Tuesday, June 28, 2022

Buy Before You Sell



A common concern for homeowners is that if they sell their home first, they may not be able to find another home to buy.  It is understandable with the low inventories currently available in most markets, but a strong argument can be made to buy your replacement home first.

In fact, there are some advisors that would tell you not to sell at all.  Instead, keep the home for a rental investment and refinance it to pull out some cash for the down payment and closing costs for the new one.

Many homeowners recognize that their home has been an excellent investment for them.  Their home may have outperformed their retirement and other investments.  In all likelihood, homeowners understand the management and benefits of a single-family home far better than they understand stocks, mutual funds, annuities, or ETFs.

Just as there are low inventories of homes for sales, there are shortages of available single-family homes for rent, as is evidenced by rent continuing to rise.  Rising prices and rents contribute to the rates of return that rental properties enjoy.

A homeowner, assuming they have good credit, can borrow the difference in their unpaid balance and 80% of the fair market value of their home.  The proceeds are most likely not a taxable event and can be used to purchase the replacement home.

It is likely that the rent could cover the total payment on the refinanced former home.  The seller, then, benefits from income, depreciation, equity build-up, appreciation, and leverage.

There is even a window of opportunity possible for the homeowner to rent it for a while, which covers his payment, allows the home to continue to appreciate, and then, sell and close it within two years and still be eligible for the section 121 exclusion of gain in a principal residence.

The homeowner may find that the investment is providing a better return than alternative investments and keep the rental beyond the two years.  At some later date, if the homeowner wanted to dispose of the property and buy another more expensive rental, a section 1031 exchange may be available to avoid capital gains for a while longer.

Many economists feel that the low inventory situation in most of America is going to be a long-term event due to over a decade of underbuilding and maturity of the millennial generation.  This will continue to propel both home values and rents; both of which are good for investors.

Buy before you sell but they don't have to be at the same time; they can be years apart.  Do a cash-out refinance on your current home for the proceeds to buy another home that meets your needs now.  Then, convert your current home to a rental investment.  Don't wait because rising interest rates will increase your payments on not only the new home but the refinanced home also.

Talk to your real estate professional about what the fair market value of your current home is now, what you can expect to pull out of it and what it would rent for.  Download our Rental Income Properties guide for more information.

Tuesday, June 21, 2022

When are the Negotiations Over?



The primary negotiation in a home purchase takes place when the contract is agreed upon that includes the price, closing and possession.   With inventory down over 19% in the past year and multiple offers being more of the norm than the exception, the first round of negotiations can be challenging.

Buyers and sellers alike feel relieved once it has resulted in an agreement, but experienced agents know there is more to come if there are contingencies for financing, inspections, or other things.  The competition for the home may be so tough that the buyer waived their rights for what would be normal contingencies.

Financing is one of the most common contingencies in normal situations but when multiple offers are involved, the cash offers tend to have the advantage.  If you don't have the resources to make a cash offer, the next best position is to be pre-approved with a commitment letter from the lender.  Arrange for the lender to confirm the pre-approval directly with the listing agent prior to the listing agent presenting the offer.

There have been buyers who know they don't have the cash to close and apply for a mortgage anyway and try to reinsert the provision outside of the contract.  Experienced listing agents will advise the seller to have the buyer provide proof of funds necessary to close and verify that they do indeed exist.

The purpose of an inspection is for the buyer to receive an objective evaluation about the condition of the home and its components to identify existing defects and potential problems.  The expense for inspections can be several hundred dollars and it's reasonable for buyers not to want to spend the money before they find out if they can come to terms with the seller.  From a different perspective, sellers want to know quickly if the buyer is going to reject the home due to the inspections because they could be losing time.   For that reason, inspection time frames are limited to a few days from acceptance of the offer.

Sometimes, buyers will expect sellers to make all the repairs listed on the report and this is where the second round of negotiations begins. If the seller refuses, the negotiations can go back and forth until the other party accepts the offer on the table.

When purchasing a new home from a builder, it is expected for everything to be in working order; after all, it is new.  However, it is reasonable to expect that existing homes, that are not new, have a different standard.  While it's understandable that buyers would want to be aware about major items that are not in "working order", normal wear and tear of components based on its age should be expected.

In a highly competitive seller's market, buyers might do whatever they can to get their contract accepted, realizing that there is another place to negotiate when they're not competing with other buyers' offers to purchase.

The negotiations involved in a home purchase are not complete until the buyer and seller have signed the papers and the title has passed to the buyer.  Up until the closing is finished, any item that comes up could prolong the negotiations.

For this to be a WIN-WIN situation, both seller and buyer must feel good about the negotiations that led to transaction closing.  Neither party should feel that the other party had an unfair advantage over them.

Tuesday, June 14, 2022

Become a Victim of Inflation or Benefit from It



In inflationary times, currently the highest in 40 years, the purchasing power of your money diminishes each day; essentially, buying you less.  The biggest threat is to be without capital assets, like a home, that are benefiting from the increase in prices. 

Your money buys less gasoline now, than it did a year ago, by close to 50%. Beef prices are up about 20% since last year.  Used cars are about 35% more expensive than they were a year ago. Mortgage rates are near 5% after reaching their lowest of 2.65% in January 2021.

And then, there is the price of houses.  CoreLogic reports that home prices increased year over year by 20% in February 2022.  Their Home Price Index indicates an annual five percent increase in prices from 2014 to 2021.

For many people, the American dream of owning a home is slipping away.  Adjusting your expectations for the perfect home and when you expect to achieve it, can be a legitimate, long-term strategy to making the dream come true.  By delaying the gratification of getting everything you want in a home now and making compromises that would allow you to stair-step your way into the "forever home" could be the plan to incrementally reach your goal.

