When making this decision, the consumer must first decide if they would like to keep the house. This is a particularly emotional issue when a family is involved. When children are in the picture, families are often willing to make sacrifices to prevent uprooting them. If this is your situation, or you have other reasons for wanting to keep the house, then foreclosure is obviously not an option.

If you are looking at bankruptcy protection in order to allow your family to stay in the house, then it is important to look at the post-bankruptcy financial picture. You will need to sit down with all of your bills and determine what will be discharged in the bankruptcy and what will remain afterwards. If the majority of your debt is tied up in student loans or to the IRS then bankruptcy is not going to alleviate much of your financial burden. On the other hand, if the majority of your debt is unsecured credit, then the bankruptcy will likely free up a substantial amount of cash. This extra money will allow you a better opportunity to meet your monthly mortgage obligation post-bankruptcy.

For consumers who decide that foreclosure is the best option, there are a few things that you must be aware of prior to the foreclosure process actually begins. Depending on the housing market in your area, you may try to arrange for a short sale. A short sale happens when an offer for a house is made that is less than the mortgage note(s) on the house but the lender agrees to accept this reduced amount as payment in full. A short sale will have a negative impact on your credit but not to the extent that a foreclosure or bankruptcy will. One benefit of a short sale over a foreclosure is that the bank considers the loan repaid in full and you will not be held liable for the difference.

Even though many banks are being jammed with foreclosures, several still refuse to accept short sales so this is not an option for everyone. At this point, there are a couple of foreclosure options to consider. Some banks will try to talk consumers into relinquishing their house deed in lieu of foreclosure. This is a good idea if the bank agrees to accept the deed in lieu without recourse. In other words, the bank accepts the deed as payment in full for the note, regardless of what the property brings at auction. If the bank refuses to accept a deed in lieu without recourse then there is no benefit to you to offer the deed and you might as well make the bank work for the foreclosure. Perhaps they’ll be incentivized to accept it without recourse when they realize the additional work that they will now be going through.

If your mortgage company will not accept a short sale or a deed in lieu of foreclosure without recourse, then they will have to go through the entire foreclosure proceedings. This usually does not occur until your mortgage is six months (or more in some cases) delinquent. A foreclosure is a serious hit to your credit report, but not to the extent that a bankruptcy is. In addition, the mortgage companies can sue you for the difference between the value of the mortgage and the amount that the property brings at auction plus additional fees in some cases.

Unfortunately the decision between filing for bankruptcy or having your house foreclosed on is one that is being faced by record numbers of Americans. Some consumers are holding on to the hope that the federal government will step in with a plan that will allow them to keep their house without having to reaffirm after filing for bankruptcy protection. If the government does step in, it will likely be too late for tens of thousands of American families.

This is a buyer’s market. If you are positioned to buy, and buy right, you will be handsomely rewarded in the next few years. Sellers are motivated, prices are artificially depressed, and mortgage rates remain at historic lows. Creativity will maximize your ability to buy and minimize your downside risk.

There are a number of interesting deals to be done. An example is an investor client who is buying as many homes in Queen Creek, AZ as possible. Queen Creek is a suburb roughly an hour southeast of Phoenix, AZ. In the real estate price run up in the first half of the decade, prices for a +-2000 square foot tract home went from $97 per foot in 4Q 2001 to over $154 per foot in 4Q 2005. There are many square miles of nice homes in well planned neighborhoods that have all been built within the last five years. He is buying at $50 per foot - almost half of 2001 pricing. With a cost to build of nearly twice that price his downside risk is very low. The homes are almost brand new and he easily rents them for $950 per month, which is enough to cover his mortgage of $665 per month. He has cash-flowing rentals and the ability to hold for a number of years. Has the market completely bottomed out? He doesn’t care.

Another example is a foreclosure bailout. This is a term that causes fear for banks and investors alike. Why would you help someone who cannot pay their mortgage stay in a house? Let’s define a bailout. Typically, a homeowner who is in default on their mortgage looks for a family member or investor to help them stay in the house. Then the current mortgage is brought up-to-date or there is a new mortgage put in place. The old incentive for an investor to do this type of deal was the equity in the house they would receive if payments were not made by the old homeowner. However, today most of these homes are “underwater”. That is, homeowners owe substantially more than an investor would be willing to pay.

