5-11-18: Should I use funds from my 401(k) to buy my new home?

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Question of the week:  Should I use funds from my 401(k) to buy my new home?

 

Answer: This is a great question that has come up a few times recently as home prices continue to climb and for many families down payment is a barrier to home ownership.

 

“Should” is the key word, and as with most of our questions of the week the answer varies from person to person, family to family.

 

Before we answer “should,” let’s answer “can.”

 

If you have a 401(k) retirement account through your employer it has several rules, regulations and policies as to how the your account must be handled, including access to funds. Since the money was put into the account before taxes, all the money in your account has accumulated with no taxes being paid. Therefore when the money does come out of the account it will probably be taxed, unless the money is borrowed to be repaid and you do not violate any of the rules and policies of either the plan or the IRS.

 

Most 401(k) plans allow loans to participants for hardship, medical or education costs and the purchase of a primary residence. Note, “most,” so your plan may not allow loans. One of the provisions of any 401(k) loan is that if it is not repaid on time you will be subject to taxes, and penalties if you are under 59 ½ years of age.

 

Assuming your plan allows you to borrow money for the purchase of your home, here is how it usually works.

 

The maximum amount allowed to be borrowed is either $50,000 or 50% of your 401(k) balance, whichever is less.

 

You must repay the loan with interest that is paid to yourself, at a rate that is set by your 401(k) policy, typically Prime + X. So if your plan has the interest on the loan is Prime + 1 today your rate would be 4.75% + 1 = 5.75%.

 

The term of repayment varies from plan to plan, most plans have a maximum repayment period of five years, with exceptions for home loans that can be up to ten year amortization periods.

 

Your repayment is made via your paycheck with after tax dollars. You can, and should, continue to make 401(k) contributions during your repayment period.

 

If your employment terminates and there is a balance due on the loan you either need to repay the balance or face tax consequences on the unpaid balance. For instance, you are offered a job with another company that is a fantastic opportunity, but you have a $6500 balance due on your 401(k) loan. Your options are to leave the company and roll the 401(k) into another account, either the 401(k) with your new employer if they allow it, or into a rollover IRA, without repaying the loan. In this case the $6500 will be taxable and if you are under 59 ½ you will have a penalty. Or, you can contact the plan administrator, find out who and how to make out a check and pay off the loan, and then transfer the account. Most plans allow you 60-90 days to make arrangements for your employer sponsored retirement account.

 

The funds for your loan are taken from the funds, or investments, within your 401(k) at your direction. You are borrowing $25,000 for the purchase of your new home, and you have your 401(k) invested in four different mutual funds and company stock. You direct your administrator to take $5000 from each of the funds and the stock account to fund your loan. As you repay the loan most plans allow you to direct the payments back into the funds from which they were taken in the same proportion to which they were liquidated, so your account allocation will still be the same as before the loan was funded.

 

Now that we know the “how,” let’s look at the “should.”

 

There are many that argue against borrowing from your 401(k) for any reason, and there are many that argue it is not a bad idea, and in fact can be a good idea. For disclosure purposes, I purchased my first home by borrowing $7500 from my 401(k) for the down payment. It was one of the best financial decisions I ever made.

 

One argument, and perhaps the one made most frequently, against borrowing the money is that you lose the growth opportunity of those funds invested in the market and growing tax free. This is true, if you take $25,000 from your 401(k) those funds are not subject to any market growth or dividend reinvestment while they being repaid; this also means that the funds are not subject to any declines in market value while they are outstanding. Lost in this argument is the interest you will be repaying yourself. If the interest rate you are paying is equal to or greater than market performance plus and dividends then there is no net loss to your account during the period. If the market grows at a significantly greater rate than your interest rate on the loan then your opportunity costs are the gains in your investments less the percentage you are paying.

 

Also lost in this argument is the accumulation of equity in the home you are purchasing during the period to loan is outstanding. So the true cost, or benefit of the transaction is the difference between the gain in value of the funds in your 401(k) less the combined gain in market value of your home plus the rate of interest on your 401(k) loan. As an example, the $7500 I borrowed to purchase my first home resulted in substantial equity growth that we then used to purchase our current home—the $7500 invest in 1994 is worth considerably more today than the growth of $7500 in the market during the time period.

 

Another argument against borrowing against your retirement account to purchase a home is that you are hurting your retirement. This may be true depending on your age and how long until you retire, how much you borrow, whether you are able to repay the loan before retirement to avoid a large tax liability, and what is the status of the home you purchase. If you are young, working for a long time and are able to repay the loan with plenty of time until your retirement and your home value rises then you are not worse off, in fact may be better off, by purchasing your home by leveraging your retirement account.

 

Bill and Sue are in their late 30’s, have been unable to purchase a home as they do not have enough money saved for down payment and closing costs. They each borrow $25,000 from their 401(k)’s and purchase a $500,000 with 10% down payment. They are able to repay their respective loans in five years. In twenty years when both kids are out of college they are getting close to retirement. Their home is not paid off, they took out some equity for college costs, but they have a lot of equity.  They plan on retiring in about five to ten years and looking at their home value, and costs for homes near where both their kids are living, discover they will probably be able to sell their home and purchase their retirement home without needing a mortgage. They enter retirement with no housing cost—typically the primary cost in retirement—except property taxes and insurance, and retirement accounts that have grown during their years of employment.

 

Some of the advantages of 401(k) loans used to purchase homes. There are usually no transactions costs, perhaps a $25 processing fee. Most loan programs do not count a 401(k) loan repayment against you for qualifying purposes. There is no qualification process for the funds, as long as you have the money in your account and the plan allows it you can borrow it. Funds are usually available within two weeks or less of your reqest.

 

Should you borrow from your 401(k) to purchase your new home? Maybe. Give me a call to discuss your situation and I can help you make that determination.

 

Have a question? Ask me!

 

Inflation concerns are a bit abated with the Producer and Consumer Price Index data from April, both of which were lower than expectations. On the wholesale side PPI showed 0.1% growth in the month and is up 2.6% year over year. For consumers the CPI was up 0.2% for the month and 2.5% for year. With the tame inflation data for April, investors’ concerns about inflation forcing rates up are dampened and the data announcements had no impact on rates.

 

Rates for Friday May 11, 2018:  Week to week we are flat once again, three Fridays in a row with the same rate shows some rate stability and what is probably the new “normal” for mortgage rates.

 

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

30 year conforming                                            4.50%       Flat

30 year high-balance conforming                      4.75%       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.

 

Spoil the moms! Your own, your children’s, your neighbor’s, your brother in-law’s, spoil them all this weekend. And remember what my mom always said, “every day should be mother’s day, not just one day a year…”

 

Have a great week,

 

Dennis

5-4-18: Do I need to get re-pre-qualified?

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Question of the week:  Do I need to get re-pre-qualified?

 

Answer: Probably.

 

As you can see from the chart below rates for 30 year fixed rate mortgages are about three-quarters of one percent (0.75%) higher than they were in January.

In real numbers, on a $400,000 mortgage that is a difference of about $175 more per month. Depending on several factors, with the increase in the rate you may not qualify for the same price today you did in January.

 

Let’s assume that you were pre-approved for the purchase of a $500,000 home with 20% down and a $400,000 30-year fixed rate mortgage in January. Your credit obligations are about 10% of your gross income. When we pre-approved you in January your income was about $6500 and you were at the maximum debt-to-income ratios will all factors considered (cash reserves, credit score, etc). If there are no other changes to your financial situation for the same purchase of a $500,000 home with 20% down you will need to earn $500 more per month to qualify.

 

If your income is the same, then you either need to pay down your debt so your monthly payments drop $175 per month, or lower your sales price and loan amount. Using the same $100,000 down your new sales price would be $470,000, a drop of $30,000 in purchase price due to the increase in rates.

 

As the prices and loan amounts go higher, so do the differentials in monthly payment with the rate increase, for a $500,000 loan the difference is about $255 more per month today than January.

