Time to check the status of your Line of Credit

In an effort to reduce risk in this uncertain market, many banks are sending notices to home owners that their line of credit on their home has been frozen or reduced. In a letter to the banks from the FDIC, banks are urged to take a reasonable and systematic approach. A blanket reduction of equity lines could further aggravate the current credit crunch.

The FDIC also warns that banks must comply with truth in lending regulation Z. Here is an excerpt from the Letter:

Regulation Z generally prohibits lenders from changing the terms of home equity lines of credit; however, there are exceptions. For example, Regulation Z expressly permits lenders to prohibit additional extensions of credit or reduce the applicable credit limit “during any period in which the value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value for purposes of the plan.” To use this exception, lenders must determine that a “significant decline” occurred.

The term “significant decline” is not defined within the regulation itself. However, the Federal Reserve Board’s Official Staff Interpretations (Official Interpretations) to this provision of Regulation Z includes an example indicating that, while a “significant decline” will vary according to the circumstances, such a decline has occurred if the unencumbered equity is reduced by 50 percent. According to the Official Interpretations, a lender is not required to obtain an appraisal before suspending credit privileges, but there must be a significant decline in value. Although full individual appraisals need not be obtained, institutions should have a sound factual basis for determining that a property has experienced a significant decline in value. For example, automated valuation models or local tax assessments may be used, taking into account the issues described in the Home Equity Guidance regarding the validity of those values.

Other grounds for a reduction in line of credit include a material change in your credit or ability to repay the loan.

You can read the full letter here from the FDIC.

If you have received a reduction in your home equity line, you should contact your bank. They have to provide you the reason why they reduced your loan. If it is due to property value, be prepared as they may want to have your home appraised unless you can show why your home is valued more than they claim. If it is due to material change in your ability to re-pay the loan, make sure to ask why they believe this to be the case and again be ready to show them otherwise.

Most importantly, you should check the status of your loan before you make a purchase that will not be honored.

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With all the Low APR deals, I thought it might be time to review how much does 0% APR save you and is it worth worse gas mileage.

Lets take a look at Ford’s offer of 0% APR for 72 months on 2008 F150’s. To determine what this means in savings all you have to do is determine how much interest you would have paid over a similar term under normal circumstances. For a 72 month loan, your normal APR would be somewhere between 6-8% for average credit, lets call it 7%.

To determine the total interest, you can use excel and calculate your own formulas, or simply visit this handy tool from Bankrate and enter your information and then view the Amortization schedule. Scroll to the very bottom and in the last month you will see the total interest paid.

So try this, assume 7% for 72-months on $25,000 (as that seems to be the mid-level price after discounts on the F-150).

With the 0% APR, your interest expense is $0.
With 7% APR your interest expense is $5,688.21.

There you have it, the 0% financing saves you $5,688.21 Vs. a loan for the same period at 7% interest. However, since most people do not get a 72-month loan, it is more accurate to compare the offer against the normal loan you would get. If, for instance, you normally buy cars on 48-month loans, than just use the lower number for your comparison. The savings goes down for ever year you decrease the time you would have normally bought the car. You should also adjust the interest to what you think you could qualify for.

Other compares you can do!

0% APR can be great offers, but remember, if you are looking to save money due to gas then make sure to compare the total cost of the car over the time you plan to own it including fuel costs. Many of the really good offers are on trucks or less fuel efficient cars. On the surface, they may look like the better route, but with fuel cost so high you will quickly lose those savings.

In the example above, the Ford F-150 would cost $4,421.53 in fuel base on $4.79 per gallon gas and 12K miles per year. A more fuel efficient car could save you 50% or more on that cost. Over a six year time, a car that cost 50% less fuel will save you $13K. This may be enough to justify a more expensive hybrid truck or a hybrid SUV if you need the large car. If you don’t need the large car, then you better be saving at least $13K off your deal before you take the truck over a more fuel efficient car. Keep in mind this savings assumes fuel will remain constant and that you only drive 12K miles per year. Adjust anyone of those numbers and you will get different results.

Point is, before you rush to buy a car based on the desperate measures automakers are taking, do the math to see if makes sense on the model you are looking at. If savings is your goal, you have to factor in fuel costs before you can make a good choice.

