April's 15 (or so) Ways to Financial Literacy

What makes April special? Let us count the ways:

April Fool’s Day
Income Tax Day
My Brother’s Birthday
National Frog Month
National Autism Month
No Housework Day
International Guitar Month

. . . and more!

It’s also Financial Literacy Month. Even with 2 days left, it’s worth it to take a minute and get a little education. (And it still counts even if you wait until May!)

Every couple years, the Jump$tart Coalition issues a "personal finance" exam to high school seniors.

The test highlights the importance of personal financial literacy among America's youth and comes at an especially important juncture.

In the last test, 12th graders answered 48.3% correct on average and posted the lowest scores since Jump$tart first issued the test in 1996.

Can you do better? Find out by taking the complete Jump$tart Personal Financial Literacy test for yourself online.

The average adult scores 68%.

There are a great many other links concerning financial literacy and personal finance. Here are a few of my favorites:

Credit.com
The Official Free Annual Credit Report
Credit Info Center
You Need a Budget
truecredit.com
myfico.com
Free Money Finance

Get clicking and get reading . . . the health of your wallet depends on it!

Simple Real Estate Definitions: PITI

Most homeowners make four housing-related payments each month:

• Principal on a mortgage


• Interest on a mortgage


• Taxes on the real estate owned


• Insurance for the real estate owned

Collectively, these payments are known by the acronym PITI but don't let it fool you -- a homeowner's monthly expenses are still called PITI even if one or more of the elements doesn't apply.

For example, a homeowner with an interest only mortgage does not pay principal each month.

Additionally, condo owners typically don't pay homeowners insurance -- they pay a monthly assessment and/or maintenance fees to an association instead.

But regardless for what it stands, determining a comfortable PITI should be every homeowner's starting point when looking for a new home. PITI is the monthly housing cost, after all, and by knowing what fits in your budget, it's a lot easier to compare homes and their related expenses.

It's certainly better than asking the bank "how much home can I afford" -- all that's going to tell you is the P and the I. As a homeowner, you need to know all four.

PITI is most commonly pronounced pee-eye-tee-eye.

(Image courtesy: Contractor-Books.com)

Mirror, Mirror . . . Who’s the Best? (Hint: It’s Not Suze)

This morning while paying bills on-line, I had CNNMoney.com’s video clips playing in the background. When I heard a piece on “who do you trust and what makes a good financial advisor” with Suze Orman, I was reminded again of how important it is when dealing with your finances to find someone who really knows you.

“The best advisor,” Suze said, “is the one you see looking back at you when you look in the mirror.”

No one knows your habits, your strengths, your limits and your risk profile better than you. And no one, but no one, cares more about your money than you.

Whatever you may think of Suze Orman and her advice to the masses, it’s hard to argue the point she made here, and it serves as a great rule of thumb whether you’re talking about credit building, financial planning, mortgage financing, insurance plans or whatever.

While we all know ourselves better than anyone else does, it’s unlikely we know financial planning, mortgage financing or how to reduce and eliminate debt as well as an experienced professional. That’s why it’s essential to find someone technically sharp and adept at dealing with the problem you are trying to solve.

More important, however, is finding someone willing to get to know you--your priorities, your needs and where you are in your life—if not as well as you do yourself, as close as they can come.

In conversations with prospective clients, I sometimes worry about them feeling they are in the interrogation room when 7 out of 10 questions have nothing to do with their current financing or interest rate.

It comes from my commitment to knowing what they really need before suggesting loan programs, rates and payment scenarios. In fact, it’s my way of determining whether we are truly a good fit in the first place.

So when you are searching for your next loan, make sure you’re listening for the way you’re being listened to. After all, we have to look in the mirror every morning, too.

And some of us actually care about who we see looking back.

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What You Need To Know About Mortgage Rate Quotes

Home buyers are often surprised when a "rate quote" from the morning won't be honored in the afternoon. Sometimes, the assumption is that the loan officer is just being sneaky.

This couldn't be less true.

Rate quotes change in the middle of the day because mortgage markets are in constant flux. All day, every day -- just like stocks.

And like stocks, a mortgage bond's morning price will likely "expire" before the day ends.

