Before you push yourself to pay off your home loan ahead of schedule, consider the downside of going this route.
When you get a mortgage, you agree to repay your loan over a certain period of time. That could be 15, 20, or 30 years -- or a different term that your mortgage lender agrees to. But you may, at some point, decide that you want to pay off your home loan early. Doing so could save you a lot of money on interest. Despite that benefit, here are a few reasons you may not want to pay off your home ahead of schedule.
1. You'll have less liquidity
Liquidity refers to how quickly you can access your money when you need to. Savings accounts are very liquid -- you can take a withdrawal from one when you want and get your money right away. Stocks are also fairly liquid -- you can sell a stock with relative ease for cash -- though they're not quite as liquid as savings accounts.
Homes, on the other hand, are very illiquid. You can't easily and quickly sell a home for cash. It could take months to find a buyer and wait for that deal to close. So, when you pay off your mortgage early, you tie up more money in your home, leaving yourself with less liquidity, or less access to money you might need in an emergency or for another reason.
2. You'll lose a valuable tax break
Homeowners who itemize on their taxes get to deduct the interest they pay on their mortgages. And depending on your tax situation, that could be a lucrative write-off. You'll lose that deduction, however, once your mortgage is paid off, which could leave you with a higher tax burden.
3. You'll miss out on the opportunity to invest
Paying off a mortgage early can make a lot of sense when you're stuck with a high interest rate on your home loan. But if you manage to lock in an affordable mortgage rate, then paying off your loan early could mean losing out on the chance to score higher returns via investing.
Imagine you take out a mortgage with a 3.5% interest rate. If you invest in stocks over many years, you might easily score an annual return of 7%, which is actually several percentage points below the stock market's average. So in that case, putting your extra money into your home isn't the savviest move.
On the other hand, if your mortgage has an 8% interest rate, then that's a different story. But if you've managed to snag a low rate, then you may want to stick to your regular payment schedule and invest whatever extra cash you have.
Many people strive to pay off their mortgages early. Along with saving money on interest, paying off your loan ahead of schedule offers the benefit of not having debt to think about. Some people really don't like the idea of debt, even though home loans are considered a healthy type to have. But before you push yourself to pay off your mortgage early, think about these disadvantages. You may decide to stick to your regular payment schedule after all.
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It is our consensus that normal middle class residential owners, upper middle-class homeowners and working families, none of whom are generating a huge income at the moment, should most likely not be supplying the California state government with extra property tax revenue right now. This is especially true during a financial crisis such as the Covid predicament we find ourselves in during 2021… where revenue is tight all over the country, especially in California, with only a few exceptions here and there – where in general unemployment, as well as under-employment, is extremely high. Regular middle class and upper middle-class homeowners need to be saving money, and spending less, not spending more. Certainly not spending more on housing or standard goods and services, or on income tax or property taxes. We’re not talking about luxury goods or high-end services. That is specific to folks with disposable income and is an entirely different matter altogether.
As a matter of fact, property taxes are the one big-ticket item just mentioned that is easily lowered, or paused, or even deferred. And if this never occurs, then property owners are going to have to be more cognizant of related details and new tax laws, as well as new ways to avoid property tax reassessment – and tax specialists or real estate experts that are available in California to help with these matters.
Middle Class Property Tax Savings
When times are hard, as they are now, the state should help residents with key information on property tax breaks, helping property owners take full advantage of established property tax breaks, like the new Proposition 19 parent-to-child transfer and parent-to-child exclusion from reassessment of property taxes.
And this means not spending more on taxes when times are hard. Certainly, property owners should all be better informed about inheriting property taxes, and Prop 19 parent-to-child exclusion; about property tax breaks, and being able to transfer parent’s property taxes, with the right to keep parents property taxes on every property tax transfer.
Owning a Home is Part of the American Dream
Purchasing or inheriting a home is part of the classic American dream and leaving part of that dream to heirs or beneficiaries is something most of us would be proud of. However, fluid, ever-changing and complicated property tax laws have to be kept up with, either by ourselves, or through specialists that make a living helping property owners with issues like property taxes.