Owning a home in today's market, even if it isn't the ultimate home, provides a significant hedge against inflation.  Not only is the home appreciating faster than the rate of inflation, the mortgage on the home produces leverage that increases a homeowner's return on their equity.

Homeowners have both the home's appreciation and its amortization working in tandem to increase their equity.  Money in a bank account or the stock market can't compare to the potential.

$40,000 invested in a certificate of deposit earning 1% would be worth $42,040 in five years.  If the same amount was invested in the stock market that earned 6% annually, it would be worth $53,529.  However, if the $40,000 were invested in a $400,000 home, with a mortgage at 5% for 30 years, that appreciated at 5% annually, the equity would be close to $180,000 at the end of the same five-year period.

Connect with us and let's put together a plan to help you benefit from inflation.

Tuesday, June 7, 2022

You don't have to give an arm to get a lower rate



Rising interest rates compounded with increasing home prices are causing affordability issues for many buyers.  To keep payments low, you won't have to give an arm, but more buyers are considering getting an ARM, adjustable-rate mortgages.

Mortgage rates are near its highest point since 2009.  "While housing affordability and inflationary pressures pose challenges for potential buyers, house price growth will continue but is expected to decelerate in the coming months." said Sam Khater, Freddie Mac's Chief Economist.

A $400,000 home with 10% down payment and a 30-year term has the choice of a 5.27% fixed-rate or 3.96% for a 5/1 adjustable-rate mortgage.  The principal and interest payment will be $1,992.40 for the fixed-rate and $1,710.40 for the adjustable rate saving the buyer $281.99 per month for five years.

There is an additional savings for the buyer choosing the adjustable-rate mortgage because the unpaid balance at the end of the five-year first period is $6,429 less than the fixed-rate.  The total savings to the buyer on the adjustable-rate during the first period is $23,348 or $389.13 per month for sixty months.

At the end of the first period, the rate on the mortgage can adjust according to the then, current index plus the margin subject to the caps as specified in the note.  These safeguards remove control from the lender or servicer from arbitrarily raising the rate.

The caps restrict the payments from going up more than a certain amount at each period or overall, for the life of the mortgage.  A common cap might be that it cannot adjust more than 2%, up or down, at any given adjustment period or 6% above or below the initial note rate.

Adjustable-rate mortgages must adjust downward if the index indicates a reduction at the anniversary of the adjustment period.  The overall trend has been lower rates for the past thirty years until recently.

Using an Adjustable Rate Comparison tool, you can project a breakeven point to determine at what point the ARM would be more expensive than the fixed-rate, assuming a worst case situation where the rates would increase the maximum at each period.

In the case of the previous example, the breakeven would occur at 7 years and 6 months.  This means that if the buyer were to sell the home prior to that projection, the ARM would provide the cheapest cost of funds to purchase the home.  On the other hand, if the buyer knew they would stay longer than that, it might be a safer option to go with the fixed-rate.

It is good to be aware of available options when financing a home.  Analyzing, using the best information available, can help you make an informed decision.  Make your own comparison using our ARM Comparison.  Current interest rates can be found on Freddie Mac.

Tuesday, May 31, 2022

Helping the Seller See Your FHA/VA Offer More Favorably



With multiple offers the norm on many listings these days, the seller relies on their listing agent to help them determine which one to accept.  In some cases, offers subject to FHA or VA mortgages tend to move to the bottom of the list.

Some sellers consider all cash offers first and then, conventional offers with at least 20% down payments as the next most likely to close.  It may be because of a common misconception that FHA or VA buyers are poor credit risks and have a higher likelihood of not being approved.  Both FHA and VA do not require as strict credit requirements as conventional loans but if a buyer has been preapproved, that should alleviate that worry.

A legitimate concern regarding FHA and VA contracts could be that if the appraisal doesn't come in at the sales price, the buyer has an option to void the contract.  This means that the property would have to go back on the market and valuable time could be lost.  However, that could also be true for a conventional mortgage.

One major advantage for buyers using these government insured, or guaranteed loans is that a lower down payment is required.  Just because buyers prefer not to put 20% down payment does not mean that they are not credit worthy.  In the case of veterans, the VA loan is a perk for serving their country that provides one of the lowest cost mortgages available.

For FHA buyers wanting a low-down payment option, the mortgage insurance could be considerably less expensive than on a conventional loan.  Conventional loans usually want a 740-credit score for the best rate and lowest mortgage insurance.  As the credit score gets lower on conventional loans, the price for mortgage insurance goes up.   This is not true with FHA; the price is the same on any acceptable mortgage.

For buyers to increase the odds of getting their contract considered seriously or even accepted, the first step is to identify a mortgage professional who specializes in FHA and VA loans and get pre-approved before starting to look at homes.  Another option is to attach the pre-approval letter to the offer when it is made along with the contact information of the loan officer.

Have the mortgage professional personally call the listing agent as soon as the offer is made so they can go to bat for you and provide verified information that can be communicated with the seller.  Some agents have a predetermined idea that all FHA and VA loans are difficult and fraught with problems.  The mortgage officer, who specializes in these types of mortgages, can give the listing agent factual information about the way the loans work in today's market.

For the buyers who have the resources, another tactic may be to let the seller know that your first preference is to use an FHA or VA loan but if during the approval process, a snag develops, making it not possible, you would be willing to go with a conventional loan.

There are real estate agents who have never participated in an FHA or VA loan and there are agents who specialize in them and have lots of experience.  It is to your advantage to be working with an experienced agent.  They are going to be the agent who recommends a mortgage professional, writes your offer, presents it to the listing agent, and works with all the other professionals to get your FHA or VA transaction to settlement.

Tuesday, May 24, 2022

Today is a Skills Market



In today's ultra-competitive real estate market where there is only 1.7 months supply of inventory compared to 6 months in a balanced market, and the average home is getting 4.8 offers per sale, it is more important than ever to have the right person "champion" your cause.

