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.

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

I wish I knew then...

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

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

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

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

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

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

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

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

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

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

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

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

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

Your Home is a Hedge Against Inflation

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

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

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

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

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

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

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

Why is the APR higher than the interest rate?

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

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

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

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

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

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

There's more to it than you might think

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

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

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

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

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

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

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

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

 

Listing Presentation

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

Marketing

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

• Inquiry phone calls
• Pre-qualify buyers
• Maintain files

Negotiations

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

Pending

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

Will Soft Inquiries Hurt Your Credit Score?

Soft inquiries, sometimes known as a soft credit check or a soft credit pull, do not impact your credit scores because they are not attached to a specific application for credit.  They can occur when a credit card issuer or mortgage lender checks a person's credit for preapproval purposes.

Examples of soft inquiries are when you check your own credit or one of your current creditors checks your credit.  If you are concerned about the negative impact on your score, specify to the lender that you want a "soft pull" to see if you qualify for preapproval.

Soft inquiries may appear on your credit report but should not adversely affect your credit score.

Consumers are entitled to one free copy from each major credit bureau, Experian, Equifax and TransUnion, once every twelve months available at AnnualCreditReport.com. 

Hard inquiries occur when a borrower makes a new application for credit.  These will impact your credit score and will remain on your credit report for about two years.  The impact is usually minimal and scores tend to rebound within a few months if no new negative information appears.

Borrowers may be concerned about multiple inquiries when they are shopping for rates or even approvals.  Scoring models have algorithms to account for this situation if the inquires take place in a 14 to 45-day period. 

Even a hard inquiry should not necessarily concern you and probably, will only play a minor role in your score.  Soft inquiries, regardless of how many you may have will not impact your score.

Working with a trusted mortgage professional and sharing your concerns in advance of the "hard pull" is valuable.  This mortgage professional may even be able to advise you on some things that could improve your credit score which may actually improve your score which could result in qualifying for a lower rate that could save thousands and possibly, tens of thousands of dollars over the life of your mortgage.

Your real estate professional can recommend a trusted mortgage professional to you.

Paying Down Your Mortgage

When the situation arises that you have a lump sum of cash to pay down your existing mortgage,  there may be different options available.  Pre-paying principal on a fixed-rate mortgage shortens the term of the mortgage but the payment stays the same.

Conversely, recasting a mortgage with a lump-sum principal payment lowers the principal and interest payment but leaves the term intact with the same payoff date.

The interest rate on the mortgage will stay the same regardless.  Prepaying principal can be done at any time but may not be applied until the next payment date.  Recasting cannot be done within the first 90-days of a mortgage.

Pre-paying principal is like driving faster on a trip to a specific destination to get you there sooner.  Recasting/Re-amortization gets you to the destination at the same estimated time of arrival but using less fuel.

Most loans allow you to pre-pay principal, but recasting is not allowed on FHA, VA, and GNMA.  If you have a conventional loan, check with your lender to see if it is possible.

Contact your mortgage servicer for specific information on pre-paying or recasting your mortgage before acting.

An Easy Fix to Avoid a Flood in Your Home

Do you remember if or when you have replaced your washing machine hoses?  Are they the original hoses and if so, how old is your washing machine?  It is recommended that washing machine supply hoses should be replaced every five to seven years. 

Washing machines, like all appliances, are expected to work and when they don't, it's time to have them fixed or replaced.  However, there is a critical connection from the water supply that may even be older than your washing machine itself.

Eventually, unless hoses are replaced, they will fail, which on the mild side could be slow leaks or burst entirely, and could cause a catastrophic flood in the home.  The failure could come from a number of causes including age, improperly installation, poor-quality materials or poor design.

The hoses are generally under the same pressure as the other plumbing in the home.  Imagine having an open faucet running directly on your floor.

Ask someone whose hose broke while they were asleep or out of town and you'll hear stories of how quickly the water can damage walls, flooring, and furniture.  Almost anyone with a pair of pliers can replace the hoses for under $30.00 to avoid this potential disaster.

As you're shopping for the replacement hoses, consider the braided stainless steel connectors available at any home center.  The advantage is that the stainless steel offers additional protection in case a soft spot develops in the hose beneath.  They'll cost a little more but offer considerably more protection for a nominal additional price.