Getting expert property tax advice and estate planning advice can help save that dream and help sustain good family financial practices for generations to come, where your home and other big-ticket investments are concerned.
Genuine Property Tax Relief
The property tax breaks middle class and upper middle class Californians are holding on to are the only safety-net solutions middle class residents have in this state, so the Legislature should be focusing on preserving and strengthening those tax breaks, and on educating and informing Californians about establishing a low tax base for trust beneficiaries; about Prop 19 parent-to-child exclusion and Proposition 19 – parent to child property tax transfer on an inherited home; plus Proposition 13 property tax transfers, as well as the Proposition 19 impact on CA homeowners, and avoiding property reassessment wherever possible – not on obsessively driving more tax revenue, under cloaked measures called “property tax relief” that are merely tax deferments.
Even when it means a little less property tax revenue going into their coffers, it shouldn’t matter to the state government. In the long run, helping to preserve working families’ financial health and helping them to pay less property taxes, thereby building up more savings, will drive greater property tax revenue to the state, as more people will own homes and pay taxes! This is what the Legislature would see if they saw long term rather than short term.
All middle-class Californians should be able to depend on secure, authentic property tax relief – like wealthy folks and corporations have in every state in America. Why should only the wealthy enjoy genuine tax cuts and real property tax relief?
To learn more about your property tax relief options when inheriting a home from parents – transferring their low property tax base to your new residence – contact Commercial Loan Corp at (877) 756-4454 to speak with a Trust Fund Loan consultant or Property Tax Savings specialist. Chances are the end result will be a much lower property tax bill.
Most Americans want to own a home at some point in their life, and they say they’re willing to make sacrifices to achieve it. For some, that means forgoing alcohol or vacations for a year to save. But others say they’re willing to give up having kids in order to have their dream home. About 60% of recent survey respondents say they’d prefer their dream home over 40% who said they’d prefer kids first, according to a new survey from Cinch Home Services, a home warranty firm.
The youngest adults in the housing market—Gen Z—feel the strongest about one day becoming a homeowner. Nearly 84% recently surveyed say that owning a home is a major component of achieving the American dream, the survey says.
More Buyers Are Taking Risks to Get Dream Home
What Couples Fight Over Most When Home Shopping
But homeownership is expensive and may require some sacrifice to save up. Cinch asked more than 1,000 respondents what they would be willing to give up to own a home. The 85% of respondents who are willing to make some sacrifices in order to own a home said alcohol or vacations would be their first choices. But some respondents are willing to give up their pet, seeing family, or their relationship for an entire year to save up to own.
Here’s what topped their list.
Overall, Gen Z showed more willingness than other generations to give up pleasures over a year to become a homeowner. Here’s how sacrifices differed by age group.
Just to dispatch with the technicalities, the Federal Reserve does not set mortgage rates, and the central bank’s decisions don’t drive mortgage rates as directly as they do other products, like savings accounts and CD rates.
But the Fed’s actions do indirectly influence the rates consumers pay on their fixed-rate home loans when they refinance or take out a new mortgage. The Fed at its September meeting indicated it plans to keep rates low at least until 2022, despite a brightening economic picture and a jump in inflation in recent months.
“The Fed is inching closer to tapering, the process of slowly – very slowly – dialing back their bond purchases,” says Greg McBride, CFA, Bankrate chief financial analyst. “The stock market has been a direct beneficiary of the Fed’s stimulative actions and the prospect of reducing that is sure to spark heightened market volatility.”
What the Federal Reserve does
The Federal Reserve sets borrowing costs for shorter-term loans in the U.S. by moving its federal funds rate. The Fed kept this rate set near zero. The rate governs how much banks pay each other in interest to borrow funds from their reserves kept at the Fed on an overnight basis. Mortgages, on the other hand, track the 10-year Treasury rate.
