How Rates Affect Your Buying Power

Over the past decade, interest rates have been historically low, but are now starting to build back up. Right now, the interest rate for an FHA loan is at about 3.625%, which is a bit up from January, and significantly higher than last year.

The difference between interest rates

So, how does an increasing interest rate affect your buying power?  Let’s consider how much home you can afford at different interest rates

In November of 2016, the 30-year FHA rate was at 3.25%. At this rate, if you wanted to buy a house, and pay no more than $1,200 a month for your mortgage (including taxes and insurance), you would have been able to afford a home worth about $218,000.

Now consider an interest rate of 3.75%, which about what you can expect now (depending on your credit score).  The amount of home that you would be able to afford at $1,200 per month becomes substantially reduced to $205,000.

That is a difference in buying power of $13,000.  In other words, the amount of home you can afford dropped by $13,000 with an interest rate increase of just 0.5%.

So, are higher interest rates “bad”?

Not necessarily, since higher interest rates also mean that you will earn more on your interest-bearing accounts (savings, money-market, investments, etc.).  Higher interest rates also normally indicate a stronger economy, so your other assets (home, 401K, etc.) will be increasing in value faster than when rates were lower.

However, a higher interest rate means that buying a home will be more costly.

What this means for buyers

A 3.625% is still a phenomenally low interest rate, but rates are likely to steadily increase over time and the economy continues to improve.  Additionally, significant increase in demand for housing in Utah is driving up home prices.  Before you put an offer on a house, set a monthly payment at which you are comfortable, and then determine how much you can offer, based on the current interest rates.  If you’ve been on the fence for a while, it may be wise to act now before higher interest rates/home values price you out of the market.

So, jump on the opportunity while the interest rates are still low, and give us a call for a free consultation to see how much home you can afford right now. 

Why You Shouldn’t Wait Until You Have a 20% Down Payment

It’s surprising how many mortgage and financial professionals are still advocating a 20% down payment. It’s bad advice and lazy thinking, as we’ll make clear.

The Old Argument:  Don’t buy a home unless you can put down 20%

It’s true that putting down 20% will shield you from mortgage insurance most of the time (some loans will still require mortgage insurance).  Also, the mortgage will be smaller (since you put more down), so the mortgage payment will be smaller.

But most people don’t have 20% to put down.  Not even close.  That is a $40,000 down payment for a $200,000 home (which is considered “small” in Utah and Salt Lake Counties).

The Better Argument:  Delaying homeownership until you have a 20% down payment is a waste of time and money

The crux of this argument is Net Worth, at least as it relates to housing.  The non-technical definition of net worth is how much cash you would have if you sold all of your assets and paid off all of the associated debts.  Let’s compare the net worth of two couples, one who put down 3.5% and bought a home now (we’ll call them the Flanders) and a couple that waited until they had a 20% down payment (we’ll call them the Wiggums).

First, a few assumptions:

• Both couples want/need a $200,000 home.

• The cost of renting is roughly equal to a mortgage payment for the same home (this is true, in today’s market).

• Homes in Utah appreciate 5% per year (a conservative average for the last 5 years).

• Both couples have $7500 saved now and can/will save another $6500 per year for the next 5 years.

The Flanders (3.5% down) –

• The Flanders have enough to put down 3.5% on a $200,000 home right now ($7500).  They buy the home and live in it for 5 years.

• After 5 years, the mortgage balance is down to about $175,000 and the home is worth about $255,000.  

• They sell the home, pay off the mortgage, and walk with $80,000.  

• They’ve also saved $6500/year for the last 5 years, giving them another $32,500.  The Flanders’ net worth is $112,500.

The Wiggums (20% down) –

• The Wiggums can’t put down 20% now (and won’t be convinced otherwise), so they save for 5 years, renting the entire time.  

• After 5 years, they buy a home, putting down $40,000.  For comparison’s sake, they sell the home the next month.

• Their mortgage balance is $160,000 and the home is worth about $200,000 (they just bought it), so they walk with $40,000.  

• The $6500/year they saved went towards the down payment, so the Wiggums net worth is just $40,000.

Each couple spent the same amount for housing, savings, etc., but the Flanders have almost $80,000 more than the Wiggums.  Plus, since the Wiggums waited 5 years to buy a home, rates would likely be higher and the home that cost $200,000 at first now costs $255,000 (because of 5% annual appreciation)!

There are exceptions that could affect this analysis (sudden market crash, super cheap rent compared to mortgage payments), but even accounting for those, it is almost always better to buy as soon as it is feasible.

There are few no-brainers in the financial world.  This is one of them.  It makes NO sense to forego homeownership until you have a 20% down payment!

For more information, feel free to look here.

Recent Home Value Changes: Utah vs. Everyone Else

Most everyone agrees that the real estate “rebound” is in full swing, and has been for some time.  But, as the experts say, real estate is local, and just as the bust affected each region differently, so has the rebound.

The chart below represents how home prices have changed over the last 3 years, comparing Utah to the rest of the country.

What does this mean?

Here are several takeaways from this information:

·         Nationally, rates of home appreciation have returned to close to normal – The 100-yr average of real estate appreciation is 3.5%.  The country is currently just under 4%, and while some areas are still exploding (parts of California, Florida, etc.), overall, things have “calmed down”.

