Return on Investment Calculations

The calculation appears simple enough:
Return on investment equals what has been
earned divided by what has been invested.
If an investor puts $1,000 in a portfolio of
stocks that appreciates to $1,100 and pays
$50 in dividends, the portfolio would have
returned 15 percent ($150/$1,000).

However, it is not that simple. To
make the percentages meaningful,
investors need to consider
a few important variables.
For one, a $150 return
on a $1,000 investment in
one year is better than a
$150 return on a $1,000
investment over two years.
Indeed, the first outcome
produces a 15 percent annualized return,
while the second produces a 7.24 percent
annualized return. Annualized returns
enable direct comparisons.

Fees also matter. Two investors each
earn 15 percent on their $1,000 investment.
One investor is charged 1 percent of the
portfolio’s value at year’s end, while the
other is charged 2 percent. After fees are
subtracted, the first investor posts a 13.8
percent return on investment, the second
investor posts a 12.7 percent return.

Leverage, or debt, is another important
variable. Consider two $200,000 rental
properties: One investor pays the full price
in cash while another investor borrows 80
percent of the property’s value ($160,000) at
6.5 percent on an interest-only loan. After
one year, the property generates $15,000
in operating income. The first investor
earns 7.5 percent ($15,000/$200,000) on
his invested capital. The second investor
earns 11.5 percent [($15,000-$10,400 in
interest payments)/$40,000] on his invested
capital.

The variable of leverage,
in turn, leads to the variable of
risk. Some investments are
riskier (offer a greater
chance of losing money)
than others. A leveraged
investment is riskier
than a non-leveraged
investment; bonds are
riskier than stocks; futures
contracts are riskier than
stocks.

Bottom line: An 11.5 percent return
on a leveraged investment isn’t necessarily
better than a 7.5 percent return on an
unleveraged one.

Returns on investment are important
considerations, to be sure, but the variables
that contributed to those returns are just as
important.

MBS Purchase Update

As I have mentioned in previous Blog posts recently, the Government’s Program to purchase Mortgage Backed Securities (MBS) is nearing the end. This program began in January 2009 as part of the economic recovery act of 2009 and was designed (and has been successfully implemented) to hold down mortgage interest rates.

This week’s purchases of MBS by the Government was $12 Billion, bringing the total to $1.173 Trillion since January, 2009, and leaving $77 Billion to be spent over the next 8 weeks. Leaving an average of $9.62 Billion per week to be spent, I have warned, as have other financial experts, that mortgage rates are going to begin increasing.

This latest week of increased refinance activity (up 21% Nationally) may be an indication of the reality of our situation becoming clear to homeowners who have not yet taken advantage of lower rates. A recent Government report (in a previous Blog Post), indicated that just 30% of eligible homeowners who could benefit from the lower interest rates we are enjoying, have actually taken the steps to refinance.

Also, homeowners wanting to sell their current homes in order to take advantage of the $6500 tax credit scheduled to expire on April 30, 2010 has also dramatically risen recently (National Association of Realtors article I read yesterday).

And finally, the first time homebuyer. What a shining star in the market place this past 12 months! With over 42% of all homes purchased in 2009 attributed to first time home buyer’s, and why shouldn’t these first time home buyer’s take advantage of a “once in a lifetime” benefit?!

First Time Home buyer's are rushing to put homes under contract before April 30^th (and close before 6/30/10) to take advantage of the $8,000 tax credit!

This is a wonderful time in Mortgage rate history! Please call me if I can help with any Purchase or Refinance Questions you may have!

What do I do to my Home before I list it for sale?

Five Things You Must Do
Before You List Your Home

While sales are showing signs of picking
up around the country, it is still crucial that
you do everything you can to make your
home as attractive as possible to potential
buyers before you list it for sale.

1. Clean everything. A clean home gives
buyers the impression that your property
has been well cared for. (Call me if you need
help in this area, I have several professionals
who I can refer you to!)

2. Repair everything. If you have neglected
small things such as burned out light
bulbs, broken closet doors or chirping fire
alarm batteries, buyers will wonder what
bigger items you may have neglected (such
as furnace repair, roof replacement or
foundation work). (For professional Electrican,
Handyman, or Plumber, call me for phone
numbers for those I trust and would refer to you!)

3. Make your home a clutter-free zone.
Removing all clutter is vital. It can make
your home appear larger and give buyers a
sense of space and order. (Rent a storage unit
for $50 per month and get $5,000 more sales
price on your home!)

4. Fantastic curb appeal is another must have.
You want buyers to be bowled over
the moment they pull up to the house. In
this competitive market, it is not enough
to assume buyers will fall in love with
the inside; the outside of your home must
impress them as well. (Interior Design
Specialist can help Stage your homes interior,
and a Landscape architect can help with the
exterior curb appeal-Call me for names and
phone numbers for professionals I would
recommend!)

5. Hire a professional stager to ensure your
home has its best foot forward. A stager
can show you strategic ways to set up
your home including furniture placement,
color and balance that will elicit certain
emotions in your buyers and help them see
just how great your house is.

Consult your Realtor for more insight into
what you can do to ensure a quick sale at
the best possible price.

Thought for the day:

Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1.
~Warren Buffett

First Time Home Buyer's Are Buying Homes!

According to the National Association of Realtors profile of home buyers and sellers, First Time Home Buyers reached the highest market share on record in 2009. First Time Home Buyer's bought 47% of homes purchased, the highest percentage since 1981.

I've gathered a lot of experience over the years. And I'd like to share it with someone ready to buy their first home. The $8,000 tax credit is soon to expire with a scheduled date of April 30, 2010 as the deadline for a home contract and June 30, 2010 as the closing date.

