San Diego Housing Bubble News and Analysis

Not recommended for most people..

For the long run, it's a risky thing to do. If you have the assets/liquidity to pay it off if you had to, that's different.

The trade off of a low rate for a year or two for the unknown over the long run could turn out to be a huge mistake (or brilliant)

It is harder to qualify for non owner loans today. It also depends on your credit score, income & equity.

What will you do if prime goes to 10% or more ?

Having a 30 YR fixed provides security..
For some price, you could buy the rate down and have a lower long term fixed rate if you qualify.

Borrowing with short term rates for a long term horizon is just gambling.

Thanks, HLS.

I totally agree with you. It is just emotionally painful to pay 7% while everybody else is paying less than 6%.

I figured that at 25 basis points per raise, it will take them 8 meetings to raise rates from 2% now to 4% and they have 6 meetings a year. This will give me one year and 4 months. Also I think they can't start raising rates until after the election. So I am safe for at least two years.

One big question is tax. Before I can deduct the interest against the rents. Now I have to pay income on rents and deduct mortgage interest on the primary resident house. Is this a smart move on the tax front?

While the mortgage is nonrecourse debt, it is my understanding that the HELOC is not. In other words, if you default on your mortgage, the only thing the bank can legally take is the house. Default on the HELOC and you're still responsible for the full outstanding amount.

Just something to think about.

While HELOCs are recourse, to get recourse the lender has to pursue a judicial foreclosure. Not something likely to happen in California. Once the trustee sale happen it wipes out everything. So unless the HELOC buys out the first and judicial forecloses on the house.. they have no recourse. From a practical point of view, high LTV HELOCs in a declining market in California are non-recourse.

CV2.. I'm in the mortgage biz, so can give you all kinds of ideas about financing options, but I'll hedge on the tax advice.

You can talk to your CPA, but if you can paper trail the funds and what they are being used for, you may still be able to take the direct deduction, otherwise you may still be able to deduct the HELOC interest with the same net result.

I'm not sure how many people have rentals with 30 YR fixed loans below 6%, but very few.

Without knowing how much equity you have,don't fret over others with lower rates. If I knew more about your situation, I might be able to suggest some other creative ways to increase your cash flow, but having equity and a 7% loan is better than being upside down with a 6% loan!

HLS...Do you or do you know of anyone offering a refi of a rental property to an interest only loan in the 6% range without any points.??.I am still good in the loan to value issue (~60% or so), but have a 5yr ARM coming up in 6 months and just want to decrease my monthly payment and pay the principle down when I like....I know I would be paying slightly higher interest, although the overall payment would go down..

Any ideas would be appreciated...

thanks

That rate just doesn't exist today for non owner, no points.
It was around there the last week of January...

If you plan to keep the property long term, you should want the lowest interest rate possible for the life of the loan, and be willing to pay a fee to get it.

There are still WAY too many people playing games with ARMS that may get caught with there pants down when their rate adjusts and not be able to qualify for a refi. They could end up with a 10% loan in a few years.

Historically, rates are ridiculously cheap.

Most people who have the pay option arm~ Negative Amortization loans have NO chance of refinancing when their payment adjusts. They were screwed in to the worst loan ever invented for the borrower.

The loan is poison and in most cases was sold by predators.
People are/will be losing their homes and the worst is yet to come. Many high end homes were financed with these loans, and are worth much less than the principal balance owed.

There may be a tsunami coming that few want to talk about because it isn't here yet.

thanks for the info.

Thanks HLS. I will count my blessings at 7% :)

What happened to me is that when I refied 5 years ago, my broker gave me a 7% rate, 1.5% above owner-occupied. However, two years after closing, when I called the lender I found out that my loan was marked as owner-occupied. So the broker made tons of money on this loan. Yet I can't do much about it.

HLS, with your crystal ball, would you think that rate will rack up quickly? On one hand, with the economy in a slow down/recession, Fed wants to keep interest rate low to stimulate. On the other hand, inflation is rampant and they have no choice but to raise interest rate. Right now they put the economy concern over inflation but for how long?

"While HELOCs are recourse, to get recourse the lender has to pursue a judicial foreclosure. Not something likely to happen in California. Once the trustee sale happen it wipes out everything. So unless the HELOC buys out the first and judicial forecloses on the house.. they have no recourse. From a practical point of view, high LTV HELOCs in a declining market in California are non-recourse."
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Yes and no. In this instance it sounds like he is considering paying off a non-recourse purchase money 1st with a HELOC. There is CA case law that suggests a no-cash-out re-fi of a non-recourse loan retains the non-recourse characteristic of the original loan. In this instance, the HELOC may be non-recourse. As an aside, if a HELOC is purchase money it is non-recourse.

A post-purchase HELOC (to pay off CC or buy toys) is a recourse loan and the lender does in fact have recourse even if the 1st forecloses. While the HELOC is "wiped-off" the property, the now unsecured debt still exists and can be turned into a judgment and collected.

So are you saying that a regular no cash out refi (not a HELOC) of an original loan is also a non - recourse loan???

just curious

"So are you saying that a regular no cash out refi (not a HELOC) of an original loan is also a non - recourse loan???"
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I don't know of a specific ruling in CA that states "a no-cash-out refi of a purchase money loan is a non-recourse loan." I also have not seen a specific ruling that suggests a no-cash-out refi is automatically a recourse loan. The cases I have seen are not precisely on point but do seem to suggest that a determining factor is cash-out or no-cash-out.

