What the most recent rate hike means

Rent vs. Buy Calculators

When discussing renting versus buying, it’s helpful to have tools to calculate the differences. Luckily, our friends at JVM Lending have hooked us up. Here is our edited version of their information:

Imagine having a borrower who is paying $1,800 in rent who is very nervous about his or her potential payment increase after purchasing a home. These calculators can show how their “effective payment” will go down when tax savings and appreciation are accounted for.

Now, Trulia and Freddie Mac both offer great “rent vs. buy” calculators that will help with this. Even with modest appreciation (like 3%) and tax rate (28-34%) assumptions, these calculators can clearly show how much better off people are when they buy.

For example, according to our imaginary borrower, the Trulia calculator tells us her net housing costs will actually be 3% lower after she buys a $500,000 home with 20% down. These tools can help potential  buyers get off the fence by showing why it’s a better investment to buy a home and  accurately differentiate between buying and renting.  I like to look at as you are paying yourself, not a landlord.

 

Supplemental property taxes can confuse a buyer

Have you recently purchased a home and been thrown off by getting bills about “supplemental property taxes?” Our friend Jay Vorhees at JVM Lending breaks it down for you:

Supplemental property taxes often create significant confusion for new homebuyers. When someone purchases a property in California, the County Assessor is required to immediately re-asses the property for property tax purposes. This re-assessment usually correlates to the purchase price and can take up to six months to complete.

JVM Supplemental property taxes

When a home is purchased, property taxes are usually based on the property tax bill of the current owner or seller. But usually, their property tax bill correlates to the price the seller paid for the property – often much less than the buyer is paying. Then, buyers mistakenly believe the property tax payment estimate when they purchase is an accurate reflection of their actual property tax. Usually, that’s false.

Anywhere from three months and beyond, buyers should expect a “supplemental tax bill” from the County Assessor. Even if a buyer has an escrow or impound account, they have to pay for the supplemental taxes, which can be sizable. As soon as a supplemental bill is received, a buyer should contact their loan servicer.

Also, when new buyers refinance into a new loan less than a year after a purchase, supplemental tax bills can cause confusion. Even if a borrower is refinancing into a lower rate, the housing payment can appear to increase. This is because lenders are basing the new housing payment on the new property tax liability, while borrowers are still basing their housing payment on the seller’s property tax liability, which is too low.

The climbing stock market’s effect on housing

Did you know interest rates climbed about 1/4 of a percent in the aftermath of Donald Trump’s election? This was the biggest single-day rate increase in three years.

trump-rates

Despite being told over and over again that a Trump victory would result in lower rates, the opposite has happened. In a recent Forbes column (Dec. 6 issue) Gary Shilling said he thinks the markets have massively overreacted to Trump’s election. He points out that the root causes of weak economic growth (that have kept rates low) will remain. He also says that Trump’s proposed tax cuts and stimulus programs will be watered down by Congress; the expectations of an economic boom are overblown. If he is correct, this means rates may fall again.

images-2

This now begs the point: nobody can predict anything in this market. So, if you have been thinking about buying or selling, is it time to get off the fence? Rates are still historically low, but for every 1/2 percent increase in rate on a $500,000 loan, the payment increases about $140 to $150 (and even less after “tax benefits”). Should buyers and borrowers wait to see if rates fall before moving forward with transactions? Absolutely not. Borrowers can easily take advantage of no-cost refi’s if rates fall.

500_f_112661321_cpogf2tpziyed8z81tkb9wpun9mfazw3

If you do decide to buy or sell, give me a call, I would love to help you navigate the process!

Will the Presidential race affect our mortgage rates?

I thought this might be interesting to share. Traditionally, there is very little on the market as we enter the holiday season. The last couple years, sellers listing in December and the beginning of January tended to have multiple offers because there isn’t much inventory (meaning, people don’t like to have Open Houses or showings during the holiday season as they are usually entertaining family or friends).

With the Presidential election around the corner, many agents are getting the feel the market has softened. It will be interesting to see how this year’s election will affect our market. Here are some insights from my friend Jay Vorhees at JVM Lending:

trump-clinton

Trump = Lower Rates; Clinton = Same or Higher Rates

We have blogged several times about how rates are not held artificially low prior to major elections. It is a myth that they are. Presidents, in fact, like to see proof that the economy is getting stronger, and these signs usually push rates higher. Presidents hope for positive signs like GDP growth, job growth, lower unemployment, etc. These signs usually push investors into stocks and out of bonds, causing rates to go up.

(Quick reminder: When investors demand more stocks, rates go up; when investors demand more bonds, rates go down.)

With respect to Donald Trump and Hillary Clinton, it is all about “stability.” Stock market investors like “stability” as much as they like growth. Worries about instability or shakeups send investors away from stocks and into the safety of bonds (pushing rates down).

Investors believe that Clinton will follow President Obama’s course, and this is perceived as “stability.” So, signs that Clinton might win will probably keep investors in stocks, which will ultimately keep rates largely the same.

Investors are not sure what Trump might do, so signs that Trump might win will probably push investors to the safety of bonds, pushing rates lower.

This is very similar to the uncertainty the Brexit vote created and its influence in pushing rates lower.

Why Are the Interest Rates So Low?

buy a houseThere have been a lot of articles about interest rates and the stock market recently. First, the German 10-Year Government Bond Yield has hit negative territory. In layman’s terms, this means that Germany gets paid interest to borrow investors’ money, the same thing is happening in Japan. Thus, Germany and Japan are getting paid to borrow money.
On the surface, this seems silly. Why would investors take a negative yield or pay somebody to borrow their money? Because it’s safe. Investors will put money wherever they can in order to ensure they can safely recoup it in the future.
How does this help the real estate market? First, the demand for bonds keeps rates very low, making real estate leverage much cheaper (The Brexit will also have an impact, which will be a different post). When investors have a lot of cash and are looking to put it somewhere, real estate investing becomes a good place to do so.
According to the National Association of REALTORS®, the number of homes that went under contract to be sold in April was the highest in more than a decade. It was also the strongest month in more than eight years for new home sales – with a 16.6% jump from the previous month. We do tend to see a bit of a lull in the summer as families head off for vacation.
If you are a buyer, it might be a great time to jump into the real estate market! Give me a call if you would like some help.

How Much Down Payment Does a First-Time Home Buyer Need These Days?

JVM Lending LogoThe idea of saving enough money for a 20 percent down payment to buy a home in the Bay Area can be a daunting thought, especially because our average prices are so much higher than the rest of the nation. How can 20 or 30-something’s save that much money and still afford rent and basic living needs?

I  posed this question to my favorite lender Jay Voorhees, Co-Owner at JVM Lending.

“Buyers often need less money than they think to buy a home, as long as their loan amount is lower than the conventional and FHA maximum of $625,500. Buyers can either take advantage of FHA financing and buy with as little as 3.5 percent of the purchase price for a down payment, or with conventional financing, purchase with as little as 5 percent down. Both options above, however, require mortgage insurance, or an additional fee that borrowers have to pay every month when their loan-to-value ratio is over 80 percent.”

What does that mean from a real estate perspective? With interest rates and inventory low, it means you will probably be competing for a property. The good news is most buyers will have similar financing; however if one has 20 percent down or all cash, that may be the deciding factor on whom the seller selects.

What can buyers do to avoid mortgage insurance? According to Jay, put down 20 percent, or 10 percent down and get a second mortgage on top of their first mortgage (“80/10/10” financing). This option requires excellent credit and very low “debt ratios.” Jay says that many borrowers are forced to use FHA financing no matter what because FHA is much more flexible with respect to credit and debt ratios.

Jay had a couple final thoughts on the topic:

JVM Lending Co pic
The JVM Lending team in Walnut Creek (photo courtesy JVMLending.com).

“Buyers can also get gifts from relatives to use for down payment funds or closing costs. Buyers cannot use borrowed funds for a down payment. Whoever provides “gift funds” will have to provide a signed “gift letter” attesting to the fact that the funds are in fact a gift.”

And:

“The total closing costs for a purchase can range from $6,000 to $18,000, depending on the type of loan, the loan amount, and the place of purchase (some cities have high “transfer taxes”). If gift funds are not available and buyers are tight on cash, they can, however, ask their lender to increase their interest rate in exchange for a credit to cover some or all of their closing costs.”

If you have specific questions or would like to discuss your options and want to speak with JVM Lending, call them at (925) 855-4491 and ask for Jay, Heejin (both owners), or one of their talented associates. They are in downtown Walnut Creek at 1850 Mt. Diablo Blvd., Suite 530. Give them a call and and tell them you saw this blog on WalnutCreekLifestyle.