Steps to compare total cost:

1. Start with the price you will pay for the car after rebates and incentives.
2. Determine the interest expense on the loan you will be going for using the tool above from bankrate.
3. Determine the number of miles you drive per year and divide that by the average MPG of the car. Multiply the number by the gas cost in your area. Now you have the yearly fuel cost.
4. Multiply the yearly fuel cost in step 3 by the number of years you plan to keep the car. (must be the same for each car you are comparing).
5. Add the results from 1, 2, 4 to arrive to your estimated total cost of the car (this excludes maintenance, registrations, and other factors assumed to be the same for all cars in your comparison. If you are comparing a BMW to a Civic, you will have to adjust these numbers as a BMW has more expensive ownership costs).

That is it, this will give you an idea of what car is less expensive when you factor in fuel, rebates, and special financing.

Good Luck!

The 600+ bill is aimed at helping distressed homeowners. I am sure we all don’t have time to read the full document (housing act), so here is a great summary of what the bill is going to do provided by Votesmart.Org:

-Establishes the Refinance Program Oversight Board, which is responsible for coordinating a program that insures “homeownership retention mortgages,” which are refinance loans designed for borrowers who are at risk of foreclosure (Sec. 112).

-Specifies that the aggregate original principal mortgages insured under the “homeownership retention mortgage” program may not exceed $300 billion (Sec. 112).

-Expands eligibility for FHA mortgage insurance to include borrowers who have been deemed “high risk” due to having a credit score equivalent to a Fair Isaac Corporation (FICO) score of less than 560 (Sec. 206).

-Provides incentives for “high risk” borrowers who have consistently paid their premiums on time that would reduce the amount of annual premium payments to payment levels equal to that of individuals who are not deemed “high risk” borrowers (Sec. 208).

-Mandates the establishment of underwriting standards which allow the FHA to insure mortgage loans for qualified borrowers who have existing mortgages with adverse terms or rates, qualified borrowers who do not have access to mortgages “at reasonable rates and terms for such refinancings due to adverse market conditions”, and qualified borrowers who are in default or at imminent risk of being in default (Sec. 210).

-Outlines the following eligibility requirements for receiving insurance for a “homeownership retention mortgage”:

-The insured residence shall be the sole residence in which the mortgagor has a full ownership interest,

-The mortgagor shall be verifiably unable to pay the existing mortgage(s) and, as of March 1, 2008, the mortgagor shall have had a mortgage debt-to-income ratio of greater than 35 percent,

-The new loans shall not exceed 90 percent of the property’s value,

-Prepayment, default, and delinquency penalties on existing mortgages shall be waived,

-Indebtedness under the existing senior mortgage shall have been reduced by such percentage as the Refinance Program Oversight Board may require, and holders of liens on property securing a mortgage to be insured under the program shall agree to accept the proceeds of the insured loan as payment in full for all indebtedness under all existing mortgages,

-The Secretary of Housing and Urban Development shall hold and retain a lien on the residence which will be subordinate to the mortgage insured under the program but will be senior to all other mortgages,

-The mortgage insured under the program shall bear a single rate which will be fixed for the entire mortgage term,

-The mortgagor shall undergo a criminal history check to ensure that he or she has not been convicted of mortgage fraud in the past seven years (Sec. 112).

-Requires the implementation of the following underwriting standards for the “homeownership retention mortgage” program: the mortgagor insured under the program shall have “a reasonable expectation” of repaying the mortgage, there shall be no denial of insurance based on credit scores, based on previous delinquency or default, or based on bankruptcy, and a total debt-to-income ratio of up to 50 percent shall be allowed (Sec. 112).

-Terminates “homeownership retention mortgages” two years after the enactment of this amendment, in the absence of any approved extensions (Sec. 112).

-Increases the allowed levels of principal obligations for mortgages insured by the FHA (Sec. 203).

-Extends the term of mortgages insured by the FHA from thirty-five to forty years (Sec. 204).

-Establishes the Federal Housing Finance Agency, which shall supervise and regulate Fannie Mae, Freddie Mac, and Federal Home Loan Banks (Sec. 311).

-Raises limits on loans that Fannie Mae and Freddie Mac can purchase from $93,750 to $417,000 for a single-family residence, from $120,000 to $533,850 for a two-family residence, from $145,000 to $645,300 for a three-family residence, and from $180,000 to $801,950 for a four-family residence (Sec. 333).

