Mortgage Minute: Do I Want to Buy a Home?

This is the first of a series of articles from our guest blogger, Cynthia Carr of Stearns Lending.

I am a big believer that people should be informed and educated on mortgage loans. This is the single largest purchase of your life and you only get one chance to do it right the first time. Home ownership is one of life’s major events, and it provides some unique personal and financial rewards. It can provide lasting stability and security and a great place to relax at the end of the day.

Here are a few things to consider if you’re still undecided about taking that leap:

• Home ownership may offer you important tax benefits.
• You’ll have the potential to build equity. This is the portion of your home that you’ve paid for, plus any rise in its value.
• You can decorate and remodel your home to suit your personal tastes.
• It’s a potential investment, since your home’s value may appreciate over the years.
• You won’t have to worry about your rent going up when your lease expires, or having to move if your rental property is no longer available or affordable.

Now that we have giving you the reasons why you should consider purchasing your new home, let’s discuss the first steps. It can be overwhelming! What do I do first? Do I get a Realtor? How do I get a Realtor? Can I qualify for a mortgage? If so, what does that mean in terms of purchase price of a property? How much money do I need? If you haven’t considered these questions, you should now. This blog series is going to guide you and prepare you for home ownership and all that comes with that from those questions to the final signature on the loan documents and getting the keys to your new home.

This month we will discuss this very important step: Do I want to purchase a home?

Let’s think about that for just a second. The knee-jerk reaction is “of course I do," but in reality you have no idea how or where to start. The very first thing you should do is to find a mortgage lender. You can ask friends, family, or colleagues for the name of the lender they worked with when they purchased a home. Please know that it is important to feel informed and confident with your lender. Getting more than one option and talking to more than one lender is absolutely the right thing to do. I know, I know, I am a lender and other lenders will not be happy that I tell you to do that. The truth is that when you have your credit pulled for a mortgage within a 14-day period, it is very unlikely that your credit score will be impacted any more than if it were only one lender checking it. Do not have more than three lenders pull it because rates are rates and all lenders are very close in that area and when you have more than three options it becomes less helpful and more confusing.

Avoid online lenders. They are not familiar with all markets and central Ohio has its own quirks when it comes to who pays for what and what credits the buyer receives from the seller. You need to feel confident in your decision. You will feel like you are going to a financial therapist when you start talking to a lender. We ask questions that have always been “taboo” to talk about: How much money you make, the debts on your credit report, and how much money you have in the bank. These are all serious questions and are a requirement for your lender to know. This confidential information is not shared with anyone unless you as the borrower provide us with the permission to do so.

Let’s wrap this month’s discussion up with a final thought. Before you start house hunting, find a lender who cares about you, one you trust, and who has the knowledge to help you with purchasing the place you call home.

Cynthia is the Branch Manager at the Stearns Lending, 1900 Polaris Parkway in Columbus and can be reached at CCarr@Stearns.com.

Mortgage Rate Drops Below 4%

Last week, Freddie Mac reported an interest rate on a 30-year, fixed rate mortgage of 3.97%, representing the lowest level since June 20, 2013. This results from a number of factors. Interest rates typically move alongside the 10-year Treasury note, which reached a low of 1.86% last week. This is the first time that the yield has been below 2% since May 2013. Many investors prefer the safety of U.S. Treasury bonds given concerns about the economic weakness in Europe, Ebola, and geopolitical turmoil worldwide (such as the threat of the Islamic State militia group in the Middle East). This contrasts expectations of rising interest rates resulting from the Federal Reserve pulling back its economic stimulus of buying bonds and mortgage-backed securities.

Many homeowners have seized this opportunity to refinance. Bank of America reports that a .5% decrease in mortgage rates for a home worth $221,000 should result in savings of $50 per month. However, the Associated Press argues that mortgage rates should not solely dictate the decision to refinance, because doing so is costly. For example, it would cost approximately $2,500 in fees to refinance from a 5.5% to 4% mortgage rate on a $200,000 mortgage, taking roughly 14 months to break even.

Millennials Put Hold on American Dream

Millennials-those born after 1980 through the mid/late 1990s-are not buying homes at the rate previous generations have. To determine why, Bank of America Merrill Lynch conducted a survey of 1000 adults ages 20-34 across various U.S. cities. This is what the company found:

Millennials want to own their own home, but lack the financial resources to do so. 73% of survey respondents report that owning a home is either very important (56%) or important (17%) to them, indicating that Millennials maintain the strong desire to own their own homes consistent with the classic perception of the American Dream. However, Millennials have been negatively affected by cyclical economic factors including high unemployment, lack of wage growth, and lack of credit. 

