MONEY home financing

Why Latino Americans Are Denied Home Loans More Often Than White Applicants

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Hero Images—Getty Images

Latinos have driven homeownership growth for the last decade, but get approved for mortgages at half the rate of non-Hispanic white applicants.

With the exception of 2009 and 2010, Latinos have driven homeownership growth in the U.S. for more than a decade, according to Census Bureau data. Still, they’re experiencing significant obstacles to homeownership, which is the subject of a recent report from the National Association of Hispanic Real Estate Professionals.

Hispanic mortgage applicants were denied loans at twice the rate of non-Hispanic white applicants in 2013 (22% vs. 11% denial rates), and in the same year, Latinos accounted for only 7.3% of purchase mortgages, even though they make up 17% of the U.S. population, according to the report. (The report uses Hispanic and Latino interchangeably.)

In the report, that disparity is largely attributed to the use of conventional credit scoring models and the lack of affordable home options. Despite these obstacles, Hispanics represent half of the U.S. homeownership growth since 2010, with 614,000 more Hispanics becoming homeowners in that time.

“While Hispanics remain poised to drive homeownership growth for the next several decades, with only a few exceptions there is little evidence that the industry as a whole has done much to address the unique nuances of many Hispanic homebuyers,” the report says.

For example, immigrants are more likely to repay their mortgages than their credit scores suggest, according to a Federal Reserve study cited in the report, and while not all Hispanic homeowners are immigrants, many are. Additionally, about half of Latino households are considered unbanked or underbanked, according to a study from the Center for American Progress, and unbanked consumers tend to be left out of traditional credit scoring models, which are used to underwrite mortgages.

“Traditional models generally do not capture transactions outside the conventional banking payment systems,” reads the NAHREP report. “This omission puts ‘unbanked’ borrowers at a disadvantage, since their good payment history using cash transactions are not considered in their credit score.”

This data paints a picture familiar to many aspiring homeowners, regardless of ethnicity: People want to buy homes and may even feel financially ready to do so, but their preparedness doesn’t allow for them to with a tight mortgage market and a short supply of affordable homes.

There’s not a lot consumers can do to change this, other than work on their credit scores and thoroughly research their options for buying a house. There are a few mortgage programs designed for first-time homebuyers, including those that require a low down payment (the NAHREP report notes that Hispanics are more likely than other consumers to make low down payments on homes). We explain how to figure out your down payment here.

On the credit side, you’ll need to regularly review your credit standing in the years and months leading up to the time when you buy a home — it’s a habit you should maintain throughout your life.

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MONEY student debt

Is Student Debt Really Keeping Millennials from Growing Up?

Skateboarders
Getty Images/Image Source—Getty Images/Image Source

Evidence is mixed, but a new survey indicates it's having greater impact now than on previous generations.

Young adults with student debt are postponing life events like buying a home or car, getting married, and having babies at higher rates than other age groups did, according to a new survey.

Overall, 45% of respondents who ever had student loan debt said they had put off life events because of it. For borrowers currently between 18 and 29, that number rises to 56%, according to the survey from Bankrate.com.

On the other hand, that means that about 55% of respondents (including about 44% of millennials) haven’t delayed life events because of student debt.

Economists, too, are studying the precise effects of student loan debt on the economy and consumer behavior. The familiar headline is that student debt is a significant strain on the economy, since it reduces borrowers’ ability to access other forms of credit. And there’s certainly some evidence to back that up.

Read next: College Textbooks Cost 1041% More Than in 1977

A recent working paper from the Federal Reserve Bank of Philadelphia found that counties with higher levels of student loan debt had less small-business growth. A survey by the National Realtors Association found that 12% of all recent home buyers said they delayed their purchase because of debt, and among millennials who did so, half said it was specifically because of student loan debt. And the New York Fed also has studied home ownership trends and found that young adults with student debt were less likely to own homes than those without it.

