Tuesday, August 2, 2011

Rate vs Price

Today we’ll take a look at the impact of both home prices and mortgage rates on your decision to buy a piece of property.

Obviously, both are very important not only in terms of whether you should buy (from an investment standpoint), but also how much house you can afford.

Mortgage Rates Still Low

At the moment, mortgage rates are very close to historic lows, with the popular 30-year fixed-rate mortgage averaging 4.55 percent last week, according to data from Freddie Mac.

But while rates are low, home sales are still pretty flat, thanks in part to high unemployment, a lack of consumer confidence, and perhaps inflated home prices.
Yep, even though home prices are well off their housing bubble peaks, many feel they’re still inflated.

This is made clear without the use of home price indices, fancy calculators and algorithms…just take a look at some listings and you’ll think home sellers are nuts for asking so much.
Problem is most of them are asking for prices below their mortgage balance (short sale) and still aren’t getting any bites.

Home Prices Inflated
You can’t really blame them, as most bought during the boom at ridiculously inflated prices or bought pre-boom, and subsequently refinanced to tap into all that wonderful home equity.

Getting back on point, home values have lost about a decade’s worth of appreciation, and are currently coupled with near-record low mortgage rates.

Home prices are predicted to be pretty flat over the next several years, but mortgage rates are expected to rise.

So should you buy now while rates are low and prices have foreseeable downward pressure, thanks to all that distressed/shadow inventory and lack of confidence?
Or should you wait it out and let home prices hit bottom first?

(How to get a mortgage?)
Well, first things first, it’s nearly impossible to buy at the bottom. Anyone will tell you this, whether it’s a home or a stock or anything else.
Predicating the absolute bottom, or even close to it, can be a tall order.
Home prices are also regional and local, so it’s not like home prices have fallen by the same amount throughout the country.

And not all home prices in the nation can be designated as cheap, average, or expensive – they vary tremendously.
At the same time, it’d be hard to argue that mortgage rates nationwide aren’t super low and only expected to rise.

That said, let’s look at a scenario where mortgage rates rise and home prices slump.

Sales price: $400,000
Loan amount: $320,000 (20% down = $80,000)
Mortgage rate: 4.50%
Mortgage payment: $1621.39
Total paid: $583,700.40

Now say home prices fall 10 percent over the next year or two, while mortgage rates rise from 4.50 percent to 6.00 percent, which isn’t necessarily unlikely.

Sales price: $360,000
Loan amount: $288,000 (20% down = $72,000)
Mortgage rate: 6.00%
Mortgage payment: $1726.71
Total paid: $621,615.60

So as we can see, buying the home at the current higher price with the lower mortgage rate results in both a lower monthly mortgage payment and significantly less interest paid throughout the loan.

That could also make qualifying easier with regard to the debt-to-income ratio requirement.

However, the down payment is $8,000 higher on the more expensive house, which could prove a barrier to homeownership if assets are low.

But we’re still looking at savings of roughly $30,000 with the larger, yet lower-rate mortgage.

Hopefully this illustrates the importance of low mortgage rates. Of course, there are a ton of variables that can come into play.
Most people move or refinance within seven years or so, making the interest savings unclear.

There’s also the thought that once interest rates rise, they’ll put more downward pressure on home prices, meaning property values today are artificially inflated based on the low rates, which has somewhat increased demand.
And who knows, maybe rates will stay relatively low and home prices will fall even more than expected over the next few years.

Monday, August 1, 2011

“Second mortgage vs. home equity loan.”

It’s time for another installment of “mortgage match-ups.”

Today’s match-up: “Second mortgage vs. home equity loan.”
This is an epic battle of the junior liens, which while subordinate to their first mortgage brethren, can still hold their own in a fight.
But in this duel, we’re probably doing more to “clear things up” than we are comparing two loan programs.

Are second mortgages and home equity loans the same?
You see, when it comes down to it, most second mortgages are home equity loans. And vice versa.
So if you hear someone talking about one or the other, they could be talking about the same thing.

This is further complicated by the fact that most home equity loans are HELOCs, or home equity lines of credit.
Confused yet?

You should be, considering the ambiguity of it all…let’s break it down.
Second Mortgages, HELOCs, Home Equity Loans
A second mortgage is any home loan that is subordinated behind (comes after) a first mortgage.

This could be a HELOC or a home equity loan.
A HELOC, as previously mentioned, is a line of credit. In other words, you get a home loan with a certain line of credit, or draw amount, which you can use kind of like a credit card.

HELOCs are tied to the variable prime rate, and thus are adjustable-rate mortgages.
After the draw period, the amount drawn upon must be paid back during the repayment period.

*Note that while a HELOC is often used as a second mortgage, it can also be a stand-alone first mortgage, taken out by the homeowner when their mortgage is free and clear, or to refinance an existing lien.
Finally there’s the home equity loan, which can refer to both a HELOC or a closed-end second mortgage.

A “closed-end second mortgage” is a home loan that operates similarly to a first mortgage in that it’s a fixed amount, not a line of credit.
Additionally, it can be a fixed-rate mortgage or an ARM. These are typically taken out as an alternative to a HELOC, especially as purchase-money second mortgages.

For example, a borrower can avoid paying mortgage insurance by taking out a first mortgage at 80 percent loan-to-value and a concurrent second mortgage for the remaining 20 percent.

Unfortunately, many banks and mortgage lenders use the phrase “home equity loan” and “HELOC” interchangeably, adding to the confusion.
To ensure you actually get what you want/need, ask the loan officer or mortgage broker to explain the terms of each loan product clearly.