MBS purchase program to end March 31, 2010

Yesterday, the Fed confirmed that its Mortgage Backed Security purchase program will end March 31, 2010. This announcement was expected, however, there WAS a chance that the program would be extended or expanded but this hoped for extension did not happen.

What this means for Mortgage interest rates is that without the extra demand that the Government has created for Mortgage Bonds, we could see a fall in Bond Prices and an increase in Mortgage rates beginning in April.

I will keep you posted of additional market news affecting mortgage rates.

FHA Loan Changes Announced

Tighter underwriting guidelines unveiled Wednesday (1/20/10) by the Federal Housing Administration (FHA) will make it harder for lenders to qualify borrowers in a year when origination volumes are already expected to tank.

FHA commissioner David Stevens announced four major policy changes that he said would primarily affect borrowers "at the margins":

1) raise mortgage insurance premiums;
2) require higher down payments from borrowers with low credit scores;
3) reduce home-seller concessions;
4) and step up enforcement actions against FHA lenders.

Raising the up-front premium by 50 basis points, to 2.25%, may have the most immediate impact, several lenders and mortgage experts said (beginning April 15, 2010).

FHA is halving the maximum share of a homebuyer's closing costs that sellers can pay, to 3% (down from the 6% allowed before) and this may have a bigger impact by disqualifying many first-time buyers.

Another FHA policy change will require, beginning early summer, that borrowers with FICO scores of 580 or less make a down payment of at least 10%. Major lender's who allowed lower than 620 credit scores are now out of business (Taylor, Bean and Whittaker).

Beginning today the FHA will begin monitoring the performance of loans vetted by individual underwriters, not just the lenders they work for. HUD also is asking Congress to give it more authority to kick lenders out of the FHA program and make the remaining ones eat credit losses.

FHA is trying to close the gap between its guidelines and the stricter standards of Fannie Mae and Freddie Mac (Conventional financing). These changes will certainly affect some borrowers and I will be monitoring the impact and giving advice in future Blog posts.

With the $8,000 tax credit for first time home buyers currently scheduled to expire April 30, 2010, and the impending tightening of FHA qualification guidelines, whether you are a first time home buyer or looking to upgrade or downsize, call me today and I can review your situation.

Continued Great Rates

Continued good news in the mortgage market! The Fed continues to purchase mortgage backed securities which is holding rates down to close to an all time low! Negative economic news including higher than expected unemployment numbers and lower corporate profits than expected has also helped hold rates down.

Here is today’s update on the Fed Bond purchasing program: 3:03 PM ET - Fed bought $12B in Mortgage Backed Securities in the latest week bringing the total to $1.149T leaving $101B left to purchase. (approximately 8 weeks remaining in the Fed Bond purchase program with the funds remaining, but there is talk to extend the program-I will keep you posted).

FHA Flipping Rule Removed February 1, 2010

FHA has removed the 90-day ‘flipping’ rule...effective Feb 1st. There are a few conditions that Underwriting still must watch for:
• Must be arms length transactions (all parties)
• 20% increase in seller’s acquisition versus new purchase price will come with several conditions (possible 2nd appraisal and/or inspection)


Read the attached if you want/need all the details.

http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf

VA Maximum Loan Amounts for 2010

2010 VA loan limits: 2009 limit in black and 2010 in red

Davis County $423,750 $417,000
Morgan 423,750 417,000
Salt Lake 652,500 516,250
Summit 652,500 516,250
Tooele 652,500 516,250
Weber 423,750 417,000

Government Debt and the effect on Bond Pricing and Mortgage rates

As I have mentioned in previous Blog posts, I am going to be watching government spending and the increasing Federal debt and the effect on Bond prices and resulting effect on Mortgage rates.

The following is a very sobering commentary on the out of control Government spending going on that will have far reaching implications on our debt structure. Remember, future inflationary worries from Government spending will negatively effect Bond prices and increase mortgage rates.

The Senate was very busy in the season of giving, approving a 10-year, $871 Billion Bill yesterday that would extend health insurance to millions of Americans. The vote was split 60 to 39, down party lines. The Bill is being framed as the biggest change to the health care industry in decades, but it’s not a done deal yet. Now the Senate and the House must come together to hammer out a compromise between their two versions, which means more discussions, negotiations, and debates.

And the Senate wasn't done there – we of course have to pay for all the stimulus, benefits and programs, so they just voted to raise the “debt ceiling” for government debt by $290B to $12.4T. By our calculations, that’s over $40,000 dollars per American. Whoa. The amount of debt that our country is piling on is very concerning – our children and their children may have a different standard of living, as they carry more of a burden in the future. Now President Obama must sign this measure into law, which would permit the Treasury to issue enough Bonds to fund the government's operations and program until mid-February.

Call me if you would like to lock in on a historically low interest rate for a purchase or refinance need you have.

Tax Credit for existing home owners

Frequently Asked Questions
About the Move-Up/Repeat Home Buyer Tax Credit

The Worker, Homeownership, and Business Assistance Act of 2009 has established a tax credit of up to $6,500 for qualified move-up/repeat home buyers (existing home owners) purchasing a principal residence after November 6, 2009 and on or before April 30, 2010 (or purchased by June 30, 2010 with a binding sales contract signed by April 30, 2010).

The following questions and answers provide basic information about the tax credit. If you have more specific questions, call me and I will visit with you about your unique situation.

1. Who is eligible to claim the $6,500 tax credit?
2. What is the definition of a move-up or repeat home buyer?
3. How is the amount of the tax credit determined?
4. Are there any income limits for claiming the tax credit?

FAQ web site (in addition to the 4 questions above, 17 additional questions and answers): http://www.federalhousingtaxcredit.com/faq2.php