Steve Pounds, a financial analyst with Bankrate, also points out that the number of student loan defaults and delinquencies shot up during the recession. While that involved a relatively small share of borrowers, it’s likely to affect their credit for the rest of their lives. “That has to be a drag on the auto, real estate, and stock industry,” he said. “How much of a drag? I don’t know. But it’s an side effect that has to be noted.”

At the same time, college graduates still enjoy more income and job stability. Bachelor’s degree holders had median earnings last year that were $23,000 higher than high school graduates, and their unemployment rate was almost half of the 6% rate among high school grads, according to the New York Fed.

And some studies have suggested that characterizing student loans as a crisis scenario may be a bit a melodramatic. For example, TransUnion tracked the borrowing behavior of milliennials and found that while they are buying cars and applying for mortgages at lower rates than previous generations, that’s true regardless of whether they’re paying off student debt.

Check out the new MONEY College Planner

In the Bankrate survey, two-thirds of younger borrowers said they didn’t receive enough information about the financial risks of loans. Millennials were more likely than older borrowers to say they were delaying money-related life events in four out of five categories. The odd exception? Retirement savings. Less than 20% of millennials have delayed saving for retirement, slightly below the quarter of baby boomers who said they had done the same.

Are you concerned about paying back your student loans? Read MONEY’s 8 Ways to Stop Student Loans From Ruining Your Life

You Might Also Like: The 25 Best Colleges for Merit Aid

MONEY Debt

A Whopping 80% of Americans Are in Debt

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Adam Gault—Getty Images

But more than half have the "good" kind of debt.

The vast majority of Americans are in debt, according to a report from Pew Charitable Trusts published in July. For the most part, that debt comes from what many people would call a good thing — homeownership. Of the 80% of Americans with debt, 44% have mortgage debt. Overall, the median debt load among Americans is $67,900, overwhelmingly driven by mortgages (the median home loan balance is $103,000).

Still, Americans have a lot of non-mortgage debt, too, particularly young Americans. Only 33% of millennials (people born between 1981 and 1997), have home loans. In fact, millennials are much more likely to have student loan debt (41% have it), car loans (41%) or credit card debt (39%) than they are to have a mortgage. Among all other generations, mortgages are the leading component of consumer debt.

Credit card debt is still incredibly common among American consumers — with 39% of Americans reporting unpaid credit card balances, it’s not far behind mortgages as a leading contributor to consumer debt. While those balances are much lower than those for student loans, the high interest rates and revolving nature of credit card debt can make it a serious threat to consumers’ financial health.

Having debt isn’t inherently a problem, but it can quickly become one if you’re living beyond your means or not working toward bringing your balances to zero. Carrying a lot of debt — relative to your limits for revolving credit accounts — can have an adverse affect on your credit scores, which can subject you to higher interest rates on debt in the future. Here’s a calculator that can show you how your credit scores can affect your lifetime cost of debt. Keeping balances low relative to your credit limits — no more than 30%, but ideally less than 10% — can be beneficial to your scores. As you pay off credit card debt (assuming you don’t add to it at the same time), you should see your scores start to improve. You can see how long it will take you to pay off your credit card debt and how much you can save by adjusting your payments using this credit card debt payoff calculator.

If you’re among the 80% of Americans with debt, the best thing you can do is focus on managing your debt and credit well. Taking out loans or using credit cards can be a great financial strategy, but it’s important to go after the balances with a plan. Regularly review your credit score so you understand how your debt affects your credit standing, and set realistic goals for paying your debt down, while saving up for your future.

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MONEY mortgage

This City Has Nation’s Healthiest Housing Market

Beacon Hill neighborhood of Boston, Massachusetts
Getty Images/iStockphoto Beacon Hill neighborhood of Boston, Massachusetts

The healthiest market isn't necessarily the most affordable.

The Red Sox may be in the cellar. But when it comes to its housing market, Boston is first in the nation.

That’s according to a recent report by financial Web site WalletHub, which ranked the relative health of real estate markets in the nation’s 25 largest metro areas. Researchers determined a market’s “health” based on factors like how much equity owners had in their homes and who paid the lowest interest rates.

