Where Did the Assumptions Go?
Mortgage assumptions have not been a practical matter for the last 30 years because mortgage rates have been on a steady decline. Even if the seller had a rate lower than the current rate, the new purchaser must qualify to assume the loan.
In the case of conventional loans, the lender has the right to increase the rate to the current rate which neutralizes the reason for assuming the loan. This change took place in the early 1980’s when lenders added due on sale provisions so lower rates could not be assumed.
FHA and VA loans can be assumed at the existing rate with the provision that the purchaser qualifies for the loan. This could be an advantage if the rate on the loan to be assumed was lower than the current mortgage rate for FHA or VA and the buyer is going to owner-occupy. Unfortunately, investors are prohibited from assuming FHA and VA loans.
Besides the obvious advantage of a lower rate which would have a lower payment, the closing costs are lower on an assumption than originating a new loan. Another benefit is that the loan will be further into the amortization schedule than starting a new 30-year loan which means it would be retired sooner while the equity is also growing faster.
The current rates are close to one-percent lower than they were a year ago, so, assumptions are probably not a method of financing a home purchase in the near future. The Freddie Mac forecast expects rates to remain low, possibly at a yearly average of 3.0% in 2021.
Mortgage rates have remained low since the Great Recession even though experts anticipated they would start trending upward. If rates increase, especially rapidly, assumptions of FHA and VA loans could easily be a tool that buyers and real estate professional alike will be employing. For sellers with an assumable loan at a below market rate, it could add to the value of the property as well as the marketability.
Vacation Home Sales Up
Vacation Home Sales Up 44%
Vacation home sales are up 44% year-over-year according to the National Association of REALTORS® based on sales during the July to September period. Not only are the number of units up, but they are also selling faster than in previous years.
On a national basis, 72% of existing vacation homes closed in October were on the market for less than one month.
The increased desirability and affordability of vacation homes, according to the National Association of Realtors, seems to be influenced by the pandemic and low mortgage rates. The ability to work from home seems to be contributing to this increase.
Freddie Mac reports the average commitment rate for a 30-year, conventional, fixed-rate mortgage decreased to 2.83% in October compared to the aver commitment rate for all of 2019 which was 3.94%.
There may also be a safety factor involved with these decisions to purchase vacation or second homes. Contagious diseases flourish more in highly populated areas like big cities and suburbs. The locations of the vacation or second homes are generally in areas with less residents.
The slower pace from the city may also add to the appeal of considering second homes. Proximity to the mountains or water, whether it be the ocean, rivers or lakes, have become a lure to people who realize that if where they work doesn’t matter, they can select a place where they want to be.
Historically, Americans on the east coast left the cities during the 1793 yellow fever epidemic. The same migration took place in the mid-19th century during three waves of Cholera and Scarlet fever.
Trends have yet to determine whether some of these new vacation home buyers may consider moving permanently or may reconsider the decision after the pandemic. Currently, it does have broad-based appeal and offers a lot of flexibility to owners who can afford it.
A home inspector is another key professional involved in a real estate transaction. Many times, the sales contract will have a provision that allows the purchaser to have inspections made to discover issues that are not readily apparent or have not been disclosed by the seller.
It is important to have a qualified individual perform the inspection. Regardless of whether a license is required, buyers should ask about the inspector’s experience, training, years in business and if they are familiar with the area and type of property involved.
Membership in professional associations can indicate an inspector’s commitment to education and training. References from both customers and agents are helpful and may be more meaningful. You are encouraged to call the references, especially, if you are concerned about any specific areas.
Errors and Omission insurance is intended to cover mistakes made during an inspection. It would be good to find out if the inspector has this type of insurance and how mistakes are handled or if omissions are made.
Find out exactly what is included in the inspection and what will trigger the inspector to recommend that you get an opinion by a specialist. They should be able to provide you with a sample report so you can see the detail with which the items will be explained. Ask if items that need attention will also be documented with pictures.
Some inspectors will allow you to accompany them during the inspection. They will be able to point out their concerns and answer any questions you may have about different things. An inspection can take two to three hours depending on the size of the property.
Generally, there is a time allotted in the sales contract for the inspections to be made and not completing them in a timely fashion could waive your right to use the contingency. Your real estate professional will be able to guide you through this process. Call us at 503-385-1518.
First Time Home Buyers
First Things First
If you are making a particular meal for the first time, it is essential to have a recipe so that it turns out the way it should. Knowing the ingredients and preparation can guide you through the process.
Buying a home is really no different than making a new recipe. There are certain things that need to be done, many of which should occur in a particular order to save time, money, effort and disappointment.
Your first inclination may be to start searching the Internet for homes and schedule some showings or possibly visit open houses. Even though this is very gratifying, it shouldn’t be done until you have gone through the preliminaries.
Buying a home for the first-time implies you haven’t been through the process before and even though, you may have a rough idea of what needs to be done, selecting the right agent in the beginning will give you the benefit of years of personal and professional experience that can help you avoid some of the common mistakes made when buying a home.
This agent can direct you to find the other team members that are required like the lender, title company, inspectors and others. Each member of the team has an important role to play that if not done correctly, could cause delays and possibly, jeopardize the transaction.
An important step is getting pre-approved so that you’ll know exactly what price mortgage and home you’ll qualify for. This may even allow you to lock-in a mortgage rate before you contract for a home. The pre-approval could also prove very helpful in negotiating with the seller by removing some of the doubt in their mind regarding an unknown buyer. Another advantage to pre-approval is that if you are competing with multiple offers, you have the advantage of being more of a known commodity.
You’ll need to assemble some documents for the lender including pay stubs from the past two months, W-2’s from last year, proof of additional income, tax returns for the past two years, bank statements for the last three months, list of all open credit accounts and balances, copy of driver’s license and history of residence for past two years.
Buying a home is one of the most important decisions in your life and it should be done with care and research. When all the things are done in the right order, finding the “right” home is just like following a recipe. For more information, download this Buyers Guide that includes great information to help you through the process and call us at 503-385-1518.
Reducing Housing Costs
Cutting Your Housing Costs in Half
Cutting the price will generally bring buyers of anything out of the woodwork that were not serious before. Some renters could easily lower their monthly cost of housing by half or more by purchasing a home with all the financial benefits that come with it.
The most obvious thing in today’s market is that the mortgage payment could be less than the rent the tenants are paying. With mortgage rates hovering around 3%, this is a major factor of the savings.
The two other major contributing factors are appreciation and amortization of the mortgage, neither of which benefit tenants continuing to pay rent. According to the FHFA House Price Index, home prices rose 5.4% from July 2019 to July 2020. There were 400,000 less homes on the market during the summer of 2020 than the previous summer which is influencing appreciation.
With each payment a homeowner makes on their mortgage, a portion is used to reduce the principal amount owed. This is like a savings account for the owner because it lowers their unpaid balance and increases their equity.
The equity becomes an asset that can be accessed by doing a cash-out refinance or a home equity line of credit once the equity has reached 80% loan-to-value.
A $300,000 home purchased with an FHA loan at 3% for 30 years would have a payment of approximately $2,013 including principal and interest, taxes, insurance, and mortgage insurance premium. If the tenant were paying $2,400 in rent, this would be a savings of almost $400 a month.
The monthly principal reduction would average $500 a month for the first year which would lower the net cost of housing. The other major item to consider would be the appreciation. Assuming, in this example, the home was appreciating at 3% annually, the monthly appreciation in the first year would be $750 which would further lower the cost of housing.
|Total House Payment||
|Less Monthly Principal Reduction||
|Less Monthly Appreciation||
|Plus Estimated Monthly Maintenance||
|Net Cost of Housing||
In this example, it would cost over $1,400 per month more to rent than to own.
A different approach to this would be that the equity in this home in seven years would be $121,579 based on appreciation and principal reduction. If the same person continues to rent, there would be no equity build-up.
If you’re curious as to how much you could cut your housing cost, go to the Rent vs. Own or contact your real estate professional.