How Does the Current Low Interest Rate Environment Impact Home Buyers?

How Does the Current Low Interest Rate Environment Impact Home Buyers?

How Do Interest Rates impact Buyers? 

On July 31st of this year, the Federal Reserve lowered the Federal Funds Rate 25 basis points in a much-
anticipated move. As a mortgage broker, I’ve fielded many questions from our firm’s clients about this
development. Specifically, people want to understand how this shift in policy impacts their mortgage and
buying power in the future.

How does a Federal Reserve rate cut impact mortgage rates?

The short answer I give to my clients is to pay attention to the 10-year treasury bond rate. There is a
common misconception that the Federal Funds Rate directly correlates to mortgage rates. Instead, the
10-year treasury bond is the main index lenders use to price mortgage rates. The reason? While most
mortgages are 30-year products, those mortgages typically get paid off within 10 years, making it a great
benchmark to determine where rates are going.

To provide an illustration, if you look at the 10-year treasury rate between January 2019 (around 2.75%)
and August 2019 (around 1.66%), that 100 basis point drop is a direct correlation to how the conforming
30-year fixed mortgage rate has performed. In January 2019, that rate was around 4.5% and in August
2019 that rate is in the 3.5% range.

What are things to consider as a potential homebuyer?

1. Low interest rates represent higher home buying purchasing power

Let’s say you’re applying for a 30 year fixed mortgage loan for a new primary residence and have been
prequalified to borrow up to $400,000.
Last year, assuming a 740+ credit score, a 30 year fixed rate would have been in the ballpark of 4.75%. The
principal & interest payment would be $2,075.43 per month.
In today’s environment, that rate could be as low as 3.5%. on conforming loan amounts (<$484,350). The
principal & interest payment would be $1,790.54 per month. That’s a difference of $285 per month.
That also means, in today’s low rate environment, you could get approved up to $463,500. The principal &
interest payment would be $2,075.43 per month at 3.5%.
The drop in rates represents an ability to borrow up to $63,500 more.

If you don’t envision owning your home for longer than 7-10 years, you might consider refinancing into a
10-year fixed Adjustable Rate Mortgage (ARM). A 10-year ARM is amortized over 30 years but offers a
lower interest rate than a traditional 30-year mortgage for the first 10 years. This can be a great way to
save on interest payments. For example, if you compare a $1MM loan with a 30-year fixed rate at 4.25%
to a 10-year ARM at 3.125%, there is an interest savings of nearly $107,000 over 10 years. Typically, you
can refinance as much as a $3MM loan balance into this type of loan.

2. Look at a 15 or 20 year mortgage

Ideally, we all would like to pay off our debt in as short and inexpensive way as possible. In comparison to
a 30 fixed mortgage, 15 & 20 year fixed options offer lower interest rates. The amount of interest you pay
over the term of a 15 or 20 year fixed loan compared to a 30 year fixed mortgage is drastically lower. In
fact, many financial advisors and personal finance experts recommend homebuyer’s utilize15 year fixed
mortgages.
So why do most buyers not finance their mortgage into a 15 year fixed loan?
They can’t budget the higher monthly mortgage payment of a 15 or 20 year fixed loan into their budget.
There’s too many other expenses, whether it be putting money away for retirement, school tuition, or
lifestyle expenses.
Assuming you can comfortably budget a 15 or 20 year mortgage payment, it’s a great financial tool to
build up equity in your home quickly and eliminate interest expense.

3. Adjustable Rate Mortgage option

Consider this example. Say you don’t envision owning your home for longer than 7-10 years. You might
consider a 10-year fixed Adjustable Rate Mortgage (ARM). A 10-year ARM is amortized over 30 years but
can offer a lower interest rate than a traditional 30-year mortgage for the first 10 years. This can be a
great way to save on interest payments. For example, if you compare a jumbo $1MM 30-year fixed rate at
4.0% to a 10-year ARM at 3.125%, there is an interest savings of nearly $82,000 over 10 years when you
compare them side-by-side. That’s a massive amount of savings. If you select the 30 year fixed option and
moved in year 10, that’s $82,000 in interest you didn’t need to pay.

