Everyone Wants a Lower Price, But What About the Impact of Interest Rates?

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When shopping for a home, the natural tendency of any buyer is to want to pay the lowest price possible maybe even buying a foreclosure. It’s important to keep in mind, however, that the sales price is not the only factor that determines what the monthly payment will be. In fact, the impact of higher interest rates can easily nullify any benefit of waiting for a lower price.

Why Should I Rush to Buy?
While you may have heard discussions in the media about the decline of property values in many markets, the rate of decline appears to be stabilizing.

That being said, it would not be unreasonable for buyers to want to hold out for an additional decline of 10%, hoping to capture the best possible price. However, as property values have declined in many areas to 2003 levels or lower, waiting longer to pull the trigger could be a mistake. Many markets are reporting that lower property values have been bringing out investors and the result has been multiple offers on many properties. Properties priced correctly are not declining and, in fact, are creating a lot of interest.

Interest Rate Complacency
The problem is that many home buyers have been lulled into a sense of complacency because of extremely low interest rates. Since the Federal Reserve initiated its program of buying mortgage-backed securities, which control the rates people pay for their home loans, rates had been range bound, bouncing between 4.50% to 5.00% for a 30-year fixed-rate loan.

But buyers shouldn’t be confused by this. These rates are artificially low! Historically, interest rates have been above 6.00%. And any rate obtained below this number is a great deal, especially on homes with price tags from 2003!

Markets are Unforgiving
The last two weeks of May showed just how unforgiving the markets can be for people who choose to procrastinate. In just five days, interest rates from many lenders increased anywhere from .50% to 1.00% as fixed-income investors demanded more for their money.

For anyone who was waiting for prices to drop even more, a 1.00% increase in interest rate would bring a higher monthly principal and interest payment on a home, even if the price of that same home had fallen an additional 10% in value.

If you are waiting for prices to fall even lower, be aware that while holding out for a lower price may help you win the battle, you could lose the war in terms of monthly payments and overall affordability. With the Federal Reserve scheduled to end its buying of mortgage-backed securities this year, rates only stand to go higher for those that wait. In fact, interest rates are already on the rise and could go higher from here.

Clock is Ticking on Free Money
If you have clients who are planning on purchasing their first home this year, be sure to let them know that they need to take possession before 12/01/2009 to be eligible for a tax credit of up to $8,000. In a survey conducted in March by Move.com, nearly 50% of home buyers are currently unaware that this free money exists in the marketplace. And since over 50% of all buyers are first-timers in today’s market, this could impact a lot of your clients.

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Discover and build a healthy credit profile

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By paying your bills on time, making at least your minimum payment due on your credit card each month (I recommend using a card’s Auto Pay feature), and staying within your credit limit, you’ll earn a good credit rating that will help you get the things you need in the future, like a loan for a car and eventually a home loan.

Always pay at least the minimum amount due on your Discover Card, as shown on your monthly statement. If you can pay your entire balance each month, that’s even better, and will help you avoid higher interest costs.
• Make your payments on time, every time. Again, I use AUTO PAY!
• Make sure the total of all your transactions is within the limit for your card.
• Never spend more than you can afford to pay back. Consider this guideline: credit card spending and other borrowing (not including rent or mortgage payments) should generally not exceed 20 percent of your net income.

720 – 850: Lenders see you as a moderate to low risk, and are
more likely to give you a competitive interest rate
on loans they provide.
620 – 719: In this range, you will be considered a fair to good
risk, but interest rates on loans provided may be
higher. You should work to improve your score
by paying your bills on time and reducing your
outstanding debt.
350 – 619: You may have difficulty obtaining credit cards, lines
of credit, or loans you need for a new car, a home,
etc. So improving your score should be a priority.

Hopefully, this makes you a better consumer, fearing not the economy but how to participate in it. If you need more info please let me know.

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…and I have inherited his townhouse.

DEAR BENNY: My father passed away in January 2008 and I have inherited his townhouse. He had an existing mortgage, and I am continuing to make the mortgage payments. I have not notified the mortgage company. I am unable to obtain financing for the home in my name at this time. I have already been turned down twice. Does state law allow me to assume this loan, or if the finance company finds out, can it pull the loan? I don’t want to lose the house. There was a will (I was the personal representative and sole beneficiary) and I had an attorney prepare the deed, which has been recorded in my name. It was my father’s wish that the house be mine upon his death. –R.N.

DEAR R.N.: Please relax. State law has nothing to do with this. Federal law — called the Garn-St. Germain Depository Institutions Act of 1982 — protects you. This law, among many other matters, specially addressed your issue. According to that Act, a lender “may not exercise its option pursuant to a due-on-sale clause upon … a transfer to a relative resulting from the death of a borrower.”

Most mortgages (usually called “deeds of trust”) contain a due-on-sale clause. That means that if the property is transferred to anyone, the lender has the right to call the entire loan. The purpose of such a due-on-sale clause makes sense. If a lender makes a loan with a low interest rate — say 5.5 percent — and interest rates rise significantly, the lender does not want another person to step into the shoes of the original borrower and continue making payments at the original low rate.

But Congress recognized that the due-on-sale clause was unfair to many people, especially in situations such as yours where you inherited the property — and the existing loan.

You should send your lender a copy of your father’s death certificate, and merely advise that you will be taking over the mortgage payments. There is absolutely nothing that the lender can do to hurt you.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column.

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This is the kind of Realty market TODAY when people become wealthy TOMORROW

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Its important for buyers to realize that we are currently enjoying a perfect opportunity in the real estate market as usually there is an inverse relationship between home prices and mortgage rates (high prices accompanying low rates, or low prices with high rates). Usually a buyer has only two options, either paying too much for their home in a seller’s market or paying too high a mortgage rate in a buyer’s market. This relationship between price and interest rate determines affordability. 2009 is an anomaly, with both home prices and their interest rates are low at the same time. As a result, housing is very affordable right now, making 2009 the best buying opportunity we’ve seen since the ’70s and the best we’ll see until rates creep up. Nearly two-thirds of current sales are first-time home buyers. For anyone looking to get into the market for the first time, right now is your chance while housing is affordable. Which is why for example, never before has one man’s trash been another man’s greatest treasure in the form of a foreclosure.

 

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Seek a Mortgage Modification

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• An extension of the term to 40yrs
• A lowering of interest rates
• “Principal Forbearance”

There is advice for handling your lender at www.hud.gov or at www.housinghelpnow.org

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