One way to visualize this is to look at today's Microsoft's stock price:
At 9:30 A.M. ET, the price was $28.46
At 9:38 A.M. ET, the price was $28.72

Over the course of 8 minutes, the stock rose by 26 cents and the "9:30 A.M. quote" was no longer available. For example, you couldn't call your stock broker at 9:38 A.M. and place an order for the 9:30 A.M. price because the price had changed.

Mortgage rates behave the same way.

Throughout 2008, mortgage rates have changed mid-day more frequently than in the past. On more than half the days, morning rate quotes were no longer valid in the afternoon. And, on at least 5 separate occasions, rates changed 4 times in just one day.

It's not typical, but it does happen.

So, if you're talking with your loan officer in the morning about a rate quote, be prepared to do all of your shopping in a compacted amount of time, and then be ready to make a decision.

By the time the afternoon rolls around, after all, that rate quote may well be expired.

If That Home Is A "Good Buy", Make Your Offer Quickly

Each month, University of Michigan researcher survey the U.S. population about their thoughts on the economy -- is it improving, it is worsening, is it staying the same.

May's consumer confidence survey registered it's lowest reading since 1980.

Given the recent headlines, that shouldn't be surprising:

• Unemployment is spiking
• Gas prices are at an all-time high
• Housing markets keep getting bad press

But despite all of that, the American Consumer appears to be taking the economy's hiccups in stride.

For example, last month, retailers around the country reported rising sales levels that doubled what economists expected. This isn't supposed to happen when consumer confidence is falling as fast as it is, right?

But, a closer look at the retail sales data shows that discount retailers such as Target and Wal-Mart led the charge higher. So, although consumers are feeling worse about the economy, they're still spending money.

And when they do, they look for value.

For home buyers, this should sound familiar because it's every real estate agent's mantra right now -- "there's a lot of good values to be had." It's why some homes are getting multiple offers within days while other languish on the market for months.

The difference lies in the perceived value of the home.

Home buyers are actively looking for "good buys" and when they find them, they're quick to make an offer. It's why the housing market is showing pockets of strength despite low consumer confidence levels overall -- everyone's snapping up the bargains.

(Image Courtesy: Wall Street Journal Online)

Guess Which 4 States Accounted For More Than 50 Percent Of May 2008 Foreclosures

RealtyTrac released its most recent foreclosure statistics and if you only read the headlines, you think the entire country was on the verge of losing its homes.

The underlying data tells a different story, however.

More than half of the country's foreclosure activity in May 2008 was tied to just 4 states in the union:
California (28 percent)
Florida (14 percent)
Arizona (5 percent)
Michigan (5 percent)

In other words, the majority of mortgage defaults are coming from a small minority of states.

See, between 2002 and 2006, California, Florida and Arizona were very popular with real estate speculators, many of whom over-extended themselves on real estate; and Michigan's economy has been decimated by job losses in the auto and manufacturing industries.

In addition, these 4 states are among the nation's most populous. It makes sense that they are distorting the national statistics.

On a local level, the news is not so grim. Not only did 20 states show a reduction in monthly foreclosure activity, but many more fell below the national foreclosure average. That type of story, though, doesn't make for good headlines, is all.

Search the full May 2008 foreclosure report for yourself on RealtyTrac's Web site.

Cancel Your PMI Before It's Too Late To Cancel It

When homeowners borrow more than 80 percent of a home's value, mortgage lenders often require a corresponding insurance policy called Private Mortgage Insurance.

PMI provides a cash payment to lenders in the event of a homeowner defaults.

But because PMI policies are designed for high LTV loans only, they usually contain cancellation options for when home equity percentages reach 20 percent or more.

In other words, PMI can be temporary.

There is a caveat, however: Lenders will not automatically remove mortgage insurance when LTV falls below 80 percent -- the onus is on the homeowner to initiate a formal request.

Earlier this decade -- when home values were soaring -- many PMI-paying homeowners recognized their equity growth and successfully petitioned out from PMI.

Many other homeowners, however, forgot.

So today, as home values stagnate or depress in different U.S. markets, homeowners eligible for cancellation may find that both their home equity and their right to cancel have vanished.

