Do Mortgage Payments Increase?

Mortgage Q&A: “Do mortgage payments increase?”

While this sounds like a no-brainer question, it’s actually a little more complicated than it appears.

You see, there a number of different reasons why a mortgage payment can increase, aside from the obvious interest rate change. But let’s start with the obvious and go from there.

And yes, even if you have a fixed-rate mortgage your monthly payment can increase.

While that might sound like bad news, it’s good to know what’s coming so you can prepare accordingly.

Mortgage Payments Can Increase with Interest Rate Adjustments

  • If you have an ARM your monthly payment can go up or down
  • This is possible each time it adjusts, whether every six months or annually
  • To avoid this payment surprise, simply choose a fixed-rate mortgage instead
  • FRMs are actually pricing very close to ARMs anyway so it could be in your best interest just to stick with a 15- or 30-year fixed

Here’s the easy one. If you happen to have an adjustable-rate mortgage, your mortgage rate has the ability to adjust both up or down, as determined by the interest rate caps.

It can move up or down once it initially becomes adjustable (after the initial teaser rate period ends), periodically (every year or two times a year) and throughout the life of the loan (by a certain maximum number, such as 5% up or down).

For example, if you take out a 5/1 ARM, it’s first adjustment will take place after 60 months.

At this time, it could rise fairly significantly depending on the caps in place, which might be 1-2% higher than the start rate.

So if your ARM started at 3%, it might jump to 5% at its first adjustment.

On a $300,000 loan amount, we’re talking about a monthly payment increase of nearly $350. Ouch!

Simply put, when the interest rate on your mortgage goes up, your monthly mortgage payments increase. Pretty standard stuff here.

To avoid this potential pitfall, simply go with a fixed-rate mortgage instead of an ARM and you won’t ever have to worry about it.

Or you can refinance your home loan before your first interest rate adjustment to another ARM. Or go with a fixed-rate mortgage instead.

Or simply sell your home before the adjustable period begins. Plenty of options really.

Mortgage Payments Increase When the Interest-Only Period Ends

  • Your payment can also surge higher if you have an interest-only loan
  • At that time it becomes fully-amortizing, meaning both principal and interest payments must be made
  • It’s doubly expensive because you’ve been deferring interest for years prior to that
  • This explains why these loans are a lot less popular today and considered non-QM loans

Another common reason for mortgage payments increasing is when the interest-only period ends, an issue that was common prior to the last housing crisis.

Typically, an interest-only home loan becomes fully amortized after 10 years.

In other words, after a decade you won’t be able to make just the interest-only payment.

You will have to make principal and interest payments to ensure the loan balance is actually paid down.

And guess what – the fully amortized payment will be significantly higher than the interest-only payment, especially if you deferred principal payments for a full 10 years.

Simply put, you’ll be paying the entire beginning loan balance in 20 years instead of 30, assuming the loan term was for 30 years, because interest-only payments mean the original loan amount remains untouched.

This can result in a big monthly payment increase, forcing many borrowers to refinance their mortgages.

Just hope interest rates are favorable when this time comes or you could be in for a rude awakening.

Mortgage Payments Increase When Taxes or Insurance Go Up

  • If your mortgage has an impound account your total housing payment could go up
  • An impound account results in homeowners insurance and property taxes being paid monthly
  • If those costs rise from year to year your total payment due could also increase
  • You’ll receive an escrow analysis annually letting you know if/when this may happen

Then there’s the issue of property taxes and homeowners insurance, assuming you have an impound account.

Even if you’ve got a fixed-rate mortgage, your mortgage payment can increase if the cost of property taxes and insurance rise, and they’re included in your monthly housing payment.

And guess what, these costs do tend to go up year after year, just like everything else.

A mortgage payment is often expressed using the acronym PITI, which stands for principal, interest, taxes, and insurance.

With a fixed-rate mortgage, the principal and interest amounts won’t change throughout the life of the loan. That’s the good news.

However, there are cases when both the homeowners insurance and property taxes can increase, though this only affects your mortgage payments if they are escrowed.

Keep an eye out for an annual escrow analysis which breaks down how much money you’ve got in your account, along with the projected cost of your taxes and insurance.

It may say something like “escrow account has a shortage,” and as such, your new payment will be X to cover that deficit.

You can typically elect to begin making the higher mortgage payment to cover the shortfall, or pay a lump sum to boost your escrow account reserves so your monthly payment won’t change.

