Foreclosure Lesson 1 - Digg

In light of all the news surrounding foreclosures, I thought we should take an in depth look at foreclosures. Over the next couple of weeks, we are going to define National and Local Factors affecting foreclosures, as well as Foreclosure laws in Virginia, the types of foreclosures, the types of property, and how to make money with foreclosures.

We will start with the National Factors that Affect Real Estate. The first is the interest rate. When most people buy a house, they have to borrow money, this is known as a mortgage. The bank however, doesn't give money away, the bank wants something in return - the interest on the money borrowed. This is the reason for the interest rate. The interest rate is based on the Federal Funds Rate. The Federal Funds Rate is the interest that banks charge each other for overnight loans of federal funds, which are held by the Federal Reserve.

From this we can determine the Prime Rate. The Prime Rate is what banks charge their largest and best customers. Everyone else gets interest rates above the Prime Rate. Interest Rates DIRECTLY affect your purchasing power. Let's look at an example.

Let's say there is a foreclosure going to the courthouse steps for $150,000. Unless you have $150,000 in the bank, the house is going to be financed. If a real estate investor gets a loan from a bank for $150,000 at 6% interest and we will assume a marginal tax rate of 25%, the monthly payment on a 30 year fixed loan will be $899.33. The total payment over the 30 year period will be $323,755 and the total interest paid will be $173,755.

Now, let's say an investor gets a loan from a bank to finance the foreclosure, but this time the interest rate will be 8% instead of 6% and we will assume the same tax rate. The monthly payment on a 30 year fixed loan will be $1,100.65. This is just over $200 more per month than the six percent quote. The total payment over the 30 year period at an 8% interest rate is $396,230 and the total interest paid will be $246,230.

For current investors, people wanting to become investors, flippers, or people looking to buy a home at a great price, need to be aware of interest rates. I could be the difference between making money or losing money. To look at historical interest rates, check out these sites:

Federal Reserve Statistical Release

Interest Rate Trends from Mortgage-X

Wall Street Journal - News and Analysis (Subscription Service)

Of course you can always Google or Digg historical interest rates. Later we will look at the next National Factor Affecting Real Estate and Foreclosures - Inflation.