More Than Just an Address

For a short time after the housing crisis a decade ago, some homeowners thought the value of home is a place to live rather than an investment. A home certainly has an appeal as a place to call your own, raise your family, share with your friends and feel safe and secure. It can be more than an address; it can also be one of the largest investments homeowners have.

Most mortgages apply a portion of the payment toward the principal amount owed in order to pay off the loan by the end of the term. This acts like a forced savings for the homeowner because as the loan is reduced, the equity grows which increases their net worth.

The other contributor to equity is appreciation. Most homeowners don’t realize the increase in value until they sell the home or do a cash-out refinance, but the increase is real and part of their equity. If the expected appreciation is averaged over the anticipated time for the home to be owned, the value of the equity increase can be proportioned annually or monthly.

Combining appreciation and principal reduction with leverage, it’s possible to build a case that a home is definitely an investment. Leverage is the ability to control a larger asset with a smaller amount of cash using borrowed funds. It has been described as using other people’s money to increase your yield and it applies to homeowners and investors alike.

The table on the picture above shows that even a modest amount of appreciation combined with the amortization of a loan can cause a substantial rate of return on the down payment and closing costs.

This example assumes a 3% acquisition costs on the home with a 4.5% mortgage rate and the resulting equity at the end of five years. The larger down payments lower the yield because it decreases the amount of borrowed funds.

If a borrower buys a home that appreciates at 2% a year with a 3.5% down payment on a FHA loan for 30 years, the down payment and acquisition cost factored by the equity will produce a 28% return on investment each year during the five year period.

A home can be many things including an investment. You can use this Rent vs. Own calculator to see the effect that appreciation and principal reduction can have on a home purchase in your price range. If you have any questions, I’m a phone call away at (805) 701-8410.

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Depends If You Can Afford It

Affordability, stability and flexibility are the three reasons homebuyers overwhelmingly choose a 30-year term. The payments are lower, easier to qualify for the mortgage and they can always make additional principal contributions.

However, for those who can afford a higher payment and commit to the 15-year term, there are three additional reasons: lower mortgage interest rate, build equity faster and retire the debt sooner.

The 30-year, fixed-rate mortgage is the loan of choice for first-time buyers who are more likely to use a minimum down payment and are concerned with affordable payments. For a more experienced buyer who doesn’t mind and can qualify making larger payments, there are some advantages.

Consider a $200,000 mortgage at 30 year and 15-year terms with recent mortgage rates at 4.2% and 3.31% respectively. The payment is $433.15 less on the 30-year term but the interest being charged is higher. The total interest paid by the borrower if each of the loans was retired would be almost three times more for the 30-year term.

Let’s look at a $300,000 mortgage with 4.41% being quoted on the 30-year and 3.84% on the 15-year. The property taxes and insurance would be the same on either loan. The interest rate is a little over a half a percent lower on the 15-year loan, but it also has a $691.03 higher principal and interest payment due to the shorter term.

The principal contribution on the first payment of the 30-year loan is $401.56 and it is $1,235.09 on the 15-year loan. The mortgage is being reduced by $833.53 more which exceeds the increased payment on the 15-year by $142.50. Interestingly, over three times more is being paid toward the principal.

Some people might suggest getting a 30-year loan and then, making the payments as if they were on a 15-year loan. That would certainly accelerate amortization and save interest. The real challenge is the discipline to make the payments on a consistent basis if you don’t have to. Many experts cite that one of the benefits of homeownership is a forced savings that occurs due to the amortization that is not necessarily done by renters.

Use this 30-year vs. 15-year financial app to compare mortgages in your price range. A 15-year mortgage will be approximately half a percent cheaper in rate. You can also check current rates at FreddieMac.com.

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Do You Know the Way?

Fear of the unknown is common among all ages. Kids, at night, imagine monsters in their closets or under their beds and adults are unsure of what the future might bring.

It may be natural for first-time buyers to be unsure of the process because they haven’t been through it before but even repeat buyers need to know changes that have taken place since the financial housing crisis.

The steps in the home buying process are very predictable and generally follow the same pattern every time. It certainly makes the move stay on schedule when you know all the different things that must be done to get to the closing.