PMI helps makes high LTV loans possible, but there's no reason to pay it longer than necessary. If your current mortgage requires PMI payments and your loan-to-value lurks below 80 percent, contact your mortgage lender to start the PMI cancellation process.

Or, if you're unsure about your home's value and the 80 percent threshold, call or email me anytime and I can help you connect with somebody to give you the answers you need.

Is The Federal Reserve Telegraphing Its Next Rate Hike?

The Federal Reserve is stumping hard on inflation this week, creating speculation that Fed Funds Rate hikes may be in store for later this month.

This is a counter-intuitive development because increases to the Fed Funds Rate are typically associated with periods of rapid economic expansion.

Lately, we've seen anything but.

Witness:

• High levels of unemployment
• Reduced consumer spending
• Falling consumer confidence

Despite the downbeat news, though, multiple Fed members are taking a hard line on inflation, adding that a strong dollar support the economy and help to offset high oil prices.

A rate hike could help accomplish that goal.

If the Federal Reserve votes to raise the Fed Funds Rate, Prime Rate will rise in tandem. Prime Rate is the basis of interest rates for credit cards and home equity credit lines. Holders of each debt type, therefore, would face higher monthly payments.

Mortgage rates, by contrast, would be expected to fall, but how the market would actually react to a rate hike is anyone's guess.

The Federal Reserve meets 8 times annually. Its next meeting is a two-day affair beginning June 24.

(Image courtesy: The New York Times)

Why Your "Dear Seller" Letter May Be Met With A "Dear John"

Several years ago, when homes sometimes sold within hours, prospective buyers often drafted "Dear Seller" letters, an accompanying personal note to help purchase offers stand out in a multiple-bid situation.

Today, some buyers are writing a different kind of letter to win a seller's favor -- a letter explaining why the buyer's offer is so far below the seller's asking price.

You can't blame buyers for trying to explain themselves, but after reading this tongue-in-cheek piece from The New York Times, it's clear that real estate negotiations between a buyer and a seller are simply a matter of perspective.

Whereas a buyer may use Fear to get his price, a seller may counter with Hope.

The article drafts a buyer letter and a suggested seller response. Both letters are powerful and persuasive, and hint at the real truth in real estate -- that reaching a purchase price agreement is only as difficult as finding a buyer and a seller committed to working together.

And that match happens every day in every city in America -- even the ones in which the housing market is reeling the most.

It's been said that a listing price is just a starting point for conversation, but if that conversation starts with "Dear Seller" and the seller is feeling hopeful, don't be surprised if you get a Dear John in response.

(Image source: The New York Times)

Why It's Good News For Home Buyers When Unemployment Rates Surge

On the first Friday of every month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.

More commonly called the "jobs report", today's 2-page analysis of May 2008 shows that the economy shed jobs and that unemployment surged.

This is terrific news for home affordability.

That may sound counter-intuitive, so let's dig deeper into the jobs report and what it really tells us about the U.S. economy.

Over the last year, rising food and energy costs have chipped away at household budgets, leaving Americans with two basic choices:

Spend less on discretionary items like vacations and dining out
Demand more pay at work so they can vacation and dine out
If Americans choose to spend less, the economy eventually slows down because two-thirds of it is tied to Consumer Spending. This is anti-inflationary.

But, if Americans demand pay raises instead, businesses eventually pass those higher wage costs back to consumers in the form of higher prices.

This is called a "wage-price spiral" and it's very inflationary.

So, because today's jobs report showed unemployment surging by a half-percent to 5.5%, Americans really have no choice but to follow the "Spend Less" path -- they're not in a position to demand more pay at work.

Today's jobs data is good for home affordability because it relieves inflationary pressures in the economy and when inflation is falling, mortgage rates tend to do the same.

Better mortgage rates mean less expensive housing payments.

Source
Employment Situation Summary
BLS.gov, June 6, 2008

(Image courtesy: Wall Street Journal)

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160 Million “We’re So Sorry’s” and One Big Opportunity

“We’re so sorry, Uncle Albert

We’re so sorry if we caused you any pain

We’re so sorry, Uncle Albert

But there’s no one left at home

And I believe I’m gonna rain”

Can you say “We’re so sorry” 160 times? And do it again a million times over?

