Archive for the 'Real Estate' Category
Wednesday, July 7th, 2010
In response to my earlier post on Should You Manage Your Own Mortgage Escrow?, reader James e-mailed me a trick he found to save some money even if you are required to have an escrow account:
Even if you’ve got an loan that requires an escrow account for the life of the loan, you can still save some money by beating your lender to the punch on payments. Most homeowners insurance companies provide a discount (about $50 in my case) if you pay your homeowners insurance premium yourself on-time or in advance. They get their money sooner that way. Payments made from escrow don’t usually post until 30 to 60 days past the actual due date.
You can make this payment using a credit card, and then provide proof of payment to your lender, who will then reimburse you from escrow instead of paying the insurance company. If you time it right, you can float the payment on a credit card as a regular purchase, and not incur any interest by paying it off as soon as you receive the payment from your escrow account. Presumably, you could do the same with property taxes.
I called my homeowner’s insurance company (State Farm), and they said they don’t offer such a discount. But maybe yours does?
Posted in Real Estate | 6 Comments »
Tuesday, July 6th, 2010
Housing prices. Are they still falling? Stable? Best time to buy ever?
Barry Ritholtz of The Big Picture thinks that housing prices have much further to fall. Here’s part of his analysis:
Today, residential real estate confronts numerous headwinds: Credit, once given to anyone who could fog a mirror, is now tight. Hence, demand is far below what it was during the past decade. Home prices are still unwinding from artificially high levels, and remained over-priced. Inventory is elevated. Unemployment remains high. A huge supply of shadow inventory is out there: Speculators and flippers who overpaid but have held onto their properties await modestly higher prices to sell. Bank owned real estate (REOs) continues to increase. We are barely halfway through a decade long foreclosure surge.
He also shares some historical data from 1977 to 2010 that support his view. The top graph below is home price appreciation divided by rent as measured by CPI. If the ratio is rising, it means that home price appreciation is rising faster than rent. If the ratio is falling, it means that rent is rising faster than home price appreciation. Then there is the price/income ratio, illustrated by the bottom graph below. In both cases, we are currently still above the historical mean.
From 1977 to 2010, the median US home price was 4.1 times median household income. But as the chart below shows, Home prices are still above that mean. Oh, and that mean is artificially elevated due to the 2002-07 boom. Same with home prices relative to rentals, or housing value as percentage of GDP. Further, we should not assume that prices will merely mean revert back to historic levels. In most markets, a near 3 standard deviation price move is resolved not by reverting to the mean, but by by careening far below it.
Data source: Ned Davis ResearchPosted in Real Estate | 11 Comments »
Monday, July 5th, 2010
I recently got a refund from my mortgage escrow servicer, as my property taxes decreased. This reminded me about how I always used to read that you should manage your own escrow account. I don’t think I have a choice about the matter right now, but I tried to research all the pros and cons below. Did I miss something? Share your own reasons in the comments, and don’t forget to vote in the poll below!
Escrow Definition and Background
When you borrow money to buy a house, the lender holds your house as collateral in case you stop paying them back. However, in certain cases the lender can lose control of their collateral. If nobody pays the city and/or county property taxes, the local government can seize the house and become the first lienholders on the property. Similarly, if the house burns down or becomes flooded without insurance, then they’ll be in trouble too. This is why most lenders require the funds for these types of charges to be automatically collected each month and placed in escrow, until the respective bills are actually due.
Now, most homeowners of course want to pay these things, but as with other big bills, many people may not plan ahead and later find themselves unable to pay. Some lenders may allow you to manage these things for yourself once you reach a certain amount of home equity (loan-to-value ratio) or if you pay them a fee or a higher interest rate.
The Real Estate Settlement Procedures Act (RESPA) provides several requirements regarding escrow. The maximum “cushion” a lender can accrue is for 1/6th of the total amount paid out, or approximately two months of escrow payments. While some states require interest to be paid on escrow account, RESPA does not.
Reasons To Manage Your Own Escrow
- Earn interest. This is the reason I hear most often. You pay out a lot of money ahead of time, when you could be earning interest on those funds instead. Even if you don’t have it as as lump sum, you could tuck away 1/12th of your insurance and tax bills every month on your own.
- Avoid payment errors. Even though the whole point of escrow is to pay your taxes and insurance on time, escrow servicing companies still make mistakes occasionally, resulting in lost payments and big headaches.
- Increase tax deductions. If you think that you will be able to itemize deductions in one year and not the next on your tax return, you may try to “bunch” deductions so that they end up in the preferred year and save you some money. For example, you could pay your 2010 taxes in January 2010, and your 2011 taxes in December 2010, so they both occurred in 2010.
