Thursday, July 26, 2018

Will $120 a Month Kill the Deal on a $1,000,000 Home Purchase – Interest Rate Facts






Morgage interest rates are going up. We have finally come to the end of the amazing and historically unique time when mortgage interest rates on 30-year fixed mortgages hovered around 4%, even dropping to under 3.5% for a while. This aberration did not result In a massive influx of new home purchases or of new home building. The reasons for this are many and varied, but while the US enjoyed these rates, the main benefactors were existing homeowners who refinanced.

Simultaneously, the lack of new residential construction and the inclination for seniors to age-in-place, created shortages in available homes and apartments to buy or rent, driving prices and rents up rapidly.

Now the pundits and some in the real estate industry are panicking over the interest rate increases, with mortgage interest in the late Spring of 2018 reaching over 4.75%. In the historical context, these rates are still very low. To give a bit of context:



From 1900 – 1967 rates were narrowly confined between 5% and 6%, except for a brief time at the end of WWII.

From 1967 – 2007 Rates ran up starting in 1967 all the way through the housing bubble bust of 2007. During this period rates were well above 6%, climbing as high as 17% in the credit crisis of 1982.



2007 – 2018. The housing bust, bank debacle, great recession combination drove mortgage interest rates to unimagined lows for over a decade. With the economy getting stronger, the Fed has seen fit to increase Fed Funds Rates and is starting to sell off assets purchased to keep the economy from crashing. The net intended affect is to send all interest rates higher to stave off potential inflation above the Fed goal of 2% annually.



Thus far in the 2018, we’ve seen rates increases that the headlines have described as the fastest increases in history. There seems to be some panic around all this. However, there is every reason to believe that rates will eventually settle into the 5%-6% range that seems to “normal” outside of extenuating circumstances. 

Will we have extenuating circumstances? Who can know? The primary driver of mortgage interest rates is bond interest rates and Federal Reserve rates. Some would argue that we have a bond bubble caused by massive borrowing in the government and public spheres. If that we to bust, we could see bond rates go much higher. Very few are expecting that in the near term.

The economy could accelerate out of control, creating inflation, and Federal Reserve efforts to slow the economy down using higher interest rates. It is hard to find anyone predicting economic growth above 4%, and most seem to agree that the economy could grow quite a bit without serious inflation.

What does all this mean to the average citizen who owns a home or is contemplating purchasing a home?

The big worry is that higher interest rates means that the cost of ownership goes up. But while every decision about purchasing can be affected by small incremental changes, the increases here would seem unlikely to do much damage in the overheated real estate market.

As noted in the headline, each increase in the interest rate of 0.25%, from say 4.5% to 4.75% will increase the payment on a $500,000 home by $60 a month or about 0.025% of the payment of $2450 (including property tax, insurance, etc.) Another way to look at it is that the increase of an entire 1% will increase the payment by $240.
If this buyer was maxed out on their ability to pay, either by their own budgeting or by the mortgage underwriting, they would need to drop their expectations to a home of about $450,000. For the first time homebuyer this could be an issue and could drive down prices by some amount.

However, a huge part of the market right now is all cash deals, high-roller tech employees, and homeowners looking to move up or down. The first group has high incomes, the second group has flexibility regarding down payments. Having said this it would be pollyannaish to think that a 1% or more move will have no force in home pricing.

The mitigating forces that are likely to keep home prices moving up

Demand is high, increasing, and likely to continue to increase.
Supply is low, decreasing, and unlikely to increase compared to supply
Current home prices have not retaken 2007 levels when adjusting for inflation.

If you’d like to review the details of those three assertions, please go here.

Assuming those three statements to be true, the upward force on prices has been at the rate of about 7% per year. A ballpark guess might be that the interest rate increases might slow that in half for a couple of years. But there’s one more mitigating force that needs to be considered.

People tend to panic, and the panic in this case would cause folks to try and get the today rate at 4.75% before it goes to 5%, and under one theory of investing, they would be correct. This theory assumes that to the extent that you wish to own, and that you intend to own for many years into the future, even if you sell and buy one or more times in your life, what you pay to make your initial purchase will not be that consequential.

Moreover, if interest rates continue up and home prices, too, you’ll be thrilled at your decision. If interest rates drop in the future, you can refinance. If home prices drop, you only lose if you sell and don’t repurchase at an equally deflated price.

Final recommendation

If you want to own your own home, or if you want to buy a different residence, don’t fret the price or the interest rate. Make the wisest decision regarding your needs, the neighborhood, and your ability to pay. The rest will sort itself out over time. 

To learn more about current rates or to arrange for a fully underwritten mortgage prior to looking for a home, call Bill Rayman today at (424) 354-5325












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One sage said: “It is easier to save money than it is to make more.” That may or may not be the case for you, but if you follow the steps below, I can pretty much guarantee you that you will save at least $250 a month and maybe $500 or more. How many more hours would you have to work each month to make that much? How much more house could you afford? What would it do for your credit report.

  1. Get rid of recurring charges you don’t need anymore – Go through every bank statement and every credit card statement. Look for recurring charges that you have forgotten about from online resources, magazine drives, newspaper subscriptions, and more. We’ll assume you find one of these at $10 a month. You might find way more.
  2. Call your cable TV provider. Tell them you are considering going off grid or switching to satellite. If you have satellite, call the provider and tell them you are thinking of switching to cable. Watch the dance begin. You are very likely to end up with at least $20 or more in savings. Now call the competition with your new rate and see what they will do. You are likely to end up with the same or better rate and some kind of promotional money or free stuff for switching.
  3. Go off the grid on cable. Between Apple TV, Hulu, NetFlicks, RedBox, Amazon Prime, and other TV offers, it is hard to justify any upgrades to basic service on cable or satellite. The savings for getting off of cable could easily be $50 or more.
  4. On to your cell phone, internet, and land line providers. This gets a bit more complicated, but the cost of all of this is dropping fast. By changing providers, bundling, unbundling, and just shopping, you are very likely to end up saving another $30 a month and improving MBPS. Recently I tried to end my land line service, but the bundle cost less with it that without. 
  5. Saving on your utilities. The water company (at least in California) will be happy to help you cut down your water use. Check with your supplier to find out how to get free or reduced costs products to reduce use in bathrooms and irrigation. Then check to see what the recommended water needs are for your yard. The electric company will help you with lighting and other ways to save on electricity. LED lights are fantastic and save a huge amount of money. Switch appliances to natural gas to save even more. Saving $25 or more per month for these changes should be a cinch.
  6. Budget. Keep a penny by penny ledger of all expenses for three months. There are many online tools that can help with this process. Once you see where the money is going, you will almost certainly be able to find ways to cut that won't hurt even a little bit. We’ll put this down as $25.
  7. Shop your car insurance. We have 4 drivers on the policy, so your results may vary. Don’t forget to check Costco or AAA. It is not unusual to save $100 or more. You should also review your other insurance policies annually to make sure you have the coverage you need, and to see about savings on rates. Life insurance is another very likely savings point.
  8. Speaking of Costco. The savings by purchasing your groceries and other items at Costco are real and significant. Costco marks up all items by 15%. What they buy for $10.00, you pay only $11.50.  Most discount department stores mark up 50% to $100.  So you would pay $15.00 - $20.00. I know you have to buy huge quantities. Find nooks all over the house for storing commodities. Buy and extra freezer. A one-time small cost for huge savings. Multiple online sources report Costco as cheaper than Walmart, Sam’s, and Amazon Prime. Imagine the savings compared to your local chain market. Potential savings of at least $25 per month per person.
  9. Amazon Prime. When it isn't a Costco item, why not buy on Amazon Prime?!? Pricey toothpaste, supplements, household items and more are almost always cheaper on Amazon than at Target or CVS. And there is no freight and no auto expense. When you need more, you have a record of what you bought. Savings of another $10 per person per month.
  10. Get rid of any high interest credit card. Use the savings from these other suggestions to first pay off all credit cards with interest rates higher than your mortgage interest rate. The only good use for a credit card is to build credit. Pay them off every month. Or get an interest free credit card and transfer all balances into the interest free card. If you owe $10,000 on credit cards that charge interest and you put this on an 18 month no interest card, you’ll pay 3% for the transfer ($300) and save at least $1800 if you pay the card off in the 18 months for a savings of $100 a month. Most families will save at least $25 per month. If you owe more than that, try a credit union for a low interest loan. If you owe a lot more, consider a HELOC.
  11. Take your lunch to work. Eating out a lunch is expensive and usually not great for your waistline. A normal lunch your make at home will cost under $2.50. Savings of $100 a month and maybe 10,000 calories.
  12. We promised not to suggest changes to lifestyle, but if you want to add another huge amount of savings, get rid of one expensive, useless or worse, habit. Smoking, buying booze in bars, daily Starbucks, fast food, gambling (including lotto.)  This could be the biggest savings of all. An expense of just $10 per day is $300 a month.

We would love to hear from you in the comments. How much did you save? What will you do with the savings. If you are interested in purchasing residential real estate for any purpose, primary home, second home, investments, or some combination, Bill Rayman can help you secure the exactly appropriate mortgage for your needs. Call Bill now at (424) 354-5325