 

For those who have been waiting for prices to come down before entering the real estate market you are losing more purchasing power with rate increases than you may be looking at whenever any market correction may occur. Take the example above, with a decrease of $30,000 in purchasing power the borrower has lost 6% in value from what s/he could have purchased in January.

 

If you have been pre-approved to purchase a new home longer than three to four weeks ago I strongly suggest you have your information updated so you know what you are qualified to purchase. If you are a real estate agent, I strongly suggest any pre-approval you receive has current rates and “fresh” qualification information—they potential buyer may have been qualified in February, but may not be qualified today to purchase your listing.

 

To go through your options for purchasing a new home, please contact me so we can run through your options.

 

 

Have a question? Ask me!

 

First week of the month economic data is always interesting. On Monday we learned that personal incomes rose a modest 0.3% in March, which was outpaced by consumer spending which was 0.4% higher in March than February. With the increase in spending above income the savings rate declined slightly for the month to 3.1%. The eye grabbing news for investors in the report is that the core inflation rate year-over-year for March was 1.9%, nudging up against the Fed’s 2.0% target rate. Overall the news was somewhat mortgage rate unfriendly, while the increases are somewhat subdued; they are nonetheless reflective of continued growth in the economy and employment.

 

Taking into consideration the inflation rate, on Wednesday the Federal Reserve released its minutes from it meetings this week. The Fed’s expectation for inflation was a high of 1.9% for the year, again just below its target rate of 2.0%. With prices hitting their expected high in the first quarter there is concern from Fed members that they may need to make some unannounced, or expected, rate increases this year. At this point it appears there will be another hike of 0.25% in June, but if inflation speeds up we should expect more rate increases as the Fed tries to keep ahead of prices and not have to chase inflation. The meeting notes were somewhat concerning to investors and puts upward pressure on rates.

 

April employment showed continued growth at a solid pace. Payroll growth was within the range of expectations;164,000 new jobs over all of which 168,000 were in the private sector. Hourly earnings were up a scant 0.1% from March and are up 2.6% year over year. The headline number is the unemployment rate dropping below 4% to 3.9% for the month. The news shows growth in employment, a bit mild but still solid, and that is negative for mortgage rates.

 

Rates for Friday May 4, 2018: An opportunity to catch our breath with rates flat from last Friday after a few consecutive weeks of rates increasing. The expectation is not for rates to drop, if they do it will either be very temporary or as result of some major negative event. What we are looking for is the top of the range. Rates, like stock prices, generally stay within a range for a period of time before breaking out, up or down, and establishing a new range. With rates increasing one-quarter of one percent (0.25%) in two weeks we are looking for when the increases will stop and rates remain within a range week-to-week. Perhaps we have found a new range, but we won’t know until at least two more weeks. Lock your rate when you can!

 

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

30 year conforming                                            4.49%       Flat

30 year high-balance conforming                      4.75%        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.

 

Star Wars fan? Me not so much. I enjoy the movies, but am not a big fan or follower. For instance, I got really confused when they started the making movies that were decades beyond the release of the first one and then called it Episode 1. I have no knowledge of the characters beyond the originals, the hairy thing, the beep-boop robot and the others, but understand others are very much into the whole genre. And to them I, somewhat reluctantly, say May the Fourth be with you!

 

Have a great week,

 

Dennis

4-27-18: Should I buy the home I rent?

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Question of the week:  Should I buy the home I rent?

 

Answer: This question has a reverse side as well, “Should I sell my rental property to the tenant?”

 

I have a client who contacted me the other day about wanting to sell a home she rents out because the tenant has given notice. She is nearing the end of the time frame of living in a home two out of prior five years to avoid capital gains and the time is perfect. I asked if she contacted the tenant about purchasing the home, however the tenant is giving notice because they had already entered a contract—otherwise did not think of asking to buy the home or they would have.

 

This was a missed opportunity for both parties. When they decided they wanted to own their own home the tenant should have informed the landlord, who gladly would have worked with them to see if the right price and terms could be found, saving each party a lot of time and expenses.

 

What are the opportunities for the landlord and tenant in having the tenant purchase their rental home from their landlord?

 

From the landlord side, there are several advantages to selling to your tenant.

 

For most landlords selling their rental property the status of the tenant is a primary factor in how the process will proceed. If it is a single-family residence then the buyer will almost always be looking to owner occupy the property, so the property needs to be vacant.

 

Typically, the dwelling should be vacant during the marketing period to maximize the ability to show the property to the most buyers and encourage offers. If you have a long-term lease with the tenant you will need to wait until the lease is nearing termination and provide notice that the lease will not be renewed and the tenant must vacate. If the lease is month-to-month you will need to give the tenant a 30 day notice to vacate. Depending on your tenant at this point it can get sticky if your tenant decides to not vacate on time. In California, the tenant has significant rights to delay vacating the property and can prolong any eviction process for a very long time. Several times over the years I have witnessed landlords paying tenants to vacate properties to get the process over and property vacant for sale or closing.

 

If you tenant is cooperative and does vacate the property you will continue to have costs, mortgage, taxes, insurance, maintenance, until you close escrow with a buyer, without receiving any rent. Depending on many factors you could have a vacant, non-revenue producing property for two, three, four or more months.

 

Speaking of maintenance, when selling to the tenant there may be some repair work requested by the tenant-buyer following a home inspection, however there will not be the costs of preparing the home for showing. No landscaping for curb appeal, refreshing flooring, painting, or other touch-ups most sellers go through before marketing their home to try to maximize value.

When selling to your tenant you have a bit more control of the escrow period, which can be especially important if your intention is to purchase a new rental property, rolling over your proceeds in what is known as a 1031 Exchange to postpone capital gains taxes. When participating in a 1031 Exchange there are time frames to identify your “up-leg” and close on that transaction, if you miss them then your gains from the sale of the property are subject to capital gains. If your sale is an open market sale with two or three other transactions that you have little to no control over it is more difficult to extend the closing date of the sale of your rental property if you need more time to find and close on your up-leg.

 

Your costs of sale can be significantly lower selling to your tenant than going on the open market. You can have more control over timing of the transaction. If you are considering selling your rental property it is advisable you contact the tenant to see if they are willing and able to purchase the home.

 

From the tenant’s perspective purchasing the home you have been renting also has several advantages to going to the open market.

 

One big plus is you do not have to pack, move and unpack. You will not have the added expenses that occur when you move, new shower curtains, dustbins, pieces of furniture, lamps, fixtures, etc. Of course, now that the home is yours you may want to make some changes, however we have found most tenants who purchase their rental home make fewer changes and spend less than those who move into a new home.

 

Familiarity is another major benefit. If you like your neighbors and neighborhood you become a homeowner and still go to the same store for groceries, walk to your local coffee shop to meet friends, go to the same schools for your kids and the same dog park with Phideau.

 

Utilities, seemingly a small thing, but no getting set up with gas, electrical, cable. Dealing with timing to meet vendors or pay deposits.

 

Not every home is perfect, even if you purchase a newly constructed home there can be, and usually are, some issues. Purchasing the home you have lived in for a while you already know the quirks and issues, some of which your landlord may be willing to fix as part of the transaction.

 

A major plus, does not always happens but usually does, is the tenant-discount. Because the landlord does not have to have the property vacant, require your cooperation to show the property if on the market while you are still living there, nor spend the funds to get it “market-ready,” we typically see some discount to market for the tenant-buyer. Some landlords have refused to offer any discount and see their tenants leave the property instead of purchasing the home and the landlord later regrets trying to maximize price instead of maximizing combination of total costs and efficiency of the sale.

 

One more consideration both tenants and landlords should consider, rent control. In more and more cities throughout the state, and at the state level, the rent control movement has been gaining momentum. I will not use this space to present the case that rent control does the exact opposite of what it is intended to do, however it is something to consider if you are a tenant or landlord.

