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Open House

Mortgage Meltdown; Unintentionally Lowering Home's Value; Preparing Your Home for Mother Nature

Aired April 07, 2007 - 09:31   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

GERRI WILLIS, HOST: Good morning. I'm Gerri Willis, and this is OPEN HOUSE, the show that saves you money.
Up ahead, what you need to know to keep your home's value from going down.

And buying or leasing a car, you'll learn which is best for you.

But first, the mortgage meltdown reaches a new level this week as subprime lender New Century Financial files for Chapter 11. Subprime loans, of course, a higher interest rate loan given to folks with lower credit scores. New Century Financial has become the poster child for the subprime debacle.

But for a few minutes, we want to put aside the industry talk and focus on what really matters to you. What to do if you want an adjustable-rate mortgage, or how to handle it if you have an ARM that is about to reset.

Melissa Cohn is with Manhattan Mortgage.

Melissa, thank you for joining me today.

MELISSA COHN, MANHATTAN MORTGAGE GROUP: Thanks, Gerri.

WILLIS: OK, so I read a study recently that said about 33 percent, a third of homeowners, they don't even know what kind of mortgage they have.

What's the easiest way of understanding the terms of your mortgage if you have an ARM, an adjustable-rate mortgage?

COHN: The best document to go back to would be in your closing binder, and that would be to go to your mortgage. And if have an adjustable-rate loan, there should be an adjustable-rate rider on that note that will actually spell out all the terms of your loan.

WILLIS: OK. So this is just a sheet of paper called a rider that's going to tell you things like what -- what your interest rate is, how high it can go up. Tell us the details that we're going to see. We're seeing some of it right now on the screen that you can find.

COHN: What the rider will first state is what your rate is and how long that rate is locked in for. Are you locked in for three years, for five years, for seven years/ And then it will tell you... WILLIS: Or a day or five days or a month, right?

COHN: We have those loans, too. I think the worst it gets is just one-month adjustable. We haven't seen anything that adjusts more rapidly than that yet.

WILLIS: OK. So -- but it will also tell you how high your interest rate can go up for the life of the loan. You'll find out how much it can go up each and every year.

So a lot of homeowners out there are seeing the writing on the wall. They're really nervous about these resets. I know people are concerned that they're not going to be able to pay their mortgage.

What options do you have if you think, this is just too expensive for me?

COHN: Well, the first thing you really need to do is to look at what your rate is going to reset to, and what are the caps. Most adjustable rates go -- have a five percent cap at the end of the first adjustment. So your rate is probably likely to go up pretty onerously.

WILLIS: Five percent is a lot. Boy, think, you know, if you've got a five percent rate, you're going to 10.

COHN: That's correct. And many people who took adjustable rates in 2002 and 2003, when rates were bottoming out at 3.5 percent, are going to watch those 3.5 percent rates go to 7.5 percent or 8 percent. So you need to think about what it pays to get when you want to refinance.

You know, versing is, you know, how much did the rate adjust to save in order to make it worth your while to refinance? And if you can take a rate that's at least three-quarters of a percent lower than the rate that you have today, or the rate that you're going to reset to, it will pay to refinance.

WILLIS: So that's the gap you're looking for? If your new rate could be three-quarters of a percent lower than what you have right now, you really want to think about refinancing. That's a good time to do it.

Does it matter how long you plan to be in the house?

COHN: Absolutely. Generally, closing costs in a refinance, except in states that have mortgage taxes, cost between $2,000 and $3,000, depending upon the value of your house. So if you're not going to be in your home for more than a year or two, it probably doesn't pay to go through the pain of refinancing today.

WILLIS: And so, 2 to 3 percent -- or, I'm sorry, $2,000 to $3,000 isn't nothing, and it could be even more than that if the value of your house is higher, right?

COHN: That's correct. And on a $300,000 loan, if you can save 10 percent on your monthly payment, you'll make up your closing cost in about a year.

WILLIS: So the reality, though, here is that some people probably aren't going to be able to refinance. Mortgage lenders are tightening their standards. They're making it more difficult for people to borrow money.

Is it possible that you could just be stuck?