In Search of a Big Mortgage

The Fannie Mae and Freddie Mac loan limits are adjusted annually to keep up with cost of living but with the appreciation experienced in many markets, it may not be enough. When the conforming loan limit is not enough, qualified buyers can turn to a jumbo loan.

The maximum loan limit on conforming, conventional loans for 2022 is $625,000 for a single-family home but is increased up to $937,500 for designated high price areas.  The underwriting guidelines for conforming loans are consistent with regards to things like minimum down payment, private mortgage insurance, debt-to-income ratio, minimum credit score and cash reserves required.

Jumbo loans are loans more than the FNMA maximum limits and are considered non-conforming loans.  This allows lenders to set their own requirements on maximum loan amount, minimum required credit score, maximum debt-to-income ratio, and minimum down payment.

The rates paid on the jumbo loans may be the same as conforming loan rates.  It might sound logical that a larger loan would have more risk and therefore, be priced higher.  Lenders do not sell jumbo loans to FNMA which saves them the guarantee fee normally required.    This makes the jumbo loan more profitable.  Borrowers are encouraged to shop the rates. 

A minimum credit score of 700 will probably be required together with a debt-to-income ratio below 45%.  While many borrowers seeking a jumbo may be putting 20% down, it is possible to find a lender who may only require 10% down payment.  Lenders may be more lenient with regards to mortgage insurance.

Lenders may also require six to twelve months of cash reserves due to the increased risk of the larger loan amount.

It is a common practice for banks to make jumbo loans to attract other business that the borrower might be able to influence like company, corporate, or investment accounts.

Credit Utilization Affects Your Score

Credit utilization reflects how much of your available credit is being used at a given time.  Lower credit utilization indicates that a borrower is not heavily relying on their credit and that they are using their credit responsibly.

Is calculated by dividing your total credit card balances by your total limits.  The higher the percentage, the higher the risk which adversely affects the credit score according to most of the companies.  It is recommended that your credit utilization be under 30% to positively impact your credit score.

If the available limit on a credit card is $12,000 and their normal monthly balance is around $3,000, they have a credit utilization of 25%.  If for whatever reason, the borrower's available limit was reduced to $6,000, and their long history of having a monthly balance of $3,000, the ratio, then, increases to 50% which will likely lower their credit score.

For borrowers who use more than 30% of their available credit and regularly pay off the bill each month, they should consider making payments toward the balance more frequently, like every two weeks.  This keeps the balance lower, and, in many cases, the card issuer will only report the credit activity once a month to the credit bureau, usually on the monthly closing date of the account.

Another option may be to use multiple cards, if they are available, for the purchases during the month.  Based on the limits of each card, this could result in lower utilization on a single card.

You could also ask for your available credit to be increased.  Assuming you have a good history of paying on time, this may be an easy fix.  Before doing this, ask if it could negatively impact your credit score because it will be reported as a hard inquiry on your credit.

If you are trying to improve your score to qualify for a mortgage, consult with a trusted mortgage professional who can advise you specifically for your situation.  If you would like a recommendation, please contact mePeteDotyDenver@gmail.com.

Larger Payment, Shorter Term, Bigger Savings

Some people consider a house payment as basic as monthly utilities but with a plan and some discipline, you can be mortgage free.

Consider a person borrowed $300,000 at 3% for 30 years, the principal and interest payment would be $1,264.81 and at the end of 12 years, the unpaid balance on the mortgage would be $210,900.

If that same person had financed the home on a 15-year term at 2.5%, the payments would have been $2,000 but the unpaid balance at the end of 12 years would be $69,310.  The homeowner will have a larger equity but they have also had to make higher payments.

15-year mortgages usually have a lower interest rate than the 30-year loans and at the time this article was written, the difference in a 30-year loan was about 0.5%.  A 15-year loan gives the lender their money back in half the time.  If rates go up during the interim, they will be able to loan it at the higher rate sooner.  For that reason, they are usually willing to offer a slightly lower rate on the shorter term.

Having a lower rate means paying less interest but another remarkable thing happens, lower interest rate loans amortize faster than higher rate loans.

