If you’re shopping for a home today, you know it can be hard work. You might not find something right away and it’s easy to become frustrated and fatigued.
Sometimes buyers get discouraged and say, “Let me take off a few months, maybe I’ll come back 6 months later.”
Some, on the other hand, think that the market might weaken shortly or that interest rates will fall even further…and are trying to essentially “time the market” Is that the right strategy?
The Cost of Waiting
Here’s the potential problem with that thinking…while you
might want to take time off and away from your search, the market isn’t taking
time off!
The cost of waiting to buy is defined as the additional funds it would take to buy a home if prices & interest rates were to increase over a period of time.
The market is quite good in terms of appreciation right now in California and Arizona. The forecasted growth in value is 2.4% in just the next 6 months; let’s quantify that.
The Numbers
A home worth $300,000 today would be worth $7,300 more in 6 months. Additionally, if you were planning on putting the same percent down, you would have to borrow more because the home is more expensive.
What about interest rates? Rates today are at very attractive levels, so does it make sense to wait for rates to go down further…and what if they don’t?
No, the monthly savings with a lower rate are nice but are
dwarfed by the missed appreciation and amortization, and it would take many,
many years to recoup what you would have lost.
One other thing to consider…if rates drop significantly after your purchase, you can always refinance in the future to take advantage of that lower rate.
Today’s Data
Here’s the data from FHFA – see how the forecast is for
nearly 5% appreciation in the year ahead. The longer you wait, the more you
miss out on appreciation and the more expensive you new purchase will be.
Stick with it, keep shopping, and you will find something. Don’t hesitate to reach out to me with questions, as it would be my pleasure to help!
Coming up with enough cash for a down payment when buying a house is the single biggest roadblock for many hopeful home buyers.
But how much do buyers really need?
What is a down payment?
In real estate, a down payment is the amount of
cash you put towards the purchase of home.
It is deducted from the total amount of your mortgage and represents the beginning equity — your ownership stake — in a house and property.
Down Payment Options
Many borrowers still believe that 20% is the minimum…and that’s just not the case. There are options from 0% to 20%+ that can work for many would-be buyers.
For today’s most widely-used purchase mortgage
programs, down payment minimum
requirements are:
FHA Loan: 3.5% down payment minimum
VA Loan: No down payment required
HomeReady/Home Possible Conventional Loan (with PMI): 3%
Remember, though, that these requirements are just the minimum. As a mortgage borrower, it’s your right to put down as much on a home as you like and, in some cases, it can make sense to put down more.
Benefits of a larger down payment
Conventional loans without mortgage insurance require a 20% down payment. That’s $60,000 on a $300,000 home, for example. There are a number of benefits to bringing in 20%:
No mortgage insurance
Lower interest rate, in most cases
More equity in your home
A lower monthly payment
As a reminder, the down payment is not the only upfront money you have to deal with. There are loan closing costs (you can find out more about those here…) and earnest moneyto consider as well. Before the dramatic music returns, let’s explore some lower down payment options.
“A large down payment helps you afford more house with the same payment. In the example below, the buyer wants to spend no more than $1,000 a month for principal, interest, and mortgage insurance (when required).
Here’s how much house this home buyer can purchase at a 4 percent mortgage rate. The home price varies with the amount the buyer puts down.”
Even though a large down payment can help you
afford more, by no means should home buyers use their last dollar to
stretch their down payment level.
A down payment will lower your rate of return
“The first reason why conservative investors should monitor their down payment size is that the down payment will limit your home’s return on investment.
Consider a home which appreciates at the
national average of near 5 percent.
Today, your home is worth $400,000. In a
year, it’s worth $420,000. Regardless of your down payment, the home is worth
twenty-thousand dollars more.
That down payment affected your rate of
return.
With 20% down on the home — $80,000 –your rate of return is 25%
With 3% down on the home — $12,000 — your rate of return is 167%
That’s a huge difference.
However! We must also consider the
higher mortgage rate plus mandatory private mortgage insurance which
accompanies a conventional 97% LTV loan like this. Low-down-payment loans
can cost more each month.
Assuming a 175 basis point (1.75%) bump from rate and PMI combined, then, and ignoring the homeowner’s tax-deductibility, we find that a low-down-payment homeowner pays an extra $6,780 per year to live in its home.”
Once you make your down payment, it’s tougher to get that money back
More from Green: “when you’re buying a home, there are other down payment considerations, too.
Namely, once you make a down payment, you
can’t get access to those monies without an effort.
This is because, at the time of purchase, whatever down
payment you make on the home gets converted immediately from cash into a
different type of asset known as home equity.
Home equity is the monetary difference between what your home is
worth on paper, and what is owed on it to the bank.
