Archive for Home Finance

Rent or Buy??

The question plaguing every tenant who wants a home of their own is whether they should continue to rent or is it the right time to buy?

The combination of good prices and low mortgage rates make it considerably cheaper to own than rent in most markets. Assuming a person is qualified with a down payment and won’t be moving for several years, there may not be a better time to buy a home.

In the example below, the total house payment is $1,281.01 compared to $1,500 to rent the same home. Before you consider any of the financial benefits attached to home ownership, it’s cheaper to own than to rent.

The net cost of housing falls to $764 or just more than half the house payment when you consider the principal reduction due to normal amortization, a modest appreciation and the tax savings along with a reasonable maintenance expense that a tenant would not have to pay.

One of the biggest benefits is the growing equity. As the value goes up, the unpaid balance goes down. A favorable leverage causes their low down payment to grow to $40,609 in a short seven years based on a modest 1% appreciation.

There’s an expression often heard in real estate circles: “Whether you rent or buy, you pay for the house you occupy.” You’re either buying it for yourself or you’re helping the landlord buy it.

Check out a Rent vs. Own to see how your numbers will compare to this example or call me to do it for you.

Refinancing Too Soon?

Some people believe they shouldn’t refinance more often than once every two years. The determining factors are if you’ll lower your payments and plan to stay in the home long enough to recapture the cost of refinancing. If so, you should consider refinancing.

Interest rates have actually come down significantly in the past 12 months and even more in the past 24 months. According to the Freddie Mac Primary Mortgage Market Survey®, rates on a 30 year fixed rate mortgage are down to 3.6% in August, 2012 compared to 4.27% one year earlier.

Refinancing in the example below would save the homeowner $67.04 per month and they would recapture the cost of refinancing in 3 years and 9 months based on approximately $3,000 of closing costs.

Click Here to make your own projection on a Refinance Analysis calculator.

FHA Mortgage Insurance Premium Release

FHA loans require mortgage insurance premium to cover a possible loss to the lender if the property has to be foreclosed and sold. The premium is substantial and eliminating the MIP would reduce the payment considerably.

The MIP must remain in effect for five years but after that, when the balance is 78% of the original purchase price, FHA will release the requirement and your monthly payment will go down. Since amortization is affected by interest rates, the normal time to reach this 78% point could be from 9 to 12 years at today’s interest rates.

In the example below, the MIP would be released in 9 years 6 months with normal payments. An extra $100 a month would allow the borrower to reach the release point in 7 years 1 month. To reach the release point in the minimum five years, the borrower would have to make an extra $268.04 per month principal contribution.

Releasing the MIP in this example would save the borrower $177.67 per month. The borrower would also save interest, build equity and shorten the term of their mortgage. Once the MIP is released, the borrower could continue the same payment schedule to further accelerate the debt reduction.

To make some projections on your mortgage, click here.

Rates are Down But It Costs More to Buy!

The latest Housing Affordability Index from the National Association of REALTORS® shows an interesting trend taking place this year that needs buyers’ attention. Most people know that the mortgage rates are still at incredibly low rates but don’t feel there is much sense of urgency.

This report shows that mortgage rates have fallen from 4.37% in January to 3.81% for June. However, the report shows that the payment as a percentage of income has gone from 12.1% to 13.9% which simply means that buyers have to spend more of their income on a home.

The reason is that the median price of homes nationally has gone from $154,600 in January to $190,100 in June which is a 23% increase. The two major components of housing affordability are the price of the homes and the mortgage rates a buyer must pay.

Even if one of those components is going down, the other could have a significant affect as is shown in this year’s trend in housing affordability. In the past few weeks, the effects of which are not show in this report, mortgage rates have been moving up.

Home buyers and investors who have been taking a wait and see approach need to make a decision if now is the time to act.

Determining Your Home’s Value

Knowing the current value of your home is important when you’re considering a move, refinancing or getting a home equity loan. Prices are determined by recent sales and the supply and demand of current inventory.

The process of selecting comparable properties involves matching similar features like bedrooms, baths, square footage and updates. In addition to price, there are other factors that affect the value and ultimately, the sale of a home.

Location plays a significant role because by the unique combination of improvements and land. Beneficial considerations would be convenience to schools, shopping, transportation and proximity to freeways. Undesirable concerns could include being in the vicinity of busy streets, high-tension lines, commercial property and other things.

To receive a computerized estimate on the value of your home that includes prices of comparable homes that have sold recently and homes currently for sale, click here.

Value is not totally objective and does require a certain amount of subjective considerations. If you have questions after you receive your report by email, contact us and we’ll be happy to talk to you about your concerns.

