Tuesday, September 20, 2022

Five Factors that affect the Sale of Any Home



Owners directly control four of the five factors that affect the sale of any home: price, location, condition, terms, and the agent you select.  The one thing you can't control is the location of the home, but you can adjust the other factors to compensate for failings.

The seller controls the price of the home which determines its positioning in the marketplace.  If is priced too high, it will take longer to sell and, in some cases, for less than what it should have sold for because when it doesn't sell immediately, it is assumed that there must be an issue with it.  If it is priced too low, the owner will not realize as much of their equity as they should.

Not pricing the home in the proper search brackets could keep the property from being exposed to potential and likely, buyers.  For example, if a home is priced at $399,000 to follow an age-old retail marketing principle, many of the most likely buyers will never know about it because they are searching for properties in the $400,000 to $450,000 range.

The seller also controls the condition of a property which affects not only the marketability of a home but indirectly, the price.  Homes in the best condition appeal to more buyers because for the most part, they are using their available cash for the down payment and closing costs and may not be able to afford to make cosmetic or more expensive improvements to the property.

Clutter can keep buyers from seeing your home, and more importantly, it will keep them from seeing themselves in your home.  There are three basic causes of clutter: there is too much stuff in the home; there is not enough space in the home; and there is no organization.

Selling a home is about positioning it to sell which sometimes means temporarily or permanently getting rid of things that make the home look small or distracts the buyers from seeing its potential for them.

Terms are the financial preferences established by the seller.  In a competitive market with multiple bids, a seller may not have to offer any terms such as a financing, appraisal, or inspection contingencies.  This will restrict the number of buyers who are financially able to pay cash and are willing to do so.

In lower price range homes, there could be a wealth of qualified buyers that need to use low down payment options, closing cost assistance from the seller, or other things.  When the seller consents to offer a variety of terms, the market of potential buyers increases.  The seller can still select the most qualified if they are not limiting protected classes.

The fourth marketing factor that the seller controls is the agent they select to represent them in the sale of the home.  Selecting the "right" person to market your home is very important and worth careful consideration.

Your agent will be the manager of the entire marketing process. They'll position your home to be competitive with the other homes in your price range and area while attracting the broadest range of buyers possible.  Your agent will offer advice on what needs to be done before the property is offered for sale.  Your agent can also offer recommendations for a variety of service providers if work needs to be done.

There are a lot of professionals involved in the sale of a home like lenders, title officers, appraisers, inspectors, insurance agents, surveyors, and the buyer's agent, just to name a few.  Your listing agent will coordinate the communications between the other professionals and negotiate directly with them.  Your agent's role as third party negotiator is critical and you need to feel confident in their ability to serve your best interests.

  1. Price
    • Too high; not realistic
    • Doesn't acknowledge Internet search range
  2. Location
    • A poor location can negatively affect price
    • Since location cannot change, must adjust price for a poor location
    • Condition
    • Clutter
    • Drive-up appeal
    • Deferred maintenance
    • Odors
    • Carpets
    • Lack of updates
  3. Terms (applicable to certain price ranges)
    • Buyer concessions like closing costs
    • Incentives like home warranty, appliances, floor covering, etc.
    • Buy-down interest rates
  4. The Agent you select
    • Experience
    • Knowledge of neighborhood
    • Promotional expertise

For more information, download our Sellers Guide.

Tuesday, September 13, 2022

Gift Amount Increased for 2022



The limit for tax free gifts for 2022 is $16,000 and no tax is due to the donor or the donee.  There are provisions that would allow gifts higher than this amount providing the total lifetime gifts above the annual exclusion of $12.06 million for 2022 has not been met.

The donor and donee can be separate persons so that the aggregate tax-free gift for one-year amounts to more money.  For instance, a father and mother can gift $16,000 each to their married son in 2022 and an additional $16,000 each to the daughter-in-law for a total $64,000.

If the son and daughter-in-law used the money as a down payment to purchase a home, depending on how recent the gift occurred, the mortgage company might require a gift letter from the parents stating the amount was a gift and is not expected to be repaid.  Lenders may ask the exact amount of the gift, where it came from and the relationship involved.

Family members and friends with financial resources can become the catalyst that allows buyers with good credit and income but without a down payment to purchase a home.  Sometimes, the gift is looked at as an early inheritance that allows the recipient to show their gratitude and the donor to see the enjoyment and benefit of the gift.

