October, 1999 Newsletter
The Home Buyer's Information Center Newsletter
+++++++++++ October 21, 1999 +++++++++++++++++++
Mortgage Rate Update
New on the Site: Should I pay points?
Mortgage Hints and Tips
This Month's Tip: 125% Mortgages: Good or Bad?
We delayed the newsletter for a couple of days this
month to try to get a feel for the changing economic
situation and maybe give a few pointers. The only
thing that is obvious, though, is that the situation
is changing--almost by the hour! The stock market,
bond market and interest rates are up and down daily
without any clear trend. The one bright note is that
after all the ups and downs, most economic indicators
are at about the same level that they were 2 weeks ago.
Thanks to all of you who have sent us some great
comments (and suggestions) for the Home Buyer's
Information Center. Many of the updates and
new sections that we add to the site come from
visitor's comments. Thanks again! You can always
send feedback to us at:
Mortgage Rate Update
As of mid October, in the U.S., mortgage rates
have continued to show a bit of stability,
averaging in the 7.75% range for a 30 year mortgage
with 1 point--about the same place rates were a
month ago. In Canada, 3 year closed term rates
were in the 8.00% range.
Will the stability last? Consumer prices in September
were about what was expected, which has cooled inflation
fears a bit. With many mortgage rates still under the
8% level, it may be an advantageous time to start your
application and lock-in plans.
Additional mortgage information can be found at:
New on the Site: "Should I Pay Points?"
Part of the mortgage comparison process, along with
the obvious rate check, is the question of points.
Since points (or lack of them) will determine your
total mortgage cost, taking a few minutes to compare
can save you lots of money. Randy Johnson, author
of How to Save Thousands of Dollars on Your Home
Mortgage, the largest selling mortgage book in the
country, has written a guest article that approaches
just this subject. You can find it at:
New on the Site: Mortgage Hints and Tips
We've added a section with a number of quick hints
on mortgages and financing including rates, terms
and more. You'll find the new section at:
In this volatile financial and interest
environment getting as many loan comparisons as
possible is crucial. At LendingTree you can submit
one simple loan request form and within a few business days
get up to 4 bona-fide offers from lenders competing for your business.
Get more information
This Month's Tip: 125% Mortgages
If you have watched any television in the last month or
so, you've probably seen one (or many) of the commercials
for the "125% Mortgage." There are several lenders who
are offering such programs, but they all work pretty
much the same way--you purchase a home and the lender
gives you 125% of its value. You pay the seller and
put the extra 25% in your pocket. They are touted as a
great way to pay off credit card debt, take vacations,
pay for a college education and more. But for the average
homebuyer, are they a good deal?
On the surface, these 125% mortgages appear to be an
excellent way of getting the maximum leverage from your
home purchase, and, on that level, they succeed. You do
have extra cash that you can do with as you please, whether
it is to pay off old debts or paying cash for something
instead of incurring new debt.
If you dig just below the surface, though, you'll find that
there may be some major pitfalls lurking there. The first,
and potentially the most expensive, is the fact that you
will be locking yourself (unless you dig deep into your
pockets) to the home for a long time. Since the interest
in mortgages is "front loaded"--meaning that the bulk of
your early payments are long on interest and short on
principal--equity comes very slowly. As an example,
let's say that you purchase a $125,000 home with a 125%
mortgage. The loan amount, without factoring in closing
costs, will be approximately $156,000. If you stay in
the home 5 years--and make all of your payments on time--
before you decide to upgrade (pretty normal for most
first-time buyers) your balance after 5 years will be
in the $148,600 range.If home prices rise at the current
average of around 2% per year and you maintain your home
adequately, your property should be worth in the $138,000
range. But, you owe $148,500, a shortfall of over $10,000.
In this example, if you sell your home through a Broker
who charges, say a 6% commission ($8280) and have rather
normal selling expenses of 1% ($1380) and closing costs
of about the same amount, your shortage now totals over
$21,500. If home prices stagnate--or go down, which has
happened in the past--this number could be even bigger!
To sell your home, you would need to come up with this
amount--in cash. Plus, since you have no equity in the
home, you will need to come up with additional cash for
both downpayment and closing costs on the new home.
"Well," many buyers say, "at least the interest on our
mortgage payment is tax deductible. Our credit card
interest isn't." True, but only to a point. The IRS
has ruled that mortgage interest is only deductible
UP TO 100% of the home's value The extra 25% usually
is not deductible. (See a tax specialist forfull
For some buyers, these mortgages may make sense.
If you are absolutely certain that you will not be
moving for 10 -12 years or more--difficult with
potential job changes, family size changes and the
like--you may not get hurt. If, however, you need--
or want--to move in less time than that, they could
be a very expensive proposition. Instead, our advice
would be to spend more time on budget planning--
tougher to be sure but a whole lot more beneficial.
On the site you'll find:
Setting a budget
As always, if you have suggestions for improving the
site, or topics you would like to see addressed in
this newsletter (or, if you have used the Home Buyer's
Information Center to successfully purchase a home),
drop us a quick line to
Thanks and have a great October and early November!
The Team at the Home Buyer's Information Center