Oklahoma City ranked second; San Antonio was third. Four Florida cities ranked in the bottom 10 (Miami, Jacksonville, Orlando, Tampa), while Las Vegas was dead last.

On average home owners in Boston have 43% equity in their homes, meaning their mortgages amounted to only slightly more than half their home’s value. The rate was second in the nation, just behind New York City.

Boston also had the second smallest pool of “underwater” mortgages — the scenario in which the owner owes the bank more than the home is worth. About 6.7% of Boston mortgages were underwater, placing just behind Rochester, N.Y. In Las Vegas, by contrast, 39% of homes are underwater.

Of course, one thing that a “healthy” housing market doesn’t guarantee is that you can afford to live there. Boston’s median home price is nearly $450,000, according to Zillow. That’s up from $326,000 at the height of the housing crisis.

The key to Boston’s success: Attractive housing stock and a strong technology and life sciences industry that have helped draw investment and educated young people, according the hometown paper, the Globe.

 

 

MONEY home financing

4 Things Your Bank Won’t Tell You When You Get a Mortgage

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Ed Freeman—Getty Images

2. Time is not your friend.

As the Consumer Financial Protection Bureau strives to create more transparency within the mortgage industry, there are crucial homebuying truths that endure — and knowing what they are can help you to be better informed as a homebuyer. But don’t expect to hear them from your bank.

1. You Can Get a Better Deal Elsewhere

Fannie Mae and Freddie Mac publish mortgagee guidelines that banks use to originate loans. In addition, individual banks may place additional credit requirements on these guidelines to minimize their risk. Let’s say that Fannie Mae has a maximum debt-to-income ratio of 45%, but the bank that you’re applying with has a maximum debt ratio of 43%, conforming to the CFPB’s definition of a ‘qualified mortgage.’ Your bank will likely never tell you can get a better deal elsewhere, even though you probably can. When you work with a bank, you are limited to their programs and their products. Direct lenders, brokers and some smaller banks have access to more credit, which ultimately dictates whether or not your loan will move forward.

Caveat: A better loan offer elsewhere is not a better offer if it won’t close because you are unable to meet the loan guidelines. So make sure that you can meet the requirements of that “better deal” before you go for it.

2. Time Is Not Your Friend

Once you’ve locked in your interest rate, the clock is running – and time is now indeed money. Let’s say you’re nearing the end of your 30-day interest-rate lock, and you need an additional 15 days. Your lender might charge you as much as 0.25% of the loan amount – on a $300,000 loan, that’s $750 more in fees because you took an additional week to get your financial documentation back to the lender. Lock fees vary, as do rate lock policies among banks. Be informed, ask upfront. After you have chosen to lock your rate, get your financial documentation back to the lender in 24-48 hours as needed in the process. While this is recognizably an inconvenience, it will ensure that your loan closes in the timeframe in which the interest rate is locked.

FYI: The reason why interest rate lock extensions cost you is because if interest rates go up and you’re locked in at lower rate, your loan is less profitable, and therefore less desirable, to the end investor.

3. You’d Better Have a Ton of Equity

Equity is a crucial factor when applying for a mortgage. If you intend to get the absolute lowest possible interest rate the market will bear you’re going to need a minimum of 30% equity in your home — ideally more. Mortgage pricing adjusters (factors that drive mortgage costs) — like occupancy, credit score and loan-to-value — begin after a loan to value of 65%, or 35% equity. That means if you have 35% equity to finance a loan for an owner-occupied home, the pricing is going to be quite a bit better than if you have 25% down, for example. Loan officers will normally tell the borrower the minimum amount they need to get a mortgage, but not necessarily the minimum amount they need to get a mortgage with the best possible combination of rate and fees.

Here’s a nifty calculator you can use if you want to see how much home you can afford. Your credit score also has a big impact on that number.