In some situations, the buyers have saved enough money for a minimal down payment, but the gift allows them to put more money down that may help them get a lower interest rate or eliminate the need for private mortgage insurance.

The important thing involving gift funds is to have complete disclosure with the lender.  It is best discussed during the pre-approval process.  Your real estate professional should also know about it so they can guide you through the process.

Tuesday, September 6, 2022

Housing Affordability - Call to ARMs



Housing Affordability is negatively affected by both rising home prices and mortgage rates.  A 20% increase in nominal home prices and a 2% increase in the 30-year fixed rate mortgage since January have contributed to a 46 point drop in the NAR Housing Affordability Index.

The Index was 143 in June 2021 and is 98.5 in June of 2022. The Housing Affordability Index indicates whether a median income family can qualify for a mortgage loan with a 20% down payment and 25% qualifying ratio for monthly housing expenses to gross monthly income.

100 points is considered the tipping point.  As the Index rises above that point, housing is considered more affordable and as it declines, it is considered less affordable.

With affordability threatening to limit buyer's ability to purchase, more borrowers are considering an adjustable-rate mortgage.  For the last ten years, fixed-rate mortgages have been so low, only about 3% of borrowers used adjustable-rate mortgages.  

There is a lot of misinformation about ARMs that keeps some would-be buyers from even considering them.  Even before the housing crisis of 2007, many safeguards were put into place to protect borrowers.

"As long as the 'spread' between ARMs and fixed-rate mortgages continues, more first-time home buyers may choose ARMs because the lower mortgage rate gives them a purchasing power 'boost' over the 30-year fixed mortgage rate."  Mark Fleming, First American Chief Economist

The potential ARM candidate is probably not a first-time homebuyer.  They should be tolerant to risk and more financially savvy with predictably increasing income.  These buyers may recognize that they do not intend to stay in the home for a long time. 

Adjustable-rate mortgages, generally start out at a lower-rate than a fixed-rate but can adjust, up or down, based on an independent index plus a specified margin and anniversary date that are referenced in the note.  Most ARMs have stated interest rate caps that limit the amount of adjustment of the rate both on a periodic basis and a lifetime.  FHA ARMs have a limit of 1% per adjustment period and a 5% lifetime cap over the original note rate.  Conventional loans, more commonly, have a 2% per adjustment period and a 6% lifetime cap.

A particularly popular type of adjustable-rate mortgage is referred to as a 5/1 which means the rate for the first period lasts five years and then, each adjustment period after that is for one year.  This allows a buyer to have stability in the rate during the first five years.  If they plan to sell in less time than that, they will not have to deal with the adjustment.

A 5/1 ARM will have a lower payment for five years because of the lower initial rate and assuming a worst case scenario, a conventional ARM could increase a maximum of 2% at the end of the first period which would put the rate at higher than the fixed rate at the time they started.  However, that is not where the breakeven point occurs.  It is not until all the savings from the initial period have been exhausted, that the ARM will become more expensive than the fixed-rate alternative.

An ARM Comparison can help buyers to determine breakeven point.  Let's compare a 5.66% FRM with a 4.51% 5/1 ARM with 2 and 6 caps.  A $450,000 30-year term loan amount will have a P&I payment of $2,600.41 for the fixed compared to $2,286.76 for the ARM.  The $317.65 monthly savings will accumulate for 60 months plus a $6,673 lower unpaid balance on the ARM due to a lower interest rate. 

The total savings in the first period would be $25,732.  If you assume that the payment would increase to the maximum at each adjustment period, the breakeven point will occur at 7 years and 4 months.  If you were to sell the property prior to the breakeven, the ARM would produce a lower cost of housing. 

One of the benefits for lenders making adjustable-rate mortgages is that they have less risk because the yield can change to reflect the current market.  Most ARMs must adjust down as well as up which means if rates do come down, the buyer can continue with the ARM at a lower rate or convert it to a fixed-rate at the, then, current rate.

Use the ARM Comparison to see where the breakeven point will be for you.  Get mortgage rates for FRM and ARM mortgages from Freddie Mac and download our Buyers Guide.