As it stands today, the bill as passed the Senate 84-12.
Bill Sponsor: Nancy Pelosi 

Key attention should be noted that this bill will reduce loan balances for troubled homeowners and transition the debt carried by the banks to the Federal Government (taxpayers).

One should also pay attention that this bill has roots to the banking industry. While the stated goal is to help troubled homeowners, it is a bank bailout. You can read an internal document from Bank of America posted by the bigpicture and help but not see how similar the bill is to the ideal plan outlined by BofA.

My favorite quote in the document “we believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market”

Who is really at fault?  The housing pull-back (or as others refer to it “crash”) has had a substantial impact on the financial health of this country.  Most news and TV correspondence have painted this as the end of the world.  I agree it is a bad situation, but not one that is a surprise or the end of the world.

While I don’t like seeing a decrease in the housing sector, it is necessary for a healthy market to have pull backs.  This pull back is larger than others only because housing was artificially inflated by high demand as a result of low interest rates and easy to obtain loans.  How can one complain that the market is in a dive bomb when it was substantially over inflated in the first place based largely on demand from individuals that could not afford the house they bought?  Really is this a surprise?  A simple calculation can tell you that a family making under 70K per year can not afford a 500K house no matter how good their credit is with little down, but with the loan products out there they were able to buy one.  Or how about the real-estate investor who bought 3-5 units that were break even on a 5 year or less ARM.  I hope these people had reserves to account for the change in payment after the initial period.  Even to this day, I hear advertisements for investment properties that “cash flow $500 per month for the first year with only 10% down!”.  Yeah right.  What happens after year one?  Negative cash flow of $1,000?  These are crap loans designed to lure people into an investment that don’t understand all the details.  If you buy investment property on a variable loan, you are just asking for a bad situation.

I read several articles that blamed mortgage brokers.  I don’t really understand this argument.  Yes there are many unscrupulous ones, but in most cases, as a consumer you can compare rates from any bank, online service, or other mortgage broker to make sure you are not getting a bad deal.  You also have the ability to read the papers you are signing.  For this reason, I can not lay blame on the mortgage brokers, even if they did practice bad lending policies.

I believe that a majority of the problems start at the banks themselves.  Lowering lending standards, allowing no documentation loans, and allowing ARMs to families that could barely afford the lower introductory rates.  There was almost no checks and balances.  It did not matter how bad your debt to income looked as long as your income could support the low fixed interest only payment (in some cases income did not even matter).

However, they should not bear all the responsibility.  The buyer should take responsibility as well.  If you do not understand the loan, if you have not shopped around, if you have not read all the terms, and if you have not taken the time to figure out what happens at every point in your loan’s life, you should not have signed the papers.  To many buyers were under the illusion that housing prices would stay level or increase in value every year which would always allow them to refinance their loan after the fixed period ended.  This is absurd.  It may continue for a long time, but what if?  The problem today is that we have reached that what if and buyers can not refi a house that is upside down in value.  I hate to say it, but unfortunately this frenzy made a lot of people money that probably did not need it and bankrupted a lot of honest people trying to provide a decent life for their family.

This mess is causing a lot of pain right now, but on the positive side, it is bringing housing back in line with where it should be.  Double digit gains year over year are not sustainable and are unhealthy in any market.  While there may not be an easy or immediate solution, housing over the long term will come back.  Buying a house may or may not be a good idea now, but with low interest rates and a 20% haircut off most markets it may not be a bad idea to begin a new strategy.

If you are looking for a new loan, here are a few tips to take into consideration:

1.    Always read everything!  I don’t care if it takes two entire days, read it, understand it, and if you don’t ask questions.  The terms are not always set in stone and can often be modified if you find something that is unreasonable.

2.    Pick the right loan for the right reason!  Don’t pick the interest only because that is what you can afford.  If that is the case, then the house is to expensive for you.  Picking a lower interest ARM is really only good for one thing, lowering your principle loan balance faster than a traditional loan can.  However, it is a gamble because you do not know what interest rates are going to do.  If you take this strategy take the time to model out how the reduction in principle offsets the increase in interest.  With some reasonable assumptions, you should be able to figure out a good break even point depending on what you anticipate interest to be.  If you don’t know how to model out a payment schedule, find someone that knows how or look at some of my previous posts.

3.  Shop around!  There are a wealth of sites and places you can go to apply for loans.  If you are using a broker, call a different one and see if they can meet or beat the current loan offer you have.  The more bids you get out, the easier time you will have finding out what a fair loan is based on your situation.