Fortunately these annual payment fluctuations will probably be minor relative to an ARM’s interest rate resetting or an interest-only period ending.

Ultimately, it’s usually quite nominal because the difference is spread out over 12 months and typically not all that large to begin with.

But it’s still good to be prepared and budget accordingly as your housing payments will likely rise over time.

The takeaway here is to consider all housing costs before determining if you should buy a home, and make sure you know how much you can afford well before beginning your property search.

You’d be surprised at how the costs can pile up once you factor in the insurance, taxes, and everyday maintenance, along with the unexpected.

At the same time, mortgage payments have the ability to go down for a number of reasons as well, so it’s not all bad news.

And remember, thanks to our friend inflation, your monthly mortgage payment might seem like a drop in the bucket a decade from now, while renters may not see such relief.

Read more: When do mortgage payments start?

Source: thetruthaboutmortgage.com

What Is a Mortgagee? Hint: It’s Not a Typo

Are You a Mortgagee or Mortgagor?

It’s mortgage Q&A time! Today’s question: “What is a mortgagee?”

No, it’s not a typo. I didn’t leave an extra “e” on the word mortgage by mistake, though it may appear that way.

Despite its striking appearance, it’s actually a completely different word, somehow, simply with the mere addition of the letter E.

Don’t ask me how or why, I don’t claim to be an expert in word origins.

Seems like a good way to confuse a lot of people though, and it has probably been successful in that department for years now.

You can blame the British English language for that, or maybe American English.

Anyway, let’s stop beating up on the English language and define the darn thing, shall we.

A “mortgagee” is the entity that originates (makes) and sometimes holds the mortgage, otherwise known as the bank or the mortgage lender.

They lend money so individuals like you and I can purchase real estate without draining our bank accounts.

It could also be your loan servicer, the entity that sends you a mortgage bill each month, and perhaps an escrow analysis each year if your loan has impounds.

The mortgagee extends financing to the “mortgagor,” who is the homeowner or borrower in the transaction.

So if you’re reading this and you aren’t a bank, you are the mortgagor. It’s as simple as that.

Another way to remember this rather confusing word jumble; Who is the mortgagee? Not me!!

Mortgagor Rhymes with Borrower, Kind Of

mortgagor

  • Here’s a handy way to remember the word mortgagor
  • It kind of rhymes with the word borrower…
  • Or even the word homeowner, which is also accurate if you hold a mortgage on your property

I was trying to think of a good association so homeowners can remember which one they are, instead of having to look it up every time they come across the word.

I believe I came up with a semi-decent, not great one. Mortgagor rhymes with borrower, kind of. Right? Not really, but they look and end similar, no?

Anyway, the real property (real estate) acts as collateral for the mortgage, and the mortgagee obtains a security interest in exchange for providing financing (a home loan) to the mortgagor.

If the mortgagor doesn’t make their mortgage payments as agreed, the mortgagee has the right to take possession of the property in question, typically through a process we’ve all at least heard of called foreclosure.

Assuming that happens, the property can eventually be sold by the mortgage lender to a third party to pay off any attached liens, or mortgages.

So if you’re still not sure, you are probably the mortgagor, also known as the homeowner with a mortgage. And your lender is the mortgagee. Yippee!

What makes this particular issue even more confusing is that it’s the other way around when it comes to related words like renters and landlords.

Yep, for some reason a landlord is known as a “lessor,” whereas the renter/tenant is known as the “lessee.” In other words, it’s the exact opposite for renters than it is for homeowners.

But I suppose it makes sense that both landlord and mortgage borrower are property owners.

What About a Mortgagee Clause?

mortgagee clause

  • An important document you may come across when dealing with homeowners insurance
  • Stipulates who the lender (mortgagee) is in the event there is damage to the subject property
  • Protects the lender’s interest if/when an insurance claim is filed
  • Since they are often the majority owner of the property

You may have also heard the term “mortgagee clause” when going through the home loan process.

It refers to a document that protects the lender’s interest in the property in the event of any damage or loss.

It contains important information about the mortgagee/lender, including name, address, etc. so the homeowners insurance company knows exactly who has ownership in the event of a claim.

Remember, while you are technically the homeowner, the bank probably still has quite a bit of exposure to your property if you put down a small down payment.

