Finance Blog

Home prices continue to move upward

U.S. home prices continued to accelerate nationally and in the major cities as 2017 came to a close, the S&P CoreLogic Case-Shiller indices reported on Tuesday.

Nationally, prices rose 6.2 percent annually in November, up from 6.1 percent in October. The 10-city and 20-city composite indices rose 6.1 percent and 6.4 percent annually, with both indices picking up the pace from October.

Seattle home prices outpaced all others with a 12.7 percent annual gain in November, followed by Las Vegas (10.6 percent) and San Francisco (9.1 percent).

“Home prices continue to rise three times faster than the rate of inflation,” said David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. Blitzer said the index has made an annual gain of at least 5 percent for 16 consecutive months.

Blitzer said a low level of supply has pushed up prices, noting that single-family home starts, at around 632,000 annually, are running even lower than at the start of the housing crisis (698,000 units) and far below the long-run average level of more than one million units.

“Without more supply, home prices may continue to substantially outpace inflation,” Blitzer said.

Case-Shiller’s reading was consistent with other recent price releases. Black Knight reported that U.S. home prices reached another peak in November, and had gained nearly 6.5 percent since the beginning of 2017. New York led all states, gaining 1.36 percent from October.

Despite the increase in home prices, First American Chief Economist Mark Fleming said low interest rates have kept homes relatively affordable in a historic context.

“In fact, consumer house-buying power is 2.3 times higher than it was in 2000, almost two decades ago,” Fleming said. “It’s also only 2.9 percent below the peak in July 2016. Because the long-run trend in mortgage interest rates has been downward, from a peak of 18 percent in 1981, the housing market has benefited from consistently increasing house-buying power,” Fleming said.

First American estimated that when incomes and mortgage rates are factored in, home prices have increased by just 5 percent in the 12 months through November.

Should You Pay Down Your Mortgage or Save for Retirement?

If you have a bit of cash each month to put toward your future, is that money best spent paying down debt or investing for retirement?
Katie Brockman (katiebrockman)
Aug 2, 2017 at 7:32AM

If you have a little extra cash at the end of each month, it’s wise to put it toward long-term financial goals. But how do you know which goals should come first? Is it more worthwhile to put your extra money toward your mortgage or your retirement fund?

The short answer is that they’re both good options. About 36% of American households have a mortgage, and of those people, the average household owes about $168,000. And in regards to retirement planning, the median amount working-age American families have saved is just $5,000 — not even enough to see them through one year in retirement. In other words, a little extra cash would benefit most people in either of these situations.

But if you only have a couple hundred dollars (or less) to spare each month, where will you get the most bang for your buck?

Investing in your home versus investing in your future
Before you start paying off your mortgage or saving for retirement, you should build a solid emergency fund to cover six months’ worth of expenses. And if you have a 401(k), it’s also a good idea to contribute enough to get your employer’s full match, because that is essentially free money, and you’d be foolish to turn it down.

After you have those basics covered, it’s time to compare the pros and cons of paying off your mortgage and saving for retirement.

The best time to start aggressively paying off your mortgage is in the first few years, because at this point, most of your payments are going toward interest and not the principle. So by paying as much as you can right away, you can pay less in interest overall. However, because the amount you pay in interest is tax-deductible (assuming you qualify and itemize your deductions), paying interest isn’t quite as terrible as it may sound.

At the same time, it’s also wise to start investing for retirement as early as possible in order to take full advantage of compound interest. Investments tend to gain value exponentially, so every year you delay saving for retirement will set you back to a disproportionately large degree. Money invested now has much more value than the money you’ll invest five or 10 years from now.

This is where interest rates come into play. If you have an unusually high interest rate on your mortgage, then it makes financial sense to pay down that debt first. Because the stock market has historically gained about 7% per year, if your interest rate is higher than that, then you’re likely paying your lender more than you could earn by investing the money instead.

A look at the numbers
Say, for example, you just took out a 30-year mortgage of $150,000 and are trying to decide whether to put your extra money toward the mortgage or your retirement savings. Also assume an interest rate of 4.5% per year on your mortgage, a 25% federal tax rate, and an 8% state tax rate. Finally, let’s say that your interest payments are tax-deductible, so your after-tax rate is 3.105%.

