I bought a home in California in February 2006 for $400,000. I financed with a 10-year interest-only mortgage with a rate of 6 percent and a 15-year equity loan with a rate of 9¼ percent. I would like to make extra monthly principal payments on one of the two loans but don’t know which one it would make more sense to pay extra on. Please advise.

Figure out if either loan has a prepayment penalty associated with additional principal payments. It’s possible that, even for loans with a prepayment penalty, you can make some additional principal payments and it won’t trigger the penalty. An extra $100 per month, for example, may not trigger a penalty. With no penalty to consider, it’s a slam-dunk to pay down the loan with the higher interest rate. Even though the lower rate loan is interest-only, making additional principal payments saves you the interest expense on that payment. You’d rather save 9¼ percent on the additional principal than 6 percent. (more…)

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For Bob and Judy Bartlett, a 4,700-square-foot home on two acres in Durham, N.C., no longer made much sense after their two children had long since moved out. Meanwhile, the retirees were spending more time at a second, lakefront home. So several years ago, they began thinking about selling their primary house and buying something smaller. But it wasn’t easy to make the break; the couple had called the Durham property home for three decades and were unhappy about the prospect of moving away from close friends.

For many older adults, walking away from a home is among the most difficult decisions in later life — even when a move makes economic sense. In a recent survey of retirees, Fidelity Investments’ Fidelity Research Institute found that 43% didn’t want to cash out the equity in their home because they wanted to live where they are “comfortable.” An additional 9% explicitly cited “sentimental” reasons. “There are big emotional barriers to selling…and those barriers appear to grow as you age,” says Guy Patton, who heads the Fidelity group.
The Fidelity Research Institute considered the outcomes from seven different strategies for a hypothetical 75-year-old couple who own a $400,000 home and need to pull out cash. The options included major steps like selling the home and buying a smaller house, as well as less-dramatic moves, such as taking out a reverse mortgage. Fidelity calculated that the couple could pull anywhere from $18,000 to $307,000 out of their home over the remainder of their lives depending on the strategy. (more…)

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While the subprime lending industry’s woes have kicked up dust in the past few weeks, observers say the problems underlying the bad news have been percolating for much longer. In December, the Washington, D.C.-based Mortgage Bankers Association said 12.6 percent of subprime mortgages were 30 or more days delinquent in the quarter ending in September, compared with 4.7 percent of all mortgages. That was an increase from a 10.8 percent delinquency rate for the third quarter of 2005.

A resurgence in the housing market and lower interest rates would certainly help as well, but that assumes the industry can recover quickly enough to keep banks interested in underwriting people with questionable credit. “If the investment banks and larger institutional lenders are afraid to lend … the money to underwrite subprime loans on a short term basis, that’s the concern we have with these companies,” said Morningstar analyst Ryan Lentell. “If they can’t finance new loans, that would have a detrimental effect. That’s what has led a lot of these companies to leave the business.” Some lenders are trying to show they still have control over the situation, saying they’re tightening credit requirements or are selling off the worst of their loans. They say the loans sold in 2006 should be the bottom of the barrel and the ones sold in 2007 will be much more reliable. (more…)

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If you’re in the market for a new home, you figure it must be less expensive to buy now than when rates go up even further, assuming housing prices stay strong in the near term, something economists expect will happen. That may be the only thing you can be sure about. But finding the best type of mortgage for your situation can feel a little like finding the perfect ecru in a sea of beige. It doesn’t have to be that way. If you ask yourself the right questions, you at least can narrow your search to the best category of mortgage for which you need to comparison shop.

Keep in mind, your mortgage payment is only part of what you’ll pay to live in your home. You also should budget for furniture, your house’s upkeep and the general expenses of life (like, say, food). A 30-year mortgage will have a lower monthly payment and a higher interest rate than a 15-year mortgage. So you’ll have a smaller monthly obligation but you’ll pay more for your house over time because you’re paying it off with interest for a longer period. Conversely, a 15-year mortgage will have a higher monthly payment and a lower interest rate so you’ll pay less for your house because you’re paying it off in a shorter period. “For most home buyers, especially first-time buyers, taking a 15-year (or 20-year) mortgage is out of the question,” said Keith Gumbinger, vice president for mortgage tracker HSH Associates. The higher monthly payments are often too much to handle for these types of buyers. (more…)

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New legislation on Capitol Hill seeks to curb an increasingly popular mortgage practice: providing home loans to applicants using their Individual Taxpayer Identification Numbers (ITIN), in lieu of Social Security numbers. ITINs are issued by the Internal Revenue Service to immigrant workers who do not qualify for Social Security numbers for use when they report their income and pay federal taxes.

