Archive for the 'Mortgages' Category
Mortgage Terms Moving Against Buyers
Interest rates and down payment amounts are both trending upwards, according to recent articles on the current state of home mortgages, potentially reducing the purchasing power of buyers.
After bottoming out around 4.25% last fall, mortgage rates for 30-year fixed-rate loans have recently moved above 5% for the first time in about a year. Commentators observe that rising rates will cause some buyers to rethink the advantages of home ownership, but generally conclude that they are not a critical threat to the housing market.
The Wall Street Journal and Zillow reported that median down payments for “conventional” mortgages rose from about 5% at the end of 2006 to 20% in 2008 in a study of 9 cities. The article also notes that mortgages backed by the Federal Housing Administration (FHA), requiring only 3.5% down payments, have increased in popularity and were used in about half the purchases in 2010.
It seems to us that there are two separate things going on here. The first is related to the overall economy and the financial policies of the country. Mortgage rates are based on the yields of the 10-year Treasury Bond. If the creditors of the United States are demanding a higher interest rate, then those higher rates will trickle down to mortgages.
The second factor influencing mortgage terms is the continued evolution of the American mortgage industry. Lenders have taken a lot of losses from their loan portfolios over the past 5 years. Not surprisingly, they’re trying to improve their business practices to make these sorts of situations less likely in the future. What mortgage products should be available? What should lenders require of buyers? What makes a borrower creditworthy? What role will the government play?
We have no special insight into either of these two issues, or the direction of mortgage rates in general. And we suspect that nobody truly knows how they will evolve over the coming months and years. However, we do know that buyers still have an opportunity to secure financing with low down payments. And we can report that while rates are a little bit higher than they used to be, they’re still very low from a historical point of view. Your guess is as good as ours when it comes to where rates move next.
Special Offers for New Homeowners
Every time a mortgage closes, marketers line up to pitch all sorts of fabulous offers and opportunities to new homeowners. Nearly all arrive via mail so they are, fortunately, easy to sort through and discard. On occasion a company will dispatch their best door-to-door salesman to pay the buyers a visit and congratulate them on their purchase – thankfully they are few and far between.
The special offer bounty covers a wide spectrum. Some is relevant and useful though much is opportunism, “These buyers just shelled out hundreds of thousands for a house, so maybe we can convince them that a few hundred here and there is a prudent additional expense.”
Since there is no real difference between a mortgage closing via a purchase or a refinance, we’ve been the lucky recipients of much of this marketing over the past couple months. It’s been interesting to see what is offered, how it is presented, and how persistent the different companies are. Here’s a sampling of some of the exciting opportunities that we’ve received:
- Coupons from Big Box Home Improvement Centers: Of the haul, these seem most likely to be helpful. Just about all houses need a little something here and there, whether it is a small repair or just some personalization.
- Coupons from Home Design/Accessory Stores: These can also be helpful, but the ones we received are not all that scarce. They regularly send out the same 20% off coupons, so it’s not like this is truly a special deal for home buyers – the text is just different.
- Gutter, Windows, and Roofs: We received a surprising number of offers to help out with moderately sized/priced home improvement projects. Sometimes they came from manufacturers, but more often they seemed be sent by the local contractors who would actually do the work.
- Water Treatment System: This seemed really random to me. I know that water treatment systems are critically important in some areas, but I don’t really see all that many of them in our area. The MDC water is actually quite tasty!
- Credit Card from Mortgage Servicer that Pays Down Principal: I give extra credit for being creative; this is a sales angle that I hadn’t seen before. Unfortunately the rewards points are less generous than other cards available.
- Mortgage Insurance! Mortgage insurance must be a very profitable product to sell, because we’ve received more than 20 offers so far. The companies are so aggressive that it immediately raises my guard. And the numbers don’t sit well with me. The benefit decreases over time (because I’m paying down my principal each month) even though I’ve paid more premiums and am more likely to die? I must not understand the product properly…
If you’ve been through a purchase recently, have you received anything worthwhile? What’s been the most outrageous solicitation?
Mortgage Rates and The Fed
This afternoon the Federal Reserve announced the next phase of their strategy to stimulate the economy. Broadly referred to as Quantitative Easing 2, the plan involves printing a whole lot of money in order to buy long-term US Treasury Bonds in the markets.
The Fed’s big picture goal is to reduce unemployment, and hopes that injecting more money into the economy will encourage businesses to begin taking risks to expand their operations (hire more workers), which would hopefully also boost confidence and inspire consumers to increase their spending.
Analysts, economists, and investors have been debating the merits of the expected plan for weeks. Some feel it will be modestly helpful in supporting the business environment, while others are quite pessimistic. Ultimately this sort of indirect economic stimulus relies on a chain of events, with many types of participants, so it’s impossible to predict what will happen with any level of confidence.