 

From the landlord side, if you have owned a single family home as a rental in an area that appears somewhat likely to be under rent control you will want to consider all options for the future. This includes the option of selling the property, getting out of the landlord business and paying your taxes, or selling the property and going through a 1031 Exchange to purchase a rental property in an area where there is less of a chance that rent control will be enacted. If the option that appeals to you most is selling the property, contact your tenant. If the tenant does want to, or cannot, buy the property then start the process of putting the home on the market.

 

From the tenant side, if rent control goes into effect your options down the road become somewhat restricted as there will likely be fewer units on the market for you to rent when the time comes and the rent you will be paying will likely be significantly higher. If you are in an area where rent control appears to be likely and you have been thinking about purchasing a home in the somewhat near future, say one to two years, then consider moving up that time frame. Call a mortgage professional (I would be an appropriate call…) to get pre-qualified and determine your purchasing power. I can also provide a ballpark price range for the home and if there is a near match and you like the home you have been renting then contact the landlord and make an offer. If the landlord does not want to sell then you know your price and we can hit the open market to see what is available.

 

If you are in a residential rental relationship, as landlord or tenant, and are considering severing that relationship by selling or buying please contact me and I can assist you with options and other professionals who can assist you.

 

Have a question? Ask me!

 

Not great but very good. That was the news this morning from the Commerce Department when it released its first estimate of GDP growth for the first quarter of 2018. The estimate showed economic growth of 2.3%, below the 2.9% growth for the final three months of 2017 but higher than the 2.0% estimate many expected. Part of the slower growth was a slowdown in durable goods purchases, namely vehicles, perhaps a hangover from the huge amount sold post hurricane season in Texas and Florida. By beating expectations the news is slightly mortgage rate unfriendly.

 

Costs going up. The cost of employing the average worker climbed the fastest in a decade in the first quarter, increasing 0.8%. Add to this extremely low unemployment, layoffs near a five decade low and some scarcity in qualified labor and the expectation is for wage inflation to start to impact prices for consumers. This is not friendly news for mortgage rates as higher costs and inflation lead to higher interest rates.

 

Rates for Friday April 27, 2018: The benchmark 10-year Treasury note broke through the 3% mark for the first time since December 2013, in doing so dragged other fixed rates on bonds and mortgages up as well. With very strong employment markets and solid economic growth, what looks like peace potentially breaking out on the Korean Peninsula, there is nothing currently on the horizon to cause rates to drop. We see rates climb again this week from last Friday and it is apparent we have broken out of the prior range; now the question is when will rates level out? We could see rates increase another one-quarter of one-percent before this happens.

 

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

30 year conforming                                            4.49%       Up 0.115%

30 year high-balance conforming                      4.75%        Up 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.

 

Pretty remarkable footage of South Korean President Moon Jae-in and North Korean leader Kim Jong Un meeting at their border today and shaking hands. This is historic and appears to heading to being this generation’s version of the Berlin Wall being torn down. There is historic correlation between the Berlin Wall and the separation of Korea.

 

Korea had been ruled by the Japanese since the 1910’s when it invaded and occupied the county. North Korea and South Korea were created in 1945 as part of the treaties ending World War II, with the Japanese removed from the peninsula and Russia and the United States occupying the peninsula, Russia the northern part and the United States the southern part—the dividing line the infamous 38th parallel. This was the same manner in which Germany, and Berlin, were divided after the war with the exception that France and England joined in those divisions.

 

In 1950 the North Korean Army sent troops over the 38th parallel and the Korean War began. The armed conflict ended in 1953 when an armistice was signed by the representatives from the United Nations, North Korea and the People’s Republic of China. The armistice has been in effect these past 65 years but no peace treaty has ever been signed between the two countries, meaning they have continued to technically be at war.

 

The world watches and hopes that the Korean leaders are able to walk the path to peace and put an end to the tensions and potential for more armed conflict.

 

Have a great week,

 

Dennis

4-20-18: Why do you want me to put 21.2% down?

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Question of the week:  Why do you want me to put 21.2% down?

 

Answer: This question came from a new client last week who had been speaking with a representative of a major national lender about loan options for purchasing a new home and called me on the advice of her tax preparer.

 

She is a first-time buyer who was getting ready to write an offer on a condominium unit and began the call the way many do, “I was given your name by my tax person when I told her I was buying a condo. I’m writing an offer tonight, have spoken to my bank already and will be putting 20% down.”

 

After getting the necessary information for income, credit, funds for closing I asked about the property she wanted to purchase, price, if she was sure it was a condominium (a great question for next week) and the homeowners’ association fees.

 

After getting all the information I said, “Everything looks great, you definitely qualify, however instead of putting 20% down I think you should put a bit more down, $6,900 more to be precise, which is 21.2% down.”

 

This prompted our question of the week.

 

Because we look at the big picture and have over 30 years’ experience that allows us to quickly sort through options my suggestion was an automatic response.

 

The offer my client was going to make was for $575,000. If she put 20% down, $115,000, her loan amount would be $460,000. Following my advice putting down 21.2%, which would be $121,900, her loan amount will be $453,100.

 

Why is that important? Look at the rates for today below. The conforming rate today is 4.375%, the high-balance rate is 4.625%, one-quarter of one percent higher (0.25%). Usually, the difference between the two is one-eighth of one percent (0.125%), however the high-balance rate is always higher by 0.125% or higher.

 

What is the difference between a conforming loan and a high-balance loan? One dollar.

 

The maximum conforming loan amount is $453,100. This amount happens to be 78.8% of the $575,000 offer my client wanted to write. The payment on today’s conforming rate for $453,100 is $2262.26 per month. If the client put down 20% the loan amount would be $460,000, which would have a payment of $2365.04 per month. By putting down the extra $6900 she is saving $102.78 per month ($1233 per year).

 

Having inherited money from her recently deceased father she has the funds to put down the extra 1.2% without any financial harm, and with her income situation the extra $102.78 per month makes her a little more comfortable with the monthly housing payment.

 

To be fair most lenders would bring up this option to a client in a situation like this, however we find time and again options with small changes to the what the client may pay in closing or monthly payment or manipulating credit or other factors that can provide another option that may be more beneficial in the long run.

 

Several decades experience enables us to look at a transaction and present several different options to consider so our clients can determine which they feel is the best for them and their family. Experience matters!

 

(The client’s offer on the condo was not accepted, but she is probably writing another offer this weekend, keep your fingers crossed for her!)

 

Have a question? Ask me!

 

The most significant economic news this week was the retail sales report for March, which was very strong. American consumers spent 0.6% more in March than February with auto sales leading the charge. The news was a bit of surprise and put a bit of upward pressure on rates.

 

Rates for Friday April 20, 2018:  With a lack of economic news this week the increase in mortgage rates was a bit unexpected. Some of the increase can be attributed to investors pricing in a rate hike from the Fed in June, and some speculation of perhaps two more increases in the second half of the year instead of the anticipated one. With a lot of government debt hitting the markets this week, and two major foreign buyers of our debt (China and Japan) not real thrilled with the Trump tariffs, plus the Fed putting bonds and mortgages from its portfolio into the market rising rates should not be a surprise. With a lot of supply coming to market prices are going to drop, when prices drop interest rates go up. The conforming rate increases for the first time in eleven weeks and we see the high-balance rate hit its highest level since January 2014.

 

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

30 year conforming                                            4.125%       Up 0.125%

30 year high-balance conforming                      4.625%      Up 0.25%

 

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.

 

 

I love the cool Spring weather we have been having and hope it lasts for a few more weeks. My weather sweet spot is low to mid-70’s with breezes, exactly what we have been having!

 

Have a great week,

 

Dennis

4-13-18: What is the IRS Form I have to sign with my mortgage application?

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Question of the week:  Why do some of the creditors on my credit report say, “Affected by Natural or Declared Disaster” when I live nowhere near a natural disaster that has occurred?

 

Answer: Because creditors were not all A+ students in geography class.

