Archive for August, 2007
I have been paying close attention to the subprime credit mess. Some articles have really confounded me, when I heard about how some individuals were using their home’s equity, which has now placed them in a precarious situation. In this article, I want to explain how your mortgage works to help you understand your home’s equity. Then I want to go over the use of that equity.
I remember seeing so many ads last year for home equity loans. From a bank’s point of view, this is a great loan, since it is backed by the amount of your home that you actually own. When you obtain your mortgage, the bank has given you a loan to purchase a home. Let us say that the price for the home was $200,000. If you put down $30,000 of your own money, you obtained a loan for $170,000. This means that 15% of the home has been paid for by you. To make the math simple, we will assume that your monthly payment is $1500. This payment consists of generally three parts: payments for the principle, the interest, and the escrow. In reality, your monthly payment can include other costs, but lets stick with these three. The escrow is an account which the bank creates to pay your property taxes and hopefully your insurance. The interest is the amount charged by the bank for loaning you the money over time. Most people are now experiencing problems paying their mortgage because they have adjustable rate mortgages, so when interest rates increase, their payments increase. For this reason, I always advise clients to go after fixed rate conventional mortgages. The principle goes towards paying down your actual loan amount (in this case the $170,000). At the beginning of the loan, you will pay more in interest than you do towards the principal. A breakdown of the payments will be given to you in an amortization table by the lender. For our purposes, we will say that the breakdown is $700 for escrow, $600 for interest, and $200 for principal. These numbers will not be too far from the mark. After a year of making your payments, you will have paid $2400 (12 months multiplied by $200) towards the $170,000 (this is only 1.4%). Here is a secret: pay more towards the principal each month, and you will greatly decrease your interest payments in the long run. Ensure that your lender will not penalize you for this method to reduce your expense. The equity in your home is now $32,400. Now things can go strange with the equity if the value of the home changes. If the price of the home goes up to $240,000, your equity is $72,400 ( $30,000 down+$2400 payments+$40,000 increase in value). However this can go the other way. If the home’s value decreases to $180,000, your equity is $12,400 ($30,000 down+$2400 payments-$20,000). I personally do not know of a lender who will give you a loan for the entire amount of the equity in your home, and the reason for this is the possibility of the change in the home’s value. Unfortunately, this may not have been the case for some borrowers at certain lenders who specialized in the subprime market, according to news accounts.
Many subprime borrowers have been hit with adjustable rate mortgages increasing payments and with the loss of their equity value, which many had borrowed against. I have read stories of homes loosing $60,000 in value, which the borrower had taken out a home equity line of credit against. This means that they have no way of having an asset to exchange for this debt, so by selling the home they have lost the $60,000 for the mortgage loan and another $60,000 for the line of credit.
All of the above is not truly realistic, but this shows you the basic idea behind home equity. So, should you use your home’s equity? This may be an old idea, but I do see my home as my biggest investment to be used later in life. Home equity can be useful when reducing your credit card debt, but you should not then use your cards to load yourself with more debt. This can actually reduce your interest payments, and by not using the cards, your not causing yourself more problems. Another use for home equity can be for a major project, like a kitchen remodel, which will increase your home’s value. Lastly, you can use the equity for periods when you are experiencing financial problems, but you are working to rectify the situation. For example, you have lost your job and the money is running out, you might want to use this equity to help you when you are looking for another job. Never use your equity for a luxury item, such as a pool or boat. Think of using your equity only when it benefits you, not to add more debt to buy something you desire.
An inspector should never make a determination on how long a roof will last, since there really is no way to tell. I am aware of one roof which was meant to last for twenty years, that is still going strong after almost fifty years. I also know of a roof that is five years old, which now needs to be replaced. Why is there a difference? Both roofs were made of similar materials, but the material behaved differently and was treated differently once they were installed.
In Houston heat and humidity cause a good deal of damage to our exteriors, but storms during hurricane season leave their toll as well. Roofs with steeper pitches have a tendency to do better here because of their ability to shed water faster. To help control the effects of the heat and humidity, you will want to have a system of ventilation in place for your attic. The most common type of ventilation is having vents in the soffits with a vent in the ridge. This allows air to flow through the underside of the roof (attic), cooling it while moving the humidity out. The magic formula is one square foot of ventilation for every one hundred and fifty square feet of attic space. However, you will want the vents to be spread around the building, instead of located in one area. For example, my son’s room had no soffit vents to the attic around it. The builder thought that they would look bad on the front of the house. The roof above his room received a good deal of afternoon sun, so his room was quite hot at this time of day. By adding the vents, I helped reduce the temperature in his room. Powered attic vents can be efficient, but the trade off is the cost in electricity.
