Coordinating the Sale and Purchase of Your Home

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Usually, it is easier to buy a home than to sell a home but that isn’t necessarily the case currently. In today’s market, it can be scary to sell your home before buying another because you could find yourself without a home.

Most sellers will not accept a contingency on the sale of a buyer’s home in today’s market. So, let’s look at some of the alternatives that homeowners are using to facilitate the transactions.

If you have the income, credit, and cash available, the replacement home can be purchased with a new 80-90% loan-to-value mortgage and sell the existing home after you have moved into the new home. This would require making two payments for a while but probably gives the seller the least amount of pressure to find the replacement property before the existing one is put on the market.

If the mortgage on the new home has the option to recast the payment, additional down from the equity in the previous home after it sells would lower the payments without causing any additional expense to refinance.

Another alternative may be available if your home has enough equity to borrow against it in a Home Equity Line of Credit or a bridge loan. This type of loan is generally made by banks who will loan qualified owners up to 80% of the appraised value less the current mortgages on the property. Freeing up the equity in your existing home will give you a down payment for purchasing the new home before you sell the previous one.

If a seller has assets in qualified retirement programs, it is possible to do temporary loans against them to facilitate the interim purchase. There can be penalties on some of these if they are not repaid in a timely manner. It would be good to investigate with your tax professional to see if this is a viable option.

Hard money lenders provide a source that will be more common to investors than homeowners. These types of loans are generally approved and funded quickly, have less requirements than bank loans and provide funding for projects that cannot be financed elsewhere. Interest rates are higher than bank loans, are written for short terms (1-2 years), and usually require 25-30% down payment or equity.

Power Buyers and iBuyers offer to purchase your home for cash and provide a quick closing. Deeper investigation into these options may reveal that you will not receive the full equity of your home because they have to discount the home to cover the expenses they will incur as a seller.

In today’s very complicated market, the value of a real estate professional representing your best interests, providing you advice, options and experience has never been greater. While there are similarities in transactions, each one is unique, and you certainly need a professional to be guiding you through the process.

Agents are trained and experienced in coordinating the purchase and sale of homes. This can be especially beneficial in navigating unfamiliar waters.

A New Opportunity for Homebuyers

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You may not have heard of anyone assuming an existing mortgage for over thirty years and didn’t know they were even possible any longer. The reason is simple, it didn’t make financial sense but now that interest rates are increasing, it may be an opportunity for some homebuyers.

Conventional loans added clauses to mortgages back in the early 80’s that gave the noteholder the right to raise the interest rate if a loan was assumed, as well as require the new buyer to qualify for the loan. This essentially ended the practice of assuming conventional mortgages.

Then, in the late 80’s, FHA and VA mortgages did impose the right to qualify the new buyers, but the big difference was that the mortgage rate would remain the same as the original borrower. Even so, it still effectively ended the assumptions of FHA and VA mortgages because rates on mortgages trended down for the next thirty years.

There was really no benefit to assume a mortgage that still required qualifying because it was possible to obtain a new mortgage with a lower rate. Generations of buyers have never even contemplated assuming a mortgage but now, in 2022, it might well be an alternative that will lower the cost of buying a home.

Mortgage rates hit a bottom in early 2021 and have been increasing since, this year especially.

Since qualifying is required for assuming an FHA or VA mortgage and only owner-occupants are eligible, you might be asking what are the benefits? If the interest rate on the existing mortgage is less than the rate on a new mortgage, there could be a savings.

In addition to that, there are fewer closing costs involved on assumptions of FHA and VA mortgages than originating new mortgages. Another benefit is that assuming an existing mortgage will be further into the amortization schedule than a new one which means equity-buildup occurs faster. And finally, lower interest rate loans amortize faster than higher rate loans.

The rub in this situation is that many buyers don’t have enough money to purchase an equity but there is a remedy for that. Let’s assume the buyer was considering a 90% conventional loan. If they identified a home with an assumable mortgage, they could put the same 10% down payment in cash, subtract the existing mortgage balance from what would be the 90% new mortgage and secure a second mortgage for the difference.

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

Most search filters on portal websites do not include assumable mortgages. You will need to rely on your agent to ferret them out. If the agent you are working with hasn’t suggested assumptions, it may be that they are unaware of their existence.

Why a Home Should Be Your First Investment

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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

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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…

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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

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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?

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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

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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?

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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

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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.