A Home Inspector’s Weblog by Frank Schulte-Ladbeck

exploring homes and the lives in them around Houston

Archive for Mortgages/Finances

Victory Not So Close: Organize and Control Your Credit Cards

That’s shocking, we need to watch that story. The story though has no shocking implications. Every evening the news forecast’s teaser indicates that some fantastic story is underfoot that will effect our lives, and I am always disappointed by the facts. Well, they succeeded in keeping me watching, which was the point. I actually do not watch the local news too much, but I do listen to it on the radio; however, I found that the quick snippet delivered on my favorite station was a bit misleading.

Maybe my memory is fading with age, but I remember loans be easier to obtain. Lenders seem not to want to give you a loan, which provides them with less money. Credit is easier to find. When I was doing research into how a home buyer could navigate the mortgage market, I signed up for some e-newsletters from various sites, so I could keep up to date on what people would be seeing. Every time the Fed lowers its prime lending late, I quickly receive a missive telling me to apply for more credit now, because it is the best moment for credit. The unfortunate aspect of credit is that the lenders control the situation, with no one looking out for us. With the subprime credit crisis still causing ripples in our economy, the government has decided to check the unfair practices of these lenders, but it may not happen as we might hope.

When I was teaching managers the financial concerns of their jobs, I incorporated examples of personal finance into the lesson. I began to notice that many believe that they could get away with small things, and it would be alright. Payment is due on Sunday, so Monday delivery would be fine. Their interest rates were increasing, but surely it would not affect them. Their credit reports would be damaged, which they never checked anyway. The offers kept coming for my credit, so life was good. I found that understanding the basic principles by which their card operated was not given a thought.

The other issue was organization. My wife throws most of her papers into a single box. If she remembers, she will hand me her credit card bill in time to make the deadline. For that reason, I take all of our invoices to store away. I have a file for them in my desk, which I go over once a week. I like to write down the date I dealt with the bill, and the date it will be paid, since I use e-banking, where I can have it delivered on a certain date. You could pick any place to store the bills, but place all of them in one spot, and make sure that you deal with them each week. Controlling these payments helps you stay in control of your financial life.

My hope is that the new regulations go into effect, and that they are not quietly rescinded later. With the election year at hand, our officials will want to come to us with rules that show they are concerned, but banks do give a good amount for campaign donations. Eventually they may just convince our leaders that these regulations are to binding on them, so without fanfare, they could go away, unless we pay attention to what our credit providers are doing, and we react to it (maybe by not using their card).

Your Houston home inspector,

Frank Schulte-Ladbeck

Here Today, Gone Tomorrow: a story of a loan

Many real estate professionals are bemoaning how current events are being portrayed in the media, when it comes to their industry. I know that I have done my share of this. We appear to be in a buyer’s market in much of the country, but there are no buyers for homes. In one post, I saw the term that buyers were living in a “2006 fantasy world”, since many buyers have not really listened to the news or real estate professionals thoroughly.

First, a little definition is called for. A buyer’s market is a reference to a situation at the negotiating table for a home. It means that the circumstances for this negotiation favor the buyer. Here are some problems buyers have created for themselves, because they believe that all of the conditions to purchase a home are in their favor. We hear reports in the news that home prices are falling, so buyers are waiting to see if they will drop further. The national price for a home is falling, but this is not true in all areas. In fact, some areas, like my home Houston, have seen an increase in home prices. The fall in the national average is due to dramatic declines in certain locales. This has led to buyers going after homes that are out of their price range, thinking that they can bring the price way down. Most sellers are ignoring these offers. In one instance that I am familiar with, the buyer was looking at homes that were $100,000 above his price range. He seriously believed that he could receive such a steep discount. You have to ask yourself, would you want to loose that money on your home? If you would not, then the seller will not either.

I have witnessed situations where a buyer has taken my inspection report to the seller to ask for all of the repairs to be done. On a home that I re-inspected yesterday, many of these repairs had been completed, which came as a bit of a surprise to me. Generally, sellers are concerned with the big ticket items, and finding a way to have them dealt with. In the current market, there are some sellers who are willing to make every single little repair. However, this is not always the case. Most minor repairs are left undone.