That’s exactly what one credit bureau promised last week.

In the largest class action settlement in US history, credit reporting giant TransUnion agreed to a preliminary settlement in Chicago federal court Wednesday that would provide 160 million Americans free access to their credit scores and six months of credit monitoring with no strings attached.

“This is astonishing,” said Ken McEldowney, executive director of Consumer Action, a national advocacy group based in San Francisco. “It’s everything we tell consumers that they need to find out if they have problems with their credit. They are getting information on how to improve it and information about whether they are creditworthy,” said McEldowney.

The settlement entitles consumers to six months of a TransUnion monitoring service—the one I use myself—that allows them access to information in their credit reports as well as their current scores at any time.

And for those of us who love being lazy, it even notifies subscribers by email of significant changes to their files, including reports of late payments or accounts opened in their names. TransUnion normally sells the service for $59.75 or more—meaning the settlement is worth as much as $10 billion.

How did borrowers get so lucky? Plaintiffs in the case alleged that anyone who had a credit file maintained by TransUnion (nearly half the U.S. population) were inundated with junk mail from marketers who bought data from the credit reporting giant. Federal law prohibits the sale of a person’s private credit information except under certain circumstances, such as when he or she has applied for a loan. The plaintiffs argued TransUnion crossed the line in the sale of private information.

The settlement represents a big opportunity to both borrowers and TransUnion. By filing a claim under the lawsuit, eligible plaintiffs receive 6 to 9 months of free access to one of the industry’s premier credit monitoring services. TransUnion offers a wide range of credit monitoring and educational resources.

The settlement represents a boon to TransUnion in that the company does not admit to any wrongdoing and at the same time offers a free trial to 160 million potential customers. Six months is more than enough time to get a handle on your credit profile, and it’s likely that after a free trial lasting 6 to 9 months, many will continue to subscribe to the company’s service.

Anyone who had any type of loan account between January 1987 and last Wednesday (and there must be some sort of prize for anyone who does not fit in that category!) is eligible to file a claim under the settlement. Claims can be filed starting June 16^th at the settlement web site https://www.listclassaction.com/ or by calling 866-416-3470.

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(Source: Chicago Tribune, May 31, 2008, Kathy Kristof)

The Proper Way To Give And Receive Gifts For Downpayments

When a home buyer is gifted cash for a downpayment, there is a right way and a wrong way to receive the funds.

The right way includes:

• Completing an acceptable gift letter
• Documenting the withdrawal of funds with receipts
• Documenting the deposit of funds with receipts

The wrong way is to ignore the rules that mortgage lenders clearly spell out for you.

Mortgage lenders watch gifts closely because they want to make sure that the "gift" is not really a loan-in-disguise. If it's a loan, the total dollar amount must be counted against the home's total loan-to-value and higher loan-to-values typically increase lender risk.

If it's a gift, a signed and dated gift letter should accompany the home loan application. An example:

I am the [relationship to recipient] of [name of recipient] and this letter serves as evidence that I am gifting [name of recipient] [amount of gift] to be used for the purchase of the home at [complete address of property].

This is a gift -- not a loan -- and there is no expectation of repayment.

Signed, [Signature of donor]

For additional evidence that the gift is legitimate, the recipient should make sure that deposited funds are not commingled at the bank. If the gift is for $12,000, for example, then the recipient's bank deposit receipt should indicate that a $12,000 deposit was made.

There may be legal and tax liabilities when gifting funds between family members so if you're unsure about how donating or receiving a gift may impact you, call or email me. If I can't answer your question, I can certainly refer you to somebody that can.

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Did You Know : The Lifespan Of A Mortgage Approval

Mortgage approvals don't last forever.

A conforming mortgage approval from Fannie Mae or Freddie Mac has a shelf-life of 120 days.

After 120 days, the approval expires and a mortgage applicant must re-submit his application for consideration.