American Dream

The American Dream of owning a home is still alive. People still want a place of their own; where they can raise their family; share with their friends; feel safe and secure. Homeownership creates emotional and financial benefits.

The government supports that dream by allowing deductions for mortgage and home equity interest as well as property taxes. The capital gains exclusion on profits from a home is incredibly generous and a low long-term capital gains tax rate applies to excess profits.

It’s reported that some of the social benefits of owning a home include higher voter participation, better physical health, higher student test scores, lower teen delinquency, neighborhood stability and pride in the community.

If for no other reason, the decision to buy a home should be considered when it costs much less to own a home than it does to rent. With the unusually low available mortgage rates, the payment is generally less than comparable rent. However, the decision becomes more obvious when the other benefits are considered like amortization, appreciation and tax savings.

It’s not uncommon for the net cost of housing to be half of the actual mortgage payment. In most cases, it is significantly more to rent than to own which could amount to more than the down payment in the first year alone.  Calculate your cost of Renting vs. Owning.

How Long to Heal a Credit Score?

The question concerning people who’ve had a foreclosure, short sale or bankruptcy is when they will be able to qualify for a mortgage loan.  It takes different amounts of time to heal credit scores based on the event.

The following chart is meant to be a general guide for how long a person might have to wait.  During this waiting period, it’s important that the person be current on all payments and maintains a history of good credit.

 

FHA

VA

USDA

FNMA/Freddie Mac

Jumbo

Foreclosure

3 years

2 years

3 years

7 years

7 years

Deed-in-Lieu of Foreclosure

3 years

2 years

3 years

2 years
<80%

4 years
81-90%

7 years
> 90%

7 years

Short Sale

3 years

2 years

3 years

2 years
<80%

7 years
81-90%

7 years
> 90%

7 years

Chapter 7 Bankruptcy

2 years

2 years

3 years

4 years

7 years

Chapter 13 Bankruptcy

1 year

1 year

1 year

2 years

7 years

A recommended lender can give you specific information regarding your individual situation and can make suggestions that will improve your ability to qualify for a mortgage.  We want to be your personal source of real estate information and we’re committed to helping from purchase to sale and all the years in between.

Buyer Pre-Approval

The benefits of buyer’s pre-approval are without question; it is good for the buyers, the sellers and the agents. It saves time, money and removes the uncertainty of knowing whether the buyer is qualified. The direct benefits include:

  • Amount the buyer can borrow decreases as interest rates rise
  • Looking at “Right” homes – price, size, amenities, location
  • Find the best loan – rate, term, type
  • Uncover credit issues early – time to cure possible problems
  • Bargaining power – price, terms, & timing
  • Close quicker – verifications have been made

There a big difference in sitting down with a trusted mortgage professional compared to going through calculators on a website. The cost of being pre-approved is a bargain and generally, limited to the cost of the credit report.

Even if you have been pre-approved, a suggestion that can’t hurt but may help is to get a second opinion from a different lender. It will either verify that you have a good deal or you’ll discover that you can improve it. Either way, it works to your advantage. Contact me if you’d like a recommendation.

Lower Interest Rate – Higher Payment

Whether you’re refinancing your current home or buying a new one, something worth considering is a 15 year loan rather than a 30 year term. The payments will be a little higher but you’ll get a lower interest rate and you’ll build equity much faster.

Let’s look at an example of a $200,000 mortgage with the choice of a 30 year term with a 3.75% rate compared to a 15 year term with a 2.875% rate. The payments would be $442.94 higher on the shorter term but the equity would be considerably higher even after you adjust for the higher payments.

Another benefit is that the shorter term loan creates a forced savings situation where the savings on a longer term loan might end up being spent rather than being saved and invested. Contact me if you’d like a recommendation of a trusted lender.

Mortgage Interest Deduction

 

A recent U.S. Tax Court ruling clarified the IRS position that the $1.1 million limit for mortgage interest deduction applies per residence and not per taxpayer as some high-priced homeowners were hoping.

A married homeowner filing jointly can have fully deductible interest on a mortgage of up to $1,000,000 of acquisition debt and up to an additional $100,000 of home equity debt. If the married couple files separately, each party is limited to deducting the interest on half of those maximum amounts.

The court case came about when two unmarried individuals who owned a home together as joint tenants felt that they were entitled to deduct the interest on $1.1 million of debt each. IRS did not agree with their understanding and neither did the Tax Court. The Court ruled that the limits apply per residence, not per taxpayer even if a home is co-owned by unmarried taxpayers.

The result for the taxpayers in this case was that their deduction was cut in half resulting in much more income tax due. While this situation only affects a few taxpayers, homeowners in this position should have a discussion with their tax professional.