Square footage of a home is a matter of debate — a homeowner measures it one way, a real estate agent another way, and an appraiser a third way. 

The local tax assessor has his own method, too.

So, who is right?

Until 2003, they all were!  That’s when the NATIONAL ASSOCIATION OF REALTORS® Appraisal Committee defined the term “square footage” to include the following:

Finished square footage on each level of the home, measured from the exterior-facing surface of outside-facing walls.

The committee defined “finished” as an enclosed area that is suitable for year-round use and includes walls, floors and ceilings.

Seems basic enough, but there were some added notes and exceptions:

1. An opening to a floor below (e.g. vaulted ceiling, open-air living room) is not included.
2. Stairs are counted as square footage and are added to the floor from which they descend
3. Finished areas must have a ceiling height of 7 feet to be included (except under duct work or beams in which case the requirement is reduced to 6 feet, 4 inched)
4. If a room is sloped, at least half of the room must have the minimum 7-foot height in order to be included
5. “Detached” finished areas are only included if they are connected to the main structure by another finished area.   Detached garages, therefore, are excluded.

Even with the standard defined, the Appraisal Committee’s approach to square footage is still just a guideline; no states have formally adopted it as a standard for appraisers, tax assessors and other real estate industry players.

Until then, the debate will continue.  Despite the “official” guidance.

(Image Courtesy: Gables at Copper Creek)

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An interesting feature of interest only loans is that your payment is re-calculated each month based on how much money you are borrowing. 

The industry term for the re-calculation is “recasting”.

When an extra principal payment is made on an interest only loan, the new loan payment is calculated as:

(Outstanding Loan Size) * (Annual Interest Rate) / (12 months)

Therefore, an additional $500 principal payment against a $200,000 interest only loan at 6.000% will reduce next month’s mortgage by $2.50, or $30 annually. 

$30 is six percent of $500.

This is in contrast to an amortizing loan in which your mortgage payment never changes until the loan is satisfied.  Any additional payments to principal on these types of loans shave months off the end of a loan.

Recasting is not exclusive to interest only loans, however.  Many lenders will allow you to recast an amortizing loan for a small fee ($100-500) but may limit the total number of times you can recast over the life of your loan.

Interest only loans recast once monthly.

Interest only loans require discipline and are not proper for every homeowner (the same way that a 30-year fixed is not appropriate for every homeowner, either).  However, within a balanced financial portfolio, they can be a terrific financial planning tool.

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 The American Consumer keeps spending.              

This morning, the monthly Retail Sales report showed a larger-than-expected jump.  Even after stripping out elevated gas prices, the sales increase was more than double the expected amount. 

The economy surges ahead, fueled by everyday spending, and this does not bode well for the future of mortgage rates.

The recent run-up in mortgage rates is largely from inflation fears.  With inflation, investors’ dollar-denominated securities have less value over time because the dollar itself is worth less. 

Runaway consumer spending exacerbates the potential for an overheated economy and that is why today’s figures are slightly troubling.  Each time you and I make a purchase, we are (in small way) contributing to the economy’s growth.

Inflation, of course, is the enemy of bonds and your mortgage rates are determined by the prices of mortgage bonds.  Inflation erodes the value of the bonds and that is what causes mortgage rates to increase. 

As a homeowner, higher mortgage rates may depress your local market because fewer home buyers can qualify for home loans, lowering overall demand.

Rates are up by as much as 0.875% in the past 3 months.

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If you ever wanted proof that mortgage rates react to global events, the past four days are it.  

Worldwide, investors are shunning the United States mortgage market in search of higher returns elsewhere.

The more they sell, the worse mortgage rates get. 

The latest catalyst for extra supply: speculation about a Bank of Japan interest rate increase coming soon.  The Japanese central bank meets Thursday and Friday and is expected to hold its overnight lending rate at 0.500% although Finance Minister Omi has hinted at future rate hikes. 

Japan is a major player in the U.S.-based mortgage bond market so the thought of higher returns at home is putting mortgage bonds on the market and forcing prices down.

As always, prices down, yields up.  And the carnage continues.

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