Slate shingles and clay tiles experience the same problems in Houston. Slate and clay tiles are brittle, so you will see broken pieces, which leads to water getting into the house. These tiles break easily during hail storms or hurricanes, and when someone is walking on them to work on the roof. These broken pieces can be replaced, but new pieces will not have weathered like existing ones, so repairs are obvious. Some breaks may not be bad, but eventually any break can lead to more serious damage.
Metal roofs are making a comeback, and they can be long lasting. With new installation methods, they can be a great option. The concern will be the movement in the roof. Metal expands and contracts more in the heat and cooler temperatures than other roofing materials. This movement can cause problems to the seam and the fasteners holding the roof in place. Some new fastening technology prevents this from occurring. If the roof feels like it is moving when you walk on it, you have a problem with the roof. Look for moisture stains in the attic and the ceiling to see if there is a leak. Checking for moisture stains in these areas applies to all roof types though.
The most common type of roof is the asphalt shingle. The granules on this shingle are meant to protect the roof from the sun’s rays, which causes the asphalt to break down. You will be able to see this if the shingles look worn down (no granules), or if you are seeing the granules in the gutter. Blistering of the shingles happens when there is too much moisture. These blisters eventually cause the shingle to break. When you are able to see fasteners going through the shingle, you will have problems. Installing nails and screws through the main surface of the shingle is an issue for any type of roofing material, but it seems to happen more frequently with asphalt shingles. A temporary remedy for these fasteners is to place an appropriate roof caulk over the head of the fastener. If the shingle feel loose, a failure is starting to occur.
Built-up roofs are used on flat roofs or roofs with low slopes. They are made from layers of asphalt and roofing felt with pebbles on top. It experiences much of the same problems that you will see with asphalt shingles: blistering and the wearing down of the asphalt from the sun. These roofs last for less time than the others.
Wood shakes and shingles are not as common any more, but many people do like the look. Cracks and broken shingles represent a problem. Also loose shingles can occur.
For all roofs you will want to look for branches of trees or large shrubs hitting the roof. This causes a path for insects into the roof system. Branches moving during a storm can break the roofing material. Shade from the leaves allows moisture to stay on the roof, promoting algae growth and material breakdown. I have seen one limb which removed the roofing material down to the rafters. You will also want to look for debris on the roof for these same reasons.
Currently innovative materials are coming into the roofing industry, which hold the promise of longer life. There are now composite materials imitating the look of slate and clay tiles, but they do not have the same issues with brittleness. Improvements are being made to the asphalt shingle and to flat roofing systems. I have even recently read of a plastic roof sheets on a vacation cottage. However, the same rules apply when examining them: look for breaks, cracks, loose pieces, blistering, fasteners showing through, debris, and excessive shade leading to moisture. Then make sure that trees or large shrubs have their branches clear from the building.
This is the most common question asked of an inspector. The second being about the roof. Probably because these two parts of our home can give us the most grief. In the state of Texas, an inspector is required to render his opinion on the performance of the foundation. Note that the inspector is not required to inform you of what actually is happening with the foundation, but his opinion. The reason for this is the fact that no one can determine what is going on underneath your home without extensive testing, which does not happen during an inspection. Inspectors look for clues to the foundation’s performance. Here are some things to look out for when considering if you need some one to look at your foundation:
Trees- a trees roots will extend to where ever the canopy of leaves reaches. That is where water is available. If the canopy is over your roof, then the roots are under your house, having fun with your foundation. Generally, a tree should be as far away as it is tall, but this poses the problem of your lot size. Most lots are not large enough for forty foot high trees.
Soil- the type of soil around your home effects how water travels around your property. Much of Houston, for example, has a heavy clay soil referred to as gumbo by locals. This soil retains water, so it expands. During drier conditions it contracts. This causes the foundation to move around, which in turn can lead to a failure of the foundation. If you see cracks in the soil during dry conditions, and a solid mass during wet conditions, you should be concerned about foundation movement.
