Archive for category: Mortgages

Question of the week:  Is Christmas-New Year holiday period a good time to buy a home?

Answer: Yes!

The old-saw in the real estate business is that December and January are slow months—for many agents this is a self-fulfilling prophecy as they slow down the work, or take the time off because, “it’s slow.”

There are plenty of agents that are on call and working during the “slow” period because the have sellers who want to sell; or buyers who want to buy.

If a seller has their home active on the market during the holiday season, are willing to have potential buyers visit the home to preview it to see if they want to buy it, despite partially decorated, a tree with presents, in-laws staying in the office-guest room, they are motivated and want to sell.

Sellers of a vacant home, unaffected by the call at 1:30 to their agent from another agent, “I have buyers who want to see the home this afternoon, is that okay?” If the response is affirmative when their listing calls with the question, the sellers are motivated and want to sell.

The market maybe, is, a little thinner during the holidays as home sellers put a pause on showings until the new year, but the homes that are actively listed with no hold on showings have motivated sellers looking for buyers.

What better present to put under the tree, or celebrate the new year, than a set of keys that represent your new home that will close escrow before you exchange Valentine’s Day cards!

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Rates were choppy this week despite economic news that should push rates lower. Primarily the PCE index, which the Federal Reserve used to determine its moves on rates, showed consumer prices dropped in November by 0.1%, the first monthly decline in prices since 2020. Personal income increased in the month, while consumer spending was flat—which means fewer units purchased as prices dropped.

Also positive for mortgage rates, was the revision for 3^rd quarter GDP, which showed economic growth for the quarter was 4.9%, down from the prior evaluation of 5.2% growth.

 Rates for Friday December 22, 2023: With inflation heading down, possibly entering deflation, and the economy growing not as fast previously expected markets should have responded with a drop in rates. However, rates are flat from last week, not unusual for this time of year as investors make end of year trades based not only on market conditions and expectations, but also on year end numbers for income, capital gains, and overall returns for their 2023 financials.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30-year conforming                             6.50%          Flat

30-year high-balance conforming        7.00%          Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

For those with stocking hanging on the mantel I hope Santa rewards you for your kindness and good deeds through the year. For readers who do no celebrate Christmas, a virtual Santa giving gratitude for your kindness and good deeds.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Question of the week:  Can my parents benefit from helping us buy our new home?

Answer: Yes.

This came up in a conversation this morning with second-generation real estate agent Paige this morning in discussions regarding a couple of her clients who were in need of more funds to purchase the homes.

Both couples have parents that are retired and have funds available to assist but are reticent for various reasons that are common to many parents who would like to assist their children in purchasing a home but feel uncomfortable separating funds from their savings or retirement.

The biggest reason is not willing to deplete cash from their accounts that they need, or may need, for their own living expenses and retirement.

Some parents have funds available, but they are in retirement account(s), typically an IRA, and are not willing to pay income tax on funds to assist with closing costs for the home purchase.

“Fairness” is an issue that also comes up with parents helping a child with a home purchase. Fairness to other children and providing assistance for one child and how it may affect any division of assets with other children.

Historically, most parents provide a gift to their children purchasing a home. Some prepare the necessary tax forms to account for the funds gifted as an early distribution from their estate, to be reconciled when the parents pass away and their trust is to be distributed to their beneficiaries within the tax exemption limits of estates ($13.61 million in 2024, note the limit put in place in the 2017 Tax Cut and Jobs Act expires in 2025 unless extended by Congress).

This straight cash transfer is the what some, many, parents are reluctant to do, not only because it is purely beneficent to their child and presents no benefit to them, but also restricts cash they have available for their own needs.

The solution I presented to Paige to bring to her clients is the parents making a loan to their children as part of the transaction. Not just a handshake loan, as this can create some issues later, but a legal obligation with a note spelling out repayment terms and a trust deed recorded against the property.

This benefits the parents as they can collect monthly payments* from their children, and have in the note a specific time it must be paid off.  For instance, a loan of $100,000 with a rate of 5% to be paid with minimum interest only payments every month with the entire balance to be paid within 5-years. The parents collect 5% per year on the loan, perhaps outperforming some of their investments over the time, and know that they will receive the principal amount back in a few years. If they pass away before the 5-year period, the obligation is owned by the estate and is settled through trust/estate being finalized. *see below regarding “after closing.”

If the parent’s funds for assisting their child are in a retirement account, they can make loan from their IRA, with the IRA being the beneficiary of the note, collecting the monthly payments and having the final payment of the outstanding balance to the IRA**. Just like other investments in the IRA account, the income received from the monthly payments are tax free. If the parents are of the age they must take required minimum distributions (RMD), the payments back to the IRA can be used to pay RMDs, whether in full or partially; i.e. the note taking funds out of the account may/should not jeopardize not being able to make the required annual RMD.