Tuesday, August 30, 2022

Surviving Spouse Sale Period



Married couples who own a home as joint tenants with rights of survivorship, the surviving spouse inherits the home, along with their basis, and it does not trigger a taxable event.  Unfortunately, the capital gain exclusion is reduced to a single person's share unless the survivor disposes of the property in the granted time.

Married couples, filing jointly, have up to $500,000 of capital gain exclusion on qualifying sales.  As a single taxpayer, the survivor is only entitled up to $250,000 exclusion of capital gain.  For instance, if the home at the time of death is worth $900,000 with a basis of $400,000, the gain is $500,000.  If the surviving spouse sells the home, their exclusion is only a maximum of $250,000 which would make the other $250,000 subject to long-term capital gains tax.

However, there is an exception to the rule that if a sale occurs within two years of the death of their spouse, the survivor is entitled to the $500,0000 exclusion if the ownership and use tests are met prior to the death.  The two-year period begins on the date of death and ends two-years after that date which means the property needs to close and fund by that anniversary. 

For more information contact your tax professional and download IRS Publication 523 and download the Homeowners Tax Guide.

Tuesday, August 23, 2022

Are prices and rates going to continue to rise?



One of the most talked about questions in the real estate market has to do with "Will prices continue to rise now that interest rates have increased dramatically this year?"

It is understandable to think that if the Federal Reserve is using interest rate increases to slow consumer demand, that it would also slow homebuyer demand to moderate prices.  Unfortunately for would-be homebuyers, it isn't the case.  High inflation, strong economic growth, low unemployment, and increased wage growth have been associated with high home price appreciation.

In a recent newsletter from First American, Chief Economist, Mark Fleming stated that historically, 90% of total inventory is from existing homes and homeowners are not moving as often as in the past.  Prior to 2007, the average tenure was five years.  After the housing crisis, between 2008 and 2016, the length of time spent in a home went to eight years.

Lawrence Yun, Chief Economist with the National Association of REALTORS� when talking about the May 2022 statistics: "Nonetheless, homes priced appropriately are selling quickly and inventory levels still need to rise substantially ... almost doubling ... to cool home price appreciation and provide more options for home buyers."  Median sales price rose to a new high of $403,800, up 10.8% from July 2021, while sales are down 20% year over year and inventory increased slightly to 3.3 months from 2.6 months in July of 2021.

In the beginning of 2022, Fannie Mae, Freddie Mac and NAR predicted home price appreciation would be 7.6%, 6.2%, and 5.1% for the year.  Their revised forecast has been increased to 16%, 12.8%, and 11.5%.  Buyer demand still exceeds inventory levels which is driving prices higher.

While the Fed does not set mortgage rates, it does determine the Fed Funds Rate which is charged by banks to each other for overnight funds.  The increases often affect the U.S. Treasury rates to increase and there is generally a reaction when the 10-year U.S. Treasury Note yields increase for the 30-year mortgage rates to increase also.

The National Association of REALTORS�, on their website, states "The Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data."  The Index uses the 30-year fixed rate mortgage as provided by Freddie Mac's Primary Mortgage Market Survey (PMMS).

Mortgage rates have gone up over 2% in the first half of 2022.  That dramatically affects the affordability of the home even if the price didn't increase, which it did.  A $360,000 mortgage at 3.05% in December 2021 would have a principal and interest payment of $1,528 for 30-years.  At 5.22% as of August 11, 2022, the P&I payment is $1,981 or a difference of $453 dollars or a 30% increase.

As of May 2022, homeowners are now staying in their homes 10.6 years.  Part of the reasons can be contributed to the pandemic, but a large degree is attributed to the lack of inventory.  Existing homeowners can sell their home for premium prices and in unusually short time frames, but the problem is finding a home to replace it.

The demand for housing still exceeds the supply and price are continuing to rise, although, maybe not as the same pace as 2021.  Many economists predicted that price appreciation would slow but CoreLogic reported "Home prices nationwide, including distressed sales, increased year-over-year by 20.9% in April 2022 compared with April 2021.  In the same report, CoreLogic predicted "...home prices are forecast to increase on a year-over-year basis by 5.6% from April 2022 to April 2023."

Another frequent question homeowners have is whether to wait to see if prices moderate and interest rates decline.  The probability is more likely for prices to continue to increase along with mortgage rates.  The consequences of waiting, in hopes of lower prices and rates, could totally price a person out of the market for the home they want.