In the Middle Ages, it became customary for a person of nobility to appoint a "champion" to fight for them in their stead.  Trial by combat ended in the 15th to 16th centuries but the practice of "fighting" or speaking in one's behalf continues even to this day.

Lawyers will take up the cause of their client to win justice for them.  Professional athletes are recruited for their abilities to help their team become victorious.  Craftsmen of every type imaginable are in high demand because of their finished product.

Sellers' and buyers' objectives are different and, in many cases opposing in nature.  Sellers, rightfully so, believe they should get the most for their home while minimizing expenses and avoiding any issues that could cause delays.  Buyers want to be treated fairly; have an opportunity to buy the home of their choice and enjoy the protections of normal contingencies for things like mortgage approval and inspections.

In most situations, there are two real estate agents involved in a single sale. While there could be legal agency distinctions, it is commonly felt that the agent on their side of the transaction is "championing" their cause.  It is natural to want your champion to be the most capable person available.

There are skills that agents need in today's market not the least of which is negotiations.  Regardless of which side of the fence you're on, your agent needs to be skilled in negotiating on your behalf.  Every part of the contract is a negotiation starting with the price, then, whether it is cash or subject to a mortgage.  What's a reasonable amount of earnest money?  Can it be "as is" and still allow the buyer inspections so they'll be fully aware of what they're buying?

The buyer wants to negotiate the best terms possible with the seller and they are depending on their agent to work for them to get them.  The home inspector has been hired by the buyer to determine the condition of the home and will most likely, ask the seller to make any necessary repairs.

The lender hires an appraiser to determine the value of the home so that the loan will be secured by the property.  Recent sales are used as comparables, but they trail the market which becomes a challenge in rapidly appreciating markets, especially, when there are multiple offers. 

And since multiple offers are the norm currently, how is the best way to handle them based on the seller's or buyer's perspective.  There could be legal and ethical procedures that must be followed but an agent's experience may also contribute to the favorable outcome.

The skilled and experienced negotiator understands that every transaction is different because of dealing with individuals, their families, their needs, and their emotions.  The role of the third-party negotiator can be invaluable to the success of the transaction based on not only their experience but the juxtaposition to the principals and their objectivity of trying to reach a compromise.

Tuesday, May 17, 2022

Existing Homeowners May be Facing Higher Payments



As a current homeowner, you may be basking in the consolation that you bought before the market got crazy with higher prices and interest rates. However, it doesn't mean that you may not be facing higher mortgage payments for next year.

Most homeowners pay their taxes and insurance into an escrow account with their mortgage payment.  The lender monitors the account to be sure there are enough funds available when the taxes and insurance are due.  If there is a shortage, it could cause your payment to increase.

In 2021, the national average increase in home prices was just under 20% but may have been considerably higher in some local markets.  The increased value of homes doesn't just affect buyers, in can affect the assessed value of properties across the board resulting in their property taxes going up.

Various taxing authorities, like state, city, school, and other special districts, can establish the rate they charge and exemptions that apply.  In most situations, there is a state assessment procedure for establishing the value subject to tax.

When the assessment is published, there is usually an opportunity for the owner to challenge the value.  The owner can submit evidence to justify lowering the assessment like comparable sales that indicate a lower value, mistakes in the size of the improvements or lot size, or possibly, deteriorated condition of the property.

There are companies who will represent sellers in the effort to lower the assessment.  Typically, they may charge a flat fee and a percent of the property taxes saved by lowering the assessment.  This particular year, some assessed values have gone up as much as 35-40% and it may not seem fair, but it really does accurately reflect market value.

Start investigating your situation as soon as you are notified of this year's assessment.  In most cases, the owner can represent themselves in the matter, but they will need to accumulate accurate, comparable sales, not use automated value models, found online.

Your real estate agent may be able to provide you a list of comparable sales.

Tuesday, May 10, 2022

Homeownership and the Three M's



Homes are valuable assets and must be maintained so they function properly, are safe, enjoyable and hold their value.  Attention to maintenance, minimizing expenses and managing debt & risk will protect your investment.

Maintenance

It is interesting that people understand the necessity to maintain a car and regularly have the car inspected, repaired and do regular maintenance.  Even though a house could be worth many times more than a car, homeowners regularly neglect what should be routine maintenance.

Failure to maintain a home properly adversely affects the value.  Many times, buyers will discount the price they are willing to pay for a home more than the actual cost of the repair or expenditure.  A home in good condition instills confidence while a home in less than good condition generates concern about unknown items that may also need repair.

HVAC systems, as well as appliances, run more efficiently when they are maintained which will result in lower utility bills.  Another big benefit is that small items in need of repairs, many times, turn into more expensive repairs or having to replace the items completely.

For example, failure to replace the air filters regularly could lead to a more expensive repair like having to clean the coils or it could even lead to a larger issue like burning out a HVAC motor.  In this example, the aggregate cost of replacing the filters is much less than the cost of a new furnace or A/C unit.

It can be more expensive to fix something that is not working rather than rather than prevent it from failing by regularly maintaining it.

Minimize Expenses

Every dollar you spend on maintenance, increases your cost of housing.  Some maintenance items may be easily done yourself and you'll save the cost of having a professional do them, like changing the filters.  However, the list of minimizing expenses goes way beyond maintenance.

Replacing all your light bulbs with energy efficient alternatives like LEDs is a great example.  In the spirit of Ben Franklin's adage that "a penny saved is a penny earned", every dollar you save on utilities lowers your overall cost of housing.

Windows and doors whose seals are not adequate, or a home not properly insulated could be using considerably more energy than necessary.  The cost of making these adjustments could be recaptured in utility savings in a short period of time.