Reason Not To Manage Your Escrow
- You have no choice. Many lenders, like the Federal Housing Administration (FHA), require escrow for the life of the loan. Others, like PenFed only allows you to manage your own escrow once you reach a 75% loan-to-value ratio. If you’re shopping for a new loan, this is a possible negotiable item.
- It costs too much. Some lenders will let you waive escrow, but only for a flat fee (possibly hundreds of dollars) or a quarter to half point (0.25%-0.5% of your loan value). That could be end up being a bad financial trade-off, especially if you don’t keep your mortgage for very long.
- Simplicity and convenience. Hey, it’s one less thing to worry about, and your monthly expenses stay more constant. Technically, if you are short on your escrow, the servicing company will even cover the difference for you and just make it up over the next year. You can view it as a service provided in exchange for any lost interest. If your annual taxes and insurance premiums total $1,500, that is $30 per year at 2% APY, which even assumes that you lose an entire year of interest. Of course, interest rates may rise later.
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Posted in Real Estate | 38 Comments »
Tuesday, May 11th, 2010
If you have a mortgage, do you know when it will be paid off? Have you though about paying extra and making that day come earlier? The commonly discussed biweekly accelerated payment plan is the same as making one extra monthly payment each year and knocking off about 5-6 years from a normal 30-year mortgage. For example if your mortgage is $1,200 per month, you would pay an extra $1,200 a year ($100 per month.)
Here’s the effect of one, two, and three extra monthly payments per year on mortgage paydown. The specific numbers are for a $480,000 mortgage at 5% fixed for 30 years, but the general effect for all mortgages is similar.
As you can see, the more you pay down, the smaller the effect because you give yourself less time to compound the interest saved. If you pay down your mortgage principal, you are effectively earning your interest rate. For example, if you have a mortgage at 5% interest with 25 years left and pay an extra $5,000 towards principal, that’s basically the same as having that $5,000 earn 5% for 25 years (taxes tend to wash out if you assume mortgage interest is tax-deductible).
Good Investment?
But is earning 5% a year for 25 years a good deal? First, you must remember that this is virtually a no-risk 5%. A fair comparison would be with bonds backed by the US government. Let’s look at how the current U.S. Treasury bond yield curve.
We see that it’s currently yielding about 4.4% for a 30-year bond and 3.8% at 15 years. Keep in mind that federal bond interest is exempt from state income taxes, which will boost the effective yield for certain residents. For me, it is nearly a wash at the 30-year mark. However, if I pay down my mortgage as fast as I plan to, I’ll only have about 15 years left. Earning 5% for 15 years by paying down my mortgage is better than earning 3.8% in a Treasury bond.
Now, people will say that they can easily earn more than 5% over 30 years. Others go even further and believe that you should never pay off your mortgage. This almost always means taking on more risk, whether in the stock market or wherever. While we should definitely take some risks in our investments overall, 2008 should remind us that taking on extra risk is not something to be taken lightly.
Another thing to consider is that you’ll be losing liquidity on the money being put towards your mortgage, as it can be costly to extract without selling the house. But I lose liquidity on everything I put in a Roth IRA and 401(k) as well. As long as I keep enough liquidity in my emergency fund or elsewhere, I don’t worry about it.
Flexibility
Now, there is a good possibility that at some point I will be able to get greater than 5% in a very low-risk investment, most likely in a time of high inflation. In that case, I’ll simply buy that alternate investment, keep the difference, and stop making extra payments during that time.
I’ll also have flexibility in other areas. If I move early, I’ll be earning 5% for even less than 15-years. If I decide to rent out the house, I can possibly refinance for a lower mortgage payment over a longer period for cashflow reasons.
Execution
Basically, as part of the big picture of your finances, paying extra can make sense. My mortgage is already automatically withdrawn from my checking account each month. So far, I’ve been making my extra payment manually in a lump sum by writing a check. I haven’t made my payment this year, and I am debating whether to switch to a constantly higher monthly payment instead. My bank allows me to make extra payments towards principal each month on an automatic basis for free. One less thing to worry about.
Posted in Real Estate | 28 Comments »
Monday, March 22nd, 2010
Lack of Recent Updates
Up until last December, I had done regular monthly updates of our net worth for five consecutive years. However, recent personal events made me much less interested in detailed, analytic planning towards early retirement. As a result, I have barely checked any of my statements in the past few months, other than to make sure they weren’t negative. I think I made a few trades here and there, but for the most part haven’t bought or sold any stocks to maintain my asset allocation. I haven’t even converted my Traditional IRAs to Roth IRAs like I had planned, or made any IRA contributions for 2010.