The legislative intent of the governing statutory section - CCP 580b - supports a public policy against deficiency judgments. The section refers to the financing of the "purchase price" - which can be construed to include a no-cash-out refi. That's what a no-cash-out refi is, after all - financing the purchase price.

"I figured that at 25 basis points per raise, it will take them 8 meetings to raise rates from 2% now to 4% and they have 6 meetings a year. This will give me one year and 4 months. Also I think they can't start raising rates until after the election. So I am safe for at least two years."

Don't be a tool.

While the Fed Open Market Committee sets Fed Funds rates, who sets Prime?

Your BANK!!!!!

They can raise Prime overnight by as much as they want.

LIBOR is an index between banks, that changes when the big banks
change rates.

Thanks, DaCounselor.

In my case, I have money in the bank to pay of this loan if I see fit. I saved enough to buy another house but with the housing bubble, I did not buy and started to focus on paying off debts.

I thought although prime rate is set by WSJ, it is always Fed rate plus 3%. So currently fed fund rate is 2% and prime rate is 5%. Is this 3% margin always the case?

If you're looking at a loan that is indexed to the Prime rate, you may want to identify with specificity who's Prime rate is being used. Every bank sets their own Prime rate - but for practical purposes I think most big banks offer the same or similar Prime rate. The WSJ publishes a Prime rate that is the rate being offered by the nation's biggest banks - this is the WSJ Prime and may be the Prime index for alot of loans.

I don't know of any mandate that Prime must have a +3% margin over the FFR and/or that Prime must move lockstep with the FFR, but that seems to be the case, at least recently. I don't know about historically. I think you are probably fairly safe operating with the assumption that a +3% margin will remain in place.

For what it's worth (which ain't much) I believe we are looking at a low FFR and Prime for the next few years at least. I think there is a 50% probability of the FFR/Prime going down a bit more before going up. There is also an international effort underway to reduce LIBOR down into a tighter position with the FFR.

cv2

Why is it all or nothing. If you are looking to lower your rate and maintain some level of securrity why not heloc out part and keep the othe wher it is at. For instance if you have 400K outstanding at 7% by going with %25 heloced you now have a weighted average interst rate of 6.31. If interest rate did start to move adversely you would only have to worry about a small amount. In the interim You could continue to pay down the 7% loan with the saved interest reducing the amount of years that you are paying on the loan.

It is not an all or nothing scenario and it seems like ther is definitity to lower your borrowing cost with a modest amount of added risk.

Hi Raybyrnes,

Thanks for your input.

In my case, the loan amount is that high, a little over $100K. Let's say if I pay off half of 100K, I still have to pay the same monthly payment for my original loan at $100K. Then I will have two payments: the monthly payment for $100K at 7% and the new payment for 50K. Roughly speaking my monthly payment will increase 50% right away. Granted, this will speed up my payoff schedule but I got a cash flow problem on my hand by doing this.

Thanks, HLS and DaCounselor.

Hi HLS and DaCounselor,

I want your opinion on the impact of the low Jumbo Conforming loan rate, now below 6%, on housing market. Granted, this is still too early to see the trend since we do not know the loan qualification details and people's reaction to it. I hope you could update your opinions as the time goes by.

It's a tiny change to average consumer. You need to think national, not just local.

It's another explanation of why the rich will get richer and the poor will get poorer.
It's not going to help that many people who would not have otherwise qualified, it's just going to be a lower payment for some.

On Monday, I had a well qualified borrower who easily qualified for an $800K purchase, full doc.
As of Wednesday, his payment will now be lower for $800K, or he can now afford an $870K house and with a simliar payment, and still be at the JC limit.

The govt REALLY doesn't know what to do, but is willing to try ANYTHING to artificially keep prices up and prolong the
downturn, they aren't got to stop it.

To bail out the irresponsible, the next 2 crazy things that I am expecting from DC are:
a)Refi's at 120% of property values.
b)Cutting principal balances of loans to keep sheeple from walking. (or some combination/variation)

After the $600 stimulus doesn't work, they will print $1200 checks for the next one.

This should ALL be an OUTRAGE to responsible people.
I am expecting riots in the streets to ensue when people realize what has happened.

Profits are privitized... Losses are socialized.
Welcome to United Socialist America.

To Larry The Renter, In re-reading your post, perhaps I misunderstood your previous question.
I was referring to a 30 YR fixed NOT being available "no cost at 6%" Do you want another ARM ?

IF you qualify,
Below $417K with 40% equity,SFR, NON owner 30 YR fixed P&I, No cash out, WITH a 1pt cost,is 6% today.
For Interest Only ARMS:
5 YR 5.375%
7 YR 5.50%
10YR 5.75%

When you asked about "no points" I'm not sure if you are asking about a total "no cost" loan or just one without an origination point.
For a loan without origination point, but still paying 3rd party closing costs (Title, escrow, Recording, Notary etc)
ARMS
5 YR 5.875%
7 YR 6.00%

If you want a total NO COST/NO FEE loan:
5 YR 6.375%
7 YR 6.375% (Same as 5 YR!)
10YR 6.75%
30 YR fixed 6.625% (P & I)

This means that if your loan is $300K today, it will still be $300K when you are done. (It will require an impound account for the best rate, which is a bit extra)

The above depends on your loan amount, but it appears that you can get a much better loan than you have today by paying some costs. Worst case getting a true no cost loan without adding to your loan balance you can still have a better rate than what you have now, and fixing the rate for another 5-7 years.

(This assumes that you can qualify. Let me know if you need any additional info. As always, rates subject to change until locked)