The study suggests that Millennials may have a distorted image of interest rates as a result of growing up during a time when interest rates were artificially low, hovering around 3-5%. Looking back in time presents a different picture: since 1971, the median 30-year fixed mortgage rate has been 7.98%. Employment for those ages 25-34 is 75.6%, which is more than the low of 73.4 but still behind the pre-recession level of 83%.  Wage growth has been slow, with the real median income for those under 35 falling 16% from $42,000 in 2007 to $35,000 in 2013. Tight credit remains another issue. The average qualifying FICO score as of July 2014 (690 and 760 for an FHA mortgage and conventional mortgage, respectively), is nearly 13 points greater than the average score back to 2000. 

Student loan debt is also hindering first-time homebuyers. One quarter of survey respondents cite that student debt has prohibited them from purchasing a home to date. The median education debt for those under 35 was $17,200 in 2013. It is not a surprise, then, that the survey revealed that Millennials who have student loans are 55% more likely to currently rent than own a home.

Nineteen percent of Millennials are living with their parents. This consists of 31% for those ages 20-24, 16% ages 25-29, and 10% ages 30-34. Many Millennials are living in an apartment (38%) while others have their own home (31%). Not surprising, higher income earners are much more likely to be living in their own home. 12% of respondents making less than $25,000 own their own home, while 60% of those making $75,000-$100,000 own their own home. 

Millennials are delaying household formation, including getting married and having children. Annual household formations of married couples lave dropped 61% for those under 25, 41% for those 25-29, and 18% for those 30-34 since 1982. Mellennials are having fewer kids, and they are having them later in life. Birthrates for women ages 20-29 are decreasing while birthrates for women ages 30-39 are increasing.

As the economy continues to recover and Millennials increase their earnings, they are expected to enter the housing market in greater numbers. Half of those surveyed plan to buy a home within the next five years. The American Dream is not lost: it is merely on hold. 

Investors Withdraw From Housing Market

In August, many investors withdrew from the housing market, possibly resulting from the Federal Reserve's signal that interest rates will be rising. It is no surprise then, that the portion of all cash buyers has dropped. At only 23%, cash transactions represent the lowest share since December 2009.

 First-time home buyers, who account for 30% of transactions and often rely on mortgage financing, will benefit from reduced competition with all-cash offers, fewer bidding wars, and increased inventory.  Another side effect of investor withdraw is the 1.8% decline in existing home sales from a seasonally adjusted 5.14 million in July to 5.05 million in August. This marks the first dip following four months of consecutive gains.

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The Best Time to Buy a Home

The real estate market is cyclical, moving up and down. Still, seasonal variations affect buyers and sellers alike.

The spring is the most common time to buy a home, as most home sales occur between April and July. Buyers like buying at this time because they have more vacation time, better weather, and don't have to take their kids out of school should they change school districts. This is good news from an inventory standpoint, but bad from a price perspective. Sellers who have just listed their homes in the spring will be less willing to negotiate the price than sellers who have withstood less favorable conditions. Increased competition means buyers risk losing a home if they do not act quickly.

Contrarily, buyers can generally expect to find less inventory but better prices in the fall, winter, and summer (the "off" season), when competition is reduced. Realtor.com suggests buying a home between Thanksgiving and New Years, as home prices are typically at a 12-month low in December. Also during the colder months, some mortgage lenders forgo some of their fees in order to attract customers, who in turn get good mortgage deals. Realtor.com also lists early spring as a good time to buy, just as sellers are listing their properties and determining an asking price.

Interest rates and related economic factors are also important to consider when starting your home search. Ultimately, though, the best time to buy varies from person to person, based on personal factors. Beware: waiting for the "perfect" time to buy a home may result in a lost opportunity, given the unpredictable timing of the real estate market.

Ready to start your home search? Contact me!

Calculating Mortgage Affordability

The affordability of mortgage financing plays an important role in a buyer's home search. Moreover, mortgage policies are different now than ever before: while interest rates are lower for accredited borrowers, those with questionable credit face higher rates and more buyers today aren't able to qualify at all. Jack Guttentag, in an article in The Columbus Dispatch, argues that, "mortgage addordability must be calculated three times using three rules...the income rule, the debt rule, and the cash rule. The final affordability figure is the lowest." By coming to three separate conclusions using three different models, home buyers are able to play it safe by assuming they cannot finance more than the lowest figure generated by the three tests.

The income rule: the borrower's monthly housing expenses (the mortgage payment, property taxes, and homeowner insurance premium) cannot exceed a percentage of the borrower's income specified by the lender. To afford more, obtain an additional source of income.

The debt rule: the borrower's total housing expense (the sum of the monthly housing expense plus monthly payments on existing debt) cannot exceed a percentage of the borrower's income specified by the lender. To afford more, repay debt.

The cash rule: the borrower must have sufficient cash to meet the down paymwnt requirement plus additional settlement expenses. To afford more, reduce the down payment and settlement costs, or gain access to an additional source of cash.

Use Guttentag's affordability calculator to see how much you can afford.