BeachTalk

A 30 year fixed-rate mortgage hasn’t always been the standard. As part of FDR’s New Deal in 1934, the Federal Housing Administration was created to help Americans purchase homes with affordable terms.

Prior to then, many loans had an amount due at the end of the term called a balloon. Most mortgages had adjustable interest rates even though some might be fixed for a short time. While banks would loan money on a home, they retained the right to call the note due at any time which could exert considerable stress on borrowers.

FHA, during this time, introduced mortgages that offered a fixed rate of interest to the borrower for a 30 year term. This fully amortized loan provided borrowers a financial vehicle that would help them achieve the American Dream while minimizing the risk of having a loan called without the resources to pay it off. It brought long-term stability to the housing market and helped stimulate the economic recovery at a very difficult time in our nation’s history.

Roughly, a third of the mortgages created in 2011 were less than 30 year terms. Many homeowners, similar to those after the Great Depression, would like to get their home paid for as soon as possible. Shorter term mortgages typically have a lower interest rate but higher payments due to fewer years to amortize the mortgage.

The question plaguing every tenant who wants a home of their own is whether they should continue to rent or is it the right time to buy?

The combination of good prices and low mortgage rates make it considerably cheaper to own than rent in most markets. Assuming a person is qualified with a down payment and won’t be moving for several years, there may not be a better time to buy a home.

In the example below, the total house payment is $1,281.01 compared to $1,500 to rent the same home. Before you consider any of the financial benefits attached to home ownership, it’s cheaper to own than to rent.

The net cost of housing falls to $764 or just more than half the house payment when you consider the principal reduction due to normal amortization, a modest appreciation and the tax savings along with a reasonable maintenance expense that a tenant would not have to pay.

One of the biggest benefits is the growing equity. As the value goes up, the unpaid balance goes down. A favorable leverage causes their low down payment to grow to $40,609 in a short seven years based on a modest 1% appreciation.

There’s an expression often heard in real estate circles: “Whether you rent or buy, you pay for the house you occupy.” You’re either buying it for yourself or you’re helping the landlord buy it.

Check out a Rent vs. Own to see how your numbers will compare to this example or call me to do it for you.

Rental properties have four primary factors that contribute to a return on investment. Based on market conditions and investor strategies, the individual motivating factor can change for property owners.

There was a time when the benefit of tax savings to offset income from other sources was considered important to some investors. However, in today’s environment, they are more likely valued as incidental benefits.

Some investors expect appreciation to deliver the satisfactory results which can be reasonable over time if a reliable appreciation rate is used. Savvy investors today are using conservative estimates for long-term holding periods.

Leverage occurs when borrowed funds are used to control a larger asset. Positive leverage can actually increase the yield on an investment.

The fourth component that contributes to a property’s yield is the cash flow. When the rents are greater than the expenses of operating the property and servicing the debt, there is a positive cash flow. A property with a good cash flow doesn’t have to go up in value to justify the investment.

The combination of lower prices, incredibly low mortgage rates and rising rents are attracting investors to rental properties that include single-family homes in predominantly owner-occupied neighborhoods.

Even if you were to ignore the benefits of tax savings, potential appreciation and leverage, the attractive cash flows make rental property a very smart investment alternative. If you’re curious, contact me for more information.

Some people believe they shouldn’t refinance more often than once every two years. The determining factors are if you’ll lower your payments and plan to stay in the home long enough to recapture the cost of refinancing. If so, you should consider refinancing.

Interest rates have actually come down significantly in the past 12 months and even more in the past 24 months. According to the Freddie Mac Primary Mortgage Market Survey®, rates on a 30 year fixed rate mortgage are down to 3.6% in August, 2012 compared to 4.27% one year earlier.

Refinancing in the example below would save the homeowner $67.04 per month and they would recapture the cost of refinancing in 3 years and 9 months based on approximately $3,000 of closing costs.

Click Here to make your own projection on a Refinance Analysis calculator.

FHA loans require mortgage insurance premium to cover a possible loss to the lender if the property has to be foreclosed and sold. The premium is substantial and eliminating the MIP would reduce the payment considerably.

The MIP must remain in effect for five years but after that, when the balance is 78% of the original purchase price, FHA will release the requirement and your monthly payment will go down. Since amortization is affected by interest rates, the normal time to reach this 78% point could be from 9 to 12 years at today’s interest rates.

In the example below, the MIP would be released in 9 years 6 months with normal payments. An extra $100 a month would allow the borrower to reach the release point in 7 years 1 month. To reach the release point in the minimum five years, the borrower would have to make an extra $268.04 per month principal contribution.

