Does high inflation discourage your from buying a home?

Inflation devalues the purchasing power of money and the interest earned on savings is almost always less than inflation.  Tangible assets like your home consistently become more valuable over time.  In inflationary periods, a home is a good investment and a hedge against inflation.

Borrowing money at fixed rates during times of inflation can be very advantageous...like buying a home.  The rate stays the same over the term of the mortgage and so does the payment instead of going up at the rate of inflation.

In September 2022, rents rose by 7.2% according to NAR Chief Economist, Lawrence Yun and "rents are accelerating to higher figures with each passing month."  The annualized rate for this year is 10.6%.  Buying a home allows you to avoid rent increases while enjoying property appreciation.

The housing shortage that is fueling the price appreciation, as well as increases in rent, is something that has existed for over ten years, yet American home building has not kept pace with population growth.

When you are repaying the mortgage, you are using dollars that are worth less and less due to inflation.  Home Price Appreciation has been close or beaten inflation in each of the past five decades.

Decade	Home Prices Average Annual Increase	Consumer Prices Average Annual Increase
70's	9.9%	7.2%
80's	5.5%	5.6%
90's	4.1%	3.0%
00's	2.3%	2.6%
10's	4.9%	1.8%
20 + 21	12%	3%
22	13.4%*	8.2%

*Revised predictions for 2022 home price appreciation are: Fannie Mae estimating 16%; Freddie Mac 12.8%; NAR 11.5%.  Average of three projections is 13.4%

 

The funds for the down payment and closing costs that are sitting idle in a bank, while an otherwise qualified buyer waits to see what happens in the market, are having their value eroded by inflation.  At the current rate of inflation, $48,000 would be worth $39,073 in three years.  In seven years, it would be worth $29,697.

A 90% mortgage at 6.3% for 30-years on a $400,000 home that appreciates at 4% a year will have an estimated equity of $202,000 in seven years due to appreciation and amortization.  That is a 22.8% annual rate of return on the down payment plus $8,000 closing costs.  That is a significant hedge against a current inflation of 7.1%.

The borrowed funds in the mortgage produce leverage for the homeowner to enjoy the benefits as the value of the home goes up while the unpaid balance goes down with each payment made due to amortization.

Every day, a renter, who is otherwise qualified to purchase a home, is faced with a decision to continue renting or buy a home.  Renters will ultimately be facing an increase in their rent, feeling an erosion of the purchasing power of their funds, and experiencing an opportunity cost by not benefitting from the appreciation and amortization benefits of buying a home.

Let's connect and talk about what opportunities are available now and options that could benefit you, even considering the volatile economic atmosphere we're all facing.

Did you know this about your credit?

Credit scores are used to assess risk and determine whether a borrower is approved or declined for a mortgage, credit card or some other type of credit.  The score is a numerical value ranging from a low of zero to a high of 850 or 900 depending on the credit bureau.

The higher the score, the more likely the lender will be repaid in a timely manner.

1. A higher credit score could help you get a lower interest rate
2. You can get a free credit report from all three major bureaus at www.AnnualCreditReport.com.
3. Your credit score doesn't have to be perfect to get a loan ... most lenders want buyers to have a minimum of 620 but FHA will consider as low as 500
4. Credit utilization, the percentage of credit used compared to what is available, should be kept below 30%; amounts higher could negatively affect your credit score.
5. There is a difference between a soft and a hard credit pull.  The former doesn't hurt your score, but the latter can lower it a few points.  Try to avoid multiple hard inquiries.
6. Credit cards, bank loans, car loans and home loans are considered "good credit" and a mixture of different types is helpful compared to only a car loan.
7. Opening new credit accounts after you apply for a mortgage can hurt or even prevent you from being approved on the mortgage.

There are five components to making up a credit score.  35% of the weighted average is determined by payment history like paying on time.  The next highest item is the amount owed and counts for 30% of your score.  This component deals with credit utilization which is expressed as a percentage of what you owe divided by what is available.

The length of time you have had credit established accounts for 15% of the score.  New credit and the types of credit accounts are weighted at 10% each.  Opening several accounts in a relatively close period will negatively affect your score.  While it isn't necessary to have all types of credit like credit cards, installment loans, finance company accounts and mortgage loans, the types of credit in the mix are evaluated.

If you need help increasing your score, a trusted lender that provides your pre-approval can also make suggestions that would improve your credit.  Contact your real estate professional to get a personal recommendation of a trusted mortgage lender.

Waiting for the Mortgage Rates to Come Down

Waiting for the mortgage rates to come down before you buy a home may not be a good decision.

If you are correct, and the rates do come down by two percent, the savings you benefit from a lower rate will most likely be devoured by the appreciated price increase.

