The following article was taken from the January issue of The Hill Rag, a monthly magazine that covers the Capitol Hill area of Washington, DC. From our perspective, it might just give pause to anyone thinking of investing in any company or entity that has a measurable footprint in the home mortgage market. It also clearly says to us that when considering the average amount of debt per family (at hyper record highs no matter how you count it) in the US, it is no longer valid to leave mortgage debt entirely out of the equation. As willing lenders (see below) encourage families to tap the maximum value out of their homes at hot market valuations and agree to interest-only and adjustable rate mortgages to stretch their ability to make monthly payments on other items, like plastic debt and automobile or real estate investment payments, both parties are betting on three variables:
1. Family incomes will rise in the future
2. The price of real estate will continue to climb, or at least, not fall significantly
3. Interest rates will stay at or near historic lows
From our perspective none of the above are good bets for many people and the odds on all three? ...rather long for everyone.
If Alan Greenspan can only see a bubble in his rear view mirror, these may indeed by halcyon days for those who bet that the US/First World economy is so dynamic and robust that it has built in anti-fail levers known only to central bankers and the IMF.
rmb
BUILDING WEALTH BY LEVERAGING YOUR REAL ESTATE VALUE (www.hillrag.com)
By Marianne Segura
Homeowners and buyers are taking advantage of the incredible growth in value of real estate in the greater DC area. And, they are profiting from mortgage loan programs that require low payments and free up capital for other investments. Instead of the one-size-fits all 30 year fixed program which, over its first ten years, builds very little equity, borrowers now seize the opportunity to lower payments with interest only loans where they pay only the cost of borrowing and have cash available for other investments or to pay principal when they choose. They may opt for 100% financing with a combination of loans. Such loans include: mortgages with rates fixed for three, five, seven, or ten year periods; home equity lines of credit where the borrower uses and pays only what is needed. Equity lines allow for home improvement, debt consolidation, college tuition payments, and large consumer purchases. The housing renaissance in DC, funded by flexible programs, allows home owners to live well for less and use their homes as a powerful investment tool.
One young couple refinanced their home and used the cash to expand their retail shop on Capitol Hill. On their $500,000 property, they selected to finance 80% of their home with a 10 year interest only loan at 4.65%.Thus, they took $150,000 in cash away from the transaction to use for their business. Their actual payment on this larger loan was just about the same as for their previous traditional thirty year fixed rate. “Since home prices in our neighborhood continue to soar, we expect the housing market to build equity in our home. Meanwhile, sales have really jumped with the improvements to our retail store and merchandise line,” they told me.
Another investor took a commercial mortgage on his gallery, and used the cash from that loan to finance restoration on a property that he purchased in one of DC’s rapidly improving neighborhoods. The house will be his primary residence, but once the work is complete, his home will be worth twice the amount he has in it. He plans then to refinance the home at the newly appraised rate, and use the cash he takes out for purchase of a residential apartment building. And, so continues the spiral. He particularly likes the low payments on his one year adjustable rate mortgage for the primary residence since he does not plan to hold the mortgage for more than a year.
All this may be fine for those customers who come to the table with property that they can borrow against, but what of the customer who has no way of securing cash for a down payment. They can now finance 100% of the purchase price for a new home plus up to 3% more to cover closing costs. Such an option has proved extremely attractive for first time home buyers with limited assets.
Marianne Segura is a Senior Loan
Officer with NovaStar Home Mortgage,
Inc.
January edition of The Hill Rag
Copyright 2003 Richard Mendel-Black All Rights Reserved
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Copyright 2003 Richard Mendel-Black All Rights Reserved
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