Should I Refinance

           If you are lucky enough to have at least twenty percent real equity in your home, then today’s record low setting mortgage interest rates make considering a loan refinance a must for any person planning on staying in their home for at least a few years.  The only question is whether it makes economic sense to refinance, and upon what terms and conditions.

          In order to understand exactly whether it is worth refinancing must you start with the current costs of your mortgage. Depending on your interest rate and your anticipated time left in the subject home will allow a determination as to whether refinance makes economic sense. In addition, in some cases a higher monthly payment in a move to a shorter amortization could help you build substantial equity in a much shorter time.

          For example homeowner with a $350,000 first mortgage with an interest rate of 5.25% amortized over thirty years will pay $1,954.45 per month for the remaining term of the mortgage. If that person currently owes $315,000 and is interested in a thirty year fixed rate loan, today’s rates of 4.25% will reduce the monthly mortgage payment to $1,549.61, or $404 per month.  Part of the savings is due to the lower principal balance, but most the savings is due to the lower interest rate.

          Interest rates on a fifteen year fixed rate amortization loans are as low as 3.43%. Using our same example, monthly principal and interest payments would increase to $2,241.07, or about $286.00 per month. However, after five years of payments, the fifteen year loan balance would only be $227,384.96, which is approximately $60,000 less than the loan balance amortized over 30 years at the 4.25% rate.  The higher monthly payment will result in $41,000 in payments over 60 months but you will realize nearly $20,000 greater reduction in the principal balance due to the lower interest rate.

          The average American family moves every seven years. If you are confident that you will not be in your home more than five years a special 5/1 adjustable-rate mortgage may actually be the best course of action.  Interest rates on 5/1 arms are less than 3%, with a monthly payment over thirty years equal to $1,314.50.  That is a savings of over $639.95 per month.  At the end of five years the amount owed will be approximately $279,010.71.  However, if the additional $639.95 is paid with the mortgage payment, the balance owed will only be $236,982.74.

          The only catch to any refinance the actual refinance cost. On a typical $315,000 mortgage refinance, the borrower will be looking at government taxes of $1,732.50, title insurance premiums of approximately $2,500.00, appraisal costs of $350, credit report, tax search and floods search fees of approximately $250, Doc prep fees of about $500 and any points that the lender is charging for the privilege of closing the loan.

          With costs of approximately $5,000, any refinance is not cheap.  If the borrower is going to replace an existing thirty year loan with a new thirty year loan it will take nearly fourteen months of lower-cost loan payments to simply make up the cost of the refinance. That is why it is crucial to determine how long you will stay in the home to see if the cost of refinance is worth the lower interest rate. If the loan has an additional point or two, it will take nearly eight months per point to make up the difference.

          Many homeowners simply ignore the benefit of refinancing and continue to pay mortgage payments on loans with interest rates over 5%. Some have rates as high six or seven percent, and converting to a lower rate loan today would result in even greater savings. Take the time to check your loan rate and determine whether it makes financial sense for you to seek a loan refinance at this time. There are many quality mortgage brokers who will assist you in reviewing your savings at no cost to you so you can determine whether it makes financial sense for you to refinance your home.

Michael Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in mortgage loans, and can assist borrowers and banks in all loan matters.  They can be reached at 561.842.3000 or at www.warddamon.com

Being Underwater (the no home equity syndrome)

While many "experts" talk about the foreclosure crisis and vacant homes as the major problem facing South Florida, I believe that another phenomenon is also causing the extreme economic problems we have related to the failure of the real estate market to recover.  That is the problem of "underwater homes."  Underwater homes are homes whose value is less than the debt owed to any lender who has a lien on the property.

For example, in the simplest case, a person who has a house worth $260,000.00 and a mortgage to a bank in the amount of $278,000.00 is considered underwater.  The sample property has negative equity of $18,000.00, and will remain underwater until either the value rises or the principal balance of the loan declines.

Statistics by various groups show that in Florida, of the roughly 4.5 million homes, over 2.1 million are underwater, or 47% of all owners.  This is more than double the national average of 20%.  With this many homes underwater, only one in two owners can consider moving to a new home, whether to upsize or downsize, or to move for a better or new job.  Owners are literally trapped in their homes, without the ability to move.

As stated above, the only way this issue will be resolved is if values rise or, over time, the mortgage balance goes down.  However, in most cases, especially over the next five years, neither factor will likely have an effect.  Currently, values continue to fall, meaning the home above will likely be worth even less come next year, when most experts expect the prices to bottom out before a slow, gradual rise over the next ten years.  If prices decline another ten percent and then rise at three percent for five years, the example home will be worth about $275,000.00 in 2017.  If the person continues to pay their original $300,000.00 mortgage at 6% they took out in 2006 they will owe about $244,000.00.  So, wait six years and you have positive equity of $31,000.00.