·         Utah is still charging hard – Utah is experiencing real growth (people are moving to the state and those that are here are having kids!).  There is a real demand for housing and that demand continues to drive up the price of real estate.

·         What happened in 2014? – The drop in home values in 2014 is surprising.  This could be due to a simple correction (of overly-optimistic pricing in previous years), timing of new homes being built, etc.  Most importantly, though real estate tends to increase in value, it’s not an unwavering trend (and this is just a 3-yr sample).

Not all of Utah is created equal

As a further example of real estate is local, below is the same chart, comparing just Salt Lake City, Provo, and Ogden:

Key Takeaways:

·         Along the Wasatch Front, Utah County continues to outpace other counties – Though the rate of growth has evened out, Utah county continues to be a hotbed for tech companies and other startups.

·         Salt Lake faltered, but came roaring back – With almost a 9% drop in home values in 2014, Salt Lake saw the steepest rebound in 2015, proof that the most populated city is still a favored destination.

·         Ogden is the least volatile – Home prices remain affordable, even though Ogden has had the highest average 3-yr rate of growth amongst these 3 cities.

In a nutshell:

Utah’s true growth makes its real estate a solid long-term investment.  But, that also means that if you’re thinking about buying, homes will likely be 7% more expensive a year from now, so act fast (if prudent)!

Common misconceptions: Renting is cheaper than owning a home pt. 2

“I can’t buy a home, because I can’t afford the down payment”

Traditionally, to get into a mortgage, a buyer would need to put down 20% of the purchase price at the time of closing. This can be quite daunting (the down payment for $200,000 home would be $40,000) and for most, just isn’t a possibility.  In fact, 20% down payments are now an exception as opposed to the norm, especially for first-time homebuyers.

Here are several low-down payment options:

·         FHA loans – FHA loans only require 3.5% as a down payment.  Their rates are also lower than conventional mortgages and allow for less income/lower credit scores.  Most first-time homebuyers buy homes with FHA loans.

·         Conventional loans – You can still get a conventional loan without 20% down.  In fact, you can now get a conventional loan for as little as 3% down.

In addition, there are several no-down payment options:

·         VA loans – For those who are serving or have served in the military (not just veterans), VA loans are available and don’t require any down payment.  They also offer lower rates, no mortgage insurance, etc.

·         USDA loans – For borrowers willing to live in “rural” areas (in Utah, that’s north of Ogden and south of Spanish Fork), USDA also offers loans which don’t require any down payment. 

·         Grants, Gifts, and Seconds – Most loan types allow for down payments to be gifted from family, friends, and even employers.  There are also programs that allow borrowers to get grants for the down payment or borrow 3.5% as a low interest 2nd mortgage.

At Evergreen, we have significant experience helping clients without access to large down payments.  While owning a home takes budgeting and planning, don’t let the immediate absence of a down-payment deter you. 

Debunking the Myth: “I should choose a home before talking to mortgage broker.”

I think this misconception stems from new buyer enthusiasm.  People get excited about owning a home, not paying a mortgage, so they gravitate towards the shopping step and figure they’ll deal with the mortgage side when they have to. 

In short, unless you plan on paying cash, looking at homes before consulting a mortgage broker puts the cart before the horse.  If you don’t know how much you can afford, you won’t know what homes are even options.  If you put an offer on a home without knowing that you can actually get a mortgage for it (or how much that mortgage payment will be), you risk losing your Earnest Money (the money you give the seller with your offer), not to mention the time and other costs associated with buying a home.  In fact, most sellers will require that you show a Letter of Pre-Approval from a mortgage broker before they will even let you walk through the home!

It’s crucial to first know what your home-price range is before looking at homes.

At Evergreen, we do this in steps:

1.       Step One:  The “Quick and Dirty” Consultation – We’ll take a “verbal” of your income, monthly debt payments, estimated credit score, and availability of down payment funds.  With that info, we will give you estimates of (a) The maximum home price you can afford, with the corresponding payment and; (b) How much home your maximum budgeted monthly housing payment will afford.  This only takes about 15 minutes but gives you a reasonable price range to consider.

2.       Step Two:  The “Cursory Glance” Stage – With the info from Step One, you can go online and see what homes are your price range.  Zillow.com, Trulia.com, and UtahRealEstate.com, will show you pretty much all of the homes for sale, including those listed on the MLS (a home-selling database for realtors).

3.       Step Three:  The “In-Depth Analysis” – If you like what you’re seeing from Step 2, then we do the in-depth analysis.  This is a crucial step, because as they say, the devil is in the details, and that couldn’t be more true in mortgages and real estate.  In this step, we will check your credit and review your tax returns, income documentation, and asset documentation (bank statements).  We will even run an Automated Underwrite that will tell is with 99%+ certainty if the loan is going to be approved.  During the process, we may change your maximum home purchase price, depending on the results.  This is a crucial step, because it lets you shop with true confidence.

I should note as well that we encourage potential home-buyers to have a consultation 6+ months before they think they will actually buy a home.  That’s because there may be items (like credit report issues) that will take a bit of time to remedy. 

In short, unless you’re loaded, you can’t buy a home without a mortgage, so let us figure that out for you first.