Instead, reading blogs and other financial news has simply been a recreational escape for me, and I think my blogging has reflected that. I still had fun learning about ways to save money here and there, and enjoy keeping track of other market changes and various offers out there.
However, it’s time to catch back up a bit! Here we go…
Credit Card Debt
In the past, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”. My balances are simply monthly charges that I have not yet paid in full when due.
If you’re looking for a competitive offer, Citibank is offering 0% APR for 15 months with a 3% balance transfer fee.
Income
We’re both still working, but will be taking some unpaid time off in April which will reduce income temporarily. Our monthly expenses are still much less than our (regular) income, so while we may eat into savings a bit, I expect to bounce back into the positive very quickly.
Retirement and Brokerage accounts
Near the end of last year, I had gradually moved $30,000 into a brokerage account at OptionsHouse to invest in ETFs due to their $3.95 trades. In my usual way, I then thought about switching instead to WellsTrade since I now had the $25,000 required to get 100 free trades per year. Stuff happened, the application process took too long, I got distracted, and the money is still sitting mostly non-invested. Grrr.
As stated above, besides our regular 401k contributions, we haven’t made any real moves in our retirement accounts either.
The stock market has done relatively well in the meantime, with the S&P 500 nearly hitting 1,200. Our total retirement portfolio is now $269,538 or on an estimated after-tax basis, $233,164. At a theoretical 4% withdrawal rate, this would provide $777 per month in after-tax retirement income, which brings me to 31% of my long-term goal of generating $2,500 per month.
Cash Savings and Emergency Funds
We continue to keep a year’s worth of expenses (conservatively set at $60,000) in our emergency fund. It’s still a nice warm safety blanket. I am thinking of moving a chunk of it into several separate 5-year CDs from Ally Bank, as they pay 1.69% APY (as of 5/21/12) and each would have a small early-withdrawal penalty of only 60 days interest.
Home Value
I am no longer using any internet home valuation tools to track home value. After using them for a year, I went back to simply taking a conservative estimate and focusing on mortgage payoff. After checking them again today, I am staying away. A house nearby sold recently for $500,000 but is listed at both Zillow and Coldwell Banker as being sold for $1,000,000. Needless to say, it is skewing my home value estimates!
It would seem that I am currently long on thoughts and short on action. Time to fix that.
Posted in Goals, Investing, Real Estate, Retirement | 18 Comments »
Wednesday, February 24th, 2010
How’s the housing market in your area doing? You can find what Zillow thinks in their Real Estate Market Reports for many metro areas. There are lots of options to play with; you can view different metrics, change the time period, or even compare entire states.
Here’s a graph of Zillow’s Home Value Index for the US as a whole as well as selected large cities over the past decade. As you can see, there was a wide range of price swings from city to city.
It would interesting to see the same chart but with rental rates instead.
Posted in Real Estate | 6 Comments »
Wednesday, December 2nd, 2009
Wow, December already…
Credit Card Debt
Up until now, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn up to 4-5% interest (less recently), and keeping the difference as profit. However, given the current lack of good no fee 0% APR balance transfer offers , I am no longer playing this “game”. The balance that you do see is either before the end of the statement or during the grace period, where I’m also not paying any interest.
Retirement and Brokerage accounts
Mrs. MMB and I have both maxed out our 401k salary deferrals for 2009. We have also started to invest in regular taxable accounts by investing $30,000 that was previously being held as cash. I’ll outline the trade activity in an upcoming portfolio update.
Our total retirement portfolio is now $231,368 or on an estimated after-tax basis, $191,475. At a theoretical 4% withdrawal rate, this would provide $638 per month in after-tax retirement income, which brings me to 26% of my long-term goal of $2,500 per month.
We are also getting ready for a Traditional-to-Roth conversion once the income limits are removed in 2010. We’ll need to gather up some information in order to see how much tax we owe on any gains. More details on this to come.
Cash Savings and Emergency Funds
We keep a year’s worth of expenses in our emergency fund. Potential large expenses include $10,000 for home improvement projects (minor roof repair and solar water heating), as well as $15,000-$20,000 on a new car to replace our 1995 Nissan. Hope it can last us 15 years as well!
Home Value
I am no longer using any internet home valuation tools to track home value. Some people have suggested using my tax assessed value, but I also think that is too high. I simply picked what I felt is a conservative number based on recent comparables, $480,000, and keep it for at least 6 months if not a year. (Currently on month 3 out of 6.) For the most part I am concerned about mortgage payoff, which I still plan to accomplish in 20 years at most.