**Before entering this transaction using an IRA consult with your tax preparer to ensure you take the proper steps to ensure you are in compliance with state and federal tax regulations and do not have an income tax, and/or penalty depending on your age.

For the children purchasing the new home, here is the impact on them, during the transaction and after.

During the transaction, the loan and its payments must be included in calculations for qualifying debt-to-income ratios and loan-to-value used to determine interest rate.

Regarding the latter, there must be some down payment for the transaction, i.e. the parents cannot make a loan for 20% of the purchase price and the kids obtain a loan for the other 80%.

 Example: Purchase price $800,000, kids have available 5% for down payment and enough for closing costs. Parents agree to loan them $120,000 at 5% for 5-years with interest only payments. They apply for a loan of $640,000.

Assume a 7.375% interest rate on the primary mortgage, the payment is $4420 per month, add the $500 for the interest payments to the parents and the total obligations for the mortgages is $4920 per month.

If the kids purchased the home with just the 5% down, obtaining a loan for $760,000, the rate would be about 6.75% (see prior WR&MU regarding lower rates for some loan-to-values with mortgage insurance) and there would be mortgage insurance required on the mortgage.

The mortgage payment would be $4930 per month, add mortgage insurance of $285 per month and the total payment for the mortgage is $5215 per month; higher than the other transaction by the cost of the mortgage insurance.

For the transaction, the loan from the parents results in a lower payment, which makes qualifying a bit easier, and the parents are receiving a steady income from their loan.

It is very important for the funds provided by the parents to be in the terms of a loan, if it does not impact qualifying, due to what will occur in the future when the children pay off the loan.

Above we discussed the most common assistance parents give their children is a straight gift, for some families the gift is a “gift;” the kids expect to pay their parents back in the future.

Let’s look at two cases using the above scenario. Parents gifted $120,000 to Cain for his home purchase with an expectation from both parties that at some point Cain would repay the money; a few years later the parents loaned $120,000 to Abel under the terms in our scenario above.

Four years after purchasing the home with his 6.875% mortgage, Cain wants to refinance as rates have dropped and his equity has increased enough that refinancing his primary mortgage and obtaining funds from the transaction to repay his parents “gift,” his loan-to-value is 80%.

Because he is taking cash out of his property to repay his parents, Cain’s refinance is a “cash-out” refinance, which will have a rate of 5.625%.

Abel also wants to refinance at the same time, he too has 80% loan-to-value if he refinances his primary mortgage balance and includes the loan balance he owes his parents.

Because the $120,000 from his parents was a loan, and the loan was used to purchase the property, and that Abel can show he made on-time payments every month for the mortgage, his refinance is considered “rate and term,” which will have a rate of 5.00%.

In the end, having a “gift” from parents become a loan, the children save money every month on their total payment, as it is lower than purchasing with mortgage insurance provided the payment to mom and dad is interest only, and when it comes time to refinance and repay mom and dad their refinance rate is considerably lower than if they were to pull cash out of their home.

Mom and dad benefit because they receive some monthly income, their money is somewhat secured as it is lien against the property, which benefits their estate and other beneficiaries should they pass away before the loan is repaid. If funds come from a retirement account, the income is tax free as long as payments are made directly to the IRA.

Before finalizing and committing to parental support for your new home purchase I strongly advise your parents consult with their tax preparer.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

 Downward momentum stalls for rates as the job market is a bit hotter than desired. The Labor Department published data for November showing the economy added 199,000 jobs for the month—a high number but tempered somewhat by about 50,000 striking workers in Hollywood and the auto industry returned to work. What is not tempered is that wage growth is still strong at 4%, well above the 3% growth rate the Fed has said it needs to see to take future increases off the table. Markets reacted by reversing gains earlier in the week.

Rates for Friday December 8, 2023: Rates hold steady from last Friday after dipping earlier in the week. Markets still not sure if Fed will hold that line on rate increases, and beginning to speculate how many, if any, rate decreases the Fed may make in 2024.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30-year conforming                             6.875%        Flat

30-year high-balance conforming        7.375%        Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

The turmoil in our country for those of Jewish faith and ancestry since the barbaric attacks by Hamas two months to the day of the first night of Hanukkah have many, rightfully, concerned for the well-being of their family, friends, and other Jews worldwide.