4. Appraisers Hold All the Cards

Mortgage professionals who work in a non-banking capacity will be more likely to tell you that appraisers do hold all the cards. Loan professionals who work for a bank have more rules and requirements for originating than non-bank loan officers. Additionally, many bigger banks own the appraisal companies, subsequently getting a piece of the appraisal revenue. The Home Valuation Code of Conduct that arose in the aftermath of the financial collapse took away the ability for loan officers to have any direct access to appraisers, including the ordering and scheduling of the appraisal. Currently, the entire appraisal process is automated to meet federal compliance regulations.

Now, you may qualify for a mortgage on paper with your credit score, income, credit and debt, but the appraiser’s opinion of your home’s value can kill your mortgage, even though a different appraiser’s opinion of value may give you a green light. Even a $5,000 difference in value is enough to throw a loan off-course. Should your appraised value not meet expectations, you do have recourse. Ask a real estate agent friend to pull comps identifying neighboring houses not included in the appraisal report. Next, ask your bank to have a “re-consideration of value” performed with the new information. In most cases, it’s a 50/50 shot, as the loan industry has been forced to give appraisers absolute power.

The more clarity and understanding consumers have about the loan process, pricing and general guidelines, the more information they will have to make an educated choice. Always best to continually ask questions — and then some — throughout the transaction.

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MONEY selling a home

I’m Trapped in a House I Can’t Afford to Sell

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Steven Puetzer—Getty Images

What to do when you're underwater on your mortgage.

Eddie would like to to sell his home, but like millions of Americans, the widely touted housing recovery hasn’t fully reached his North Akron, Ohio, neighborhood. He owes about $60,000 on his mortgage and the two experienced real estate agents he consulted put the value of his home at somewhere around $58,000 to $59,000. Even if he were to find a buyer who would pay the full $60,000 he owes, by the time he paid a real estate commission and closing costs, he would have to bring a few grand to the table.

“Being underwater on the mortgage has me trapped here,” he writes in an email. “As I sit here right now, I cannot even sell my home without taking a loss, and that will prevent me from buying the next house.”

Eddie’s not alone. According to CoreLogic, at the end of 2014, 10 million (20%) of the 49.9 million residential properties with a mortgage have less than 20% equity (referred to as “under-equitied”) and 1.4 million of those have less than 5% equity (referred to as near-negative equity). According to the Zillow Negative Equity Report, “the rate of underwater homeowners was much higher among the homes with the least value.”

What can borrowers who find themselves with little or no equity to do? Here are six options.

1. Cough Up Cash

Coming up with cash to get out of an unaffordable home may make sense if it will save money in the long run. Run a “break even” analysis to find out at what point your monthly savings will exceed the money you must pay to get out. For example, let’s say Eddie would have to come to the closing table with $5,000 to get out of his current home loan. If he saves $100 a month in a different home it will take him 50 months to replenish his savings with the money he paid at closing. After that, his $100 a month savings is money in his pocket. But if he’d save $300 a month on a new home, it would take less than two years to come out ahead. (Of course, that’s a simplistic example that doesn’t take into account taxes, the cost of moving or buying a new home, etc.)

In order to reduce the money they have to pay to get out of their homes, some borrowers are opting to sell their homes themselves to save money on real estate commissions. (Ever wonder why real estate commissions are often 6% of the sales price?) This may be an option for a seller who is comfortable doing most of the work themselves and in no rush. Be sure to factor in closing costs as well. Some may be negotiable, but some won’t be.

2. Let It Go

At some point, it may make sense for a borrower to cut their losses and move on, whether that involves deed-in-lieu of foreclosure, a short sale, a bankruptcy or a combination of those.

In Eddie’s case, he has a very good reason to avoid this route. Over the past two years he’s been diligent about rebuilding his credit scores and has made significant progress, raising his credit scores anywhere from 75 to 100 points or more, depending on which credit scoring model is being used. (You can get your credit scores for free on Credit.com to see where you stand and to track your credit-building progress.)

“He’s worked so hard to improve his credit score I wouldn’t want to recommend anything that would take him in the wrong direction,” says Credit.com contributor Charles Phelan, founder of SecondMortgageAdvice.com. For example, if he stops making his mortgage payments in order to get his lender to agree to a short sale it would cause significant damage to his credit scores. Since he’s not in distress, it probably wouldn’t make sense.