Unlike cash, home equity is an “illiquid
asset”, which means that it can’t be readily accessed or spent.
All things equal, it’s better to hold
liquid assets as an investor as compared to illiquid assets. In case of an emergency, you
can use your liquid assets to relieve some of the pressure.
It’s among the reasons why conservative investors prefer making as small of a down payment as possible.”
In Conclusion
As you can see, there are a wide variety of down payment options for buyers. Please feel to contact me to go over those choices, as it would be my pleasure to help you in financing your next home.
I receive a number of questions regarding mortgage interest
rates every time there is a meeting of the Federal Reserve Board.
Most assume that the Federal Reserve controls mortgage interest rates…and, interestingly, that’s not the case.
I’m linking to a fantastic article by Dan Green at The Mortgage Reports – he does a great job in highlighting what really takes place with mortgage rates. You can read the entire piecehere…and I’ll highlight a few key pieces below.
The Federal Reserve Open Market Committee
The Federal Reserve Open Market Committee (FOMC) is a rotating, 12-person sub-committee within the Federal Reserve, headed by current Federal Reserve Chairman Jerome Powell. The FOMC meets eight times annually on a pre-determined schedule, and on an emergency basis, when needed.
The FOMC’s most well-known role worldwide
is as keeper of the federal funds rate.
The Federal Funds Rate is the prescribed rate
at which banks lend money to each other on an overnight basis. It is not correlated to mortgage rates.
The FOMC met a few weeks ago and dropped the federal funds rate by .25 basis points to 1.75%.
The Federal Reserve does not control mortgage rates
Here’s a fantastic graph (courtesy The Mortgage Reports) that shows how the Federal Funds Rate does not track with the 30-year mortgage rate (the green section tracks the mortgage rate, while the blue section highlights the Federal Funds rate):
When the Fed Funds Rate is low, the Fed is
attempting to promote economic growth. This is because the Fed Funds
Rate is correlated to Prime Rate, which is the basis of most bank lending
including many business loans and consumer credit cards.
For the Federal Reserve, manipulating the Fed
Funds Rate is one way to manage its dual-charter of fostering maximum
employment and maintaining stable prices.
The Federal Reserve can affect today’s
mortgage rates, but it does not and cannot set them.
The Federal Reserve has no direct connection
to U.S. mortgage rates whatsoever.
The Fed Funds Rate and Mortgage Rates
As Dan Green states: “It’s a common belief that the Federal Reserve ‘makes’ consumer mortgage rates. It doesn’t. The Fed doesn’t make mortgage rates. Mortgage rates are made on Wall Street.
Here’s proof: Over the last two decades, the Fed Funds Rate and the average 30-year fixed rate mortgage rate have differed by as much as 5.25%, and by as little as 0.50%.
If the Fed Funds Rate were truly linked to U.S. mortgage rates, the difference between the two rates would be linear or logarithmic — not jagged.”
With that said, the Fed does exert an influence on today’s mortgage rates.
Fixed Mortgage Rates vs. Treasury Yields
A far better way to track mortgage interest
rates is by looking at the yield on the 10 year Treasury bond. These two seem to track quite closely:
The 30-year fixed mortgage rate and
10-year treasury yield move together because investors who want a steady and
safe return compare interest rates of all fixed-income products.
U.S. Treasury bills, bonds, and notes directly affect the interest rates on fixed-rate mortgages. How? When Treasury yields rise, so do mortgage interest rates. That’s because investors who want a steady and safe return compare interest rates of all fixed-income products…and investors move to these type of products to fulfill their needs.
What the Fed Says Impacts Mortgage Rates…and Bond Prices
Dan Green outlines how the Fed impacts rates: “the Fed does more than just set the Fed Funds Rate. It also gives economic guidance to markets.
For rate shoppers, one of the key messages for which to listen is the one the Fed spreads on inflation. Inflation is the enemy of mortgage bonds and, in general, when inflation pressures are growing, mortgage rates are rising.
The link between inflation and mortgage rates is direct, as homeowners in the early-1980s experienced.
High inflation rates at the time led to the highest mortgage rates ever. 30-year mortgage rates went for over 17 percent (as an entire generation of borrowers will remind you), and 15-year loans weren’t much better.
Inflation is an economic term describing the loss of purchasing power. When inflation is present within an economy, more of the same currency is required to purchase the same number of goods.”
Meanwhile, mortgage rates are based on the
price of mortgage-backed securities (MBS) and mortgage-backed securities are
U.S. dollar-denominated. This means that a devaluation in the U.S.
dollar will result in the devaluation of U.S. mortgage-backed securities as
well.
When inflation is present in the economy,
then, the value of a mortgage bond drops, which leads to higher mortgage
rates.