 

Last year saw many natural disasters across the country, from hurricanes in Texas and Florida to wildfires up and down the state of California. Many people were severely impacted by the disasters, some of the more fortunate only lost some days at work and had the financial burden of cleaning up after the disaster, however many lost their homes, cars, places of work and neighborhoods. While trying to recover from the disasters, dealing with the emotion of such tremendous loss they also had the reality of bills still due, negotiating with insurance companies to cover losses and added costs of where to stay and how to get there.

 

Understanding that financial disasters create tremendous financial burden on those in the impacted areas more and more credit companies are automatically putting into their reports to the three major credit bureaus that the debtor resides in a natural disaster area. The purpose of this statement is to let those reviewing the credit report for the possibility of extending credit will understand if there are any late payments on the account that the natural disaster could be responsible for the late payments. Essentially letting future creditors know there is likely a very good reason for the late payments that should be taken into account when extending credit.

 

So why are these notices popping up on credit reports for people who have not been affected by a natural disaster? Because the notices are put on credit reports using computer models and the computer models, from what we have seen, are using counties or regions when determining which accounts to label.

 

For instance, a couple in Long Beach, which has not been impacted by any natural disaster in decades, has a couple of accounts labelled with the natural disaster language. While Long Beach has not had a natural disaster declared, within the last twelve months there have been severe fires in both Los Angeles and Orange Counties; Long Beach is in LA County and borders Orange. It appears the creditor plugged in LA County as having a natural disaster and tagged all its accounts in the county, not realizing the size of the county and how geographically distant Long Beach is from any of the fires that occurred.

 

In Texas and Florida people are facing similar reporting, while they were not severely impacted by any of the storms they live near enough, or are in counties, declared natural disaster areas that they have had accounts tagged with the natural disaster warning.

 

Does this impact your credit? No, it does not. Does it impact your mortgage underwriting? As this reporting is relatively new on credit reports we have had some underwriters request appraisers note on the report if the property was impacted by a natural disaster.

 

At this point we have not seen any impact on credit scores, positively or negatively. Meaning if you have an account that has a 30-day late payment on the credit report and that same account is labelled “Affected by Natural or Declared Disaster,” we have not seen your credit score not impacted by the late payment—meaning your score is still depressed due to the late payment.

 

If this label is on some of  your accounts do not be concerned that it is in any way impacting your credit or ability to obtain a mortgage or other applied for credit such as an auto loan. It is merely a head’s up to other creditors that if you do have any late payments in the recent past there may be a very good reason why—if you in fact did live in a natural disaster area and were negatively impacted.

 

If you have any questions about your credit report please do not hesitate to contact me.

 

 

Have a question? Ask me!

 

A few reports this week that can impact rates. On Wednesday, the final revision to Gross Domestic Product for the 4th quarter of 2017 was released, and the revision was up 0.4% from the prior revisions. Strength in the increase was mainly attributed to consumer spending, which increased 4.0% from the 3rd quarter. The news was somewhat mortgage rate unfriendly as stronger economic data portends higher interest rates in the future.

 

While consumer spending led the way in 2017, so far in 2018 that has not been the case, causing expectations for GDP growth in the first quarter to be lower than it was in 2017. On Thursday data was released on Personal Income and Consumer Spending. The good news is that wages continue to increase, up 0.4% in February, matching January’s increase. And like January, consumer spending in February was up a lackluster 0.2%. Workers are earning more but spending less, so it is no surprise that the personal savings rate has increased to 3.4%. With the flat growth in consumer spending prices were up 1.8% from February 2017, still below the Fed’s 2% inflation rate target. The increase in earnings is negative for mortgage rates as it creates expectations for wage inflation, however workers putting more of their earnings into savings instead of spending is positive for mortgage rates. Since consumer spending is approximately 65-70% of GDP, a slow-down in spending could slow down GDP growth, keeping upward pressure on rates at bay.

 

Rates for Friday March 30, 2018:  A short week for markets as stock and commodity exchanges are closed today for Good Friday. Conforming rates continue to hold steady from Friday to Friday, seven weeks in a row now with the same rate. Lenders continue to bounce up and down on the high-balance conforming rates (loans from $463,451 to $679,650) and we are down 0.125% from last Friday. Markets continue to be volatile, and there is more turbulence ahead as indicated by the stock markets down in the first quarter of 2018 after nine consecutive positive quarters. My advice remains to lock through your escrow closing when you can.

 

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

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                      4.375%      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 parents on young ones I will give you this Easter tip learned from my mom, count the number of eggs you hide so you make sure they are all found. My mom learned this lesson when her young sons found an egg or two in the middle of August, in Tulsa, that had been rotting in the sun and heat since March. There was a special kind of scent and cleaning her boys after they found the putrid little bombs and did what boys do (throw at each other) taught to always make sure all the eggs were found on Easter…

 

Spring Break begins for our kids and many others, after this next week the next stop is summer. Seems like forever for the kids and tomorrow for the parents.

 

Have a great week,

 

Dennis

3-30-18: Credit report states impacted by natural disaster

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Question of the week:  Why do some of the creditors on my credit report say, “Affected by Natural or Declared Disaster” when I live nowhere near a natural disaster that has occurred?

 

Answer: Because creditors were not all A+ students in geography class.

 

Last year saw many natural disasters across the country, from hurricanes in Texas and Florida to wildfires up and down the state of California. Many people were severely impacted by the disasters, some of the more fortunate only lost some days at work and had the financial burden of cleaning up after the disaster, however many lost their homes, cars, places of work and neighborhoods. While trying to recover from the disasters, dealing with the emotion of such tremendous loss they also had the reality of bills still due, negotiating with insurance companies to cover losses and added costs of where to stay and how to get there.

 

Understanding that financial disasters create tremendous financial burden on those in the impacted areas more and more credit companies are automatically putting into their reports to the three major credit bureaus that the debtor resides in a natural disaster area. The purpose of this statement is to let those reviewing the credit report for the possibility of extending credit will understand if there are any late payments on the account that the natural disaster could be responsible for the late payments. Essentially letting future creditors know there is likely a very good reason for the late payments that should be taken into account when extending credit.

 

So why are these notices popping up on credit reports for people who have not been affected by a natural disaster? Because the notices are put on credit reports using computer models and the computer models, from what we have seen, are using counties or regions when determining which accounts to label.

 

For instance, a couple in Long Beach, which has not been impacted by any natural disaster in decades, has a couple of accounts labelled with the natural disaster language. While Long Beach has not had a natural disaster declared, within the last twelve months there have been severe fires in both Los Angeles and Orange Counties; Long Beach is in LA County and borders Orange. It appears the creditor plugged in LA County as having a natural disaster and tagged all its accounts in the county, not realizing the size of the county and how geographically distant Long Beach is from any of the fires that occurred.

 

In Texas and Florida people are facing similar reporting, while they were not severely impacted by any of the storms they live near enough, or are in counties, declared natural disaster areas that they have had accounts tagged with the natural disaster warning.

 

Does this impact your credit? No, it does not. Does it impact your mortgage underwriting? As this reporting is relatively new on credit reports we have had some underwriters request appraisers note on the report if the property was impacted by a natural disaster.

 

At this point we have not seen any impact on credit scores, positively or negatively. Meaning if you have an account that has a 30-day late payment on the credit report and that same account is labelled “Affected by Natural or Declared Disaster,” we have not seen your credit score not impacted by the late payment—meaning your score is still depressed due to the late payment.

 

If this label is on some of  your accounts do not be concerned that it is in any way impacting your credit or ability to obtain a mortgage or other applied for credit such as an auto loan. It is merely a head’s up to other creditors that if you do have any late payments in the recent past there may be a very good reason why—if you in fact did live in a natural disaster area and were negatively impacted.

 

If you have any questions about your credit report please do not hesitate to contact me.

 

 

Have a question? Ask me!

 

A few reports this week that can impact rates. On Wednesday, the final revision to Gross Domestic Product for the 4th quarter of 2017 was released, and the revision was up 0.4% from the prior revisions. Strength in the increase was mainly attributed to consumer spending, which increased 4.0% from the 3rd quarter. The news was somewhat mortgage rate unfriendly as stronger economic data portends higher interest rates in the future.

