Tuesday, July 20, 2021
It has been said that more money has been lost due to indecisions than ever was due to making the wrong decisions. Many times, the larger the decision, the more likely procrastination comes into play and doing nothing will cost something.
Buying a home is certainly one of the biggest decisions people make. Careful consideration and planning are necessary steps leading to a prudent decision. Considering today's market that includes a global pandemic, financial volatility, and rapidly rising home prices, it is understandable that many people thinking about a home purchase are in a wait and see posture.
However, there is a cost connected to waiting and it may be a lot more than you think. The recent Home Price Expectation Survey 2021 Quarter two estimated appreciation rates will average just under 5% annual for the next five years. It expects prices to increase by 8% in the next one year.
Being a renter or even putting off moving to a larger home, could keep you from enjoying the benefit of that appreciation. If your down payment is in the bank, your expected earning will be less than 2%. In a home, the owner has the benefit of leverage when a mortgage is used to finance the home.
Buyers are borrowing a large portion of the purchase price at around 3% interest but the entire value of the home is appreciating at a higher rate and the profit builds equity for the homeowner.
Another major component for the owner is that the amortizing mortgage is being reduced with each payment that is made. As the home goes up in value due to appreciation, the unpaid balance goes down with principal reduction creating equity from two directions.
If you waited one year to buy a $350,000 home today, the price could easily be $378,000. A 5% down payment on this home at today's price is $17,500. If you could earn 2% on a certificate of deposit, it would be worth $17,850 in one year. If it used as a down payment on a $350,000 home that appreciates at 8%, the equity in one year would be $52,442. Use the Your Best Investment calculator to make your own projection.
Mortgage experts anticipate rates to rise by 0.75% in the next year which means that you'll pay more interest on a larger mortgage by waiting. The monthly payment could easily be $200 more by waiting a year. Based on how long you intend to be in the home, it could make the overall housing cost much more.
If you have some specific concerns that is keeping you from deciding today, let's get together on the phone, an online meeting or somewhere face-to-face so that you can get the facts about what it takes to buy a home now.
Tuesday, July 13, 2021
Stepped-up basis is an incredible benefit to people who inherit property. Not only do they receive the property itself, the basis or cost value of the property becomes the fair market value at the time of the decedent's death. This avoids recognizing the gain between the decedent's cost and what it is worth when it is inherited.
If a person had purchased a home for $100,000 and 20-years later when they died, it was worth $500,000, there would be a potential gain in the property of $400,000. However, because of a tax provision called step-up tax basis, the person inheriting the property will have a basis of the fair market value at the time of death.
The recipient could sell the property for $500,000 and have no taxable gain on the sale.
A formal appraisal is the most reliable and defensible estimate of fair market value at the time of the decedent's death. There will be a fee of several hundred dollars for the appraisal. Another alternative is to get a broker's opinion of value in writing. It may be reasonable to get three opinions to see if they are similar. They should rely on comparable sales to justify their position. Either method is acceptable to IRS.
There is discussion from the current President about the possibility of eliminating the step-up in basis that allows families to leave assets to their heirs without having to pay capital gains tax. Some people consider it to be a tax loophole for the ultra-rich but it can impact ordinary people who inherit property and do not want to have to sell it.
An example would be a family farm that when inherited by the heirs may not be able to afford to pay the capital gains tax due at time of transfer and they could be forced to sell the property or borrow the money to pay the tax, assuming that was possible.
Federal estate tax is paid from the deceased's remaining estate, not by the heir. If the decedent's estate is approaching the limit before estate taxes are due, currently $11.7 million, professional tax advice should be considered because there could be additional provisions in play. More information on this can be found on IRS.gov.
Tuesday, July 6, 2021
The question is "financially speaking, are you better off owning than renting in the long term?"
Renting a home has advantages. It is usually a short-term commitment from year to year and the landlord is responsible for the repairs.
Owning a home with today's low mortgage rates, the total house payment could easily be less than what the rent would be on a comparable home. Once you assume ownership, you will have the responsibility of the repairs and possibly, a homeowner's association fee.
Many times, an initial benefit of owing a home includes the ability to deduct property taxes and qualified interest on the mortgage. With the increase of the standard deduction and a limit of $10,000 on state and local taxes, it is estimated that 90% of homeowners do not itemize their deductions to consider property tax and mortgage interest. This comparison will not consider them.
There are two very significant benefits that contribute to a home being an excellent investment and they are principal reduction due to normal amortization of the mortgage and appreciation of the property. While the property goes up in value and the unpaid balance decreases, the owner's equity grows, increasing their net worth.
Renters do not benefit from either of these, but their landlords do. That is the reason for the saying "whether you rent or buy, you pay for the house you occupy." Tenants pay for the home for their landlord.
Estimated Monthly Maintenance
Estimated Homeowners Association Fee
Net Monthly Cost of Housing
*Projections based on 3% appreciation; $350,000 sales price with 10% down payment and a 3.5%, 30-year mortgage.
With each payment made on a fully amortized loan, the principal balance is reduced. While appreciation is generally expressed in an annual rate, homes go up in value incrementally throughout the year so considering the monthly appreciation is appropriate in this comparison.
In this example, the payment is less than the rent proving the initial idea that it costs less to own a home. After factoring in the effect of the principal reduction and the appreciation, even when you consider the maintenance and HOA fees, the net monthly cost of housing is considerably less than renting.
The largest part of the savings inures to the equity of the home which directly impacts a homeowner's net worth. While the money may not be easily accessed, it has real value and available in a cash-out refinance or when the home is sold.
If you curious about how your numbers would be reflected in a similar comparison, go to the Rent vs. Own. Please let me know if you have any questions.
Tuesday, June 29, 2021
A home warranty is a service contract that protects your home's appliances and some systems from repairs or possible replacements. A convenient benefit of a home warranty is that when you report an item, they will assign a service provider to evaluate whether it should be repaired or replaced without the owner having to act like a middleman.
Homeowner's insurance is required by most mortgage lenders when there is an outstanding loan. This coverage protects the structure and the dwelling and the homeowner's personal property from named occurrences like theft, natural disaster, or accident. Homeowner's insurance does not cover the systems and appliances for repairs or replacements due to normal wear.
The fees for home warranties can vary based on deductibles and how much of the risk the homeowner is willing to accept.
Additional items can be included to the standard coverage to include pool, spa, additional refrigerators, septic tanks, and other items. There may also be some named items that are not covered that could include sprinkler systems, window air conditioning units or other specific items.
Contracts usually are for a one-year period, may have a waiting period and usually will not include pre-existing conditions. The premium or fee is paid in advance.
Many homeowners learned about this type of service when they bought a home. It was provided by the seller and probably gave some element of peace of mind. Home warranties can be purchased even when the home is not being sold and by the current owner. Even rental property owners are using this type of coverage to manage the repairs and replacement expenses.
Tuesday, June 22, 2021
Credit plays a huge role in getting a mortgage because it is a variable that helps the lender determine the likelihood that the loan will be repaid on a timely basis. Credit bureaus evaluate people's credit worthiness using a FICO score. The higher the score the better the borrower's credit.
The mortgage rate charged to a borrower depends on their credit score. There is an inverse relationship between credit score and interest rate changed. The higher the score the lower the rate and the lower the score, the higher the rate.
Two separate buyers with the same income, purchasing the same price home may both be approved by the lender, but they may be charged different interest rates based on their credit scores.
You could save thousands of dollars over the life of a loan by improving your credit score by just a few points. A $350,000 mortgage at 3.5% has a principal and interest payment of $1,571.66. By improving your credit score to qualify for a 3% rate, it would save $96.04 a month.
Over the life of the mortgage, that would save $34,575 in interest. Improving your credit score to shave 0.25% off the rate would make it worthwhile.
Credit utilization is the percentage of total credit used compared to the total credit available. If you have a $2,500 balance on a credit card with $10,000 available credit, your utilization rate is 25%. Ideally, it should be 10% or below. This ratio accounts for 30% of a person's FICO score.
Credit utilization is calculated using the balance on the monthly statement so paying it off in full every month could still result in a high CU score. Some credit counselors suggest paying down the balance before the end of month statement comes out. A trusted mortgage professional can make specific recommendations like how to improve your credit utilization.
Your credit score can be adversely affected if your credit limits are lowered. You may have the same monthly outstanding balance you have had for years but it now becomes a larger percentage of your available credit and your score goes down. In the example used earlier, if the available credit was lowered to $5,000 and your balance is $2,500, the credit utilization is now 50%.
Payment history is the largest contributor and counts for 35% of an individual's FICO score. It is an indication of your likelihood of paying on time and as agreed for your debt, especially mortgages, credit cards, student and car loans, among others.
A big shock to some borrowers is to find out that while they may have never actually incurred a late fee because of a grace period, their score could be dinged because it was not paid on time of the actual due date.
Foreclosures, deeds in lieu of foreclosure and bankruptcies will affect a borrowers payment history as long as they appear on the credit report.
Americans are entitled to a free annual credit report by law from the major credit companies: Experian, TransUnion and Equifax. AnnualCreditReport.com is the source for these federally authorized reports. During the Covid-19 pandemic, they are offering free weekly reports.
Even if you are not buying a home or getting a mortgage currently, it is a good routine to check your credit report periodically to discover signs of identity theft early.
Tuesday, June 15, 2021
There is a story of a real estate agent's prayer: "Dear Lord, if I can't be someone's first love, or second wife, at least, please let me be their third REALTOR®." In a normal market with a balanced supply of sellers and buyers, this describes the preference that it might be better to be the third listing agent to help the seller after they became more realistic about their list price.
In today's market, it might have more to do with buyers because of the increased competition, their chance of having an accepted offer is greatly reduced and it is only after they have lost several that they become more aggressive in the negotiations.
Competition for homes being sold has greatly increased over the previous two years, according to a recent REALTORS® Confidence Index Survey from NAR. In April of 2021, there were nearly five offers for every home sold which increased from two offers in 2019 and 2020.
Utah reported the highest number of offers per home sold with seven while Arizona, Georgia, New Hampshire, and Washington had six. California, Colorado, Tennessee, and Texas each had five offers per home sold.
To make their offers appear more attractive, more buyers are making cash offers to eliminate financing contingencies and reduce the chance of rejection. Cash offers represented 25% of offers in April and 21% in the first quarter of 2021 compared to 18% in 2020.
Buyers who are not able to make cash offers are increasing their down payment. Nearly half of homebuyers are putting 20% or more down during the first quarter of 2021. Even first-time buyers are using an 80% mortgage to make their offers more attractive to sellers.
The median days on the market for listings was 17, down from 21 days a year ago. 31% of residential sales were made to first-time homebuyers which is down from 32% in March 2021 and down from 36% one year ago.
While nearly ¾ of homes closed on time, 5% were terminated and 22% were delayed but eventually went into settlement. Appraisal and financing issues were the major contributors to the delayed transactions. The two major factors for the terminated transactions were also appraisals and inspections issues.Today's environment requires a strong, sensitive agent who understands your goals as well as the intricacies of the market to be able to devise a plan to make it happen. Your agent and their recommendations for the other professionals involved are the boots on the ground necessary whether you are a buyer or a seller.