COHN: It's quite possible that you can be stuck. First of all, the credit guidelines have tightened.

Five years ago, when people applied for an interest-only loan, they qualified at the interest-only rate. Today they're going to have to qualify at the fully indexed, or a higher rate, making it harder to qualify. And we also have to be concerned with real estate values.

Most people in the heyday of the get into the real estate market took 90, 95, some people took 100 percent financing. So if the value of your home has dropped at all, it's quite possible that you're in a negative equity position and you may not be able to refinance, unless you're willing to put money into the home.

WILLIS: That's very important information. Thank you for bringing it to us, Melissa. We appreciate it.

COHN: Thanks, Gerri.

WILLIS: There are some signs that the housing market may be stabilizing. The National Association of Realtors released pending home sales numbers this week, up nearly .7 percent. Now, these are homes where a contract to sell is signed but the closing hasn't happened yet.

The rise is a big surprise, but does not necessarily signal the start of a recovery. Some analysts say it might mean the housing market, well, it just won't get any worse.

Straight ahead on OPEN HOUSE, certain parts of your home may actually lower the value of your house. Find out exactly what they are.

And the spring storm season, well, it's in full swing. How to prepare and protect your home from tornadoes.

But first, your "Tip of the Day".

(BEGIN VIDEOTAPE)

WILLIS (voice over): OK, so you want to buy a used car. Fire up that computer. Start with edmunds.com and kbb.com. That's the old Kelley Blue Book online. At those sites, you can read up on the cost of ownership, including maintenance.

Now, if you're buying used, you'll definitely want to find out a car's history of accidents. So grab what they call the VIN number from the dashboard. Plug the VIN number into the search engine at carfax.com. On that site, you can get a complete rundown on the car. The $25 fee is well worth it.

That's your "Tip of the Day".

(END VIDEOTAPE)

(COMMERCIAL BREAK)

WILLIS: Folks often worry about their safety if they hit another car, but what about if a car runs into the back of your car? The Insurance Institute for Highway Safety says seat head restraints in 60 percent of car models fall short of safety standards, and seats in almost two of three models are rated marginal or poor. The government will require better head restraints by 2009.

Some of the automakers with a strong showing in this study, Volvo, Audi, Ford, Nissan, Saab and Subaru.

Last week on this program we told you all about the renovations that up the value of your home, but now let's go the other way. Let's talk about what you might be doing unintentionally to lower its value and what you can do about it.

Kirsten Kemp is a realtor, developer and host of TLC's "Property Ladder".

Welcome. Good to see you.

KIRSTEN KEMP, AUTHOR, "FLIPPING CONFIDENTIAL": Nice to see you, too, Gerri. Thank you for having me.

WILLIS: All right. You say bad floor plans big problem. What do you mean?

KEMP: Big problem -- poorly laid out floor plans, obvious do-it- yourself craftsmanship. If you start with...

WILLIS: Whoa, whoa, whoa. Bad floor plans, what do you mean by that?

KEMP: Bad floor plans -- start with a basic foundation that doesn't have a flow. The bedrooms are at one end, but there's no other room at the other end. To have a nursery next to the master bedroom, and you invest all this money in trying to upgrade it, get rid of the bad wallpaper. You're still dealing with a basic problem.

You want to address the foundation of the house, the layout of the house, the mechanics of the house before you start wasting money on the fun finishes.

WILLIS: Yes. Well, fun finishes, you say bad DIY is a big problem. What do you mean by that? Is it, like, that you don't get it right, it looks ugly, it's not finished?

KEMP: I think it's an emotional thing. As homeowners, we go out on a whim, we have a weekend, we're going to do the weekend warrior thing, so you go to your local home improvement store and they have petunias on sale. So you buy too many of them, you go back to your house and you plant a ton of them in the front yard.

You don't have irrigation, it doesn't fit for the weather. Then the next thing you know, they're dying right away because blowout sale means they're already on their way out. So you want to do a little research before you go out there and start spending a lot of money on your house.

WILLIS: Great idea. You know, pools, everybody says that's a great thing to do, but I think so many people don't want pools these days.

