Dennis' Mortgage Blog

Question of the week:  We are considering retirement in five to ten years, when should we think about purchasing our retirement home?

Answer:  Just as many first time buyers are entering the market to take advantage of low rates and prices, those in position to purchase a retirement home now may want to do so for the same reasons.  You may want to be in the market to Pre-Buy your retirement home.

Many couples once they retire sell the family homestead and use the net equity to purchase a home debt free that is smaller and more suited to their new lifestyle with no work.  Locking into lower housing costs at a time when they transition from salaried employment to fixed income retirement.  Traditionally this exchange occurs after the last day of employment and the couple sells their home at market price and purchases their new home at market price.

If you are considering undergoing such a transaction in five to ten years also consider what will the relative prices be of my current home and the home I wish to purchase for my retirement?  Chances are they will both have higher prices than they do today, no guarantees for home prices as we have seen the past few years, however since the market has undergone drops in values all over the country the probability is in five to ten years there will be price increases off the floors of the current market.  So if you are able to purchase your next home at what amounts to a discount and then sell your current home at a premium to today’s market why not do it and benefit from the market? Pre-Buy today for retirement in the future.

The obvious and biggest disadvantage to such a transaction is carrying two mortgages during the period until retirement, presuming your current home has one.  This can be off-set through renting the new purchase until you are ready to move in full time.  If you are not comfortable being a landlord you can either hire a property management firm to handle tenants and rent collection, or you this plan may not be for you.

If you are able to accommodate two mortgages, again provided your current home has one, then there are several benefits to “pre-buying” your retirement home.  Just like you have been putting a little money away every paycheck into your 401(k) or retirement plan you can put funds away every month into your retirement home for when you are ready to use it.  Some families I have worked with diverted some of their retirement contributions to assist with a second mortgage payment, their consideration being that the rising home equity values in the future would make up for, or exceed, their return on the funds had they continued to put them into the standard options of their retirement accounts—which have shrunk as well. 

Other options with the retirement accounts are the possibility of using some of the funds for purchasing the new home. Converting the retirement asset that is invested in the financial markets for a retirement asset that is invested in real estate diversifies the retirement investments.

One of the benefits of Pre-Buying your retirement home is that you have an opportunity to test-drive the home and the location.  Some of our clients who have gone through this process have used the new property as their second home if they have purchased it in another area and have stayed in it for long weekends or vacations.  Doing so has allowed them to slowly furnish the home to their taste, experience the day-to-day aspects of the neighborhood and area and determine if they wish to keep the property for full time living.  Over the years a few of them have determined they did not wish to live in the home full time upon retirement and have either rented it out, or kept it for a current second home knowing they will be selling it in the future to purchase another property for retirement. 

Perhaps the biggest potential advantage of Pre-Buying a retirement home is locking in the value for the new home at today’s depressed prices and selling your current home in the future at a greater value than you can today—probably.  With an increased spread between the acquisition and sales price of the two properties it will increase the net equity for your bank accounts after you pay off the mortgage used when you went through the Pre-Buying process.

This suggestion is not for everyone, but there are thousands of couples in the local area for whom this concept of Pre-Buying a retirement home makes plenty of sense.  Perhaps they want to move close to their children and grandchildren, or they want to live closer to the water, or nearer where other families have retired.  Whatever their intentions may be, looking at the logistics and financial opportunities of undergoing the transaction today rather than in five to ten years is worth a conversation.

If you are interested in exploring your options and opportunities to possibly Pre-Buy your retirement home in the near future instead of the far future, please give me a call, I am happy to go through your current financial situation and the options that may be available to you.  The more options you are aware of today the better you can plan for tomorrow.

I will keep this link on my “Question of the Week” section to assist new homeowners:

IRS Form 5405 for First Time Buyer Tax Credit for those eligible for the up to $8000 credit. Note credit only for those who close escrow before November 30, 2009 under current legislation.

Have a question for me?  Ask me!   

REMINDER ALERT! For those who are eligible for the first time buyer tax credit, it is set to expire at the end of November.  Let’s look at that time line.  November 30^th is the Monday after Thanksgiving, so I Los Angeles County your loan must fund on Friday 11/27/09—however many lenders will be closed for the long weekend so if you go to the limit you would have to fund on Wednesday 11/25/09 and pay interest for five days you do not own a home, so it makes most sense to fund on Tuesday 11/24/09.  Docs will have to be signed and back to your lender with all conditions by Tuesday in order to fund so realistically you will need to have loan documents on Friday 11/20/09, since there will be a full pipeline at all lenders because of the expiring tax credit to be safe all prior to doc conditions must be in and doc order complete by Tuesday 11/17/09.  Again with the pipelines underwriters will be working with that means loan approval must be given by Friday 11/13/09 and therefore a full loan package submitted by Tuesday 11/ 10/09.  With time lags from having an offer accepted, new TIL disclosure rules, ordering and receiving appraisal through HVCC process, possible appraisal appeal if value is low, plus the added volume because of the tax credit expiring that will slow down all the processes, figure 20 or so days, so your offer needs to be accepted around October 20^th.  If a short-sale or foreclosure with a bank making a decision add two weeks for having offer accepted after submitting the offer and that puts you at writing your offer the first weekend of October.  Now add time for getting pre-approved, working on any credit issues, funds for closing, etc that may come up, time for looking for the right home for your family, time for writing offers and having them accepted (one agent announced on Facebook this week he is writing his 8^th offer on a condo for a client due to multiple offers on units she is interested in—that is about a month or more of looking and writing offers) and you are into early September.

It is now mid-August.  If your plan is to purchase a home this year and get the first time buyer tax credit of up to $8000 if qualified your plan should be to get started now on buying a new home.  While some of the dates on this are padded a bit, the timeline is very realistic, those who wait until the last day will stress considerably over the November 30^th closing date and greatly risk missing it—as there will be thousands of others who also waited clogging the pipelines throughout the process.  Do not wait.

Call me today, this weekend, next week….let’s get you pre-approved and ready to buy your new home so you do not miss the opportunity for an $8000 tax credit.  562-243-6912 will always reach me.

Mortgage Backed Securities had a positive week over all with Monday and today providing most of the lift.  With some technicals and stock trading factored in to limit greater gains in the bond markets we still have a positive for the week.

Economic data was a bit mixed but enough of a mix to lead bonds higher.  Confidence and CPI both were weaker than expected, new unemployment filings were higher than expected and the Fed held firm on rates and said they expect to be flat for a while, all these benefited rates.  France and Germany showed positive economic growth in the 2^nd quarter and China continues its positive direction which put a damper on rates.

Rates stay within range that we have seen for the past couple of months.  We can expect them to go between just below 5% to close to 5.5% for conforming for the next several weeks. But…. Rates have been supported by the Fed injecting almost a trillion dollars into purchasing mortgage backed securities and purchasing an almost equal amount of treasury bills.  This activity has kept demand artificially inflated, increasing prices (which we know means lower rates).  The Fed is scheduled to stop buying Treasuries in October and mortgage backed securities in December.  Then what?

A good week for rates.  With some pull back today ahead of the weekend and some profit taking we still are at a nice dip and a big drop from last Friday.  Looking at the chart we are about 1.5% in rate below last August.  You can also see the volatility week to week the past month, at some point that volatility ceases and dips stop.  Take advantage of this rate market while you can. 

Rates for Friday August 14th:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional  4.875%                           Down 0.5%

30 year conforming-jumbo 5.375%                   Down 0.375%

30 year FHA    5.00%                                      Down 0.375%

30 year FHA jumbo 5.625%                            Down 0.375%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Last day of 49er Camp today—Demo Day!  I will be spending much of the afternoon watching the dances the girls have been working on, archery, swimming, soccer and I think softball.  What a great experience for all the kids, Cal State Long Beach does a great job year after year with the camp and exposing kids to a multitude of sports and activities—while keeping them out of mom and dad’s hair every afternoon!

Tomorrow we go visit one of my closest friends and freshman roommate and his family.  It was 29 years ago next week that Steve and I met, he and one or two relationships from my years at school have meant a lot more to me than anything I learned from a professor.  Before summer ends reach out to one or two of your old friends and get together, we are all too busy all the time, but let’s make time for what really matters in our lives.  Call that friend now and see what they are doing this weekend.

Have a great weekend,

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.

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