Using a $400,000 home that could be purchased today at 5.22% on a 90%, 30-year mortgage, the P&I payments would be $1,981.  If the price appreciated only 5% in the next year and the mortgage rates were to go up by 1%, the payment would increase by $339 a month.  If a person stayed in the home for 7 years, the increased cost would be $28,458 and if they stayed for full term, it would cost them $121,965 more by waiting.

Increases in rates and prices have forced some people out of the market, at least temporarily.  For the fortunate ones, who can still afford to buy, even with the increases, acting now could save them tens of thousands and maybe hundreds of thousands depending on the price of the home.

Make an appointment with your real estate professional to get the facts on what you home is worth, the mortgages available, and the logistics to put it together for your best advantage.

Tuesday, August 16, 2022

Indecision Can Be Expensive



With all that is going on in the world, a global pandemic, supply chain issues, highest inflation in 40 years, the economic effects of a war in Ukraine, it can be overwhelming to think about when the right time is to buy a home.

On a local level, there is a pent-up demand for homes that have been building for years.  Builders haven't kept up with demand for new housing for almost 15 years.  Low inventory, especially in the past three years, have driven up prices nationally in 2021 by 20% and even though, the rapid appreciation seems to be moderating, in June, NAR reported that the median price home was up 13.4% from one year ago.

Then, of course, there are mortgage rates that have gone up by 2% since the beginning of 2022.  Appreciation and rising interest rates are a double whammy for people looking for their first home or to move up. It is completely understandable that many people are faced with so much that they are sitting on the sidelines waiting to see if things will improve.

Let's look at a hypothetical situation where buyers have the money for a 10% down payment on a $400,000 home but have decided to wait for three years to see if things improve.  They need to park their money somewhere safe so that it will be available when they feel comfortable to buy but also earn as much as they can to ward off the effects of historically high inflation.

If they were to put the $40,000 into a certificate of deposit for three years that pays 2%, they would earn $2,448 in interest.  With current inflation at 8.5%, the purchasing power of their down payment would diminish.

A slightly riskier alternative would be to invest it in the stock market or a mutual fund.  Assuming they picked the right stock or fund that earned 7%, their $40,000 would grow to $49,002 in the same three-year period.

The problem is that homes are appreciating much faster and the buyers would either pay more to get the same home or to pay the same price in three years, the home would not have the same amenities.    

If the buyer purchased the home today that appreciates an average of 5% per year, the equity in the home in three years would be $118,000 based on two dynamics: appreciation and amortization.  The wealth position at the end of the three years in the home is almost three times what it would be with the certificate of deposit and over twice as much as the stock investment.

Homes have appreciated more than inflation over the last fifty years.  The average home price appreciation from 1970 to 2020 was 7.16% compared to the average inflation for the same period which was 4.3%.  In 2021, home prices were up close to 21% nationally compared to 7% inflation. 

Connect with your real estate professional to find out the facts about the market, the various mortgages available, what you can expect to buy, and if you have a home, what it will sell for.  Good information can make a difference in making a good decision.  Download our Buyers Guide.

Tuesday, August 9, 2022

Good Records Can Reduce Capital Gains



Regardless of whether you're entitled to $250,000 or $500,000 of exclusion when you sell your home, prices have gone up so much in the past two years, you may be approaching the limit where you might have to pay tax on the excess when you sell.

Any improvements you have made to the home during your ownership can be used to raise your basis in the home which will reduce your gain.  It is worth the effort to start reconstructing the list, both big ticket items and lower priced items that qualify.

While repairs to your home do not count as improvements, other money which either materially adds value, appreciably prolongs the useful life of the property, or adapts a portion of the property to a new use will qualify.  Hopefully, you have contracts and agreements on the major items and receipts on things over $75.

If you have photographs before and after the improvements were made, it can help serve as evidence that they were in fact made. 

The best proof is to record the expenses and receipts as close to when they are made instead of having to dig through boxes and invariably, either not finding them or worse yet, forgetting what was done altogether.

Download more information on this from IRS Publication 523 and the Homeowners Tax Guide.

Tuesday, August 2, 2022

Moving Down in an Up Market



Selling and buying a lower priced home in an "Up" market can be to your advantage.  The advantage is to maximize the sales price on your existing home and replace it with a less expensive one.