Unfortunately, when the experts talk about homes being underwater they forget one crucial issue in South Florida, the cost of sale.  For a typical seller in Palm Beach County, they will have to pay a myriad of closing and proration costs in order to sell their home.  These costs include a real estate commissions, documentary stamp tax, title insurance premiums, real property tax prorations, and unpaid interest (mortgages are paid in arrears, so that June 1 payment you make is for interest in May).  So, given a $275,000.00 sales price, here is the breakdown at a June 30, 2017 closing:

Sales Price:                                                     275,000.00

          Commission                                           16,500.00

          Title Insurance                                         1,800.00

          Documentary Stamp Tax                          1,925.00

          Tax Proration Credit                                2,500.00

          Loan Payoff (includes unpaid interest)  245,221.00

        

          Net to Seller                                          $7,054.00

So while our patient homeowners will get about $7,000 at closing, they will be $33,000.00 short of the minimum twenty percent down payment due on their next $200,000.00 home.  For many people, the figures are worse, as they carry both first and second mortgages.  With these problems, most people who use their homes as springboards to new homes are stuck, which only further deflates the market.  With a total cost of sale at almost 9% it becomes clear that more than half of all homes in Florida are underwater.

For homeowners in this current situation, there are some actions that can be taken to address this dilemma.  First, a program of accelerated payment of the mortgage debt can be made.  One option is a bi-weekly mortgage payment, rather than paying monthly.  This will result in an annual payment of one additional payment per year, which could reduce the loan pay-off over five years by almost $10,000.00.  However, most banks charge fees and costs for these programs which eat into the savings, especially in the shortfall.

Paying additional principal each month can also act as a forced savings plan.  For example, if the monthly mortgage payment is $1,700.00, paying a round $2,000.00 per month will result in $18,000.00 in principal reduction over five years.  Refinancing to a lower interest rate (anyone over 5.75% should consider this) would accelerate principal reduction as well.  If you are underwater due to a large second, but the first mortgage is less than 80% of your house value, you can still refinance if the second mortgage holder cooperates.

Finally, making small changes to the home over the next five years can increase value.  Paint, cabinets, tile and the like increase value, plus make the house more enjoyable.  After all, with the home underwater, you might as well enjoy it as you will be living there a long time.

Michael Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate law, and can assist owners and lenders in all real estate matters.  They can be reached at 561.842.3000 or at www.warddamon.com

Current Trends in Real Estate

     When we look back on the year 2012 from the not too distant future, many will say that it was a bellwether year for residential real estate.  It will be seen as a year of low prices, cash only deals, historic low interest rates, foreclosures galore, the decline in the American dream of home ownership and possibly, quite possibly, the year that the great depression in real estate ended and that proverbial light at the end of the tunnel was first realized.  At least one can hope so, and in that vein I look at some of the current trends in South Florida Real Estate.

     Prices:  Most experts agree that we have hit the bottom of price deflation.  Values are at ten to twelve year lows.  Individual homes may go lower, but because we have lost so much value, it is unlikely that there is any further room to decline.

          Some current examples of the market decline in Boca Raton:

          8700 Jasmine Way:  Listed for $99,000.00; last sold in 2003 for $126,950.00

          10297 Allegro Drive:  Listed for $250,000.00; last sold in 2007 for $425,000.00

          5874 Harrington Way:  Listed for $895,000.00; last sold in 2005 for $1,125,000.

          6380 Boca Circle:  Listed for $145,000.00; last sold in 2005 for $230,000.00.

          10890 Lakemore Lane, Unit 101:  Listed for $139,900.00; last sold at foreclosure in 2011 to the lender at only $57,800.00; sold in 2001 for $124,000.00

        4001 N Ocean Blvd, #1002:  Listed for $525,000; last sold in 2005 for $390,000.00.  Tax collector value at $425,000.00, Zillow value at at $532,900.00

     As you can see, for the most part, the declines are real and they are big.  However, we can see some bright spots in the trends, with some values stabilizing or even going up, such as the Lakemore Lane home.

     Mortgage Rates:  Mortgage rates have continued to decline with the average fixed rate mortgage for thirty years at 3.73%, with the fifteen year rate at 3.02%, both historically record lows.  Compared to rates a few years ago, the monthly savings are astonishing (chart shows a $250,000 loan):

                             Market Rate          Five Percent           Seven Percent

Monthly Payment  $1,154.95               $1,342.05               1,663.26

     In fact, today’s fifteen year rate monthly payment of $1,730.06 is equal to a rate of only 7.375% over thirty years.  The continuing problem in the market is the difficulty in qualifying for these fantastic rates.  In order to get these great rates, you have to have a very high credit score plus at least 20% down payment.  This shuts out many buyers, with many more potential buyers sidelined due to the fact that nearly half of all homes are underwater (based on a 42% non-equity rate reported in the media, plus costs of sale of 8% for commissions, title and doc stamps).