 

While consumer spending led the way in 2017, so far in 2018 that has not been the case, causing expectations for GDP growth in the first quarter to be lower than it was in 2017. On Thursday data was released on Personal Income and Consumer Spending. The good news is that wages continue to increase, up 0.4% in February, matching January’s increase. And like January, consumer spending in February was up a lackluster 0.2%. Workers are earning more but spending less, so it is no surprise that the personal savings rate has increased to 3.4%. With the flat growth in consumer spending prices were up 1.8% from February 2017, still below the Fed’s 2% inflation rate target. The increase in earnings is negative for mortgage rates as it creates expectations for wage inflation, however workers putting more of their earnings into savings instead of spending is positive for mortgage rates. Since consumer spending is approximately 65-70% of GDP, a slow-down in spending could slow down GDP growth, keeping upward pressure on rates at bay.

 

Rates for Friday March 30, 2018:  A short week for markets as stock and commodity exchanges are closed today for Good Friday. Conforming rates continue to hold steady from Friday to Friday, seven weeks in a row now with the same rate. Lenders continue to bounce up and down on the high-balance conforming rates (loans from $463,451 to $679,650) and we are down 0.125% from last Friday. Markets continue to be volatile, and there is more turbulence ahead as indicated by the stock markets down in the first quarter of 2018 after nine consecutive positive quarters. My advice remains to lock through your escrow closing when you can.

 

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

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                      4.375%      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 parents on young ones I will give you this Easter tip learned from my mom, count the number of eggs you hide so you make sure they are all found. My mom learned this lesson when her young sons found an egg or two in the middle of August, in Tulsa, that had been rotting in the sun and heat since March. There was a special kind of scent and cleaning her boys after they found the putrid little bombs and did what boys do (throw at each other) taught to always make sure all the eggs were found on Easter…

 

Spring Break begins for our kids and many others, after this next week the next stop is summer. Seems like forever for the kids and tomorrow for the parents.

 

Have a great week,

 

Dennis

3-23-18: What should I look for in a Home Equity Line?

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Question of the week: What should I look for in a Home Equity Line?

 

Answer: With equity building, rates rising and prices continuing to climb we are getting more and more inquiries from clients looking for Home Equity Lines of Credit (HELOC) to remodel homes or for other purposes.

 

Before getting a HELOC some questions I have clients answer to be sure that is the correct route for them to go to meet their needs:

 

  • Can you accomplish what you want with a cash out refinance? The rate on a refinance may be lower than a HELOC, and depending on your current rate and payment may be better in the long run. Yes your rate may go up but it will be fixed and over time you may be paying less for the funds you need.

 

  • If you are looking to remodel and/or add on to your home is what you want in your home available on the market? Instead of converting your two bedroom one bath to a three bedroom two bath home, can you buy the home you want in today’s market? What is the cost of the new home? How do the payments compare to your final costs after the remodel? Do you want to live with a contractor handing you coffee and a newspaper every morning for several months?

 

  • Do you know how a HELOC works?

 

If you go through your due diligence and a HELOC is what you need, what should you look for when comparing different options on the market?

 

Before we discuss what to look for a quick primer on how a HELOC works. This is not a fixed rate loan, it is adjustable and it can adjust at any time. As a rule the base rate for your HELOC is the Prime Rate (what a bank charges its clients with the lowest risk is the standard definition). Prime is not tied to anything, in the past different banks have had different Prime Rates and they were all published in financial media, today most banks have the same Prime Rate. When does the Prime Rate move? Whenever a bank feels it needs a better return on its loans, typically when one major bank changes its rates all other follow.

 

For the past few decades banks have moved their Prime Rate in conjunction with the Federal Reserve’s Federal Funds Rate, the rate banks charge to borrow from each other through the Federal Reserve. This week when the Fed increased the funds rate by one-quarter of one percent (0.25%) banks immediately increased their Prime Rates, as a result the Prime Rate went from 4.5% to 4.75%. As the Prime Rate increases and decreases so does the rate on your HELOC.

 

HELOCs then operate like a credit card, you have a credit limit and can borrow within that limit and pay back as much as you like at any time, and you have a minimum payment due every month based on your balance. If you have a HELOC with a $100,000 limit and borrow $25,000 then you owe at minimum the interest on the $25,000 every month (some banks have a 1% repayment rule, or interest only whichever is greater). As long as your HELOC line is open to drawing against it you can run the balance up and down as often as you like within the credit limit.

 

 

If you get a HELOC is your rate the Prime Rate? Maybe, but most likely not. This leads to one of the important factors about a HELOC you need to know when comparing options:

 

  • What is the margin? We discussed that your rate is tied to the Prime Rate, but that is not necessarily your rate. Your rate will be the Prime Rate plus a margin. The margin is a fixed amount throughout the loan. Perhaps the bank is running a special and you can get Prime with no margin, but generally there will be a margin anywhere from a quarter percent (0.25%) to one and a half percent (1.5%) or higher depending on many factors. What is important to you is what is the margin. If Prime is at 4.75% and you have a 1% margin to start your rate is 5.75% on whatever balance you have outstanding—until the next time the Prime Rate moves at which point your rate will adjust. Whatever your margin is added to Prime is your rate, the margin will remain fixed but your rate adjusts with Prime.

 

  • What determines the margin?
    • First and foremost your margin will be determined by your credit score. The higher your score the lower the margin, which makes sense. If you have a lower credit score you are considered a higher risk than someone with a higher score, so your margin maybe 1.5% while someone with a much higher score may have a margin of 1%.
    • Second, what is the amount of money you are looking for? It seems counter-intuitive but generally the more you want as your maximum limit the lower your margin may be. If you get a line for $50,000 the margin maybe as high as 2%, but if you get $250,000 it may be 1%.
    • Third, what is the total loan to value? If your home is appraised at $600,000 and you owe $300,000 then the loan to value (LTV) is 50%. If you want an equity line for $100,000 the total LTV will be 67% (300,000 + 100,000 = 400,000 divided by value of 600,000 is 66.66666% or 67%). If you want an equity line of $180,000 then the LTV is 80%. Generally, the higher the LTV the higher the margin.

 

  • What are the terms of the HELOC draw and repayment period? Is your line open and available for use for ten years, fifteen, twenty? If the line is shut down for use before the balance is due what are the repayment terms for the final years of the loan? Can you continue to make interest only payments? Does the loan become fully amortized for the remaining term of the loan? Is there a potential balloon payment? These are very important terms to know as they will dictate what your financial obligations will be in the future. If the loan begins to fully amortize for five years after you use it for ten will you be able to make those payments (for instance you have $80,000 balance and your rate is 6% when the HELOC shuts down and is fully amortized your payment at that rate would be about $1550 per month)? What if it has a balloon and you did not do a good job of making principal payments, where will you come up with $80,000, $125,000 or even $25,000, when the time comes.

 

Before getting into a HELOC look at what will happen in the future, know how your rate will be determined by knowing the margin, know how you will have to repay the debt in the near term but equally important later in the loan when the repayment terms may change.

 

HELOCs can be very beneficial financial instruments, but like all financial tools they work best when used properly.

 

If you have any questions about HELOCs or want some help deciphering different options being presented to you please do not hesitate to contact me for assistance.

 

As well, if you currently have a HELOC and are concerned about your rising interest rate and possible repayment challenges in the future (i.e. fully amortized payment and/or balloon payment) please call me to discuss options for refinancing and if that is an option that makes sense for you and your family.

 

Have a question? Ask me!