Here’s what your financial future could look like based on how fast you pay off your mortgage:

Mortgage Payoff Term/ Monthly Payment/ Total Interest Paid
30/ $760/ $123,609
25/ $833/ $100,124
20/ $948/ $77,754

If you pay only the minimum mortgage payments over the course of 30 years, you’ll end up paying a grand total of $123,609 in interest alone. However, if you bump up your monthly payment by about $200 and pay off your mortgage 10 years early, you’ll pay only $77,754. In other words, you could save about $46,000.

Now let’s assume that you only make the minimum mortgage payments and instead put that extra $188 per month into your retirement savings, rather than your mortgage payment. Assuming you start with $0 in savings and earn an average of 7% per year on your investments, in 20 years you’d wind up with about $96,000 in your retirement account — about $45,000 in contributions and $51,000 in earnings. That only puts you slightly ahead of the $46,000 in interest you’d save by paying off your mortgage 10 years early. However, if you continued to invest that $188 per month until the end of your 30-year loan term, your retirement savings would swell to $221,000 — that’s $153,420 in earnings on top of your $67,680 investment. All in all, you’d come out $30,000 ahead by investing your spare cash, rather than using it to pay off your mortgage 10 years early.

To sum it up, you can save more money in the short term by paying down your mortgage faster, but in the long term, you’ll likely come out far ahead by saving more for retirement. In any case, you certainly shouldn’t completely neglect your retirement savings while you pay off your mortgage. Even if you choose to repay your loan on an accelerated schedule, make sure you save something for retirement while you have time — and compound interest — on your side.

How to calculate your own numbers
Ready to find out which option is right for you based on your unique situation? First, use a compound interest calculator to determine how much your retirement savings can grow over time. Then use a mortgage calculator to see how much you’ll be paying in interest over the course of your loan.

After you compare these numbers, you’ll have a better idea of how much you can earn on your investments compared to how much you can save in interest payments.

Every situation is different, so there’s no one-size-fits-all answer as to whether you should use your extra cash to pay down your mortgage or save for retirement. But by creating a plan and calculating where your money will be best spent, you’re setting yourself up for future financial success.

10 Housing and Mortgage Trends to Watch for in 2018

The housing picture is likely to improve in 2018:
•Home prices are expected to climb, but not as fast
•More houses could be for sale toward the end of the year, giving home buyers a greater selection to choose from
•Homeowners will have more equity to borrow from

Yet in other ways, 2018 might continue to be challenging, especially for home buyers. Mortgage rates are likely to rise, reducing affordability.

Here are 10 housing and mortgage trends to expect in 2018.

1. Home prices decelerate

Good news for first-time home buyers: Home-price appreciation is expected to cool down in 2018 after a torrid couple of years.

Home prices rose 6.3% in 2016, according to the Federal Housing Finance Agency. They’re on track to exceed 6% in 2017, too. But for next year, the median forecast among six industry and lender groups is for a 4.1% increase in existing home prices nationwide.

Why the slowdown? One factor is home construction. Economists expect the construction of single-family houses to rise sharply in 2018, based on building permit applications. The median estimate has single-family housing starts rising about 8% in 2018, to roughly 912,500 new houses.

2. More homes for sale

Home buyers are struggling to find houses for sale. The shortages are especially acute for the kinds of homes that first-time buyers tend to get. Among the reasons for the tight supply:
•Many baby boomers are content to age in their homes instead of downsizing
•Investors bought millions of homes after the housing bubble burst, and they’re making too much money as landlords to sell
•Home builders make more profit from expensive houses than entry-level houses, so that’s what they’re constructing

But there’s some hope for 2018: Realtor.com predicts that the housing supply pinch will begin to ease late in the year.

“It looks like we could get to a point where we’re seeing growth in inventory sometime in the fall of 2018,” says Danielle Hale, chief economist for Realtor.com.

3. Home sales could rise

Resales of existing homes are expected to rise modestly in 2018. The median estimate is that existing home sales will rise 2.5%, to 5.6 million units.

Meanwhile, sales of new homes are expected to rise a median of 7%, to 653,500 newly built single-family houses.

According to Realtor.com, cities in the South will show the most sales growth in 2018. Hale says she expects 6% existing home sales growth, particularly in markets such as Dallas; Tulsa, Oklahoma; Little Rock, Arkansas; and Charlotte, North Carolina. She says those places are not as “regulation constrained,” they have strong regional economies and developers have plenty of vacant land to build on.

