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Welcome to Real Estate Live, an online discussion of the Washington area housing market, featuring Post real estate writer Daniela Deane.

For this event, she has invited special guest Steve Calem, a mortgage banker/broker who works with the Washington Savings Bank. Calem has been in the mortgage business since 1985 and has an MBA from George Washington University.

Ask him whether you should re-finance, what kind of property you can afford on your salary, what to do about a bad credit history and other questions on your mind about mortgages.

The transcript follows.

Editor's Note: washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Daniela Deane: Hello everyone! Welcome to Real Estate Live...I've got mortgage broker/banker Steve Calem here and it's a good time to have him...30-year fixed rates averaged 5.70 (with one point) last week, slipping from 5.79 the week before, according to Freddie Mac. So, should you refinance? Again? I've got questions here not about re-financings, mortgages or interest rates, which I will respectfully ignore. This is your opportunity to talk to a mortgage broker without being hustled! Sorry Steve...). So, let's get started.

Lewisburg PA: How do I know if its time to refinance my house? Are there any risks to refinancing a house?

Steve Calem: Great question. There are many reasons to refinance. You may want to consolidate other debt that may be at higher rates, pay them off, and close them, or you may want to take some cash out at a very low interest rate (tax deductible) which you could invest for your childrens college, or in other vehicles.
But in an apples to apples comparison of paying off one mortage with another, you basically want to consider the costs of the refinance, and the savings that you would gain. Then divide the cost by the savings, and you would get the time frame that you would be at a break even....if your planning to own the home for a significatly longer period of time after that,...it would make financial sense..

22305: My husband and I just bought our first house. We have very good credit (my highest credit score is 749, my husband's highest credit score is 705) and we got 100% financing on a $275,000 house. Our first trust interest rate is 5 3/8% (5/1 arm) and our second trust interest rate is 6 3/4% (adjustable, interest-only).

Are we getting a good deal?

Steve Calem: Sounds like your credit is good and you've got a great deal...remember you are borrowing 100% of the cost of the house...there is no collateral at this point to the lender(s)...I'd say you got a great deal, (particularly on the 2nd)..of course I assume these are at 0 points.

Refiancing Smaller Loan: Hi,
I have a 30-yr, 6.75%, no pts loan for $71,920. (Bought Condo in Oct '01 - Price was $89,900) I have found it hard to find a rate that will lower my payment enough to make it worth the hassle. Someone told me its b/c my loan is so small. Is this true?

Thanks!

Steve Calem: True....The savings on a smaller loan amount will be less than on a larger loan amount...because with payments scheduled out typically over 30 years, the payments on a smaller loan amount are diluted already.....One consideration that may make sense is to change your loan from a 30 year loan to a 15 year, (payments would most likely stay the same or close to the same, but more of every pymnt would go to principal). Then for the same monthly outflow you are paying off your loan faster, and paying the bank less interest....Good Luck

Rosslyn: We bought our hse last year and are now applying to refinance. We are tempted with the 7year option at a lower rate than the 30 year fixed. But have gone back and forth about what the rates might be in 7 years and whether the savings would be worth it. Advice?

Daniela Deane: Here's my two cents worth and I'm sure part of which Steve would say. How long are you planning on being in your house? More than 7 years? Or less? If more than 7 years, Steve, are ARMS worth it? Won't rates be higher in 7 years? But does the savings now offset that?...I'm a serial ARMer so I really need to know...

Steve Calem: Yep thats right Daniela....how long are you planning to be in this home...and what kind of reward will you be gaining for the risk of rising rates if you are still there....I am a huge fan of this program, bought my first two houses on it...in my opinion the amount of money that you'd typically save in the 7 year period + the additional principal paydown that you'd gain, (with the lower rate), your more than ahead of the gain 7 years later,...and if you're there 7 years....will you really be there another 5 or 7 more?...If fixed rates are higher in 7 years, you can go for another ARM and beat the bank at their own game....

Daniela Deane: Beat the bank at their own game, Steve? C'mon...We know who the winners are in this real estate game...

Alexandria, VA: Steve -- what's your take on the paid advertisements in the Post and some of the local papers such as the Gazette Package from lenders one has never heard of offering rates that seem to be about a quarter point lower than market? Are they outdated ads, do they sucker you with junk fees, or are they legit?

