Mortgage

This isn’t the first mortgage fraud bust in Brooklyn and it won’t be the last, but it’s good to see some weight sentences getting thrown around. This case, reported by The Post today, involves all the usual suspects: a ring of lawyers, real estate brokers, mortgage brokers, title insurers and straw buyers got together to buy cheap properties in Brooklyn and Queens and then quickly flip them at inflated prices. The amount of fraud surpassed $10 million, with Lehman Brothers and a handful of lenders getting stuck with the bill. The ring leader, a 44-year-old lawyer named Anthony Onua, could face up to 30 years in prison.
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The New York Times had a good primer this weekend on when it makes sense to send in money above and beyond your required monthly payment to reduce the principal amount of your mortgage. Back in corporate finance class in business school (if we recall correctly—it’s been twelve years!), you’re taught that a company should pay down its debt if can’t find any alternative use for its capital that it believes can return as much as it’s paying in interest on its debt. The same thing applies to an individual, and with rates as low as they are and the significant tax breaks factored in, the hurdle is pretty low right now. “Back when rates ran at 7 or 8 percent, making extra payments offered what amounted to a guaranteed return on your money,” says The Times. “When you’re ridding yourself of debt that costs you much less, however, it’s easier to imagine a future when you could more easily earn a higher return by investing those potential extra mortgage payments someplace else.” Of course, there are some other common-sense considerations to factor in, like the flexibility and safety that having some cash sitting in the bank can bring or the priority of paying off higher-interest debt like credit cards before attacking the balance of your mortgage.
When Not to Pay Down a Mortgage [Brownstoner]

Here’s an interesting twist in our refinancing story. We received in the mail earlier this week the following notice from Chase, which is the provider of both our current mortgage and our Home Equity Line of Credit:

With home values falling in many parts of the country, we’ve used a proven valuation method to estimate your home’s value at $1,000,000. Unfortunately, that valuation no longer supports the full amount of your Line of Credit, so we are suspending future draws again your account as of May 15, 2009.

We’ve had a 6 percent 30-Year fixed mortgage since we bought our house in 2005. With rates at historic lows, we, like many people, started looking into refinancing earlier in the year, but had to put it on hold until we got tax extensions, and then returns, filed. When we spoke with the mortgage specialist at Chase in February the conforming loan limit for a two-family house in Brooklyn was just south of $800,000. When we got on the phone yesterday morning we were pleased to learn that the conforming limit had recently been raised to $934,200; the single-family limit is $729,750. We were able to do a 90-day lock for a 1/4 point at 5 percent. Here’s where you have to start to question how low prices can really go: With rates where they are right now, you could, say, buy a $1.2 million house and lock in mortgage payments of $5,000 a month; assume you make $1,500 on your rental and you’re down to $3,500; throw in the tax breaks and you’re down to $2,500; add back in $1,000 a month for taxes and insurance and you’re back up to $3,500. $3,500 a month to own your own house in New York City and have, say, 2,400 square feet of living space for yourself (three out of four floors). The trickier part comes when you need to finance more than that $934,200. Have any readers gotten financing for significantly more than that recently? How did you structure it? We heard from Chase that HELOCs are quite hard to get right now?