	30-year	15-year
$300,000 mortgage for 30 years	3%	2.5%
Monthly payment	$1,264.81	$2,000
Unpaid balance at end of 12 years	$210,900	$69,310
Increased equity		$141,590
Additional monthly payment		$735.56
Additional total payments for 12 years		$105,920
Savings		$35,670

This recognized wealth building technique with higher payments, saves interest and retires the mortgage sooner.  The shorter-term mortgage requires a commitment to make the higher payments each month rather than giving the borrower flexibility to spend or invest the difference each month for as long as the loan is in place.

To make you own calculations, go to the 30yr vs. 15yr Comparison.

Have you checked these lately?

Homeowners know the need to periodically check certain things around the home to ensure that things operate properly and efficiently.  If maintenance is required, it may be less expensive to take care of it early rather than waiting until it is not working at all.

Checklists are helpful because it requires little effort to know what must be done.  They are usually concise and provide enough information to complete the task.  These items apply to most homeowners but in no way offer a comprehensive list.

1. Vacuum dryer exhaust ... not only does it affect the efficiency of your dryer itself, the accumulation of lint along with the hot air can ignite and create a fire hazard.
2. Replace HVAC filters 4 to 6 times a year ... This is one DIY project that almost everyone should feel confident in handling.  Locate the filter, make a note of the size, and keep replacements available.  Turn off the unit, open the door or housing, remove the dirty filter, and replace it with the new one.  Pay attention to the direction of the air flow; filters are marked to indicate the correct direction.
3. Test all GFCI breakers. - GFCI breakers, as well as outlets, have a test button on them.  Pressing the test button should cause the breaker to trip which shuts off all power to the entire circuit.  To reset the breaker, push it completely to off and then, back to on.
4. Vacuum refrigerator coils ... Coils on refrigerators can be in different places depending on the model and manufacturer.  Locate the coils and clean the dirt and dust from them using a soft bristle brush or a vacuum cleaner with a brush.
5. Replace batteries in smoke detectors ... smoke detectors should be tested monthly by pushing the test button.  Annually, the batteries should be replaced, even if they appear to still have life in them.  After replacing the batteries, test the smoke detector to see if it is functioning properly.
6. Check windows and doors for leaks ... There are several ways to check for leaks.  One method used on a cold day would be to hold your hand a few inches from the window or door frame to feel for drafts.  Another method would be to light a candle and trace the outline of the window or door to see if the flame or smoke pull in one direction, indicating an air leak.
7. Inspect all sprinkler system stations to see if heads are leaking or need adjusting. ... Manually, turn on each of the stations and look at each sprinkler that is running to see if it is leaking or if it is properly covering the area intended. 
8. Check garage door opener to see that safety features engage properly ... Place a cardboard box in line of one of the sensors before trying to close the door.  The door should reverse itself after sensing the obstruction.
9. Check and clean fireplace(s) annually, if used ... this may be a job that you want to have someone else do but you may be able to recognize indicators that the chimney needs cleaning.  These things include evidence of birds or animals; fireplace smells like a campfire; smoke fills the room; difficulty starting or keeping a fire going; the fireplace walls have oily marks; the damper is black with soot and creosote. The frequency of use on wood burning fireplaces will impact the need for cleaning.

If you need a recommendation of a service provider for repairs, contact me PeteDotyDenver@gmail.com with what you are looking for.  I'll get back to you quickly.

Uncle IRRRL wants to refinance your VA loan

You don't have to have an Uncle IRRRL but you must be a veteran with a current VA-backed home loan. IRRRL is an acronym for Interest Rate Reduction Refinance Loan. To refinance with this program, also called the VA Streamline, the loan must provide a net tangible benefit (NTB) which would be in the financial interest of the Veteran. 

Obtaining a lower interest rate is usually the reason behind refinancing but there needs to be enough difference in the current and the new mortgage to justify the expenses incurred.  Significantly lower payments or a shorter term are examples of acceptable benefit.

The Veteran must currently have a VA-backed home loan to refinance using this program.  The Veteran does not have to currently live in the home as long as it can be certified that he or she did at one time.

In most cases, an appraisal is not necessary and less verifications are required.  A minimum 640 credit score is needed, and borrower must be current on their payments with no 30-day late payments in the previous 12-months.  A two-year employment history is required.

