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The Trouble with Low Mortage Rates; Understanding Closing Costs; Garage Makeover

Aired June 11, 2005 - 9:31   ET


GERRI WILLIS, HOST: Mortgage rates defy predictions by dropping yet again. What should you be doing about it?

ANNOUNCER: Today on OPEN HOUSE, rock-bottom mortgage rates mean more home for less. But they could be creating some long-term trouble for the housing market.

Then, closing costs, they can be confusing. We show you how to make sure you're not paying too much.

And our weekend project, a garage makeover. Get rid of the clutter and get organized, next on OPEN HOUSE.


WILLIS: Hello, and welcome to CNN OPEN HOUSE. I'm Gerri Willis.

It's a little like Christmas in June for home buyers, as mortgage rates drop again this week. The 30-year fixed-rate mortgage is now nearly a full percentage point lower than a year ago.

Now, this has the National Association of Realtors changing their forecast for 2005, saying they expect sales to rise 1.8 percent to another record, after an earlier prediction that sales would drop.

Allan Chernoff takes a look.


ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): For home shoppers like Jonathan Oakman, it's almost too good to believe. Just when experts were predicting mortgage rates were about to jump, they've taken another dive.

JONATHAN OAKMAN, HOMEBUYER: Our money goes farther. I mean, we would have had to probably look at a studio if we hadn't been able to get these low interest rates. And we're much more happy with a one- bedroom. I think we'll be able to be in it longer.

CHERNOFF: Signs that inflation pressures are easing have pushed down long-term interest rates, including those for home loans. The average 30-year fixed mortgage rate in the nation is down to 5.55 percent. That's a steady decline over the past few months from just over 6 percent in late March, the lowest rate since early February. FRANK NOTHAFT, ECONOMIST, FREDDIE MAC: This is great news for the housing market. Housing demand is very interest-rate-sensitive. So any time we have low or -- low mortgage rates or a decline in mortgage rates, that translates into a spurt in housing demand.

CHERNOFF: Low mortgage rates have been fueling the housing market. Declining rates mean lower monthly payments, though the way home prices have been soaring, the drop in rates may merely help to offset higher prices that Americans are paying for homes.

BOB MOULTON, AMERICAN MORTGAGE GROUP: I think the housing market's going to continue to do well, but not as well as it has done the last five years. In the last five years, we've seen a 10 percent growth on average. I think you'll see something closer to 3 to 4 percent in your strong markets.

CHERNOFF (on camera): The recent drop in mortgage rates may not fuel another explosive boom in housing, but as long as mortgage rates remain low -- and that's a big if -- they should provide a floor for housing, minimizing the risk of any bursting bubbles.

Allan Chernoff, CNN, New York.


WILLIS: So while mortgage rates are low, what should you be doing about it?

Joining me now from Livonia, Michigan, is Bill Emerson. He's CEO of Quicken Loans.

Bill, welcome.

BILL EMERSON, CEO, QUICKEN LOANS: Hi, Gerri, how are you?

WILLIS: Good to see you.

Let's start out with a basic question. You know, how unusual is it for rates to be this low?

EMERSON: Well, if you take a look over the past few years, it's not unusual. But given what we talked about at the beginning of the year, and seeing a market that could potentially push your fixed rates up to maybe 7 percent, I think this is very unusual, and it's probably the story of the summer.

WILLIS: What advice do you have for people in the market right now?

EMERSON: If you're in the market now, either to buy a home, or if you've been thinking about refinancing, now is the time to act. I mean, there's no telling how long these rates are going to stay this low. And given that fixed rates are the mid-5s, anybody's who's buying, anybody who has an adjustable-rate mortgage that could be adjusting in the next six months, absolutely the time to take a look at it right now. WILLIS: Bill, what's the difference between, say, the long-term average, and what people can get now, just to give them an idea of how much they're saving?

EMERSON: Well, you know, if you're in a fixed rate right now in the middle 5s, you know, if you're anywhere higher than 6 percent, you should be taking a look at that. Depending upon your situation, you could save hundreds of dollars a month just by looking at your particular situation.

WILLIS: Well, let's talk about that a little more in detail. A lot of people out there could consider refinancing. You say if there's a half-percent or a full percent difference between what you're paying now and what's on offer.

EMERSON: It depends on what you're trying to accomplish, Gerri. If you simply want to reduce your monthly payment, and you've got a half-percent spread, you absolutely should take a look at it. If you're looking at a scenario where you might want to pay off some debt, you might want to get out a private mortgage insurance, or you might want to go from an ARM to a fixed rate, then the change in rate is not necessarily as important as what you're trying to accomplish with that strategy.

If you want to get out of an ARM, and lock something in that's fixed, that's a great strategy for the next five, 10 years.

WILLIS: And that's a real opportunity right now. A lot of people have adjustable-rate mortgages where their payments are going to go up if rates do hike to, say, 7 percent, which is what the forecast is with a lot of economists out there.

Now, you mention private mortgage insurance. Describe what that is, and how people could lose this extra payment that they're making.

EMERSON: Well, a lot of times when people buy a home, they don't have 20 percent to put down on their property. So typically, if they put less than 10 percent down, and they're only using a single mortgage, they're going to pay private mortgage insurance. It's an insurance that protects the lender, and it's an additional monthly fee that the -- that a client would pay.

So because of what we've seen in the housing industry, with prices going up, and because we're now looking at a scenario where interest rates are very low, anybody's who's purchased a home in the last 12 to 24 months and is paying private mortgage insurance does have the opportunity to refinance and potentially get rid of that additional monthly obligation.

WILLIS: Good news for them. OK, let's say I want to put that addition on my house. Home equity loan, or line of credit, what's best now?

EMERSON: Well, you know, it's a great question. I think right now, given what you see, it kind of depends on your short-term versus long-term strategy. If you're only going to hold the money for the next one to two years, I would go with a home equity line of credit. If you're really going to hold onto that debt for another three, five years, then you might want to take a look at the fixed-rate second mortgage.

WILLIS: All right. Let's quickly talk about the future of interest rates. You mentioned 7 percent on the horizon here. How long do you think these lows can stay? How much time do people have to lock this in?

EMERSON: Well, you know, as I said, Gerri, I think right now is the time to act. We talked about 7 percent at the beginning of the year. Given what's going on with the market right now, I don't think you're going to see that happen by the end of the year.

However, you know, when you have this opportunity standing in front of you, you have to take advantage of it, because I think rates have an opportunity to go up a lot faster than they do to go down. And if I'm wrong, and rates continue to go down, you always have the opportunity to tune up your mortgage again in the next six months.

WILLIS: Well, great advice. Bill Emerson, thanks for your time today.

EMERSON: It's my pleasure, Gerri. Thanks.

WILLIS: Not everybody agrees what sort of impact lower rates will have on the housing market. In fact, some economists say rock- bottom rates can encourage buyers to may pay even more for their dream homes, straining the pocketbooks of middle-class buyers.

Now, for that reason, if you're buying right now, you'll want to make sure that you're not overpaying. Compare the price per square foot paid by recent buyers in your target neighborhood with the price per square foot you're offering. And don't stray from the norm. That way, you won't own the most expensive house on the block.

Coming up on OPEN HOUSE, homebuyer beware. Before you purchase that new house, make sure you get a good home inspector who knows what to look for.

And our weekend project, organize your garage. Don't let the toys and tools take over. We'll show you how to get rid of the mess.

But first, your tip of the day.


ANNOUNCER: Now that you know how much house you can afford, why not get prequalified and preapproved for a mortgage loan? It will give you negotiating leverage with sellers, and when you're ready to buy, you'll save time by being two steps ahead in the closing process.

With prequalification, you provide the lender with details about your finances, and the lender estimates how much mortgage you can afford. Preapproval goes one step further. The lender will verify your financial history and issue a letter stating approval for a certain mortgage amount with a certain time frame.

Gain a buying edge by getting prequalified and preapproved. That's your tip of the day.



WILLIS: Welcome back to OPEN HOUSE.

Sure, the home you want to buy looks great, but what's going on underneath the plush carpets and the shiny new paint? That's where a home inspector steps in.

And as Kathleen Hays shows us, hiring the right inspector, it's crucial.


KATHLEEN HAYS, CNN CORRESPONDENT (voice-over): Rotten wood in the deck. Joe Farsetta says it wasn't easy to spot.

JOE FARSETTA, WWW.ADVANCEDINSPECTIONS.NET: And the case of this deck above us, I was able to remove a piece of wood. The main support beam here had been covered by it. So this is a good example of a concealed defect. And right here, I put my knife in here, there's nothing...

HAYS (on camera): Wow. Oh, man, it is completely rotten.

FARSETTA: Yes, it is gone.

HAYS (voice-over): This home inspector says some sellers go out of their way to hide defects from buyers, one more reason why a home inspection is crucial.

FARSETTA: I want my homebuyers to ask me as many questions as possible. The inspection is also educational for them. They're learning about the defects, but they're leaning about the house.

HAYS: Still, in this hot housing market, buyers fearful of losing out to other bidders may be too willing to skip this step.

KATHLEEN KUHN, CEO, HOUSEMASTER: In a very hot market, a buyer who's anxious to get a deal may want to forego the normal precautions and not get a home inspection. But that can really be a double whammy if they buy the house at top dollar and move in to find expensive repairs need.

HAYS: Kathleen Kuhn runs a home inspection company. She says, choose inspectors carefully.

KUHN: You also might want to make sure that the inspector is tested annually, not just once 20 years ago when they first started. And you also want to make sure that the inspector carries errors and omissions insurance, which is a credential that says they're a respected company, and they have a good track record.

HAYS: But even qualified inspectors can miss defects if dishonest sellers hide them well.

PETER GRAUBARD, REAL ESTATE ATTORNEY: If they didn't disclose something that's wrong with the house, and you learn of it after you've closed and after you buy the house, then you may have recourse against that seller for failing to disclose what they knew to be true.

HAYS: It's those hard-to-find defects a seasoned inspector should sniff out.

FARSETTA: The good, the bad, and the ugly. Well, they already know the good, because that's why they decided to buy the house, so I'm really there for the bad and the ugly.

HAYS: Kathleen Hays, CNN, New York.


WILLIS: So it's definitely a buyer-beware situation with home inspection.

But another tricky part of the home buying process, selecting the right mortgage lender. The reason, closing costs can be vastly different from one bank to the next, costing you hundreds if not thousands of dollars more if you're not careful.

Joining us now to explain, from West Palm Beach, Florida, is Greg McBride, senior financial analyst with

Greg, welcome.


WILLIS: All right. Well, we should say up front, this is a really complicated topic. If you're struggling with your own closing costs, you're not alone. Greg's here to help.

Start us off with just a definition of closing costs.

MCBRIDE: The closing costs encompass a number of different things, but they essentially compensate the various parties that have contributed to the loan-approval process. And they break down in several different ways, the fees that compensate the lender or the mortgage broker, and those that compensate third parties, like the appraiser. And then there are also government fees and other prepaid items that are added in.

WILLIS: Greg, how much do people pay, on average?

MCBRIDE: Well, excluding the prepaid items, a good ballpark number is 2 to 4 percent of the loans. We're talking a significant amount of money. Of course, if you have a larger loan, you'll probably be at the lower end of that range. If you have a smaller loan, you'll probably be at the higher end of that range.

WILLIS: All right. So if you have a $200,000 mortgage, which is about the median price right now, you're paying $2,000 to $4,000.

Let's look at some of these numbers in detail, starting with the lender fees. Greg, there's a lot of numbers here. We're talking about almost $2,000, according to your survey. Which of these are negotiable?