Changes to the federal funds rate might or might not move the rate on the 10-year Treasury, which are bonds issued by the government that mature in a decade. Though a Fed rate cut doesn’t directly push down yields on the 10-year, it can lead to the same outcome. Investors worried about the economy after a rate cut might flock to the 10-year Treasury, considered a safe-haven asset, pushing down yields.
The Fed also influences mortgage rates through monetary policy, such as when it buys or sells debt securities in the marketplace. Early in the pandemic there was severe disruption in the Treasury market, making the cost of borrowing money more expensive than the Fed wanted it to be. In response, the Federal Reserve announced it would buy billions of dollars in Treasuries and mortgage-backed securities, or MBS. The move was to support the flow of credit, which helped push mortgage rates to record lows.
What influences mortgage rates
Fixed-rate mortgages are tied to the 10-year Treasury rate. When that rate goes up, the popular 30-year fixed rate mortgage tends to do the same and vice versa.
Rates for fixed mortgages are influenced by other factors, such as supply and demand. When mortgage lenders have too much business, they raise rates to decrease demand. When business is light, they tend to cut rates to attract more customers.
Price inflation pushes on rates as well. When inflation is low, rates trend lower. When inflation picks up, so do fixed mortgage rates.
The secondary market where investors buy mortgage-backed securities plays a role. Most lenders bundle the mortgages they underwrite and sell them in the secondary marketplace to investors. When investor demand is high, mortgage rates trend a little lower. When investors aren’t buying, rates may rise to attract buyers.
What Fed rate decisions mean for mortgages
The Fed sets the federal funds rate. This is an interest rate applied to money that banks and other depository institutions lend to each other overnight.
The fed funds rate affects short-term loans, such as credit card debt and adjustable-rate mortgages, which, unlike conventional fixed-rate mortgages, have a floating interest rate that goes up and down with the market on a monthly basis. Long-term rates for fixed-rate mortgages are generally not affected by changes in the federal funds rate.
If the central bank wanted to reduce rates again to stimulate the economy, it would have to push rates into negative territory, a move that Powell, the Fed chairman Powell has said is not being contemplated.
What to consider if you’re shopping for a mortgage
When you’re shopping for a mortgage, compare interest rates and APR, which is the total cost of the mortgage. Some lenders might advertise low interest rates but offset them with high fees, which are reflected in the APR.
To begin your search compare offers online, read lender reviews and go directly to lenders’ websites.
If you have a relationship with a lender, bank or credit union, find out what interest rate or customer discount you might qualify for. Often, lenders will work with customers to give them a better deal than they might otherwise get at another place.
Mortgage rates are near historic lows, so while you should pay attention to the Fed and the economy, your best move if you need a property loan is to get a rate that suits your budget and goals rather than wait for still lower rates.
This start-to-finish overview walks you through every step of getting a home loan.
Buying a home is a huge financial commitment that’s both exhilarating and stressful, especially for first-time buyers. But if you’ve done your homework and know what to expect, you’ll be ready to close your deal with confidence.
The process can vary from one scenario to the next, but you can expect to go through certain basic steps when you apply for a mortgage. Depending on your unique situation, these steps may happen concurrently, or take longer than expected. (We’re giving you some time estimates, but keep in mind that, for a variety of reasons, delays aren’t uncommon.)
In the end, if all goes to plan, you’ll soon pocket the keys to your new home.
Time: Generally, 2 to 5 days, but sometimes longer
Once you’ve saved up a down payment and think it’s the right time for you to buy, you may be tempted to contact a real estate agent and hit the open houses. That’s not always the best strategy, though — you could fall in love with a home only to find out later that you can’t afford it. For that reason, it’s a good idea to get pre-qualified or pre-approved before you start shopping for homes.
For a pre-qualification, a lender will ask you about any previous homeownership, and about your income, assets, and debt, to get an overall sense of whether you would qualify for a loan.
This conversation could happen over the phone or in person. There are a few red flags that would let them know you’re not ready to buy. If, for example, you had a recent foreclosure, you’ll need to wait several years before you can apply for a new mortgage.