Knowing the right service providers can be a big source of savings as well as give you peace of mind.  Your real estate professional has developed a wide range of trusted service providers who are both reputable and reasonable.  You should feel comfortable asking for a recommendation whenever you need one.

Manage Debt & Risk

Refinancing your home to get a lower interest rate can be a big savings but you'll need to analyze it to determine how long it will cost you to recapture the cost involved.  A Refinance Analysis calculator can help.

Other cost-saving items could be investigating multi-policy discounts for insurance, lowering your property tax assessment, low-flow toilets, smart thermostats, unplugging small appliances when not in use, and adjusting the temperature on HVAC units and water heaters.

While you are talking to your insurance agent about possible discounts, ask about your liability coverage also.  Homeowner policies have a stated amount of coverage, but your financial situation or exposure may indicate that you need to increase those amounts.  Generally, homeowners with pools or boats have increased risk and you'll want to ask your agent about your other extracurricular activities.

Owning a home has a lot of responsibility and having a good source of information is valuable.  Your real estate professional is uniquely qualified to be your source of credible real estate information.  If you are wondering why they would be helpful even when you are not buying or selling a home, it is because they want to establish long-term relationships so that whenever you need their help or services, not only will you feel comfortable asking but that you'll feel confident to refer them to your friends.

Tuesday, May 3, 2022

Will Selling Your Home Increase Your Tax Bill?



With home prices rising 20% nationwide in the past year and in some markets, even dramatically more, many homeowners are excited about the equity in their homes.  In the past, most homeowners were not concerned about profit from the sale being taxed but some may be surprised.

The profit homeowners make on the sale of their homes have enjoyed a generous exclusion.  Since 1997, for qualified sales, single taxpayers exclude up to $250,000 of capital gain and married taxpayers filing jointly, can exclude up to $500,000 of gain.

Prior to the Taxpayer Relief Act of 1997, homeowners over the age of 55 were only allowed a once in a lifetime exclusion of $125,000.  The new rule greatly increased the amount of excluded profit to the extent that most homeowners did not think about paying tax on the profit from their principal residences.

Section 121, commonly called the Home Sale Tax Exclusion, requires that you owned and used the property as your principal residence for two out of the previous five years.  This allows for a temporary rental of the property and still be able to qualify for the exemption. It can be claimed only once every two years.

Cost basis is determined by Purchase Price plus certain closing costs at acquisition plus capital improvements made to the home during ownership.  Sales price, less selling expenses, is considered net sales price from which the cost basis is subtracted to arrive at capital gains on the sale.

If the capital gain is less than the applicable exclusion, no tax is owed.  When the gain exceeds the exclusion amount, the overage is taxed at long-term capital gains rate which could be 0%, 15% or 20% depending on the taxpayer's taxable income.

Capital improvements made to a home increase the cost basis and effectively, lower the gain in the sale.  It is important for homeowners to keep records of the money they spend during the time they own the home.

Some improvements are apparent like a swimming pool, new fence, or roof but some are not so obvious.  Replacing a faucet or a light fixture can be a capital improvement and even though the cost is small, lots of these items over the lifetime of owning the home add up.

The three rules for identifying capital improvements listed in IRS publication 523 are: 1) does it materially add value to the property? 2) does it extend the useful life of the property?  3) does it adapt a portion of the home to a new use?

While taxpayers are allowed to reconstruct a register of the improvements made during the time they owned their home, some things will undoubtedly, be overlooked.  It is much better to have a written record of all money spent on the home in a contemporaneous manner and keep receipts for items over $75.

It is better to have the record of all items available when you are ready to make the capital gain determination.  You'll save time and probably pay less taxes having the list readily available whether you do your taxes or have a professional do them.

For more information, download the Homeowners Tax Guide. 

Tuesday, April 26, 2022

Buying a Home...Ask for a CLUE Report



People purchasing a used car have most likely heard of CARFAX vehicle history reports to help them avoid buying a car with costly hidden problems.  Less likely are buyers to know that there is a way to discover some of the repair history of homes they are interested in.

Lexis Nexis C.L.U.E. (Claims Loss Underwriting Exchange) is a claims history database that enables insurance companies to access consumer claims for the previous seven years when they are underwriting a risk or rating an insurance policy.

An insurance underwriter could identify a previous claim for substantial damage to a property and try to find out whether the repairs were completed properly before assuming the risk as a new insurer.  Similarly, a buyer could benefit from knowledge of former claims that may affect the value of the property or possible, future repairs.

A CLUE report can discover insurance claims on a home to investigate whether the repairs were done properly.  These reports are not directly available to potential buyers, but their property casualty insurance agent could order a report subject to successful negotiations with the seller to agree on a contract of sale. 

If a buyer had a CLUE report on a home that they were buying and were concerned about specific issues, the buyer could address those things with the inspector during the inspection period.  Conversely, the CLUE Report could detect items that may not be visible during a home inspection.

In some cases, a listing agent might suggest a seller get a CLUE report in the spirit of full disclosure to potential buyers.  Even if there were claims and the work was done properly, a high number of claims could affect the premium paid by a new homeowner.

A current homeowner can request one free CLUE report every twelve months online or by calling 888-497-0011.  They can also email consumer.documents@LexisNexisRisk.com.  Please be ready to provide your first and last name, social security number, driver's license number and state in which it was issues, date of birth, current home address and phone number.  For more information, see Lexis Nexis Consumer Portal.

If a buyer doesn't have a property casualty insurance agent, your real estate agent can recommend one.

Tuesday, April 19, 2022

Coordinating the Sale and Purchase of Your Home



Usually, it is easier to buy a home than to sell a home but that isn't necessarily the case currently. In today's market, it can be scary to sell your home before buying another because you could find yourself without a home.

Most sellers will not accept a contingency on the sale of a buyer's home in today's market.  So, let's look at some of the alternatives that homeowners are using to facilitate the transactions. 

