Home Buying Myths Slayed

Home Buying Myths Slayed [INFOGRAPHIC] | MyKCM

Some Highlights:

  • The average down payment for first-time homebuyers is only 6%!
  • Despite mortgage interest rates being over 4%, rates are still below historic numbers.
  • 88% of property managers raised their rents in the last 12 months!
  • The credit score requirements for mortgage approval continue to fall.
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“Short of a War or Stock Market Crash…”

“Short of a war or stock market crash…” | MyKCM

This month, Arch Mortgage Insurance released their spring Housing and Mortgage Market Review. The report explained that an increase in mortgage rates and/or home prices would impact monthly payments this way:

  • A 5% increase in home prices increases payments by roughly 5%
  • A 1% rise in interest rates increases payments by roughly 13% or 14%

That begs the question…

What if both rates and prices increase as predicted?

The report revealed:

“If interest rates and home prices rise by year-end in the ballpark of what most analysts are forecasting, monthly mortgage payments on a new home purchase could increase another 10–15%. That would make 2018 one of the worst full-year deteriorations in affordability for the past 25 years.”

The percent increase in mortgage payments would negatively impact affordability. But, how would affordability then compare to historic norms?

Per the report:

“For the U.S. overall, even if affordability were to deteriorate as forecasted, affordability would still be reasonable by historic norms. That is because the percentage of pre-tax income needed to buy a typical home in 2019 would still be similar to the historical average during 1987–2004. Thus, nationally at least, even with higher rates and home prices, affordability will just revert to historical norms.”

What about home prices?

A decrease in affordability will cause some concern about home values. Won’t an increase in mortgage payments negatively impact the housing market? The report addressed this question:

“Even recent interest rate increases and higher taxes on some upper-income earners didn’t slow the market, as many had feared…Short of a war or stock market crash, housing markets could continue to surprise on the upside over the next few years.”

To this point, Arch Mortgage Insurance also revealed their Risk Index which estimates the probability of home prices being lower in two years. The index is based on factors such as regional unemployment rates, affordability, net migration, housing starts and the percentage of delinquent mortgages.

Below is a map depicting their projections (the darker the blue, the lower the probability of a price decrease):

“Short of a war or stock market crash…” | MyKCM

Bottom Line

If interest rates and prices continue to rise as projected, the monthly mortgage payment on a home purchased a year from now will be dramatically more expensive than it would be today.

Two Ways Rising Mortgage Rates Could Impact You

According to the Freddie Mac weekly market survey, mortgage rates have increased by 0.5% in the past year (April 2017 – April 2018). This means your monthly payment today could be approx. $30/month higher than it was last year for every $100,000 you borrow.  Here are two ways this could impact you:

1 – If You’re Thinking of Buying a Home
It may be worthwhile for you to consider buying a home now instead of waiting.  That’s because most economists anticipate that interest rates will continue to go up throughout this year due to:

  • Risk of higher inflation, which leads to higher interest rates
  • A greater supply of bonds due to growing budget deficits
  • Less demand for bonds due to the Fed winding down their bond-buying program

It may benefit you to lock in today’s rates instead of waiting for interest rates and monthly payments to move higher.

2 – If You’re Thinking of Making Home Improvements
You may be able to fund your new project by using a “cash-out” mortgage refinance.  That’s where you trade in your current home loan for a larger home loan, and use the “cash-out” for your new home improvement project.  For the same reasons outlined above, it may be worthwhile for you to consider doing this now instead of waiting.
Contact me for more info or to explore your options!

PLEASE NOTE: This article is provided for illustrative purposes only. It is not an offer or commitment to lend you money, and it is not an advertisement for a specific mortgage or a specific interest rate. Payment examples don’t include property taxes and home insurance. Contact me to run the numbers for your situation.

The Cost of Renting vs. Buying Today

The Cost of Renting vs. Buying Today [INFOGRAPHIC] | MyKCM

Some Highlights:

  • Historically, the choice between renting or buying a home has been a tough decision.
  • Looking at the percentage of income needed to rent a median-priced home today (28.9%) vs. the percentage needed to buy a median-priced home (15.7%), the choice becomes obvious.
  • Every market is different. Before you renew your lease again, find out if you can put your housing costs to work by buying this year!

How to Calculate the After-tax Cost of Your Mortgage

Homeowners who itemize tax deductions can deduct the interest on up to $750,000 of mortgage balances used to buy, build or improve a qualified home.  Here’s how to figure out the impact of that tax deduction: What’s your marginal income tax bracket? In our example, we’re going to use a tax bracket of 24%.

What’s your mortgage rate?
In our example, we’re going to use a mortgage rate of 5%.

What’s your after-tax interest rate?
Step 1: Express your tax bracket as a decimal: 24% = 0.24
Step 2: Subtract that number from the whole number one: 1 – 0.24 = 0.76
Step 3: Multiply that number by your interest rate: 5% x 0.76 = 3.8%

In this example, a 5% mortgage costs 3.8% after-tax for someone in a 24% tax bracket.

Contact me for more info or to explore your options!

PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936. Also, this article is not an offer or commitment to lend you money, and it is not an advertisement for a specific mortgage or a specific interest rate. Payment examples don’t include property taxes and home insurance.

The Cost of Waiting: Interest Rates

Some Highlights:

  • Interest rates are projected to increase steadily heading into 2019.
  • The higher your interest rate, the more money you end up paying for your home and the higher your monthly payment will be.
  • Rates are still low right now. Don’t wait until rates hit 5% to start searching for your dream home!

Investment Property Math: 30-yr vs. 15-yr Mortgage

Here are three things to consider when choosing between a 30-year fixed rate mortgage and a 15-year fixed rate mortgage on an investment property:

1 – Cash-Flow Considerations
A 30-year mortgage carries a lower monthly payment and therefore is more likely to result in positive monthly cash flow.  The less money you pay out each month, the more likely you are to achieve and maintain positive monthly cash flow. Positive cash-flow reduces your risk of default in case the tenant stops making their rent payments or in case the property goes vacant for a while.  For this reason, a 30-yr mortgage is generally less risky for investors vs. a 15-yr mortgage.

2 – Rate of Return Considerations
A 15-yr mortgage saves you money because you pay less interest over time.  However, is your goal to save money or make money?  If your goal is to make money and improve your rate of return on investment, a 30-yr mortgage may be a better option for you. Although you’d need to run the numbers in each case to determine which option would produce a higher rate of return, you’ll typically find in favor of a 30-yr mortgage.  That’s due to the impact of positive leverage on your investment returns.

3 – Investment Objectives
Investing in real estate is not always purely a numbers game.  For example, some investors would be happy earning less of an investment return, and experiencing less financial liquidity with a 15-yr mortgage because they value the tangible nature of owning real estate property free and clear. A 15-yr mortgage pays off in half the time, and it would result in higher cash flow and less cash-flow risk in the future when the loan is paid off (assuming you still own the property at that time).

As you can see, there’s no “one-size-fits-all” strategy when it comes to investing in real estate.  Contact me for more info or to explore your options!