If there are no obvious red flags, the lender may pre-qualify you up to a certain amount. The process is fast and convenient, and you should have an answer in a day or two.
Pre-approvals can often take longer, and many banks and lenders divide the process into two stages. Initially, you may be asked to provide the following documentation:
Getting a pre-approval before you start shopping for a home can help when you’re ready to make an offer.
A loan processor will use an automated underwriting system to independently verify your income, assets, and debt. Those findings are forwarded to an underwriter, who compares them to the information you’ve provided. (The underwriter’s job is to determine the risk involved with giving you a loan, which requires evaluating lots of documentation, most of which you’ll provide later in the process.)
If your initial information checks out, the lender will generally provide a pre-approval letter indicating you may qualify for a loan of up to a certain amount. This process often takes two or three days if the information you’ve supplied is complete and accurate. If the lender has to ask for additional or more current information, the process will usually take longer.
But remember, a pre-approval is not a guarantee you’ll get a loan. You’ll still have to apply for a loan and go through the underwriting process.
Is it necessary?
Getting pre-approved has advantages. It shows your agent and sellers that you’re serious about buying, and that one lender already feels you’re financially capable.
Home shopping and purchase offer
Time: Varies widely, depending on your real estate market
Finding the right home for you could happen in a matter of days, or it may take months. Whatever your situation, when you’ve found a home, you want to buy, you’ll work with your real estate agent to structure a purchase offer.
Your offer includes what you’d like to pay, inspections that need to take place (like a home inspection and termite inspection), contingencies (like a financing contingency that gives you time to get a loan), and how much you’ll put down in earnest money.
Typically, you pay earnest money to an escrow company when you submit an offer. It’s often 1-2% of the sales price, and if you pull out for a reason not allowed under the purchase contract, you may lose that money. (Don’t confuse earnest money with your down payment, which is the amount of money lenders require you to put toward the home purchase. The down payment is typically 3-20% of the purchase price depending on the loan, and is due at the closing, along with your closing costs.)
In a slow real estate market, you might only have to pay $500 – $1,000 in earnest money. In other markets, where sellers may have several offers to choose from, you might want to increase your deposit to 2% or 3% of the offer amount. Your earnest money will generally be kept in an escrow account to be applied to the purchase price at closing.
Application and disclosures
Time: Generally, about 1 week, if you’ve supplied all required documentation
The loan application
Now it’s time to submit a mortgage loan application. You can use any lender for this step; you aren’t obligated to use the lender that pre-approved you.
You’ll need to supply six key pieces of information:
At this point, you can also talk to a loan officer to discuss how much you plan to put down, and the types of mortgages that may fit your situation. These could be fixed or adjustable-rate mortgages, conventional or government issued (VA, FHA, or USDA).
Once you’ve found the perfect home for you and submitted your loan application, you’ll receive a Loan Estimate within three days.
Your loan estimate
Within three days after your loan application is complete — meaning you’ve supplied all your current income and asset information — the lender will provide a Loan Estimate that outlines the terms of your loan, including estimated closing costs, the interest rate, and monthly payments (which include principal, interest, taxes, and hazard/homeowner’s insurance, sometimes abbreviated as PITI).
It’s important to know that the Loan Estimate doesn’t mean your loan is approved. But it does let you know the loan terms the lender expects to offer you if the loan is approved, and you accept.
If the terms look good to you and you want to move forward with this lender, you must notify them (usually within 10 days of receiving the Loan Estimate) of your intent to proceed.
During this stage, you’ll probably also have the result of home inspections and may be negotiating with the seller to make some repairs.
During this time, you can expect a series of disclosures to be sent for your review and signature. Typically, you’ll use e-signature (e-sign) technology on your smartphone, tablet, or computer to view, download, sign, upload, and return these documents.
While it isn’t required, e-signing documents condenses what used to take days into just minutes. But to use the technology, you’ll need to sign a consent form saying you agree to the process. Some lenders include this consent step as part of their online application.