Here is how the bailout looks today. In our example we will assume that the house is worth $200,000 and the current homeowner owes $240,000. The investor is willing to pay $160,000. First, an investor offers to purchase the property from the homeowner at $160,000. Since this is less than the amount owed on the property, the bank must approve a short sale on the property. This means that bank must be willing to accept the lower amount as payment in full and write off the difference between the purchase price (less fees) and the amount currently owed on the property. Since the investor is offering 80% of today’s market value on the property and the current owners have probably not been able to make their payments for 2-3 months, the bank will likely accept the offer.

The investor now owns the property. They can then offer to lease the property to the former homeowners. They may even allow the former homeowners to buy the property from them in a year or two for $220,000 (as long as the tenant pays all of their rent on time). The rent may be slightly above market rates and will more than cover the new mortgage that the investor has taken out on the property.

This transaction works for the investor since they have a cooperative seller (new tenant) and they get a good deal on the property. The property cash-flows. They have a profitable exit strategy in place. Best of all, they do not have the house sitting vacant while marketing for a tenant, and the old homeowners are happy because they get to stay in the house. The one argument often heard is, “If they do not pay the bank, how will they pay me?” Many times the new rent is dramatically less than the old combined mortgage payment. Often the rate has risen due to the original loan type and has only recently become unaffordable.

These are two examples of a multitude of creative ways to profit from the current real estate climate. We offer custom tailored solutions for most problems, and we lend nationwide.

Unlike other traditional mortgages, where the payment is calculated from the total of the index and margin, the Options ARM offers 4 monthly payment options every month, giving you the opportunity to choose which payment to make. This monthly payment option is where the Options ARM derives its name. The typical four payment choices are:

THE MINIMUM PAYMENT OPTION - This allows you to make a small monthly payment usually equivalent to a 30 year mortgage at 1% interest, or about half of your interest cost for the month. This unpaid interest expense increases the principle balance of the mortgage.

INTEREST ONLY PAYMENT - This covers all of the cost of the interest for the month. Choosing this keeps the mortgage balance from increasing or decreasing.

30-YEAR PAYMENT - Standard principle and interest payment that will pay the loan off in 30 years

15-YEAR PAYMENT - Standard principle and interest payment that will pay the loan off in 15 years

Now that we have define the Option ARM, we need to answer the questions, “Is it an option (pun intended) for me?” As with most things in life, there are positives and negatives.
Lets start with the good news. Option ARMs exist because there is market for them. They do some things better than other mortgage types. For example:

Low payment - there is no mortgage option that give a lower payment on a given principle balance. If you choose the lowest monthly payment you are not even required to cover the cost of the money. Clearly, the downside of this will be discussed later, but if, for a variety of reasons, you need a low, low payment, an option ARM cannot be beat.

Automatic payment adjustment - Though not unique to option ARMs, having the payment automatically decrease with a principle payment can come in handy. For example, you finally sold your old house and want to use that equity to lower the amount of money you owe on your new house. When you make that large principle payment, your monthly payment will automatically drop accordingly. You do not need to refinance and pay loan and title fees to take advantage of your new lower balance.

High loan amounts available - In our current credit climate, many of the ALT-A products that used to exist are gone. The lenders that offer the option ARMs tend to be some of the few remaining sources that will give higher loan amounts, higher LTVs, and lower required documentation for their loans. If the traditional mortgage cannot get approved—-and you really need the loan—the option ARM may work.

Of course, we cannot forgo the negatives, and frankly, with the option ARM there are (numerically) many more negatives than positives. However, you should consider the risk of the negatives and weigh them against the gains before rejecting the option ARMs outright.

High cost of money - If you qualify for a traditional mortgage and are considering an option ARM, you should understand that the flexibility comes at a price. Everything else being equal, the interest rate on an option ARM is almost always higher. Sometime times this difference is miniscule, but sometimes it can be 3 or 4 percent higher. On a $300,000 loan, a 4% higher rate costs you $1000 MORE per month in interest. Be sure to compare the fully indexed rate against other mortgage choices prior to signing the paperwork.

Negative Amortization (Neg Am)- This means that rather than amortizing your mortgage over 30 years and paying the principle to zero in that time, you are actually increasing the balance owed each month you make only the minimum payment. The ramifications of Neg Am can be very costly.

Banks are smart. They do not allow you to have a Neg. Am. loan forever. At a certain point your loan will recast. This means that you have exceeded the original principle balance by a contractual percentage. For example, many Option ARMs recast at 110% of the original balance. Once you have reached this mark, your new minimum monthly payment is often the fully amortized 30 year principle and interest payment. This can cause a payment to increase 3 or 4 times the minimum all at once. This can be an unwelcome event if you were accustom to only paying the lowest payment.

This much higher principle balance causes another problem. It is almost impossible to refinance out of this loan, since in our current market you typically owe substantially more than the home is worth. This leaves many borrowers two choices; foreclosure or struggle with the new payment. This is a very ugly outcome.

HELOC - It can be difficult to borrow additional money against a property that has an Option ARM as a first mortgage. Many home equity lenders flat out refuse to be in 2nd position behind a 1st mortgage that can increase in size over time and erode their collateral position. Though this is not a fatal flaw it is worth noting.

Monthly rate adjustments - Many Option ARMs have a provision for monthly unlimited interest rate adjustment. In a declining rate environment, such as we are currently experiencing, this can be a good thing. However, as rates begin to rise again, they will likely rise quickly and this will cause your cost of money to skyrocket. Many Option ARMs do not have a cap on how much or how high they can rise. This uncertainty can become very expensive and can cause a loan to recast unexpectedly. Some lenders have modified this to have an initial interest rate that is locked for 5 years, but they are not all this way.

Enough of the pros and cons. Why do these exist? Who should use this product? In my opinion, this product should be used in two instances. The first group of borrowers that should consider this product are borrowers that have irregular income. For instance, you receive a nominal salary weekly and a substantial annual bonus. This borrower should use the low monthly payment option monthly and use discipline to pay down the accrued interest with a portion of the large annual check. In this instance, the Option ARM helps with monthly cash flow, but many of the negatives are not a factor.

The second group of borrowers that will benefit from an Option ARM are the borrowers with transitory circumstances. Examples of these circumstances are as follows:
Buying a new home without selling your old home. In this real estate market, many borrowers are looking to take advantage of depressed prices and move up to a large home at a great price, but they are unwilling to sell their existing home. By using an Option ARM until the market turns around, a borrower can afford to wait to sell their old home and still take advantage of a great price on a new one.

Job changes or temporary income gaps. When a family relocates due to a job change and the other spouse is now job hunting in a new area, an Option ARM can allow the family to buy a house and afford the payment until the second spouse finds a job.
Debt management can be another transitory event that takes advantage of a low mortgage rate. For example, a family that has $20,000 in credit card debt at 24% interest would be able to make only the minimum payment on the house and use the balance of the payment to aggressively pay down higher cost debt. Of course, once the debt is paid off, they should resume paying at least the interest only payment.

Finally, a word of caution, Option ARMs can be complicated and sophisticated financial tools. Do not be sucked into the low initial payment to buy a home beyond your means. If you live on a regular or fixed income, you are guaranteeing problems for your future if you use this tool in an unwise manner. Be sure you are receiving good advice from your mortgage professional. Make sure you understand and appropriately weigh the pros and cons. You are always welcome to call us to discuss this and any other mortgage topic. We lend nationwide and are happy to discuss all of your options with you.

Green building is becoming increasingly popular in new homes and construction, and many homebuyers now expect green features when purchasing a new home. Whether you’re building new or remodeling an existing home, there are many ways green building practices can be easily applied to housing, creating healthier indoor atmospheres while reducing your carbon footprint.