As you can see, the reasons to pay attention to rate changes are many and varied. However, as a
homebuyer, low interest rates represent a great way to increase your borrowing capacity and save
thousands of dollars in interest over the life of your loan.

Making the decision to buy a home can be an overwhelming. Tim O’Brien, at Zipfel Capital, can help you understand opportunities that will provide clarity in a complex situation like purchasing a home.

About the Author

Tim O’Brien is an equity partner in Zipfel Capital, a mortgage brokerage company
based in Hyde Park, specializing in residential and commercial lending. Tim has
been acknowledged by the Greater Cincinnati Mortgage Bankers Association
(GCMBA) as a Diamond Level Producer, given to less than 1% of industry
professionals. He has also been featured in the Cincinnati Business Courier’s “Ask
the Expert” series. Tim holds a bachelor’s degree in Xavier University and is a
graduate of The Summit Country Day School. He lives in Mt. Lookout with his wife
and three children.

Inspections May Be the Most Important Step of the  Home Buying Process!

Inspections May Be the Most Important Step of the Home Buying Process!

So Just How Does the Inspection Process Work?

So you’ve put a contract in on a homes and now It is time for inspections.  You may think that the most important thing when negotiating the contract is the purchase price, but in our opinion it is the inspection process!

Hiring a certified home inspector is one of the best decisions you can make when buying a home. They are over 1,200 items that home inspectors look at during the inspection on your new home. Some of the biggest items are: structure, foundation, roof, plumbing, mechanicals and appliances. There are also other inspections that you can have done usually for an extra cost that include radon, termite, sewer and mold testing.
Buying a home is normally the largest investment that you make in your life so it is very important to have all of these items checked so you make a wise financial decision.
Can you imagine buying a house and not having an inspection done? Imagine a year later finding out you have major structural issues or that you need a new roof. Having an inspection done before purchasing a home can protect you for years to come on your new purchase!  If issues are found during the inspection, you as a buyer can negotiate items to be repaired or replaced by the seller.  The Seller is not obligated to fix any item, but it allows the buyer the option to reconsider the purchase or fix things before they move in.
This is why we feel the home inspection process is one of the most important steps when going through the home buying process. Don’t make the mistake of buying a new home without having an inspection performed!
Should I Rent or Buy a Home?

Should I Rent or Buy a Home?

Choosing whether to rent or own a home is not an easy decision. It requires you to carefully examine the factors and costs associated with each option. Which is better? That depends.

Your unique economic situation, lifestyle and goals play the largest part in deciding what is better for you. It’s important to go into your calculations with open eyes. As much as you want a home, you may not be able to afford it. Or it may not be the right decision for the way you like to live.

Factors To Consider When Buying/Renting a Home

The following four points are the largest factors to consider when weighing the pros and cons of home ownership vs. rental.

1) What are the total costs?

Many people look at the economics of home-ownership as a mortgage payment only. In reality there are insurance, repairs, property tax, homeowners association dues etc. that all have to be factored in to your monthly costs. Check out this calculator from the New York Times to see more.

Use a calculator and compare to see if:

  1. The monthly cost as a homeowner is less than renting.
  2. You can afford the monthly cost (if it works out more than renting in your area)
  3. Saving a 10-20% down-payment is feasible for you

If owning a home definitely the way to go for you, you need to be able to answer the above questions definitively.

2) What is important to you?

Are you more interested in building for the future, or reducing your financial risk until you can figure out a plan? You may want to own if you are thinking about starting a family. But as someone who is single, you may enjoy your freedom and having less financial debt. (Even if it is building your net worth in the long run)

Undoubtedly, buying a house only makes sense if you plan to set up roots. If you plan to move within (or every) 5 years, your transaction costs will likely bring the equity you build in your house to zero. Thus diminishing your upside while carrying all of the liabilities that come along with home ownership. Owning a home is a smart decision if you plan to stay for 10 years or more.

3) What is your preferred lifestyle?