Follow-up tasks and documents
Time: Varies, and can happen concurrently with other steps
Throughout the loan process, the lender will probably request additional or more current documents. For example, it’s not uncommon for lenders to ask for updated bank statements and income information.
This can be frustrating when you’re anxious to know whether your loan is approved, but try to be patient — and remember, it’s to your advantage to reply promptly. You’ll want to respond to these requests right away, ideally within 48 hours, to keep the process moving.
Be sure to send complete and current documents when your lender asks for additional information.
Time: Varies, based on your closing date
You’ve been sending your lender a lot of paperwork, and you may be wondering where it’s all going and what’s happening with your loan.
Loan processing can take much longer than most borrowers would like, but it pays to be patient.
Most likely, your file is in the hands of a mortgage loan processor. It’s their job to ensure all documents are present and accurate, clarify any discrepancies, and ask for additional information needed.
Because time is elapsing, you may need to send new pay stubs or bank statements, so the lender will consider them “current” on your closing date.
When your loan file is complete, it’s sent by the processor to an underwriter who will verify your identification and credit history, and make an assessment of your financial situation, which includes verifying your income, cash reserves, equity investments, financial assets and more.
Time: About 2 weeks, if all the information you’ve supplied is still current
The underwriter may assess your mortgage application manually or run it through an automated system for approval. Many lenders adhere to underwriting guidelines from the government-sponsored enterprises (GSEs) — Fannie Mae and Freddie Mac — which purchase mortgages in the secondary mortgage market. In most cases, GSE guidelines require a maximum loan-to-value ratio of 97%, a credit score of 680 or higher, and a debt-to-income (DTI) ratio of 36% or lower.
Stay in touch with your lender during the loan decision phase and notify them if anything related to your income or credit changes.
The underwriter will generally make one of three decisions about your loan:
If your loan is approved
When all underwriting requirements are met and your loan is approved, you’ll often receive a commitment letter, indicating your loan program, loan amount, loan term, and interest rate. At that point, certain inspections and other activities need to happen, including a final pull of your credit report, an appraisal, and a title search.
Final credit check
When the lender pulls your credit, it’s important that your credit score and revolving debt payments haven’t changed much. In other words, don’t make any large purchases that could raise your DTI or lower your credit score once you’ve applied for a mortgage.
The lender will order an appraisal to determine if the amount you’ve offered to pay for the property is appropriate based on the home’s condition and comparable homes (or “comps”) in the neighborhood.
If the home appraises at the sales price, everybody’s happy.
If it comes in too low, the seller may need to lower the price to the appraised value to keep the deal moving forward, or the lender may be able to dispute the appraisal. Talk to your loan officer and real estate agent about the best approach for your specific situation.
The lender will also order a title search to make sure the property can be legally transferred. A title company will check for any claims, liens, easement rights, zoning ordinances, pending legal action, unpaid taxes and restrictive covenants.
If the property is clear of these prohibited encumbrances, the title company issues an insurance policy that guarantees the accuracy of its research. Often, two policies are issued, one to protect the lender and one to protect the buyer. Owner’s title insurance is generally optional and not required.
When these activities and all other required actions or inspections are complete, the underwriter gives final approval. This means you’re “clear to close.” (Congratulations!)
Learning you’re “clear to close” is cause for celebration.
Once the closing has been cleared, a closing agent will review instructions and requirements from all parties involved and the legal and loan documents. They will assemble charges, prepare the closing statements, and schedule the close.
If your loan is approved with conditions
This means the underwriter has a question (or a few) that must be cleared up before they can approve your loan. You might need to explain where money in your bank account came from if it wasn’t from your regular paycheck, or maybe pull a document that’s aged during the review time, like a bank statement that shows your current balance.
Once you’ve addressed all the conditions, the underwriter will either give final approval or deny your loan.
If your loan is denied
There are many reasons a loan application could be denied. For example, if your employment status or credit situation changed after you applied, that could be the cause. Talk to your lender to find out the specific reasons your loan was denied.
