had to pay for a $30 outgoing wire fee in place of the free cashier’s check I could have gotten from a local bank.

Recap: Provident Funding has very competitive rates, but with strict underwriting requirements that often lack common sense. You should be wary of them if you are a non-standard applicant in any way (self-employed income, recent job change). There are many complaints that people lost the house they had under contract because they were eventually denied their loan or did not close on time. The total time from loan application to closing on our refinance was approximately 45 days. If you have a great credit score and nice, stable W-2 income with good ratios, then go for it if their rates are the best and you’re willing to trade a few headaches for it.

Compare with rate quotes from:

Related mortgage refinance articles:

Don’t Fall For These Common Mortgage Refinance Myths

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Mortgage rates are still setting record lows! Qualification is still very difficult to refinance for those with little home equity, but there’s still many people out there that are eligible (maximize your appraisal). Don’t miss your opportunity to lower your interest costs and own your home faster by believing in one of these common mortgage refinance myths:

#1 I don’t want to pay the high closing costs again.

It’s true, when you refinance there will be additional costs. The mortgage broker has to eat! However, that doesn’t mean you actually need to pay anything extra.

First of all, you can get paid for negative points. Depending on the interest rate, the originator/lender will actually pay you a credit each 1 point = 1% of the loan principal. The lower the rate, the less points you’ll get. But if the credit is high enough, that may cover all your costs, making it a “no-cost” refi. Alternatively, they may simply advertise “no closing costs” which means they cover a certain list of fees.

When you apply for a refi, you’ll get a Good Faith Estimate (GFE) with a total closing costs amount listed at the bottom. However, you should separate the true costs from the stuff that you’d otherwise have to pay anyway, including:

  • Prepaid or partial month interest
  • Homeowner’s insurance to escrow
  • Property Taxes to escrow

The remaining amount (origination fees, doc fees, application fees, appraisal fees, title insurance, credit report fees, etc.) is what I would just call the true cost of refinancing. Some “no closing cost” lenders still make you pay the title insurance fee.

#2. I can’t refinance because it’s been too soon since my last financing.

[Read more...]

What’s The Record For Multiple Mortgage Refinances Within a Short Period?

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…because it looks like I’m getting another one. After seeing repeated news articles titled “Mortgage rate set record lows”, I’m now looking at refinancing to a 15-year fixed mortgage for 3% with all lender closing costs covered. I’ve seen multiple quotes for under 3% and getting under or close to zero in net fees.

Here’s a chart of the historical mortgage rate averages, courtesy of HSH.com. It includes the 30-year fixed, 15-year fixed, and the 5/1 30-year adjustable. Since I bought my home less than 5 years ago, 30-year fixed mortgage rates have ranged from a high of 7% to just above 4% today.

Even though I stopped trying to predict mortgage rates a while ago, I still find it hard to believe that I started with an interest rate of over 6% and now could be paying under 3% with a no-cost refi.

Alternative investments
If I successfully close on this loan, I don’t know if I’ll be aggressively paying it down as much as before. It’s important to note that the risk levels are not the same for the options below, but the interest rate environment is finally tipping to the point that I’d consider investing instead of paying off 3% debt.

  • I could buy super-safe US Treasury bonds, with yields at ~2.2% for a 15-year maturity. Interest on Treasury bonds are exempt from state income taxes.
  • I could buy a municipal bond fund like the Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX), which invests in investment-grade municipal bonds. The fund holdings have a duration of about 5 years and yields nearly 2% federally tax-exempt. If you’re in the highest tax bracket, that would be an effective yield of ~3%.
  • If I lived in California, I could buy shares of the Vanguard California Long-Term Tax-Exempt Fund (VCITX) with 2.60% yield that is exempt from both federal and state income taxes, with a duration of 6.4 years. That could be an effective yield of well over 4%.
  • I could take on more risk and buy shares of mature, dividend-paying companies. The Vanguard Equity Income Fund (VEIRX) has a current dividend yield of nearly 3%.

I’m going through a local mortgage broker, but you can find similar rates over at Amerisave. If the “all lender fees and points” is negative, that means the credit they give you is more than all closing costs including appraisals and title insurance. (Anyone use them before?) Compare that with rate quotes from and Quicken Loans.

Will Housing Prices Track Inflation Over The Long Run?

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The Calculated Risk blog has shared an updated graph of inflation-adjusted housing prices through 2011, based on Prof. Shiller’s data.