     Investors:  Buyers with cash available are now big players in the real estate market. Traditionally cash buyers made up about 20-30% of all buyers with a low of only 13% in 2006.  Today, as many as half the buyers on the market are cash buyers, a trend we see in our own real estate title company.  Many investors see the low prices and are buying to either hold and resell, or to rent until the market recovers.  Taking the Boca Circle home above, a buyer paying cash could probably acquire the house for about $130,000.00.  Zillow estimates a rental rate of 1,345.00 a month.  That is $16,140 net rental income a year.  Taxes are $2,500, HOA fees are $3,240 and insurance is about $3,000 a year.  Add in a healthy repair and miscellaneous budget of $1,500, the total costs are about $10,240, leaving a net return of $5,900.  Based on the original investment of $130,000, that equals an annualized return of about 4.5%.  Certainly better than 1% at most banks, but with a greater risk, such as defaulting tenants or large repairs.

     As we can see, prices are low, interest rates are low, and interest is picking up.  Based on these trends I believe that we will see a slow but steady increase in sales, with some properties, properly priced, selling quickly, especially at the low end (below $250,000).  The owner-occupied $250,000 to 1,000,000 market will remain stagnant for a while as upgraders are trapped in existing homes, and the plus million market will likely vary with new popular units selling strongly while traditional large homes in older communities still moving slowly.

Michael Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate law, and can assist owners and lenders in all real estate matters.  They can be reached at 561.842.3000 or at www.warddamon.com

Avoiding Probate - The Non-Resident Problem

           I frequently get phone calls from out-of-state parties that they are having issues selling mom or dad’s property in Florida. These calls come mostly from New York owners but also many come from Canada. As I often have to explain, that in order to sell mom or dad’s condominium they need to probate their parent’s Florida estate. Invariably they tell me that they have already probated their parent’s estate in New York or Canada or some other place where they reside and they do not understand why they need another probate to sell a second home in Florida.

          The process starts when a couple purchases a second home in Florida but resides in the state outside of Florida. The state they reside in is known as their domiciliary estate.  When a person dies, their estate generally has to be probated in the state where they resided at death. If the decedent only owns real property within the state and possesses only personal property within the state (including intangibles like stock and bonds which are deemed to be possessed within the state wherein the holder resides even if the actual stock or bonds is in another jurisdiction or broker outside the state) then only one probate is necessary.

          When a couple buys a home in Florida they usually purchase the property in their capacity as husband and wife. This creates a tenants by the entireties estate.  This special estate is only used in about half of the states in the United States. It does not exist in New York. The tenants by the entireties estate is most similar to joint tenants with right of survivorship estate common throughout the United States.  This estate means that when one of the joint tenants dies, the interest in the property does not pass through the joint tenant’s estate but passes to the other survivor.

          In addition, the tenants by the entireties estate in Florida acts as a creditor’s rights protection.  In joint tenancy estates, a judgment against one of the owners would attach to that owner’s interest in the property, converting the ownership from a joint tenancy to a tenant in common relationship. However, the creditors of one spouse cannot attach to any property owned by both spouses as tenants by the entireties.

          So when out-of-state owners purchase as husband and wife and one of the spouses dies the ownership interest in into the property transfers, by operation of law, to the surviving spouse. In order to clear title the only two requirements are the recording of a death certificate for the deceased spouse, (with the cause of death omitted if it is a Florida death certificate) and the recording of a continuous marriage affidavit from the surviving spouse stating that the marriage remained continuous from prior to the date they acquired the property through the date of the deceased spouse’s demise.

          However, when the surviving spouse dies and that surviving spouse is not a Florida resident a probate of their Florida estate is necessary. In order to probate this estate a copy of authenticated copies from the domiciliary probate must be obtained and filed with the Florida probate court in the county where the property is located. A Florida personal representative must be appointed, and notices to creditors and all beneficiaries must be made.

          Often the beneficiaries are not aware of this issue until they find a buyer to purchase the property. In that case, we have to delay the closing until we can open the estate, and then petition the court for an order authorizing the sale of the property. All net proceeds from this sale must be held in escrow until the creditor’s rights period expires.

          None of this would have happened if proper planning was made before the last surviving spouse died. One option would have been to create a trust to hold title to the property. A trust beneficial interest is an interest in personalty and therefore would be probated as part of the domiciliary estate. The successor trustee would take over from the former owner and could sell the property without a Florida probate.

          Another option would be for the surviving spouse to create a life estate conveying the remainder interest to his or her beneficiaries.  Once the life tenant dies the property transfers to the remaindermen by operation of law and the recording of a death certificate is all of that is needed to clear title to the property. There are multiple types of life estate deeds which can be used to create this interest. The traditional life estate deed gives the property to the life tenant for the remainder of their life regardless of whether they have physical possession of the property and the remainder interest only passes on death.

          Some life estate deeds restrict ownership to the life tenant so long as the life tenant resides at the property and does not commit waste. Another type of life estate deed is the Lady Bird Johnson deed. This life estate deed gives the life tenant the right to mortgage or sell the property without the consent or joinder of the remaindermen, whose interests only arises on death. Named after the former First Lady this deed keeps full control of the property with the current owner but also solves the requirement for a Florida probate.

          Proper planning can help avoid an unnecessary probate but I ask that you keep this a secret as it is a good source of legal work for office. However, if you insist we will also help prepare the appropriate trust or life estate deed to avoid this problem in the future.