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.

Managing Payments with Mortgage Rate Buydowns

Mortgage Rate Buydowns help get into a new home

The rapid rise in mortgage rates during 2022 coupled with continued appreciation of home prices have limited the number of buyers in the market which is reflected by the lower number of home sales currently. Experienced real estate agents are utilizing mortgage rate buydowns to help buyers purchase a home.

ADJUSTABLE-RATE MORTGAGES

One of the things that agents are doing to help buyers lower their house payments is to suggest an adjustable-rate mortgage. The rates on these types of loans are tied to indexes that reflect the current market rates and produce less risk for the lender. The payments adjust on the anniversary date based on the index plus margin named in the note.

While many people think that they only adjust upward, they also adjust downward when the index indicates it. For the week of September 29, 2022, the Freddie Mac 5/1 ARM was 5.03% compared to the 30-year fixed-rate of 6.70%.

MORTGAGE RATE BUYDOWNS

Another tool that experienced agents are using to address affordability issues are interest rate buydowns. In recent years, there have not been many buydowns used because interest rates were already very low, but now, more people are considering them again.

Mortgage rate buydowns occur when you prepay the interest on a mortgage at the time of closing to lower the payment for a specific period or for the term of the mortgage. Obviously, it would be more expensive to buydown the rate for the whole term of the mortgage.

Either the seller or the buyer can buydown the rate and it would be specified in the sales contract. From a practical perspective, sellers in the recent past haven’t had to consider this option. This is because of the high demand and multiple offers that were commonplace. Now that sales have slowed, and both inventory and market time is increasing, some sellers want to make their homes more marketable and are seeking a competitive advantage.

A common temporary buydown is called a 2/1 which reduces the payment in the first two years of the loan by calculating the borrower’s payment at 2% less than the note rate for the first year and 1% less than the note rate for the second year. Years three through thirty, the payment would be the normal payment at the note rate.

A buydown is a fixed rate, conforming mortgage that the borrower must qualify at the note rate to indicate that borrowers will be able to afford the mortgage after the first two years of lower payments. For more information on mortgage buydowns CLICK HERE.

MORTGAGE BUYDOWN EXAMPLE

As an example, on a $400,000 sales price with a 90% mortgage at 5.54% interest for 30-years, the normal principal and interest payment would be $2,053.08. By using a 2/1 buydown, the payment for the first year would be at 3.54% interest, 2% lower than the note rate, making the payment $1,624.61. The second year, it would be at 4.54% interest, 1% lower than the note rate, making the payment $1,823.63.

The buyers’ payment would be $428.47 lower each month for the first year and $220.45 a month lower for the second year. The total savings would be $7,787.04 which becomes the cost of the 2/1 buydown. This amount must be paid at the time of closing by either the seller or the buyer.

2/1 Buydown Example

Year 1

Year 2

Years 3…30

Interest Rate

Principal & Interest Payment

Monthly Savings

Annual Savings/[Total Savings]

4.7%

$1,867.10

$455.90

$5,470.80

5.7%

$2,089.44

$233.56

$2,802.72

6.7%

$2,323.00

—-

[$8,273.52]

The most prevalent providers of buydowns in the past have been builders. It is a concession like paying closing costs or upgrades for the buyer. As sales have started to slow, some builders in particular price ranges and areas are currently considering this benefit to close more sales.

ADVANTAGES OF MORTGAGE RATE BUYDOWNS

To summarize: a buydown is a fixed-rate mortgage where the interest is pre-paid for a period. This is to help the borrower with lower payments for a time. A 2/1 buydown allows the buyer to have significantly lower payments in the first two years. This will give them time to settle into the house while they can be confident of what the payment will be in years three through thirty.

The pre-paid interest is deductible for the buyer, even if the seller pays for it. Talk to your tax advisor when they are doing your income tax in any year where you participate in a mortgage rate buydown.

BUYDOWNS CAN HELP BOTH BUYERS AND SELLERS

When selling a home, talk to your listing agent about this option to increase marketability. If you are a buyer, discuss this as an affordability option. If your agent isn’t familiar with buydowns, ask them to research it with a trusted mortgage officer. Buydowns are legal and have been available for decades. The determining factor may be whether the market has softened enough that sellers are willing to consider them.

Mortgage Assumptions Make Sense Again

Existing FHA and VA mortgage assumptions may be available at the note rate to owner-occupied buyers who qualify. This can be an alternative to paying higher, current rates and benefit buyers with lower closing costs while saving money on the payment. For the last 20 years, rates had been steadily coming down so there was no reason to qualify for an assumption when a new loan had a lower interest rate. But with rising mortgage rates, that trend is now changing.