KEMP: A lot of people don't. It depends on the area you live in. If you're the only house that doesn't have a pool, maybe that's worth the investment. But if you're going to spend $40,000-odd on a pool, it's going to take you about $10,000 to fill it in. And if nobody else has one, that's not going to be a selling point.

WILLIS: Right.

KEMP: Plus, it's a liability. Anybody with a family coming in might have a problem with a pool, a coy pond. Any kind of water feature is going to detract value.

WILLIS: I was going to say, coy ponds, forget about it. Nobody wants that, right?

KEMP: I think not.

WILLIS: Trendy sinks. You know, I see these things when I'm out to dinner here in New York. You see these fancy-schmancy fixtures in the bathroom, and people want to buy them and put them in their houses. And I think, you know, next year that's going to look oh so 2007.

KEMP: Yes. Anything too trendy is definitely going to detract value over the long term. I'm all for trying -- I'm all for trying something new and maybe going a little edgy, but a vessel sink is not functional. It might look great in a restaurant, but you're not the one cleaning the sink or worrying about what's happening when the water's penetrating the countertop because you didn't clean it into the sink.

WILLIS: Right, exactly. There are all kinds of weirdo finishes out there, too.

But when you get to the outside of the house, people think about landscaping. It's always a positive. It's not true. There are things you can do, like gazebos, which some people just hate.

KEMP: That can be an eyesore, especially if it's not put in the right place. And if you have an elaborate landscape plan, a lot of buyers are going to come through and think high maintenance, a lot of upkeep, too much money with the water and the irrigation. You want to keep it simple, you want to keep it a little bit neutral and attractive to everybody.

WILLIS: So let's talk about the flip side, some of the things that people really do want. We've got a list here.

Air-conditioning tops the list, I guess. A very interesting survey that we've got that we want to show you.

Air-conditioning, top of the list. Walk-in closets in the master, these are all things that people really want, features that you can add and add value to your house.

KEMP: We are creatures of comfort. Air-conditioning makes us feel good, being able to walk into the closet and see all of our clothing, that's a nice feeling in the morning. You want to make 594 percent on your money? Spend it on de-cluttering and lightening up your house.

If you want to spend $1,000 just getting rid of the stuff that doesn't allow you to see in your closet, doesn't allow you to know exactly where people can put their things and feel comfortable walking in, spend that $1,000. You're going to get $6,000 back. That's a pretty good return.

WILLIS: Yes. I read somewhere that for every dollar you spend de-cluttering, you make $5 at resale, which is a pretty good return, because people forget that if you're actually spending money for upgrades, kitchen, baths, anything else, it's unusual to get 100 percent back. You usually get back less than that. There are some markets where you can do better, but ultimately, you've got to be really careful about how you spend those dollars.

KEMP: Yes, and those statistics can fool you. It depends on your neighborhood and what improvements you're making.

Again, if you're the do-it-yourself guy and you're using laminates on your cabinetry, that might not be a very good return. People won't see the value in that, and they might wonder where else you cut corners on your house.

KEMP: Kirsten, thanks so much for being with us today. We appreciate it.

KEMP: It's my pleasure. Thank you.

WILLIS: Still ahead on OPEN HOUSE, prepare and protect your home from dangerous storms. The how-to, next.

And to buy or not to buy, to lease or not to lease. We have the answer for you.

But first, your mortgage numbers.

(COMMERCIAL BREAK)

WILLIS: More than 1,200 tornadoes are reported every year by the government, resulting in more than 1,500 injuries. Three hundred and thirty-four tornadoes have already been reported this year, and we're right in the middle of tornado season.

Let's make sure you and your home are ready for Mother Nature.

Wendy Rose is with the Institute for Business and Home Safety in Tampa.

Wendy, welcome.

WENDY ROSE, INSTITUTE FOR BUSINESS & HOME SAFETY: Thank you, Gerri.

WILLIS: All right, let's say that I want to get my home ready for a tornado, but I have lots to time to do it. What are the kinds of structural things that I should be thinking about?

ROSE: You want to be thinking about how to keep your house together. What the wind is going to do is look for the weakest link, and they're going to pull up or push up on that.