You can view previous net worth updates here.
Posted in Goals, Investing, Real Estate, Retirement | 17 Comments »
Monday, November 2nd, 2009
Credit Card Debt
In the past, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. I even put together a series of step-by-step posts on how to make money off of credit cards in this way.
However, given the current lack of great no fee 0% APR balance transfer offers, I am no longer playing this “game” and have just paid off my last 0% offer for now. This makes the net worth chart a bit funny, but it should clear up next month.
Retirement and Brokerage accounts
Our total investment portfolio increased by a few thousand dollars since last month. DW’s 401k was already maxed out at $16,500. I made another $1,000 contribution to my Solo 401k, for a total of $16,500 contributed in 2009 as well. (I forgot the limit was $16,500 and not $15,500 last month…) This makes us done with our goal of maxing out both our 401k salary contributions for 2009.
I am starting to build up too much cash, and have started investing for retirement in a taxable brokerage account as well. In the interest of tax efficiency, I’ll have to move around some investments in order to keep bonds in the tax-advantaged IRAs/401k and the “extra” stocks in taxable. I expect to finish investing $20,000 this week.
Taking that additional 20k into account, our total retirement portfolio is now $211,095, or on an estimated after-tax basis, $170,047. At a 4% withdrawal rate, this would provide $567 per month in tax-free retirement income, which brings me to 23% of my long-term goal of $2,500 per month.
Cash Savings and Emergency Funds
We keep a year’s worth of expenses in our emergency fund. Another $10,000 is earmarked for upcoming home improvement projects that I keep putting off (minor roof repair and solar water heating).
Home Value
I am no longer using any internet home valuation tools to track home value. Some people have suggested using my tax assessed value, but I also think that is too high. I simply picked what I felt is a conservative number based on recent comparables, $480,000, and keep it for at least 6 months if not a year. (Currently on month 2 out of 6.) For the most part I am concerned about mortgage payoff, which I still plan to accomplish in 20 years at most.
You can view previous net worth updates here.
Posted in Goals, Investing, Real Estate, Retirement | 29 Comments »
Tuesday, October 6th, 2009
Credit Card Debt
For newer readers, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. I even put together a series of step-by-step posts on how to make money off of credit cards in this way. However, given the current lack of great no fee 0% APR balance transfer offers, I am mostly waiting on existing offers to end.
Retirement and Brokerage accounts
Wife’s 401k was already maxed out at $16,500 for 2009. I made another $5,500 contribution to my Solo 401k, for a total of $15,000 contributed in 2009. This makes us about 95% done with our goal of maxing out both our 401k salary contributions for 2009.
Our total retirement portfolio is now $190,085, or on an estimated after-tax basis, $152,349. At a 4% withdrawal rate, this would provide $508 per month in tax-free retirement income, which brings me to 20% of my long-term goal of $2,500 per month.
Cash Savings and Emergency Funds
We still have a little over a year’s worth of expenses in our emergency fund. Part of the cash is earmarked for some smaller home improvement projects.
The next step is to put future funds into buying ETFs in a taxable brokerage account since I no longer have room in tax-sheltered accounts. I’ll probably use TradeKing or Scottrade as my buy-and-hold ETF broker, and keep Zecco as my “play money” account.
Home Value
I am no longer using any internet home valuation tools to track home value. If I still did, it would have been $572,000. Some people have suggested using my tax assessed value, but I also think that is too high. I am simply picked what I felt is a conservative number based on recent comparables, $480,000, and keep it for at least 6 months if not a year. This way, I just focus on the mortgage payoff, which I still plan to accomplish in 20 years at most.
You can view previous net worth updates here.
Posted in Goals, Investing, Real Estate, Retirement | 23 Comments »
Monday, October 5th, 2009
If you like to keep up with my net worth updates, you’ll know that I’ve been trying to estimate my home’s value using four different internet valuation tools:
It’s finally been a year since I started using these tools, and I wanted to look back on how successful this experiment has been. Some give one numerical estimate and some give ranges. When I got a range of values, I simply used the midpoint. Here are the results over the past year:
Accuracy. We all know the real value of a house is what someone is willing to pay for it. (Actually, it’s what a bank is willing to lend that person…) But as a group, I would say these services can’t possibly be accurate because they all seem to disagree all the time. In nearly every month, estimates would differ by $50,000 or more. Half are up over the past year, and the other half are down.
Even though they all seem to use similar housing information databases, all of them must interpret the data differently. Some may take into account the change in value of all houses in zip code, or the city in general. Or they may differ in what properties they consider to be comparable sales (by zip code, by distance, size, or age). How do you weigh different physical factors (i.e. number of bedrooms, bathrooms, and square footage)?