  • In the initial interview with your real estate professional, you share the things you want and need in a home, discuss available financing and learn how your agent can represent you in the transaction.
  • The pre-approval step is essential for anyone using a mortgage to purchase a home to assure that they’re looking at the right price of homes and so they’ll know what they can qualify for and what the interest will be.
  • Even with lower than normal inventory, it is difficult to stay up-to-date with the homes currently for sale and the new one just coming on the market. Technology has simplified this process, but the buyer needs to implement them.
  • Showings can be accommodated online through virtual tours, drive-bys and finally, a personal tour through the home. Your real estate professional can work with you to see all the homes in the market through REALTORS®, builders or for sale by owners.
  • When a home has been identified, an offer is written and negotiation over price, condition and terms takes place.
  • A contract is a fully negotiated, written agreement.
  • Escrow is opened to deposit the earnest money from the buyer as a sign they’re acting in good faith. The title search is also started so that clear title can be conveyed from the seller to the buyer and that the lender will have a valid lien on the property.
  • 88% of home sales involve a mortgage. The lender will require an appraisal to be sure that the home can serve as partial collateral for the loan. If the buyer has been pre-approved, the verifications will be updated to be certain that they’re still valid. The entire loan package when completed, is sent to underwriting for final approval.
  • When the contract is completed, at the same time the title search and mortgage approval are being worked on, the buyer will arrange for any inspections that were called for in the contract.
  • After all contingencies have been completed, the transaction goes to settlement where all the necessary papers are signed, and the balance of the buyer’s money is paid. This is where title transfers from the seller to the buyer.
  • Possession occurs according to the sales contract.

One of the responsibilities of your real estate professional is to make sure that things are done in a timely manner so that the transaction will close according to the agreement on time and without unforeseen or unnecessary problems.

Even if you’re not ready to buy or start looking yet, you need to be assembling your team of professionals. Let us know and we’ll send you our recommendations, so you can read about them on their websites.

If you have any questions, download this Buyers Guide and call us at (805) 701-8410; we’re happy to help. Informed buyers lead to satisfied homeowners and that is better for everyone involved.

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When It’s Important…Find the Facts

Most parents don’t put a lot of credence in the statements “Everyone is doing it” and “No one does that anymore.” They’ll dig a little deeper and get the facts of the situation. Interestingly, when it comes to buying a home, similar common myths continue to prevail surrounding what it takes to buy a home.

One of the most common myths is that it takes 20% down payment to get into a home. Certainly, an 80% mortgage might have the most favorable interest rate. It won’t require mortgage insurance and qualifying requirements might be a little less but there are alternatives.

“88% of all buyers financed their homes last year and consistent with previous years, younger buyers were more likely to finance their home purchase. In 2018, the median down payment was 13% for all buyers, 7% for first-time buyers and 16% for repeat buyers.” Stated by the 2018 NAR Profile of Buyers and Sellers.

  • Qualified Veterans are eligible for zero down payment, 100% mortgage loans without mortgage insurance.
  • Conventional loans are available with as little as 3-5% down payments.
  • FHA mortgages have a 3.5% down payment.
  • USDA mortgages for rural housing have two major products: one does not require a down payment and the other has a 3% down payment. Maps, based on population numbers, are available to determine if the area you’re interested in purchasing in is eligible for a USDA mortgage.

We’ve come to believe that facts can be instantly verified by searching on the Internet. Unfortunately, there are a lot of things on the Internet that are questionable and certainly, that includes some information on mortgages. Specifically, some loans are not available in certain areas and to a particular persons based on their income and credit history.

The best approach, when it comes to buying a home, is to get the facts from a knowledgeable and trusted loan professional before you begin the home search process. Contact me at (805) 701-8410 for a recommendation.

A website may not provide relevant information for your individual situation. Purchasing a home is a large investment and taking the time to find out the facts is worth the effort.

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Your Real Estate Resource

Being a better homeowner is a full-time job. It takes good information to make good decisions not only when you buy and sell but all the years you own a home.