Mr. McBride also digs a little deeper and argues that because Shiller changed up the data series he was using in 1987, the true slope of the line should be a little more slightly positive. Using the original data series would result in an overall slope of housing prices increase slightly faster than inflation (1.5% per year) vs. the Shiller line (0.5% per year). His conclusion:

In many areas – if the population is increasing – house prices increase slightly faster than inflation over time, so there is an upward slope for real prices.

This reminded me of this chart via Sober Look that compared the US age distribution in 2000 and 2010 (US Census). The Boomers are getting old, and there is a little gap before the Echo Boomers come in. How will this affect housing prices in the future?

To me, the main takeaway is still that housing prices over the long run don’t rise much faster than inflation. This is not unexpected, as the cost of housing is by definition a big component of inflation. Of course, housing also provides dividends in the form of rent. So if you actually owned a house instead of most people “owning” a house with a big fat mortgage, your overall return on investment would be much better. I can’t wait to really own my house so I can earn that imaginary (imputed) rent.

In reality, what many people seem to do nowadays is hold on and rent out their properties for less than their mortgage payment and hope for price appreciation. This might work I suppose, and one could argue from the graph that prices overall are now close to historical averages. There are now some places where you can buy a house that rents for more than the mortgage payment, but unfortunately not anywhere near me (unless we’re talking huge down payment). As for me, I suppose I’ll just stick with owning low-maintenance REITs and getting my “rental income” that way.

Financial Status Bar & Goal Updates

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This updated post explains my ratio-based method of tracking our financial progress towards early retirement (as shown by the status indicator on the top right of every blog page).

Cash Reserves / Emergency Fund

Our goal is to always have a full year of expenses in cash equivalents as our “emergency fund”. (This is not the same as a year of income. Our expenses are much lower than our income.) This is a cushion for a variety of potential events including job loss, health concerns, or other unplanned costs. It also allows us to take a more long-term view with our investment portfolio since we know we won’t have to touch it.

Since our emergency fund is relatively large, I try to maximize the yield. If we stuck it all in a money market fund, the yield would be barely above zero. With a bit of work, our cash earns a blended rate of over 2% annually without taking on extra risk. We use the same accounts to make money from no fee 0% APR balance transfer offers, but currently don’t play that “game”. Here are recent updates on where we keep our cash:

March 2013 Cash Reserves Update
June 2012 Cash Reserves Update
March 2012 Cash Reserves Update
May 2011 Cash Reserves Update
January 2011 Cash Reserves Update

Home Equity

I don’t think everyone should buy a house (or more accurately, take out a huge loan on a house), as it historically doesn’t necessarily work out to be a very good investment over short or even long periods. However, if you are geographically stable, I do think buying and eventually owning a house free and clear can be a solid component of an early retirement plan. My current forecast is to have our house paid off in 10-15 5-10 years. Housing is very expensive where I live, so once that mortgage payment is gone, the actual income my investments will have to produce will drop drastically.

There are many ways to define home equity, and I am sticking to a simple method of calculating home equity by taking 100% minus (outstanding mortgage balance / original home purchase price). As of 2011, our home price has rebounded to over the original purchase price according to a refinance appraisal and comparable sales. Overall, I’d rather enjoy having continuous progress without worrying about my home’s exact market value. Here are some previous mortgage updates:

April 2013 Mortgage Paid Off
[...]
November 2011 Mortgage Payoff Update
February 2011 Mortgage Payoff Update

Investment Portfolio

The goal of my investment portfolio is allow withdrawals to support our needed expenses in “retirement”. Again, income and expenses are not the same thing. After mortgage payoff, I expect our required expenses to be less than 25% of our current income. I like to assume a simple 3% safe withdrawal rate, which means for every $100,000 saved, I can generate $3,000 a year of inflation-adjusted income for the rest of our lives. I used to assume 4%, but since our target “retirement” age is in our 40s and not 60s, I feel that 3% is better. Even 3% is not guaranteed, but again it does provide a quick estimate of progress. Here are recent portfolio updates:

June 2013 Investment Portfolio Update
January 2013 Investment Portfolio Update
July 2012 Investment Portfolio Update
February 2012 Investment Portfolio Update
November 2011 Investment Portfolio Update
July 2011 Investment Portfolio Update

My initial goal was to try and keep the home equity and expense replacement ratio about the same so that both will reach 100% at the same time, but we’ll see. I am still (very slowly) researching shifting to a more income-oriented portfolio that yields about 3% and has a principal value that can grow with inflation.