For those who do think it’s time to let go, however, it’s a good idea to get professional advice as there may be both legal and tax implications to walking away from your home. Here’s a complete guide to your options if you are underwater on your home.

And there’s another option that might work: “If a seller can prove that he or she has buyer – as evidenced by an executed purchase contract with a meaningful earnest money deposit in escrow – the seller can use that as leverage to haircut the loan just enough to make the deal close. But just calling the bank and asking them without anything in writing and earnest money won’t do anything,” says Salvatore M. Buscemi, author of Making the Yield: Real Estate Hard Money Lending Uncovered. And if the lender won’t budge, “the buyer isn’t obligated to cover any shortfalls for the seller,” he warns.

3. Pay Down Debt

Paying down the principal balance on your mortgage can get you to positive equity faster. Eddie says he has taken a part-time job to bring in extra cash to do just that.

A word of caution: homeowners need to be careful not to become “house poor” by sinking all their their money into their home, and failing to leave cash available for emergencies. If that happens, it’s easy to end up in a situation where they are forced to run up credit card debt to fill in the gaps.

4. Raise the Price

Increase your home’s value and you may be able to get a higher price. “I began a renovation that will encompass the kitchen (refinishing cabinets, new range hood, new lighting, fresh paint and laminate flooring) the bathroom (a tub surround, a shower door and a new floor), and the living room (these awful white walls will soon be tan),” Eddie says. “Hopefully once these renovations are complete I will see my home value increase by at least $5,000.”

“Cosmetic improvements or little incremental improvements can start to bump the value up,” says Phelan, “because he’s not that far away from having property that’s coming back in the money.” Just be careful to focus on improvements that are likely to increase the home’s value. Be especially careful about going into debt here. If the home doesn’t sell, you’re stuck with that extra monthly payment.

Eddie’s decided it’s worth a try. “Worst case, I will have a house with three rooms renovated,” he says.

5. Rent or Be a Renter

For those who can swing it, another option may be to go ahead and purchase another home now, says Scott Sheldon, senior loan officer with Sonoma County Mortgages and a Credit.com contributor. “If you purchase the new property as an investment property you can use the projected fair market rents to purchase the property to offset the mortgage payment, typically at 75% of the gross rents.”

In other words, purchase the new home as a rental and move into it later. “He is going to be paying a premium, a higher interest rate and higher fees, to purchase the property as an investment property,” he warns. For some, though, this could be a way to snag a property at an attractive price and then move into it later.

What about renting out his current home and purchasing the other as his primary residence? “In order to convert a primary home to a rental property you have to have 30% equity in the property supported with fair market appraisal and have a tenant lined up by closing,” says Sheldon. “This way you can use the fair market rents to offset the mortgage payment of your current home, allowing you to go buy another one.”

Since Eddie is nowhere near that level of equity yet, that option is off the table for the moment. For someone considering this path, remember that becoming a landlord can be quite risky. If your tenant doesn’t pay rent or trashes your property, your costs can mount quickly.

6. Wait It Out

Finally, if none of these strategies work, simply continuing to pay the mortgage and live in the home may be the best option. However, if Eddie stays, both Sheldon and Phelan suggest he look into whether he can refinance his current loan through the Home Affordable Refinance Program (HARP). If he brings his interest rate and payment down, he’ll be able to throw more money at the principal balance. Phelan also encourages him to contact a local housing agency for a free consultation. There may be local programs that could help.

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MONEY buying a home

These States Offer the Most Help for Buying a Home

"For Sale" sign outside town home in Society Hill neighborhood, Philadelphia, Pennsylvania
Frances Roberts—Alamy Society Hill neighborhood, Philadelphia, Pennsylvania

Grants and no-interest loans are available if you know where to look.

Trying to scrounge together a down payment for a house? Your first instinct may be to hit up mom and dad. One more option you shouldn’t overlook: The state where you live.