For example, if you come in with just a 3% down payment, and the bank grants you a mortgage for 97% of the home’s value, they are a lot more exposed than you are.

This is why hazard insurance is required when you take out a mortgage, to protect the lender if something bad happens to the property.

Conversely, if you buy a home with cash, as opposed to taking advantage of the low mortgage rates on offer, it’s your choice to insure it or not.

But more than likely, you’ll want insurance coverage on your property regardless.

In summary:

Mortgagee: Bank or mortgage lender
Mortgagor: Borrower/homeowner (probably you!)

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

Don’t Be a Desperate Home Buyer

It’s no secret the housing market is hot at the moment, so much so that just about everyone is wondering when the next housing crash will take place.

The few homes that are out there are flying off the shelves, and bidding wars are becoming more and more common, if not a foregone conclusion.

Instead of home sellers delivering price reductions to prospective buyers, as they did just a couple years ago, properties are going way above asking.

While some are quick to scream “Another housing crisis!,” for me it just reinforces the housing market dynamic we’ve seen over the past year and change.

One driven by limited housing supply, low mortgage rates, and rising salaries for prospective buyers, all of which increase both home prices and purchasing power.

At the moment, it’s clear the home sellers have all the leverage, but that doesn’t mean you still can’t negotiate or get a better deal.

Sure, the past few years have been crazy – but you shouldn’t have to write a letter to the seller begging them to accept your offer.

And while it’s still easy to get caught up in all the excitement, don’t forget that you have power too as the home buyer, no matter the market conditions.

Simply put, don’t be a desperate home buyer. Or a desperate buyer of anything. If you are, you’ll likely get ripped off, or at the least pay more than you need to.

Here are some things to consider to avoid being that desperate buyer, which might lead to a lower price and better choice of property.

Buy a Home at the Right Time for You

First off, make sure it makes sense to buy a home at any given time, not just for financial reasons.

I’m not talking about timing the market – I’m talking about not rushing into homeownership unless it makes sense for YOU.

This is part personal based on your life goals, needs, etc., and partially to do with the housing market in the area where you want to live.

While we can’t all control the timing, there’s no need to rush in when we’re talking about a costly home purchase.

It’s a big deal, and as such a lot of time, thought, and preparation should go into it. Forget about what those iBuyers are attempting to do.

Once you actually know homeownership is for you, there are some seasonal patterns to consider that could provide an edge.

One tip here is that spring tends to be the worst time to buy a home because it’s a time when the most prospective buyers are active.

While there might be more listings to offset the surge in buyers, it can be in your best interest to shop for a home during fall or winter, when competition is generally lower.

You could have an easier time negotiating with the seller, snagging a price reduction, getting repair requests approved, and so on.

The mortgage process might also be smoother if your lender, loan officer, underwriter, appraiser, and escrow officer aren’t totally swamped.

In summary, less stress and potentially a lower sales price if you can exercise some patience.

Get Pre-Approved for a Mortgage Before You Shop

This is a no-brainer, and one I’ve mentioned on many occasions. Without a pre-approval letter in hand, sellers won’t take you seriously, especially in today’s hot market.

The real estate agents won’t either, knowing a mortgage isn’t a sure thing. So take the time to get pre-approved first.

In fact, look for a mortgage before you search for a house!

This will also help you narrow down your property search to ensure you only consider homes in your price range.

It’ll also let you determine if you can bid a little extra if need be, knowing you’re approved for larger loan amounts.

Tip: With bidding wars common at the moment, lower your maximum purchase price in the Redfin/Zillow apps to allow for above-asking offers.

Set Aside Cash for Down Payment and Closing Costs

One key component of a mortgage approval is cash on hand. Without it, you won’t have funds to cover the down payment and/or the closing costs.

Sure, there are lots of loan programs that require very little, such as Fannie Mae HomeReady or the FHA’s flagship 3.5% down mortgage, and even zero options from the VA or USDA.

But it helps to have money in the bank so you can present a stronger offer to the seller, and give yourself the ability to negotiate.

If I’m a seller in a hot market, I’m going to want the buyer who can put 20% down on the purchase versus the buyer scraping together just enough funds to close.

That extra cash could also come in handy if the appraisal comes in low, which is probably happening more often as the market eases and overinflated prices drift back down to earth.

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

Always, Always Negotiate, Even in a Seller’s Market

Speaking of negotiating, do it. Always. It doesn’t matter if it’s rent, a mortgage, or you’re getting a cavity filled. Always ask for a lower price.

