Buy Now or Wait, How Interest Rates Trump Price!!

Uncertainty as to whether prices will continue to fall has to be one of the most common causes of buyer procrastination.  Paying too much wouldn’t be a smart thing but price isn’t the only factor to consider.  Interest rates have as much effect on housing costs as price.

A small increase in mortgage interest rates can offset a significant drop in home prices.  If the price of the home were to come down by 5% but the interest rates were to go up by .5%, the payments might be close to the same.

In the example below, if the price of $175,000 home went down 5% but the interest rate went from 4.75% to 5.25%, the payments would actually be $4.98 more at the cheaper price.  If while the buyer was waiting for the home to decrease 5% and the interest rate increased by 1%, the payments would actually go up by $55.30.

Then, of course, there is always the possibility that the price of the home doesn’t go down but the rate does go up by 1%.  The payments would be $104.58 more per month, each and every month for as long as you have the mortgage on the home.

You, of course, should consult with a mortgage professional and be comfortable with your ability to get financing and comfortable with all the numbers.  I can suggest several very professional and reliable mortgage brokers to interview.

As a Residential Finance Consultant, I will brainstorm with you to help you make better buying decisions and help you run the numbers.  A home is a place to feel safe and secure, to raise your family, share with your friends and an investment.  It’s an investment in your family and your future.  You owe it to yourself to check out the real numbers in your market because every market is different.  In the Portland area, even every neighborhood is different!

What is the MCC ( Mortgage Credit Certificate) program? The program is open to all borrowers and is trying to help more buyers enjoy the benefits of home ownership. Buyers need to meet certain income and geographic critera similar to the Oregon Bond program, but can benefit from a 20% tax credit for as long as they keep the home or mortgage with certain restrictions. Again, as an example, on a $200,000 loan amount with a 5% 30 year rate, the annual interest deduction is $10,000.00. A 20% credit would equal $2,000 or $166.00 per month. That $166.00 per month can be added to income to help the borrower qualify with lower debt to income ratios or help finance a larger home.  I can direct you to a lender who can evaluate your qualifications for this program. For more information on MCC, click here!

By the way, the difference between a tax deduction and a tax credit means money in your pocket.  A tax credit lowers your tax bill dollar for dollar. A deduction shaves money off your taxable income, so the value depends on your tax bracket. For example, if you’re in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter which bracket you might be.

It’s one thing to have the down payment and not qualify because of credit scores but in today’s tough financial environment, it may be even more frustrating to have good credit, income and job stability without the down payment.

The 2010 NAR National Housing Pulse Survey states that 79% of respondents identified the down payment and closing costs as obstacles to homeownership.  73% express a lack of confidence in getting approved based on a concern that banks have made it too hard to qualify for a home loan.

Most buyers depend on the savings or the proceeds from the sale of a previous primary residence for the down payment.  The savvy agent can recommend some other legitimate sources such as a gift from a relative or friend that doesn’t have to be repaid.

Another frequently overlooked source of down payments could be the buyer’s IRA.  If neither buyer has owned a home within two years, each may withdraw $10,000 from their own IRA to be used to buy a home.  The money must be applied within 120 days from the withdrawal.  The 10% penalty normally associated with early distributions is avoided but it will be subject to income tax since it was exempt the year it was deposited into the IRA.

Full disclosure of the source of the down payment needs to be made to the lender.

What would you sacrifice to own a home, whether it be in Portland, Oregon or elsewhere?  What are the motivations that drive people to purchase a home base in good markets or challenged markets?  I suppose it’s “home and hearth”, security for the future, a place to call you own, a place to raise your family, a place to invite your friends, a place that reflects your individuality through decor, landscaping, more!  These are all huge emotional motivators and I’ve often said that “people buy homes based on the fantasy of their lives, not the reality”.  In other words, the choices that the average buyer base their home purchase on are much more emotional than practical.

However, that does not discount the absolute practical nature of homeownership!  There is stabilization of living costs benefits (rising rents vs a 30-year fixed mortgage).  There are tax benefits (writing off interest and taxes).  There are equity benefits (gaining equity through amortization and appreciation).

The motivation is so powerful that buyers are willing to sacrifice to make their dream come true.  According to the 2010 NAR Home Buyers and Sellers Survey, 41% of first-time buyers cut spending on luxury or non-essential items.  They also cut spending on entertainment, clothes and even cancelled vacation plans.

I recently posted an article on “Choosing your Real Estate Broker“, so I thought I would follow with some tips on choosing a Mortgage Broker.  Most of us need to borrow money in order to facilitate to purchase of our next home.  So, exactly how does this process work for you?  We all want the best rates, the best closing costs and a responsive loan officer.  Like the rest of life, some of this can often be a compromise.  My recent experience with lending institutions is they can be overworked.  As you are shopping loans, remember their promises are only as good as their service.  You have little or no power with a long-distance lender.  They are NOT trying to establish a relationship with your local Realtor or client.  They are simply trying to entice your immediate and “once upon a time” business.  Know that fact going in and deal accordingly.  All I’m suggesting is that if at the last minute there are “problems” or “last minute conditions”, I have no power.  Locally, a lender is attempting to establish a relationship with the Realtor (with hopes of repeat referrals).  If they are enlisting your business from afar and offering you amazingly competitive results, be aware!  That does not mean they are not legitimate.  I’d just want to give a little leeway for a late closing, some last minute conditions on the loan or other “unforeseen” problems.  You must go into each real estate transaction with a certain amount of faith.  However, “Knowledge is Power” and the more you know, you more you know to ask.  Thus, you can offset the inevitable problems or hesitations in the process of buying a home.

I would be happy to suggest several local mortgage brokers so you could shop your loan.  I always suggest shopping for interest rates AND closing costs, etc.  It’s not easy.  Remember, the lender “always wins”.  In other words, they have to make money or they won’t make the loan.  So, decide what you need at the moment.  Do you need a lower interest rate, as you know you’ll be in the home for quite a period of time or you may want a lower interest rate adjustable rate mortgage because you believe you will move up, down or around in the near future?  Or, do you need a break on the closing costs, because you know you’ll be “moving on” in a certain amount of time.  All of these considerations are realistic.  A good loan officer can help you resolve how long you would have to hold the loan to make up the difference between a higher interest rate vs more loan costs.

After you make your decision to go forward with a lender, do not stop there,  be vigilant, keep a log of your conversations (especially if they are not local) and the names of the people who are servicing your loan.  This will help if there are last minute issues to resolve.  I will always be as “involved as you want me to be”.  The money decision is a very personal decision.  If it’s a local loan officer, I could have some power if there are last minute problems.  If not, I’ll always do “what I can do”!  When it’s over, I want you to be happy with the transaction, not just “done”!  That means, getting what your research shows is a “good deal” on borrowing money and it also means getting your deal closed as promised!!! 

Let me know what I can do to help!!!!!

I’m not scared by lions and tigers and bears, either…oh my!  That could be because I don’t encounter them on a daily basis.  But, the entire process of buying real estate is certainly convoluted these days and I do encounter that daily.  I’ve always contended that working with less than professional Realtors, inspections and possession could be the “stickiest points” in any real estate transaction.  However, real estate deals are like “walking through quicksand” from beginning to end right now.  I have been diligently looking with my investment partner for our next income real estate property and finally located one on which to bid.  I had to make a “sight-unseen” first bid contingent upon seeing and approving the property, of course, if we agreed on the other terms of the that offer.  Upon seeing the condition, running the numbers “ad nauseum”, I concluded that it was too much work for the price I was initially willing to pay.  I revamped the offer and the response was a counter-offer from the seller AND they lowered the price officially to that countered price.  Even though a couple of weeks had passed during this initial series of events, I suddenly encountered a multiple offer situation.  This just confirms my “pricing trumps location” theory.  Price is king! 

My third attempt at an offer prevailed and the offer was accepted!  Now we have had an oil tank sweep (found two older oil tanks, no longer in use, that must be decommissioned), we’ve had a sewer scope (the 1929-built home’s sewer line “shows the signs of age” but is functional) and a full-house inspection (we knew the house needed remodeling but now found some relatively minor structural issues).  I’m glad I’m “in the biz”.  I’ve seen enough inspection reports not to let it deter me from the “greater good” and that would be getting 5.5% mortgage interest rate for 30 years in a buyer’s market (even if well-priced investment properties are likely to generate a competitive bidding situation)!!!

Stay tuned for lots more on the exciting adventures of getting through the loan process.  Also, our future remodeling experiences  and tribulations and learning experiences  and set-backs .  Our last summer’s renovations should hopefully help prepare us for this new project.

PS:  don’t be afraid to let your offer be in “back-up” position on a short-sale, as the attrition rate is notorious (we all have a limit to our patience)!!!

But, is this an indication of a recovery in the Portland home selling marketplace?  Homes ARE selling if they are priced to suggest a “steal or a deal” because homes that are NOT distressed must compete against homes that ARE distressed properties (meaning that sellers must simply sell for less than is currently owed on the property OR the property is bank-owned and has already been foreclosed).  But, if you subscribe to the theory that all sales are good sales because it continues to lessen the inventory then this is a positive indicator (or, at least, not bad news). 

Here are the 2009 Portland Oregon monthly stats for lockbox activity (monitors the number of home showings by Realtors in the Portland area) showing a definite spike in May and slight decrease in June (schools out and family vacations???)

Monthly Stats for lockbox activity for Oregon

Moving forward, here’s a few ways to help a borrower short on cash:

1)      ♥  When they buy, they will skip a month’s payment, keeping cash in pocket.  For example, close in June and first payment won’t be due until August.

2)     ♥   If they are a first-timer, they will be able to write off mortgage interest on their taxes (big write-off, consult your CPA).  They should be able to raise their payroll exemptions and have less taxes taken out of paycheck, putting more in their pocket right now.

3)     ♥  $8000 tax credit for most will mean no (or smaller) tax bill next April.  Read number two about raising exemptions and getting a few hundred/month benefit right now.

 4)      ♥  Gifts from mom & dad.  Many parents or relatives will help a family member get into a home.  And, there are ways to work it out to keep everyone involved in the deal happy.  Call me for details and ideas.

Initial Jobless Claims Down:
Initial Jobless Claims were down by 20,000 last week.  While the overall numbers were still bad, this is the first time in quite a while that we have had any sliver of positive news in the employment numbers.

This is important because our housing markets have always been tied directly to employment levels.  As the employment picture starts to level out, consumer confidence will rise and will lead to increased interest in housing.  We could consider taking advantage of these great rates and large selection of homes on the market while home prices are still at bargain levels.

What happened to rates last week?
The Mortgage Backed Securities (MBS) market closed early on Thursday.  We ended up slightly for the week but we had a roller-coaster ride.

We saw a huge rally in Fannie Mae mortgage backed securities on Tuesday and Wednesday that caused 30 year fixed mortgage rates to fall.

But we gave it all back by Thursday’s market close which caused 30 year fixed rates to move back to their levels on Monday.