How Interest Rate News Affects Your Home Search

With the interest rate in the news, I wanted to provide some perspective on what that might mean if you are considering buying a home. The Fed declined to raise the rate, but is projected to make a slight bump in December. While rates probably wont skyrocket soon, any increase does affect your buying power when it comes to house shopping. We would never advise you to buy a house based on fear or market pressure. The decision to buy should be made considering many factors, including your lifestyle, desires, and general readiness, in addition to financial considerations. To look at the financial picture, a rent versus buy calculator, like my favorite from the New York Times, can help you get a better sense of whether or not it makes sense for you.

If you are already considering buying a home, the projected bump in interest rates, and the estimated additional 5.4% increase in housing prices over the next year, may be reasons to consider looking in earnest now, versus waiting until next spring or summer. As an example, below is a snapshot at the average housing price for a first time home buyer in our area. If you are looking at homes priced higher, the difference will be even more pronounced.

The difference of $185 a month, may not look like much, but it adds up to almost $67,000 across the life of the loan for the same house. If you are ready to buy now, that difference could make it worth starting to look seriously this fall versus waiting until next year. The good news is that if you aren’t ready to buy, next year’s projected rate of 3.71% is still VERY low compared to historical averages.
As always, we want to lead with information and help you make the decision that is right for you. Feel free to contact us with any questions, we’d love to hear from you.
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1031 Exchange

Are you an seller or investor looking to sell a property, buy a new property, but want to avoid paying capital gains or recapture taxes?

Have you heard of 1031 exchange? This is a process where you are redistributing the equity of one property into another investment, to defer additional taxes.

Here are some simple facts on the 1031 process;
1. Sell property & identify new purchase within 90 days.
2. Find a like kind/replacement property you want to acquire. (Must be equal or greater value).
3. Reinvest all equity into the new property OR apply equity to a higher valued property.

This transaction is similar to a trade, where the equity is transferred to a new property, rather than received as proceeds, and taxed.

We have had clients sell a long term investment property, for a new construction investment, sell their investment, and apply the proceeds towards a portion of an investment or, apply the equity of one property to the purchase three new properties.

As part of the exchange process, the purchase property must be identified with in the specified time frame, and the owner may not receive cash or other benefits from the sale.

Using a Qualified Intermediary to complete this process is highly recommended, given the complicated nature and timing of the transactions.

If you have more questions about completing a 1031 Exchange, our team has completed these types of transactions on our personal properties, and for clients. Contact us today, for more info!

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Falls Church First Time Homebuyers Program

falls church logoThe City of Falls Church offers closing cost and down payment assistance of up to 20% of the purchase price of a house (less than $450,000) for first time homebuyers. The assistance is a second interest-free loan, with repayment due at the sale or refinance of the home, or if the buyer rents the home out (it is no longer the buyer’s primary residence). One caveat: the City wants an interest in any appreciation in the property for the use of the money. If they loan you 20% of the purchase price of the home and it appreciates, when you sell the home, they want 20% of the new sale price.

Requirements to qualify:

  1. Income restricted to 120% of the area median, which for a household of 1-2 people is $120,000.
  2. Credit score of 620 or better.
  3. Be able to qualify for a 30 year loan.
  4. Be able to contribute at least 2% down.
  5. Buy a home within Fall Church City that is less than $450,000

Ask us for more information about how this program stacks up to others on offer in the area, or a recommendation on getting started in your search or working with a lender.

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Buyer Resources: VHDA FHA Plus Loans- No Down Payment

VHDA logoIf you have 1% cash and can otherwise qualify for a FHA loan, you may be able to get a second loan for the amount of your down payment from VHDA Plus Loans program. The income and sales price limit on this VHDA funded, FHA insured second mortgage are slightly more generous than some other first time homebuyer programs. You can qualify if your household of 2 makes less than $122k a year and you are looking to buy a place that is under $500k. There are other qualifications, including having good credits (above 620) and taking a buyer education course, but this program can help bridge the cash gap to get your into your new home. Let us recommend a great lender who can help get you pre-qualified.

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Lowest mortgage rates since 2013!

Are you thinking about buying or selling this year?

Yesterday, the US Mortgage rates dropped to an all time low since May of 2013 with 30 year fixed rate at 3.73%! This decrease in rates is great news for buyers and sellers, as it helps increase buying power across the board.  With a $500K sales price, and 10% down, this rate drop would save buyers over $180/month*, or $2160 a year compared to rates in 2014.  Over 30 years, and that’s a saving of $777, 600!

Rates for 2014 started high, at 4.43% in January, dropped a bit in the spring, hovered around 4.15% for the summer and fall months and continued to decline below 4% into the end of the year. The average rate for 2014, was 4.17% on a 30 year fixed rate loan. Annual averages for 2013 came in at 3.98%, and 3.66% for 2012. Rates for a 15 year loan have also dropped and are averaging around 3% for 2015.

rates_jan0515

Many may be asking, “why did rates drop?” Simply put, concerns about Europe and Asia’s political and economy status are causing investors to focus on U.S Treasury bonds.  The 10 year Treasury yields dropped below 2 ( for the first time in several months), lowering the mortgage rates as well. Its hard to say how long rates will stay this low, but if you are thinking about buying or selling in 2015, it may be a great time. Additionally, if you are looking to refinance your home, this is another great opportunity for a lower mortgage rate.

If you’d like to learn more about rates, and how this can help you save on buying a home contact us for more details!

*Calculations based on $500K, 10% down, principle & interest only, rates: January 2014 at 4.3% and January 2015 at 3.73%. Actual rates are subject to individual credit, income and financial qualifications.

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Renting Vs. Buying In The Washington, DC Area

We often find that incoming clients are on the fence about buying or renting in the area. The DC area is a very transient one, and many people find themselves packing up to leave just as quickly as they arrived. The decision of whether to rent or buy is a difficult one; renting is essentially hassle free, but without the possibility of appreciation and no tax benefits.  Consider this: DC and the surrounding area average a 34% higher rental rate than a comparable mortgage. So if you find yourself loving a home for rent at $2,000/month, that same home sold to you and financed through a typical mortgage would be only $1,300-1,500/month! Here is a great Rent vs. Buy Calculator to start determining what would work best for you!

 
The Washington, DC, region is one of the strongest housing markets in the country, and as such you can typically expect your break even horizon to be 4 to 5 years.  Why is this important to you? Over the course of a standard 2 to 3 year lease, with a monthly budget of $2000, you will have spent anywhere from $55,000 to $85,000 in total rent and utilities. This money might be better used to build equity and then either sell for a profit or use as a rental investment property. We can help you think through the decision of renting vs. buying, and then to find the best home to reach your financial goals. Contact us for a no obligation consultation!

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Let’s Talk Loans: Conforming Conventional Loans

Many clients are frequently baffled about where to begin the financing process and what they should be looking for in a mortgage. With so many changes over the years, it’s hard to keep up! We decided to simply and effectively lay out the most common loans and their general guidelines over the coming weeks as part of a series “Let’s Talk Loans”.

Conforming Conventional Loans

What is it? “Conforming” loans are the most common loans in the marketplace, and meet the required standards of both Fannie Mae and Freddie Mac (that is, they “conform” to Fannie and Freddie rules), both of which purchase loans from lenders and then package them up to sell on the secondary market. This allows lenders to receive cash up front for you loan, so they can lend to someone else.  Conforming loans can be fixed rate or adjustable rate, and can be 15 year or 30 year.

Why is that important? Investors buy these packaged loans from Fannie and Freddie.  Fannie and Freddie charge a guarantee fee, which is approximately 0.5% more than your interest rate.  Some banks, however, keep these loans in their own portfolio rather than sell them, depending on the market and their own investment objectives.

What are the guidelines? Typically, you need at least a 5% down payment, and good credit.  The conforming loan limit is generally 417,000; however, in more expensive markets of the country, including the DC Metro area, high-value conforming loans up to $625,500 can be found.  But be prepared to have a 10%-20% down payment for these larger loans.  And without 20% down, you can expect to pay private mortgage insurance, as well.

Next Up:  Let’s Talk Loans: FHA

To find out more, or to speak with a home loan expert, contact us!

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FAQ: Can my Parents Give Me a Gift to Help with my Down Payment?

I work with a lot of first time buyers in the DC area, which is a very expensive market and thus many clients have their parents help out either with down payment assistance or co-signing the loan. The most important thing is to get a trusted lender involved very early in the process. Lenders sometimes have different sets of guidelines by bank and also by loan product. It’s important to choose an appropriate product (e.g., 30 year fixed FHA, or 30 year fixed conventional) early in the process. Sometimes gifts can be ‘seasoned’ in the recipient’s account and used as a down payment, but if it arrives too late in the process it may cause problems with the loan approval.

There’s a big misunderstanding about gift taxes. For gifts below a certain amount, no filing is due to the IRS, and for above a certain amount a filing is due BUT taxes may or may NOT be due! It depends on the amount of the gift, how many recipients there are, and whether the giver has reached his or her lifetime exclusion. Parents often mistakenly assume they will be taxed on every gift above the reporting threshold, and thus want to structure it as a loan but that is one of the worst things they can do. If it’s structured as a loan then the lender will count it as debt and it will affect the recipient’s debt-to-income ratio and could very well result in a rejection by the lender. The key is to speak with your tax preparer early to determine whether the gift is taxable, and then speak to a trusted lender.

Need a recommendation for a CPA or a lender? Contact us.

Other Resources:

Attend a free first time home buyer class

Choosing a Lender

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How Do I Choose a Lender for my Mortgage?

When you start your home search, there are two people in your life who become important very quickly: your real estate agent, and your mortgage loan officer. If one of them doesn’t know what they’re doing, you can end up in serious trouble. Buyers often ask me how to choose a lender. They want to ‘shop’ rates and go with the lowest priced loan…after all, money is money, right? Well, yes, and fees are fees, and points are points, and when they don’t actually process your loan in time you are in default on the biggest contract of your life. Let me explain.

First, let’s discuss interest rates. Do NOT compare lenders solely on interest rates. Interest rates change every day, and they will be different on the day you sign a contract on a property than they are today. Your pre-approval letter does NOT lock in your rate (read the fine print on your letter.) So a lender who has the lowest rate today may not have the lowest rate tomorrow. You also need to compare apples to apples. You cannot look at rates without asking about points. Points are pre-paid interest. You pay a fee at closing to buy down the interest rate for then entire life of the loan. A point always costs you 1% of the amount you are borrowing, but what you get for it changes every day depending on the market. So, for example, on a $400,000 loan you might pay one point ($4,000) at settlement to buy down the rate from 4.175% to 3.875%. Whether or not to pay points depends on how long you are going to keep that loan–if you buy down the rate but then refinance a year later then you’ve wasted that money because you pre-paid it. Of course with today’s all time low rates it’s hard to imagine refinancing, but people said that a year ago too! A lender charging 4.175% with no points might be a better deal than a lender charging 4% with one point when you do the math. Points generally have declining benefit; If you get 0.5%  off with the first point, you may only get 0.1% off after the second point and perhaps nothing after the third.

After you look at rates and points *together*, you look at the lender fees at settlement. Lenders need to make money too, and they want some of it up front in the form of fees. Some are negotiable and some are not, but don’t fall for the trick of looking at the total closing costs–compare *only* those fees that are charged by the lender. The lender might underestimate the settlement charges, for example, to help hide his own exorbitant underwriting fee.

Finally, and most importantly, you need a lender that will get the money to settlement on time! Your deposit could be at risk if he doesn’t. Do NOT assume a big bank can close on time…in fact, lately I have found the opposite to be true.  Often a big bank can be more difficult to deal with because the underwriting department is in a whole other state and has no ongoing relationship with the loan officer. Turn around times are slow, and when they are juggling the huge volume of loans they have, they tend to wait until the very last minute to get things done, creating extraordinary stress in the days leading up to settlement.

If you need a recommendation for an excellent local lender, or discuss lenders to avoid, please contact us.

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Changes Coming to FHA Fees

Bad news for FHA home buyers: On April 1 your costs are going up, and that’s no joke.

As required by the Temporary Payroll Tax Cut Continuation Act of 2011, FHA will increase its annual mortgage insurance premium (MIP) by 0.10 percent for loans under $625,500 and by 0.35 percent for loans above that amount.  (FHA has an upper limit of $729,750 in the metro DC area.) Additionally, upfront mortgage insurance premiums (UFMIP) will also increase by 0.75 percent beginning June 1, 2012.  Currently the UFMIP is one percent. (NB: Loans that are assigned a case number prior to the effective dates will have the old rates.)

Doing the math, that means that a buyer of a $400,000 home, with a loan of 96.5% of that amount (typical for FHA) will pay almost $2900 more at settlement for the upfront MIP, and an extra $386/year in annual premiums. Ouch. With closing costs typically around 2-3% in our area, that is a very significant cost at closing. Buyers will still have the option to finance that ‘upfront’ portion by rolling it into the loan balance BUT total contribution from seller is limited to 3%, down from the current 6%.

This is the latest in a string of rising premiums for FHA loans as they try to rebuild their capital reserves.  There were also large increases in October 2010 and April 2011. FHA loans are a very popular choice for today’s buyers because they require significantly smaller down payments (3.5%) than private loan options, which range from 5-20%, require. Credit requirements are also less stringent.

More Resources: HUD Press Release

 

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