There are expenses associated with the IRRRL but they can be rolled into the loan balance.  The VA funding fee, required on new VA loans for purchases or refinances is lower on the IRRRL at 0.5%.  Disabled Veterans and qualifying surviving spouses refinancing under this program are exempt from the VA funding fee.

This program is not available for a cash-out refinance.  There is a $6,000 exception for additional funds to pay energy improvements completed 90-days prior to closing.  Your lender can provide more information for you.

If you are a Veteran and considering a refinance, ask your mortgage professional about this program.  If you need a recommendation of a trusted mortgage professional who is experienced in VA loans, give me a call at (303) 880-5585 or PeteDotyDenver@gmail.com.

Buy Before You Sell Options

The decision to buy first or sell first, has always been a little of the "Which came first: the chicken or the egg?" type of question.  Is it better to buy another home before you sell your current one or sell the current one before you buy the replacement?

Some buyers don't have a choice because they need the equity out of the current home to purchase the new one and possibly, their income limits their ability to qualify for having both mortgages at the same time.  However, some buyers, with sufficient financial resources, may have other options available to facilitate the move.

A home equity line of credit, HELOC, is a type of loan that a traditional lender like a bank will loan up to the difference in what is currently owed on the home and 75-80% of the value.  A borrower is approved for the line of credit and then, can borrow against it as needed. 

A homeowner with sufficient equity, would want to secure a HELOC prior to contracting for the new home.  Typically, the interest will be due monthly.  When they sell the home, the loan would be paid off along with any other liens on the property like the first mortgage.

A bridge loan is different in that it is usually a specific amount of money for a short term used to "bridge" the time frame necessary to acquire the replacement property and sell the existing home.  The amount available is like the HELOC, usually, up to 80% of the home's value less the existing mortgage.

Some lenders may require being in the first position which may require retiring the existing first from the proceeds from the bridge lender.

Hard money lenders are a little more flexible in some of their requirements compared to typical lenders, but it comes at a cost.  They could charge two to three percent, called points, of the money borrowed paid up-front and the interest rate will be higher than long-term mortgage money. 

Another alternative is to find a conventional lender who has a program that allows you to recast the loan in a specified period.  The borrower would get a low-down payment mortgage on the replacement home and after the original home is sold and funded, the lender will apply the lump sum toward the principal amount owed and recalculate the payments and amortization schedule.

By recasting the loan, the borrower does not go through the process of getting a new mortgage by refinancing and saves the costs involved.  Most conventional loans and conforming Fannie Mae and Freddie Mac loans allow it after 90-days.  FHA, VA, GNMA loans do not allow recasting.

Borrowers with 401(k) retirement accounts may consider borrowing against that asset which could be a lower interest rate than other temporary options.  Depending on the size of the 401(k), the amount available to borrow could be up to half the balance or $50,000 whichever is less.   If the loan isn't repaid in a timely fashion, there can be taxes and penalties.

In each of these options, the seller is involved in borrowing money to accommodate a purchase and sale of a home.  There will be expenses involved but the advantage is that they have a better chance of realizing most of their equity while facilitating a purchase before they sell their home.  This is particularly helpful in markets that are low in inventory.

One last options is to consider selling your existing home to an iBuyer or private investor.  The attraction to this alternative is that they will make you an instant offer, buy your home and you'll have cash to use to purchase your new home.  These companies or investors, intend to resell the property, so they must discount the price they pay for your property taking into mind they will be responsible for repairs, maintenance, selling fees and other expenses.

While it may sound appealing, you may discover that the amount you will realize will be less than if you sell your home in a conventional manner.

Your real estate professional will be able to do a comprehensive market analysis to indicate market value and the net proceeds you can expect to have.  This will assist you in determining which option makes sense for you at this time.  They can also recommend lenders and approximate timelines for each alternative.

Removing or Adding a Person to a Loan

In divorce situations, it is common, for the spouse who keeps the home to refinance to remove the other spouse from the loan.  Equally as common, first-time buyers who don't have enough income to qualify may ask a parent to co-sign and must add their name to the mortgage.

Another situation that requires removing or adding a person to a loan could be to qualify for a better interest rate.  The difference in a minimally acceptable credit score and something that might be considered "good" could be as much as a 0.5% higher rate for the term of the mortgage.