Time: Generally, about 2 hours
An escrow or settlement agent will oversee the close. Under the TILA RESPA Integrated Disclosure rule (TRID), also known as the Know Before You Owe mortgage disclosure rule, the lender must provide a Closing Disclosure at least three business days before you’re scheduled to close the loan. Use this time to compare your final terms and closing costs to those from the lender’s Loan Estimate and ask any questions you have.
Signing the documents
The seller and buyer can sign documents at different times, or together. In any case, the seller signs the deed and closing affidavit. The buyer signs the new note and mortgage, and any other disclosures. The old loan is paid off, and the seller, real estate agents, attorneys and other parties involved are paid.
Closing may take place with the buyer and seller both present, or they may sign documents separately.
After the signing, the transaction documents are recorded in the county where the property is located. Title insurance policies are prepared and sent to you and to your lender.
As part of the close, you will be given instructions on how to pay your mortgage, including the monthly amount you’ll owe and where to send it.
The lender collecting your mortgage payments, called your loan servicer, will usually set up an escrow account on your behalf so property taxes and other payments (such as HOA fees) are paid automatically.
And now you’re officially a homeowner!
If you need money to pay bills or make home improvements, and think the answer is in refinancing, a second mortgage, or a home equity loan, consider your options carefully. If you can't make the payments, you could lose your home as well as the equity you've built up.
Talk to an attorney, financial advisor, or someone else you trust before you make any decisions about borrowing money using your home as collateral.
Early Warning Signs
Don’t let anyone talk you into using your home as collateral to borrow money you may not be able to pay back. High interest rates and credit costs can make it very expensive to borrow money, even if you use your home as collateral. Not all loans or lenders (known as “creditors”) are created equal. Some unscrupulous creditors target older or low income homeowners and people with credit problems. These creditors may offer loans based on the equity in your home, not on your ability to repay the loan.
Avoid any creditor who:
Protecting Your Home and Equity
Here are some steps you can take to protect your home and the equity you've built up in it when you are looking for a loan.
Costs can vary greatly. Contact several creditors, including banks, savings and loans, credit unions, and mortgage companies. Ask each creditor about the best loan you would qualify for. Compare:
Generally, the creditor or mortgage broker will give you a written Good Faith Estimate that lists charges and fees you must pay at closing, and the creditor will give you a Truth in Lending Disclosure that lists the monthly payment, the APR, and other loan terms. If you don't get these d, ask for them. That makes it easier to compare terms from different creditors.
Once You’ve Chosen a Creditor
Negotiate. It never hurts to ask if the creditor will lower the APR, take out a charge you don't want to pay, or remove a loan term that you don't like.
Ask the creditor for a blank copy of the form(s) you will sign at closing. While they don't have to give them to you, most honest creditors will. Take the forms home and review them with someone you trust. Ask the creditor about items you don't understand.
Ask the creditor to give you copies of the actual documents that you'll be asked to sign. The creditor may not have to give you all of the actual filled in documents before closing, but it doesn't hurt to ask.
Be sure you can afford the loan. Do the math. Figure out whether your monthly income is enough to cover each monthly payment, in addition to your other monthly bills and expenses. If it isn't, you could lose your home and your equity — through foreclosure or a forced sale.
If you’re refinancing the original mortgage on the property, ask about escrow services. Does the loan's monthly payment include an escrow amount for property taxes and homeowner's insurance? If not, be sure to budget for those amounts, too.
Before you sign anything, ask for an explanation of any dollar amount, term or condition that you don't understand.
Ask if any of the loan terms you were promised before closing have changed. Don't sign a loan agreement if the terms differ from what you understood them to be. For example, a creditor should not promise a specific APR and then — without good reason — increase it at closing. If the terms are different, negotiate for what you were promised. If you can't get it, be prepared to walk away and take your business elsewhere.
Before leaving the creditor, make sure you get a copy of the documents you signed. They contain important information about your rights and obligations.
Don't initial or sign anything saying you're buying voluntary credit insurance unless you really want to buy it.