 

Rate moving news this week did not come from our usual sources of economic reports from various government or private agencies. The first announcement was the Federal Reserve Open Market Committee (FOMC) that it was raising the fed funds rate by one-quarter of one percent (o.25%), which as discussed above resulted in an increase in the Prime Rate to 4.75%. The rate increase alone had no impact on mortgage rates as the markets had fully anticipated the move and it was already priced into our rates a long time ago. What can move mortgage rates are comments from the meeting and Fed Chair Jerome Powell that may indicate the Fed will engage in three more rate increases this year instead of the previously announced two more increases. There were no comments or statements that indicated a change in the rate increase schedule for 2018 and markets reacted somewhat favorably.

 

Yesterday the Trump Administration announced tariffs of about $50 billion worth of certain Chinese imports. The immediate announcement caused stock markets to drop about 2% and the sell-off proceeds were put into bonds and mortgages, leading to a dip in rates. Later as considerations were given to possible retaliation from China one target stands out—U.S. debt. China is the largest holder of United States Treasury bills and bonds, with almost $1.2 trillion. Should China start a significant sell off of their holdings it will cause rates to climb, how much would depend on how much debt China wants to bring to market. The potential retaliation from China caused rates to reverse yesterday into correction mode after their initial dip.

 

Rates for Friday March 23, 2018: Some movement in the price of conforming rates this week, but we end the week steady from last Friday. On the higher side we saw the high-balance conforming rate (loans from $453,101 to $679,650) gave back their brief dip from last week. Rates are volatile for many reasons and I expect rates to have more pressure to move up than down, I retain my mantra of locking as soon as you can through your escrow period.

 

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

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                      4.5%         Up 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.

 

 

Regular readers of the WR&MU know this last section is usually something personal going on in my life. It is a bit longer than the usual short paragraph or two, but I hope you indulge me and give it a read.

 

Many of you know I am a member of the Rotary Club of Long Beach. I am proud of my membership, not only in our local club that contributes tens of thousands of dollars to assist local non-profits every years, has purchased hundreds of thousands of dollar in books for local schools and every year provides hundreds of thousands of dollars in scholarships to students at Long Beach City College and Cal State Long Beach; but also proud to be part of Rotary International.

Rotary International could be looked at as the primary organization responsible for the nearly complete eradication of polio around the world. Taken on as a primary mission in the 1950’s, Rotary clubs around the world raised funds and volunteers to vaccinate children from Boise to Bangkok, Tulsa to Tunisia. Today there are only a few new cases of polio every year and Rotarians continue to administer the vaccine around the globe to the disadvantaged.

 

Lack of easily accessible clean water is incredibly debilitating to a community. Disease denies children to opportunity to go to school or adults to work, lack of sanitation and ability to properly clean increases the spread of disease. Some villagers, almost always women and their daughters, spend hours each day walking to and from the nearest source of water—not clean but water. Agriculture is poor, if existent, due to lack of water available for irrigation. In sum, it is practically impossible to turn around a community that is under-educated, in poor health and lacking economic activity if it has no clean water source.

 

With the overwhelming success in fighting polio the organization began to look at how it could impact the world again. Water. Clean water for everyone has become a universal cause for Rotarians. Millions of people around the world do not have access to clean water to drink, cook or clean with. Our club is very active in this effort and this past year some of our members were key players in raising funds and partnering with Water Underground to drill wells for four villages in Mozambique.

 

Below is link to  a video of one village on the day its well was tapped and fresh water came shooting from the ground. This was one of the wells our club was primarily responsible for funding. Watch these villagers and consider how so very fortunate we are to have some we consider so simple, getting water to drink, cook or clean with, from a tap.

 

After this video was shown at our club meeting Wednesday those present quickly made donations to pay for one more well in Mozambique. Sometime next year another village of a few thousand people will dance in the water shooting from the ground.

 

Here is the video (click on the “Watch our 2017 film” box embedded in the bottom of the video on the home page). Take a few minutes to watch it, you will be glad you did.

 

Have a great week,

 

Dennis

3-16-18: What is the difference between Fannie Mae and Freddie Mac?

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Question of the week: What is the difference between Fannie Mae and Freddie Mac?

 

Answer: Before we look at the differences between Fannie and Freddie a quick recap as to what they are. Fannie and Freddie are currently owned by the United States government and regulated by the Federal Housing Finance Agency. When you hear or read about “conforming” or “conventional” mortgages, know the reference is to Fannie and Freddie mortgages.

 

Here is how they work. When your conventional mortgage funds the lender will bundle your mortgage with tens of millions of dollars of other mortgages and sell them to Fannie Mae or Freddie Mac. They will then create a bigger bundle, think hundred million, and sell Mortgage Backed Securities (MBS) to investors. So your home loan in Cypress, California becomes an investment for the Shreveport Municipal Employees Pension Fund.

 

Side note: investors purchase MBS as an alternative to US Treasury bonds or other long term fixed rate investments. When investors are buying MBS rates go down, when they are selling, or not buying, rates go up.

 

When investors purchase the MBS of conventional mortgages they do so with the understanding that all the mortgages in their investment have been underwritten and funded under the guidelines of either Fannie or Freddie, depending which on whose mortgages they are buying.

 

To review, your mortgage is underwritten to either Fannie Mae or Freddie Mac underwriting guidelines, after it is funded by the lender it is sold to whichever entity whose guidelines were used to approve the loan, it is then sold as part of a larger package of mortgages to investors.

 

The differences between Fannie and Freddie comes down to their underwriting guidelines. For decades Freddie was known for somewhat looser underwriting standards, in the past few years Fannie has altered several of its guidelines to align with the Freddie guidelines.

 

There differences between the guidelines between the two are not many but useful to know when certain situations arise. For instance for income qualifying Freddie may only require one year tax returns in situations where Fannie may require two years. Certain property requirements are easier for loans going to Freddie as well—for instance we recently had an issue with a property that had a shared private road, Fannie Mae has some challenging requirements regarding maintaining that road whereas Freddie Mac does not have any requirements. Certain instances of how credit and debt are considered, use of co-signers and funds can also vary between the Fannie and Freddie guidelines.

 

If we go into all the differences your eyes will roll back in your head, actually after a few you will quit reading, but there are enough differences that somewhat frequently we will determine to use fund a loan using Freddie guidelines instead of Fannie, or vice-versa, because we need to in order to get the loan approved and funded.

 

Have a question? Ask me!

 

Prices and sales dominated economic news this week. Inflation was subdued in February, the Consumer Price Index rose 0.2% from January and was up 2.2% from last February; strip out volatile food and energy prices, which is what the Fed does when gauging inflation, and prices were up 1.8% from 2017 which is below the Fed’s target 2.0% inflation rate. Wholesale prices were also benign with the Producer Price Index also up 0.2% for the month and 2.5% for the core rate (less food and energy). The price data does not support the Fed looking to alter its stated course of three rate increases of 0.25% this year. Also not support more aggressive rate increases was the retail sales report. Retail sales dipped 0.1% in February from January, a bit counter to expectations with strong job growth and rising wages; an interesting aspect of the report was that nonstore sales jumped 1% from January.

 

Proceed with caution is the advice for the coming week. On Wednesday the Federal Open Market Committee will announce its decision on whether the Federal Funds rate is being increased. The overwhelming consensus is the Fed will bump the rate 0.25% at its meeting, the first of three expected for the year. This rate increase is already priced into the mortgage markets so if there is a 0.25% increase there should be no impact on mortgage rates. Key word in that sentence? “Should.” If the expected rate increase is what is announced, investors will then read with great interest the statement accompanying the rate announcement. Is there any statement regarding following labor markets more closely, concern or attention to wage inflation, changes in expectations for economic growth? Investors will be parsing the statement to see if there is a hint, or a hint of a hint, that the Fed may have four rate increases this year instead of the expected three, or that one or more of the hikes could be 0.5% instead of 0.25% their reaction will be to sell of bonds and Mortgage Backed Securities and we will see rates jump up on Wednesday afternoon.

 

Rates for Friday March 16, 2018: Conforming rates hold steady for another Friday and we see high-balance rates (loans between $453,101 and $679,650) dip after three flat weeks.

 

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

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                       4.375%      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.