Each of the 50 states has some sort of program to help homebuyers, especially those making their first purchase, according to mortgage Web site HSH.com, which recently compiled data and ranked the states.

The most generous state of all is Pennsylvania, where homebuyers have access to no fewer than 11 programs, including ones for first-time and repeat buyers, and even assistance for homeowners looking to make improvements. The Keystone state was followed by Wyoming and New York.

While not necessarily new, state homebuyer assistance programs may be more critical than ever. That’s because seven years after the 2008-2009 financial crises, lingering after-effects like depleted savings and an expensive rental market have made it particularly hard for 20- and 30-somethings to buy homes.

Traditionally, getting a mortgage in the strictly private market requires a down payment of 20%. Yet the Federal Housing Administration makes it possible to buy homes with as little as 3.5% down, with the caveat being that you will be required to pay mortgage insurance. The assistance offered by states — often in the form of grants or no-interest loans — can help get you to the finish line.

Not all programs are available to all would-be homeowners. As well as targeting groups like veterans and the disabled, many state programs have income caps that reduce or eliminate benefits for those making more than a certain amount. One thing you shouldn’t assume, however, is that programs only target the needy. Many are open to middle-income earners.

For instance, Pennsylvania offers closing-cost assistance up to $6,000 in the form of a no-interest 10-year loan to borrowers at participating lenders. The program is open to all borrowers regardless of income or whether it’s your first home. In addition, first-time homebuyers (and some repeat buyers) can turn the first $2,000 of their federal mortgage income tax deduction into a much more valuable tax credit. While incomes are capped, you can earn up to $97,300, or $113,500 if you have kids, and live in relatively high-cost counties like Philadelphia.

Want to find out what your state offers? The HSH directory includes links to state pages with detailed descriptions of individual programs. But you don’t have to be an expert to claim the benefits. Most assistance is arranged through private lenders. So if you think you might qualify, look for participating banks that should be able to help you enroll.

One final thing: If there isn’t much on offer in your state, you should also check Web pages of county and local governments. Even states that offer relatively little help, like Hawaii and Kansas, may fill in the gap with county level programs, according to HSH.

 

MONEY

Five Years Ago Congress Tried to Fix Wall Street. How is That Going?

U.S. President Barack Obama points to co-sponsors of the Dodd-Frank Wall Street Reform and Consumer Protection Act, U.S. Sen. Christopher Dodd and U.S. Rep. Barney Frank, after signing it into law at the Ronald Reagan Building in Washington, July 21, 2010.
Larry Downing—Reuters President Barack Obama and the sponsors of the Wall Street reform act, Sen. Christopher Dodd and U.S. Rep. Barney Frank, in Washington, July 21, 2010.

Here's how the Dodd-Frank law affects you when you bank, borrow and invest. Some parts of the law are still in limbo.

Five years ago Tuesday, in the wake of the worst financial crisis since the Great Depression, the Dodd-Frank bill to reform Wall Street became the law of the land.

The 849-page law largely operates behind the scenes, setting out who will regulate Wall Street and how the government unwinds failing banks.

But two important aspects of Dodd-Frank were aimed squarely at making borrowing and investing safer for everybody. What have these parts of the law accomplished so far? Here’s a closer look:

The Consumer Financial Protection Bureau

Beyond the bank rules, this new agency is the best-known result of the Dodd-Frank law. It was championed by Harvard law professor Elizabeth Warren, who argued that the government should do more to keep consumers’ money safe when they borrow or bank, much as the Consumer Product Safety Commission tries to protect Americans from faulty toaster ovens or power tools. At that time homeowners were facing high payments on houses they suddenly couldn’t sell, often as result of new, complex kinds of mortgages and very aggressive lending practices. So the idea of the CFPB quickly gained steam in Washington. Warren ultimately didn’t get the nod to lead the agency, but she was subsequently elected to the Senate.