As of 12/8/22, the 30-year fixed-rate was at 6.33% which is close to the highest level since mid-2008.  If the rate drops to 4.7% in three years but the price increases by 5% a year, a $400,000 home today, will cost $463,050 three years from now.

An increasingly, popular option that more buyers are considering is to purchase the home today with an adjustable-rate mortgage that could give them a 5.00% rate for five years.  Then, refinance to a fixed rate when rates come down.

Not only will the buyer have lower payments with the ARM, but the buyer will also own the home, and benefit from the appreciated prices which will build equity in the home and increase their net worth.

Mortgage rates have increased over 3% in the first three quarters of this year.  Some would-be buyers are wishing they had a do-over so they could get into a home at a lower rate. The current differential between the fixed and adjustable rates could lower the monthly payment. 

The lower adjustable-rate could save a buyer $300 a month during the first period of five years.  At any point during that period, they could refinance at a better interest rate should it become available.  However, if the rates do start trending down, the homeowner might decide not to refinance because the rate on the ARM would have to go down at the next adjustment period to reflect the lower of rates in the market.

Mortgage rates have been low since the housing crisis that caused the Great Recession.  The government kept them low to build the economy.  Then, the Pandemic threatened the economy, and the government spent a tremendous amount of money to bolster it which led to inflation which is what is causing the rates to increase currently.

When inflation is under control and back to acceptable levels, the rates should lower.

Home prices are a different situation.  The recent rise in mortgage rates has caused home prices to moderate because it affects affordability.  Inventories are still low and there is a pent-up demand for housing from purchasers unable to buy during the pandemic.

This coupled with millennials reaching household formation age and insufficient home building to keep up with demand for the last decade, prices are expected to continue to rise.  The rate of appreciation could even increase when rates come down which would also affect affordability and demand.

Buyers who feel they missed a window of opportunity to buy before rates started increasing should investigate financing alternatives.

Downsizing Options

Opportunities exist for a subset of homeowners, possibly in their 60's to 70's, who want to downsize to smaller homes for convenience, less maintenance, change of lifestyle, or to save money.  These homeowners are more likely to have large equities and will not feel the same constraints that are keeping younger owners in their homes due to the substantial increase in mortgage rates in the past year.

In some cases, there may be enough equity in their relinquished home to pay cash for the replacement.  In other situations, the loan-to-value may be so low that even with higher mortgage rates, it won't be as expensive as purchasing with a minimum down payment.

Some downsizers may be moving from a high-cost area to a lower-cost area where they can get more home for the dollar and may even be able to free up cash for investment or special projects.

It is more likely that older homeowners are living in a property above the median price.  If a seller has a $750,000 home with no mortgage and they're wanting to downsize to a $400,000 home, 7% mortgage rates are probably no concern at all because they're going to pay cash.  In a situation like that, even considering sales costs on the relinquished home and acquisition costs on the replacement home, there will be cash proceeds available.

If you're considering downsizing, or possibly, have parents in this situation, feel confident that you have different options than first-time buyers becoming a homeowner.  Your equity and the fact that you're buying a smaller home can help you achieve your objectives even in a volatile market.

Let's connect and explore the different options that are available.

Concessions Make Your Home More Marketable

Sellers offer concessions as an incentive to encourage buyers to purchase their home.  The concessions, paid for by the seller, benefit the buyer in ways that may be more appealing than possibly, being able to purchase the home for a lower price.

In some situations, buyers have good income, credit, and even the down payment to purchase a home but not necessarily enough cash reserves to pay their closing costs.  Another possibility is that there could be a feature in the home that the buyer wants replaced but can't afford to do it themselves.  If the seller agrees to make that improvement, it could cause the buyer to act favorably.

Concessions could include paying the buyer's closing costs, buying down the interest rate, or any possible combination of physical improvements or upgrades to the property.

Sellers, occasionally, question why they should provide concessions to a buyer.  It should be obvious; it improves the marketability of the home.  With less than the normal number of homes on the market, it may appear that the seller has the advantage and may not need to offer concessions.

Today's market is different.  The decreasing number of sales and increased days on the market are resulting from a smaller than normal pool of buyers.  Interest rates have more than doubled in 2022 which has made houses less affordable.  Buyers who qualified last year but couldn't find a home to buy, may be able to find a home today but their debt-to-income ratio has increased significantly, causing them to qualify for smaller mortgages.

Most buyers, especially in lower priced range homes, can't afford to put more money down and human nature tends to discourage them from considering a smaller home.  For that reason, they are forced out of the market until rates come down.

To counteract this dilemma, sellers are willing to consider making concessions, something that builders have successfully used for years to sell their inventory without lowering their prices that will have a direct impact on comparable sales which affects appraisals.