4. Mortgage rates head up

Mortgage rates are expected to rise in 2018. CoreLogic, a data provider for the real estate industry, averaged six forecasts of mortgage rates, arriving at a consensus view that the 30-year fixed will average 4.7% in December 2018. In November 2017, the 30-year, fixed-rate mortgage averaged 4.07%.

“Not only are mortgage rates higher, but mortgage rates will be at the highest level since 2011,” Nothaft said at the Urban Institute symposium. “So we’re looking at an environment, going forward, where this era of cheap mortgage rates will largely be behind us.”

Interest rates are notoriously resistant to prediction, though. At the beginning of 2017, most people expected mortgage rates to rise steadily throughout the year. And they did rise — for a few weeks. The average 30-year fixed peaked in mid-March 2017 at 4.58%, according to NerdWallet’s daily survey. Then it declined, dipping slightly below 4% a few times in the summer, before moving upward slightly in the fall.

5. Affordability declines

If, as expected, home prices and mortgage rates go up in 2018, homes will be less affordable.

For example, if mortgage rates rise to 4.7% toward the end of 2018, and the median price of existing homes rises by 4.1%, then monthly mortgage payments for a typical house would rise substantially.

But according to an Urban Institute analysis, middle-class families in much of the country still have some financial wiggle room if rates and prices rise in 2018. Most home buyers don’t appear to stretch to the limits of affordability, the Urban Institute wrote.

6. More equity, more HELOCs

As home values rise, homeowners gain equity. And banks expect millions of homeowners to borrow against that equity.

About 1.6 million homeowners are predicted to get new home equity lines of credit in 2018, a 16% increase over 2017, according to a recent TransUnion study. The credit bureau says 67% of homeowners have enough equity to get HELOCs, and 80% of those borrowers have high credit scores.

TransUnion forecasts that 10 million homeowners will get HELOCs from 2018 through 2022, double the number of new lines of credit in the five years before that.

7. Security headaches continue

Thieves are stealing down payments from home buyers by combining email hacking with wire fraud. And there’s no sign of it slowing.

Complaints of this type of wire fraud skyrocketed by 480% in 2016, according to the 2016 annual report (the latest available) from the FBI’s Internet Crime Complaint Center. Lenders and title companies say the problem worsened in 2017, and that they fend off this form of fraud constantly.

The best way to avoid becoming a victim: When you receive emailed instructions for wiring money, call your agent to verify. The email may be a fake, designed to trick you into wiring money into a thief’s account.

8. More options for people with credit issues

A few specialty lenders are focusing on nontraditional mortgages. For example, Angel Oak Mortgage Solutions in Atlanta targets the borrower “who has had a life event, so they lost their house or had to file bankruptcy or things got really bad, but they’ve now got their feet back on the ground and they’re ready to buy their next house,” says Tom Hutchens, the lender’s senior vice president of sales and marketing.

Several lenders offer interest-only mortgages, and even loans with limited income documentation. These mortgages are dubbed “non-QM” because they don’t meet Fannie Mae’s and Freddie Mac’s plain-vanilla “qualified mortgage” rules. One prominent non-QM lender, Impac Mortgage Holdings, plans to begin securitizing these loans early in 2018.

9. Lenders embracing automation

Mortgage lenders continue to pour money into automating the loan-application process. The best-known example is Rocket Mortgage by Quicken Loans. But Quicken isn’t the only lender that embraces automation. Some lenders, such as loanDepot, cook up their own automation in-house, while software providers such as Blend and Roostify help large and small banks to automate applications. Now a few lenders want to use automation to guide borrowers to loan products that best suit them.

10. Tax reform could affect buyers and owners

Lawmakers were still working on tax reform as this article was being written. Preliminary House and Senate versions limited the number of home sellers who would benefit from the home capital gains exclusion, and they treated the mortgage interest tax deduction differently. It’s too early to know how a final tax reform bill would affect home buyers and homeowners, but we will keep you posted.

About the author Holden Lewis
Holden is a personal finance writer for NerdWallet. He previously covered mortgages and real estate at Bankrate

Here are 6 housing predictions to know for 2018

Here are realtor.com’s six major predictions for the housing market in 2018:

1. Home price appreciation – Home prices are expected to rise 3.2% next year. This slower rate of increase will allow for home sales to pick up next year.

2. Mortgage rates – Mortgage rates are expected to average 4.6% throughout the year, but reach 5% for the 30-year fixed-rate mortgage by the end of the year. The Mortgage Bankers Association also predicted rates will continue rising, saying mortgage rates could pass 4% or even 5% over the next few years.

