So you might think: Foreclosure. That will never happen to me. No way. But lurking in millions of mailboxes each month is a financial time bomb, a threat to homeownership never before seen in this country.

For the past few years the nation has been flooded with forms of financing which allow buyers to purchase homes that were once unaffordable. The essential deal is this: You buy now, pay less than you should each month and then within five years sell at a big profit or refinance.

Truth is, it’s been a great ride. Many people have followed the formula and made a ton of money. But like musical chairs, you just know that a bunch of people will be caught in the wrong place at the wrong time.

In a growing number of metropolitan areas, the wrong time is now. Just look at what’s happened to home prices during the past few years.

Okay, so why are falling metro prices a problem? If you’re not selling and you’re not refinancing, who cares?

Falling prices are not an instant problem for those with fixed-rate loans. But for millions of borrowers with the latest forms of low-ball financing, falling prices can be financially lethal.

Imagine that you bought a property a few years ago. Since values were going up it made sense to buy the biggest home you could afford and to buy that big house you got a $400,000 interest-only loan at 5.6 percent, a mortgage amount that covered 100% of the purchase price.

For the first years the loan was wonderful: Monthly payments were $1,867 plus taxes and insurance. But after five years the loan automatically converted to a one-year ARM. The 1-year rate that was originally at 3.60 percent rose to 5.45 percent. Combine the index with a 2.0 percent “margin” and your new rate for the loan would be 7.45 percent.

After five years not only does the rate go up, the mortgage bill now includes the expense of monthly principal payments to reduce the loan balance. The monthly cost for principal and interest? It’s now $2,943. Taxes and insurance are again extra. < !- http://www.fanniemae.com/tools/libor/2006.jhtml __ http://www.fanniemae.com/tools/libor/2001.jhtml-->

“Those low-payment loans that looked so good a few years ago are going into their second phase,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com. “Each day more and more borrowers are finding that the low ‘start’ payment is gone and that steeper, fully-amortizing payments have now kicked in. At the same time, homes that were once easy to sell are now tough to market. It’s a brutal combination and what we’re seeing is likely to get worse.”

The instant solution to high monthly costs is to sell the property. During the past five years many areas have seen huge price increases. The odds are good in most markets that a seller with several years of ownership at this can readily sell, often with a significant profit.

But as the market evolves the odds may become less attractive. Not all markets have seen double-digit growth. In such areas price stagnation or actual declines can lead to huge inventory increases. To sell in down markets homes owners will be forced to offer not only price discounts but other incentives such as “seller contributions” to help buyers at closing, new carpets, new kitchens, moving allowances, etc.

But selling also may not be an option. Not only can a sale in a down market produce a bankrupting loss, but losses on the sale of a personal residence are not tax deductible.

What can you do to avoid being a foreclosure statistic, to not get caught in the impossible position of loan costs that are too high and market values that are too low?

“Act now,” says RealtyTrac’s Saccacio. “Don’t wait for the hammer to fall. If you see a mortgage problem looming in the next year or so, refinance to a long-term, fixed-rate loan before your credit report shows any late or missed payments. Take a careful look at traditional loans with liberal qualification standards such as FHA or VA financing. Speak with your lender about a loan modification and see if your adjustable-rate mortgage has a conversion feature, a right to switch to a fixed-rate within the first few years of the loan term. Because a conversion is a loan modification and not new financing, conversion can be quick and cheap.”

If you find a situation where the property cannot be reasonably refinanced, if unaffordable monthly costs are certain, then it makes sense to sell now and move to a less-expensive home with reduced debt, lower monthly costs and fixed-rate financing. Moving is a way to avoid foreclosure and dodge bankruptcy — two events no property owner should experience.

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Published originally by RealtyTrac.com during September 2006 and posted with permission.

Will You Become A Foreclosure Statistic? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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While new homes are bigger, lots are not. As the price of ground has shot up in major metro areas, what we increasingly see are big houses on small lots further and further away from big city cores.

This means that in many communities we also have older and smaller homes on large lots with close-in locations — so-called “infill” properties. These infill properties raise a question: Is there a way to increase their value and utility, and is it worth trying?

• Do nothing. If smaller and older homes worked for families 50 years ago, why change? Such homes are, or can be, perfectly habitable — especially for small households.
• Renovate. With this option we take the basic house and fix it up with new kitchens, baths, electrical work and other improvements. This is a good choice for folks who like their current home and have no interest in moving or enlarging.
• Expand. In this case we take the basic house and add-on. This needs to be done with care. For example, additional cubic footage will require a larger heating and air conditioning system. Also, some expansions are impractical. A five-bedroom home with a tiny kitchen may not “work” on a daily basis.
• Tear it down. With a “teardown” you remove the current home and replace it with entirely new construction. The result is a big, buildable lot with mature trees, a close-in location and — in a short time — a modern and larger home.

The attraction of a teardown as opposed to a renovation or expansion often involves money. On a cost-per-square foot basis a teardown can represent a good value, especially when the result is a completely new home with modern design and new features. Older homes, for the most part, lack common features found in new construction such as great rooms, walk-in closets, spa-like baths, and big kitchens. Newer homes often have small lots, few trees and distant locations. With a teardown you can get the best of both options.

To make a teardown work you need a purchase price which is significantly below the teardown re-sale value. For instance, if you have a 1950s rambler with 1,200 square feet situated on a 1-acre lot that can be bought for $250,000 you might then ask: What would this property bring with a new home? If the re-sale value is $750,000 or so after improvements, a teardown could make sense.

A teardown project is not a job for someone looking to buy without cash or credit. In our example, the buyer paid $250,000 up front and then had the expenses required to take down the old home, carry a mortgage, pay property taxes and build a new home. Such costs must be paid with cash or investor financing. If the final sale price yields a 10- to 20-percent profit, the investor made from $75,000 to $150,000, most probably over a period of 15 to 18 months.

Marketing a teardown differs significantly from a typical home sale. With a teardown there is nothing to fix-up, no open houses, no home inspections or worries about condition. Teardown buyers really don’t care about old carpeting or marred walls — it’s all going to go anyway.

Teardowns often resolve another problem. Investors tend to think of older homes as good properties to demolish and replace with townhouses or several residences — options often opposed by neighbors and local governments. With a teardown, one house is replaced by another, a zoning-friendly strategy.

In one nearby neighborhood we have had a number of teardown projects. Small, brick single-story ranch houses and wooden cape cods on large lots have been replaced with palatial houses, some seemingly with enough interior space to stow a blimp. In other cases, older homes have been enlarged and are now part of what might be described as compounds.

Because the teardown area is heavily wooded the new construction largely fits with the older houses that still dominate the neighborhood. But those older homes, fixed up or not, are now far-more marketable than in the past. With few buildable parcels remaining in the area, prices for small homes on large lots are soaring — great news for long-time owners and their neighbors.

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Published originally by Realty Times on January 20, 2004 and posted with permission.

Why Teardowns Rise In Metro Areas is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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