If you have the income, credit, and cash available, the replacement home can be purchased with a new 80-90% loan-to-value mortgage and sell the existing home after you have moved into the new home.  This would require making two payments for a while but probably gives the seller the least amount of pressure to find the replacement property before the existing one is put on the market.

If the mortgage on the new home has the option to recast the payment, additional down from the equity in the previous home after it sells would lower the payments without causing any additional expense to refinance.

Another alternative may be available if your home has enough equity to borrow against it in a Home Equity Line of Credit or a bridge loan.   This type of loan is generally made by banks who will loan qualified owners up to 80% of the appraised value less the current mortgages on the property.  Freeing up the equity in your existing home will give you a down payment for purchasing the new home before you sell the previous one.

If a seller has assets in qualified retirement programs, it is possible to do temporary loans against them to facilitate the interim purchase.  There can be penalties on some of these if they are not repaid in a timely manner.  It would be good to investigate with your tax professional to see if this is a viable option.

Hard money lenders provide a source that will be more common to investors than homeowners.  These types of loans are generally approved and funded quickly, have less requirements than bank loans and provide funding for projects that cannot be financed elsewhere.  Interest rates are higher than bank loans, are written for short terms (1-2 years), and usually require 25-30% down payment or equity.

Power Buyers and iBuyers offer to purchase your home for cash and provide a quick closing.  Deeper investigation into these options may reveal that you will not receive the full equity of your home because they have to discount the home to cover the expenses they will incur as a seller.    

In today's very complicated market, the value of a real estate professional representing your best interests, providing you advice, options and experience has never been greater.  While there are similarities in transactions, each one is unique, and you certainly need a professional to be guiding you through the process.

Agents are trained and experienced in coordinating the purchase and sale of homes.  This can be especially beneficial in navigating unfamiliar waters.

Tuesday, April 12, 2022

A New Opportunity for Homebuyers



You may not have heard of anyone assuming an existing mortgage for over thirty years and didn't know they were even possible any longer.  The reason is simple, it didn't make financial sense but now that interest rates are increasing, it may be an opportunity for some homebuyers.

Conventional loans added clauses to mortgages back in the early 80's that gave the noteholder the right to raise the interest rate if a loan was assumed, as well as require the new buyer to qualify for the loan.  This essentially ended the practice of assuming conventional mortgages.

Then, in the late 80's, FHA and VA mortgages did impose the right to qualify the new buyers, but the big difference was that the mortgage rate would remain the same as the original borrower.  Even so, it still effectively ended the assumptions of FHA and VA mortgages because rates on mortgages trended down for the next thirty years.

There was really no benefit to assume a mortgage that still required qualifying because it was possible to obtain a new mortgage with a lower rate.  Generations of buyers have never even contemplated assuming a mortgage but now, in 2022, it might well be an alternative that will lower the cost of buying a home.

Mortgage rates hit a bottom in early 2021 and have been increasing since, this year especially. 

Since qualifying is required for assuming an FHA or VA mortgage and only owner-occupants are eligible, you might be asking what are the benefits?  If the interest rate on the existing mortgage is less than the rate on a new mortgage, there could be a savings.

In addition to that, there are fewer closing costs involved on assumptions of FHA and VA mortgages than originating new mortgages.  Another benefit is that assuming an existing mortgage will be further into the amortization schedule than a new one which means equity-buildup occurs faster.  And finally, lower interest rate loans amortize faster than higher rate loans.

The rub in this situation is that many buyers don't have enough money to purchase an equity but there is a remedy for that.  Let's assume the buyer was considering a 90% conventional loan.  If they identified a home with an assumable mortgage, they could put the same 10% down payment in cash, subtract the existing mortgage balance from what would be the 90% new mortgage and secure a second mortgage for the difference.

There are lenders that make this type of loan and buyers need to shop and compare rates and fees on them just like they would if they were getting a new first mortgage.  Your agent can suggest lenders for second mortgages.

Most search filters on portal websites do not include assumable mortgages.  You will need to rely on your agent to ferret them out.  If the agent you are working with hasn't suggested assumptions, it may be that they are unaware of their existence.

Wednesday, April 6, 2022

Cost of Waiting to Buy in Both Price and Interest Rates



Have you ever been shopping on a website where you were looking at something that was on sale?  You were interested in it but there wasn't a sense of urgency and maybe, you had a lot going on and didn't get back to it for a few days.  When you did go back to the website, the price on the item had returned to its regular price.

How did you feel?  Did you go ahead and purchase it for the current price?  How did that make you feel knowing that if you had acted more decisively, you would have saved money and had the product by now?

In 2021, homes across the United State went up 19.1% on average.  There were some markets where the prices soared 30 to 40%.  Fortunately, last year the mortgage rates did remain relatively stable but that isn't the situation this year, in 2022.

At the end of 2021, economists from Fannie Mae and Freddie Mac, felt like prices would go up around 7% for 2022.  The Mortgage Bankers Association and the Home Price Expectation Survey predicted more like 5% and Zelman Research and the National Association of REALTORS� forecast closer to 3%.

While the number of sales did decline at the end of February 2022 to 7.2% month-over-month and 2.4% year-over-year, that could be explained as a lack of houses for sale.  In the same month, inventory was 1.7 months which is down from 2 months in February 2021.  The median sales price had a year over year increase of 15.0% to $357,300.

The Fed had their first of what may be four or five interest rate hikes this year to try and get control of the inflation rate.  We have already seen mortgage rates at the 4.5% price and that is for borrowers with the best credit.  Those with less than sterling credit can expect to pay more.

It is anyone's guess at where rates will end a year from now, but many experts think this decade of low rates is over and we'll not likely to see them again.

