Waiting for Mortgage Rates to Drop

Don't wait for mortgage rates to fall.

Waiting for mortgage rates to drop before you buy a home may not be a good decision. If you are correct, and the rates do come down by two percent, the savings you benefit from a lower rate will most likely be offset by the appreciated price increase. For example, as of 12/8/22, the 30-year fixed-rate was at 6.33%. This is close to the highest level since mid-2008. If the rate drops to 4.7% in three years but the price increases by 5% a year, a $400,000 home today, will cost $463,050 three years from now.

OPTIONS TO WAITING FOR MORTGAGE RATES TO DROP

An increasingly, popular option that more buyers are considering is to purchase the home today with an adjustable-rate mortgage that could give them a 5.00% rate for five years. Then, refinance to a fixed rate when rates come down. Not only will the buyer have lower payments with the ARM, but the buyer will also own the home, and benefit from the appreciated prices which will build equity in the home and increase their net worth.

ADJUSTABLE LOANS CAN OFFER LOWER MONTHLY PAYMENTS

Mortgage rates have increased over 3% in the first three quarters of this year. Some would-be buyers are wishing they had a do-over so they could get into a home at a lower rate. The current differential between the fixed and adjustable rates could lower the monthly payment. The lower adjustable-rate could save a buyer $300 a month during the first period of five years. At any point during that period, they could refinance at a better interest rate should it become available. However, if the rates do start trending down, the homeowner might decide not to refinance because the rate on the ARM would have to go down at the next adjustment period to reflect the lower of rates in the market.

CAUSES FOR RATE INCREASE AND DECREASE

Mortgage rates have been low since the housing crisis that caused the Great Recession. The government kept them low to build the economy. Then, the Pandemic threatened the economy, and the government spent a tremendous amount of money to bolster it which led to inflation which is what is causing the rates to increase currently.

WHAT TO EXPECT IN THE FUTURE

When inflation is under control and back to acceptable levels, the rates should lower.
Home prices are a different situation. The recent rise in mortgage rates has caused home prices to moderate because it affects affordability. Inventories are still low and there is a pent-up demand for housing from purchasers unable to buy during the pandemic.
This coupled with millennials reaching household formation age and insufficient home building to keep up with demand for the last decade, prices are expected to continue to rise. The rate of appreciation could even increase when rates come down which would also affect affordability and demand.

Buyers who feel they missed a window of opportunity to buy before rates started increasing should investigate financing alternatives.

Assuming a FHA or VA Loan

Assuming a VA Home Loan

Assuming a FHA or VA Loan Hasn’t Been Popular

You may not have heard of anyone assuming a FHA or VA home loan on an existing mortgage. You might not have known they were even possible any longer.  The reason this type of loan assumption hasn’t been popular for over thirty years 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 that for 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.

Why FHA and VH Loan Assumption Is Now Worth Looking Into

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. However, now it might well be an alternative that will lower the cost of buying a home. This is because mortgage rates hit a bottom in early 2021 and have been increasing ever since. Therefore, 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 when you assume an existing mortgage, you will be further into the amortization schedule. This means your equity-buildup occurs faster than it would with a new loan.  And finally, lower interest rate loans amortize faster than higher rate loans.

Potential Difficulty in Assuming a Loan

The difficulty in this situation is that many buyers don’t have enough money to cover purchasing the equity on the existing home. But there is a potential 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 toward the equity. The buyer could then secure a second mortgage for the difference.

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

If you want to take advantage of VHA loan assumption, it may be difficult to find them. Unfortunately most search filters on portal websites do not include assumable mortgages.  You can get assistance from your real estate agent to find them.  

Home Equity Dynamics

Sound Investments - Dynamics of Home Equity

Variables Affecting the Dynamics of Home Equity

Appreciation and amortization are the key factors in home equity dynamics for homeowners with mortgages.  Therefore, as the home goes up in value due to appreciation, and the unpaid balance goes down due to amortization, the equity increases.

Appreciation

Appreciation is the increase in value of a home and is usually measured year over year.  In recent years, appreciation has been robust (19% nationwide in 2021) due to high demand and low inventory.  While the news often quotes annual appreciation rates from a national or regional level, your local appreciation rate may differ.

Occasionally, you may see a chart that tracks the annual appreciation over time. But that information is more interesting than it is useful.  The reality is that supply and demand determine appreciation along with location and condition.  To more accurately understand what your individual home has appreciated, you’ll need to find local numbers. Your real estate professional can provide this for you.