Most home equity borrowers have at least three business days after closing to cancel the deal. This is known as your right of "rescission." In some situations (ask your attorney), you may have up to three years to cancel. To cancel the loan, you have to tell the creditor in writing. Send your letter by certified mail and ask for a return receipt. That will allow you to document what the creditor received and when. Keep copies of your correspondence and any enclosures. After you cancel, the creditor has 20 days to return the money or property you paid to anyone as part of the credit transaction and release any security interest in your home. Then, you have to offer to return the creditor's money or property, which may mean getting a new loan from another creditor.
High-Rate, High-Fee Loans
You may have additional rights under the Home Ownership and Equity Protection Act (HOEPA) if your loan is a home equity loan, second mortgage, or refinance secured by your principal residence and if:
You may have additional rights if your loan is used to buy a home (but not for the initial construction of your home, or for a temporary loan of 12 months or less), a home equity loan, a second mortgage, or a refinance secured by your principal residence and if:
If you think your creditor has violated the law, you may wish to contact the creditor or loan servicer to register your concerns. At the same time, you may want to contact an attorney, your state Attorney General's office or banking regulatory agency, or the Federal Trade Commission.
The economy is weird right now. The pandemic has upended daily life for almost everyone, the Federal Reserve is trying to stave off even more dire conditions by lending money for next to nothing, and the unemployment situation remains precarious.
Even so, real estate has remained an unusual bright spot, because homeowners and would-be buyers were generally less affected, monetarily speaking, by the pandemic than renters.
Although the housing market has remained strong, it’s not immune from outside economic forces, including inflation. Inflation essentially is an increase in the prices consumers pay for goods and services.
A small amount of ongoing inflation is considered normal, but the rate of inflation has been rising recently, affecting everything from how much you pay at the pump to the listing prices of homes.
“By keeping interest rates this low for this long, what they’ve done is they’ve created an everything bubble. It’s not just the housing market,” Desmond Lachman, a senior fellow at the American Enterprise Institute, previously told Bankrate.
Compounding the inflationary pressure on housing, the limited number of homes available for sale is pushing prices up rapidly. That low inventory is due partly to pandemic-related construction delays and partly because many homeowners who would otherwise have moved chose to postpone putting their properties on the market during lockdowns.
Taken together, these conditions are favorable for sellers, who are often receiving many offers above asking price, but the market can be extremely frustrating for buyers, who can struggle to make the winning bid.
What to consider if you want to sell your home
If you’re looking to sell your home right now, you shouldn’t have too much trouble. The real issue could be what happens on the other side of the transaction. When you go to purchase your next place to live, you’ll be joining the scrum of eager buyers competing for a limited number of available properties.
What to consider if you want to buy a home
Even in this crazy market, you can still snag a great home if you play your cards right and make sure the numbers work for you. It’s especially important to get preapproved for a mortgage before setting out to look for homes, and make as big a down payment as possible, to show sellers you’re serious and your financials are sound.
Should you wait for inflation to decrease and inventory to increase?
There’s no perfect time to buy a house, so it really comes down to what you’re comfortable with. If the numbers work for you now, and you can secure a mortgage that has monthly payments you can afford going forward, then it’s a fine time to buy if you can make the best offer.
Otherwise, it could be worth it to wait until market conditions favor buyers a little more or see if you can adjust the geographical area or physical parameters of your housing search.
No matter what you decide to do, it’s important to get your finances in order so you’re in as strong a position as possible when you do decide to enter the homebuying fray. If you wait, you can use the time to keep contributing to your savings. Your down payment fund may go farther in a cooler housing market, after all.
Home buyers can make mistakes that could put their mortgage in jeopardy leading up to closing or make them miss out altogether in homeownership.
“Most buyers are so preoccupied with simply saving up for a down payment and getting their foot in the door that they forget about the little details that can trip [them] up,” Michele Harrington, COO of First Team Real Estate, told The Mortgage Reports.