Daniela Deane: Great question. Steve?

Steve Calem: Unbelievable question! We deal with this stuff every day. Advertised rates are often placed in the papers on different days that they run, additionally, there are so many caveats to "pricing" loans that these advertised programs may be accurate but would apply to less than 1% of the public...like <50% loan in relation to property value, short term locks, special property types, prepayment penaltyies...etc. Additionally, closing costs may be significantly higher on these programs to make up for the differential in rate....the labelling of the cost doesn't matter, (points / loan origination) the total costs can buy down the rate...apples should be compared to apples...In general...because of the market,...rates should be very competitive....as brokers,...we are all getting our money from the same sources, (mainly), so when something that looks to good to be true...most likely is...get it in writing...that is often difficult,...Remember,...these are marketing tools, to get the telephone to ring...that is there purpose....that said, ever wonder why on those lists that there are always a few lenders that are a bit higher than all the rest...(usually consistently)..why would they advertise a higher rate than their competition with the goal of getting the telephone to ring? These lenders are pricing loans that are a bit more mainstream to the general public....

Daniela Deane: You mean the banks are lying too? Oh man...

Washington, D.C.: I am purchasing an apartment to rent-out and have been told to tell the lender that it will be my second home rather than an
investment property so that I get a better interest rate. Does anyone have any experience doing this? Am I better off just being honest and telling the
lender that I intend to rent it out? What difference in interest rate do you think it will make?

Daniela Deane: Oh my, you're a liar!! I've heard of others doing this though...I can tell you this, although I do not condone lying..Once you get the mortgage, they never come back to see what's happened...and you could have had it as a second home and then decided to rent it out ... I can't believe I'm saying this though...It's unethical to lie to a lender, if not illegal, isn't it? Steve, do people get caught doing this? Or do they just have trouble sleeping afterwards? And how do banks regard this? Do you have any experience with this?

Steve Calem: Yes guys this is unethical, and as part of the loan application you are stating that this property is either an owner occupied property or an investment property or a second home...so if you choose 2nd home as opposed to investment....it is also officially "fraud".
NOw that I've scared you....the second part of the question.....regarding the rate.. the rate on second homes is typically lower with more flexibility (less down payment needed) then on investment propertys because 2nd homes typically do not get run down by inconsiderate renters, and experience pride of ownership and the love and care of their vacationing owners...If you plan on calling an investment property a second home..it should be either far enough away, or near a golf course, or beach, so that it is acceptable to be a second home....most people do not have 1 home on the east side of town and another on the west.....Underwriters do look for this type of stuff, because people often do it.....Your call what you put down,as your lender only knows the accuracy of the application you've presented them with....

Falls Church, VA: Steve,

We are in the process of getting an equity line of credit and will be closing in a couple of weeks. We are looking at some investment property and had considered using saved cash and part of the equity line to pay cash for the home. What is your opinion of that approach? If we decide to get a conventional mortgage on the property, will the equity line loan process interfere with getting the conventional investment loan?

Thanks.

Steve Calem: I have several clients who are doing the same thing! The home equity loan proceeds are acceptable as down payment on the new property, (after all it is your money in the bank account called "your home")..Additionally, currently the rate of interest on these loans are very low as they are tied to prime...a word of caution though....prime will go up as the economy recovers....your payment on the home equity will also then go up...make sure you are comfortable with these options.....Paying cash for a property like this really boils down to borrowing some $ at a super low home equity rate...I think its a great idea, as long as the home equity portion is not to great...so if rates go up, you can refinance and pay off your home equity down the line...Good luck!

NW, DC: I'm refinancing my condo and cashing out to pay off some school loans which have a varialbe rate. I told the woman from the mortgage company this on day 1. When I got the forms, she had put down that different loans than the ones I wanted were going to be paid off. (she put down ones w/ fixed rates) I told her this before I signed and told her which ones I wanted paid and she said she'd fix it later. I was approved for the loan. The day of my closing I found out that she never fixed it and so we had to push closing off for another month while she re-ran my loan-debt ratio. I'm still waiting to hear back from her. Does this sound right to you? What actions should I take from here?

Daniela Deane: Okay, now the mortgage brokers are lying too...I give up. Steve, what can this poster do now? Complain to the National Association of Mortgage Brokers? Call them and ask what to do?