Concessions can take on different forms.  A seller could offer to pay the buyer's closing costs or pay points for the buyer to get an FHA or VA loan.  Another option would be to pay for a 2/1 buydown that would lower the buyer's payments in the first two years of the mortgage.

Any number of improvements could be offered to the buyer like appliances, floor covering, countertops, roof, fence, etc.

Typically, these would be included in the listing agreement and promoted in the listing description through MLS and other public media.  When a sales contract is written, it needs to be included so that there is no misunderstanding between the parties and that the lender is completely aware of the concessions.

To avoid possible disputes, it is also recommended that a dollar limit is attached to the concession.  For instance, "Seller to pay up to 3% of the sales price in buyer's financing concessions" or "Seller to escrow up to $5,000 for appliances at buyer's discretion."

Concessions have not been used much in the past fifteen years, but changing times requires us to use different methods to be successful.  Sellers can offer concessions and buyers can ask sellers to make concessions in the purchase agreement.

If your agent is not familiar with concessions, it may be that they have never used them before.  They are commonplace and legal, within limits, if they are disclosed.  The benefit is that concessions can improve marketability of a home and put a transaction together between parties that would not be possible otherwise.

Building Your Home Buying Team

There are a lot of professionals involved in the homebuying process.  And when these people can function as a team, the buyer is much more likely to end up where they want to be...in their new home.

The lender is an integral part of the team unless you are going to be paying cash.  Trust is very important when selecting this person because they are going to qualify you for the mortgage you need.  The interest rate and fees should be fair based on your credit, income, and the market. 

You'll want someone who can close at the rate and terms that were quoted.  In a rising market, you may want to consider locking in the rate so that it doesn't go up before you close.

The appraiser is hired indirectly by the lender to determine the value of the home as part of the loan approval process.  During the financial crisis of 2008, a process was created by the Dodd-Frank Wall Street Reform and the Consumer Protection Act to limit direct contact between borrowers, lenders, and appraisers.

This requirement protects appraisers from being influenced by a lender.  Sometimes, an Appraisal Management Companies, AMC, may assign an appraiser who may not be familiar with a particular area or type of property.  The real estate agent can act as a liaison to provide additional information about the property and area that the appraiser would not necessarily know about initially.

Once a contract has been fully agreed upon, one of the first steps is for the buyer to have a home inspection made by a professional.  While most states require these professionals to be licensed, 14 states do not require one to perform inspections.

In addition to being licensed, some inspectors belong to professional organizations that provide specialized education and suggest levels of performance.  Recommendations from friends who have recently purchased a home would be helpful.  Your agent may give you several names of inspectors and you can ask for the buyer's contact information who used them recently to verify their results.

Pest control is not usually included in the normal home inspection.  These are also licensed specialists who are concerned about termites, other insects, and vermin.  If you do not have experience with a pest control company, recommendations from friends and your agent can give you a place to start.

Property casualty insurance is required by the mortgage holder but even if you were paying cash for a home, it would be prudent to have insurance.  A homeowners' policy provides the broadest coverage with fire and other named perils including burglary for both the dwelling and the contents. Liability is packaged with the other coverage to protect you if someone is hurt while on your property.

Deciding based on policy price may not present a complete comparison.  Another consideration is how the company handles claims in both time and settlement.

The title insurance provider is usually named in the sales contract.  There are two different policies that are usually offered simultaneously but paid for separately.  The owner's title policy guarantees the buyer they are getting a clear and marketable title while the mortgagee's title policy guarantees the lender that they have an enforceable lien.

The Real Estate Settlement Procedures Act gives the buyer the right to determine the provider.

Surveys are commonly required when new mortgages are established to make sure there are not encroachments on the property lines.  Even in a cash purchase, a buyer may want to get a survey for the same reason.  In some cases, lenders might accept a seller's previously obtained survey.

The title company usually order's the survey based on instructions from the contract or lender.

A real estate attorney is required in some states to be involved in all transactions.  In other situations, a real estate attorney may be involved to draw the legal documents but in no way is representing the interests of a specific person.

A buyer or seller can consult an attorney and have them represent their interests in the transaction.  Once a buyer understands if an attorney is not required in a real estate transaction, they are free to decide if they want legal representation.

The listing agent is hired by the seller when they place their home on the market for sale.  In many cases, the listing agent has a fiduciary duty to put the seller's interest above their own.  These duties include loyalty, confidentiality, disclosure, obedience, reasonable care and diligence and accounting.

The buyer's agent will interface with the listing agent in the various negotiations that will take place beginning with showing the property, offer, acceptance, and all the other steps that will lead to the settlement of the sale.