Moving down in an "up" market may be to your advantage in multiple ways.  It is possible that your present home doesn't meet your current needs like it once did.  Making a move can allow you to "re-balance" the equity in your home to better reach your future goals.

The "up" market maximizes the sales price you can expect to receive, and it will free the equity in your home. A lower priced home will result in reducing your housing costs with lower property taxes, insurance, utilities, and maintenance...while improving your liquidity position.

It is not required to reinvest the proceeds of the sale.  You may decide to get an 80% loan-to-value mortgage on the replacement home to get the best interest rate and avoid private mortgage insurance.  This would allow you to put the excess proceeds into an income producing or growth investment, start a business, fund an education, buy a second home, take a spectacular trip, gift a down payment to a relative, or any other different projects.

The expression "other people's money" describes borrowing money and using it to invest with the expectations of earning more than the rate you're paying.  Mortgage interest is one of the most attractive ways to borrow money because it is generally the lowest rate compared to other types of loans while having the option to get a fixed-rate mortgage for up to 30 years.  Most other borrowed funds involve short terms and floating interest rates.

Rental real estate could be a possibility to invest part of the funds.  There is a shortage of available rentals which has caused rents to increase like homes have appreciated.  Single family homes for rentals provide large loan-to-value mortgages at fixed interest rates for long terms on appreciating assets with defined tax advantages and reasonable control not found in many other investments.  For more information, download our Rental Income Properties Guide.

Homeowners who have owned and occupied their principal residence for two of the last five years are entitled to exclude up to $250,000 of gain for single persons and $500,000 of gain for married persons filing jointly.  For more information, see IRS topic #701.

Contact your real estate professional to find out more information like potential sales price, what net proceeds you can expect to receive on a sale, available replacement homes, and the types of mortgages and rates available.

Tuesday, July 26, 2022

Showing How Earnest You Are



The expression "putting your money where your mouth is" demonstrates a monetary sincerity to what could be empty words.  In today's competitive market where multiple offers are common, sellers want as much assurance as possible that the buyer is sincere and will close on the sale.

The seller who accepts a contract expects the buyer to follow through but, in most cases, doesn't know the buyer either personally or by reputation.  The earnest money submitted by the buyer with the contract shows their commitment to the terms of the offer.

If the amount is relatively small, the seller could be concerned that the buyer may walk away from the contract if they change their mind before closing.  The lost time could be injurious to a seller who is trying to meet a deadline.

The more earnest money a buyer deposits indicates to the seller a higher level of commitment to the contract.  Except for stated contingencies in the sales contract, if the buyer fails to close on the sale, the earnest money could be forfeited.  Significant earnest money makes the seller feel more secure that the contract will indeed close. 

There certainly are a lot of things that can dictate how much earnest money is appropriate.  Local customs, price of the home and type of mortgage can all help to determine the proper amount.  In some areas, it may be common for it to be one to five percent of the purchase price.  In other areas, it might be a specific amount like $1,000 to $10,000 depending on the sales price.  It really comes down to whatever the buyer and seller agree is the proper amount. 

Another strategy is for the buyer to put up an adequate amount initially prior to inspections or other contingencies, and then, to put up an additional amount when the contingencies have been removed. 

The earnest money demonstrates the buyers' sincerity in making the offer and proceeding according to the agreement so the seller can take their home off the market and start making plans to move and give possession of their home.  A higher-than-normal amount could also help the seller to choose yours in a multiple offer situation.  Ultimately, both parties want to close as anticipated according to the contract and the earnest money helps facilitate that. 

Your agent can explain what is customary for your area and price range.  Many times, a disinterested party, like a title company, will hold the earnest money and the sales contract will provide how to dispose of it should the contract not close.

Tuesday, July 19, 2022

Is Your Home Inventory Up To Date?



A current inventory of all the personal items in your home is important and even necessary, if you are faced with filing a police report or insurance claim. The homeowner is usually asked if they have a home inventory.  If not, the homeowner can reconstruct one to estimate the loss.

Imagine you are in this position; would you be able to make an accurate list of your belongings and their value?  As an exercise, pick a room of your home, and, while being in another room, list all the belongings and their value.  When you're finished with the list, go into the room, and check to see how you did.