My favorite stories are coming out of the mortgage industry, where the
term “2006 fantasy world” came into play.
You see that year was a great year for a buyer to obtain a mortgage. Zero down loans at good interest rates were available. Many of the subprime loans that we are hearing about in the press were made during this time period. Some buyers feel that since conditions are in their favor, that they could obtain their dream loan. Reports of how lenders are pulling back from these offerings are not being heeded. One broker I know had clients who seemed to be serious about the loan, so he went through all of the paperwork. At the end, his clients told him that they were going to shop for a better rate. He attempted to explain to them that rates are in flux, but he was delivering the best rate that he could produce, and that to lock it in, they had to complete the loan. The buyers were convinced that they could do better, so they left his office. Some time later, they come back to his office, stating they were ready to sign for that
loan at that specific rate. He informed them that he could no longer provide what they wanted, because the rates had gone up. They were naturally upset that they were no longer getting the best deal; however, they blamed the broker, when he did try to explain to them that he could not lock it in without completing the forms. The buyers only had themselves to blame, but this they could not see.

If you are planning to purchase a home, you should have some money tucked away to pay for a down payment on the loan and for closing costs. Even if there are zero down loans out there, which some lenders still claim are available in certain circumstances, your priority should be to find the best deal. In the loan industry, this has always meant coming to the lender with some cash in the bank. The larger you down payment is, the lower your interest rate can be. To determine your down payment amount, ask about what the closing costs might be (just an estimate; they cannot give you all of the specifics); plan to have some money to deal with the costs of moving
in (for example, if you are new to paying for utilities, they will ask for some money to hold to see that you will pay- this money will be given back to you over time). Then see how much you have left over to use towards the loan.

Good luck in finding your home.

Your Houston home inspector,

Frank Schulte-Ladbeck

Taking Care of Your Investment: Home Maintenance

I have been on my own small crusade this week, by advocating that people should stop looking at their homes as a bank, but rather as their greatest investment. The New York Times had an article last week about home equity lines of credit. Lenders slashed the amounts of these credit lines recently for their customers, which caused the clients problems with their credit scores. Lenders have been urging us to use this form of a borrowing, and now they have punished those who took them up on the offer.

This credit turned your home into a cash machine, when you should have looked at it as an investment. Not too long ago, most people saw their homes as their greatest investment. By not taking equity out of it, this investment would grow, and it became an important component in our retirement plans. As businesses moved away from pension funds to 401k or 403b plans, people should have become more cautious about touching their home equity, since they stopped saving for their own retirement. The fact is that most Americans feel it is too hard to save for a secure financial future, or to pay down their debt. We have become accustomed to the lifestyle that credit has afforded us, so we do not save.

If your home is the your greatest asset, should you not take care of it? Many of my home inspections over the last few months have been on foreclosed properties. I realize that these homeowners were (are) facing tough situations, so funds for home care where the last thing on their mind. However, I went over two homes this past week where the owners did have the money, but they did not really check out their home. Items that were apparent, such as a broken water heater, were repaired, but the crumbling chimney was not. There have been a few clients who hired me to inspect their home, simply because they had a problem, and they wanted an answer. You do not really need an inspector for this, but at times it may help.

I have mentioned having funds available for repairs on this blog, but you may wish to consider home warranty insurance too. This insurance is being offered more at the time of closing on a home. It will not take care of the structure, but it will deal with appliances, water heater, and air conditioning systems. The companies providing this insurance have become creative with their policies by allowing you to customize them. I saw that swimming pools could be included. The coverage on these policies will cover the items that homeowners insurance does not, so the two together can provide a good umbrella for your home.

Preventive maintenance is your cheapest route when caring for your home. It is easy to pass by small problems, to eventually ignore them. Once a week, month, or at the most a year, take a quick look at your house from top to bottom, and make the repairs. Fixing locations where water can get into the structure is vital. Moisture damage to the framing is hard to notice, but devastating to the home.