3. Existing Home Sales – Existing home sales are forecasted to rise 2.5% as the trend in low inventory begins to reverse course.

4. Housing Starts – Even as existing home sales increase, new home sales will increase even more, meaning housing starts will also rise. Overall, housing starts are predicted to rise 3% over the year, but single-family home starts will increase 7%.

5. New Home Sales – These will increase at the same rate as housing starts, rising 7% year-over-year in 2018.

6. Homeownership Rate – The homeownership rate will stabilize at 63.9% after having hit bottom in the second quarter of 2016, realtor.com forecasted.

Mortgage News: Purchasing Power Increases as Interest Rates Hit 16 Month Lows

If you are in the market for a new home, now is the time to act as interest rates fall below 4 percent.

Due to concerns about the global economy, the yield for Treasury bonds has fallen, leading to a drop in interest rates lenders charge borrowers for mortgages. According to Bloomberg, the interest rate for a 30 year fixed mortgage has dropped to below 4 percent for the first time in the past 16 months. As a result, the number of applications for mortgage refinancing increased last week by 10.6 percent along with a spike in demand for home purchase loans. NJ.com reports interest rates for 30 year fixed mortgages range from 3.62 percent to just over 4 percent.

The Relationship between Interest Rates and Purchasing Power

In addition to reducing your borrowing costs, a drop in interest rates may make it easier for you to buy your dream home because your purchasing power increases as rates drop. According to the website MortgageReports, with every one percent shift in interest rates, your home purchasing power increases by 10.75 percent. Given the current interest rate environment is likely to be short lived, time is of the essence to lock into an interest rate for your mortgage.

To learn more about how you can take advantage of today’s low interest rates, contact a local mortgage broker today!

Mortgage News: New Mortgage Options for Outside the Box Buyers

After the housing crisis, the underwriting criteria to qualify for mortgage became much stricter as lenders looked to minimize their risk. Unfortunately, these more stringent guidelines have excluded many would-be homebuyers from securing mortgage financing even though they are creditworthy. In order to service this market, some smaller lenders are branching into offering non-conforming home financing solutions for people who have the means to make mortgage payments but do not fit neatly into today’s stringent underwriting guidelines.

What You Need to Know About Non-Qualified Mortgages

According to the Los Angeles Times, lenders who offer non-qualified mortgages use flexible underwriting standards when evaluating a borrower’s creditworthiness when compared to the requirements for a conforming mortgage. For example, a self-employed person might have variations in their monthly income, but overall they have sufficient income to make mortgage payments. Other individuals might have a debt to income ratio just outside the limits set for qualified mortgages. Since these lenders are taking a slightly greater risk by extending non-qualifying mortgages, the interest rates of these loans tend to be one to 1.5 points higher than what lender charged for traditional mortgages backed by Fannie Mae or Freddie Mac.

To learn more about your mortgage options if you have unique financial circumstances, contact a local mortgage broker today.

Mortgage News: A Possible Affordable 15-Year Mortgage Solution

The cornerstone of the mortgage industry has been the 30-year mortgage, but a new 15-year mortgage solution was announced in September to make it possible to build home equity quickly to reduce risk to borrowers.

Since the founding of the Federal Housing Administration in 1934, the 30-year mortgage has been the bedrock of the path to home ownership for many Americans. The advantage of the 30-year mortgage is that the monthly payments for the loan are within reach of many homebuyers; however, with the changes in the economy and with underwriting standards during the past 80 years, this mortgage product has become riskier for some homebuyers. The reason is that for the first five to seven years of the loan, the payments go primarily to paying the loan interest, so only a small portion goes toward reducing the principle. This delay in building equity can put the borrower at risk if the individual experiences a job loss, medical issues, a divorce, or if there is a downturn in the economy.

A Strategy for Reducing Risk with a 15 Year Mortgage

According to a report by NPR, a mortgage expert from the American Enterprise Institute proposed a strategy for first time buyers and people with modest incomes to build equity in their homes more quickly. The strategy is to use the money set aside for a down payment to buy points, which effectively reduces the interest rate of the loan. Since you are paying less in interest charges, you build equity more quickly. This strategy does reduce the loan amount you are able to secure by about 10 percent and your monthly payment might be slightly higher. The advantage of this tactic is that you build up equity that provides a cushion in case of a financial emergency and you can own your home outright sooner than you would with a 30-year mortgage.