The origins of Hanukkah, simplistically Mattathius leading a revolt against Antiochus who, as part of outlawing Judaism, ordered and altar to Zeus erected in the Temple of Jerusalem and Jews to make a sacrifice to Zeus. The rebellion was successful and after three years, in 164 BCE, the Temple of Jerusalem was liberated and rededicated and the festival of Hanukkah began to celebrate.

For the past 2100 plus years there have been several periods when kings, dictators, people, have tried to rid the world of Judaism and Jews. We are witnessing yet another attempt by Hamas and its supporters who proclaim here, and abroad, their stated goal, many of those supporters in our own country.

It is my hope that next year, or a year in the very near future, when Jews around the world light their candles to celebrate the Festival of Lights that the world is once and for all rid of those who are committed to preventing Hanukkah, and its celebrants, from performing their annual rituals of lighting their menorahs from happening.

Happy Hanukkah, for those celebrating I hope you do so in joy and peace, this year and every year.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Question of the week:  Will court ruling on real estate agent commissions impact home prices?

Answer: This is a question being asked across the country, and a main topic of discussions in real estate offices nationwide.

A big Halloween scare shook the real estate industry when the jury in a federal court case awarded plaintiffs in a class-action suit be paid close to $1.8 billion in damages by the National Association of Realtors (NAR) and several of the biggest national real estate brokerages. Under federal antitrust law, the amount could be tripled to over $5.3 billion.

There are some additional law suits in the judicial pipeline that are similar to the above Gibson, et al v. NAR, et al, this is the first to come to a verdict.

The Cliff Notes version of the lawsuit is that home sellers sued because they felt they were being over charged on commissions as half the commission being paid to the listing agents (representing sellers) were paid to the agents representing the buyers (selling agents). Because this arrangement, commission splitting by the agents paid for by the sellers, is standard in NAR contracts, the plaintiffs argued this violates federal antitrust laws.

Members of NAR can use the title of Realtor© in their marketing and promotional materials. The title comes with rules made by NAR that agents must adhere to remain members. These include rules regarding commissions paid to selling agents, selling agents

Most real estate listing contracts have a 5-6% of sales price as the commission paid by the seller for the agent to represent them in their sale process and list the property on the Multiple Listing Service (MLS), as agreeing that a non-negotiable, by the seller, commission, typically half the total commission, will be paid to a selling agent.

The lawsuits contend that because the sellers have to pay commissions to the agents representing buyers, they are paying for more to sell their homes than if the buyers were to pay their agents directly. One other factor, is that since they buyers are not able to negotiate the commissions the agents representing them are getting paid, the contention is they are paying more than they might if they negotiated the commission directly.

So, what does this mean to the real estate market moving forward?

To generalize there are three segments of the market that are impacted the most: buyers, sellers, and agents.

Real estate buyers in the United States are somewhat unique when it comes to real estate agent compensation. Internationally, the United States is pretty much the only market where buyers’ agents are paid by sellers through an agreement with the listing agents. Elsewhere, buyers, contract with an agent prior to working together. Some of the agreements call for a flat fee to be paid for a period of time during which the agent will be diligent in finding a home, negotiating a price, and handling the details required for the sale. Other agreements call for a commission to be paid as a percentage of sales price.

Because the seller is paying the buyer’s agent, both agents’ commissions are part of the sales price. If a seller agrees to a 6% commission with half being paid to each agent, a sales price of $1,000,000 generates a total commission of $60,000. In closing the buyer will fund $1,000,000 into escrow in some combination of cash and loan(s). At closing the seller will net $1,000,000 minus costs, including the commission before paying any mortgages or other liens on the property.

Due this arrangement, the buyer is technically paying the commission for their agent as it increases their sales price by that amount—assuming the market price would not be the same if only the listing agent’s commission was being paid by the seller.

In the example above, a normal transaction is the buyer would purchase the home with 20% down, $200,000, and 80% loan, $800,000.

If the market changes and selling agents are no longer paid through escrow from the seller’s proceeds, buyers will need to pay their agents directly. How does the buyer restructure their contract? If the commission remains 3% to the selling agent, does the buyer continue with 20% down and pay the $30,000 in cash at closing? Or does the buyer only have $200,000 for the transaction, plus other closing costs, put down $170,000 and obtain a loan for $770,000, which because it is higher than 80% loan to value will require mortgage insurance.

Because of either the additional cash to close required, or the higher loan amount, the buyer may no longer be qualified for the home.

If the seller reduces the sales price by 3% because they are no longer paying the selling agent commission, the price of $970,000 still, at 3%, would have a $29,100 commission—still presenting an issue for the buyer as to paying cash, restructuring the loan, or not qualifying.

For sellers, the supposition is that they will net more from the sale of their homes if commissions for selling agents are no longer taken from their proceeds. But this is assuming the market does not make an adjustment to market values due to buyers having to pay agents directly and not finance as part of their purchase price.