A lot of times, it's a matter of keeping your house together through the connections. So if you have an existing home, hire a contractor who can look at those connections that are keeping the roof to the walls. A lot of times, they can add the steel straps like we see in hurricane areas and make that connection stronger.

WILLIS: Do those steel straps work well? Because, you know, you've seen where mobile homes get just ripped from the ground, and they have steel straps. Does it work with a regular house?

ROSE: It works very well with a regular house. We do damage investigations after storms, wind storms, whether they're tornadoes or hurricanes. And what we see is, the better connected a house is, the better it's going to maintain its integrity.

WILLIS: OK.

ROSE: Because what these connections do is create a continuous load path. So instead of the wall or the roof bearing the brunt of those wind's forces, it's sharing the load through the other components of the house.

WILLIS: Wow. OK.

Let's talk about doors, because doors can be a big problem with wind. What do I need to know about garage doors, you know, those sliding glass patio doors? Those can be a big problem.

ROSE: Because doors usually cover larger openings, they're going to be more vulnerable to wind or the impact of debris. So, whenever you can upgrade, make sure for a garage door, it's put on stronger tracks. If it's impact-resistant, or at least high-pressure rated, it's going to better protect your home.

The same thing for sliding doors or entry doors. If you have existing entry doors and you're not planning to replace them any time soon, see if they can be changed to open out, or make sure the bolts and locks extend deep into the wall frame. The roof is another area of the house that's really important to strengthen. So if we're not -- if we're going to re-roof our house at any time, that's the great opportunity and a less expensive time to increase your roof's strength. So make sure...

WILLIS: OK.

ROSE: ... the contractor rescuers it better that the trusses and rafters with something called a ring-shank (ph) nail. It acts as a screw and actually doubles the ability of your roof to stay on.

WILLIS: All right.

ROSE: And then they can layer a secondary moisture barrier over that. So should your roofing material come off, you have another layer of protection keeping water out of your house.

WILLIS: OK. Wendy...

ROSE: And then of course, when you are choosing a roofing material, make sure it's rated for high wind and impact.

WILLIS: ... let's move on so that we can give some advice on what to do if you want to do something this weekend. You've got some great advice for people who might be thinking, hey, I want to protect my house from a tornado, but I'm going to do what I can this weekend. One interesting point you made -- I've never seen this before, but don't use gravel landscaping.

ROSE: In high-wind events, we've seen the small gavel rocks picked up, they could tear apart vinyl siding or end up in a mailbox. So we know that they do travel.

So if you can, change the landscaping in your yard. Put in something softer, as in bark.

Also, look around your yard. What is the wind potentially going to pick up? If you have a lot of lawn ornaments or a lot of debris, it might be trees that need branches trimmed. Anything that can be picked up by that wind and potentially become flying debris, which could cause problems with your house.

WILLIS: OK. Wendy, perfect.

And, of course, the average tornado warning is just 20 minutes or less, so you want to watch for that flying debris.

Thank you so much for being with us.

ROSE: Thank you, Gerri.

WILLIS: As always, if you have an idea for a "Weekend Project," send an e-mail to openhouse@cnn.com. And if you want to check out this "Weekend Project" again, check out our web site, cnn.com/openhouse.

It's the age-old question for car shoppers out there: buy or lease? We have the right plan for you, next.

But first, a city in the heart of Tornado Alley and the storms themselves in this week's "Local Lowdown".

(BEGIN VIDEOTAPE)

WILLIS (voice over): Oklahoma City, Oklahoma, three and a half times more likely to see a tornado than the rest of the United States. On May 3, 1999, Oklahoma City's southern suburbs were hit by the strongest tornado ever recorded, an F-5 up to a mile wide, with winds topping out at 380 miles per hour.

OKC is a sprawling city situated right in the heart of Tornado Alley. Some half a million people live there. Median family income sits at about $50,000, slightly below the national average of $56,000. But the median home sales price is only about $100,000, less than two- thirds the national average.

And you can thank Oklahoma City for the world's first parking meter, installed July 16, 1935.

That's your "Local Lowdown".

(END VIDEOTAPE)

(COMMERCIAL BREAK)

WILLIS: That's the top five cars of last year.