4.  Be smart and check BBB and consumer reports!  If using a broker, take the time to research for any negative comments.  Odds are, you will find some and see what the complaints were.  Depending on what you find, you can ask how the broker how they resolved the issue or not do business at all with them.

5.  Know your facts!  That is, know you credit score, know what you can afford, know your back up plan if things get tough, and most importantly know your habits.  If you can not stick to a budget don’t get a house that requires a loan that will put you in a situation that requires tight money management.  A nice big house is great, but if you don’t have any flexibility for travel, entertainment, or living, what is the point of having the nice house?

These are just a few tips, but I hope that you find them useful on your next home purchase.

What are your thoughts on the current housing problems?  Who is at fault?  What is a good solution?  Should the tax payers bail people out?  Should the CEOs with big bonuses pay? 

With so many good financing offers out there, thought I would throw a quick reference guide together that you could print out and take to the dealer. Here goes:

1. (MF) money factor to approximate percentage rate: Multiply lease factor by 6,400.

2. Low APR financing monthly payment per $1,000 financed:

72-months 0% APR - $13.89 per $1,000 financed.
60-months 0% APR - $16.67 per $1,000 financed.
48-months 0% APR - $20.83 per $1,000 financed.
36-months 0% APR - $27.78 per $1,000 financed.

72-months 1.9% APR - $14.71 per $1,000 financed.
60-months 1.9% APR - $17.48 per $1,000 financed.
48-months 1.9% APR - $21.65 per $1,000 financed.
36-months 1.9% APR - $28.60 per $1,000 financed.

72-months 2.9% APR - $15.15 per $1,000 financed.
60-months 2.9% APR - $17.92 per $1,000 financed.
48-months 2.9% APR - $22.09 per $1,000 financed.
36-months 2.9% APR - $29.04 per $1,000 financed.

72-months 3.9% APR - $15.60 per $1,000 financed.
60-months 3.9% APR - $18.37 per $1,000 financed.
48-months 3.9% APR - $22.53 per $1,000 financed.
36-months 3.9% APR - $29.48 per $1,000 financed.

3. Here is one the car dealers don’t ever advertise: Total interest paid per $1,000 borrowed:

72-months 3.9% APR - $123.18 per $1,000 financed.
60-months 3.9% APR - $102.29 per $1,000 financed.
48-months 3.9% APR - $81.65 per $1,000 financed.
36-months 3.9% APR - $61.26 per $1,000 financed.

72-months 2.9% APR - $90.73 per $1,000 financed.
60-months 2.9% APR - $75.46 per $1,000 financed.
48-months 2.9% APR - $60.33 per $1,000 financed.
36-months 2.9% APR - $45.34 per $1,000 financed.

72-months 1.9% APR - $58.87 per $1,000 financed.
60-months 1.9% APR - $49.04 per $1,000 financed.
48-months 1.9% APR - $39.27 per $1,000 financed.
36-months 1.9% APR - $29.56 per $1,000 financed.

If your car costs $20,000 and you received 3.9% APR for 72-months you will have paid $2,463.60 in interest ($123.18 * 20).

Quick note on leases. Now that you know the total interest paid on the special financing terms, if you decided to lease on the spot with out doing your homework at least do this quick check before you sign any papers.

Multiply your total payments.
Add your down payment. (Should be zero or very small)
Add your trade in allowance.
Add any rebates and incentives.
Add in the residual value of the car. (Should be as high as possible)

This is you total price of the car. Does it make sense? Is it high compared to traditional financing? If you are doing a 36-month lease, look at what your total cost of the car would be using traditional financing using the charts above. For a car that costs $20,000 financed at 3.9% for 36 months you will pay a total of $21,225.26. If you do your calculation above for your lease and it turns out to be $25,550, you know you have a terrible deal.

Word of warning here. Just because the numbers match the good financing does not mean you have a good deal. If you are at the dealer and reading this and you don’t know why, then take the information down and tell the dealer you will call him with your acceptance within 24 hours. Go home and walk through the calculations on this site and determine if your lease meets the proper factors for being a good deal.

If you are arithmetic challenged, post the information in the discussion board or on any other car buying discussion board and wait for responses.

Never rush a lease unless you are already familiar with each factor before you go into the dealer.

Good luck!