In addition, a mortgage approval can "expire" within the 120-day period for other reasons:

-- Change of job status or income
-- Newly-acquired monthly debt (i.e. car payment, student loan)
-- Change in asset levels

If your current mortgage approval (or pre-approval) is dated prior to February 3, 2008, it is now expired and your new approval may be subject to Fannie Mae's new, more strict, underwriting guidelines.

Guess What Number Could Doom Your Loan Now (Hint: It’s Not Your Credit Score)

“I’m thinking of a number . . .”

Unless you’ve been living under a rock for the past 10 years, you've seen the ubiquitous FreeCredit.com commercial featuring a too-smart-for-his-own-good looking guy in a director’s chair and those 5 famous words.

In fact, I apologize if you’ve somehow finally succeeded in banishing this annoying phrase from your mind only to be reminded again by this post.

As annoying as this guy was, the commercial helped wake America up to the importance of the mysterious 3 digit number known as your credit score. Without the right number, your chances of qualifying for favorable interest rates—or qualifying for a mortgage at all—are often doomed from the start.

These days, however, there is a new number wreaking havoc with borrower’s attempts at obtaining mortgage financing. And unlike the credit score, there is virtually nothing borrowers can do to change it when it doesn’t come in at the right level.

The new number killing otherwise successful loan applications today? Appraisal value.

Several factors, all a function of the collapse of the mortgage market and subsequent declining home sales, have converged to give appraisal value an increasingly prominent role in loan approvals:

Declining markets

A new “declining market” designation has meant tighter lending guidelines for certain properties, reducing the maximum loan-to-value allowed on a given loan by as much as 5%. A loan originally approved for $285,000 on a $300,000 property in a declining market is now limited to $270,000—a $15,000 reduction in funds available to the borrower.

Tougher appraisal review

Appraisal reviews by lenders have resulted in greater scrutiny of appraisal reports. After reviewing an appraisal, the lender’s market review “experts” often order values to be reduced by tens of thousands of dollars before approving a loan. A recent legal settlement regarding mortgage broker-appraiser relationships will place even further restrictions on appraisal practices.

Foreclosure and short sales

Perhaps most important has been the rise in housing inventories, foreclosures and short sales. Slow sales and increased supply places downward pressure on home prices, while below-market sales resulting from foreclosure and short sale prices compound the pressure.

While it is illegal for loan officers to consult with or advise appraisers concerning home valuation, some lenders are setting up “valuation desks” independent of their appraiser to conduct preliminary searches of recent comparable sales data before ordering an appraisal. By considering whether recent comparable sales figures are likely to support the value needed for a loan to work, borrowers can better determine whether it’s worth it to order and pay for an appraisal for a property that may come up short in value.

Short of picking up and moving a house to a neighborhood that is retaining its values, there is little a borrower can do to compensate for the new threat to qualifying.

But judging from the number of borrowers stopped in their tracks by unfavorable appraisal values, the grating memory “I’m thinking of a number” conjures may help keep expectations realistic, and could even help save a few hundred dollars when the numbers don’t add up.

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The Impact of Falling Oil Prices on Mortgage Rates

Falling oil prices is one reason why mortgage rates are dropping for the first time in 6 days.

Oil is off $9 per barrel from last week, a shift that correlates to $0.23 per gallon of unleaded gas, roughly.

This drop is good news for both home buyers and "rate shoppers" -- high gas prices is partly to blame for rising mortgage rates this week.

The connection between oil prices and mortgage rates is not necessarily clear, but it goes like this:

• High oil prices are linked to inflation
• Inflation devalues the U.S. dollar
• Mortgage bond repayments are made in U.S. dollars

Therefore, inflation devalues the payments made on mortgage bonds and investors typically avoid products with decreasing returns.

So, as demand for mortgage bonds fall, prices fall, too. This is basic Supply and Demand and many people "get" how that relationship works. But what is not so well known is that when the price of a bond falls, its corresponding interest rate goes up.

The reverse is true, too, and that's what we're seeing today. Because oil prices are falling, it's reducing one of the many inflationary pressures on the economy and mortgage bonds are suddenly more attractive to investors.

Higher demand means higher prices and lower yields. Mortgages rates are benefiting from the action this morning -- they're down about 0.125 percent across the board.

(Image courtesy: The Wall Street Journal)

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