Please Buy More, You Will Save Money, or how to keep your money

It is interesting listening to economists on the news. They have been much maligned, mainly because they try to make their pronouncements sound as if they are the final words on a matter. However, it does seem that most economists agree that we are in a recession. Just how bad it is, no one can say. On the other hand, most of us feel pretty good about our own finances. Is this because of the rebate and refunds that we are getting from the federal government? It could be.

I have noticed two trends that are taking hold even more when I go shopping: green friendly products that save you money; and buy one/get one free. The green trend was obvious starting last year, but “bogo” slogan seemed to be in only a few areas of the market. Now as I go through my grocery store, I see it on more products. You can be easily lulled into thinking that you are saving money with this purchase, since you got one free, right? Look at what you just put in your cart. Is it an essential good, like eggs or bread? More than likely, it is a product that you do not use that often, or at least not an essential. Stores have been very good at playing on our whims to buy items that we do not need, while the cost of eggs has risen over 33% from February to March. Most essential goods have averaged about a 2% increase during those months. We will never be able to buy those needed goods with a buy one/get one free offer.

I open my e-mails this morning to see that the mayor is hosting a Green Building Expo here in Houston. These Expos allow you to see many new products for the home, and most will use the tag line of saving you money over time. Most of these products have a high initial cost, so it has become standard in this industry to tout the savings over a lifetime, so you can see that the initial cost is not so bad. You do save with many of these products, and you should start converting over to goods like compact fluorescent lights (CFLs). I have noticed that more products are coming into the “green” field. Shirts from recycled soda bottles is one example. This is a good idea to me, but do you need that new shirt? Such products are playing on our emotion to save the planet, to be environmentally concerned, by suggesting that we need to shop more, which is the worst thing for the planet.

Times are already difficult if you are new to your home. There are expenses to contend with that you may not have considered. Since I have been inspecting many foreclosures lately, I see homes where the owners did not take care of them, but they did make some of these impulse purchases. If you are going to make an impulse purchase, make it a book on home repair. Many repairs are simple, and you may prevent further damage to your home by making them.

I hope that you are a thinking shopper. Do not let an advertiser seduce you into buying something you do not need. You may need a new shirt, then buy it, but otherwise, concentrate on the essential items.

Your Houston home inspector, Frank Schulte-Ladbeck 

Zero Down Loans in the Current Market

I have been asked in this past week if zero down loans for mortgages are still available. Buyers are looking so closely at costs and their finances that they are looking for deals in many aspects of the home buying process.

I had one caller looking at how he could reduce my price, but there is only so much that I can do. I have seen clients looking at ways to have the price of a home come down, and I have been hired by a seller to inspect for items around the home which may cause the price to go down, so they can be taken care of before the sale. This trend of having a home inspection is increasing among sellers. Some buyers are going in with quite low offers thinking that the seller will simply accept these values. In Houston, this is not the case. I have seen some sellers price their homes below the appraised value to encourage the sale though.

Back to the initial question: can you find zero down loans? Yes, there are lenders who still will make this deal. A better question is do you want such a loan? When you come to the negotiating table with no money to cover the closing costs, or to pay part of the home on your own, the lender charges you more for such a convenience. This will mainly take the form of a higher interest rate. Over the course of a thirty year loan, even a 1% increase in the rate could cost you a great deal of money. I think that some consumers hide the cost of interest rates from themselves. A three hundred dollar television could cost you over four hundred dollars if you only make the minimum payments, and the same principle holds for your home loan.

If you are shopping for a home loan, I would strongly suggest that you have some money in the bank. (How about that tax rebate and your refund?) If you do find a zero down loan that suits you, then you still have the funds in the bank. However, you may find that the rebate/refund money could be a step toward home ownership, but you will need more than those funds to obtain the best deal.

The largest expense that you will have in your life will be your home purchase. You should absolutely look for the best deal, and you should make sure that you are not paying more than you are required, but do not skimp, because a major mistake could ensue. For example, if you do not have a home inspection or a WDI report (termite inspection), you could find out that you bought a house with a major problem. By not negotiating from a position of strength with your lender, you will find yourself paying more than you should.

Do you have some cash?

In a continuing effort to help new homeowners set up their budget, I thought it wise to go over the idea of cash. You know what cash is? The stuff that used to be in our wallets? Well, yes, that is one version of cash, but when you are speaking to people in the financial industry cash means a bit more than that definition.

Even with all of the somersaults of the stock market, I still think that you should have a basic portfolio which includes an S&P tracking stock, and a bond fund, like the one from Lehman Brothers. However, you will need to round out your portfolio with cash: CDs; T-bills; and money market mutual fund. When I was buying some CDs, I took my son to the bank with me, because I wanted him to learn about money. I have always involved him in the steps that I am taking. I started when he was young, so I know that he did not have a clear understanding, but at least he has the exposure. I encouraged him to ask questions, so he put this query to the banker: what music is going to be on the CD? He was five at the time. She explained that a CD was a certificate of deposit. It was like giving the bank a loan, so they could loan the money to others. You could pick how long you wanted to loan the bank money. The longer you loan, the higher the interest the bank will pay- that is the money that the bank will pay you. So no Rolling Stones, my son responded. No, she said. Could we loan money to them, he asked. I guess we could, she laughed. Good, my son said satisfied.

A CD is one of the easier ways to have your money in cash, while earning a good interest rate. Here is my method for setting up my CDs. I choose a one year term, which means that at the end of the year, I could take the money out, or I could roll it over for another year in the CD. In this way the money will be available if I need it, but I take this a step further. If the money is available in January, what happens if I need it in June? To resolve this dilemma, I have one CD scheduled to come due in January and one in June. However, I like the idea of having cash ready for each quarter, so I also have CDs coming due in March and September. The minimum amount for all CDs that I am aware of is $1000. With these four CDs, you have close to the basic amount for your emergency fund for your home.

T-bills refers to Treasury bills, which is like loaning money to the Federal government. They work in a similar fashion to CDs. Banks used to sell these bills, but most banks seem to be directing you right to the Treasury Department to buy them. You can do this over the internet now.

Money Market Mutual Funds are offered by firms like Vanguard or Fidelity, so they are not insured by the federal government (the FDIC that you may see posted on your bank’s door). The typically allow you to write some checks against the account, but the idea is to keep the money in the account. These firms do work hard to ensure that your account will not lose money, so they are relatively safe. The money market accounts provided by your bank are similar, but they are not mutual funds. These accounts are insured by the government, but they do not offer as high an interest rate to you.

I hope this gives you an idea of what is meant by cash. I find CDs to be the easiest for me, but all of these means are easy to set up. In our current market, these “cash” vehicles are needed for some stability.

Can I use my retirement fund to buy a home?

As banks are becoming tighter with their finances, home buyers are becoming creative in trying to find ways to locate the funding to purchase a home. I saw that someone used a search term indicating using their 403b to buy a home, and then I was asked this very question in a conversation, so I decided to post my thoughts on the matter.

Yes, you can take money out of your IRA, 403b, or 401k, but you will pay a hefty tax if you do (the capital gains tax). No one should ever (and I repeat ever ) take money out of their retirement account, unless it is same last resort situation. Buying a home should not be such a situation. In addition, you will be surprised by what you may need in the future for living expenses, so save the funds now for that eventuality. You can borrow money against these accounts. Each financial institution has its own policies about this type of loan, and there are advantages and disadvantages to doing this. You are basically borrowing money from yourself, but you have to pay fees to the provider for the account for managing this loan. Generally you are paying yourself interest for borrowing the money, but this interest is not as much as you may earn if you had left the money in the account in the first place.

Another concern in today’s market is that lenders do not want you to borrow money for the down payment. They are bound to give you a better rate, if you save the funds to do this on your own. There are instances of the banks turning down applications that would have been accepted last year (and we are not talking about subprime borrowers here). Before rushing into homeownership, take the time to learn about what will get you the best deal from the bank, and you may find that it is not that hard to have everything in place to get that loan.

Owning a home is the American dream, but hopefully going into debt is not the corollary to that fact.

Your Houston home inspector,

Frank Schulte-Ladbeck