Consider that a couple is buying a home on a conventional loan, and 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, assuming the borrower with the higher credit score had enough income to qualify for the mortgage separately.  If so, that person would be eligible for the lower rate.

The property could still be titled in both names and if so, that person would be liable for the mortgage should the named borrower default on the loan.

Another scenario that may arise is that a couple has enough income to qualify for a mortgage but because one of the parties has a lower credit score, it will be priced higher.  Having 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.

The value of a trusted mortgage professional is very important.  They can offer alternatives to situations that could be worth tens of thousands of dollars over the life of the mortgage and in some cases, can make the difference in being approved at all.

Your real estate professional would be more than willing to make a recommendation and can support the need to assemble a strong team to help with your transaction.

Keep Your Current Home as a Rental

Let's assume that you have owned your home for several years.  It has increased in value and the unpaid balance considerably less than you originally borrowed.  In short, you have equity in the home.  You're thinking about buying another home and one of the questions going through your mind is "should we find a replacement property before we put our home on the market?

It is a good question but maybe there is another one you should be asking.  "Should we keep our current home and convert it to a rental when we buy another home?  The answer to the question may have a great deal to do with your finances but if you can afford it, it may end up being one of the better investments you have made.

Do you have enough discretionary funds for a down payment and closing costs for your new home?  Is it enough to put 20% down payment so you can avoid paying mortgage insurance?  Can you qualify for the mortgage on the new home with the additional liability of your current home?

You don't even need "yes" answers to all of these to be considering the possibility of converting your home to a rental.  If you have sufficient equity, you may be able to pull part of it out for your down payment and closing costs and still have equity available for other needs.  Lenders will usually make cash out refinances up to 80% of the value of the home.

Another possibility may be to borrow against your qualified retirement program.  The advantages include speed and convenience (it is your money), repayment flexibility, and cost advantage.  If you believe the stock market is moving toward a down position, this could be additional incentive to earn more in the rental.

What makes rental properties so attractive right now is that rents are rising and expected to continue because the factors that make a shortage of homes for sale are the same that make the shortage of homes for rent.  The rent collected, less the mortgage payments and expenses will probably result in a positive cash flow before tax.  The other major factor is that homes are appreciating at a very high rate. 

Using borrowed funds to control an appreciating asset is leverage and it can dramatically affect the rate of return an investor enjoys.  The dynamics of income, appreciation and favorable tax benefits makes rental real estate very appealing.

Your real estate professional can provide information on the value of your current home, estimates for rental income and expenses and in finding your replacement home.  Talk with your tax advisor to see how this alternative would work for you. 

The good news if you choose this opportunity is you will not have to put your home on the market and timing of your new purchase became greatly simplified.  It may even be to your advantage to be flexible with the seller's occupancy which could be a big advantage if you are negotiating against multiple offers.

For more information, download the Rental Income Properties and talk to your real estate professional.

Cash-Out Refinance

With the rapid appreciation that homes have had in the last two years, most homeowners have equity.  A common way to release part of the equity is to cash-out refinance but some homeowners may not be eligible currently.

This type of loan replaces the current mortgage by paying it off and an additional amount of cash for the owner.  Generally, lenders will consider a new mortgage up to a total of 80% of the current value.

Typically, the rate on a cash-out refinance will be slightly higher than a traditional purchase money mortgage.  As is in any lending situation, the rate depends on the borrower's credit and income.  The best interest rates are available to borrowers with higher credit scores, usually over 740.

Loan-to-value can affect the rate a borrower pays also.  A 70% loan-to-value mortgage could be expected to have a lower interest rate than an 80% LTV because there is a larger amount of equity remaining in the property and therefore, less risk for the lender.

There are no restrictions on how the owner can use the money.  It can be used for home improvements, consolidating debt, other consumer needs or for investment.

Eligibility Requirements as found in FNMA Selling Guide B2-1.3-03 Cash-Out Refinance Transactions

"Cash-out refinance transactions must meet the following requirements:

• The transaction must be used to pay off existing mortgages by obtaining a new first mortgage secured by the same property or be a new mortgage on a property that does not have a mortgage lien against it.
• Properties that were listed for sale must have been taken off the market on or before the disbursement date of the new mortgage loan.
• The property must have been purchased (or acquired) by the borrower at least six months prior to the disbursement date of the new mortgage loan except for the following:
  • There is no waiting period if the lender documents that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership).
  • The delayed financing requirements are met. See Delayed Financing Exception below.
  • If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower's six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See B 2-2-01, General Borrower Eligibility Requirements (07/28/2015) for additional details.)
  • If the property was owned prior to closing by an inter-vivos revocable trust, the time held by the trust may be counted towards meeting the borrower's six-month ownership requirement if the borrower is the primary beneficiary of the trust.
• For DU loan case files, if the DTI ratio exceeds 45%, six months reserves is required."

