Mortgage Newsletter Fall 2024
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- Economy & Mortgages: Mortgage Rate Outlook - Ready to Take Advantage of Lower Interest Rates?
-ARMs are Big
-The Importance of Liquidity When Buying
-Should You Skip the Rate Lock?
-Is Title Fraud Really a Problem?
Economy & Mortgages: Mortgage Rate Outlook - Ready to Take Advantage of Lower Interest Rates?
ARMs’s are BIG
Adjustable Rate Mortgages (ARM’s), which are usually fixed for 3, 5, 7, or 10 years before they actually start to adjust, are a popular alternative to 30-year fixed-rate mortgages, since they can have lower initial rates, which can improve affordability.
They can be a smart option for buyers who don’t plan to stay put. ARM’s tend to be more popular with younger, higher-income households that have larger mortgages, according to the Federal Reserve Bank of St. Louis.
Because rates have been high recently, ARM\s represent about 16% of the market, near a historical high-water mark. Many borrowers are attracted to the rate advantage, figuring that rates will have improved enough within the next few years to make a refinance possible. Or, they plan to move soon.
If you do the math, even if rates rise after the fixed period ends, an ARM could make the most sense to finance your purchase. But hold on, we do all this math for you! Reach out to us for details.
The Importance of Liquidity When Buying
When buying a home, especially your first home, it’s easy to get focused on the amount of funds it takes to make the purchase happen -- down payment and closing costs – and overlook the resources required after the purchase.
The last thing you want is to buy your dream home and then be “house poor” and miserable for months afterwards. Planning for post-purchase liquidity is an essential part of a winning financing strategy.
First, you’ll need to meet the minimum requirements for mortgage reserves. Lenders often require reserves -- it guarantees that there is cash on hand to cover the mortgage for a few months after closing, in case you’re laid off.
On single-family homes, this amount can be up to 6 months of mortgage payments for conventional loans (FHA loans usually do not require them), and varies based on several underwriting factors. Reserves can be cash in checking/savings accounts, money market accounts, CD’s, stocks and bonds, trust accounts, cash value in life insurance policies, and the vested portion of 401(k)’s and IRA’s.
It's tempting to check that box and be done with it, but keep in mind that buying a home comes with a few other financial considerations that you’ll want to plan for:
• Moving Expenses: A local “DIY” move could still cost $1,000 or more (plus pizza and beer for your friends). Long-distance moves with pros start at around $4,000 for a 2-3 bedroom load and a few hundred miles, to over $15,000 for a 4-5 bedroom load and 2,000 to 3,000 miles.
• Furnishings: A new home may be bigger or simply different than your current home. To make your new place not look just like your old place did, you should have a generous reserve in your budget for furniture. The good news is that there is a tremendous market for pre-owned furniture these days, which can help you get more for your dollar.
• HOA Fees: Many newer homes come with Homeowners Association dues that cover the cost of common areas in your development. Make sure you know what those are.
• Upgrades and Maintenance: In addition to upfront costs for upgrading paint, carpets, flooring, and window coverings, the average annual cost to maintain a single-family home reached $6,663 in 2023, according to vendor website Thumbtack. Budget as much as 4% of your home’s value each year for maintenance of things like roofing, HVAC, plumbing, flooring, landscaping, pest control and more. In certain areas of the country, you’ll also want to be prepared for periodic costs associated with storm damage.
Take action early. As you approach a home purchase, you can bulk up your reserve readiness by decreasing spending as much as you can, setting aside funds each month in a special account, or even picking up some side gigs if that’s an option. Make sure your home purchase goals are realistic enough to ensure you’re liquid and not “house poor” once you move in.
With Rates Dropping, Should You Skip the Rate Lock?
With mortgage rates edging down, it’s natural to ask whether requesting a rate lock still makes sense. When interest rates are rising, exercising a rate lock is a slam-dunk decision. With rates trending down, it’s still worth discussing with us, since it still may make sense.
What is a Rate Lock?
You lock in your loan rate for a specific number of days, often aligned with the time it will take to close your home purchase or refinance. Rate locks of 15-30 days are standard, depending on your loan application status, whereas locks of over 30 days usually cost more, to cover the risk that the market rate will change relative to the rate that was quoted.
Locks for 30-days and 60-days are typical, given how long it takes to close on a purchase, with even longer locks sometimes available at higher cost.
Why Lock When Rates are Trending Down?
The main reason to lock in your rate when interest rates seem to be declining is peace of mind. Even in a downtrending market, rates jump up and down on a daily basis. There can be periods of 2 to 3 weeks where rates trend up for one reason or another, then resume their down-trend.
If you’re someone who agonizes when rates bump up by even a small amount, and it’s stress inducing to think that you might have missed a slightly lower rate, then lock it in and relax. There are enough other things to worry about when buying a home.
Have Your Cake and Eat it Too
Float-down options can also help. These let you honor your locked-in rate or the current rate, whichever is lower. Float-down options often have unique terms that dictate how many times the rate can float down, what the cost is, and how much it can float down in total.
Talk to us about how this works. Right now, with financial markets already pricing in Fed rate cuts to some degree, any upside surprise (employment, consumer spending, inflation, geopolitical conflicts, etc.) could cause interest rates to pop unexpectedly.
If these things are of concern, a rate lock can help with peace of mind. We can help you make the best decision for you.
Is Title Fraud Really a Problem?
Losing sleep over that radio ad about villains stealing the title to your home? The ads claim that thieves can “steal” the deed to your property, then mortgage it or sell it without you knowing. In a world where phishing, hacking, personal data theft, and scamming is all too commonplace, it could be another new thing to worry about.
Or not. Here are the stats: the FBI estimates that title fraud impacts 10,000 homeowners annually. So yes, it’s a thing, but with 86 million homeowners out there, a “crime wave” it is not. You might want to ignore the hysterical ads peddling $79 monthly “Title Fraud Insurance.”
While someone could potentially forge a deed that transfers title to themselves, and try to record it with the county, if a buyer or lender relies on that forged deed without doing due diligence on the property’s title, they (not you) are on the hook for any lost money paid to the thief.
Further, the deed’s signature must be certified by a Notary Public, who is required to verify your identity. And lenders, title companies, and real estate firms have major safeguards in place that validate any transactions based on a myriad of other factors.
Still, if you’re worried, contact your county offices. Just like the free monitoring services available from the credit bureaus, many counties now offer title monitoring services that alert you when a change occurs to your deed.
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