In the above example if the sales price is reduced 3% due to the seller not paying the selling agent, the net proceeds of sales price minus commission (3% to listing agent), would be $970,000 less $29,100, $940,900.

In the “traditional” sale with a $1,000,000 sales price and $60,000 commissions being paid, the seller’s net proceeds would be $940,000.

If the market adjusts downward in pricing because of the change in commission structure, the seller may net a bit more in proceeds, depending on the market adjustment. If prices do not adjust due to the commission structure changes, the seller will net considerably more.

What about realtors? How will they be impacted if the federal judgement results in wholesale changes and buyers having to pay their agents directly.

The real estate industry will go through tremendous change. First, commissions paid per transaction will go down. While the listing agent commissions may still remain in the current 2.5% – 3% range for listing agents, buyers not being able to finance selling agent commissions will very likely reduce the amount able to be paid to selling agents.

With buyers negotiating commissions directly with the agents to represent them, and factoring that cost into their ability to qualify for the homes they wish to buy, market forces will result in lower commissions for agents representing buyers.

Currently there are about 1.2 million members of NAR, and approximately two million more licensed agents that are not members. The vast majority of real estate transactions are done by a minority of licensed agents, estimated to be 20-30% of licenses. Consider that in 2021, a very active year with record sales, the average number of sales per real estate license was 12. If there are 3 million licensed agents, that means 1.5 million did less than 12 and 1.5 million did more than 12.

Real estate is one of the few industries where part-time workers can earn significant income; consider a part-time agent who sells two homes for a total value of $1.5 million with 3% commissions will earn $45,000. If those commissions decline by 25%, 30%, 50%…? how many part-time agents will remain active?

Should commissions drop, so will the number of active, full and part-time agents. This reduction of competition, increase in specialization, should result in increased volume for agents to can make up for some, a lot, of the lost income due to reduced commissions.

Buyer behavior will be interesting to see. Due to Zillow and other real estate websites, for the past several years many of the buyers we have worked with are very knowledgeable about what is on the market, prices in certain areas, and often know the home they want to purchase before they engage a realtor. With more sophisticated buyers, will they contract with the traditional realtor to represent them, try to represent themselves, or use other services.

I foresee agencies that specialize in representing for flat fees become part of the real estate market should the commission structure drastically change with large impact on the commissions paid to selling agents.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Speaking of change in prices, a very small change in prices had a huge impact on mortgage rates this week. Prior to the release of the Consumer Price Index data on Tuesday, the consensus among economists was that the data would show the CPI increased 0.1% in October. They just missed in their estimate as CPI showed no change for the month, the first time in 15-months CPI was flat month to month. The zero growth was primarily due to gas prices dropping 5.3% in the month. Stripping out food and gas for the “core” rate, inflation was 0.2% for the month. The year-over-year rate fell to 3.2% , the lowest increase in two years; the core rate, which is the Fed’s barometer for adjusting rates, was 4%–a level that has not been able to be breached due to fluctuating food and energy costs. Bond and mortgage markets loved the news, sending prices soaring and rates dropping.

Rates for Friday November 17, 2023: Conforming rates have their biggest Friday to Friday drop since July 14^th and hit lowest level since September 1^st due to the CPI data.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30-year conforming                             7.00%          Down 0.375%

30-year high-balance conforming        7.50%          Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Good thing I like routines. Several time a day, pedal machine, leg bent 90 degrees, leg flat 0 degrees, deep vein apparatus, leg lift, leg bend, leg flat, leg squeeze, and icing throughout…surgery rehab is a full-time job. But worth it as working my goal of incrementally better each day. A motto that is not only good for rehab but also for life!

We have much to be grateful for this year, as every year. I hope you and your family are able to spend a happy, and grateful, Thanksgiving together.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Question of the week:  Should we enroll in auto-pay?

Answer: Yes.

Too often we see credit reports for clients who have excellent credit, except….one credit account that has a late payment or two, thus turning excellent credit into fair credit and resulting in a higher interest rate on their mortgage.

The lates could have been easily avoided if they had set up auto-pay on the accounts.

The most common scenarios where we see the “rogue” derogatory reporting are HELOCs (Home Equity Lines of Credit) and credit cards with small balances.

Here are some scenarios that are not uncommon.

First scenario: You get a HELOC with a bank or credit union with which you have never had an account. You open an account with a minimum balance of $2500 to lower the rate on the HELOC by 1%, and you must maintain at least that amount to avoid monthly bank charges.

Your minimum payment is interest only, and because you are using the loan to do various home maintenance and remodeling projects, the amount owed varies from month to month.