This little project should demonstrate the difficulty of reconstructing a list and depending on whether you missed a lot of items and the importance of having an up-to-date home inventory.  Not only will this help you purchase the right amount and type of insurance, having an accurate inventory will make filing a claim easier.

An accurate accounting of your belongings can also help you and your insurance agent  to see that your belongings are properly insured.  Other reasons for a home inventory include creating a maintenance calendar and helping you declutter by getting rid of items no longer needed.  Over half of households do not have a home inventory and the majority of those who do have them, haven't updated them with new possessions purchased since it was done.

The peace of mind having one can be a strong reason for having a home inventory.  It provides confidence that this area is financially organized and prepared should you have need of proving losses.  It will help you and your family return to your normal life after an unsettling event.

Download our Home Inventory for more tips on creating one along with alternatives for documenting your belongings.  If you don't have another media, this will allow you to take pictures and list individual items along with values in a fillable PDF that can be stored safely in your online cloud.

Tuesday, July 12, 2022

Difficult to Buy What Is Not For Sale



Buyers are becoming discouraged there are not enough homes on the market, especially, in certain price ranges.  When they do find something they want, there may be multiple offers and they end up losing to another buyer.

Some buyers after experiencing several of these instances have decided to wait until the market changes.  It is understandable but it may be a very long wait as well as being a very costly decision.

Inflation is affecting all sectors of the economy; prices on food, cars, and electronics are going up as well as housing and mortgage rates.  Home prices rose 20.2% year over year in May 2022 over 2021, according to a recently released CoreLogic report. 

The advantage to current homeowners wanting to move up is that their home is now worth more and it takes the sting out of the price they will have to pay for a larger home.

Unfortunately, first-time buyers and those who don't currently own a home are seeing the prices continue to increase at a rate many Americans have never seen before.  Waiting is most probably going to make it less affordable.

It is true that housing inventory is at very low levels but over six million homes sold last year so there was enough inventory available for six million buyers.  For buyers, the problem was they sold fast and there was a lot of competition.  The advantage for sellers is they sold fast and there was a lot of competition that increased the price they received.

It may not be as easy as if there were four to six month's supply of homes for sale but when you purchase a home, these same dynamics will be working in your favor to build your equity with appreciation.

Successful buyers are positioning themselves to act decisively when the new listings hit the market. 

  1. Working with a trusted real estate professional
  2. Pre-approved by a local lender
  3. Developed a plan to write a competitive offer
  4. Determined their limits financially and emotionally.

Six million people bought homes last year and you can be among the fortunate ones who buy one this year.  Be committed to what it takes in a highly competitive market.  Surround yourself with a competent and confident team that will produce the results you want.

For more information, download the Buyers Guide and schedule an appointment with us to get the facts about the best plan to get you into a home this year.

Tuesday, July 5, 2022

Questions to Ask a Mover



"I'd wish I'd known that before I picked a mover."  Having a checklist of questions might have prevented this issue.  This list of questions will provide you with things to discuss when interviewing a moving company.

Fees

  • What is the charge for packing?
  • Does it include boxes?  If not, what do they cost and will you deliver them?
  • Is there an additional charge to deliver some items to a storage unit?

Insurance

  • How is a damage claim handled?
  • What insurance do you provide and is there a cost?
  • Does the insurance cover items packed by the owner?
  • Can additional insurance be purchased?
  • If items are covered by my Homeowner's insurance, whose insurance pays first?

Unusual Items

  • Can you ship my car(s)?  Will they be in the moving van or towed?
  • What are the charges for shipping cars, lawn tractors, etc?
  • What items cannot be shipped?
  • If a shuttle truck is needed because of the location of my house or size of the drive way, is there an additional charge?
  • If packing and loading are on different days, can you leave the beds and other basics out for us to use?

Dates

  • What dates are available for our move?
  • What date will you pack and how long will this take?
  • What date will you load the van?
  • What date will the van arrive at my new location?
  • If my new home is not ready for delivery, how many days can it be delayed before there is a charge? 
  • What is the charge for additional days or weeks?

Terms

  • Are there any additional fees that I'm responsible for that have not been discussed?
  • What are the terms of payment? 
  • Is a down payment required? 
  • When will the balance be due and who is authorized to accept it?

Download a Moving Guide with more suggestions and a link to change your address online with the United States Postal Service.

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, 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