There are many different aspects of green building. Material choices can be green. The method by which materials arrive at a jobsite, the amount of waste generated and the method of waste disposal can be green. The location of a home or community, the architecture, design, landscaping, and quality of the air inside a building can give a project a “green” label. If you’ve decided to go green, or are in the market for a green home, here are some green building ideas to consider:

• Use materials that are renewable - Examples of renewable resources are bamboo and solar power. Bamboo is an environmentally friendly choice for flooring, cabinets, countertops and furniture that is both durable and good looking, and since it’s a grass that grows quickly, it creates less of an impact on the environment than harvesting lumber. Solar power is a cleaner choice for energy, and can be used for one appliance, such as a water heater, or can power your entire home. Many states offer rebates on solar power equipment, and there may be tax benefits as well.
• Get Recycled - There are many recycled material options including recycled glass tiles, reclaimed hardwoods and timber, and even carpets and countertops made from recycled materials. By reusing these materials, less waste ends up in landfills.
• Breathe Healthy Air - Pay attention to indoor air quality by avoiding products that contain harmful chemicals and choosing non-toxic and low-VOC finishes and materials. VOCs (volatile organic compounds) are present in many paints, stains and adhesives and can be harmful to your health. Low or no VOC paints, stains and glues are an excellent alternative. Choosing low-VOC and formaldehyde-free insulation, such as blue jean insulation, cellulose or spray foam rather than traditional batting is another great option. Make sure doors, windows and tub/shower enclosures are properly sealed to prevent moisture from seeping into the home, opening the door for mold.
• Use Less Water - Look for water-saving features like low-flow or dual flush toilets, low-flow faucets and shower heads, and energy efficient washing machines. Landscape using xeriscaping; plant native plant species that require less water and install a drip system with an automatic timer. Use a minimal amount of lawn which requires heavy water use. In some areas, rainwater or grey water can be used for plant irrigation.
• Conserve Energy - There are many easy ways to reduce the amount of energy you use. Choose energy star appliances and light fixtures, use compact florescent or LED bulbs rather than traditional incandescent bulbs, upgrade to high efficiency heating and air conditioning units with dual/multiple zones and programmable thermostats, add extra insulation and consider more efficient cellulose or spray foam insulation methods, choose a tankless water heater, look for low-e dual pane windows and doors, and make sure all cracks, crevices, and areas around pipes, doors and windows are sealed with caulk or foam. Not only do these things help to reduce your carbon footprint by reducing energy consumption, your utility bills will be drastically lower.
• Think Long-Term - Sustainable design produces less waste. High-quality, timeless materials and well thought-out floorplans and designs will reduce the need for future remodeling or demolition. Spend time planning out the project, considering the orientation of the sun and direction of prevailing winds when deciding on window placements. Use quality, healthy, timeless materials rather than low-cost trendy options.
• Location, Location, Location - Communities and homesites that promote walking or biking and are close to amenities, parks and public transportation reduce dependence on fossil fuels.
• Shop Local - Purchasing products from local manufacturers reduces the amount of emissions from transportation required to get materials to your home.
• Waste Not - Plan ahead to reduce the amount of waste your project generates. Recycle as much waste product as possible (rather than transporting torn-out concrete to a landfill, try to stain and reuse pieces of broken concrete as patio pavers, or have a concrete recycling plant pick it up). Transport any waste materials that cannot be recycled to the closest landfill possible.
• Is It Certified? The US Green Building Council is a non-profit organization that developed the LEED® green building rating system, which certifies and rates projects that meet their inspection criteria and can give a homebuyer a better understanding of the green features of a particular home. Homes can also be Energy Star Qualified. In addition, independent inspectors offer energy audits or inspections that can give suggestions on how to improve the energy efficiency of an existing home.

Whether you’re interested in reducing your carbon footprint and improving environmental quality, creating a healthier atmosphere for your family, conserving energy and natural resources, lowering your utility bills, reaping tax benefits, creating a sustainable space or adding value to your home, choosing green construction is an easy choice that benefits us all.