Think of times when you need advice on financing, taxes, insurance, maintenance, finding reasonable and reliable contractors and lots of other things. Imagine how nice it would be to have a real estate information line you could call whenever you have a question.

Our objective is to move from a one-time sale to customers for life; a select group of friends and past customers who consider us their lifelong real estate professional. We believe that if we help you and your friends with all your real estate needs, we can earn the privilege to be your real estate professional.

Throughout the year, we’ll send reminders and suggestions by email and social media that enhance your homeowner experience. When we find good articles to help you be a better homeowner, we’ll pass them along. You’ll discover new ways to maintain your property, minimize expenses and manage debt and risk.

We want to be your “Go-To” person for everything to do with real estate. We’re here for you and your friends…now and in the future. Please let us know how we can help you.

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Is a Home Equity Loan an Option?

Here’s the scenario: you have a project and need to borrow some money, but you want to do it in the most economic manner. You’ve got a low rate on your existing first mortgage and don’t want to do a cash-out refinance and pay a higher rate. Is a home equity loan an option?

Prior to 2018, homeowners could have up to $100,000 of home equity debt and deduct the interest on their personal tax return. The Tax Cuts and Jobs Act of 2017 eliminated the home equity deduction unless the money is used for capital improvements.

Regardless of the deductibility, lenders will still loan money to owners who have equity in their home and good credit. The most common reasons people borrow against their home equity are:

  • Consolidate debt with higher interest rates
  • Make improvements on their home
  • Refinance an existing home equity line of credit
  • Down payment for another home or rental investment
  • Creating reserves or available access for potential needs

One available loan is a fixed-rate home equity loan, commonly referred to as a second mortgage. It is usually funded at one time, with amortized payments for terms that could range from five to fifteen years.

Another option is a home equity line of credit or HELOC, where a homeowner is approved for up to a certain amount at a floating-rate over a ten-year period. The borrower can draw against the amount as needed and would pay interest every month and eventually, pay down the principal.

The amount of money that can be borrowed is determined by the equity. Lenders generally will not exceed 80% of the value of the home. If a home was worth $400,000, the 80% ceiling would be $320,000. If the homeowner had an unpaid balance on their first loan of $240,000, an amount up to $80,000 would be possible.

The next variable is the borrowers’ credit score which will determine the rate of interest that will be charged. The higher the score, the lower the rate the borrower will pay. And the converse is true, the lower the score, the higher the rate.

Another common variable considered is the borrowers’ total debt to income ratio. Ideally, the combination of regular monthly debt payments should not exceed 43% of their monthly gross income.

If you have good credit and an adequate amount of equity, your home could be the source of the funds you need. There is a lot of competition among lenders and shopping around can make a difference.

Call us at (805) 701-8410 for a recommendation of a trusted mortgage professional. If you have questions about whether the interest on the loan will be deductible, talk to your tax professional.

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Home Inventory

Generally speaking, when you need an inventory of your personal belongings, it is too late to make one. Sure, you can reconstruct it but undoubtedly, you’ll forget things and that can cost you money when filing your insurance claim.

Most homeowner’s policies have a certain amount of coverage for personal items that can be 40-60% of the value of the home.

Homeowners who have a loss are usually asked by the insurance company for proof of purchase which can come in the form of a receipt or current inventory of their personal belongings.

The most organized people might find it difficult, if not impossible, to find receipts for the valuable things in their home. Think about when you’re rummaging around a drawer or closet looking for something else and you discover something that you had totally forgotten that you had.

An inventory is like insurance for your insurance policy to be certain that you list everything possible if you need to make a claim. Systematically, make a list of the items by going through the rooms, along with the drawers and closets. In a clothes closet, you can list the number of shirts, pants, dresses and pairs of shoes but higher cost items should be listed separately.

Photographs and videos can be adequate proof that the items belonged to the insured. A series of pictures of the different rooms, closets, cabinets and drawers can be very helpful. When video is used, consider narrating as it is shot and be sure to go slow enough and close enough to see the things clearly.

For more suggestions and an easy to use, interactive form, download a Home Inventory, complete it, and save a copy off premise, either in a safety deposit box or digitally in the cloud if you have server-based storage available like Dropbox.

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