You know how to it goes, you go to buy a car. On the one hand, leasing sounds like a cheaper way to go, but owning the car sounds good, too.

Time now to get to the bottom of which is best for you.

Sam Grobart is a senior editor with "Money" magazine.

Sam, good to see you.

SAM GROBART, SR. EDITOR, "MONEY" MAGAZINE: Good to see you, Gerri.

WILLIS: You know, I read that the total cost of buying a car these -- the average is something like $29,000. Golly, my dad paid $30,000 for his first house. It seems insane that people pay that much for cars.

GROBART: Right.

WILLIS: It's an all-time high, or at least the highest in six years.

Let's talk about that buying versus leasing thing.

GROBART: Absolutely.

WILLIS: What are the pros and couldn't of leasing? Let's start there with the pros.

GROBART: Well, the pros of leasing a car are that you're going to have virtually no down payment up front, you're going to have lower monthly payments, and you're going to be driving a new car that's going to be protected under warranty for almost as long as you own it.

WILLIS: I know. I love that new car smell. And you get to do that all the time when you're leasing, right?

GROBART: Yes, exactly.

WILLIS: OK. The cons. You know, you can't drive as much as you want to, right?

GROBART: That's right. All leases have a mileage restriction, maybe it's 10,000 miles a year, 15,000 miles a year. It's going to cost you more to negotiate more miles. And if you exceed the mileage limit, you're going to pay a penalty when you turn the car back in.

WILLIS: Yes, a per-mile penalty that can really add up.

GROBART: Exactly. It can really add up, indeed.

WILLIS: OK. And, of course, you're not building equity in the loan, in the car, right? You're just throwing the money out the door every month.

GROBART: That's right. You're renting. You're renting for a long time.

They call it leasing, but you're renting. I mean, you're paying a monthly fee, and then when the term of the lease is up, you don't have a car anymore. You have to pay another monthly fee to get a new car.

WILLIS: And you pay for the dents and the dings.

GROBART: Exactly. Carmakers, when you return a car off lease, will check it to see the condition of the car, and they're very strict to make sure that it comes back more or less the way they gave it to you.

WILLIS: OK. Now if you want to buy, I mean, the big deal, of course, is that the pros are you're not facing some of the fees that you face if you're leasing, right? What don't you pay?

GROBART: Oh, well, you don't pay those mileage restrictions, you don't pay those conditional requirements, or anything like that. On the other hand, you will be paying more up front when you start the purchase process.

WILLIS: Which is why a lot of people lease, is because they want a big, fancy-schmancy car, but they can't really afford the BMW or the Lexus, so they go and lease it, right?

GROBART: That's right. You can get usually get a nicer car for less money if you lease, but you're not buying a car. So it depends on sort of what your priorities are.

WILLIS: Let's talk about the cons. We mentioned the bigger down payment.

GROBART: Yes.

WILLIS: Of course, the new car smell, forget about that. That will be gone after a couple months.

GROBART: Right, after a couple years -- or a couple months, actually, you'll lose that, but it will still be your car. The cons of buying a car is that you're going to have a lot of money up front. You're going to have to make that down payment.

Your monthly payment is also going to be maybe 15 percent higher than leasing a car. And you're going to hold on to that car for a long time. So you'd better like it for a while.

WILLIS: Yes, you'd definitely better like it for a while.

GROBART: Yes.

WILLIS: OK, if you had to say one thing to our viewers about the best way to negotiate, buying or leasing, what would you say?

GROBART: I would look and find online. You can find this at cnnmoney.com, the purchase price for the dealer, the invoice price for the dealer, and negotiate up from that price.

Do not negotiate down from the sticker. Because you might think, oh, he knocked $1,500 off the sticker, I'm getting a good deal. Meanwhile, there's still another $3,000 that he's pocketing. So start from the original invoice price.

WILLIS: OK. Thank you so much for your help.

OPEN HOUSE will be back next week, right here on CNN. And you can catch us on "HEADLINE NEWS" every Saturday and Sunday at 5:30 p.m. Eastern Time.

As always, we thank you for spending part of your Saturday with us.

Don't go anywhere. Your top stories are next in the CNN "NEWSROOM".

Have a great weekend.

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