 

Arghhh. Why  did I change my bracket at the last second and put in Arizona to make the Final Four instead of Virginia? Because I over-thought it. It’s a mistake I try to avoid in business and working with clients—don’t over think, the solution is right there just implement it—but when it comes to trying to predict sporting events I tend to over-think which is good for my friendly competitors but frustrates me.

 

A great weekend to be a bar owner with St. Patrick’s Day falling on a Saturday night. I am going to assume the take in the collection plates on Sunday morning will be a directly reciprocal to the take in the tills of the drinking establishments on Saturday night. According to Wallethub.com beer consumption tomorrow will be 152.5% greater than usual, and Guinness sales will be 819% higher. I tend to enjoy Guinness throughout the year, why restrict such a fine beverage to only one day? Not only will purveyors of Guinness benefit from the Irish holiday, but so will cabbage sellers and transporters as the cruciferous vegetable sees a 70% increase in shipments the week of the green.

 

Have a fun, and safe, St. Patrick’s Day,

 

Dennis Cleary Smith (now you know what the “C” is for!)

3-9-18: Why do I need to pay for a home inspection and an appraisal?

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Question of the week: Why do I need to pay for a home inspection and an appraisal?

 

Answer: With many of our clients being first time buyers this is a question that pops up as they try to learn the vernacular of real estate, understandably because the appraiser does inspect the property.

 

The quick answer is, if you are getting a mortgage you will most likely need to pay for an appraisal*, and if you are buying a home you should pay for a home inspection.

 

(*) There are instances with conforming loans (Fannie Mae or Freddie Mac) where the Automated Underwriting System (AUS) will have in the approval findings that they (Fannie or Freddie) will purchase the mortgage from the lender with an “appraisal waiver” instead of a full appraisal. Not uncommon for the waiver to show up, but not real prevalent either. For our purposes today we assume there is no waiver.

 

While both the appraiser and home inspector look at, or inspect, the property, each is doing so with a different purpose and therefore have different reports for you to assist in your decision to continue with your transaction as agreed to with the seller, or perhaps ask for some modifications to the agreement. The purpose of the appraisal is value as collateral, the purpose of the inspection is condition of the property.

 

As mentioned, the appraiser’s purpose is to objectively determine the fair market value of the property for the lender. Since the home you are buying is the collateral for the lender there needs to be sufficient value to support the loan for which you are applying. Therefore the primary work of the appraiser is to evaluate the property in comparison to other similar properties that have sold, and are on the market, in the vicinity.

 

Many people are surprised at how little time most appraisers spend in the property when they are inspecting it. When the appraiser visits the property s/he will take pictures of the exterior and interior, note if certain compliance laws are being followed (smoke and carbon monoxide detectors, strapped and raised water heaters), and if there are any noticeable issues visible by cursory inspection that can create a safety hazard or impact value (broken windows, exposed wiring, obviously deteriorating roof). If there are any very noticeable adverse conditions the appraiser will take pictures and note in the report. The appraiser will also measure the property to include the floor plan in the report. Depending on the size and condition of the property the process takes 15-20 minutes.

 

Most of the work for the appraisal is done away from the property at the appraiser’s office researching recent closed sales, pending sales (in escrow but not closed) and active listings on the market, before visiting the property. Looking for properties that as close as possible to the subject property in square footage, bedroom and bath count, amenities such as pool or spa, condition and proximity, the appraiser notes the similarities and differences and of course the prices of the properties.

 

Using a matrix in the report the appraiser begins making adjustments to the “comps,” or comparable properties. One property is bigger by 200 square feet, so there is an adjustment of $10,000, another has only one and a half bathrooms and the subject has two full baths so there is an adjustment of $15,000, one property sold four months ago and the market has gone up since that sale resulting in a $17,500 adjustment.

 

The appraiser makes adjustments as the properties are compared and in the final column adds up the plusses and minuses to the comparable properties and adjusts the sales (or list if pending sale or active listing) price. If your sales price is $500,000 and the comparable sold for $490,000 but is slightly smaller, in similar condition and closed the sale last week the appraiser may have made $11,000 in adjustments for an adjusted price of $501,000. The next comparable sold for $515,000 but is bigger but in worse condition as it was a rental and the appraiser deducts $17,000 from the price for an adjusted value of $498,000.

 

From the adjusted prices the appraiser presents the opinion of value, if the other comparables are similar to the ones in the above example the appraiser will most likely conclude the value of the property is the sales price, $500,000. The lender now has professional, third party confirmation of the value of the collateral proposed for the loan.

 

In short, a bit late at this point to be short, the appraiser’s work is done without much need for detailed inspection of the property.

 

If you are meeting a home inspector at the property you are purchasing and intend to shadow him or her as the inspection is made you need to block at least two hours on your calendar. The purpose of this inspection is to thoroughly inspect all the physical attributes of the property and test all the mechanical systems. Because of this the inspector will need to spend quite a bit of time at the property. My advice is to always accompany the inspector as s/he does their duty. You will learn a lot about your new home and the inspector will make verbal comments to you that will make reading the report a bit easier later.

 

The inspector will crawl under the home if you have a raised foundation. Climb up on the roof. Go in the attic. Put electrical instruments in all the plugs. Switch every wall light switch on and off. Turn on all the faucets in the sinks and showers and then flush the toilets. Walk the perimeter of the building looking for cracks and how water drains. Doors will be opened and shut. Heating and cooling systems turned on and off. If appliances are included they will also be tested. The floors and flooring will be noted for wear and tear.

 

A good home inspector will look at your home in a more intimate way than your family doctor will you during a physical. Well, perhaps.

 

As the inspection is going the inspector is taking detailed notes which will result in report this is, no surprise given the scope, very detailed. The inspector will, or should, go through the report with you indicating what items are noted and to what extent there should be some concern on your part for future repairs or replacements.

 

It is easy to read through a report and think, “wow, what a mess…” but for most buyers in California you are buying a used home, most likely at least thirty or forty years old, and in many cases like ours over sixty years old when we purchased it almost twenty years ago. There will some flaws, some wear and tear. The important aspects of the inspection are any items that are in need of costly repairs or replacements in the not too distant future. Is the roof nearing the end of its life? Is the heating system antiquated? Does the electrical need upgrading?

 

The appraisal is a required expense for most buyers due to obtaining a mortgage to purchase the property. The inspection is optional, however I would never advise buying a home without first obtaining a home inspection from a professional inspector. Even if you are purchasing new construction it is strongly advised; a friend of mine, many real estate agents reading this will know, George Harper, who was an inspector for many years once told me, he found as many issues in brand new construction as older homes due to quality of workmanship when tract housing is being built—don’t assume because it is brand new it is perfect.

 

The purpose of the appraisal and the inspection are different, but both are important to your home buying process.

 

Have a question? Ask me!

 

Some really big news this week, both economic and political, that can impact rates. On the political side President Trump had an interesting day yesterday—well he has one everyday but for our purposes in composing the WR&MU it was particularly interesting. Directly impacting the economy of the United States and other nations Trump an authorization on tariffs for steel and aluminum imports. This could, probably will in the short run, result in higher prices for those commodities and the products requiring steel and aluminum for manufacture. Ordinarily this would result in investors fleeing stocks and buying bonds, thereby lowering interest rates. Yesterday it was also announced that Trump will be meeting face to face with Kim Jong-un the “supreme leader” of North Korea, at Kim’s request, for nuclear talks. Ordinarily this would be bad for bonds, meaning higher interest rates as good news has investors selling safe, fixed income investments and buying more risky stocks and equities. Neither bit of news had a tremendous impact on the markets, which is surprising to me as I thought the tariffs would result in a pretty strong boost to mortgages and lower rates.

 

Good news is bad, bad is good, when it comes to interest rates. Long time readers of the Weekly Rate & Market Update know this—bonds are fixed return investments, as are mortgages, and are considered “safe” because if you buy them you know what your return will be based on the interest of the bonds. When there is bad news that leads to an uncertain future investors engage in a “flight to safety,” purchasing fixed incomes products like bonds and mortgages creating lower interest rates, and to do this they usually sell stocks, resulting in lower stock prices. The converse is true with positive news, bonds are sold, resulting in higher rates, and stocks are purchased.

