Archive for October, 2018

Cash Out Refi or HELOC – Key Questions

October 25, 2018


 

 

In the last post we covered the fact that American households have over $6 trillion of accessible home equity and described the two main ways home owners can access that equity – a cash out mortgage refinance and a home equity line of credit (HELOC).  I promised to make my recommendations on which option is best for a home owner, based on a set of questions.  You will find my recommendations below:

Question #1:  Do I want a fixed payment, or can I live with changing interest rates and payments?  Recent economic conditions show rising interest rates.   HELOC accounts typically carry a variable interest rate that increases as market interest rates increase and decrease as the market decreases.  Borrowers obtaining a cash out mortgage refinance often secure fixed rate mortgages, so the payments do not change over time.  Which do you prefer?

Question #2:  Am I disciplined to proactively pay down my loan over time, or will I only make minimum payments?  HELOC accounts typically require interest-only payments.  If you only plan to make the minimum payments, you may be surprised in a few years when your HELOC account matures and the bank expects you to pay off the remaining account balance.  If you will proactively pay down the balance, you will not have this surprise.  Refi mortgage payments fully amortize over the loan term, so your monthly payment always includes a principal component.  And when you make the last payment, your original loan balance will be fully repaid.  Which option is best for you?

Question #3:  How much money do I need, $100,000 for a home renovation or $10,000 for a home repair?  In short, if you do make extra principle payments, how long will it take you to repay the loan balance?  The lower the amount and the faster you repay it, the less likely increasing interest rates will burst your budget.  If you need a renovation amount of cash, selecting the long-term fixed mortgage rate may be a better option since it provides a fixed payment over a long time period.

Question #4:  Why do I need access to my home’s equity?  In my opinion, home renovations, repairs, and debt consolidations serve as good reasons to tap home equity.  These are steps that ultimately increase your equity or improve your overall financial position.  To me, that’s a wise use of your home equity.  On the other hand, tapping home equity for expendable items or vacations may not be the best use of a home’s equity.

Do you have a friend pondering whether to access their home’s equity?  Please refer them to me.  I will ask them these questions (and more) and coach them to make the best decision for their own unique circumstances.

Advertisements

Is Your Home Your Piggy Bank?

October 18, 2018

A recent study shows that for the first time ever, accessible (or “tappable,” the term used by the study) US home owner equity has exceeded $6 trillion.  The number of home owners with equity that they can access has reached about 44 million.  In the first half of 2018, this tappable home equity increased by about $636 billion.

Ultimately this means that many Americans can utilize their home equity to fund home renovation projects, cover education costs, consolidate higher-interest debt, or fund other household needs.  Americans typically access their home equity in one of two ways, a home equity line of credit (HELOC) or doing a cash out refinance on their entire mortgage.  Here are some costs and benefits of each option:

Cash Out Refinance:

  • Interest rate is typically fixed.
  • Fully amortizing – some of each monthly payment is principal.
  • Pays off existing mortgage so borrower starts with a new loan term and interest rate.

HELOC:

  • Variable interest rate.
  • Interest only payments – balloon due at end of loan term, often 10 years
  • Lower closing costs than a cash out refinance.
  • Does not change your current mortgage interest rate or amortization term.

So which option is best you ask?  Well, that depends considerably on the home owner’s circumstances.  As a mortgage lender, here are some questions I think a home owner should ask him / herself to help determine which option is right:

  • Do I want a fixed payment or can I live with changing interest rates and payments?
  • Am I disciplined enough to proactively pay down my loan quickly, or will I only make minimum payments?
  • How much do I need?  $100,000 for a home renovation or $10,000 for a home repair?
  • Why do I need to access my home’s equity?  Is the reason really worth tapping my equity?

Answers to these questions form the basis for a home owner’s decision.  In the next post, I will opine on my preferred options based on these questions, and give a recent client scenario.

Do you have a friend considering a renovation or needing funds for a child’s education in the next 3 months?  Please refer them to me.  I will ask them these questions and coach them to make the best decision for their own unique circumstances. 

 

Mortgage rates rise again

October 16, 2018

Mortgage rates are on the rise (from the dead?!? 🎃🎃🎃Happy Halloween! 🎃🎃🎃) again in the month of October. Mortgage rates jumped sharply to yearly highs and to levels not see in over seven years. Mortgage rates for a 30 year fixed loan are nearing 5%. What is going on!?!

Mortgage rates rising can be scary!

A year ago, mortgage rates were just under 4%… that is about a full point lower than they are today. I know what a lot of people think… “it is because of the Federal Reserve raising rates.” Not exactly.

The Federal Reserve raised rates three times so far this year at 0.250% each time. That means the Federal Funds Rate is up 0.750% on the year, but mortgage rates are up almost 1%. Why the difference?

  • the Federal Funds rate directly impacts the rate on second mortgages, car loans, credit card rates, etc.
  • bond values – specifically mortgage backed security bonds (or MBS bonds)- impact rates for first mortgages. As these bond values decrease, mortgage rates increase.

That is what we’ve seen this year. Stocks are up on the year, the economy is better, and MBS bond values are down… meaning, higher mortgage rates. Remember the reason we saw all time historic lows for mortgage rates was two-fold.

First, the economy went through the Great Recession. In this environment, investors move money out of stocks and into bonds. The more money into bonds mean those values go up, and mortgage rates go down. As the economy improved, more money is going into stocks and out of bonds (bond values drop and mortgage rates rise).

Second, the Federal Reserve purchased bonds (quantitative easing or QE) to help push rates down to stimulate the housing market. The economy is now doing well, the Federal Reserve ended QE, and the Feds are now selling off some of the bonds they bought during QE. All of the factors pushing rates to historic lows are gone, and the current environment on rates is pushing them up. This trend doesn’t look like it will change anytime soon.

What can we expect? Earlier this year, mortgage rates jumped 0.75%, but recovered about half of those losses. We can expect to see some market fluctuations, and possibly some positive improvements in mortgage rates. Those looking for rates to get below 4% again? Those days are long behind us now, and probably not returning anytime soon.

Worried about rates going up even more? Considering buying a home but waiting for the right time? If you are buying in Georgia, contact me today. Let’s talk about what buying a home would look like for you, and see how the current dynamics in play will impact your next home purchase.

The end of the seller’s market

October 2, 2018

I know it seems we are stuck in a seller’s market. It feels like an eternity at this point! I’ll be back to that theme in a moment, but right now… If you have been putting off buying a home because of fierce competition, now is a good time to look at the market again. Homes are staying on the market longer now than they have all year. There are fewer buyers out looking to purchase a home. This is the best opportunity for buyers so far in 2018!

Regarding 2018 as a whole though, and back to the theme of this post, there are too few homes on the market for the number of buyers wanting to own a home. Sellers tend to receive multiple offers, and can be picky when it comes to whom they choose to sell their home. According to a recent study by Zillow, the market will balance out in the near future.

Zillow’s study says there are signs that the inventory levels are beginning to get better (as I mentioned above), but the country is still dealing with the fallout of limited new construction over several years during the Great Recession. Expect to see conditions continue improving over the next year, and around 2020, Zillow expects the market to become a buyer’s market again. By then, Zillow expects new construction will have caught up to demand. As people move from their existing homes into the new construction, it will put more homes on the market for other people to buy/enter the home ownership market.

It is coming… not as quick as we may like it, but a more balanced market is on its way. In the meantime:

  • Remember there are a lot of myths out there when it comes to buying a home. For example, you do NOT need 20% down to purchase a home. For more on this, check out my previous post.
  • There are things buyers can do to make their offers more competitive. For more on this, check out Rodney Shaffer’s recent post.

Better days are coming, but that doesn’t mean you have to wait another year. If you are buying in the state of Georgia, contact me today. I can help you get prequalified to purchase your home, and we can discuss the variety of options to make your offer more competitive in this market.