Amortization

The amortization of a loan is consistent with regular monthly payments based on the term of the mortgage.  Homeowners frequently receive a monthly statement, either through the mail or online, from their lender declaring the current unpaid balance.

If a homeowner makes additional principal contributions toward the loan, the unpaid balance will accelerate the normal amortization schedule.  Additional principal payments on fixed-rate mortgages shorten the term of the mortgage.  Additional principal payments on adjustable-rate mortgages will lower the payment on the next anniversary date.

Impact on Equity

The difference between the value of the property and the amount owed on in is your home equity.  If there is no mortgage on a property, the equity and value of the home are the same. However, in every case, appreciation affects how much your equity grows.

For instance, let’s take at an example of a $400,000 purchased today that appreciates at 3% a year using a 90% mortgage at 4% for 30 years.  The $40,000 would grow in seven years to $182,135 in equity with $91,950 coming from appreciation and $50,186 from amortization.

If the appreciation is 5% annually in the same hypothetical example, then the amount of equity changes. Equity grows to $253,026 with $162,840 coming from appreciation and the same $50,186 from amortization.  The same loan amount, rate and term will result in the same unpaid balance as the example with lower appreciation.

With the considerable appreciation experienced in recent years, the values are going up fast and benefit the people who currently own a home. At the same time it makes it more expensive for would-be buyers.  Another factor facing buyers is rising interest rates.

Get the Facts About Home Equity Dynamics

It is important to get the facts about the market and your individual situation to determine what alternatives you have to purchase a home in the near future.  Your agent provides this objectivity and is able recommend a trusted mortgage professional to be pre-approved. For more information, download our Buyers Guide.

Equity, Price and the Agent You Select

Equity Price and Agent

Understanding the relationship between Equity, Sale Price and the Agent you select is critical to your success when selling your home. A Seller’s equity in their home is the difference between what the home is worth and what they owe. At any point in time, it is an estimation because value is a very subjective term. If you think your home is worth more than a buyer will pay for it, your estimated equity is too high. If a buyer is willing to pay more than the seller believes the home is worth, the estimated equity is too low.

Sale Price Validates Equity

A true determination of equity becomes more objective when the home is sold. The value is solidified by the sales price. That’s because the value is determined by negotiations between the seller and buyer. This eliminates speculation and conjecture because money and title are being exchanged.

Gross vs. Net Equity

The equity being defined above is more accurately referred to as Gross Equity. Take the ordinary and necessary expenses connected with the sale of a property. Deduct those from the sales price. Also deduct any mortgage balance and/or liens you have. The resulting amount is referred to as Net Equity.

Maximizing Sales Price and Net Equity

Like in business, the goal is to maximize revenue and minimize expenses, the same is true in selling a home. The goal is to achieve the highest possible sales price while keeping the expenses as low as possible.

Setting the price of a home is ultimately, the seller’s decision. Sales price is critical because it impacts the amount of proceeds the seller realizes. Moreover, it can affect the length of time it takes to sell. It also impacts how much activity it will generate from buyers, and eventually, whether it sells at all.

The cost of a home is what the seller paid for it and the improvements made. Cost has no relationship to value. Market value is the most probable price willing and informed buyers and sellers can agree upon in a competitive market in a reasonable period.

Price the home too low and the seller has unrealized proceeds. Price it too high and it eliminates interested buyers.

Sale Preparation Costs Important to Maximizing Net Equity

Preparing the home to go on the market has expenses involved. Things like painting the front door or adding landscaping to increase the initial appeal is an investment to attract the buyer’s attention. While it may not add value to the home, it is an important element.
Decluttering the home takes time and may even involve temporarily renting a storage facility for things that may make your home feel smaller or detract from making your home as visually appealing as possible.

There are obviously selling expenses involved in the sale of a home which can vary based on the price of the home, what is customary in your area and negotiations in the sales contract. The right real estate agent can advise you on these so that you don’t pay anything out of the ordinary and can provide you an estimate of what is to be expected.

Real Estate Agent’s Role

Your real estate professional can provide you the information necessary to decide on price. But you might want to price your home differently than what by the market indicates. The market determines the value, and the seller sets the price. But a good agent can help you know when to set the initial price higher or lower to get the best return. Select an agent based on trust, reputation, integrity, and the ability to execute a successful marketing plan.

In today’s market, on average, homes, are selling in 17 days and sellers are seeing an average of five offers. It is not uncommon for homes to sell for more than the list price. This assumes these homes are not priced dramatically over the market initially.

Call us at (510)-244-0081 or email us at riwilson@soundnvest.com to discuss professional pricing strategy. For example, sometimes “coming soon” promotion to encourage increased buyer interest and possibly, encourage multiple offers.