There is a pent-up demand for houses to buy and an urgency to buy before the rates get higher.  If a buyer waits a year to purchase a home but the price goes up by 5% and the interest rate goes up by 1%, it will have a dramatic effect on the payment.

 

 

5% price increase

10% price increase

Sales Price

$400,000

$420,000

$440,000

Mortgage

$360,000

$378,000

396,000

Current Rate vs Possible 1.00% increase

4.5%

5.5%

5.5%

Monthly Payment

$1,824

$2,146

$2,248

Payment Difference

 

$322.18

$424.38

Additional Cost for 7 years

 

$27,063

$35,648

Additional Cost for 30 years

 

$115, 983

$152,776

 

If the appreciation is closer to 10% increase, the negative effect of waiting is exacerbated.

The equity in a person's home contributes greatly to their overall net worth and wealth position.  The effect is very apparent in contrast to renters compared to homeowners whose net worth is 1/40th of the homeowners $300,000 or $8,000 for the renters.

As people stair step their way into larger homes to not only meet their increasing demands but also to enjoy the amenities of a nicer home, the equity will continue to grow based on two dynamics: appreciation and equity-build up.  The renters do not benefit from either of these.

To run your own comparison, using your own numbers and what you believe will happen in the marketplace, go to Cost of Waiting to Buy.  If you haven't developed a plan to purchase in today's market whether it be your first home or a move-up, you need facts and a trusted team of professionals to work for you.

It starts with finding an agent who will be as committed to find your home as you are.  We would love to help you or your friends.  It is what we do.

Tuesday, March 29, 2022

Instead of a vision, show them the house



Sellers try to rationalize not making needed updating and repairs to their homes before marketing them by saying they are going to let the buyers make their own personal choices.  It is a convenient story to justify not going to the effort for the necessary market preparation to justify achieving the highest possible sales price.

An agent told a story of a home that was structurally sound being on the market, but it needed significant cosmetic work, like paint, floorcovering, updated fixtures, and lots of yard work.  The house was vacant with the owner having moved out of town. 

The agent explained to a prospective buyer what he thought it would take to bring the home up-to-date and what it would be worth.  The buyer was from out of town and was going to be teaching at the university the next semester.  He returned home without buying and came back to look again two months later.

As they were looking at homes with the same agent, the question came up about the previously viewed home that needed work.  The agent told him that she had bought it and did all the things that she had suggested.  The buyer asked if he could look at it.  On seeing the property, now, in its pristine condition, the buyer asked the agent if she would sell the home to him at a profit.

The agent told him that it wasn't for sale but followed up to the buyer with a question of her own.  "I told you that you could buy it for below market and gave you an estimate of what it would take to update it which would have you in the home below market value and with all the colors and choices of your own.  Why didn't you buy it then?

The buyer admitted that it looked like a lot of work and that he just didn't feel up to the challenge.  The main thing was that he just saw a lot of work and couldn't really see the finished product.

This story is not novel; it happens frequently.  Buyers are not experienced enough to recognize what needs to be done, how much it would cost and how long it would take.  In many cases, they don't have the connections with the different service providers.  In some cases, they simply can't imagine what the home would look like after the renovations are made.

There are some buyers who scout out opportunities for do-it-yourself experiences where they can earn sweat equity by buying below market and making the repairs to add value to the home.  There are many more buyers who don't know how and/or may not want the hassle and are willing to pay a higher price and be able to "move in" to their new home.

The highest prices being paid for homes are the ones in the best condition with the best locations.

The highly popular TV series Fixer Upper now, on the new Magnolia Network, uses this situation for the premise of each show.  People want to buy a home in great condition but can't find what they want.  Chip and Joanna find a good home in a good neighborhood for them and sell the vision of what it could be.  The unique aspect of the show is that they act as agents, designers, and contractors to meet the buyers' budget.

In the case of Fixer Upper, the buyer is the beneficiary of the increased equity for having taken the risk to make the repairs.  For the seller to be the beneficiary, they need to do the updating and repairs before marketing the home.

Ask your agent if they can provide suggestions of what items would most benefit from remodeling and if they have service providers that they can recommend.  The proceeds from the sale of your home belongs to you and to maximize them, it needs to sell for the highest possible price.  Your agent can work with you to make that happen.

Tuesday, February 8, 2022

Why a Home Should Be Your First Investment



Real estate has been described as the basis of all wealth.  Without considering income or investment property, buying a home to live in is an incredibly powerful way to build wealth or financial net worth.

A home is an asset measured by the size of the equity.  Equity is simply the difference between the value of the home and the amount owed.  There are two powerful dynamics at work to increase the equity which include appreciation and amortization.

Appreciation occurs when the fair market of the home increases.  The shortage of available inventory coupled with high demand has contributed to an 18% increase in value in the past year on average for homeowners in the U.S.

Most mortgage loans are amortized with monthly payments that include the interest that is owed for the previous month and an increasing amount that is paid toward the principal loan amount so that if all the payments are made, the loan would be repaid by the end of the term.

A 30-year mortgage at 3.5% interest on a $400,000 loan amount would have a principal and interest payment of $1,796.18 every month for 30 years.  After the interest is applied from the first payment, $629.51 would reduce the loan amount, thereby, increasing the owners' equity.

Each succeeding payment would have an increasingly larger amount applied to the principal and a decreasingly lower amount applied to interest.

Recently, CoreLogic reported that homeowners with mortgages have seen their equity increase 29.3% since the second quarter of 2020.  Equity rich is defined as when combined loans secured by a property are no more than 50% of estimated market value.  ATTOM reported that 42% of mortgaged homes in the U.S. are considered equity rich as of the fourth quarter of 2021.

Another advantage of this powerful asset is that borrowing money against the equity of your home is a non-taxable event. Regardless of whether it is a refinance or a home equity loan, the borrowed money is not income and not taxable.

A homeowner could stay in the home for years and as the home increases in value due to appreciation, they could borrow against their equity as many times as the value will justify.  They could continue to pull money out of their home for decades and under the current tax law, they could die and will the home to their heirs who would receive a step up in basis and the taxes would never have to be recognized.

Lastly, let's consider the home as an investment by looking at the rate of return.  Obviously, it is a personal asset that the homeowner will be able to live in, enjoy, raise a family, and share with their friends.  In calculating the rate of return, we consider a $375,000 home with a 3.00% 30-year FHA mortgage with a 3.5% down payment.  Using an annual appreciation of 3% and normal amortization, the $13,125 down payment in this home turns into a $148,062 equity in seven years.  The rate of return calculated is over 40% per year for the seven-year holding period.

Even if you discounted the ROI by half for all the unforeseen other expenses that may affect the real equity, it is still a 20% return on investment which could easily justify why purchasing a home should be your first investment.

It is challenging, particularly in some markets with low inventory, multiple offers, rising prices and increasing interest rates, but the advantages of owning a home are significant.  Would-be homeowners need the facts about their market and how to get into a home.  Start with downloading the Buyers Guide and make an appointment with a trusted real estate professional.

Tuesday, February 1, 2022

Paying Points to Lower the Rate



Two commonly known ways to lower your mortgage payments are to make a larger down payment especially if it eliminates private mortgage insurance and improve your credit score before applying for a mortgage.

Another way to lower your payment would be to buy down the interest rate for the life of the mortgage with discount points.  A discount point is one percent of the mortgage borrowed.  Lenders collect this fee up-front to increase the yield on the note in exchange for a lower interest rate.

A permanent buy down on a fixed-rate mortgage is available to borrowers who are willing to pay discount points at the time of closing.

Let's look at two options on a $315,000 mortgage for 30 years at 4% interest with no points compared to a 3.75% interest rate with one-point.  The principal and interest payment on the 4% loan would be $1,503.86 compared to $1,458.81 on the 3.75% loan. 

The $45.04 savings is available because the buyer is willing to pay $3,150 in points.  By dividing the monthly savings into the points paid, you can determine the breakeven point.  In this example, if the buyer is planning to stay in this home for at least 70 months, they would recapture the cost of the points and each month after that would be savings.

Another interesting thing to consider is that lower interest rate loans amortize faster; in other words, they build equity faster by paying off the loan sooner.  If the buyer stayed in the home for 10 years, their unpaid balance in this same example would be $2,117.38 lower than the 4% mortgage.  Combine that with the $2,259.29 in savings from the breakeven point to the end of 10 years and the buyer, in this situation, is $4,372.67 better off buying down the mortgage by paying the additional points. 

For a person buying a home, it may be difficult to come up with the extra amount for the points but one benefit is that the points paid are considered interest by IRS and can be deducted in the year paid.

A rule of thumb commonly used is that one discount point lowers the quoted mortgage rate by ¼% or 25 basis points.  A lender may quote X% + .6 points for a mortgage.  Using this scenario, to lower the mortgage rate by .25%, the buyer would need to pay 1.6 points. It is important to note that each lender determines the pricing of points for the loans they make. 

It may be beneficial to a buyer to pay points depending on how long they plan on being in that home.  To help you determine whether paying points should be considered, use this Will Points Make a Difference and download the Buyers Guide

Tuesday, January 25, 2022

I wish I knew then...



We have all heard this expression that implies that had a person known earlier in life what they know now, they would have done things differently.  The subject possibilities are endless   While no one has a crystal ball to see into the future, it may be possible to learn from people who have experienced similar situations.

In the late sixties, mortgage rates hit 8.5% but before the decade had finished, the rates had come down to 7% where they stayed for some time.  Homeowners who purchased at the higher rate, could buy a larger, more expensive home for the same payment if they could get out from under the obligation of their existing mortgage.

FHA and VA mortgages, up until the late 80's, could be assumed by anyone, regardless of credit worthiness.  Since these homes were purchased one or two years earlier, the sellers didn't really have much equity in them, and many homeowners were willing to "give" them to investors so they could qualify on a new, lower rate mortgage.

It was a fantastic opportunity for investors who could afford the negative cash flow because the homes wouldn't rent for the payment.  As the 70's economy, started heating up, so did inflation.  Most people consider inflation an undesirable thing but for people who owned rental property, it meant the values were going up and so were the rents.

Soon, the rentals no longer had negative cash flows and the investments turned the corner.  If you talk to investors who purchased those homes during that period, you'll very likely hear, "I should have bought more of them."

If we could fast forward into the future to see how people will be talking about the period we're currently in, we might see an even greater opportunity in our present time.  Interest and mortgage rates have been on a downward trend for thirty years.  In the past ten years, they hit an historic low.  They are trending up currently and it appears they will continue to do so.

Homes are in short supply which has caused the prices to go up.  Builders haven't returned to the number of new units needed to meet demand and that has been going on for over ten years.  Even when the supply does increase, it will take a long time to catch up with demand.

Combine that with supply chain shortages due to the pandemic and prices look like they are unaffordable.  Many millennials and some Gen Xers believe the "window of opportunity" has closed.

For tenants, rents are continuing to increase due to the same causes that home prices are increasing.  Buyers, by acting now, can lock in their mortgage rate and the purchase price of the home.  As prices continue to increase and the amortization of the mortgage pays down the unpaid balance, homeowners' equity increases and so does their net worth.

Unfortunately, for tenants, the rents will continue to rise, along with prices which will make it more difficult in the future to purchase.  Their rent is used to pay the landlord's mortgage who benefits in the principal reduction for each payment made.

The market is changing and people who don't own a home currently must find a way to buy one.  The longer they wait, the harder it will be to buy one.