Do you want to build a career in a specific city or travel around? Do you have long-term goals in mind? It’s okay if you don’t. The most important part is being aware of where you are at. You may want to get some international work experience or try your luck in another part of the country. Or not.

Really think about what you want. You could lose some serious money if you buy a house and sell within a few years because you decide it isn’t for you.

4) What are the opportunity costs?

Think about the pros and cons of home-ownership. On one hand, you will always have a home base. On the other, you have a property that ties you down to a geographical location. Can you make more money in another city? With a home, you can’t move to pursue those opportunities.

If rent is equal to monthly payments as an owner, think about the opportunity costs of having all of your money tied up in the house. For example, some investors may rent and opt to invest their money in the stock-market or other investments in their portfolio. Can you make higher percentage returns yearly with the money you would be using for a down payment?

The above were things you will want to consider. If you need to be realistic to make the right decision about renting vs owning a home. The below two situations may help if you aren’t able to come to a conclusion.

When is Renting a Home Better?

Despite popular belief, owning a home is not always the best decision. Let’s not be black and white. It depends on your particular situation.

You may want to rent if:

  1. You want to travel and set-up shop in different places every few years.
  2. You do not have the job or financial security to (realistically) guarantee payments for years to come.
  3. You have demonstrated the ability to make better financial returns through other investments.

There are other factors. However, this is a good starting point to help you determine your argument for renting versus owning a home. The benefit of renting is not being tied down to a geographic location and being able to leave when your lease runs up.

When is Owning a Home Better?

Owning a home is the long-term game. You need to have your goals in mind and understand if you can afford it.

You may want own if:

  1. You are okay with staying in one place for 10 years or more.
  2. You have the financial stability to afford the home (and float payments if you lose your job)
  3. You want to leverage your home as an investment property down the line (through rental)

Owning a home gives you an anchor. It helps you stay grounded by having a home base. At the same time, you can increase your upward potential by leveraging the home as an investment property.

Some food for thought

Choosing to rent or own your home is a big decision. It depends on your individual situation and vision for the future. In short, owning is traditionally the better long-term strategy. However, that’s not to say that you can’t do as good or better with the right investment portfolio.

Before jumping into anything, analyze yourself. Think hard about where you are and what you want for the future. Speak to a realtor and see if they have any advice for your individual situation.

If you are looking at purchasing property in the area, give me a call. I’d love to discuss your options and see if buying is the right path for you.

2018 Should Be Your Year to Buy!

2018 Should Be Your Year to Buy!

Make 2018 YOUR YEAR…Because Renting is SO 2017!

Do you know the benefits of owning a home VS renting?

Are you tired of increased rent each year, neighbors who come and go, places that
don’t accept your pets and everything else that comes along with renting? We know owning a home sometimes seems like a scary thought, but owning a home is not only a smart investment but it also has several advantages that you may not have thought of:

1. Build Equity – Unlike renters, homeowners build equity over time. On most mortgages, a portion of each monthly payment goes toward the loan’s interest. The remainder pays down its principal.  Every dollar you put toward your loan’s principal represents a dollar of equity – actual ownership of the property. Usually once you reach 20% equity, you can tap that equity through a home equity loan or to secure a lower interest rate.

2. Deduct Mortgage Interest – You can deduct your property taxes and the interest paid on your mortgage, reducing your overall income tax burden (often substantially).

3. Sense of Belonging to a Community – Since homeowners tend to stay in their homes for longer than renters, they’re more likely to put down roots in their communities. You might join a local neighborhood association, sponsor block parties, volunteer at a nearby community center, or join with a business outing.

4. A Place to Call your Own – As a homeowner, your decorating and home improvement choices answer to no one.  You can paint walls, add new bathroom fixtures, update your kitchen, finish your basement, or build a patio or deck to your heart’s content.  Making your home to suit your personality is a fun, and even cathartic aspect of homeownership.

…and so much more!

If these all sound like things you are ready to take advantage of, it is the right time for you to start your search to find your home! At Build Cincinnati, we have years of experience working with first time home buyers and will hold your hand through every step of the home buying process.  Reach out to us today so we can get started at 513.686.7676!

 

 

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