Why Consider a Mortgage Assumptions Now?

Assuming an FHA or VA loan with a lower interest rate will obviously mean lower payments but it will also build equity faster because the amortization schedule is advanced from a new 30-year mortgage. Another benefit is that the acquisition costs on an assumption are much lower than starting a new loan.

Some Mortgage Assumption Examples

In the example in Table One, a couple bought a home two years ago for $400,000 with a 3% FHA mortgage that has principal and interest payments of $1,656. It is now worth $435,000.

Let’s look at a hypothetical situation involving the sale of this home after two years. The savvy listing agent explains that the home may have additional marketability due to the assumability of the FHA mortgage in place.

In scenario #1, the buyer purchases it for $435,000 with 10% down payment at the then, current rate of 5% for 30 years. The principal and interest payment is $2,102. If the home appreciates at 4% annually the equity will be $230,989 in seven years.

In scenario #2, the buyer purchases it at the same price with the same down payment but assumes the 3% mortgage with 28 years remaining. Since he doesn’t have enough cash to buy the equity, he gets a second mortgage for the balance at 5%. The combination of the payments on the first and second are $1,739 or $363 less than the payments in scenario #1.

Sound Investments Mortgage Assumption Scenarios

Impact of Mortgage Assumptions

In seven years, the $363 savings accumulated to $30,492. The future equity is $21,457 larger on the assumption because the first mortgage is at a lower rate and the loan is amortizing faster. In this example, the buyer is much better off assuming the FHA mortgage.

Get Help Finding These Types of Opportunities

There will be a challenge in identifying which homes for sale have assumable FHA or VA mortgages because for decades it didn’t make much difference to list it in the description. Many MLS’s are not even including fields for existing mortgages.

Finding the “Right” home for a buyer is important but equally important is finding the “Right” financing. Not all agents have the training or the tools to identify the possible opportunities for buyers but the ones who do are invaluable. Contact us at Sound Investments by calling (510)-244-0081 or CLICK HERE to send us a message.

Why Names Are Added or Removed from a Loan

WHY CHANGE NAMES ON A LOAN?

There are some valid reasons why names are added or removed from an existing loan. When couples divorce, the spouse keeping the home usually will want to remove the other spouse from the loan. They often will refinance it to remove the other spouse from the loan. Also common, first-time buyers may not have enough income to qualify for a loan. They may then ask a parent to co-sign and must therefore add their name to the mortgage.

Another situation that requires removing or adding a person to a loan is to qualify for a better interest rate. The difference between a minimally acceptable credit score and a “good” credit score could result in as much as a 0.5% higher rate for the term of the mortgage.

IMPACT OF ADDING OR REMOVING A NAME

Consider a couple that is buying a home on a conventional loan. They have individual credit scores of 760 and 670. The underwriters will price the loan based on the lower of the two scores. A half percent interest on a $400,000 30-year mortgage could have close to $110 a month difference.

A possible solution to this dilemma could be available. Assume the borrower with the higher credit score has enough income to qualify for the mortgage separately. That person would be eligible for the lower rate. The property could still be titled in both names. In this case, the other person whose name is also on the title will be liable for the mortgage should the named borrower default on the loan.

In another situation, a couple has enough income to qualify for a mortgage. However, because one of the parties has a lower credit score, it will be priced higher. The borrower can have a parent or relative added to the mortgage as a non-occupying borrower to help with the credit score. Interest rates are determined on the lowest middle of three scores for the borrowers applying for the loan. Assuming the parent’s score was higher than the lower score of the couple, it could improve the rate applied to the mortgage loan.

BEFORE YOU ACT, CONSULT A PROFESSIONAL

The advice of a trusted mortgage professional is extremely valuable. They can offer alternatives to situations that confront you. This could be worth tens of thousands of dollars over the life of the mortgage. In some cases, their advice may be the difference in being approved at all.

Sound Investments can support your needs to help with your transaction. CLICK HERE to contact us with your questions.

So Many Low Down-Payment Mortgage Options!

There are so many types of mortgage that you can apply for. But, you may find yourself asking, “What do I qualify for?” “Are there any hidden charges?” “Is this really the best choice for me?”

On top of that, so many companies advertise that THEY have the best, low down-payment option available. If you’re confused because there are too many options, let’s talk. We’re here to help!