The Dynamics of Home Equity

Your Equity = You Largest Asset and Best Investment

The dynamics of home equity often make your home your largest asset and your best performing investment. Equity in a home is the amount that your home is worth minus what is still owed. Two dynamics, appreciation and the reduction of unpaid balance, work in concert to make homeowner’s equity grow.

The Power of Appreciation

Usually, your home is your best financial investment. It is the appreciation, the increase in value, is what causes it to be your best financial investment. In a one-year period, the increase in value divided by the beginning value will determine the rate of appreciation for the year. News stories and articles, report statistics on appreciation. However, using local appreciation rates are more reflective of an individual property.

The National Association of REALTORS® reports “The median existing-home price2 for all housing types in June was $363,300, up 23.4% from June 2020 ($294,400), as every region recorded price jumps. This marks 112 straight months of year-over-year gains.”

The low inventory experienced nationwide resulted in some significant appreciation. This in turn has increased homeowners’ equity. According to Black Knight, a mortgage technology and research firm, at the end of 2020, roughly 46 million homeowners held a total of $7.3 trillion in equity.

Monthly Mortgage Payments Increase Your Equity

If a homeowner has a mortgage on their home, while the home is appreciating, the unpaid balance is declining. An increasing portion of each payment is applied, when the payment is made, to the principal balance to retire the debt based on the term of the loan. Each month the equity in the home becomes larger because the home is worth more due to appreciation and the unpaid balance is less due to amortization.

Make the Dynamics of Home Equity Work for You!

Once a homeowner has sufficient equity in their home, they can borrow against it and take cash out of their home. Most lenders require that the homeowner maintain at least 20% equity position. You can then borrow up to 80% of the property’s appraised value, less the amount that is currently owed on the property.

The options include a cash-out refinance mortgage or a home equity line of credit, HELOC. While some institutions have stopped offering HELOCs, they are still available. (For more information about what a HELOC is Click Here.)

The HELOC is a line of credit. It usually has a term of 10 years. Once the HELOC is approved, you can draw out your mone as needed. Interest calculates daily. Like a credit card, when the balance is paid down, the unused portion of the available credit is available again. Check out this HELOC Calculator from Bank of America to get a sense of what payments would be like.

Contact Sound Investments and we will be able to offer some lender suggestions.

Less to Own than to Rent

PLUSSES AND MINUSES OF OWNING

Are you better off owning than renting in the long term? Due to today’s low mortgage rates, a total house payment could easily be less than what the rent would be on a comparable home.  But, once you assume ownership, you will have the responsibility of the repairs and possibly, a homeowner’s association fee. Renting a home has advantages.  It is usually a short-term commitment from year to year and the landlord is responsible for the repairs.

Additionally, an initial benefit of owing a home includes the ability to deduct property taxes and qualified interest on the mortgage.  With the increase of the standard deduction and a limit of $10,000 on state and local taxes, it is estimated that 90% of homeowners do not itemize their deductions to consider property tax and mortgage interest.  This comparison will not consider them.

There are two very significant benefits to consider if you want to know if you are better off owning property. First, a home is an excellent investment. Also, it is a principal reduction due to normal amortization of the mortgage and appreciation of the property.  While the property goes up in value and the unpaid balance decreases, the owner’s equity grows, increasing their net worth.

Renters do not benefit from either of these, but their landlords do.  That is the reason for the saying “whether you rent or buy, you pay for the house you occupy.”  Tenants pay for the home for their landlord.

COMPARING RENTAL PAYMENTS TO OWNING COSTS

Rent Own
$2,500Rent/Payment$2,232
-0-Principal Reduction$504
-0-Appreciation$875
-0-Estimated Monthly Maintenance$300
-0-Estimated Homeowners Association Fee$25
$2,500Net Monthly Cost of Housing$1,178
*Projections based on 3% appreciation; $350,000 sales price with 10% down payment and a 3.5%, 30-year mortgage.

With each payment made on a fully amortized loan, the principal balance is reduced.  Moreover, while appreciation is generally expressed in an annual rate, homes go up in value incrementally throughout the year so considering the monthly appreciation is appropriate in this comparison.

In this example, the payment is less than the rent proving the initial idea that it costs less to own a home.  After factoring in the effect of the principal reduction and the appreciation, even when you consider the maintenance and HOA fees, the net monthly cost of housing is considerably less than renting.

The largest part of the savings inures to the equity of the home which directly impacts a homeowner’s net worth.  Therefore, while the money may not be easily accessed, it has real value and available in a cash-out refinance or when the home is sold.