Steve Calem: This could have been an honest error by the broker, which was exacerbated by a lack of follow up and response...I would contact the supervisor, manager, or owner of the company and explain to them..if necessary in writing (faxed) to get some resolution....Good Luck

alex, va: Steve, please write in sentences with punctuation (especially periods!). It's hard to read when everything is a run-on sentence separated by ellipses.

Daniela Deane: Give him a break, will you? The man is typing so fast he can hardly think...I understand what he's saying...

Steve Calem: Is that you MOM?....she was an english teacher!...I'll try my best!

For Washington D.C. - second home: Isn't the better question, "What is the right thing to do?" rather then "Will I get caught?"

Daniela Deane: Okay, what is the right thing to do?? I think Steve said it: Tell the truth or it's fraud....Sorrrrrrrrrryyyyyy.....

Steve Calem: Right!

ARLINGTON, vA: Yes to ARMS - I have a 3 year ARM at 4%. If I don't sell in 3 years, I plan to refinance to get rid of my PMI - probably into another ARM.

Daniela Deane: Here's an opinion on ARMs..Thanks for sharing. Anyone else have anything to say about adjustable-rate mortgages? (I've got a 5/1...But shoot, interest rates are so low, shouldn't I have just gotten a 30-year...? Steve says no...But Steve, ARM rates could be higher in five years than the 30-year fixed now...They almost certainly will be...I'm not sure I'm convinced...

Steve Calem: Yes its complicated and no one knows what lies ahead in the future...the bottom line question I think should be...does the amount of money I'd save in the time the ARM is fixed, (3 years in this case), worth the risk of where rates will be when the ARM adjusts....and if fixed rates are much higher when I need to refinance....will I be OK going with another ARM....The most sophisticated borrowers by the way...with the highest loan amounts, often pick ARMs over Fixed Rates as they pay down the loan faster ....if you take an ARM but make the payment you were required to make on the Fixed....you'd be surprised on how quickly your loan will pay down...nudge nudge...wink wink...

Arlington, VA: My vitals:
First Time Homebuyer
Approx $67k income
Zero debt
Excellent credit (773)

I want to buy a townhome in the next six months, but have very little cash available for a down payment (I am just paying off my 5-year car loan three years early, which is why I have no debt).

My question is: considering the above info, can I expect to get a loan at rates near the prevailing area average? Or because I have very little to put down and am a first time buyer should I expect that I will only qualify for loans at higher rates?

Steve Calem: Based on your Vitals you look great to me! There are several specific loan programs tailored to people like you and you should be able to recieve the lowest possible rate with minimum or no money down and no problems! Congratulations! Doesn't that feel good!

Daniela Deane: Steve is right that many sophisticated investors go from ARM to ARM...I've talked to many of them...I was too chicken to do that on my investment condos, and my investment advisors (most of whom have done very well, thank you) tell me I was wrong...sigh.

Washington DC: I think both of you were a little flippant with your response to the person who asked about falsely describing an investment property on a loan application. It is a federal offense to make a false statement on a loan application at a federally insured institution.

The risk is not that your loan will be rejected. The risk is that down the road, you won't be able to make the payments, and go into default. That's when the real scrutiny of your loan application will begin. Just ask Webster Hubble!

Daniela Deane: Saying it's unethical and fraudulent is flippant??

Steve Calem: You are correct! It is a federal offense. I did not mean to be flippant. Fraud is Fraud.

Daniela Deane: Fraud is fraud and unethical is unethical. Happy now?

WDC: This may be a dumb question, but what is a LIBOR? I don't even know enough about it to ask the question properly!! Thanks!

Daniela Deane: You and everybody else..Don't worry. What do they say? There's no such thing as a stupid question when you're trying to learn?

Steve Calem: The Libor is an index that some Adjustable Rate Loans are tied to. In comparison with other indexes, this is a good one, and slower to move when the economy picks up.

re: lenders that advertise in the post: I have to say this is how I found my lender. I shopped around A LOT, and some of the best rates/lowest closing costs came out of the Post's ad section. Of course some were also unreasonably priced, but I know I got an unbelievable deal I'm really happy with (and that's still better than the refi options these days despite all the equity I've built).

Daniela Deane: Yey for advertising in the Post!!! (I gotta say that...)