The CFPB has endured some growing pains. But the bureau also appears to be making headway in its mission. So far this year, the CFPB has succeeded in writing new rules requiring mortgage lenders to verify borrows can repay loans. It’s also gone after retail banking practives, ordering Citibank to pay $700 million for allegedly deceptively marketing of credit card add-on services.

The CFPB has fielded more than 600,000 consumer complaints against financial companies ranging from mortgage lenders to debt collectors. Last month the bureau began publishing the texts of more than 7,000 of these to highlight frequent problems. Up next: an overhaul of the confusing mortgage documents home buyers get and broader rules governing overdraft fees. However, some consumer advocates are worried these may not turn out to be strict enough.

Standards for investment advisers and brokers

Dodd-Frank also included a key provision that is supposed to protect investors from getting bad advice. Here action has been slower.

The new law gave the Securities and Exchange Commission the option to impose on financial advisers something called a “fiduciary” standard. A fiduciary has a duty to act in clients’ best interests when they recommend investments like mutual funds. While that may seem like a no-brainer, in fact, today many advisers are required only to recommend investments that are “suitable” for the investor, based on factors like age and risk tolerance.

The law stopped short of saying the SEC had to adopt this standard. While the past two SEC chairmen have indicated they would like to move forward, a full-court press by Wall Street lobbyists has successfully stalled those efforts.

The fiduciary standard isn’t dead. The Labor Department has taken up the mantle and is attempting to impose the rule for people advising on investment decisions like IRA rollovers. The Obama Administration has indicated support for the DOL’s effort, but as recently as last month, Republican-led Congress moved to prevent the Labor department from implementing the rule.

MONEY home financing

3 Times to Refinance Even if You Might Move

If you can recapture the closing costs on a refinance before sell your home, you could save big.

Are you interested in refinancing your mortgage, but hesitant to do so because you’re thinking of selling your home at some point? Believe it or not, refinancing could still make sense. Here are several reasons why you might want to consider refinancing anyway.

Your Financial Circumstances Could Change

Let’s say you plan to sell your house in five to seven years. No matter how well you plan for the future financially, things happen. Job loss, illness, death — life inevitably gets in the way of your financial plans. Focus on the here and now, as long as you can financially justify refinancing your mortgage. The longer the horizon of selling the home, the more chances life has of getting in the way. If refinancing can save you money in the meantime, it may just make sense.

Because financial circumstances can change over time, for better or worse, it can be a good idea to calculate how affordable your house really is for you. This free calculator can tell you how much house you can afford.

You Could Take Advantage of Lower Interest Rates

At publishing time, 30-year mortgage rates have edged their way up and are hovering just over 4%. The new outlook for mortgage rates points to continual increases, bringing the cost of debt up. Picture this, if you don’t sell the property or if there is a market correction — and you do not refinance for whatever reason — is your current loan rate and payment something that you can afford to carry for the long haul? If you could save money or better your financial position, it is probably worth investigating. Rates are even better on jumbo mortgage loans, as more investors are pouring into this particular market niche. So if you have a big mortgage on your home, you may want to consider refinancing.

You’re Facing a Higher Rate on Your ARM or HELOC

With the increased likelihood of interest rates going up in fall 2015, the subsequent recasting of adjustable rate mortgages and home equity lines of credit will affect millions of homeowners. Most adjustable mortgage loans were tied to the London Interbank Offered Rate, which closely trails the Fed Funds Rate, the rate at which the Federal Reserve uses to control the U.S. economy. If the Federal Reserve hikes interest rates, LIBOR will soon follow suit, and any homeowners within their adjustment period will experience a higher payment or a future higher payment when their adjustable-rate loans reset.

A home equity line of credit (HELOC) works in a similar fashion to an ARM with a fixed period for the interest rate, followed by a rate reset. For a HELOC, payments are interest-only for the first 10 years of the 30-year term. After 10 years, the loan resets, and for the remaining 20 years the loan payment is principal and interest, so at the end of 30 years, the loan is paid off in full. The payment shock will happen after the first 10 years is up.

