Save My Real Estate Deal

Here's what the Brits see about our mortgage market meltdown....

The US Congress is orchestrating a show trial of "predatory lenders". The blame-game was ever thus. Wall Street bankers were hounded after the 1929 crash: some went to prison. But if you track down the root cause of this credit bubble - now popped - the "blame" lies with Asian, European and Anglo Saxon central banks.

They created this mess, if that is what we now face. It was they - in effect governments - who intervened in countless complex ways to push down the price of global credit to levels that warped behaviour, as the Bank for International Settlements (BIS) has repeatedly noted. By setting the price of money too low, they encouraged debt and punished savings.

—Abrose Evans-Pritchard, in the UK Telegraph, August 21st, 2007.  (courtesy of lenderimplode.com)

All great questions. Unfortuantely not clear answers.

However, keep in mind that all markets are cyclical. They have ups and downs. The unique fact covering real estate is that over the long term, values due go up and remain up. It is those in the short term, hoping to profit on a flip or speculation are at the greatest risk in market ups and downs.

Pick the correct cycle and bingo--you stand to make a great deal of money. Pick the wrong end of the cycle--you can loose not only money, but your credit rating also.

But if you are looking to buy to occupy--there is really no bad time to buy. This is your home, even if values drop, you still need a place to live. Besides, our current tax laws allow to write off the mortgage interest expense, property taxes and mortgage insurance expense (subject to income limits). Overall, if you rent, you can't and wont be able to offset your federal (and some state) income taxes at such great levels.

Let me provide an example.  Assuming you have purchased a home for $500,000 with 5% down payment. Your loan is $475,000 at 7.50%. At the end of the year (assuming you purchased in January) you'd have $29,875 in mortgage interest to list on Schedule A. $6250 in property taxes and $3705 in mortgage insurance for a grand total of $39,830. If you made $100,000 in income in that year, your income subject to taxes would be reduced to $60,170.

If you rented you'd still be paying income taxes on the $100,000 unadjusted amount.

These numbers are simplistic and are not exact, however they illustrate the point that homeowner ship is still the best tax shelter around. ALSO, keep in mind, the income needed to buy an $500,000 home would be more than $100,000/yr gross.

So, the end results--regardless of the market...buy a home--it's yours, not your landlords. You make the rules--not the landlord.

It's all over the news..the anticipated Fed Governors voted to lower the Federal Funds Rate by .500%. Stock market rallied on the news and bonds tanked....so what happened?

The first thing to understand is that the .500% drop does little for the housing market and home mortgage rates--generally the opposite effect occurs in the immediate preceeding days and weeks. This is because money that normally would be stored in the mortgage market will move back into the stock market. Why? Because, the cost of corporate borrowing has been lowered, thereby, helping publicly traded companies have better earnings reports which increases the value of their shares (stock prices). This starts a "buy" sequence in the market.

The second thing to understand is that when the stock market is ralling, and bond prices fall (rates rise), there is another fundemental in play. Investors will be less likely to invest in fixed securities (e.g. mortgages) because the lowering of the rates de-values the asset and devalues the dollar against foriegn currancies, such as the Euro. This again, stems the flow of capital into the mortgage markets for the more profitable stocks.

Okay, so now this doesn't really look like a good deal after all. The third item: is that the lowering is overall good for the average Jane and Joe American because it lowers the cost of auto financing, credit lines (HELOC's), and revolving debt thereby reducing the carrying charges associated with consumer credit.

Assume you had an Equity Line of Credit as a 2nd mortgage on your home. If that loan is $70,000 at 10.50% and now drops to 9.75%, this would translate into a saving of $29.17 in lower interest payments. You may say big deal, $29 bucks--but it is your money that you do not have to give to the lender! So, it is a big deal--because now you can choose what to do with the money.

This also means that if only 80,000 households had their payments lowered by $29/mo. there would be about $2,333,000 more money each money in the hands of consumers -- yeah yours and mine. If we saved it or used to pay down existing debt--in the long run we all would have more money and less anxiety over the economy.

Thats my thoughts and lesson.  Have any comments--I'd love to hear from you.

One of the most important concepts that may just help you make it in today's housing market is by offering Seller Carry financing to the buyers (if you have enough equity to make it work).

The benifits are many--so are the pitfalls.

Benifits: As a seller you will be able to defer any taxible income/gain on the amount you carry-back and only claim what is paid in the tax year it is earned. You will also be setting up an income stream to supplement your current income. Second mortgages generally earn in the range of 9.00%-15% interest--passbook and CDs are in the 2.89%-7.00% range.

In the event you need money, there is a market that will purchase your note for cash at a discounted rate.  If your buyer stops making payments, you can foreclose, recover the home, and then re-sell it.

Pitfalls: You must service the loan and keep track of the payments. You must be ready to act in the event the buyer stops making the payments to protect your investment. The buyer may payoff your loan early--thereby limiting your income stream. Again, you may have to foreclose to protect your investment.