This is why the Fed’s comments on inflation are closely watched by Wall Street. The more inflationary pressures the Fed fingers in the economy, the more likely it is that mortgage rates will rise.
It does look
like most economists are pointing to a recession (although most do think it
will be relatively mild by historical standards) in the next 12 months.
A recession
occurs when there are two or more consecutive quarters of negative economic
growth, meaning GDP growth contracts during a recession.
When an economy is facing recession, business sales and revenues decrease, which cause businesses to stop expanding.
How do the
economists know this? And what does this
mean for interest rates and real estate values?
Read on for more…
Recessionary Indicators
The Yield Curve
One of the major
indicators for an upcoming recession is the spread between the 10-year US
treasury yield and the 2-year US treasury yield.
While
various economic or market commentators may focus on different parts of the
yield curve, any inversion of the yield curve tells the story – an expectation
of weaker growth in the future.
What does
this inverted yield curve look like?
Here’s a good depiction:
Why does
inversion matter? Well, the yield curve inversion is a classic signal of
a looming recession.
The U.S.
curve has inverted before each recession in the past 50 years. It offered a
false signal just once in that time.
When
short-term yields climb above longer-dated ones, it signals short-term
borrowing costs are more expensive than longer-term loan costs.
Under these circumstances, companies often find it more expensive to fund their operations, and executives tend to temper or shelve investments.
Consumer borrowing costs also rise and consumer spending, which accounts for more than two-thirds of U.S. economic activity, slows.
Unemployment
Unemployment
is a recessionary factor, too – as economic growth slows, companies generate
less revenue and lay off workers to cut costs.
A rapid
increase in the overall unemployment levels—even if relatively small—has been
an accurate indication that a recession is underway.
Here’s a
chart that shows what happens when unemployment starts to trend upward – and
notice that recessions follow shortly thereafter:
As you can
see, when things in the economy starts to slow down, one of the first things
business do is to reduce their labor force.
The curve is flatting now, and unemployment might be ticking up soon.
Mortgage Rates During Recession
When a
recession hits, the Federal Reserve prefers rates to be low. The prevailing
logic is low-interest rates encourage borrowing and spending, which stimulates
the economy.
During a
recession, the demand for credit actually declines, so the price of credit
falls to entice borrowing activity.
Here’s a
quick snapshot of what mortgage rates have done during recessionary periods:
Obtaining a mortgage during a recession might actually be a good opportunity. As mentioned, when the economy is sluggish, interest rates tend to drop.
Refinancing
or purchasing a new home could be a great way to get in at the bottom of the
market and make a healthy profit down the road. A borrower should be market-
and financially savvy when considering large real estate purchases in a
recession
Real Estate During Recession
Believe it
or not, outside of the “great recession” of 2007 (which was caused, in part, to
a housing crisis), home values and real estate actually appreciate historically
during times of recession.
That seems counter intuitive…but because interest rates generally drop during recessionary periods, homes become MORE affordable to potential buyers (even though property values are higher), due to the lower payments provided by those lower rates.
When more
people can qualify for homes, the demand for housing increases – and so do home
prices.
In Closing
Although no one likes to see recession, you can observe that it actually can be beneficial for homeowners and would-be purchasers to refinance or purchase during these periods.
If you have more questions and or would like to strategize about purchasing or refinancing, don’t hesitate to contact me, as it would be my pleasure to help you!
When you need cash for home improvements,
school tuition, a down payment for a 2nd home, or debt
consolidation, you might want to consider tapping into what could be your
greatest source of wealth — your home equity.
Interestingly, there is more than one way to access your home equity – so it’s smart to compare available options to find the right fit.
Two of the most popular ways are a home equity line of credit (HELOC) and a cash-out refinance. Both of these loans can work if you want to access your home equity, but they do work rather differently.
The “Cash-Out” Refinance
Cash-out refinancing involves replacing your current home
loan with a new one. The “cashing out” part of the equation means you
essentially take out a larger home loan than you currently have so you can
receive the difference as a lump sum. This strategy works for those who have
equity in their homes due to paying down their mortgage balances or
appreciation of their property.
To qualify for a cash-out
refinance, you need to meet similar requirements as you would if you were
applying for a first mortgage – and you must have the equity in your home to
qualify, as well. You can borrow up to
80% of your home’s value.
So, let’s assume your home has a
value of $300,000 and you want to take cash out. In that case, you could only
borrow up to $240,000 through a cash-out refinance. If you owe that much or
more on your home already, you wouldn’t qualify.
The Home Equity Line of Credit (HELOC)
While a cash-out refinance
requires you to replace your current mortgage with a new one, a HELOC lets you
keep your first mortgage exactly how it is.