Real estate pros and financial experts point to several of the most common mistakes buyers make, such as financing a car or another expensive item before closing. They may buy new furniture and appliances for their new home on credit. “All of these activities are a big no-no, as lenders will do a final credit inquiry check before closing,” Jim Roberts, president of True North Mortgage, told The Mortgage Reports. “If new debts were added, it could jeopardize the loan approval.”
Also, borrowers may be tempted to max out their credit cards as they try to afford homeownership by saving money. Lenders consider how much you owe relative to your credit limit. For example, if a borrower owes $2,000 on a limit of $2,500, the card is considered nearly maxed out, which will significantly reduce a credit score, Roberts said.
Another big mistake that home buyers often make failing to shop around for their mortgage. “Although many lenders’ rates are very close in price to others, some lenders charge rates that are above average,” Kahri Washington, broker and owner of 1st United Realty & Mortgage, told The Mortgage Reports. “Getting a bad loan with a higher interest rate can be very expensive in the long run, so be sure to shop around and get quotes in writing from several different mortgage lenders.”
A 2018 study by Freddie Mac found that potential borrowers could save an average of $1,500 over the life of a 30-year fixed-rate loan by getting just one additional rate quote when shopping for a mortgage. More quotes can offer more savings; for example, 80% of borrowers who received one additional rate quote while shopping for a mortgage saved between $966 to $2,086 over the life of their loan. Eighty percent of the borrowers who obtained five quotes saved between $2,089 and $3,904, according to Freddie Mac’s report.
For the ninth consecutive week, mortgage rates stayed below 2.9%. But even with historically low mortgage rates, home buying may be following a more typical seasonal pattern of cooling off, Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes on the association’s Economists’ Outlook blog.
“Buyers and sellers typically do not want to move their family in the middle of the school year, and they usually wait until its end so they have more free time for moving,” she wrote. Sales typically drop by 15% between August and September, she said. “Even with historically low rates, it’s normal to see the market cooling off in the following months,” she added. NAR has forecast existing-home sales to drop by 10% in the last quarter of this year.
“While the economy continues to grow, it has lost momentum over the last two months due to the current wave of new COVID cases that has led to weaker employment, lower spending and declining consumer confidence,” said Sam Khater, Freddie Mac’s chief economist. “Consequently, mortgage rates dropped early this summer and have stayed steady despite increases in inflation caused by supply and demand imbalances. The net result for housing is that these low and stable rates allow consumers more time to find the homes they are looking to purchase.”
Freddie Mac reports the following national averages with mortgage rates for the week ending Sept. 9:
Freddie Mac reports average commitment rates along with average points to better reflect the total upfront cost of obtaining the mortgage.
Americans’ home equity reached another record high in the second quarter, according to a new report by mortgage data firm Black Knight. That metric, along with still-low mortgage rates, sets the stage for a continued boom in mortgage refinancing.
Black Knight says “tappable home equity” — the equity homeowners could borrow against while maintaining a loan-to-value ratio of less than 80 percent — jumped to a record $9.15 trillion at the end of June.
“U.S. homeowners with mortgages gained another $1 trillion in tappable equity in the second quarter alone,” says Ben Graboske, Black Knight’s president of data and analytics. “This is by far the strongest growth we’ve ever seen and equates to some $173,000 in equity available to the average mortgage holder, a $20,000 increase in just three months.”
The surge in home equity goes hand in hand with soaring home values. Prices are rising in nearly every part of the country, as shortages of homes for sale lead to bidding wars by desperate buyers. Meanwhile, the average rate on a 30-year fixed-rate mortgage fell to 3.03 percent last week, just 10 basis points above the record low, according to Bankrate’s national survey of lenders.
Cash-out refinances come back strong
In boom times, record levels of home equity open the possibility of using a refinance to extract cash from your home to fund renovations or pay down higher-cost debt. As the housing market has powered through the coronavirus recession, lenders have proven willing to sign off on cash-out refinances.
Black Knight says cash-out refis are soaring. The 1.1 million cash-out refinance loans originated in the second quarter made up fastest quarterly pace in nearly 15 years.
What you can do if your mortgage rate is too high
Does it make sense to refi? Here’s how you can tell: