When Will the Next Housing Market Crash Take Place?

I’ve noticed a trend lately. Everyone’s a real estate expert.

It seems the most recent crisis and recovery has turned just about every single person into a guru on all things to do with home buying and selling.

I suppose part of it has to do with the fact that the massive housing bubble that formed a decade ago swept the nation and was front page news.

It also directly affected millions of Americans, many who serially refinanced their mortgages, then found themselves underwater, then eventually short sold, were foreclosed upon, or held on for the ride back up to new heights.

It’s a common conversation piece these days to talk about your local housing market.

Thanks to greater access to information, folks are scouring Redfin and Zillow and coming up with theories about what that home should sell for, or what they should have listed it for.

Neighbors are getting upset when nearby listings are not to their liking for one reason or another. What were they thinking?!

A New Housing Bubble Mentality

  • Real estate is red-hot again thanks to limited supply and intense demand
  • It can feel like an ominous sign that we’re headed down a dark road again
  • But that alone isn’t reason enough for the housing market to crash again
  • There have to be clear catalysts and financial stress for another major downturn

All of this chatter portends some kind of new bubble mentality in my mind, though it seems everyone is just basing their hypotheses on the most recent housing bust, instead of perhaps considering a longer timeline.

One could look at the recent run-up in home prices as yet another bubble, less than a decade since home prices bottomed around 2012.

After all, many housing markets have now surged well beyond their previous lofty levels seen about 15 years ago when home prices peaked.

For example, Denver area home prices are about 86% higher than they were in 2006. And back then, everyone felt home prices were completely out of control.

In other words, home prices were haywire, and are now nearly double that.

Meanwhile, the typical U.S. home is currently valued around $273,000, per Zillow, which is about 27% higher than the peak of $215,000 seen in early 2007.

It’s also nearly 70% higher than the typical home price of $162,000 back in early 2012, when home prices more or less bottomed.

So if want to look at home prices alone, you could start to worry (though you also have to factor in inflation which will naturally raise prices over time).

But they say bubbles are financially driven, and we’ve yet to see a return to shoddy underwriting.

I will say that there’s been a recent return of near-zero down financing, with many lenders taking Fannie and Freddie’s 97% LTV program a step further by throwing a grant on top of it.

This means borrowers can buy homes today with just 1% down payment, and even that tiny contribution can be gifted from someone else.

So things might be getting a little murky, especially if you consider the increase in prices over the past four or five years.

One could also argue that affordability is being supported by artificially low mortgage rates, which history tells us won’t be around forever.

There’s also a general sense of greed in the air, along with a feeling amongst homeowners that they’re getting richer and richer by the day.

That type of attitude sometimes breeds complacency and unnecessary risk-taking.

But When Will Home Prices Crash Again?!

real estate cycle

  • If you believe in cycles, which seem to be pretty evident in real estate and elsewhere
  • We will see another housing crash at some point relatively soon
  • There appears to be an 18-year cycle that has been observed for the past 200 years
  • This means the next home price peak (and then bust) might begin in 2024

All of those recent home price gains might make one wonder when the next housing market crash will take place.

After all, home prices can only go up for so long before they drop again, right?

Well, the answer to that age-old question might not be as elusive as you think.

The real estate market apparently moves in cycles that some economists think can be predicted to a relatively high degree.

While not a perfect science, there seems to be “a steady 18-year rhythm” that has been observed since around the year 1800.

Yes, for over 200 years we’ve seen the real estate market follow a familiar boom and bust path, and there’s really no reason to think that will stop now.

It puts the next home price peak around the year 2024, followed by perhaps a recession in 2026 and a march down from there.

How much home prices will fall is an entirely different question, but given how much they’ve risen (and can rise still), it could be a long, long way down.

And we might not have super low mortgage rates at our disposal to save us this time, which is a scary thought.

You’ll Never Get Back Into the Housing Market…

  • There are four main phases in a real estate cycle
  • A recovery period and an expansion period
  • Followed by hypersupply and an eventual downturn
  • Don’t believe the hype that if you don’t buy today, you’ll never get the chance!

Another housing bust in inevitable, despite folks telling us we’ll never get back in again if we sell our home today, or don’t buy one tomorrow.

There are four phases to this predictable cycle, including a recovery phase, which we’ve clearly experienced, followed by an expansion phase, where new inventory is created to satisfy demand. This is happening now.

At the moment, home builders are ratcheting up supply to meet the intense demand in the market, with some 45 million expected to hit the average first-time home buyer age this decade.

The problem is like anything else in life, when demand is hot, producers have a tendency to overdo it, creating more supply than is necessary.

That brings us to the next phase, a hypersupply period where builders overshoot the mark and wind up with too much new construction, at which point prices plummet and a recession sets in.

The good news (for existing homeowners) is that according to this theory, we won’t see another home price peak until around 2024.

That means another three years of appreciation, give or take, or at least no major losses for the real estate market as a whole.

So even if you purchased a home recently and spent more than you would have liked, it could very well look cheap relative to prices a few years down the line.

The bad news is that the real estate market is destined to stall again in just three short years, meaning the upside is going to diminish quite a bit over the next few years.

This might be especially true in some markets that are already priced a little bit ahead of themselves, which may be running out of room to go much higher.

But perhaps more important is the fact that home prices tend to move higher and higher over time, even if they do experience temporary booms and busts.

So if you don’t attempt to time the market you can profit handsomely over the long term, assuming you can afford the underlying mortgage.

And remember, there’s more to homeownership than just the investment.

Source: thetruthaboutmortgage.com

Don’t Choose a Mortgage Lender for Their Sales Gimmick

Last updated on January 9th, 2018

As competition heats up, banks and lenders will likely ramp up efforts to get their hands on your mortgage, using all types of pitches and gimmicks to separate themselves from the crowd.

But mortgages aren’t cool or exciting, so any funky stuff they come up with to sell you a mortgage is probably just a load of baloney.

For example, you might be offered reduced closing costs, a relationship discount, or a stuffed animal. Okay, that last one may only be a half-truth if you bring your kid with you to sign the paperwork.

You may also be told that certain fees will be waived, or that they’ll lock your mortgage for free. Sadly, most of these “fees” don’t tend to exist in the real world, so you have to question whether you’re actually getting anything at all.

All the major players do it, including Wells Fargo, Capital One, Chase, Citi, Discover, Costco, etc.

The smaller guys probably don’t offer special discounts or fancy marketing, though that doesn’t mean they won’t throw some nonsense your way in a different form.

Look at the Big Picture

When shopping for a mortgage, it’s important to look at the interest rate and the fees you must pay to acquire that rate.

If you’re focused on $500 off closing costs, as opposed to your mortgage APR, you’re missing the point.

The same goes for a relationship discount. If you already do business with the bank that is offering to close your mortgage, and they agree to shave .125% (an eighth) off your mortgage rate, make sure it’s lower than competitors’ straight up rates.

Perhaps a good analogy to put this in perspective is the insurance industry, which is notorious for offering discounts for all types of silly stuff.

These days, the discounts are endless, and the marketing brains seem to be working around the clock to come up with more inane discounts to peddle to consumers.

But even if you receive 100 discounts, if your overall premium is still higher than what some no frills insurer is offering, the discounts mean squat.

It’s the same deal for mortgages – if some lender offers me a relationship discount, $1000 off my closing costs, or a stuffed pony for my niece, it won’t mean a thing if another lender is offering me a lower rate with fewer fees.

Get a Discount If We Screw Up

Perhaps the worst of the “discounts” are the ones that are only applied if the lender screws something up. Seriously?

Do you really want to go with a lender who will offer you money if they can’t get the job done on time?

That sounds like little consolation and a whole lot of stress, not to mention the fact that you’ll probably need to argue with them to get your credit.

So let’s get this straight – they fail to close your loan on time, and then offer you a credit, which will undoubtedly require you to send in even more paperwork and plead your case.

Good luck explaining that it was indeed the lender who was at fault, and not you or a third-party.

At the end of the day, you should do your best to avoid being sucked in by these marketing gimmicks, as enticing as they may sound.

Chances are the discounts are “priced in” somewhere else, whether it’s via a higher mortgage rate or added junk fees.

This is not to say that you should avoid the big banks in favor of a mom and pop broker shop, but you should take a hard look at a variety of offers to cut through the fluff.

Read more: Watch out for the adjustable-rate mortgage pitch.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

There Is No Mortgage Trick

Over the years, I’ve seen tons of ads and articles about a so-called “mortgage trick,” only to click on the associated hyperlink and see nothing regarding any tricks. Talk about disappointing.

For the record, I’m always interested to see what someone might have up their sleeve, which is why I continue to click year after year, hoping there really will be a trick one of these days.

Instead, I repeat the same mistake over and over again, expecting a different result, which some liken to insanity. I’m okay with that, I’ll swallow my pride.

You may have seen these same ads or articles claiming to save you thousands or more on your mortgage by “using this one trick,” only to be left disappointed or scratching your head. Did I miss something?

In fact, I got suckered into another one this morning, which revealed absolutely nothing new. Quelle surprise.

When it comes down to it, there’s no mortgage trick. A trick is defined as “a cunning or skillful act or scheme intended to deceive or outwit someone,” per Google.

Or one that mystifies the audience – think the quintessential magician pulling the rabbit out of the hat, or making a dove appear out of nowhere.

Do you really think mortgages are like magic, or anywhere close to it? And are they entertaining or even the least bit interesting?

Not really, even though I try to make them slightly more appealing on this blog. Whether I’m actually accomplishing is another question.

A mortgage is simply a loan on your home that requires regular payments for a set period of time, usually a long 30 years.

There’s no magic trick to change that unless you’ve got more money or can simply avoid a mortgage altogether and pay in cash.

So What Is the Mortgage Trick?

  • Those annoying mortgage trick advertisements and articles you come across
  • Are nothing more than a roundabout way to convince you to refinance your mortgage
  • Or to read yet another post about something you probably already knew existed like biweekly payments
  • There’s nothing magical, special, or groundbreaking about it

The supposed trick most of these ads tout is a simple rate and term refinance. And they’re offered at just about any bank, credit union, or lender you’ll come across.

You don’t have to ask around about them, or know someone on the inside to get one. They’re readily available as long as you qualify.

While a refinance could save you tons of money, even hundreds of thousands of dollars depending on the situation, it’s not a trick.

It’s just a conventional financial tool to reduce your mortgage rate or shorten your loan term so you’ll pay less interest. It can be a great move and one that changes your life, but it’s still not artifice or a clever ploy.

A refinance isn’t a scheme nor is it intended to deceive or outwit. It’s just an option you have as a homeowner to take advantage of the dynamic interest rate environment.

[The refinance rule of thumb.]

The other common “trick” I’ve come across has to do with biweekly mortgage payments. Again, not a trick, just another option to pay the mortgage a little bit faster while reducing your interest expense.

Why Call It a Mortgage Trick Then?

  • I suppose there is a trick, just not a mortgage one
  • And it’s getting you to click on their ad or read their article
  • By convincing you they’ve got some special method that they’ll let you in on
  • But ultimately there is no silver bullet to extinguish the mortgage

I guess it just sounds a lot more enticing to refer to it as a trick rather than a boring old refinance, like you are pulling one over on your bank or being let in on a secret. Take that “The Man!”

At the end of the day, if you want to own your home free and clear you need to pay your mortgage in full with real money. You can do this in a variety of different ways.

You can slowly pay back your home loan over 30 years and never refinance, even if interest rates fall dramatically. Or you can keep an eye on rates and refinance if and when it makes sense to do.

To avoid resetting the clock, you can also go with a shorter loan term when you refinance to stay on track and avoid taking your mortgage into retirement with you.

This could be quite wise, and as mentioned, save you tens if not hundreds of thousands of dollars. Trick, no? Smart financial move? Quite possibly.

At the end of the day, there is no silver bullet to your mortgage problem. Yes, you can pay off your mortgage a lot faster and for much less money, but it’s not magic, just common sense.

(photo: Steven Depolo)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

11 Ways to Build Home Equity

These days, home equity is booming thanks to rapidly appreciating property values.

At last glance, total equity on mortgaged properties exceeded $10 trillion, with more than $6.5 trillion of it tappable, per recent figures from Black Knight.

tappable equity

Yes, that’s a “T” not a “B.” But you would of never guessed it less than a decade ago after the housing bubble burst and put millions in underwater positions.

In the early 2000s, it was all about tapping into your home equity with a line of credit or a cash-out refinance, often at absurdly high loan-to-value ratios (such as 100%).

The whole using your house as an ATM thing to make lavish purchases or even just pay the bills each month became the norm.

As a result of all that excess, the narrative quickly changed to overpriced homes, declining equity, negative equity, underwater mortgages, loan modification programs, foreclosures, and so on.

Funny how that works…

This reversal of literal fortune was caused by crashing home prices and zero down mortgages, many of which weren’t properly underwritten to begin with.

Most of those who got into trouble purchased homes at the height of the market at unsustainable prices, while at the same time relying on 100% financing to get the deal done.

This caused lots of homeowners to leave or think about walking away, as home price deprecation was found to be the leading driver of default.

But many of those who stuck around and rode it out are actually in great shape, maybe even better positions than when they first took out their mortgages.

In fact, those who held on, even if they purchased a home in 2006, could be up 50% today thanks to the recent boom.

However, others are still feeling the negative effects of the housing crisis, even after several years of double-digit home price gains.

If you’re one of those homeowners, or even if you’re not, you may be wondering how to build some home equity.

That way, when it comes time to sell your home (or refinance your mortgage), you can do so without worry.

Those with more home equity will walk away with more cash in their pocket, and if refinancing, may be able to qualify for a lower interest rate.

Let’s look at the many ways you can build equity in your home:

1. Rising home prices – Here’s an easy one that requires no effort on your part.

When property values climb higher, you will gain equity simply because your home or condo will be worth more. It’s as simple as that.

For example, if your home was worth $200,000, and then rose to $250,000 after five years, you’d have $50,000 more equity.

This is the beauty of homeownership, and one of the many advantages of owning a home versus renting.

In fact, the most recent Survey of Consumer Finances (SCF) from the Federal Reserve revealed that homeowners had a net worth of $255,000 versus just $6,000 for renters. A lot of that can be attributed to home equity.

Of course, the opposite can also occur if home prices drop, as we all now know. But at the moment, everything appears to be on the up and up.

2. Falling mortgage balance – Here’s more low-hanging fruit. As you pay off your mortgage each month, you pay a portion of interest and a portion of principal (assuming it’s not an interest-only home loan).

Any principal payments made will boost your equity as your home loan gets paid down.

For example, you’d gain $343 in principal during the first month on a 30-year fixed with a $200,000 loan amount set at 3%.

After a year, that’s about $4,000. And after five years, more than $22,000!

Every time you make your mortgage payment, you’ll gain some home equity. And when combined with an appreciation, it can be a powerful one-two punch.

3. Larger mortgage payments – This one requires more money out of your pocket, but can save you money at the same time.

If you make larger payments each month, with the extra portion going toward principal, you will pay off your mortgage much faster and gain home equity a lot quicker. Simple and effective.

While it will cost you more initially, you’ll pay a lot less interest over time.

For example, your total interest expense would fall from $104,000 to $59,000 if you paid just $200 extra each month, and your mortgage would be paid off nearly a decade early.

4. Biweekly mortgage payments – Here’s another way to save on interest with very little effort.

You can go with a biweekly mortgage payment plan, where you make 26 half payments throughout the year, which equates to 13 monthly payments.

This will shave down your mortgage term, save you a ton in interest, and help you build home equity a lot faster.

There’s also a simple way to do this without having to sign up for a program that may cost money where you just add 1/12 to each monthly payment.

5. Shorter mortgage term – If you’ve got the means, and want to extinguish your home loan earlier, think beyond the 30-year fixed.

It’s possible to refinance into a shorter-term mortgage with a lower mortgage rate, such as a 15-year fixed, which will increase the size of your payments, but build equity at a much higher rate than a traditional 30-year mortgage.

You might also be able to pick something in between, like a 20- or 25-year fixed, or even something that matches your original term, like a 22-year loan term.

This will keep you on track, or even ahead of schedule, and also help you avoid resetting the clock.

6. Avoid refinancing – Conversely, if you don’t refinance and pull cash out, you’ll retain all the equity in your home.

During the prior housing boom, scores of homeowners refinanced their loans over and over until they sucked their equity dry.

This was actually one of the reasons why many chose to walk away, or were forced to sell short or foreclose.

Had they just paid down their loans over time, most would of been in pretty good shape.

Simply put, it’s fine to tap equity, but like everything else, moderation is key.

7. Home improvements – Here’s a potential win-win that you can actually enjoy.

If you make smart home improvements, where the expected value exceeds the cost, you’ll increase your home equity by owning a home that’s worth more.

While it’s seemingly the same exact house, smart home devices, quartz countertops, and stainless steel appliances still draw buyers in, and you might be able to sell for more.

You can even do it for free if it’s your own sweat equity. And in the meantime, you get to enjoy a better house.

8. Maintenance – Now let’s talk about being a responsible homeowner.

Keep your home in tip-top shape and you will be rewarded when it comes time to sell.

If you can unload it for more as a result of proper maintenance, you’ve essentially created more equity in your home.

Home buyers often hit sellers with costly repair requests, but it’ll be more difficult for them to ask for concessions if you took great care of your home.

It could even be prudent to get a home inspection yourself, before you sell, to address any red flags before a buyer tries to get you to pay for them.

9. Curb appeal – This is one of my favorites and something anyone can do to boost their home value, and therefore equity if selling.

I’m referring to curb appeal and also home staging. Make your home look good when you list it and there’s a better chance it’ll sell, and sell for more.

Simple things can make a big difference, such as new paint, carpet, bright lighting, plants, flowers, and even basic cleanliness or a lack of clutter.

Or even how you arrange your home. For example, if home offices are en vogue, make a room that served a different purpose into an office to bring in more buyers.

10. Rent it out – One of the best ways to build equity is to have someone else do it for you.

If you rent out part or all of your property, it’s possible to build equity via the rent you receive from your tenants each month.

Having someone else pay off your mortgage is pretty sweet, especially if the property appreciates at the same time.

11. Bigger down payment – Finally, you can make a larger down payment at the outset to automatically acquire home equity and build it faster thnaks to a lower outstanding balance.

While this may seem like you’re putting money in an illiquid investment, more equity means a lower loan-to-value ratio, which may equate to a lower interest rate, no mortgage insurance, and easier-to-obtain financing.

Over time, that lower mortgage rate and smaller loan balance will mean less interest paid and more equity accrued.

It’s also possible to recast a mortgage or complete a cash in refinance to get your loan balance down and increase your equity.

Just remember that any extra money might be better served elsewhere, such as the stock market or a retirement account.

Bonus: If you happen to be an underwater homeowner, get the bank to grant you principal forgiveness and you’ve essentially built home equity, even if you’re still just above water as a result.

Source: thetruthaboutmortgage.com

Marriage and Mortgage May Not Mix

Marriage or Mortgage?

The premise of the new Netflix show “Marriage or Mortgage” is simple. It pits a wedding planner against a real estate agent.

The prize, if you want to call it that, is getting the spouses-to-be to go in one direction over the other.

In this case, an over-the-top wedding versus a dream house. Because they can’t possibly have both, at least not on their budget.

While this might make for great reality television, it is a serious issue many young couples face, especially with home prices a lot higher than they’ve been.

At the same time, the pressure to throw an incredible wedding has never been greater, perhaps thanks to Instagram and social media. It’s like a weird competition no one really wins.

It’s Okay to Rent and Be Married, Honest

  • There’s nothing wrong with renting at any time in your life
  • You don’t need to own a home just because you’re married or engaged
  • But if you do plan on starting a family in the near future it might be smart to put down roots somewhere
  • This will provide added stability and perhaps more space for additional occupants

So you’re planning on getting married this summer, and you just have to find a perfect house to call your own before that magical day. Or very soon thereafter.

There’s no possible way you could continue to live in an apartment and rent once you’re married! That just won’t do. Married people are supposed to be homeowners, right?

Not so fast. It’s a big financial decision that shouldn’t necessarily take place while you’ve got a lot of other major life changing events in the works.

Why do newlyweds and newlyweds-to-be have this must-own mentality? Is it the seriousness of marriage, or the need for a solid foundation to begin raising a family?

While I get the latter part to some extent, one shouldn’t buy a home simply because of a recent or upcoming wedding.

You should buy a home when you have given it a lot of thought, done your due diligence, and are financially secure to go through with the purchase.

Generally, this means having enough money for a down payment, closing costs, and reserves, factoring in any wedding day costs.

Married or not, one must take the time to determine if homeownership is for them. Guess what? It’s not for everyone.

We don’t all want the responsibility of owning a home or condo. It can be a lot of work, hard on the finances, and super stressful.

There’s also the question of home prices, which are pretty sky-high at the moment. One should always take the time to consider the current state of the real estate market too.

Obviously, there will be people marrying at the height of the market and at market lows. So the results will always vary.

That latter group might have a great reason to buy a home, whereas the former group could make an ill-timed decision and add a lot of uncertainty and stress to a new marriage.

[What’s the Best Mortgage for First Time Buyers?]

There Shouldn’t Ever Be a Rush to Buy a Home

  • Plenty of married couples rent until finding their forever home
  • A wedding can be hard on a couple’s finances and their collective psyche
  • As can the marriage itself as two individuals learn to commingle assets for the very first time
  • So waiting to get all your ducks in a row can actually pay off and reduce stress

All I see these days are new couples rushing into home purchases because they’re engaged or newly married.

It appears to be the next logical step in life, but forcing the issue just because everyone else is doing it isn’t necessarily the right decision.

Sure, kids are often not too far out once you tie the knot, assuming you want them, but that doesn’t mean you just take another plunge.

Give it some serious thought, just as you did your wedding (hopefully). Like marriage, it’s a major commitment, not a hasty decision.

For me, this seems like a huge layer of stress to pile on top of an already stressful period.

Buying a home is no trivial matter, and could lead to arguing and fighting, which is no way to start a marriage, especially during a pandemic!

Additionally, you’ll probably have lots of expenses related to the wedding and subsequent honeymoon, so it might be tough to come up with the minimum down payment on the home purchase.

This could put you in a bad position, or force you to attempt to buy a home with nothing down.

Sure, it could be an option to buy with little set aside in the bank, but at what price?

Expect a higher mortgage rate, higher monthly payment, and perhaps a less competitive offer relative to others willing to put more down in the case of a bidding war.

Start the Home Buying Discussion Early

  • Once you’re married (and long before that) the home buying discussion should take place
  • You should include a hard look at your finances and your spouse’s
  • Take the time to determine your housing goals, wants, and needs
  • That way you’re adequately prepared to buy when your dream home comes along

A wise couple should take the time to organize their finances, check and fix their credit if necessary, and do a lot of debt-to-income and valuation homework before even thinking about buying a home.

It doesn’t make sense to rush into the purchase of a home simply because your relationship status changed. They’re two entirely different things.

But it is perfectly sensible (and smart) to begin the conversation as early as possible, just as you would other important decisions like having kids.

This is especially true as you get to know your significant other’s saving and spending habits, and perhaps their not-so-good credit history.

It’s not uncommon for one individual to weigh down the other in that department, which could jeopardize the entire mortgage approval.

Speaking of, start with a mortgage pre-approval before you begin scouring listings and picking out furniture.

You certainly shouldn’t start your marriage off with a rash decision just because it’s the “normal” way of doing things, or because other couples or family members pressure you to buy a home.

Take your time and do it right, whether you’re planning to get married, newly married, or even if marriage isn’t even on the radar.

[What Is a Good Price for a First-Time Home Buyer?]

What About Buying a Home Before Marriage?

  • A common trend these days is buying a home before getting married
  • For some reason it’s easier to commit to a home purchase than another person
  • But the situation can get pretty sticky if the couple decides to go their separate ways
  • Again, you’re making a big commitment either way so give it a lot of thought!

A trend that has emerged in recent years, especially among the Millennial cohort, has been buying a home before marriage.

You can call it progressive or unconventional, or perhaps smart if two people see a good buying opportunity they don’t want to miss.

Some of the advantages to purchasing a home before marriage include having more money for a down payment (since it hasn’t been wasted on a big wedding ceremony).

Or simply buying a home solely because you want to, not because you’re married and feel pressure to do so.

On the other side of the coin, owning a home together before marriage could pressure you to actually get married, even if cracks start to develop in the relationship.

You may feel that you have no choice since you already own a major asset together, and separating it won’t be financially advantageous.

Some may also have personal beliefs that dictate the order of things, which don’t allow a home purchase before marriage.

There are also legal and title issues to consider when two unmarried individuals jointly own real estate or any other asset.

Ultimately, real estate and marriage are very separate things that don’t necessarily need to go hand-in-hand.

Try to look at the big picture. How will the home purchase fit into the larger plan? Is it better to buy now or later and why?

One plus to a post-wedding home purchase is the chance you might get some money as a gift, which could be helpful to cover the down payment and closing costs.

You may just want to let the dust settle before you hire the moving van.

Should Married Couples Live with a Roommate?

married homeowners

Another emerging trend lately has been taking on roommates or boarders to help pay the mortgage bill each month.

It makes a lot of sense if you’ve got spare bedrooms and don’t mind having friends or family members live with you.

Amazingly, this even happens with married couples (I know of at least two firsthand), though I’ve also heard of the arrangement ending fairly quickly, especially once kids enter the picture.

Data parsed by Trulia found that the share of married couples with roommates hit its high in 2012, around the time the housing market was bottoming. It wasn’t far off in 2007 either, when home prices were peaking.

They also found that more expensive housing markets (many on the West Coast) tend to have a higher share of married couples with roommates.

This could be attributed to affordability issues all around, whether it’s an existing homeowner hanging onto their home by supplementing income from another individual.

Or a former homeowner or renter being forced to become a boarder during tough times.

As of 2018, just 3.28% of all U.S. households had a roommate/boarder. It doesn’t sound like much, but it still accounts for some 4.2 million households nationwide.

Among married couples, the rate was a much smaller 0.46%, representing about 280,000 households.

While perhaps not for the faint of heart, it could make housing payments more affordable, especially as home prices hit new all-time highs in the more expensive markets nationwide.

In the end, a smart couple that does their homework might not need to make the very hard decision between a marriage and a mortgage, and can actually have the best of both worlds.

Those who do may also set themselves up for greater success in their marriage, which could be the recipe to long, happy life together.

Remember, a wedding typically lasts for a few hours, while homeownership can go on for decades.

Read more: When should you start looking for a home?

(photo: Kim Marius Flakstad)

Source: thetruthaboutmortgage.com

How to Get Cash Out of Your Home in a Rising Rate Environment

Posted on September 27th, 2018

In a perfect world, you could tap into your home equity and lower your mortgage interest rate at the same time.

But because interest rates rise and fall over time, this simply won’t always be the case for homeowners in need of cash.

This is especially true these days as the great bulk of existing homeowners out there locked in mortgage rates at all-time lows.

This has created an interesting problem – homeowners are sitting on the most available home equity in history, yet very few are tapping into it.

The reason being is that most don’t want to give up their 3.5% 30-year fixed mortgage in exchange for one closer to 4.75% or even higher.

After all, doing so will hit their monthly housing payment twice – once via the higher interest rate, and a second time via the larger loan amount associated with the cash out refinance.

For some, this could create qualification issues if DTIs are maxed out. And for others it’s just not an attractive option.

At the same time, there are few other places (if any) where you can borrow money more cheaply than via your home.

Clearly credit card interest rates are sky-high, as are any personal loan options. So even if rates have risen since you last purchased your property or refinanced, cashing out will likely still be the cheapest option.

So what are you to do if you need cash and interest rates are unfavorable?

Open a Second Mortgage

  • If you like the interest rate on your first mortgage
  • Simply open a second mortgage to get the cash you need
  • You can choose from a home equity loan or a HELOC
  • And while rates are higher than first mortgages, they should be the other lowest option available

Well, one obvious place to turn is a second mortgage, that way your existing home loan will be untouched interest rate-wise and remain on track to be paid off.

The main drawback to a second mortgage, such as a HELOC or a home equity loan, is the fact that interest rates are higher relative to first mortgage rates.

How much higher will depend on your specific loan attributes, such as loan-to-value ratio (LTV), credit score, property type, etc.

Those who have a large amount of equity and are able to keep LTVs at or below 80% should enjoy fairly reasonable rates.

Conversely, if you don’t have a ton of equity and need an LTV of 90% or higher, it could get pretty expensive.

This is especially true if your credit score is marginal or if the property isn’t an owner-occupied single-family residence.

Another problem with the second mortgage route is that the Fed keeps raising rates, which in turn leads to a higher prime rate. HELOCs are tied to prime, so your rate could keep inching higher and higher as the Fed gathers and determines inflation is a concern.

But as noted, you’ll be able to access cash in your home and keep your first mortgage intact, which can be quite valuable if you’ve got a super low fixed interest rate.

And as noted, you probably won’t find a lower interest rate elsewhere other than on a first mortgage.

Just Refinance Your First Mortgage

  • If your existing mortgage rate isn’t so great
  • Possibly because you put little down or had questionable credit
  • It could still make sense to trade in your first mortgage for a new one
  • Especially if you’re paying mortgage insurance at the moment and can drop it

Speaking of, you can always bite the bullet and refinance your first mortgage and pull cash out in the process.

Yes, you’ll lose your existing interest rate, but it could still be the cheapest alternative depending on the alternatives.

While mortgage rates have risen this year, they’re still very attractive historically, and not all that much higher than they were.

For example, the 30-year fixed was around 4% to start the year, and now closer to 4.75%. Yes, it’s higher, but it’s not tremendously higher.

And it’s possible you could be refinancing a mortgage that wasn’t ideal to begin with.

A lot of first-time home buyers put little to nothing down, meaning they’re often saddled with mortgage insurance and higher interest rates relative to the best available.

So for some homeowners, refinancing the first mortgage could actually result in a lower rate with cash out, or simply a lateral move.

If you can drop the mortgage insurance in the process and get cash, it’s a win-win.

Same goes for those who had poor or average credit when they first took out a home loan and have since seen their scores go up thanks to some positive mortgage history.

Explore Different Mortgage Programs

  • You don’t have to take out a 30-year fixed mortgage
  • There are lots of options available including ARMs and FRMs
  • Maybe you refinance into a 20-year fixed
  • Or perhaps you go for a hybrid ARM if you know you’ll be moving on eventually

There’s always this assumption that you either already have a 30-year fixed or will be refinancing into a 30-year fixed.

This clearly isn’t always the case, as there are plenty of alternatives to the 30-year fixed, including both fixed and adjustable-rate options.

An existing homeowner in need of cash could move from a fixed-rate mortgage to an ARM, or from an ARM to a fixed-rate mortgage.

For example, someone who plans to move in the next 5-7 years could take out a 5/1 ARM or 7/1 ARM and enjoy a lower fixed rate for the entire duration they stay in the property.

Or a borrower with an ARM could simply refinance into another ARM to keep monthly payments at bay.

Some individuals have little interest in paying off their home loans in full, and are just happy to gain access to money at attractive rates so it can be deployed elsewhere.

Moving from an ARM to another ARM could mean access to cheap money, with a fixed rate for a period of time (five or seven years in the above example) to keep that level of certainty around.

Put simply, there are lots of possible scenarios that should be explored when it comes time to refinance.

Hold Off and Try to Budget, or Borrow a Little Differently

One final option is to just hold off on the cash out refinance and look for other ways to get the money you need for whatever it is you need it for.

This could mean pumping the brakes on a remodeling project that’s a want, but not necessarily a need.

Or simply cutting expenses elsewhere so you can begin saving up the cash you need to make that desired home improvement.

Alternatively, you could look into a 0% APR credit card, as I’ve mentioned before. It might not be for the faint of heart, but if you can borrow a decent sum of money and pay no interest for around two years, that could be a solution too.

All without having to touch your mortgage, or go through the sometimes-painstaking process of completing a mortgage refinance.

Just be disciplined and absolutely sure you can pay it back in time before the 0% APR goes away.

If history tells us anything, homeowners are going to tap into all that equity one way or another. There’s simply too much money up for grabs for them not to.

How you do it is important, so be sure to take the time to explore all your options.

Source: thetruthaboutmortgage.com

When Do Mortgage Payments Start?

A little bit of mortgage Q&A: “When do mortgage payments start?”

New homeowners (and those refinancing a mortgage) often wonder when mortgage payments start, as there’s sometimes a considerable gap between loan closing and the due date of the first monthly payment.

For example, you may have been told by your real estate agent or mortgage broker that payments won’t start for 45 days or longer and express some intense optimism as a result.

But you might be skeptical as well, and for good reason. Why would it take so long to start paying your mortgage lender back? Let’s find out!

Mortgages Are Paid in Arrears

when mortgage payments start

  • Unlike rental payments that are paid a month in advance
  • Mortgage payments are paid after the fact (arrears)
  • Because interest must actually accrue before it becomes due
  • So once the month is over you pay interest for that time period
payment date

This loan was closed in early August, but the first payment isn’t due until October.

This phenomenon occurs because mortgages are paid in arrears, not in advance, meaning payment is made at the end of a certain period, such as one month.

Because interest is accrued on a mortgage balance each month, it cannot be paid until after the fact.

Simply put, your mortgage payment made on the first of the month will cover last month’s interest, along with taxes and insurance, and principal (if applicable).

This differs from monthly rental payments, which are paid in advance for the month they cover; if you rent a property, your payment due on say August 1st covers rent for the month of August.

You are paying the landlord ahead of time for the privilege to live in their property.

It makes sense if you think about it. With rent there isn’t a loan involved, and thus no interest. So it doesn’t need to accrue first before it is paid.

You just make your payment and get to stay in the property for the month.

With a home loan, it’s the opposite, which explains the time lag you might experience after first taking out a mortgage.

First Mortgage Payment Determined by Closing Date

  • Your first mortgage payment is driven by the closing date
  • If you close late in the month, your first payment will be due about a month later
  • If you close early in the month, you may get nearly two months before the first payment is due
  • Be sure to speak with your loan officer about timing this if you want payments to start sooner or later

It’s gets tricky when you start making mortgage payments, as the start date of your first payment is determined by your closing date.

Example: If you close your mortgage on August 20th, your first mortgage payment isn’t due until October 1st.

However, at closing, you would need to pay the remaining interest for the month of August, or 11 days worth; this is typically known as prepaid interest, and appears as a closing cost.

In this particular example, assuming your mortgage rate was 5.50% and the loan balance was $300,000, the daily interest rate ($45.83) x 11 would be $504.17.

Some borrowers think they’re skipping a monthly mortgage payment, but in fact they’ve paid the 10 days of interest in August and the full month of September by the time the October payment is due.

You can, however, avoid costly out-of-pocket upfront expenses by closing at the end of the month.

Doing so cuts down on the amount of prepaid interest that is due initially, but it doesn’t make a difference long-term. And your first mortgage payment will be due sooner.

If you close early in the month, you’ll pay many more days of prepaid interest at closing but your first mortgage payment won’t be due for about two months, as our scenario above illustrates.

For example, if you close on the 7th of August, you’ll pay about three weeks of interest at closing, but you’ll have nearly two months to make your very first mortgage payment.

In fact, because lenders typically provide a grace period to pay up until the 15th of the month, you could actually have more than two full months before the first payment is due.

However, if you close very early in the month, say on the 1st, 2nd, or 3rd, there might be an option to receive a credit from the lender for those few days of prepaid interest.

Then you’d make your first payment the very next month for the full amount of interest due.

This way you can start tackling your mortgage if your goal is to pay it off sooner rather than later. And you can keep closing costs down if money is tight, or if cash to close is an issue.

But don’t forget about other prepaid items, like homeowners insurance, property taxes, and HOA dues, for which reserves may also increase if your loan closing date falls into the next month.

There is an advantage to closing early in the month though; mortgage lenders are typically a lot less busy.

This has to do with a company’s monthly funding goals and getting those loans closed by month’s end for the borrower’s sake.

And really, you should have enough money set aside for closing costs regardless of when your home loan funds.

Read more: 21 mortgage questions commonly asked, answered.

(photo: thejaymo)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com