Encouraging Multiple Offers

Based on the current competition due to lower than normal inventories, it is possible for a seller to find themselves on the beneficiary side of a multiple offers.  Two or more parties may be trying to buy your home at the same time and because of the competition, they increase the purchase price, possibly, remove unnecessary contingencies and try to make their offer as attractive as possible.

This can pleasantly result in you realizing higher-than-expected sales price and proceeds of sale.  While it may not materialize, it is good to understand what could happen and the best way to handle it.  Your real estate professional is positioned to offer you specific advice but the following are some things to consider.

One tactic is to delay showings for a short period of time.  Some agents will create this by putting a sign on the property with a rider that indicates "coming soon" and depending on the local MLS rules, it may even be put in the system.  No showings will be allowed until a publicized date, usually, a few days, at which time, the goal is to have prospective buyers standing in line to see the home.

This might even be combined with an open house scheduled for the initial showings.  Agents using this method have sometimes found lines of people waiting outside the home to see it first.

When multiple offers are made, invariably, there will be some disappointed people and for that reason, it is essential to follow a strict procedure to see that no one is given an advantage over other buyers.  Discuss the following suggestions with your professional:

• All offers are countered by asking the buyer to make their "best and final" offer which will include not only price but terms also.
• The seller may authorize the listing agent to disclose that there are multiple offers.  (Article 1, Standard of Practice 15 of the National Association of REALTORS® code of ethics.
• Discuss with your professional their thoughts on revealing information, like price and terms, on other offers you are considering.  In most cases, they are allowed to do so with your permission, and it may make a difference in the negotiations.
• If one offer is substantially better than the other offers, the seller can accept or counter-offer.
• Have your real estate professional advise you of countering more than one offer which could result in contracting to sell your home to more than one person.  They can advise you alternative ways to do this.

Keep this in mind.  Sometimes, the highest offer is not the best offer.  Even though the buyer is willing to pay a high price for your home and possibly, willing to remove the financing condition, if they are going to get financing and it doesn't appraise, it can cause issues. 

Have your real estate professional tell you about asking for proof of funds from a cash buyer or confirming their ability to pay above appraised value.

Your real estate professional can help you realize the most out of your home.

Homeowners Need to Know

In the Boy Scouts, a certification, called a Totin' Chip, is required for scouts to carry, and use woods tools like a knife, axe and a saw.  They must read and understand the use and safety rules from the scout handbooks and demonstrate the proper handling, care, and use of each.

No such certification is required for homeowners but there are a lot of good reasons why it should be self-imposed.  Making minor repairs is part of the responsibility of owning a home that will save both time and money.

A homeowner will certainly appreciate the need for such training the first time a call is made to a service company to fix their air conditioner that suddenly quit cooling.  When the repairman arrives, he has a checklist which includes verifying the unit is getting electricity.  If not, they go to the electrical panel to see if a breaker has been thrown.

It can be very humbling and expensive to have to pay a service fee to have a repairman flip a breaker to get your air conditioning working again.

The basic items every homeowner should be able to do the following:

• Turn off the water in case of an emergency.
• Reset a circuit breaker.
• Change the HVAC filters and clean the outside coils.
• Clean a dryer vent.
• Reset a garbage disposer and dislodge a jam by spinning the flywheel
• Unclog a sink or drain.
• How to plunge a toilet and when to use an auger.
• Re-caulk a bathtub or sink
• Light a pilot light on a water heater or furnace
• Change the batteries on a smoke alarm

YouTube can be a great resource for searching the millions of videos that have been uploaded to help homeowners with all sorts of do-it-yourself projects.  You should be able to find one that addresses your particular situation, and you can determine if you have the skills and tools to handle it.  If not, check our list of Service Providers or just ask for a recommendation.