People wanting to purchase a home in today's market must educate themselves with facts and not hearsay.  There are all sorts of programs available to address low down payments, varieties of mortgages, credit issues and other things. 

It starts by meeting with a real estate professional who can recommend a trusted mortgage professional.  Download our Buyers Guide and check out your numbers using the Rent vs. Own.

Tuesday, January 18, 2022

Your Home is a Hedge Against Inflation



The concern about inflation is the sustained upward movement in the overall price of goods and services while the purchasing value of money decreases.  Tangible assets like your home consistently become more valuable over time.  In inflationary periods, your home is a good investment and a hedge against inflation.

Money in the bank loses purchasing power due to inflation and the interest you may be earning is almost always less than inflation.

Home prices are going up but so is rent.  With mortgage rates near historic lows, the interest is, generally, less than the appreciation the property is enjoying.  Combine this with the leverage that occurs using borrowed funds to control an asset and your equity is most likely, growing at a faster rate than inflation.

A 90% mortgage at 3.5% for 30-years on a $400,000 home that appreciates at 4% a year will have an estimated equity of $220,000 in seven years due to appreciation and amortization.  That is a 27.5% annual rate of return on the down payment.  That is a significant hedge against a current inflation of 4%.

If a person were to put that same $40,000 in a certificate of deposit that earned 2%, it would be worth only $45,947 in seven years.  If it was invested in the stock market that earned 7% annually, the $40,000 would grow to $64,231.  The equity in the example for the home would be almost 3.5 times larger.

The assets that are considered to be good bets against inflation include some bonds, gold and other commodities and real estate.  Another distinct advantage of investing in a home is that you would be able to live there with your family and enjoy it which is not possible with bonds and commodities. 

There are certainly other considerations in a comparison like this such as maintenance, but it could be offset, at least partially, by the cost of housing being less than you would be paying for comparable rent.  And with the shortage of rental units available, the rent will certainly continue to increase annually where your housing costs are fixed with the exceptions of increases in property taxes and insurance.

Tuesday, January 11, 2022

Why is the APR higher than the interest rate?



Annual percentage rate is a calculation to accurately reflect the cost of the mortgage considering the note rate of interest, financing fees and charges based on the term of the mortgage.

Annual percentage rate, APR, calculates the interest rate and loan fees over the life of the loan expressed as a rate.  A mortgage has a quoted interest rate plus a specified number of points which may be paid at closing or rolled into the loan, in some instances.

For example, a $400,000 loan amount at 2.98% interest for 30-years with 0.7 points would have an annual percentage rate of 3.0349%.  While the mortgage rate is quoted at 2.98%, the borrower must additionally pay 0.7 points or slightly less than one percent of the amount borrowed as a fee to the lender in consideration of making the loan.

This increases the yield to the lender on what they are earning by making this loan and is expressed as the annual percentage rate for the benefit of the buyer.

Since the lender is required to include all the loan fees being charged in the APR calculation, if the seller is paying some of those fees on behalf of the buyer, the APR would not accurately reflect the cost to the buyer.

The lender is required to disclose the APR to the borrower in the Truth in Lending document referred to a TILA.  Your mortgage officer will be able to answer any specific questions regarding what is included.

Tuesday, January 4, 2022

There's more to it than you might think



There is more to selling a home than you might think.  Superficially, a person might think that it will sell itself currently because, nationally, homes for sale receive 3.6 offers and they sell within 18 days. 

Any business student can probably list the four Ps of marketing: product, price, place, and promotion.  It may appear that there isn't much to selling a home: put a price on it; photograph it; put a sign in the yard; and, put it in MLS but, on closer scrutiny, there is a lot more that the best agents provide.

Long before the home goes on the market, the agent will create a detailed value and pricing study based on similar homes in size, price, proximity, and condition.  An overpriced home will sit on the market longer than it should.  The longer it stays on the market, buyers, as well as other agents, begin to wonder if there is something wrong with it.

The agent will develop a staging and declutter plan to make the house show at its best because first impressions matter and this type of effort provides a neutral canvas for buyers to start imagining their things in the home.

The marketing plan is a comprehensive strategy to consider every aspect of selling the home with the focus being to maximize efforts to get the highest possible price, in the shortest time with the fewest unanticipated events.

The individual marketing materials need to present the home in its best light.  It begins with professional photos because today's buyers will most likely, first see the home online and if the pictures don't make the property look good, they may decide not to see it. In addition, those photos will be used on the brochures for the home and just listed announcements, as well as social media.  They are crucial.

Among the most important value the agent brings to the table is their negotiation experience.  Every phase of the sale involves negotiation and the position of third-party negotiator eliminates an uncomfortable situation for sellers having to deal directly with buyers, other agents, appraisers, inspectors, and lenders.  Your listing agent will be your champion.

The following list includes typical things that most professionals will provide.  When interviewing an agent, feel comfortable to ask questions regarding their position on these items.  Another item you might find helpful is our Sellers Guide.

 


Listing Presentation

  • Create Value/Pricing Study
  • Staging/DeClutter Plan
  • Develop Marketing Plan
  • Document Preparation

Marketing

  • Professional photos
  • Property Description
  • Lockbox
  • Sign
  • MLS & Portals
  • Flyers
  • Showings
  • Open Houses
  • Answer phones
  • Just Listed/Just Sold
  • Prospect for buyers
  • Weekly Follow-up - Seller
  • Inquiry phone calls
  • Pre-qualify buyers
  • Maintain files

Negotiations

  • Meet with buyer's agent
  • Write & Review contract
  • Net sheet
  • Present offer
  • Negotiate

Pending

  • Inspections
  • Appraiser
  • Resolve Issues
  • Review Escrow Statement
  • Track buyer' loan progress
  • Coordinate closing
  • Documents Review
  • Attend final inspection
  • Attend settlement