The actual implementation of my plan will probably require more flexibility. At some point, I plan on using some of my money and invest in an immediate annuity for some income stability. I’ll also need to vary my exact withdrawal rates a bit with market conditions. Once I reach age 70 or so, Social Security will kick in something. I don’t think Social Security will disappear although I do expect means-testing, but who knows these days.

How To Maximize Your Appraisal During A Mortgage Refinance

During the housing boom, nobody worried about appraisals. If you put in a bid to purchase a house for $300,000, the appraisal was basically guaranteed to come out at $300,000 or above. Appraisers are hired by lenders, and back then lenders wanted to make the loan happened no matter what. Therefore, if you were an appraiser and you didn’t reliably provide the number that the lender wanted, then your phone might stop ringing. I was told directly that the intended purchase price itself was a “strong indicator of value”. Rather self-fulfilling, no?

Nowadays, banks are much more cautious, and thus so are appraisers. In addition, recent legislation created new Appraiser Independence Requirements for Fannie Mae and Freddie Mac loans. At the same time, mortgage rates are at lows and refinance requests are at highs. Your ability to refinance is often dependent on what the appraiser says your house is worth, as you will need to satisfy a certain loan-to-value ratio. So what can you do to maximize your appraisal?

Feel out the lender first. Appraisers still work for lenders, and a good mortgage broker should be able to give you an idea of your chances for an adequate appraisal given the current environment and your basic home details. Check recent sale prices in your neighborhood on sites such as Zillow.com and Trulia.com to get a realistic sense of what to expect.

Collect supporting documents. If you’ve made any improvements to the house, gather up any blueprints or housing permits to provide to the appraisal. You could also make a list of the best “comps”, or recent sales of comparable homes in the area. If you’ve gotten one recently, dig up your last appraisal, and see if there were any omissions or changes. A busy appraiser might simply copy stuff from the previous appraisal. You may even find that they just bring a copy of the old appraisal and mark off things as they go.

Prepare your house. The appraiser will call you to schedule a time to see the interior of your house. Some people have suggested that you should hire a landscaper and basically stage your house as if you were selling it. I don’t know about spending that much energy on things, but I would definitely keep things neat and tidy. Have the kids and pets playing elsewhere. You want the house to come off as well-maintained and cared for.

Meet the appraiser. You’re dealing with a human, so be nice. Walk the appraiser around your house, answer any questions he or she may have, and point out any changes that you have made to the house. When I met my appraiser he was happy to see our official building permits that showed our legal additions. We also pointed out any remodeled areas and newly-installed hardwood flooring.

I don’t know if all appraisers would be open to debating about exactly what houses make good comps to yours or not, it might rub them the wrong way. But you could probably point out ways that your house is different than other potential comps (bigger yard, pool, view, etc.).

Read the appraisal report and follow-up if needed. Request a copy of the report and review it for any inaccuracies. The workload is high right now, and it could be that they mixed up details with another house or just copied stuff over from other sources. Point out any errors along with supporting evidence and you may be able to get the appraisal re-evaluated. On the extreme end, you might ask for another new appraisal at your cost.

Don’t worry about property taxes. While the local government might consider your house’s sales price history when figuring out your home’s tax assessment, they will not be notified of the value from an independent appraisal. In fact, they probably have a rather rigid formula to figure out your home’s assessed value (they do have to do this on a lot of houses) based on things like number of bedrooms, number of bathrooms, square footage, lot size, etc. If anything, you might volunteer data from the new appraisal to appeal your assessed value – assuming it’s lower of course!

In the end, by taking these steps we felt that we had done our best… and our refinance was a success, so good luck!

Credit Sesame’s New Interactive Mortgage Map

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Credit Sesame might be best known for offering people a free credit score every month, but they make their money by providing mortgage quotes. That makes sense given how sensitive mortgage interest rates are to credit scores. They just rolled out a new tool called the Mortgage Map that lets you visually compare various mortgage loan options. Here’s an example screenshot:

The vertical axis appears to be savings (refinance) or cost (new loan), and the horizontal axis appears to be interest rates. Different colors denote fixed-rate, variable-rate, and interest only loans. A little house icon appears for refinance quotes to indicate your existing loan. Mortgage rates are still reaching new historic lows, so it’s good to be aware of the options out there.