Commentators do seem to agree that the Fed’s move will continue the very favorable refinance opportunity for homeowners. Because mortgage rates are generally based on the long-term US Treasury Bonds, and those are the exact securities the Fed plans to purchase, rates should be directly impacted by the program. Again, there are various opinions as to how much lower mortgage rates may go, but I have not seen any articles expecting them to rise.
The refinancing opportunity appears as though it will be extended again. Homeowners with strong credit and positive home equity may want to consider improving their interest rate and/or shorting the length of their loan. Just keep in mind that there is an up-front cash cost to refinancing, so in order for it to make sense homeowners should plan to be in their property for at least a few more years. We’re happy to share our experience with the process and suggest mortgage professionals – just call or email.
Courant Companion: A Refi Bonanza
Today’s front page Courant article gives another view of the refinancing opportunity. They highlight a homeowner who is moving from a 30 year to 15 year mortgage, illustrating the significant amount of interest they can save by knocking 8 years off the total term of the loan. The story provides another great example of the line of thinking and analysis we did when working through our refinancing process. And kudos to the homeowner for aspiring to pay it off even earlier.
Although the article is definitely in line with our thinking, there are a couple of statements that concern us. So we thought we would write a quick companion piece.
The homeowner used in the example paid $213,000 in 2006, but was told today that she shouldn’t list her home for more than $218,000. She said, “I would have lost money on the deal.”
We’ve unfortunately been seeing homeowners talk about “losing money” on their real estate a lot recently, but they often mean very different things. Some look strictly at the price they paid versus the price they expect to get in a sale. Others will add the cost of their improvements to the price they paid and then compare that to what they expect to get in a sale. And still others will deduct the transaction costs from the expected sale price before comparing to their cost.
We think that the correct cost to consider is the purchase price plus the cost of improvements. And the appropriate value for the house is the expected sale price without deducting the transaction costs.
That being said, homeowners shouldn’t expect to get all of their money out of improvements. Part of the reason is that many improvements are actually maintenance costs – keeping a home in proper working condition – and maintenance costs have very little value to potential buyers since they expect a home to be in proper working order. Even projects that are truly enhancements to a property typically don’t pay back at 100%. The main reason is that we design to our own personal tastes, which are usually different than that of others. Swimming pools are a classic example of an improvement that is owner-specific, but on a smaller scale it’s things like the choices of cabinets, counters, tile, and other long-lasting decorative elements. As homeowners we have to factor in the enjoyment we get from living in a space that feels inviting to us.
“Looking back, [homeowner] knows that she paid too much when she bought her first house in 2006.”
Prices and markets have to be evaluated in the moment. This statement could be true, but the only way to tell would be to analyze data from 2006 to see if the price she paid was in line with what other comparable homes were selling for at the time. That’s one of the main benefits of working with a real estate agent – they can analyze the data to make sure the seller’s asking price is reasonable.
We’re finding that some owners are comparing values in the current market to what they paid years ago and concluding that since the value of their home has not increased they must have overpaid. Residential real estate markets have changed considerably over the past few years, so it’s quite possible that a property that was a great buy in 2006 is now worth less than its purchase price.
If she holds the home for another 20 years, will she still feel she overpaid?
Refinancing Our House- Journey Completed
Like clockwork, about 45 days after our refinancing journey started, this morning it ended. We’ve officially and successfully purchased our house for the third time. You see, we bought it in 2004, refinanced in 2005 to a lower rate and refinanced again to an even lower rate and a 15-year mortgage today. The message? We must REALLY like this place.
All in all, the process was pretty painless and easy. First, we had plenty of equity in the house based on the initial down payment we made the first time we purchased and the fact that we’ve done improvements to the home since we’ve owned it. Some folks trying to refinance now are finding that they don’t have enough equity in their homes, making it impossible to go through the process and get a lower interest rate. Second, Kyle is a master document keeper/organizer, so he had all of the paperwork we needed to submit at his fingertips. (Don’t ask me where it is, I have no idea, he’s the obsessive/compulsive about that stuff). Finally, we had the cash available to close. It was a little over $7,000 out of pocket to cover the lender charges, escrows for taxes and insurance, and the title insurance fees. We will get a good chunk of that back when Wells Fargo releases our previously escrowed tax and insurance payments for the mortgage that was just released as we refinanced. Still, we had to have cash money available today to make this all happen.
As we went over the HUD statement with our closing attorney I asked him what he thought about the fees that we were charged. Were they in line with all of the other refis that he’s closing? He mentioned that he felt they were fair and comparable to two other lenders that I know many people use. He also mentioned that our rate was very competitive. That of course made me feel good.
Now, what next? Well, I don’t expect that we’ll be refinancing any time again before the mortgage is paid off in the next 15 years. That loan was really cheap at 3.75% and I don’t think we’ll ever see anything substantially lower than that which would encourage us to refinance again. So we’ll stay put and pay this sucker off. Because we REALLY like this place.