Steve Calem: Great! Thats what I like to hear!

Bethesda, MD: My fiance and I are house hunting and he just got approved for a mortgage for our future home- His FICO score is very high, he has no debt, and he has saved a downpayment of nearly 20%. I have about 15K in student loans to pay off, but no other debt. I also have no other savings. Basically, we figured the mortgage will be in his name. Is this a good idea? He has worked very hard to make this house possible for us, but I wonder if me not being on the mortgage is the best way to go. Is there any reason I should be concerned about not being on the mortgage? Thanks for your thoughts!

Steve Calem: You didn't mention how your credit scores were, or if your debt is effecting your ability to be approved for the mortgage...are you working? That should offset your debt. It is a personal decision, (which should be an educated one), the two of you should make as to who goes on the mortgage. If you choose not to go on the mortgage, you can typically still go on the title of the new home.

Shirlington, VA: We're buying a house, financing 80-15-5. We have a good 30yr fixed rate on the 80 (5.75%). For the 15, instead of a traditional loan w/ a fixed rate a little higher (e.g. 7%), the lender is offering a line of credit tied to prime (which is now 4.25%), and with a basement rate of 4.5%. Does this sound like a deal? How fast can prime move to 8, 10, 12, 15%? Thanks!

Daniela Deane: We know what prime is, thank you!! (If not, what the heck are we doing here?)....Here's the short answer: Nobody knows what will happen to the prime rate...Greenspan said the other day that he thinks the economy will start picking up in the second half, which will push the prime rate up. Right, Steve?

Steve Calem: Right..and those are great rates! Prime will go up, but when you look at the net payment increase on these loans, (even with a 2% increase), it is often very manageable as the payments are often calculated as interest only...ask your lender to calculate the payment on the second at 6% or 8%...find out when prime was last at 8 - 10%....I think you'll feel pretty good...

Vienna: Interest rates have dropped since I locked in the rate for the house I recently agreed to buy. I don't close for another month. Is there any way I can get a better rate?

Steve Calem: Ask yourlender what their policy is towards a float down.
You may be able to relock at a lower rate. Good Luck!

Daniela Deane: I'm starting to worry about the fraud question now. I reiterate: I do not condone lying. And lying on a loan application is both fraudulent and unethical. What we were trying to say, perhaps unsuccessfully, is that people do it..And they're all breaking the law...Oh man. I'll probably get fired now. THANKS A LOT.

Clarksburg, Md: Hello,

Are prepaid penalties legal in Maryland and if so, are there any limits ?

Thanks,

Daniela Deane: Sure they are....You can accept or reject, remember...Steve just told me that brokers oftentimes get paid more for selling mortgages with prepaid penalties...I've got one..That irritates me...Okay, I'm stupid...

Steve Calem: The rate is typically lower on loans with prepayment penalties then without prepayment penalties. Some areas have laws against prepayment penalties. Those laws (as I understand them), relate to some types of institutions but not all types...My understanding is that Prepayment Penalty loans are legal in Maryland. You should always understand these features of the loan before signing and know what you are getting as a benefit for the prepayment penalty.

Washington, DC: How much mortgage debt (as a percentage of income) should a person realistically take on? The usual estimates (28-36% of income) seem very high to me. I'd like to have something left over to enjoy life a little! Thanks.

Daniela Deane: It's important to look at what other debt you have too. Would the mortgage be your only payment? Or do you have a car loan, student loans, credit card debt, etc..? The ratios have gone out the window these days..What's important to look at is the monthly payment you'll have. Can you afford that? Does it leave you money to live a little too, as you say?

Steve Calem: Here Here! These days, people can usually qualify for loans of a much greater amount than they feel comfortable making payments on...You should feel comfortable with the monthly obligation after the real estate lender and realtor are gone.

Daniela Deane: Okay, folks, that's it for today. I'm going to give Steve a little plug since he sat here for an hour answering questions. You can email him at steve@stevecalem.com or check out his web site at www.stevecalem.com. I'll see you in two weeks, unless I get fired...which the poster can feel really really guilty about....Bye folks. Don't feel bad if we didn't answer. We got 115 questions today...Ciao!

WDC--about the fraud: Don't worry, we know you have been good for the readers here.

Daniela Deane: This HAS to get posted...Thanks!

Steve Calem: I like her chats too.

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