Lee Morof's Real Estate Blog

Buying a house is an exciting time, but homeowners also need to make the best financial decision to meet their needs. One of the biggest decisions potential homeowners will face is how much money to put down.

A down payment is the amount of money that homeowners pay upfront when they purchase a home. Many homeowners believe they need to put down 20 percent; however, this is not always the case. What do homeowners need to know about putting a down payment on a house? 

20 Percent Is Not Always Required

The reason why homeowners often believe they need to put down 20 percent is that lenders will often require a 20 percent down payment to avoid paying PMI. PMI stands for private mortgage insurance. If a homeowner puts down less than 20 percent, the lender takes on significant risk if the homeowner defaults. Therefore, the lender may require the homeowner to purchase PMI to protect the lender against the risk of default.

Homeowners might be able to secure a loan with 10 percent down if they are willing to pay PMI. First-time home buyers might be able to secure a home loan with as little as 3.5 percent down if they go with an FHA loan.

The Relationship Between Down Payments And Interest Rates

Homeowners might want to put down more money to earn a lower interest rate. Securing a lower interest rate could save homeowners tens of thousands of dollars over the life of the loan. If homeowners put down more money, the lender doesn’t take on as big of a risk. Therefore, the lender might be willing to charge a lower interest rate. 

Work With A Professional 

Ultimately, the size of the down payment is one of the biggest decisions potential homeowners have to make. It can take a long time to save up 20 percent for a home, but this is not always required. Homeowners need to know whether they need to pay PMI if they do not put 20 percent down, and they need to understand how the size of the down payment will impact the interest rate on a loan. It is a prudent idea to consult with a professional when deciding how much money to put down for a house.

Many first-time homebuyers are having a difficult time finding the right purchase. Therefore, a new trend is catching on. Some people are renting in the city, where property values are more expensive. Then, they buy a vacation home in the suburbs. Is it smart to buy a second home as a first home? 

The Advantages Of Buying A Vacation Home First

There are several advantages that come with buying a vacation home as a first home. First, buying a vacation home in the suburbs is usually less expensive than purchasing a house in the city. Furthermore, first-time homeowners can rent out their vacation homes the majority of the time, helping them cover monthly mortgage payments. Then, as the value of the vacation home rises, first-time homeowners build equity they can use to purchase a more expensive home in the city later. This can also help people save money on the cost of a vacation. 

Interest Rates On Vacation Homes Might Be Higher

At the same time, interest rates on vacation homes might be higher. Homeowners interested in getting the best interest rates need to live in the home they are buying. If they are not living in that specific home, lenders may charge a higher interest rate. Furthermore, first-time homeowners might have to put more money down to qualify for that loan. 

Managing A Vacation Home

First-time homeowners also have to think about how they will bring in rental income. It might be helpful to work with a property management company that can handle this from start to finish. Or, services such as VRBO or Airbnb might be helpful. Homeowners need to have a plan for how to maximize rental income. The more the home is rented out, the easier it will be to afford the mortgage payments.

Have An Emergency Fund Set Aside

First-time homeowners still need to have an emergency fund set aside for the vacation home. What happens if the roof needs a repair? What happens if the HVAC system has to be replaced? Homeowners need to think carefully about how they can cover these expenses. Not all of them are covered by home insurance, and some of them can cost thousands of dollars. 

There are a lot of people who are wondering if now is the right time to move or refinance their current home loan. With interest rates still favorable, a lot of homeowners have the potential to save a lot of money if they are able to secure a home loan with a lower interest rate. There are two ways homeowners can secure a home loan with a lower interest rate. The first is to refinance. The second is to move. Which option is better? There are a few key points to keep in mind.

Taking A Closer Look At Refinancing

There are a lot of homeowners who have an abundance of equity currently built up in their homes, making this a great time to refinance. With a refinance, there are multiple options available. Some homeowners might refinance to access the equity in their homes, allowing them to complete a project. Some homeowners might refinance in an effort to pay off their home loan sooner. If homeowners are trying to access more equity, or are trying to shorten the term of the loan, then refinancing might be the smart move.

Looking At The Option Of Moving

The other option is to get a new home loan entirely by moving. This is an attractive option for homeowners who might have a dream house they would like to move to. In particular, any homeowner who currently has a home loan with a high interest rate should consider moving into their dream home now. Because mortgage rates are low right now, this is a chance for homeowners to move into a larger house while keeping their mortgage payments the same or less by obtaining a lower interest rate.

Every Situation Is Different

In the end, every situation is different. Because interest rates right now are so low, now could be the time for homeowners to consider moving or refinancing. Switching to a home loan with a lower interest rate could save tens of thousands of dollars over the life of the loan. Anyone with questions or concerns should reach out to a professional for help.

The Federal Open Market Committee of the Federal Reserve said in its post-meeting statement that the Federal Reserve expects to raise its benchmark interest rate range twice during 2023. No rate changes will be made during 2022 as the economy continues to recover from the Covid-19 pandemic. The Fed’s current interest rate range is 0.00 to 0.25 percent.

Fed Expects “Transitory” Inflation

The Fed’s post-meeting FOMC statement said that although Committee members adjusted their forecast for raising the Fed’s benchmark interest rate range, members did not predict long-term inflation and described current upward inflation as “transitory.”

The Consumer Price Index reported that the cost of living jumped in May and drove inflationary growth to a 13-year high of five percent.

11 of 18 FOMC members currently expect two or more rate hikes in 2023; in March, seven members expected one rate hike in 2023. Former Treasury Secretary Larry Summers said that the Fed needs to reconsider its monetary policies based on the two stimulus payments provided to Americans. The Fed has held its benchmark interest rate range to 0.00 to 0.25 percent and continued its monthly purchases of $80 billion in Treasurys and $40 billion in Mortgage-Backed Securities in efforts to support the economy and stabilize financial markets.

The Committee will follow economic news and developments through readings on public health, labor market conditions, inflation, and financial and global news to determine monetary policy adjustments.

Fed Chair Suggests Future Tapering of Bond Purchases

Federal Reserve Chair Jerome Powell said in his post-FOMC meeting press conference that members had their first discussion of tapering the Fed’s bond purchases. Although the Fed has indicated it wants to see “substantial further progress” in the economy before it starts to taper its bond purchases, analysts expected further discussion of tapering bond purchases in FOMC’s July meeting. Reducing bond purchases is considered the first step in moderating the Fed’s accommodative stance on monetary policy.

Chair Powell said that the FOMC will continue to develop monetary policy in consideration of the FOMC’s dual mandate of achieving maximum and an annual inflation rate of two percent over the longer term. Inflation has run below two percent for some time before the pandemic; so a current inflation rate running above two percent would help raise the average inflation rate to the two percent requirement.  

The unemployment rate is improving as businesses and other employers open their doors and restore service to full capacity. Chair Powell cautioned that the economy remains strongly connected to how the Covid-19 virus progresses and said that monetary policy would be adjusted according to how the pandemic impacts the economy.

Last week’s economic news included readings from Case-Shiller Home Price Indices, along with Commerce Department readings on public and private-sector job growth and the University of Michigan’s Consumer Sentiment Index. Weekly reports on jobless claims and mortgage rates were also released.

Case-Shiller: Home Price Growth Ramps Up as Demand for Homes Increases

July home prices rose at a year-over-year rate of 4.80 percent in July as compared to June’s reading of 4.40 percent. Shortages of available homes were driven by demand. Homebuyers were looking for larger homes to accommodate working from home and also wanted to leave congested urban areas.

Home prices in Case-Shiller’s 20-City Index rose by 3.90 percent year-over-year in July; Home prices in participating cities grew by 3.50 percent in June. Home prices grew fastest in Phoenix, Arizona with a year-over-year growth rate of  9.20 percent. Seattle, Washington home prices grew by 7.00 percent, and home prices in Charlotte, North Carolina rose by 6.00 percent.

Craig Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices, said,

“Prices were particularly strong in the Southwest and West were comparatively weak in the Midwest and Northeast.” 16 of 19 cities in the 20-City Home Price Index reported a faster growth rate for July’s home prices. Detroit, Michigan did not report data for July’s 20-City Home Price Index.

Construction spending in August jumped from July’s reading of 0.70 percent growth to 1.40 percent. This could be positive news if it indicates a faster pace of home construction, but it could also reflect higher prices for building materials. Rising costs of building materials are typically added to home prices, which further challenges first-time and moderate-income home buyers.

Mortgage Rates and Jobless Claims Fall

Freddie Mac reported lower fixed mortgage rates last week; The average rate for a 30-year fixed-rate mortgage dropped two basis points to 2.88 percent; rates for 15-year fixed-rate mortgages averaged four basis points lower at 2.36 percent. The average rate for 5/1 adjustable rate mortgages was unchanged at 2.90 percent. Discount points averaged 0.80 percent for 30-year fixed-rate mortgages and 0.70 percent for 15-year fixed-rate mortgages. Discount points for 5/1 adjustable rate mortgages 0.20 percent. 

New jobless claims fell to 837,000 claims filed from the prior week’s reading of 873,000 initial claims filed. Ongoing claims were also lower last week with 11.77 million filings as compared to 12.75 million ongoing claims filed in the previous week.

The national unemployment rate dipped below 8.00 percent for the first time since March with a reading of 7.90 percent. Analysts said that the number of people in the workforce dropped from 164.5 million in February to 160.1 million workers in September; this indicates that 4.4 million workers have left the workforce.

Consumer sentiment rose to its highest level since March according to the University of Michigan’s Consumer Sentiment Index reading for September was 80.40 as compared to August’s index reading of  74.10.

What’s Ahead

This week’s scheduled economic news includes readings on job openings and the minutes from the Fed’s Federal Open Market Committee meeting. Readings on public and private-sector jobs will also be reported.

The real estate market has been in flux during the past few months. As a result, this could be a great time to both buy and sell a home. This is because mortgage rates are attractive for borrowers right now. With so many people who are looking to buy a home, is likely the people selling a home are going to receive multiple offers. On the other hand, given what the mortgage market looks like right now, borrowers also have attractive options.

As a result, many people are wondering if they should buy a house with cash or take advantage of low interest rates. For homebuyers in this position, there are a few important points to keep in mind. 

Consider What The Cash Can Do

Ultimately, a decision to buy a house with cash or taking advantage of low interest rates is going to be a personal decision. At the same time, there are several factors to consider. One of them involves what the cash is going to be used for. For example, many people have heard the saying that cash is king. Buying a house with cash might be right for some people. 

On the other hand, there might be some individuals or families who can put this cash to better use elsewhere. For example, if this cash is needed to buy a new car, fun retirement, or pay for someone’s education, then the cash might be better spent in this area. It is important to think about how this cash will be spent when deciding whether or not to use it to buy a home. 

The Competitiveness Of A Cash Offer

It is also important to consider the advantages of buying a house with cash. In addition to the obvious benefit of not having a mortgage payment, a cash offer is also going to be seen as more competitive. With so many people looking to buy a house right now, it is critical for homebuyers to appear competitive right off the bat. 

A cash offer is always going to look better than someone who is trying to take out a loan because the transaction is simpler, faster, and provides the seller with an instant source of liquidity. 

These are a few of the most important points that people should keep in mind when deciding how they are going to purchase a home.

It is no secret that the COVID-19 pandemic has had an impact on everyone; however, there are a few impacts that are being overlooked. In addition to the public health crisis and the tanking of the stock market, there are also impacts of the virus on people’s home values.

Some of these impacts have been positive while others have been negative.

Regardless, it is important for everyone to understand how these impacts might impact someone’s home value, particularly for those who are looking to buy or sell a home in the future.

The Dropping Rates Of Mortgages

Because of the shelter in place laws surrounding the COVID-19 pandemic, not many people are looking to move right now. As a result, banks have had a hard time getting people to come in and sign up for loans. 

This means that many people who are looking to buy a home might be able to sign up for a loan at a very low cost. This might open the door for someone to buy a bigger home than they might have been able to during less turbulent times.

The Impact On Sellers

As a result of the low-interest rates from the COVID-19 pandemic, this also means that sellers should anticipate getting a large number of offers for their homes. There are still many people who are hesitant to sell a home in this environment. This means that there might not be many options on the market. For those who decide to take the plunge, they might be rewarded with more offers than usual. This is going to drive up the value of their home, which is good for their next purchase.

The Future Of The Market During The Pandemic

These are just two of the many ways that the COVID-19 pandemic has impacted the value of homes. While it is unclear when this pandemic is going to be behind us, it is important for everyone to understand how the pandemic is going to impact them if they are looking to buy or sell a home. This will help everyone make the right decision during a turbulent time.

Last week’s economic reports included readings from Case-Shiller Home Price Indices, data on pending home sales, and the consumer sentiment index released by the University of Michigan. The Federal Reserve released a statement from its Federal Open Market Committee and Fed Chair Jerome Powell gave a press conference. Weekly readings on mortgage rates and expanded reports on jobless claims were also released.

Case-Shiller Home Price Readings Showed Slowing Home Price Gains in May

May readings from Case-Shiller Home Price Indices showed no decline in home prices, but the national pace of home price growth slowed to 4.50 percent from April’s national average of 4.60 percent.

The Case-Shiller 20-City Home Price Index reported slower home price growth in May with only three of 19 cities reporting higher home price growth rates than in April. Data for the Detroit, Michigan metro area was not reported. The year-over-year rate of home price growth for May’s 20-City Home Price Index was 3.70 percent as compared to April’s reading of 3.90 percent.

Phoenix, Arizona led the 20-City HPI with 9.00 percent year-over-year home price growth in May; Seattle, Washington followed with 6.80 percent year-over-year home price growth and Tampa, Florida held third place with 6.00 percent year-over-year home price growth. Analysts credited record-low mortgage rates and slim inventories of available homes with keeping home prices afloat, but the spreading coronavirus pandemic may cause home prices to lose ground as would-be home buyers postpone home purchases due to weakening economic conditions.

In related news, the National Association of Realtors® reported that pending home sales increased by 16.60 percent as compared to April’s reading of 44.30 percent growth in pending home sales. April’s reading was the highest growth rate reported for pending home sales.

FOMC Meeting: Fed Says Ongoing Assistance Needed for Consumers

The Federal Open Market Committee of the Federal Reserve left its key interest rate range of 0.00 to 0.25 percent unchanged and said it didn’t anticipate raising the rate in the next three years based on the coronavirus pandemic’s damage to the current economy and the Fed’s low to medium-term outlook. Fed Chair Jerome Powell said that given current economic indicators, it is important for the government to provide ongoing aid to American consumers.

Freddie Mac reported record low mortgage rates as the average rate for a 30-year fixed-rate mortgage fell two basis points to 2.99 percent. The average rate for 15-year fixed-rate mortgages was three basis points lower at 2.51 percent. Rates for 5/1 adjustable rate mortgages dropped by 15 basis points to 2.94 percent on average. Discount points averaged 0.80 percent for 30-year fixed-rate mortgages and 0.70 percent for 15-year fixed-rate mortgages. Discount points for 5/1 adjustable rate mortgages averaged 0.40 percent.

Jobless Claims Fall, but Remain Far Above Pre-Pandemic Levels

New state jobless claims rose by 1000 claims to 1.43 million claims as ongoing state jobless claims rose to 17.29 million claims from the prior week’s reading of 16.20 million continuing jobless claims. National and state jobless claims rose by 2.04 million initial claims as compared to the prior week’s reading of 2.31 million initial claims. Continuing State and National jobless claims fell to 30.2 million claims from the previous week’s  reading of 31.80 million continuing jobless claims 

The University of Michigan reported that consumer confidence fell in July to an index reading of 72.90 percent as compared to June’s reading of 73.20.

What’s Ahead

This week’s scheduled economic reports include labor-sector reports on public and private-sector jobs, the national unemployment rate, and weekly readings on mortgage rates and new and ongoing jobless claims.

Wednesday’s post-meeting statement of the Federal Reserves Federal Open Market Committee reaffirmed its concern over the coronavirus pandemic and its impact on the economy and health of all Americans. The Committee voted to hold its benchmark target federal funds range at 0.00 percent to 0.25 percent. Analysts do not expect the Fed to raise its key interest rate more than once in the next three years.

Federal Reserve Chair Jerome Powell said that the sharp increase in Covid-19 cases in mid-June kept the economy from recovering after the virus pandemic caused a historic plunge in the U.S. Gross Domestic Product during the second quarter.

Chair Powell described the resurgence of Covid-19 as “flattening the curve of the recovery,” and said that efforts taken to control the virus are “critical.” Restoring the economy to normalcy will require national responses designed to stop the rapid spread of the highly contagious virus.

Fed Chair Powell said the pandemic and its fallout caused the biggest shock to the U.S. economy in living memory. 

FOMC Statement Commits to Using its Full Range of Tools to Ease Impact of Pandemic

The Federal Open Market Committee reasserted its commitment to using ”all available tools to support the U.S. economy during these challenging times.” The Committee’s monetary policy decisions are based on two legal mandates to achieve maximum employment and price stability. 

Committee members said that although the economy has recovered since the initial coronavirus outbreak, economic readings remain far below their pre-pandemic levels. The Fed statement said that the path of economic recovery depends significantly on the course of the virus. The Fed expects the pandemic to severely impact the economy in the near term and to continue damaging the economy in its mid-term forecasts.

The Fed will continue to purchase Treasury bonds and mortgage-backed securities to support credit flow to businesses and households. The FOMC statement stressed the Committee’s flexibility in dealing with current and emerging economic conditions; members will review domestic and global financial conditions and will change monetary policy according to developments.

Those who are involved in the real estate industry likely know that mortgage rates are at an all-time low. At the same time, nobody wants to pay more for a house than they have to. Some of the most important factors that dictate how much someone is going to pay for a house include points and interest rates.

While interest rates are incredibly low, there is a way to make them lower. This comes in the form of points. This is additional money that is paid upfront to get a better deal over the life of the loan. Even though this sounds great in theory this might not be the best option for everyone. There are a few important points to keep in mind.

What Are Points?

Often, the lender is going to offer someone the option of paying points when the mortgage is created. This should be viewed as paying interest on the loan in advance. In exchange for paying interest upfront, the lender should offer to lock in a lower interest rate over the life of the loan. The more points someone purchases, the better the rate.

For example, paying one point of interest may reduce the interest rate on the loan by 0.25 percent. This is standard. Take, for example, a $200,000 home. One point on this loan would cost someone about $2,000. In exchange, the interest rate on the loan is going to drop by 0.25 percent. This might be worth it in the long run.

Discount Points

Other people might have heard about something called discount points. This is another term for mortgage points. The two terms can be used interchangeably. Typically, people can purchase as many discount points as they want, up to the limit of the lender. 

An Overview Of Origination Points

Another type of points that people might have heard about is origination points or origination fees usually expressed by a percentage of the loan amount. These are points that are charged to the borrower to cover the of processing, or originating, the mortgage loan. These fees are included in the total closing costs disclosed when you apply for your home loan.

Origination points are almost always negotiable. The number of origination points that a lender is going to charge can vary from place to place. Therefore, always be sure to ask about origination points. There might be a way to get these points waived, saving the borrower a significant amount of money.