Most times, folks will oblige just due to human nature, even if it’s a nominal discount.

It irks me that most people are happy just to accept whatever price is thrown at them. Or whatever price the listing agent says the seller is willing to accept.

You can almost always go lower. In most cases, the seller is going to be more desperate than you, even if they’ve supposedly got multiple offers.

They likely need to sell their home because they’ve made the commitment to do so, and you don’t need to buy their particular home.

The same is true for a brand new property, even if you’re told by the home builder that prices are firm.

Of course, it depends how much demand there is for their properties; if there’s a lot, they might not budge on their price. But it’s always worth a try regardless.

There will always be other homes on the market, so keep that in mind.

Don’t Show Your Hand to Anyone

A key tactic in the negotiating department is never showing your hand. And I mean never, ever, showing it, to anyone.

This includes your own real estate agent. If they know you’re in love with a particular house, they might not fight as hard to ask for credits or a lower price.

Sure, they should and might, but if you make it appear that you’re more than happy to walk, they’ll be on the phone with the listing agent warning them that the buyer is ready to walk.

That could be enough to get the sellers to act, and give into the buyer’s demands.

Basically, whatever you express to your own agent will likely be passed along to the listing agent.

Another approach is to peruse listings without a buyer’s agent, then simply contact the listing agent directly if you come across something you like.

This could provide an edge above other bidders if you’re represented by the listing agent’s brokerage.

Just be sure they have your best interests in mind and you don’t overpay for the house.

Be Willing to Move On No Matter What

Lastly, it is perfectly okay to walk away, whether it’s at the car dealership or the negotiating table with your real estate agent.

There are plenty of houses in the sea, and while it’s easy to get hung up on one particular property, it’s amazing how we often fall in love again and again.

More often than not, if a first property falls through or you don’t win the bid, you may look back grateful that it didn’t work out.

Typically, I hear something along the lines of “I’m glad we found this house.” Not “I wish we hadn’t missed out on that other home.”

Try to remember that when shopping homes and making offers.

It’s decidedly a seller’s market at the moment, which isn’t great for those entering the market, but that doesn’t mean you can’t employ the tactics above.

While home prices might appear steep, they aren’t so bad when you consider real housing prices adjusted for inflation.

And with mortgage rates so cheap, it could be a great time to lock in an absurdly low rate for the next 30 years.

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

Source: thetruthaboutmortgage.com

Watch Out for the Adjustable-Rate Mortgage Pitch

Over the past couple weeks, mortgage rates have risen roughly 1% across the board.

If you look at Wells Fargo’s mortgage rates, which I highlighted late last week due to their meteoric rise, you’ll notice the 30-year fixed is now pricing at 4.875%, up from 4% about 10 days ago.

Consider the fact that back in early May, a rate in the low 3% range was the norm for the 30-year fixed.

The 15-year fixed has climbed similarly, from 3.125% to 3.875% in about 10 days. A month earlier, it was around 2.5%. In other words, conditions aren’t good in mortgage land, to put it more than mildly.

It’s not much different for adjustable-rate mortgages either – the popular 5/1 ARM is now pricing at 3.125%, up from 2.5% a week or so ago.

Mortgage Payments on the Rise

What this all means is that mortgage payments are rising, even if you’re refinancing your existing mortgage to a much lower rate.

The payment you could have secured earlier this month will now be significantly higher, to the point where your refinance may not even make sense anymore.

[The refinance rule of thumb.]

If you’re looking to purchase a home, your purchasing power has been severely reduced. Check out my mortgage payment chart to see what you can afford based on today’s rates.

And as mortgage rates continue to rise, banks and lenders will increasingly look for ways to soften the blow, of course, without actually lowering rates.

So all those ads touting record-low fixed-rate mortgages will quickly and quietly make the switch to a 5/1 or 7/1 ARM instead.

Why? Because they know rates on ARMs will sound a lot more appealing to homeowners and prospective buyers who have been staring at rates in the 3% range for months now.

Nobody wants to hear that their interest rate is now 4.5%, or worse, somewhere in the 5% range. It’s embarrassing. What will their friends think?

It could even be enough for a prospective home buyer to have a change of heart about buying a property to begin with, especially if it requires getting into a bidding war and paying well over list.