Plumbing- if the water is taking some time to drain from the sink or tub, you may have a problem underneath the home. If water from the plumbing is leaking there, it could lead an issue with your foundation. If you have this symptom, consider having a hydrostatic test done to determine if a repair is needed. Foundation companies will do this kind of test. However, make sure your drains are clean first. You do not want to pay for a test, for the hair down the drain.
Design- look to see if water can flow away from the base of your home. Standing water is always an issue. Just look to see if the foundation looks right. If something is nagging at you, there may be a reason to be concerned, so call some one for advice. Many foundation firms will do a free inspection for you.
Age- if you have an older home, your foundation will not have the better technologies to ensure a lasting foundation. Look for cracks through bricks, on tile floors, or on walls around windows and doors. Not all cracks mean that you should be concerned, since some result from a natural settling process.
To determine if there is a problem, an inspector looks for signs around the base of your home, on the walls (inside and out), on the floors, and in the attic. Offset cracks on the floor, cracks larger than 1/8” on walls, rafters moving apart in the attic are other signs to look for, but some problems are not about the foundation. If the driveway or sidewalk have become slabs moving up and down, rarely have anything to do with foundation movement, since they are made differently. The one time that they may be linked to a concern is when you have a fault line running through your property. In this case, you will see the ground at two different levels throughout the property. Believe it or not, we do have fault lines in Houston, so do not assume that because earthquakes are not an issue, you do not have to worry about a fault. One other thing to look out for is on a post tension cable slab. These are foundations which have high tension cables running through them. You can determine if you have this type of foundation by looking at your base. When you see small dabs of cement protruding from the slab, you are looking at the ends of the cables. If the cable end is exposed, you can have problems with the foundation when these ends rust through. If the end is exposed, patch with some cement before it rusts. If it did rust, you will need to use some type of rust remover/transformer before patching it.
If you notice some of these conditions, you may want to know who to call. If the house is under warranty, and the company providing the warranty is giving you a hard time, call an inspector to produce a report, so you will have a document to back up your concerns. When your home has no warranty situation, call a foundation company which offers you a free quote, so then you know what needs to be done. If your concerns are about the foundation and other problems that you have observed, call in a structural engineer to make a plan of how to have everything fixed. A typical home repair for a foundation is done with pylons placed under the home to lift it back into position. An average house requires around thirty-two pylons for the entire home, but a normal job should only be around 12 to 16 pylons. If the foundation company is quoting a job for 32 pylons, you should obtain a second quote without delay. It is always wise to have at least three quotes for a major job like this one. If you have any questions, you can e-mail at email@example.com.
During one inspection last year, I had the pleasure of inspecting a home where the homeowner criticized inspectors from the moment I walked in. If you are buying a home, this is the time you should worry.
I cannot think of a home inspector who would want to treat the seller badly, even when working for the buyer. The seller is a potential client. I tried to be polite and professional while being graced with negative comments. The interesting thing was that the seller had said that the buyer was the only offer she accepted, and she had not bought or sold a home in the past twenty years, so why the disdain for an inspection?
The seller had several boxes stored in the house ready for the move, and I was informed that I was not allowed to shift them, since they contained fragile antiques. I did find issues, but I was particularly curious about a sloppy repair job under a sink. I could not find a leak, but there was evidence that a leak had occurred once. I stated this in my report, and then informed my client to expect something to be happening there.
After my client moved in, I was called back to check out a leak in the area where the boxes had been. On the other side of the wall was the bathroom where I had noted the repair. I reminded the client of my comments, and how the seller to the last was telling my client to not take any report that I produce seriously.
The lesson to be learned is always watch your clients reaction to your inspector.
Another day of bad news for home owners has occurred. The real problem in my mind is the adjustable rate mortgages so many people obtained. These loans are popular when the rates are low, but even without the subprime fallout, these loans have ever increasing payments when the initial terms lapse.
If you find yourself unable to pay your mortgage payment, we may find yourself in the foreclosure process. However, foreclosure usually does not start with one missed payment (this may be changing in today’s environment though). Foreclosure is a process which takes several months; the term of the process is different from state to state, but three months is typical. Considering that this is not an immediate event, you should take action once you receive your first notice.
Step 1: Do not ignore notices. In fact, contact your lender before they send a notice. This can be risky, because you are letting them know of a situation where they may not be sympathetic, but you should control the circumstances.
Step 2: Contact a housing counseling agency associated with HUD. To find the closest agency, call (800) 569-4287. Be wary of phony counseling agencies, since they may be after a fee from you while offering no help. A HUD approved agency is your best resource during foreclosure.