Acting as a second mortgage, a
HELOC lets you borrow against your home equity via a line of credit. This
strategy allows you to withdraw the money you want when you want it, then repay
only the amounts you borrow.
You now have two mortgage payments to make each month – your first mortgage payment and the new HELOC.
To qualify for a HELOC, you need
to have equity in your home. Depending on your creditworthiness and how much
debt you have, you may be able to borrow up to 85% of the appraised value of
your home after you subtract the balance of your first mortgage.
For example, let’s say your home
is worth $300,000 and the balance on your mortgage is currently $200,000. A
HELOC could make it possible for you to borrow up to $255,000, because you
would still retain 85% equity after accounting for your first mortgage and your
HELOC.
Generally speaking, HELOCs work a
lot like a credit card. You typically have a “draw period” during which you can
take out money to use for any purpose. Once that period ends, you may have the
option to repay the loan amount over a specific amount of time or you might be
required to repay the balance in full.
Like credit cards, HELOCs also
tend to come with variable interest rates, so you should be prepared for some
rate volatility.
Key Differentiators
Before you decide between a
HELOC or a cash-out refinance, it helps to do some analysis on your personal
finances and your overall goals.
A cash-out refinance may work better if:
Your current home loan has a higher rate than you could qualify for now, so refinancing could help you save on interest
You need more than $50,000 overall
You prefer the stability of a fixed monthly payment or only want to make one mortgage payment every month
You have high-interest debts and want to consolidate them at the same rate as your new mortgage
What you save by refinancing — such as savings from a lower interest rate — outweighs the fees that come with refinancing
You are able to roll your closing costs/fees into the new loan amount so there are no out-of-pocket costs
A HELOC may work better if:
You are happy with your first mortgage and don’t want to trade it for a new loan
You need less than $50,000 overall
Your first mortgage has a lower interest rate than you can qualify for with today’s rates
You aren’t sure how much money you need, so you prefer the flexibility of having a line of credit you can borrow against
You want to be able to borrow up to 85% of your home’s value versus the 80% you can borrow with a cash-out refinance
Here’s a quick “snapshot” of two
different options – notice how the smaller transaction works well with the
HELOC, the larger one with the refinance.
As you can see, for the smaller transaction, the HELOC is less expensive overall – both in fees and monthly payment. However, once you go over the $50,000 mark in cash-back, it appears that the cash-out refinance is the most economical, all things considered.
Applying for a HELOC allows you to maintain the terms of your original mortgage, which can be an advantage if your rate is low.
You can use money from a HELOC for anything you want, and you only have to repay amounts you borrow.
HELOCs tend to come with lower closing costs than traditional mortgages and home equity loans.
HELOCs can generally be closed quicker than refinances
Cons
Taking out a HELOC means you’ll need to make two housing payments every month — your first mortgage payment and your HELOC payment.
Interest on a HELOC is no longer tax-deductible, unless the funds are used for acquisition or updating your home.
They are more expensive the more you borrow – if you are needing more than $50,000, your payments might be higher than that of a refinance
Since you only repay what you borrow and the interest rate on HELOCs is typically variable, you may not be able to anticipate what your monthly payment will be. Your monthly payment could also be interest only at first, meaning your payment won’t go toward the principal or help pay down the balance of your loan.
The interest rate on HELOCs tends to be higher than first mortgages, and their variable rates can seem riskier. You may also be required to pay a balloon payment at the end of your loan, so make sure to read and understand the terms and conditions.
Refinance Pros and Cons
Pros
You can use the money from a cash-out refinance for anything you want, including home upgrades, college tuition, a vacation or debt consolidation.
If rates have gone down or your credit has improved since you took out your original home loan, you could refinance your mortgage into a new loan with a lower interest rate.
You can choose from different types of loans for your refinance, with various terms and fixed or variable rates available.
Interest on your first mortgage may be tax-deductible.
Interest rates on first mortgages tend to be lower than other options, such as home equity loans or HELOCs.
Cons
Closing costs for a cash-out refinance are typically higher than those of a HELOC
If interest rates have gone up since you purchased your home, you could be trading your mortgage for a higher interest loan that will be more expensive.
Refinancing your home to take cash out may leave you in mortgage debt longer.
You won’t qualify for a cash-out refinance unless you have at least 80% equity in your home after the process is complete.
In Conclusion
As you can see, there’s really no right or wrong decision to be made here, but it is important that you know the benefits and drawbacks of both options. Please do reach out to mefor more information, as I’d be happy to go over the specifics of your scenario to find the best option.
Thomas Eugene Bonetto
Mortgage Loan Originator
NMLS: 1431961
About The Coach
Tom Bonetto has been helping his customers and players achieve their best for nearly 30 years. His goal is to provide both a superior customer experience and tremendous value for both his business associates and his players alike.