Choose Your Mortgage Wisely

While it may be tempting to go with an ARM instead of a fixed-rate mortgage, there is a whole lot of risk, especially right now.

Everyone pretty much expects mortgage rates to keep rising over the next decade, so your ARM will most likely be more expensive in the near future, once that first adjustment date rears its ugly head.

At the same time, rates on fixed mortgages, despite their recent upward trajectory, are still pretty darn cheap. Just ask anyone over 50 what they think.

And locking in a mortgage at today’s rates isn’t a losing endeavor, it just doesn’t sound as sweet, seeing that rates were a heck of a lot cheaper just weeks ago.

But in hindsight, you might be pretty happy with a 30-year fixed in the 4% range, especially if they make their way past 5% and up in to the 6’s. It’s not unlikely over time.

So if your loan officer or mortgage broker tells you they can put you in a 5/1 or 7/1 ARM instead of a fixed product (and save you lots of money!), question their motives.

They want the loan to sound more attractive to you, and a lower rate with a lower payment will certainly accomplish that.

But don’t discount the fact that the rate will eventually rise, once the fixed period comes to an end in five or seven short years (they go by faster than you think).

Read more: How long do you plan to keep your mortgage?

(photo: Hasan Diwan)

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

Slowing Mortgage Market Could Lead to Looser Lending

The forecast for the 2013 residential mortgage market wasn’t all that optimistic.

Back in December, the Mortgage Bankers Association said it expected refinance volume to slip to $785 billion from $1.2 trillion in 2012, while purchase money mortgage activity was slated to increase only slightly from $503 billion to $585 billion.

After all, there are only so many refinances out there, and many were originated in earlier years. Mortgage rates have pretty much idled over the past year, so the eligible pool probably hasn’t grown much.

Additionally, despite an anticipated increase in purchase activity, it’s clear that inventory constraints continue to make it difficult to purchase a home.

Cash buyers continue to control the market as well, so even if home purchases rise, lenders aren’t necessarily getting a piece of the action.

At the same time, more and more banks and lenders are positioning themselves to take part in the burgeoning mortgage market.

For example, lenders that didn’t even exist prior to the latest mortgage crisis, such as PennyMac (ex-Countrywide execs) or OneWest Bank (IndyMac’s ashes), have entered the fray, and old names, such as Nationstar and Impac, have risen from the dead.

Meanwhile, the big guys, like Bank of America, Capital One, Chase, Discover, and Wells Fargo, continue to compete for market share.

Bad for Lenders, Good for You?

This sounds like a recipe for disappointment if you’re a lender, not to mention possible layoffs, but there may be a silver lining for consumers.

If lender competition continues to increase, and the pool of potential mortgages continues to shrink or remain relatively flat, there’s a good chance lenders will begin to take on more risk.

Assuming they do, there will be plenty more options for homeowners going forward, as opposed to the plain vanilla stuff that has been on offer for years now.

So instead of requiring a credit score north of 720, or a massive amount of home equity to take cash out, homeowners and prospective buyers may be greeted with more reasonable underwriting guidelines.

For those with a property, or able to get their hands on one, it could make life just a little bit easier.

Additionally, as home prices rise, existing homeowners will have more equity to play with, which could lead to an increase in HELOC lending.

The maximum loan-to-value ratios for such loans may also rise if decent home price appreciation is projected to be in the cards.

A Slippery Slope?

The mortgage market is clearly not back to normal just yet. As mentioned, most of the lending is pure vanilla, meaning excellent credit score, full documentation, 20%+ down payment, and so forth.

This has led to criticism from housing market advocates, such as the National Association of Realtors, who have called for looser guidelines to spur lending and home sales.

But market participants will have to be careful not to repeat history in just 5-6 short years.

Sure, lenders aren’t going to return to originating no-doc loans with zero down financing overnight, but the lack of supply could tempt some to dip their toes in those waters again.

If more private capital funnels into the market and competition heats up, it’s only a matter of time before the return of Alt-A lending leads to the arrival of subprime, and then an eventual “situation.”

It will be especially interesting to see how lenders manage the expected uptick in mortgage rates.

Clearly homes will be less affordable if mortgage rates normalize just a little bit, so it’s only a matter of time before creative financing rears its ugly head again.

Let’s just hope it’s more creative, and less destructive this time around.

Read more: Will high quality mortgages prevent another housing bubble?

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

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