If you have a first mortgage on your home with a HELOC, it very well might make sense even if you plan to sell the home down the road, to roll the first mortgage and HELOC into one, saving money and continuing to make a manageable mortgage payment until you sell.

Mortgage Tip: If you have not taken any draws on the HELOC in the past 12 months, you may eligible for more mortgage programs as the HELOC may be considered to be what’s called “rate and term,” which allows you to refinance up to 80% of the value of the home.

You Want to Rid Yourself of This Dreaded Mortgage Cost

The one mortgage cost consumers love to hate is private mortgage insurance. PMI is an extra portion of the mortgage payment that not only drives the housing expense higher, but doesn’t do anything beneficial for the consumer. PMI benefits the bank to protect against payment default. If you can rid yourself of PMI because you have 20% or more equity in your home, or can qualify for a special mortgage loan program such as lender-paid mortgage insurance, you’ll save money. PMI can average up to several hundred dollars per month in most instances. If you have the 20% equity needed to refinance a new non-PMI loan and are credit-worthy, but simply choose to not refinance because the paperwork is too daunting, you’re throwing money away.

If you’re not sure where your credit stands, but you do want to refinance, it’s a good idea to check your credit sooner rather than later.

How Quickly Will You Begin Saving Money?

No one should refinance unless the time frame it takes to recapture the closing costs on a refinance is sooner than the time in which they plan to sell the home. The most common form of determining how quickly you can recoup your money when refinancing is performing a “cash-on-cash” calculation. For example, if your closing costs are $2,800, and you’re saving a proposed $300 per month on a refinance, that’s a nine-month recapture. Fees divided by benefit equals recapture.

If you can benefit by refinancing by payment reduction, by cashing in on equity, or by interest savings or any combination of these benefits, remortgaging your home very well could make sense. Consider the following scenario: If you can recapture the costs of the refinance in under two years, and you don’t plan to sell for five years, you’re three years ahead, and the rewards are yours, no matter what the future holds. Ultimately, weighing out the pros and cons of a possible refinance in conjunction with selling the home is a decision for you to make. A good mortgage professional should be able to suggest mortgage options in alignment with your financial goals and objectives, which can help you make the most prudent decision.

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MONEY real estate

Home Prices Continue to Rise, But For How Long?

aerial view of subdivision
David Sucsy

Home prices rose 6.3% in May, but higher interest rates loom.

More good news for those of us looking to sell homes.

Home prices climbed 6.3% in May, marking the 39th consecutive month of year-over-year gains, according to a report by CoreLogic. Prices in 10 states, including New York and Texas, plus Washington DC, hit 40-year highs.

But for owners and would-be sellers, the silver cloud has a gray lining. The rate at which prices are rising, which topped 10% in 2013, has begun to slow. Moreover, a key factor driving May’s growth, according to CoreLogic was 30-year mortgage rates, which remained below 4% during throughout the first half of the year. Low mortgage rates tend to push up home prices by making it possible for buyers to borrow more. Conversely, even a small increase in rates can add hundreds of dollars to a monthly mortgage bill.

A potential problem: Last week Freddie Mac reported 30-year mortgage rates had climbed above that threshold to 4.08%. Freddie’s chief economist, Sean Becketti, recently said that much of the recent surge in home prices was the result of buyers trying to act before they climbed even further. That’s likely to happen soon, since the Federal Reserve, which as been holding rates low since the recession has said it plans to begin slowly ratcheting them up as soon as September.

Just how big can the effect be? Real estate analyst HouseCanary recently estimated that if mortgage rates reached 6%, a third of millennials—key first-time home buyers—wouldn’t be able to afford a home at today’s rates.

For the next twelve months, CoreLogic expects a more modest increase in home prices — a gain of 5.1%. But others have sounded less optimistic.

“I’m worried about it,” Glenn Kelman, chief executive of Redfin, a real-estate brokerage recently told the Wall Street Journal. “The rates have been so low for so long that trying to persuade anyone that 4% or 4.5% is still a bargain may not be easy to do.”

 

 

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