Step 3: Discuss options with the lender. They may be willing to arrange a lower payment for a time (special forebearance), to arrange a new type of mortgage like a fixed rate mortgage, or some type of FHA payment. Your last two options would be selling the property before foreclosure (but selling your property can take three to five months), or signing over the house to the lender (which is a last resort). Maybe you should consider a lender you could trust, or who could at least offer you refinancing.
Step 4: Be careful of people approaching you during this period with offers of help or of purchasing your home. Who knows how scam artists will find you, so you will not be able to avoid them, but do not listen to them. Only deal with firms or agencies you have contacted. There is no easy out of this situation, so do not be tempted.
Step 5: Since you are being proactive, make sure you understand what the lender is arranging. Understand the papers you are signing, and that those papers state everything that you understand that you are agreeing to. Make sure that any agreement releases you from any liability with the loan. Having a lawyer or the counseling agency go over any deal worked out, so you can know that your interests have been served.
Remember, not do anything, or not seeking out all of your options could cost you your home and good credit.
Do you remember in the movie “Arthur”, where an apartment was advertised with IOL, instant on lighting. It seems that IOHW is becoming a standard desire.
With energy and water conservation being frequent issues in the news, we are more aware of making our homes meet these standards, but we do want our quality of living to improve. We leave our shower running in the mornings until the warm water is flowing before we step into that chamber. I have seen people turn on various faucets to help speed this process up. A nice bit of water is wasted there. Others have turned the temperature setting up on their hot water heaters in hopes of having the hot water come faster, which is just a waste of energy. I have also seen small water heaters for individual faucets, or homes with water heaters in different sections to ensure quick hot water, which is also an energy waste. Here are some steps to take to conserve both energy and water:
1) Insulating your pipes. Insulating the hot water pipes helps retain the heat in the pipe, instead of it dissipating into the attic. This may be a small step, but every little bit helps, and pipe insulation is a cheap and simple step.
2) Buy a tankless water heater. These heat the water when it is demanded. The typical tank heater keeps the water at the set temperature, so it will be heating the water even if you are not using it. So the energy savings are good. Also, most of us do not maintain our hot water tanks like we should, so hard water causes build-up, which in turn leads the heater to work harder to heat the water in the tank.
3) Some new homes have a recirculating hot water system built into the structure. The idea is that the water in the pipes is flowing through the pipes back to the heater when not in use, so the water is always heated. Turn on the faucet, and voila, IOHW! Now there are two neat tricks to this idea. If you have an existing house, there is a product which can be installed to imitate this system without installing a return pipe. It comes in two parts, one hooks up to your heater and the other to the sink furthest from the water heater in the line. It uses the cold water line as the return line, so your water will be hot when needed. Now here is the second trick, you can program this device so it turns on only at times when you will need this hot water (like when you usually take your morning shower), so you are only heating the water when you need it. This idea combines energy and water savings.
There you go IOHW. To implement all of these steps will cost you in the area of $1000 for a typical home. I know that insulating you home gives you a tax break, but I recall that the tankless heater will give you a tax break too. This plan can also be implemented in stages; the biggest cost will be the heater, so it could be saved for last.
Did I write too soon in my last post about the mortgage market? On this past Friday, another mortgage company called it quits, and a bank in Germany which had been involved in the American mortgage market had to be bailed out. Still, I do not think my post was inappropriate.
There are ads floating around promoting home loans, and the basic premise that banks and other lenders want this business is sound. What I need to clarify is the facts about what would help you obtain that loan that were not previously stated.
1) Some money in the bank. With closing costs and costs for due diligence reports (like my home inspection reports), will cause you to have costs which cannot be defrayed to credit. This is not true on all fronts (some home inspectors like myself and other service providers will accept credit cards), but there will be some payments which you will need cash. There is also the down payment to consider.
2) Do your homework. There can be repair costs, or fees for setting up services after you move in. If you have been living in an apartment, you will discover the joy and agony of maintaining your landscape. Just think about what owning a home entails, and what the costs associated with that fact might be.
Most cities and states have some type of department of housing, which has information or programs about home ownership. I suggest attending a program for buying a home offered by HUD, even if you are not going for a HUD loan. For individuals who are new to this home buying adventure, it can help you avoid mistakes. In Houston, Mayor White and the city administration have made a great effort to inform people of these programs (go to the city’s website to link to the appropriate pages).