Dozens of banks around the country have begun offering home mortgages to undocumented immigrants using ITINs, but their programs generally have been low-key and small. Bank of America stirred controversy earlier this month when it announced a pilot program in Los Angeles to provide credit cards to resident immigrants who lack Social Security numbers but have ITINs. Some critics charged that the bank was seeking to profit by helping illegal immigrants who should be deported or prosecuted, not extended consumer credit. Bank of America said its program is legal and may be rolled out nationwide if the pilot is successful. (more…)

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Ms. Mauro, now 32, still remembers the moment in 2002 when, sitting in her cube at a New York City communications agency, she tapped out an email to me at The Wall Street Journal lamenting the “pre mid-life crisis that afflicts a tremendous number of people in the 28-35 age range.” Working 12-hour days to pay the rent on their Manhattan apartment, she and her husband of two years, Marc Hineman, a trading-desk manager, had “all kinds of questions” about how they would afford to buy a house and raise a family, she wrote.

“It wasn’t until Marc and I took a huge leap of faith that things started to fall into place for us. About 10 of my friends had moved to Charlotte, N.C., after college. They said, ‘We’re getting out of New York.’ On a visit there in 2005, we saw a new house in a new subdivision that was under construction. It was priced attractively, and we took the leap and bought it. We made plans to move there with Ava — before my husband even got a job in Charlotte. Talk about having faith! My grandfather said, ‘You guys are nuts. You bought a house and your husband doesn’t even have a job there? What are you doing?’ But we felt we had to step out of our comfort zone a little and say, ‘What if?’

“We knew we might have to have a commuter marriage temporarily, but that was a risk we were both prepared to take. Luckily, my husband got a job in Charlotte the day after we closed on the house. The power of positive thinking has a lot to do with that. Sometimes you just have a vision — you know, ‘This is right and we’re going to find a way to make it work.’ (more…)

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While some of the nation’s leading economists are optimistic for an improved housing outlook during the second half of 2007, Wall Street’s capital markets researchers — the money guys — are concerned hundreds of thousands of home loan borrowers could be in default before the summer months arrive. Chris Flanagan, managing director and head of global research for JP Morgan Securities, said approximately 35 percent of all subprime mortgage borrowers could have a difficult time meeting their loan obligations when their adjustable-rate mortgages hit their first adjustment period.

The amount of money at stake could be $200 billion, with as many as 500,000 to 1 million consumers in potential jeopardy. Many of the loans were “stated income” or low-documentation loans, which involved a relatively low-interest-rate first mortgage and a simultaneous, or “silent second,” mortgage, which together equaled the entire value of the property. In the mortgage business, this is known as a 100 percent loan-to-value-ratio loan. Frank Nothaft, chief economist for mortgage giant Freddie Mac, said while subprime borrowers typically have a default rate eight to 10 times greater than conforming borrowers, he was more suspicious of the huge share of speculators/investors than owner-occupants. “For an owner-occupant to go into default, you usually have to have a trigger event like unemployment or serious illness in the family,” Nothaft said. (more…)

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The meltdown in the subprime mortgage sector continued last week, raising concerns that home buyers with impaired credit will face higher rates and far fewer options in the months ahead. Following the December bankruptcy filing of Ownit Mortgage Solutions, a major subprime lender, a steady stream of mortgage firms have either announced cutbacks in subprime production, quarterly losses, or sharply-elevated delinquency rates. Some major banks, such as Washington Mutual, have announced staff reductions in subprime and moved to tighten underwriting rules.

Subprime mortgage originations now account for 20 percent of all new loans, up from a tiny sliver a decade ago. Roughly 45 percent of all subprime borrowers use their loans to buy a home, according to Michael Fratantoni, an economist with the Mortgage Bankers Association, and 25 percent of those purchasers are buying their first home. Any major flight of bond investors from the subprime mortgage securities market, in other words, would have negative repercussions not only lenders and borrowers, but on realty agents and builders as well. The tightening of standards already underway is reducing the availability of “piggyback” mortgages-combined first lien and second lien loan programs that cut downpayment requirements to 5 percent or zero with no private mortgage insurance. The cutbacks in investor appetite are also reducing opportunities for home buyers with spotty credit histories to use limited-documentation and stated-income mortgage financing, sometimes called “liar loans” in the industry. Mortgage wholesalers also report sharply-reduced investor appetites for loans that “layer” risk-combining, for example, low FICO scores with high debt-to-income ratios. (more…)

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