To find out of if a 15 -year mortgage is the right choice for you, contact a local mortgage broker today.

Mortgage 101: How to Make the Mortgage Approval Go Smoothly

For first time homebuyers, the mortgage application and approval process may seem daunting. These tips can help make the process seem easier.

As Millennials secure jobs and develop savings, they are starting to explore the option of homeownership. Since many watched their parents struggle with their home loans during the Great Recession, people in this age group approach the home financing process with a great deal of trepidation. By doing some preparation, young homebuyers will find the path to securing a mortgage and purchasing their first home to be much easier than they anticipated.

Three Ways to Make the Home Financing Process Go Smoothly

Here are five recommendations from Realtor Magazine and the Independent Community Bankers of America to make the mortgage approval process easier for first time buyers:

  • Gather your documentation before you start your application: The vast majority of mortgage lenders require proof of income and expenses, so you will need to have tax returns, bank statements, paycheck stubs, and W-2s to submit with your home loan application.

  • Monitor your credit report: Before your house hunt, you will need to check your credit report and score to make sure you’ll be able to qualify for a mortgage. While you are home shopping, you may want to check the report to ensure there are no reporting errors.

  • Maintain discipline with spending habits: When you are going through the mortgage approval process, you need to try to avoid making large purchases, such as buying a car, and maxing out your credit cards. High ticket purchases made with credit can have a significant impact on your debt to income ratio.

  • To get expert advice about the mortgage process, contact a local mortgage broker today.

Mortgage News: New Home Loan Options Coming Soon

As mortgage applications decrease, lenders are beginning to offer new loan products to meet the news of borrowers.

After the 2007-2008 mortgage crisis, many of the innovative mortgage products that offer people with special financial circumstances a path to home ownership disappeared. Now that economic recovery is underway, mortgage bankers have loosened their lending criteria and have started to introduce new home financing solutions. While you will still need to document your income and have a reasonable credit score, people who are first time home buyers, have low incomes or need a jumbo loans will have new mortgage options this fall.

New Home Financing Solutions

Some examples of the new mortgage products reported by Realtor Magazine that will be available soon include:

  • Home Loans for Low Income Borrowers: Some private lenders are offering an alternative to traditional FHA loans that have interest rates that are independent of the borrowers FICO score and the loan to value (LTV) ratio can be as high as 95 percent. Once the LTV reaches 80 percent, the borrower no longer needs to carry private mortgage insurance (PMI). Another new mortgage option allows borrowers to substitute up to 70 percent of certain assets for income.

  • Jumbo Loan Options: After the mortgage market meltdown, many lenders pulled back from offering mortgages for high priced homes. New home loan solutions allow a maximum LTV of 85 percent for homes costing $1.5 million and a LTV of 80 percent for homes costing as much as $ 2 million. The borrow needs to have a minimum credit score of 740 for these loans.

  • To discover what home loan solutions are right for you, contact a local independent mortgage broker.

     

Money Matters: The Advantages of Paying Off Your Mortgage before Retirement

Multiple factors determine whether paying off your mortgage is the best choice for you.

After making mortgage payments for 15 to 30 years, nothing beats the sense of freedom of sending in the final payment so that you own your home free and clear. Historically, people were able to pay their home loan in full well before retirement; however, today many people find themselves still making mortgage payment well into their golden years. Some people needed to tap into their equity by refinancing their mortgage or by opening a home equity line of credit to cover medical bills or college costs, while others needed to pay bills during a period of unemployment. Now that the economy has recovered, what are the benefits of paying your mortgage before you retire and what are some strategies to achieve this goal?

Reasons to Pay Your Mortgage in Full before Retirement

According to MarketWatch, some of the reasons to make an effort to pay your home loan in full before you retire include:

  • Those who pay off their mortgage before reach age 65 reduce their annual housing expensing by two-thirds.

  • Retirees can still enjoy their homes without the risk of foreclosure due to missed payment that may occur during periods of illness.

  • Retirees who have paid their home loans in full have greater financial flexibility than those who are still making monthly payments.

If you plan to make extra payments to ensure your mortgage is paid off before retirement, you need to make sure all your high interest debt, such as credit cards, is paid in full. In addition, you need to ensure you do not incur any prepayment penalties.

To get expert advice about managing your mortgage, contact a local mortgage expert.