Volatility. Bank of America appears to have had the least volatility over the last year, while Coldwell Banker has the wildest swings. I believe the recent upswings are due to some more houses being sold in my area at the higher range recently, while for a time very few houses were being sold and those were at the low end. If so, it would follow that Coldwell Banker weighs recent sales more heavily.
Should I Keep Using These Tools?
Even though the house you live in might not be considered an investment per se, I still think one should track it’s value. The fact is that $200,000 in home equity here could buy me an entire house elsewhere if I were to move. (And I know people who have done just that.) I have seen that home price trends can vary across different neighborhoods within the same area, so you can’t just go by city-wide data.
However, due to the lack of reliable estimates from these internet valuation tools, I’m going to stop using them in my net worth updates. I initially tried to deal with the variations by taking the average of all four and also subtracting 5% to be conservative and 6% for real estate agent commissions, but the swings still dwarfed all my other accounts. I’m still undecided about what alternative to use.
Posted in Real Estate | 36 Comments »
Wednesday, September 30th, 2009
I received an interesting reader question last week about a scenario where you are very sure that you’re going to sell your house in a few years. In that case, would paying down your mortgage principal create an opportunity for a relatively high return with minimal risk? The e-mail:
Your blog is very insightful. I had an idea that I wanted to run by you. I plan to list my condo for sale in about 14 months. Currently I have a 2nd mortgage with an 8.875% rate. I want to have the most net cash at the time of sale, so I’m thinking the safest investment I can make over the next 14 months is to pay down this mortgage. If my math is correct, I would get a 4.9% return on the avoided interest (less what I would have gotten back from deductions). Am I crazy, or does it seem like I’ve found a good place to put my cash until I leave?
I’m not a mortgage professional, but it would seem to me that in theory this should work. When you make the additional principal payments, every future mortgage payment will also include less interest and more towards paying the loan balance down even faster. When you sell the house, you’ll get your “return” from this lower loan balance.
The annul return from paying down your principal should be roughly equal to the annual interest rate of your loan. The reader had an 8.875% second mortgage, which would seem like a pretty great short-term return over 14 months. The exact return might be a little off to the amortization schedule, it should be close. The mortgage interest may be tax-deductible, but remember that interest from a bank CD outside an IRA is also fully taxable. Check out these related posts:
Within the posts above, based on the amortization schedule of a 30-year fixed mortgage at a 5% interest rate, I plotted both the effective interest rate paid and the annual investment return from prepaying below:
I suppose that one big risk in doing this is that you don’t end up selling the house, so your cash is now stuck in the home’s equity and will be more difficult to access. So you’ll have to be fairly confident that you will be selling the house, or at least be okay with the possibility of just having a smaller mortgage balance.
Posted in Real Estate | 15 Comments »
Tuesday, September 22nd, 2009
I hope that all of you in the Atlanta metro area are safe and dry right now. I’d also like to take this chance to correct a common misconception, which is often promoted by the media every time a flood occurs. As just one example, take this CNN article:
He hustled out of bed and rushed to the door. There were his neighbors, surrounded by floodwaters the neighborhood is supposed to experience only once every 100 years.
The highlighted sentence is not accurate, and gets people thinking strange thoughts like “Oh the last flood was in 1969, I should be good until 2069 or so”. The fact is there is a reason we hear about such floods all the time. Let’s look at what FEMA has to say:
The term “100-year flood” is misleading. It is not the flood that will occur once every 100 years. Rather, it is the flood elevation that has a 1-percent chance of being equaled or exceeded each year. Thus, the 100-year flood could occur more than once in a relatively short period of time.
Again, if you live in a 100-year floodplain, you have 1 percent chance of being flooded every year. Think of how concerned you’d be if you were told there was a 1-in-100 chance of your house burning down every year. The way the math works out, this means that over a 30-year mortgage, there is a 26% chance you’ll have a 100-year flood during that time period (1 – (0.99)30). This is also why most people with home loans in such areas are required to buy flood insurance.
Many people are in 500-year flood plains, which gets people even less worried. “The last flood was in 1909, we’re good for another 400 years!” Actually, having a 0.2% chance of a flood each and every year works out to a 6% chance of occurring at least once over a span of 30 years, or 1-in-17.
If you haven’t already, take some time and check if you are in a flood plain here. Some may consider buying flood insurance even if you are not required to by your mortgage lender. We ended up buying a modest amount of building coverage from the NFIP.
Posted in Real Estate | 26 Comments »