Of course, I played around with it using my own numbers, even though I already refinanced last year into a new 15-year fixed mortgage. Almost all of the loan options given were worse than my existing loan, which I suppose made me happy. However, a 7/1 ARM or 10/1 ARM would save still save me money if I paid it off during the fixed initial term (makes sense, although these are lesser-known flavors). I noticed that the default setting for refinancing a 30-year mortgage is that you will only keep it for 7 years, my guess is that’s how often the average person changes houses. But you’ll want to remember to change that to better reflect your own situation.

All of the quotes that I wanted to “learn more” about seemed to be offered by First Choice Bank, which I am guessing is a mortgage broker? As a result, I don’t really know how many different lenders are behind this map, and how it would compare to something like LendingTree.

Thoughts on Paying Extra Towards Mortgage Principal

I’ve been thinking more about whether I should commit some additional funds to pay down the principal on my mortgage and reduce my interest paid.

There is already a good deal of discussion on this topic in my posts Why Paying Down Your Mortgage Early Can Be A Smart Investment and 10 Reasons You Should Never Pay Off Your Mortgage, but I’ve tried to summarize and update all the pertinent points into something more coherent below.

Other Higher Priorities?
I don’t think paying extra towards a mortgage should be the highest priority. If you have no emergency fund, high-interest credit card debt, proper insurance, or don’t have your IRAs/401ks maxed out, then you probably should focus on those things before worry about paying extra towards your mortgage.

What is your tax situation?
Next is the topic of tax-deductibility of mortgage interest. Everyone already gets the standard deduction, which in 2012 is $5,950 for singles, and $11,900 for married filing jointly. Only the amount that your itemized deductions exceed this amount actually saves you money. If you have a $200,000 mortgage at 4%, your interest is only $8,000 the first year (and decreasing in subsequent years). If that’s your only deduction as a married couple, you’re not getting any real tax benefit at all.

However, some people have a big cushion of deductions, like high property taxes, state income taxes, charitable contributions, etc. Some don’t. Some people are in high marginal tax brackets, where saving 35% sounds really nice. Some are in the 15% or lower tax brackets. As for us, we are in a high marginal tax brackets, and pay a good deal of state income tax, so the deductibility is definitely in effect.

Paying 4% mortgage interest fully-deductible would be perfectly counteracted with a bond earning 4% interest fully-taxable.

Comparing with other investment options
One major argument against paying extra towards a mortgage is that you can earn a better return elsewhere. Who cares about saving 4% interest annually when your money could be earning 8% somewhere else? As we’ve seen recently, stock market returns are not guaranteed, and also not without lots of heartburn. Do you really want to invest in stocks using borrowed money? If anything, you should compare your mortgage interest with a high-quality bond or bank account interest.

Liquidity
Another argument against paying extra is that it is hard to access the equity in your house. You may not get a home equity line of credit, or it may be frozen later. However, if your alternative investments are in IRAs or 401k’s, then those aren’t exactly liquid either. Also, if you have an adequate cash cushion (as we do) and proper insurance, then liquidity will become a lesser concern. I don’t need to have access to every penny of my portfolio at all times.

Inflation hedge
A nice thing about mortgage payments is that if you have a fixed mortgage, the payment stays the same each month. Meanwhile, rents will increase with inflation. If inflation starts to rise significantly, you’ll be very happy to have a loan at 4-5%. But we also may stay in an era of prolonged low interest rates.

A possible strategy?
After all that, my idea is to simply look at the current yield of a comparable U.S. Treasury bond and compare it to my mortgage interest rate. If my mortgage interest rate is a lot higher than the bond rate, then I should pay extra towards the mortgage. Otherwise, if the Treasury rate is higher, then I should invest in bonds or bank accounts directly instead. If it’s close, stick with liquidity.

As of 2012, my mortgage rate is now slightly under 4%. I expect to pay off my mortgage in under 10 years, ideally closer to 5-7 years. This means that I’ll effectively be earning 4% a year for 10 years, whereas the Treasury rate for a 10-year bond is only 2%. If rates do rise, then I’ll stop paying extra toward the mortgage. In the meantime, since I already have bonds in my asset allocation, I’d much rather earn 4% by paying down the mortgage than 2% in the market. (Remember, I’m already maxing out both IRAs and 401ks for the year.)

I really don’t like the idea of staying in debt longer just for the possibility of investing for higher return elsewhere, especially as the difference for such a short time is minimal. I have plenty of money in stocks and if they go up 8% a year over the next 5-7 years, then I’ll still be fine.

(Posted originally in 2009, but I have updated the numbers for 2012.)