MCBRIDE: The lender fees, all of them, are subject to negotiation. Now, what you have to understand is, this is where the lender is being compensated for their work, so you can't expect them to write everything off. But this is where you really want to compare among different lenders. The idea here is to get good-faith estimates from about three different lenders, and then really compare and see who's giving you the best deal.

WILLIS: Well, OK, you need to define good-faith estimate for people new to the process.

MCBRIDE: A good-faith estimate is something that the lender has to give you within 48 hours of application, and on this good-faith estimate, that itemize each of the fees that you would be expected to pay, based upon the loan that you're applying for.

WILLIS: But you, Greg, you know how this works. If you look at the fees from a bunch of different lenders, you can't figure out what's what. They're all different.

MCBRIDE: Very difficult. And I think a lot of that is by design, that this process is not terribly transparent. It does make that apples-to-apples comparison much more difficult. Some lenders will itemize each thing individually, other lenders will just lump everything under one fee. And some may put different fees on different columns, using different names.

So, yes, the process is very confusing. It's somewhat time consuming. But you're talking about big money here, so it does pay to invest that time.

WILLIS: Is there any way to get that apples-to-apples comparison? I mean, can I hold their feet to the fire?

MCBRIDE: Well, you know, on the lender fees, if you find a situation where one lender's itemizing, another one's lumping everything together, maybe you just take a step back, look at the bottom line, the total of those lender fees.

Now, that's not going to be a number that they're going to circle for you on the good-faith estimate or on the loan statement. But if you use the chart we have at to kind of help you see which fees are controlled by lender, that should be a big help in deciding which ones you can spend your time negotiating on. WILLIS: All right, great advice. Let's talk about third-party fees. How much wiggle room is there?

MCBRIDE: Well, the idea on third-party fees is that they should be passed along without any markup. That being said, you still want to compare and see what different lenders are offering. The idea here is that you're not married to their appraiser. If they say that that appraiser's going to cost you $600, and you know that that's way out of bounds, you're perfectly within your rights to suggest or request a different provider at a more modest price.

WILLIS: And again, you know, these are not insignificant fees here. They add up to about 500 bucks. And the last thing you want at that closing table is to find fees that you didn't expect, right, Greg?

MCBRIDE: That's exactly right. And, I mean, and that may crop up in the government fees, or in some of the prepaid items, just because those are truly estimates that the lender provides whenever they provide you that initial good-faith estimate after your application. It's v difficult for them to estimate those fees in many cases.

WILLIS: Greg, describe prepaid fees for a second, because we haven't talked about that.

MCBRIDE: The prepaid items are things like interests that's due between the time of your closing and the end of that month, things like the initial funding of your escrow account, property insurance, even homeowners' association dues, perhaps, the things that you have to pay up front. These aren't fees that are charged by the lender, but they do add a pretty penny to the amount you need to bring to the closing table.

WILLIS: Can be pretty darn scary. Greg McBride, thanks so much for helping us today.

MCBRIDE: Thank you, Gerri.

WILLIS: Coming up on OPEN HOUSE, our weekend project. We're tackling your messy garage. Clear the clutter and get organized, next on OPEN HOUSE.

But first, your mortgage snapshot.


BONNIE SCHNEIDER, CNN METEOROLOGIST: Good morning, everyone. I'm meteorologist Bonnie Schneider from the CNN Weather Center, where we are guess, you guessed it, we're tracking tropical storm Arlene, getting closer and closer to making landfall, expected today in just a few hours, but already the rain is coming down in Mobile, Alabama, Pensacola, and pretty much throughout most of Florida, we've seen those heavy downpours throughout yesterday and today, and we can see the rain bands from our tropical storm as it gets closer to Mobile. Still about 100 miles away, so we're timing it around 2:00 p.m. this afternoon for it to actually make landfall, and that's when the strongest winds and heaviest downpours most likely will occur. This area may see between five and eight inches of rain.

The bigger picture now shows you that the system's already bringing up tropical moisture as far north as Nashville, not really the best weather there for today.

We'll keep you up to date on tropical storm Arlene and everything else that's happening in the Weather Center.

