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.
The Mason area continues to be a hot spot for new construction, and for good reason! With a top rated school district, an abundance of recreational outlets nearby, a wide variety of shopping and dining, and close proximity to I-71 and I-75, new home buyers consistently add Mason to their top choice for a new home. As the 2109 selling season goes into full swing, we wanted to give you a brief outline of three of the most popular New Home Communities in Mason.
For more information, contact Mike Hines at 513.260.0424 or Jan Gerding at 513.608.3770 at Build Collective at Coldwell Banker West Shell. They can get you started on building your perfect home in 2019!
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!
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.
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)
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 strong! Home 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
The last thing in the world you would ever want is to spend a bunch of time searching for a home, finding that perfect place and then not being approved for your mortgage. There are also many common mistakes homebuyers make that could make the process much more painful than it has to be.
We’re writing this article because we know how stressful it can be to buy a house. In order to make your process easier, we are going to cover the 9 things you shouldn’t do when buying a home.
1) Don’t overestimate your budget.
Ever heard the expression “House poor“? Many homebuyers overestimate what they can actually afford and end up with very little wiggle room financially. Before jumping into buying, make sure you have a realistic idea of the yearly costs involved with owning a home.
Remember, there is your mortgage, property taxes, utilities, insurance and repairs. All of this before you even think about making upgrades. Factor in all the costs and leave yourself some room.
2) Don’t let your emotions run wild.
Buying a home is one of the biggest decisions of your life. It’s normal to be excited and fall in love with a home. However, try to keep a level head. Falling in love with a home can cloud your judgement or end in disappointment. This can happen if unforeseen issues are exposed in the inspection or if someone puts in an offer before you.
If you don’t find a home… don’t get discouraged. Home searching can be a lengthy process. It will be worth it when you find the winner.
3) Don’t talk to sellers about plans for the house.
As much as you are excited to get in and put your personal touch on the home, it’s best to keep this to yourself. Sometimes home buyers meet and get to know the home owners. This is fine, but remember that the current owner will have an emotional attachment to the property.
It’s best not to make them feel like you’re going to come in and completely change the place. If you make conversation with the owners, just keep the conversation light.
4) Don’t withdraw or deposit a lot of cash.
Going further with your financial history, cash withdraws and deposits also play a part in your mortgage approval rate. Large quantities of cash going in or out of your accounts signals a warning sign that you do not have stability. Avoid any sporadic withdraws or deposits of large sums of cash.
5) Don’t apply for more credit.
The amount you are approved for on your mortgage comes down to your capital. How much money do you have at your disposal? Applying for extra credit increases your debt. This extra debt decreases the amount you will be approved for on a mortgage.
6) Don’t co-sign a loan.
While a loan may not technically be yours – it will still equally count towards your overall debt. Co-signing a loan can have an impact on not only the amount of your mortgage, but approval rate in general. Avoid co-signing any loans until you have purchased your home.
7) Don’t finance a car or furniture.
As financing is again a loan, it is therefore debt. Stay away from financing a car or furniture for the above mortgage approval reasons.
8) Don’t switch or leave your job.
Financial stability is one of the most important factors considered when a bank is approving your mortgage. The key to financial stability is having a dependable income. If you switch or leave your job, often or before applying for a mortgage, this may signal red flags.
If you are thinking about a move, hang tight with your job until after your mortgage is approved.
Ensure you don’t make these mistakes
There are many important things to consider when purchasing a home. It is one of the biggest decisions of your life.
In order to ensure that you get the house you want, when you want it, you need to understand and follow those above tips. Doing so will increase your chances of finding that perfect home and getting it. Remember that financials are very important when it comes time to apply for a mortgage. Make that your priority.
Also keep in mind the emotional aspects of purchasing a home and try to stay cool. It can be a draining process, but it will be worth it when you get the keys to the castle!
Are you looking for a home in the area? Give me a call. I’d love to help you find a home (and make sure you make none of the above mistakes in the process!)