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.

Fall Market:  What to Expect

Fall Market: What to Expect

Did you realize that the Fall market is already here! It snuck up on us. It might not feel like it with these 90 degree days, but now that Labor Day has come and gone, we’re in the heat of the Fall market. Literally.
Over the years, we’ve seen an incredibly strong market in September and October because of lack of inventory and increasing demand. This year is no different, but there are some trends in the market that you’ll want to keep an eye on so you can see how they might effect your selling and buying plans.
To understand the market though, we first to explain how we view and track the local real estate market. We’ve all heard that real estate is all about location and that’s never been more true. We like to use the term “Hyper Local”. What does this mean? Well, each neighborhood has it’s own ecosystem if you will. Demand and supply can be different from one neighbor or another…heck, from one street to another.  Monthly, our Build Cincinnati team reviews the sales, listings and trends for each area we focus to understand the health of that market. We even go as far as breaking each area up by price point.
An example would be looking at Montgomery and Hyde Park. Below, you’ll find a quick breakdown of home sales and listings at different price points and their average days on market. By going hyper local, we can best advise our clients on how to position their homes or buying plans.
Montgomery
Less Than $400,000 – 10 Listings
$401,000 – $700,000 – 26 Listings (2 New Construction)
$700,000+ – 40 Listings (18 Resale or Completed Homes & 22 New Construction)
Hyde Park 
Less Than $400,000 – 28 Listings
$401,000 – $700,000 – 18 Listings
$700,000+ – 25 Listings
Most people are under the impression that each of these areas are Seller Markets, meaning the lack of inventory gives Seller’s the edge. That might be true some cases, but in many, there is actually a growing amount of inventory. Before you worry though, Cincinnati in general only has 2.1 month absorption rate. This means that if there were no new listings, all of the homes would be sold in 2.1 months (theoretically, of course). A balanced market in Cincinnati is 4.5-5 Months, so we’re still well below that.
Here’s what this means to you:
For Sellers: the market is strongHome prices are up 7.4% across Ohio. However, Sellers and Agents need to be care not to become over confident in a home’s ability to sell at any price. When pricing your home to sell, we need to be ever vigilant in finding that sweet spot on pricing. The first two weeks after listing are the most important and you only have one chance to do it right. We always arm our clients with list price range and of course, a suggested list price. When reviewing the competition and sales, be sure that you’re being objective.
For Buyers: Inventory is low in most cases, but there are great properties that come on the market (or we find through back channels) routinely! Our team is hungry to find new homes, lots and opportunities for our Buyers, but we all have to work harder than ever to find them. This means making yourself available as much as you can to see homes the moment they hit the market and being pre-approvaled!  We’ll be sure to take care of you on this front!!
Building Buyers: Cost is going up so get it now before it gets even more expensive to build! Over the past 12 months, the cost to build has gone up 8-10%. That’s purely the cost of materials and contractor work. Lumber, hardwood, labor, roofing, you name it! The longer you wait to build, the higher likelihood that the cost will go up even more. Land and lot opportunities are more difficult and more expensive to find too. If you’ve considered building, now might be the time to explore it a little more seriously.
With that, we’ll leave you with an interesting statement that sums up what many are seeing out there and to calm any of those that are throwing the term bubble around…
“We’re seeing the first indications that price appreciation may be slowing, but the underlying fundamental housing market conditions support a natural moderation of house prices rather than a sharp decline.” -Mark Fleming Chief Economist at First American
Why It’s The Wild West In Cincy’s Rough n’ Tumble Housing Market

Why It’s The Wild West In Cincy’s Rough n’ Tumble Housing Market

How many homes are on the market in Cincinnati? About 4,000.

In other words, not many. And housing inventory—that’s what that’s called—is falling fast. This time last year there were 15 percent more homes on the market than there are today.

Here’s what that means if you’re thinking about dipping into the housing market: The buying windows are smaller, the prices are rising, and more than any time in recent memory you should consider building one yourself.

As to that last part—the whole resale vs. new construction debate—we’ve got a few words of wisdom to get you started:

NEW BUILD!

Upfront/long-term costs: Generally the cost to acquire a lot and build on it is higher than buying an existing home. The thing to keep in mind here is maintenance costs, which are reliably lower in new homes—at least in the time frames we’re talking about (20-30 years).

Build it now: Rising interest rates are increasing the cost of homeownership, whether new build or resale. But new build prices are also sensitive to commodity prices—lumber, steel, roofing, etc. And commodity prices are rising too, meaning if you want to build new, you should do it soon.

Hot neighborhoods: The myth about new homes is you can’t find lots in hot neighborhoods—Madeira, Hyde Park, Downtown, et al. But that’s not true. Whether through subdivision or tear down, lots are available in these communities, and you can get ahold of them today.

Exactly yours: File this one under the category of “super obvious things,” but when you build a new home, you get to make it exactly what you want. That includes the floor plan, materials, interior design… everything you can afford, you can have. It really will be the house of your dreams.

RESALE!

Character: Like a broken-in baseball glove, an existing home is aged and polished in all the right places. It has strange intricacies, lovable imperfections, and a certain way of getting better the more you get to know it. You don’t get that with new build.

Maintenance costs: The thing people underestimate most about owning a home is the constant work it requires. Well, that work gets more expensive as a house ages. Yes, this is the downside of the whole “character” thing; it’s all fun and games until you need a new boiler.

Walk-in ready: Build new and you could be waiting for more than a year to move in. Buy a home that’s already built and, well, “here are the keys.” All you need to do is arrange the furniture, and your life immediately gets simpler.

The market is about to heat up: Think it’s difficult finding a house you love now? Wait until it really gets warm out—May and June. That’s when home sales go into overdrive. It’s also when things tend to go on and off the market in a matter of days, if not hours. So you should strike before the iron gets hot; that is, get looking now.

…and when you do decide to get looking, there’s not a better team out there than our friends at Build Cincinnati. With them you get the best of both words—a diverse portfolio of resale homes in hot communities, and a better understanding of new construction than any other realtor group in the area.

as featured in Cincinnati Refined (in partnership with Local 12 News).

Written by Brian Penlap: http://cincinnatirefined.com/arts-design/cincinnati-housing-market-build-cincinnati-coldwell-banker-west-shell-local-real-estate-team

 

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