In the meantime, let's go back to OPEN HOUSE.

WILLIS: Is all that stuff in your garage forcing your car into the street? Well, have no fear, it's a problem you can begin to tackle this very weekend.

To learn how, I met up with Barry Isaac. He's author of "Organize Your Garage in No Time," and he started by telling me the first thing to do, get rid of the clutter.


BARRY ISAAC, AUTHOR, "ORGANIZE YOUR GARAGE IN NO TIME": The first thing that I recommend is to clear the space. So you basically just start bringing the things out into your driveway, and then you begin to sort.

WILLIS (voice-over): Group the items that belong together, and toss what you don't need.

ISAAC: So let's just group the shovels.

WILLIS (on camera): Hey, we've really narrowed this down.

ISAAC: And when you do this, this saves you a lot of work.

WILLIS (voice-over): Think zones. Whether you're a sports nut or just buy too many groceries, make sure all your stuff will fit into a zone, and put it away neatly.

ISAAC: One of the cardinal rules is, we want to put the heavier things on the bottom.

WILLIS (on camera): Very nice. Right at hand level, easy to get to. Simple. And, boy, I tell you, the mess is gone. That's great, Barry.

(voice-over): Hardware can be tough to organize. Your best bet, forget the toolbox and keep things out in plain sight. Just make sure all your items are separated and stored in visible containers.

ISAAC: The first thing we do is, after we sort it, of course, we want to organize them by types. We've got the screwdrivers. We've got the wrenches right here. And we have a suitable holder here that holds them. Every...

WILLIS (on camera): And look at this, this is really (INAUDIBLE).

ISAAC: Yes, I love these for nuts and bolts, these little tilt things. They are a great product.

WILLIS: So much easier, you know, instead of...

ISAAC: Absolutely.

WILLIS: ... you know, having them all over the inside of one of these.

(voice-over): Another trick, whether it's excess food or your kids' toys, you want to keep all items off the ground. This will prevent water damage and bugs getting into your goods.

Bulky sports equipment can be tough to contain. Try racks and bins to keep it neat.

ISAAC: Well, the cool thing about these racks are, they're multipurpose racks. And more than one solution is provided. We can put balls in the bags. We can put balls in the bin. We can put balls in a basket.

WILLIS: For stuff you only use once a year, like holiday decorations, try an accessible attic or other storage unit. You don't need to keep seasonal items out at all times.

Once you've gotten rid of what you don't use, and organized your garage into zones, well, there's only one thing left to do, make sure your kids don't mess it up.

ISAAC: That's one of the important things, Gerri, is that people wonder, Will my kids keep the system up? Well, how can they not when al they have to do is throw a ball in a bag or stick a bat in a holder? It makes it user-friendly.

WILLIS (on camera): So, Barry, the garage looks great. How do I get this done in a weekend?

ISAAC: Well, one important thing to remember, Gerri, is that you might not get it all done in a weekend. You need to be realistic with your expectations. Break the task into small, manageable pieces so you don't defeat yourself before you start.

WILLIS (voice-over): Once your garage is spick and span, you may finally be able to make room for one more important item -- your car.


WILLIS: Another idea, try installing a thin, inexpensive indoor- outdoor carpet over the high-traffic area in your garage. This will limit the amount of dirt and water that gets tracked into your house.

Coming up on OPEN HOUSE, a look at next week's show. We're going to be right back.


WILLIS: Coming up next week on OPEN HOUSE, investing in foreclosed properties. You can make big money, but it can be risky. We'll show you how it's done.

And our weekend project, vegetable gardens. From the best soil to the right amount of sunshine, we have tips to create a masterpiece.

Plus, we want to hear from you. Send us your comments or questions to

Thanks for watching OPEN HOUSE. We'll see you here next Saturday.

Coming up, DOLANS UNSCRIPTED. Internet billionaire Mark Cuban talks about his latest undertaking, blogging. But first, a look at the day's headlines.

Have a great weekend.


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