Releasing the MIP in this example would save the borrower $177.67 per month. The borrower would also save interest, build equity and shorten the term of their mortgage. Once the MIP is released, the borrower could continue the same payment schedule to further accelerate the debt reduction.

To make some projections on your mortgage, click here.

A quick once-over of the items on this list may improve the safety and security of your home and could protect your family and friends. It is important to periodically pay attention to these things because things change over time.

Security

• Does each exterior door have a deadbolt?
• Does the lock on each window work?
• Have you added pins or clips to your windows for additional security?
• Do you have dowels or broom sticks in the track of windows and sliding glass doors?
• Do you have security company labels or signs displayed prominently?
• Do you have an alarm system? Is the system monitored?
• Do you have a dog that barks when strangers approach the home?
• Are emergency numbers posted near the telephones?

Fire

• Do you have smoke detectors near all sleeping areas?
• Do you check the batteries monthly and change them annually?
• Do you have two carbon monoxide detectors?
• Do you have an escape ladder for upper floors?
• Do you have fire extinguishers near exits and in the kitchen?
• Do you have an emergency escape plan and is the family familiar with it?
• Are any outlets or switches warm to the touch?
• Are kitchen ventilation systems working properly?
• Is the dryer ventilated to the outside and is the exhaust free of lint?
• Is the furnace cleaned and serviced yearly?
• Is the space around the hot water heater clear of combustible materials?

Falls

• Are all electrical and phone cords out of the flow of traffic?
• Are rugs and runners slip resistant?
• Is your step-stool sturdy and in good condition?
• Are stairs clear of objects that could cause a fall?
• Are all entrance ways, exits, halls and walks well lighted?
• Do bath tubs and showers have non-skid strips or suction mats in them?

Other

• Do you keep drugs and medicines out of reach and sight of small children?
• Are interior doors designed so small children cannot lock themselves in rooms?
• Are pool and play areas fenced to keep small children in and uninvited guests out?
• Are firearms kept out of reach and sight of children?
• Is a well-stocked first aid kit available for emergencies?
• Is there one member of your family trained in first aid, CPR and the Heimlich maneuver?

The latest Housing Affordability Index from the National Association of REALTORS® shows an interesting trend taking place this year that needs buyers’ attention. Most people know that the mortgage rates are still at incredibly low rates but don’t feel there is much sense of urgency.

This report shows that mortgage rates have fallen from 4.37% in January to 3.81% for June. However, the report shows that the payment as a percentage of income has gone from 12.1% to 13.9% which simply means that buyers have to spend more of their income on a home.

The reason is that the median price of homes nationally has gone from $154,600 in January to $190,100 in June which is a 23% increase. The two major components of housing affordability are the price of the homes and the mortgage rates a buyer must pay.

Even if one of those components is going down, the other could have a significant affect as is shown in this year’s trend in housing affordability. In the past few weeks, the effects of which are not show in this report, mortgage rates have been moving up.

Home buyers and investors who have been taking a wait and see approach need to make a decision if now is the time to act.

It can be unsightly and upsetting when a home in a neighborhood isn’t being maintained like the others. It might be an overgrown yard, a fence in need of repair, paint peeling on the home or even a car parked in front of the home that hasn’t moved in weeks.

I believe most people want to be good neighbors and may be willing to correct the issue once it is brought to their attention. In some cases, they may not agree with the same urgency and it might be necessary to seek other remedies.

The most expedient solution may be to contact the responsible person and describe your perception of the problem. An owner-occupant may be sympathetic to the neighbors and more than willing to correct the issue.

However, if you suspect that it is a rental property, check with the county tax records to identify the owner. They may be unaware of the situation and would actually welcome the “heads-up” to protect their investment.

The next step might be to notify the homeowner’s association if there is one. The covenants or bylaws will specify how properties must be maintained and the association can enforce them.

The final step would be to notify the city for a possible code violation. Most cities have a separate code and neighborhood services division and some cities have 311 for non-emergency assistance.

Knowing the current value of your home is important when you’re considering a move, refinancing or getting a home equity loan. Prices are determined by recent sales and the supply and demand of current inventory.

The process of selecting comparable properties involves matching similar features like bedrooms, baths, square footage and updates. In addition to price, there are other factors that affect the value and ultimately, the sale of a home.

Location plays a significant role because by the unique combination of improvements and land. Beneficial considerations would be convenience to schools, shopping, transportation and proximity to freeways. Undesirable concerns could include being in the vicinity of busy streets, high-tension lines, commercial property and other things.

To receive a computerized estimate on the value of your home that includes prices of comparable homes that have sold recently and homes currently for sale, click here.

Value is not totally objective and does require a certain amount of subjective considerations. If you have questions after you receive your report by email, contact us and we’ll be happy to talk to you about your concerns.