Houses are in foreclosure and more are heading that way it seems. At this point most writers begin providing a history of events leading to home owner woes – but they generally fail to get the story right. The woes are due to three things – people buying too much house and engaging in speculation, too many people taking variable rate mortgages with teaser rates and the sudden increase in the price of oil. The last item probably had the largest impact because this is what caused our economy to crash – but that would take a series of writings to explain and I digress.
One thing that can be done to help our economy and home owners both is to make it more affordable for people to refinance their homes. The cost of an appraisal is now about $400 - $450. Why? New banking rules (thanks Congress and President Obama) increased the complexity of banks getting appraisals. But here is the rub. An appraisal shouldn’t be this expensive unless there has been a major change to the property. Besides, if you get two appraisals they are likely to differ by several percent points. A common five percent difference is $10,000 on a $200,000 property.
Next is the mortgage tax (think of this as a “sales” tax). If you take out a new mortgage in Brevard County, the taxes are one percent of the total value of the mortgage. If you refinance an existing mortgage (one you already paid the tax upon) you pay the tax again. This one feature alone frequently makes refinancing uneconomical. Simply refinancing a $200,000 balance will cost you $2,000 in just taxes.
Rates are at historical lows. With good credit you can refinance into a 30 year mortgage and get a rate under five percent – maybe as low as 4.5 percent. A 6.5 percent mortgage on a $200,000 loan has a monthly payment of $1264.14. The same mortgage at 4.5 percent has a $1013.37 payment. That reduction would help struggling families.
Unfortunately, to get that 25 reduction in monthly payments one must refinance – which is almost as painful (and expensive) as buying a new home. Refinancing means new closing costs, new title searches, paying mortgage taxes, buying a new appraisal, and more. All of these add thousands to the cost of refinancing – and frequently make refinancing uneconomical. The question is, why all the pain? Refinancing a car is easy, simple, quick, and rather painless usually. Why is refinancing a house so expensive?
Most home loans are standardized. And a loan is just a contract. Therefore there is actually no reason a bank and a home owner could not agree to simply lower the interest rate and make a modification to the existing contract instead of destroying and remaking a new contract (i.e. totally refinancing). The laws just make this painful (and non-profitable for closing companies, attorneys, loan officers, and counties and states).
One thing Brevard County and Florida can do to help its home-owners is to either reduce its mortgage tax rate or set up a tiered tax rate whereby the seller pays a reduced rate to refinance the existing loan balance (say 0.1 percent) and pays the full one percent on any additional money borrowed. This would make it easier to refinance mortgages and greatly help home-owners – and our economy. And it is the right thing to do.
I'd say the link worked fine, I made it here.
ReplyDeleteNot sure about eliminating apprasials, when I was younger I did some work on FHA Repos. People forced into selling or refinancing a house have often lost their source of income.
That means minor repairs, don't get made. A leaky wax seal between a toilet and waste line can ruin a bathroom floor, including the sub-floor and damage the ceiling of a room beneath it. Up North a house that's been relying on spece heaters instead of the furnace can have serious plubing problem.
The tax is another story, when houses were inflating daily, no one cared.. now that they're deflating in value... what's wrong with a flat fee for each. Govenment has some paperwork costs it can justifiably charge for
Thanks Grumpy. H'mm did you take my post to imply we should eliminate appraisals? That was not the intent. My point was, appraisals are too expensive (guess I should have mentioned that the new rules added $50 - $100 to the cost of an appraisal). Appraisers don't need a college degree and don't even have to be right since the appraisal is just a guess at the value. If folks don't like the result they hire another appraiser.
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