Every month you transfer money from your personal checking account to the bank or credit union to make the payment.

One month you forget that you had transferred money from the HELOC to your bank account, therefore raising the balance and the minimum payment. You send the same payment from the month before, which is not enough.

You get your next statement and notice two things, a late charge for the last payment, and that the minimum payment was more than you sent. You now have a 30-day late on an account that lenders see as a mortgage late, a very egregious late reporting for mortgage underwriting.

Second scenario: You have several credit cards, but primarily use two; one for most of your transactions that builds miles for an airline you use frequently for the family, the other builds points for a hotel chain your family uses frequently when you travel and you only use it at those hotels as they triple the points when used at their properties.

Your primary card was compromised and you are waiting for the replacement card to arrive. You are shopping with your son before he heads back to college, he needs a good pair of boots. You use your hotel-points credit card for the $250 purchase.

You have paperless statements, and since you have not travelled in a while you don’t go on-line to check your hotel-points card account. You miss the payment and you end up with a late charge and a reporting on your credit report of a 30-day late.

In both of these scenarios setting up auto-pay would have prevented the late reporting of the two late payments.

For the HELOC, set up an automatic transfer every month to send a deposit from your checking account to the HELOC for the interest on 2-3 times the balance. If your current rate is 8.5% and your balance is $30,000 the minimum payments of interest only is $212.50, send $500 to $600 to your account at bank with the HELOC. Next set up auto-pay for the HELOC that will take the minimum payment each month from the account.

Your balance at the HELOC bank account will grow from the minimum required $2500 as you deposit more than the interest only payment being taken to pay the HELOC’s interest. Every quarter, or month if you prefer, review the account and you can decide to pay down some principle on the HELOC or leave the funds in excess of the $2500 account minimum as you know the balance on the HELOC will go up in the near future.

Even if your balance were to fall below the $2500 minimum after the bank takes out the minimum interest only HELOC, resulting in monthly bank charges for a month or two, those charges will cost you less in the long run than having a 30-day late on your credit report.

For all your credit cards setup and auto-pay for the credit card company to pull out the minimum monthly payment from your bank account. This way when you have a one-time charge on a card you do not use very often the minimum payment will be made until you remember you made that charge. On the card you use most frequently you can always pay as you always have, but if travelling or something else comes up they payment will be made.

Using auto-pay is wise for all your accounts, mortgages, auto loans, student loans, etc. Set them up for the minimum required payments, and if you want to make a higher payment you can do so.

For mortgages, I prefer to set up an auto-send from my account to be taken on the 5^th of the month. This is because our household income varies every month since we are both self-employed. By having the payment taken on the 5^th I have a few days to see what has come in for the month prior and if we need to make a transfer from savings or not to cover the mortgage payment.

With mail theft seemingly increasing by the month, the stories about mishandled checks at payment processing centers, I strongly recommend that if you are writing checks every month to pay your bills, “because that is the way I have always done it,” set up auto-pay through your bank, and/or creditors.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Bang, Zoom, to the Moon (Alice—a reference for some of our mature in age readers), describes fixed rate investment markets this week (meaning markets for bonds, mortgages) as prices soared and interest rates plummeted. Why? The Fed did not make any move on rates, letting market rates cool the economy and inflation was on reason. The other was today’s jobs report from the Labor Department.

After heating up the economy and contributing to inflation, the heat is way down in labor markets as seen by September’s payroll and unemployment figures. The unemployment rate rose to 3.9% in September, continuing a steady climb since April’s 3.4% low. Employers hired 150,000 more workers in September, down from 297,000 new hires in August. Analysts are showing that most of the added jobs were “back-fill” in services still trying to get back to pre-pandemic numbers, i.e. retail, hospitality, healthcare. Hiring slower, unemployment rising, so no surprise that wage growth is weaker, up .2% from August and 4.1% from last September. Taking an annualized figure for the last three months and wages are growing at 3.2%. All of this news is positive for mortgage rates.

Rates for Friday November 3, 2023: Mortgage rates have their biggest Friday-to-Friday drop since July this week. The trend is downward for rates, will it continue? For how long? How far will they go

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30-year conforming                             7.375%        Down 0.25%

30-year high-balance conforming        7.625%        Down 0.50%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Time for the bi-annual debate: should we move the clocks back and forth each year or just pick a time and stick with it?

If we stick with one time there are plenty who argue for each time to be the one, the daylight savings time (34 weeks every year) and those who want standard time (18 weeks). With the government deciding when to move the clocks, it is evident which way they lean.

Don’t forget to “fall back” Saturday night before you go to bed.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog