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What’s Going On With Mortgages?
By Tisza Major-Posner | August 21, 2007
Hi All,
Lately, one of the first questions I get when anyone finds out I am a Realtor is “What’s going on with mortgages”? Well, I’ll tell ya… It is no secret that the sub-prime mortgage market is not what it was. It is also no secret that every time we turn around the rules for qualifying for a mortgage have changed yet again.
But, fear not, all is not lost. If you are thinking about buying a home or selling a home you still can, and you still should, you just need to be prepared for what you you are facing.
As a buyer, even with an excellent FICO score, you may need to provide “full docs”. This means that you will need to have all your financial records ready to show to your lender. Yup, its a pain… but it really is a good thing for everyone, ultimately.
A full doc loan that demonstrates the borrower’s financial history and ability to pay back what they have borrowed protects not only the borrower, but also the lender and ultimately, the market. Foreclosures and short sales are not good for anyone.
Also, although interest rates are still low right now, historically when the market has behaved as ours has these past few years, the market correction usually involves higher interest rates so that the lenders can recoup some of their losses.
What this means to you as a buyer is that a home bought right now at a higher price with a lower interest rate will ultimately cost you less in the long run that a home bought for a lower price with a higher interest rate will. Don’t believe me? Check for yourself using the free mortgage calculator I used on Bankrate.com
I used the same time period for both (30 year fixed). First I looked at $450,000 loan, (a starter home price here in Claremont), fully amoratized, at 7%. Your monthly loan payments would be $2,993.86/mo. And, you would have paid $627,790.04 in interest alone over the life of the loan.
Then, I looked at a $400,000 loan, also fully amoratized, at 9%. Your monthly payments for the lower home price would be $3,218.49/mo. And, you would have paid $758,656.57 in interest over the life of that loan.
A $50,000 drop in the price of a home, which is a pretty good discount, would cost you $224.63 MORE each month on the loan payment, and $130,866.53 more in interest over the life of the loan.
And, a $100,000 drop in the price of a home, which would be a VERY good discount, at 9% would save you $177.68/mo. on the loan payment, but would still wind up costing you $36,034.46 MORE in interest than the $450,000 loan at the 7% rate would cost you.
Just think, a $100,000 drop in price and you still wind up paying more ultimately. So, the time to buy a home really is right now while interest rates are still favorable.
As a home seller, you want to have the largest pool of buyer’s for your home possible. So, listing your home now, for a realistic market price, while interest rates are still low, means a larger percentage of buyer’s are still able to buy.
As a Realtor, I want to help my buyer’s buy the most house they can get for the lowest price that they can pay. And, when I am representing my seller’s, I want to help them realize the highest price they can for their home in the shortest amount of time.
So, you can see that right now I have the opportunity to do both for my clients, by helping my buyer’s buy while interest rates are low saves them money. And, helping my seller’s sell while the market is stronger makes them more money. A $100,000 drop in value hurts my seller’s and potentially my buyer’s as well.
While it may not be anyone’s idea of fun, especially while the interest rates remain lower, a 30, 40 or even 50 year fixed loan where the borrower has been asked for full docs, and has demonstrated both their creditworthiness and their ability to pay is good for the market, which is good for everyone.
Take care,
Topics: Buying and Selling Tips, Buyer Must Read's, Seller Must Read's |
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August 21st, 2007 at 8:25 am
Can you tell us more on the likelihood of interest-rate hikes? It sure seems to me (from my cursory reading about the early-90s real estate crisis) that the Fed keeps the rates low until the recovery begins. In other words, prices start rising before the interest rates do — so we’d never have the opportunity to make the mistake you describe (buy low at higher rate).
But I’m the first to admit that I don’t know much about this stuff. Tell us more!
August 21st, 2007 at 1:37 pm
Hi Meg,
Thanks for stopping by
To answer your question, we need to remember that the market in the early 90’s is not the market today. The sub-prime market’s behaviour has been a huge factor in what we are seeing happen right now.
As for prices rising before interest rates do, and the opportunity for the buy low at a higher rate scenerio to occur, it already has, right here, right now.
A home that you purchased when the market was at its highest and interest rates were lower, is now, in most areas selling for less, while the interest rates climb.
Granted, the ascent of the rates is not as rapid as the price decline can be in some areas, but a rise is a rise. And every dollar that you spend on interest is one less that you have to put toward the principal where your equity and ultimately your investment really lie.
Take care,
Tisza
August 23rd, 2007 at 3:34 pm
[…] Original post by Tisza Major-Posner […]
August 26th, 2007 at 9:14 pm
Tisza,
It’s nice to find someone actually looking out for their customers best interests.
I’m not from your area, but do have relocation clients moving from SOCAL.
If I’m reading your post correctly, even though sellers may loose money selling their home in your market, they would more than make up the difference purchasing a more expensive home while the market and rates remain untypically low. (That is if they qualify) Which is a good thing!
November 25th, 2007 at 12:46 pm
Tisza:
It is important for the customer to know there are still loans that go “straight to close”. In other words, they sign the docs and bring the check. These are for customers with good job time, excellent credit scores, and good assets and reserves.
They are not designed for all types and can switch to full doc in underwriting if the specifics of the transaction change. Have a great rest of your weekend and hope you had a great Thanksgiving!
November 12th, 2008 at 5:36 pm
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