 

Today we had some unexpectedly very positive economic news. The Labor Department released its February employment report and it vastly exceeded expectations. The consensus range for new hires in February was 152,000 to 230,000 workers added to payrolls. The actual number was 313,000 new workers added to nonfarm payrolls, as well January’s new hire totals were adjusted up 54,000 workers. The only negative in today’s report was the concern for wage inflation with the strength in employment expansion with average hourly earnings year over year growing 2.6%, more than half a percent over inflation. The unemployment rate remained at 4.1% for the fourth month in a row. With the very strong employment signally economic growth, and possibly supporting a fourth increase in rates from the Fed this year instead of the scheduled three increases, rates opened higher this morning to the surprise of no one in the industry.

 

Rates for Friday March 9, 2018: With all the news this week rates remain constant from last Friday, our fifth straight week at the same rate on conforming. I will admit to being a bit surprised we are not higher than last Friday with the news this week.

 

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

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                       4.50%      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.

 

As most of you know, I am a big sports fan. This coming week is the start to one of my favorite sporting events—the NCAA Men’s Basketball Tournament. Few events have the nail biting finishes, numerous upsets and the energy that occur over three weeks of March Madness. On Sunday the teams participating will be announced and the brackets revealed showing each team the path they need to take if they are going to be cutting down the nets on April 2nd in San Antonio. On Monday campus and office tournament organizers across the country will be posting rules and “costs” and millions will fill out their brackets for “bragging rights.”

 

Every year there is more and more parity in college basketball, and this season was no exception, which should ensure us another tournament filled with surprises and excitement. I hope you are able to enjoy it as much as I will.

 

Have a great week,

 

Dennis

3-2-18: What is the cost of waiting?

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Question of the week: What is the cost of waiting?

 

Answer: Last week we discussed if we are in a housing bubble and if I thought it could pop and send real estate prices, at least in Southern California, tumbling again. The follow up to that question is, what is the cost of waiting if you feel the market will decline in the future and are waiting “buy the dip” when you feel that occurs.

 

This is something I analyze about once a year and it is time to revisit the topic. Past performance is no indication of future performance, but can give us a look at the costs associated with waiting to purchase should prices and/or rates continue to go up.

 

In January 2017, the median price of a home in Los Angeles County was $509,130; in January 2018 the median price was $564,100.  The 30-year fixed rate I quote every Friday was the same on the last Friday of January 2017 as it was on the last Friday of January 2018 at 4% (after dipping as low as 3.625% in late summer early fall) to the cost of money was constant.

 

Assuming 20% down what was the cost to those who waited to purchase in January 2018 instead of purchasing the year before? Here we see the difference in down payment and monthly mortgage payment between purchasing the median home in January 2017 verus January 2018:

 

PRICE  LOAN AMOUNT RATE  PAYMENT MONTHLY  DOWN PAYMENT
 $       509,130  $     407,304 4.000%  $      1,945  $        101,826
 $       564,100  $     451,280 4.000%  $      2,154  $        112,820
 DIFFERENCE  $         209  $          10,994

 

 

As you can see, waiting one year—even with no change in rates, increased your down payment by 10% and your monthly payment by 10%. In the first year of home ownership the cost of waiting from 2017 to 2018 cost about $13,500—and the cost will increase about $2500 per year. (Note the actual cost is higher since you will have higher property taxes with the higher purchase price.)

 

From a qualifying standpoint, if your monthly payment for the mortgage (not including taxes, insurance, homeowners association if applicable) cannot exceed 30% of your monthly income then from January 2017 to 2018 you would need to make about $8400 more per month to qualify.

 

To recap, by waiting from last year to this a home buyer in Los Angeles County needed to earn over $8400 to qualify for the loan, spend almost $11,000 more in down payment and have mortgage payment that is $2500 more per year.

 

Let’s play what if….What if you are ready to buy today but decide to wait for prices and/or rates to dip back down? And what if during this waiting period prices and/or rates go up? Here is a chart showing price increases of about 5% from today’s median price and rates going up to where I, and others, think we may be by the end of 2018:

 

PRICE  DOWN PAYMENT  LOAN AMOUNT**  PAYMENT 4.375%  PAYMENT 4.50%   PAYMENT 4.625%  PAYMENT 4.75%
 $  560,000  $  112,000  $      448,000  $        2,237  $          2,270  $        2,303  $          2,337
 $  585,000  $  117,000  $      468,000  $        2,337  $          2,371  $        2,406  $          2,441
 $  615,000  $  123,000  $      492,000  $        2,456  $          2,493  $        2,530  $          2,567
 $  645,000  $  129,000  $      516,000  $        2,576  $          2,615  $        2,653  $          2,692

 

Digging into this a little bit, if prices do not go down but rates do you can payment increases of about $33 per month. If the rate stays the same but the prices increase you can see payments go up over $100 per month for every 5% increase in price, and the amount of money needed for down payment will increase as well. Should rates and prices continue to climb the amount of money needed to for down payment and monthly payment increase exponentially.

 

I have ** Loan Amount because as the loan amount increases there is a very good chance that you could move from the conforming rate to the high-balance rate—further exacerbating the monthly cost for the mortgage.

 

There are always a lot of what-ifs when we consider the future and try to predict anything, especially markets. However, there are a lot of factors that would support the chart immediately above, from economic growth to homeowners not selling as frequently as they have in past markets which leads to inventory scarcity.  All the data I see supports that if you are ready to purchase a new home now you should not wait as the downside of higher costs and payments is more likely, in my opinion, than any potential upside to lower costs and payments dependent on prices and/or rates receding enough to make the wait worthwhile.

 

Using those who waited through 2017 as an example, those who were ready in January 2017 that are still waiting have seen not only prices but also rates increase through February, making that wait even more costly.

 

Are you ready to buy? Call me to discuss your options and abilities in today’s market, or find out what needs to be done so you are ready to buy sooner rather than later.

 

Have a question? Ask me!

 

We have a new Fed head, Jerome Powell steps into the chair, previously occupied for the past four years by Janet Yellen. On Tuesday Powell had his first public testimony and told Congress he sees a strengthening economy but did not go so far as to answer directly questions from members of Congress if this means he sees four rate hikes this year instead of the previously assumed three rate hikes. Naturally his not saying, “there will not be four hikes” caused investors to sell on bonds and mortgages pushing rates up.

 

The second adjustment to Gross Domestic Product for the last quarter of 2017 was released and saw a slight revision downward, from 2.6% growth to 2.5%. This had minimal impact on rates. There was no impact on rates with this data.

 

There was some positive economic news this week for workers. In February, personal income rose a very strong 0.4%, the second such monthly increase in a row. Higher wages are great, but what was really strong was the 0.9% increase in disposable income due to the tax cuts hitting paychecks with the reduction in automatic withholdings. With prices up only 1.7% for the year workers are seeing their dollars stretch a bit further.

 

Rates for Friday March 2, 2018: Markets continue to be fairly volatile inter- and intraday depending on the news—either economic or political. When there is this type of volatility it usually suggests there is a breakout, either up or down, approaching. We have a rarity with mortgage rates for 2018 as the conforming rate has remained unchanged for three Fridays in a row, the last time that happened was in mid-December to early January (when we went eleven weeks in a row with no week-to-week change). We always like stability—however I am cautious as to how long we will enjoy it. Lock your rate when you can.

 

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

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                       4.50%      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 Academy Awards are this weekend and I cannot recall the last time I saw so few of the Best Picture nominees—many are on our list to see but we have not had the opportunity to see them. Leslie and our youngest daughter are big fans of the award show, I am not so excited so will no doubt be watching something on Netflix while they are cheering or jeering through the show.

 

Nice to have some rain today, stay safe on the roads!

 

Have a great week,

 

Dennis