Instead of looking at your loan as a new set of requirements, look at how to fit your new loan into your current requirements.  Stay with me here.  This is going to require you to do some actual forward planning.  But it won’t hurt much, I promise.

First, figure out when you want your home paid off.  Yes, put an actual date on it.  If your 30-year mortgage closing was in October of 2009, that means that you’ll pay the loan off more or less in October of 2039.  Sound like forever?  Okay then, shorten the time.  Put that date anywhere you like.  At this point, it doesn’t matter.

Second, now that we have a date, we have to figure out what payment pays the loan off on that date.  Alternatively, we have to figure out what lump sums at what points will pay the loan off on that date.  The earlier additional funds are paid on the principal balance, the greater the impact those funds will have.  There are excellent calculators out there that can help you do this math.  For instance, on a $200,000 loan, if you want to cut your 30-year, 5% loan down to 18 years, you pay an additional $316/mo, and there you go.  You can accomplish the same thing by putting $3500 down every year in a lump, plus $5000 right at the beginning.  And so on.

NOTE: You’re thinking this is backward.  You’re thinking that what you should do is figure out how much money you can put toward your mortgage, then see how fast it will be paid off.  And of course you can do that, but I wouldn’t.  This is not how savvy people do this calculation.  They know that if they have a target to hit, they’ll move Heaven and earth to hit it.  So they set a date, then they figure out how to arrange things to make that date.  This process makes it much more likely that the plan will work.

Third, now that we have the payoff date set and the payment calculated, let’s find out if the refi gets us to that date faster, or with less cash expended.  Using the same scenario above, the current loan already has a low interest rate, and it has already been paid for 11 months.  That’s an advantage for the current loan.  However, what happens if you refinance it to the current rate, say, 4.5%?  The principal balance after one year is about $197,000.  We’re going to add $5000 in closing costs to that, making it $202,000.  Since you’re looking to pay off, not to drop your payment, we’re going to take the payment you skip (all refinances have a payment skip built in) and pay it as a principal reduction on the new loan.  That drops our principal to $200,900.  Then we have monthly payment savings of $56/mo (from reducing the interest rate).  Doesn’t sound like much.  But over time, it is the difference-maker.  If you target your 18-year payoff, as above, you can pay $30 less per month and still hit it.  If you keep the payments at the same level, the refinanced loan pays off one year sooner and saves you $10k in interest.

And that means (in this case) that you should refinance, if your goal is to get to zero in the shortest time, with the least cash expended.

Now, you can do these calculations yourself, but I wouldn’t.  Your mortgage professional – you do have one of those, right? – can do those numbers in seconds, while you’re doing what you do for a living.

If you need to lower your payment, then this calc won’t help you.  But for those that are aggressively seeking zero, as we say, this is a handy way to figure out how best to get there.

It might be a great idea.  Can I offer one thing, as a lender in Utah (and the rules are the same everywhere), for you to think about before you go?

If you’re going to refinance or buy a house, do it before you leave your job – before you even mention to anyone that you’re thinking of doing so.  Underwriters are unkind to the self-employed (and even more unkind to those whose verifications of employment come back with “we don’t think he’s staying here very much longer”).  There are no more stated-income loans (well, essentially), so you’re going to have to document all your income, and not with bank statements, either.  It will be tax returns. And those will be verified by an IRS transcript.

You’re going to want to have a long chat with your accountant.  She’ll probably have some suggestions for ways that you can minimize your tax liability while maximizing your adjusted gross income (AGI), and you definitely want to do that.  Underwriting is going to look hard at your AGI, and there are also add-backs for depreciation and amortization, so you can get some tax relief there without hurting your qualifying income.

But the big thing is that if you are self-employed, you have to have two years of tax returns showing this before you can be qualified for a loan under FNMA/FHLMC (Fannie/Freddie) guidelines.  So it’s going to be at least 24 months, and possibly longer, before you’ll qualify, once you leave.  And don’t try to claim that you’re not self-employed just because you get a W2.  If you own more than 25% of the business, you’re self-employed no matter how you get paid.

I’m not saying you shouldn’t do it.  I love self-employment.  I’ve been self-employed for a decade.  Small businesses are the heartbeat of the economy.  But before you go, get your house in order.  Literally.

Here are a couple of clues.

First, and perhaps most importantly, it is really, really hard to sell a house when you owe more on it than you can sell it for.  If you short sell, or send in the keys, your credit will not permit you to become a buyer for a good long while.  There are some million plus people that ordinarily would be prime candidates for purchase that are in this group.  There are tens of millions – some estimates have up to 25% of the homeowners in the US – that are unwilling to trash their credit and therefore cannot sell their homes.  Not all of those people (me, for instance) are interested in moving, but a lot of them are.  That takes some ten million more people out of the market.

But if it were only that, I think the low rates would be having a significant impact.  Unfortunately, there’s something worse happening.

This is the second problem.  Let me use an analogy here.  Getting a mortgage loan is like running.  Once upon a time, say, 2006, getting a loan was a lot like running a 100-yard dash.  Practically anyone can do this.  They might not be very fast, but it is likely that all but the very most obese would be able to run 100 yards without stopping.  Roll out of bed, go to the track, run 100 yards.  Roll out of bed, go to a loan officer, get a loan for a home.  Pretty much, that was that we had four years back.

Fast forward to 2010.  Lenders are terrified.  Foreclosures are everywhere.  10% of the workforce is officially unemployed, with another 10% or more practically so.  The only hiring going on is being done by the US Census.  Homes are underwater.  It’s not a good lending environment.

Add to this something we forget, and that is that low rates are good for BORROWERS, but they suck for LENDERS.  If you’re getting 10% on your money, a higher foreclosure rate won’t kill you.  When you get 4.5%, it does.  So let’s just sum up with “lenders are skittish”.  When they get skittish, they lock down on qualifying.

Roll out of bed.  Go to the track.  Run a 10k.

Um.

Most people cannot do this.  The average Joe and Jane are unable to run 6 miles without stopping.  There is a segment of the population that can, of course.  You know which ones those are, because they are actively running, and quite regularly.  But out of the next 100 people you meet, how many could run 6 consecutive miles?  10? 5?  Not many.  Many people, say another 35-40, could be able to run a 10k in 90 days or so.  They’d have to train, but no major lifestyle changes would be necessary.  The other 50?  They would have to significantly alter their diets, start getting some limited exercise, and train up.  It would take a while.  Six months.  For some, a year.  For some, it would never be possible, whether for health reasons or sheer unwillingness to change.

And that’s where we are with mortgage loans.  There is a segment of the population that can qualify just by showing up.  It’s a small segment now, and it’s the segment that is financially savvy, very careful, saves money, made a sizable down payment and/or bought their house several years ago and never cashed out of it.  That’s 10-15% of the population.  Then there’s another 35% or so that might be able to qualify if they worked at it.  They’d have to pay down some debt, fix up the house, sell a car.  Save some money (this one is the kicker).  Many of these people have credit issues that need fixing.  But a little guidance and they can get there.

Problem is, they don’t get the guidance.  It’s hard to train for a 10k.  It hurts.  You try to do it yourself, you’ll find its quite difficult to do.  If you have a coach, someone that can tell you that those shin splints you’re getting are not going to go away without rest, and “shake it off” is not going to work, then you’re far, far more likely to get where you need to be to run your 6 miles, get your loan.

[AN ASIDE: why did the $8000 tax credit make such a difference?  Because the hardest thing for people to do is to save money.  They cannot come up with a down payment.  Inasmuch as there are only two kinds of 100% loans anymore - USDA Rural (currently out of money with 6 months left to go in the fiscal year) and VA - the $8000 credit allowed a lot of people to get a "gift" from mom and dad (or, let's face it, from Visa), put the cash down on the house, then use Uncle Sam's largesse to pay it back.  PRESTO!  100% financing.  That's gone now, and the pool of buyers is shrinking fast.  It's like having a rabid dog chase you while you're running.  Amazing what you can do in that circumstance.  But it's a short-term thing, and it has negative consequences that show up later.]

Then there are the remainder, the 50% that really need to change radically.  Those people will almost NEVER get there without help.  They need radical credit surgery, a draconian budget, major lifestyle changes.  Without a coach that really cares, and will take the time to design a program that they can stick to, then help them stick to it, they will not be able to qualify in six months to a year.  They will not ever be able to qualify.  That’s HALF of the population.

You want to know where the borrowers are?  They’re stuck in their homes that they wish they could sell.  They’re unable to qualify for loans.

So woe is me, all of us in real estate are doomed.  Or are we?  I have outlined the problem.  There is a solution.  Want to hear it?  It’s really quite simple.

Unfortunately, I have to go do some mortgage work now.  But during Mexico/South Africa tomorrow, I’ll post the answer.

If you:

1. Have not owned a home in the last 3 years (this means you have not been on the title of a primary residence)
2. Have income less than $250,000 last year
3. Are purchasing a home less than $720,000 in value
4. Have your new home under contract (this means a written agreement signed by both parties) by April 30
5. Close the purchase (this means sign the documents, fund the loan, and transfer the title into our name) by June 30

then you qualify for an $8000 tax credit on your federal taxes.  The credit is fully-refundable, meaning that you get it even if you owe no tax.  You may file it on your 2009 taxes.  You may also file your taxes now, close later, and file an amendment claiming the credit.  The rumor is that the IRS will audit everyone that takes this credit* (seems unlikely, but that’s the rumor), so be forewarned.

For the long-time homeowner tax credit:

If you:

1. Have owned your primary residence for at least 5 years
2. Have occupied that home as your primary residence for four consecutive years of the five
3. Purchase a new home (new to you, it does not have to be new new)
4. Get the new home under contract (see above) by April 30
5. Close the purchase (see above) by June 30

then you qualify for a $6500 federal tax credit.  Same terms apply as those above, except that there is actually a way to document your qualifications, and you should expect to have to.  Ask for a copy of the title report on your current home; your mortgage lender should be happy to provide that.  We are, anyway.

*It being impossible to prove a negative – how, exactly, can you prove that you have NOT been on title on a home in the last three years? – I don’t know how the IRS will be able to dispute this.  They will surely ask for a credit report, and it would be a really good thing if there were no active mortgages on it in the last three years.  But if you own a home outright, it’s going to be complicated for the IRS to prove that, especially if you have some sort of rent that you claim on your taxes.  Not encouraging anyone to cheat, here; I’m just sayin’.

This is a warning for those of you that do business in Utah County.  Expect your values to be low.  We have not noted this problem in Salt Lake County, so at the moment we think it’s a phenomenon restricted to Utah County and southern environs.

Here’s our take on why this is: everyone knows that the $8000 first-time homebuyer credit is expiring in 90 days.  In Utah County, with its two large universities spewing forth about 10,000 graduates a year, there is an abnormally large population of first-time homebuyers.  That means that for the next little bit, that cohort, being especially active, is going to have disproportionate impact on home values.  When shopping for the thousands of properties out there, which is going to be most attractive to you: $198,000 or $204,000?  It’s human nature.  If the houses are even reasonably similar, the lower price is going to win, but here you also have the famous $1.99 effect working against you.

One of our most recent appraisals reaffirms this rather directly.  The house appraised for $203,000.  There were two comps in the low $200k range, each had been on the market for 300 days or longer.  There were 2 comps in the high $190k range, and their time on market was 42 days and SEVEN days.  The stuff that’s selling, people, is the stuff right under the K, at $295k and $195k, so if your house wants to appraise at $310k or at $210k, you might find that you’re in trouble.

Just a word to the wise.

Q: Why do I need to provide my social security number and birthday?  I’m not sure I want to give out that information.

A: Good Morning!

Let me give you a bit better idea what the approval and discovery process is for your loan.  There are, of course, a number of loan programs we can access.  Based on the info you provided already, we can eliminate most of those, and we’re left with three or four that are possibilities.

The closer we get to choosing a program, the more information we need, and the more specific that information has to be.  When we get to where we are now, choosing one loan out of the entire set of options, we are essentially underwriting the file as we go.  The Desktop Underwriter system is the same framework that the lender will use in underwriting the file, which has great advantages, but one of the disadvantages is that it requires mountains of specific data in order to function.  It is making very fine calculations about income, assets, and credit, and without the exact numbers, it doesn’t work.  We provide the income and asset numbers – though we will later have to verify to a human that those numbers are accurate – but the credit numbers it gets for itself.  To get those, it requires social security numbers and birthdays.

When it’s finished, we can have confidence that we have a real approval on a real loan that will eventually make it to closing.  But until we get the data, we can’t proceed from here.

Today, here’s this from the San Francisco Fed:

In the long-run, however, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes. For many U.S. households, current debt levels appear too high, as evidenced by the sharp rise in delinquencies and foreclosures in recent years. To achieve a sustainable level of debt relative to income, households may need to undergo a prolonged period of deleveraging, whereby debt is reduced and saving is increased.

Bingo.

Yes, I know that bankruptcy judges re-write credit card debt all the time.  This is the argument that Elizabeth Warren, the chief TARP watchdog, used yesterday in her statements to Congress.  Perhaps someone ought to point out to Ms. Warrent that credit card interest rates are in the 20% range, and ask her to consider how much of that high interest is due to the additional risk credit-card issuers have to take on because bankruptcy judges can re-write their contracts with their borrowers any time they like.

The economy functions based on trust.  No trust, no economy.  If I don’t trust the guy I’m dealing with, then I have to borrow that trust from being able to count on stable financial arrangements, like contracts, being enforceable as written.  If I can’t trust those contracts, either, then I’m just not going to do business.  What’s the point?  I could be taken advantage of at any time.

Don’t want to pay me back if I lend you money?  Hey, no biggie.  Let the judge just write off your debt for you.  Why would a lender be willing to lend under those circumstances?

And the answer is – very good, you there in the back – they won’t.  Or, more accurately, they will, but they will cover their butts by raising interest rates so they can make sure that those of us that WILL pay them back can cover their losses on the ones that won’t.  This is basic economics.

Then, when lenders raise their rates, the government can step in again, this time to stop rate-gouging, or whatever, and within a fairly short period of time the government will be the nation’s banking system as well.  And won’t that be better for everyone?

Once again, the government is contemplating action that will benefit a few people at the expense of everyone else.  But then, this is what large, centralized bureaucracies do.  It gives them life, because they never, ever run out of problems to “solve”.

Count me out.  Kudos to the Republicans (I can’t hardly even write this sentence) and the couple of Democrats that could see this, and refuse to pass the bill with the cramdowns in it.

First, a definition: a “point” is 1% of the loan amount, also rendered as 100 basis points, or bps.

Before we talk about “paying points”, we ought to divide the costs of the loan from the costs of the rate for the loan. There are two sets of costs, and they don’t really have very much to do with each other. This is, I think, a major point of confusion.

Cost of the loan: To borrow $200,000 costs X. X varies a bit from lender to lender, just like the cost of grapes from grocery store to grocery store. Do not be confused here by “no-cost refinances”; the cost is still there, however you hide it, just as grapes cost money even if someone happens to be giving them away.

Cost of the rate: Different rates cost different amounts, just as faster cars cost more than slower ones.

Keep those two principles in mind as we go through an example.

Jane wants to get a $200,000 loan. This is going to cost Jane $4000. Now Jane has to decide what rate she wants on the money. People call up all the time and say “what are rates today”, which is exactly like calling a car dealership and asking “how fast are your cars?” Which car? What engine? How fast do you want them to be?

Lenders sell their money to brokers, and the price sheet for that money is called a rate sheet. On that sheet is the cost of any rate Jane could want. At lower rates, the lender will charge the broker, and at higher rates the lender will pay the broker. Want an example? Here you go:

The rate where the broker makes nothing from the lender and pays nothing   to the lender is called par. The closest to par on this sheet is 4.75%, in red there. As you see, the broker is actually making a couple bucks at that rate – .162 x the loan amount, to be exact. Usually, a broker will quote you a rate higher than par, so he can make some money on the margin.

This may look complicated, but it isn’t. Think of it like a car dealership. There’s the base cost, and then the sales price, which is the base plus the dealer markup. As you would expect, the better car you get, the more it costs. And just like at a dealership, a lender can sell you a crappy car for the same price as a good one, and pocket the difference. This is why, unless you have a dealer you trust, you always compare prices, and the same should absolutely hold true for mortgage brokers.

So in our example, the wholesale rate is 4.75%. The lender quotes Jane 5% as the rate for her loan. If Jane wants a better rate, say, 4.5%, it will cost .248 (times the loan amount) – this is called paying points. If she wants 5.5%, Jane should get back a chunk of money to defray her loan costs.

In other words, JANE should decide what her rate is, not her broker. The lower she wants it, the more it will cost. The higher she can stand it, the less it will cost, to the point that at some rates, the rate will pay her, and eliminate some of the cost of the loan.

Thus:

And that’s how it works. It works this way for every lender, no matter what they tell you.

Now that you know the super double-secret mortgage code, here’s the fastest way to use this knowledge to get a good deal: get three Good Faith Estimates (GFEs), one for each rate you pick. The difference in closing costs will tell you how much of the fees are loan fees and how much are rate fees. Then you can decide whether you want a great rate and more fees, or great fees and a higher rate.

See? It’s not rocket science. But I guess I wouldn’t call it simple, either.