FIND OUT FOR YOURSELF

If you want to know about how your numbers would be reflected in a similar comparison, go to our Rent vs. Own calculator. This will help let you know if you are better off owning a property vs. renting.  Please let me know if you have any questions.

Optimize Your Sales Price

Doing a lot of work to a car before you trade or sell it to a dealer is not generally a good idea. In most cases, you won’t recapture the cost of the repairs. They can do the repairs for a less than you can. Not to mention, you are selling to a wholesaler who needs to sell it again to the end user and still make a profit.

A home sale is totally different. The owner is selling the home to an end user. Since the buyer, in many cases, is using their available funds for the down payment and purchase costs, they don’t have money to spend on repairs or decorating the home. They would need to live in it “as is” for a while which may not be as appealing as finding a home that is refurbished, up-to-date, and ready to move into.

Even if the buyer would be willing to get a home improvement loan after the sale, it would be a separate loan at a higher interest rate making their payment higher than financing it all in one mortgage at the lower first mortgage rates.

The seller may experience some inconvenience going through the remodeling process, but it will, most likely, result in a higher sales price in less time. Occasionally, sellers say they’ll let the buyer choose their own colors but not all people have the imagination to know what something will look like after it is finished. It is better to go ahead and get the work done before putting it on the market.

The bathrooms and kitchen are the most important rooms to update. If the finish on the cabinets is bad, have them painted. New countertops and appliances can make a world of difference. Paint, countertops, and fixtures in the bath give the home a great feel.

In addition to the repairs, a major cleaning and decluttering can make a home look and feel better than the competition.

The first step is to go through the home and pack up or get rid of things you don’t need or things that detract from the home like excess furniture, exercise equipment, personal artwork, etc. Now, do the same with the closets and cabinets. By getting rid of things, there will be more room and they’ll look larger.

Next, walk across the street from your house and give it a critical look. How is the drive-up appeal? Would you want to go inside to see the rest if you were a buyer? Are the trees and shrubs trimmed? Yard cleaned up? Do you have blooming flowers in the beds? Does the front door and mailbox need a new coat of paint? Do you need to power wash the outside of the home and the sidewalks and driveway? Do the windows need washing?

Buyers are visual people and beauty is always rewarded. Restaurants know that people eat with their eyes first and they go to a lot of effort to plate the food so it is visually appealing. The same approach works for selling a home. Ask your agent if they have ever taken a buyer to a home that refused to go inside because they didn’t like the looks from the street.

Your real estate professional can make specific recommendations and assist you in finding someone to do the work. This is what they do. TRUST THEM!

Homeowner Equity and Wealth Accumulation

RECENT HOMEOWNER EQUITY GROWTH

Lately, the impact of Homeowner Equity on wealth accumulation has grown. National homeowner equity grew in the fourth quarter of 2020 by $1.5 Trillion or 16.2% year-over-year based on a CoreLogic analysis. Furthermore, the number of mortgaged residential homes with negative equity in the fourth quarter of 2020 decreased by 8% from the third quarter. Compared to the same quarter in 2019, negative equity decreased by 21%.

Equity is defined as the value of the home less the mortgage owed. Negative equity means that the homeowner’s debt is more than the value of the home. Appreciation is the dynamic that moves homeowner’s equity to the positive position.

On a national basis, according to National Association of REALTORS®, annual price growth for the last ten years was 6.4%. In the last five years, it has grown at 7.3% annually. According to the CoreLogic Home Price Index, home prices in December 2020 rose 9.2% from the year before.

Frank Nothaft, Chief Economist for CoreLogic, is quoted as saying, “The amount of home equity for the average homeowner with a mortgage is more than $200,000.”

EQUITY AS A COMPONENT OF NET WORTH

Equity in a home is a significant component of net worth. The median homeowner has 40 times the household wealth of a renter, $254,000 compared to $6,270. According to the 2019 Survey of Consumer Finances by First American, housing wealth was the single biggest contributor to the increase in net worth across all income groups.

Housing wealth represented nearly 75% of total assets of the lowest income households. For homeowners in the mid-range of income, it represented 50-65% of total assets. For the highest income households, it represented 34% of total assets.

RENT VS. OWN COMPARISON

How does renting property affect homeowner equity and wealth? Renters do not benefit from any housing appreciation. They also don’t benefit from the amortization of a mortgage. These two factors are significant contributors to home equity that results in net worth. Run a “Rent vs. Own comparison for yourself and find out how much a down payment can grow in seven years.