Agency describes a legal relationship and can apply to seller's and buyer's agents and is created once an agreement is signed; a few states have provisions for oral agreements.  Members of the National Association of REALTORS� subscribe to a code of ethics that describes their practice and behavior to clients and the public.

There are many professionals involved in the purchase of a home.  From a buyers' standpoint, it is helpful to have one person who is familiar with the process to be coordinating the efforts of the different parties to finish with a settlement and possession.

There are a lot of steps and even if a buyer has been through the process before, they may not have the experience to anticipate difficulties and solve issues that could derail the transaction.  The role of a third-party negotiator is a valuable role that the buyer's agent plays.  While the buyer is in control, the buyer's agent can provide information and background necessary for sound decisions.

The purchase of a home is the largest investment most people make.  Like it takes a village to raise a child, it helps to have a team to buy a home.  Finding an agent to keep your best interests at heart is the first team member you need to select.  From there, your agent can help you find the other team members.

For more information, download the Buyers Guide and make an appointment, in-person or virtually, to find out how they can put together your Homebuying Team.  In that appointment, ask the agent to explain agency and its benefits to you in your upcoming transaction.

Securing Your Retirement

Social Security was established, on August 14, 1935, to take care of the country's elderly in their retirement years.  Today, about 65 million or 1/6 of Americans collect benefits and the average monthly retirement amount received in January 2022 was $1,614 per month or about $19,370 per year.

This annual Social Security benefits exceed the 2022 Federal poverty level of $13,590 for individuals and $18, 310 for a family of two but from a practical level, it is nowhere near enough to be comfortable in your "Golden Years."

Every adult in the work force, can go to SSA.gov to find out what to expect to receive based on their planned retirement age.  Since it probably won't be the amount you need to retire comfortably, at least you'll know how short you'll be so that you can devise an investment plan.

There's a quick formula to estimate the investable assets needed by retirement to generate a certain income.  The target annual income is divided by a safe, conservative yield to determine the investable assets needed.

A person wanting $100,000 annual income generated from a 5% investment would need investable assets of $2,000,000.  If a person had $500,000 now, they would need to accumulate $1.5 million more by the time they retire.  A 50 year old wanting to retire at 65 would need to save about $100,000 a year for 15 years.

If trying to save an extra $100,000 a year seems impossible, consider the leveraged growth available in rental real estate.  The use of borrowed funds can contribute to the yield earned by the investment.  By reinvesting the positive cash flows from the rental to retire the mortgage, the home could be paid for by retirement, providing more cash flow when it is needed the most.

One of the bright spots in investments is rental real estate which is also open to self-directed retirement savings.  Single-family homes offer high loan-to-value mortgages at fixed interest for long terms on appreciating assets with tax advantages and reasonable control.  Price appreciation alone has outpaced inflation for the last fifty years.

Many Americans have participated in Individual Retirement Accounts, SEPs, 401(k)s or other types of retirement that would supplement the Social Security benefits.  Many of these are invested in mutual funds which have lost about 20% in value in 2022.  With inflation at a 40-year high, many retirees and future retirees are concerned about their income from these investments.

Retirees want a safe and secure investment whose income will not be eroded by inflation.  Single-family homes, in predominantly owner-occupied neighborhoods, meets those requirements.  Home prices have experienced double-digit appreciation in the past two years and around 5% for the last five decades.

Decade	Home Prices Average Annual Increase	Consumer Prices Average Annual Increase
70's	9.9%	7.2%
80's	5.5%	5.6%
90's	4.1%	3.0%
00's	2.3%	2.6%
10's	4.9%	1.8%
20 + 21	12%	3%
		Source: NAR & Bureau of Labor Statistics

 

Increased mortgage rates coupled with rising home prices have sidelined many would-be purchasers who want to be in a home.  Since they cannot buy at this time, the next best alternative is to rent a home.  This has added to the increased demand for single-family homes in good neighborhoods which have resulted in increased rents.  While this isn't good news for tenants, it is for investors.

Investing in rental real estate could be a way for you to increase your retirement income and grow your net worth while avoiding the volatility of the stock market.  Current homeowners already are aware of the value of homes as well as the maintenance they require.

To get more information about single-family homes for rentals, download our Rental Income Properties guide.  You can also schedule a time with me to get answers for any questions you may have and find out about what is available now.

Homeowners Need Resources

Managing an asset worth hundreds of thousands of dollars is a responsibility that requires attention to details such as timely payment of the mortgage, home repairs and maintenance, upkeep, and oversight on financial issues including taxes, insurance, and other things.

Depending on how long you've been a homeowner, you may have faced some of the decisions common to homeownership.  Occasionally, there could be something new that you haven't had to deal with in the past.  This is where having a resource you can rely on becomes valuable.

During the buying or selling process, it is natural to turn to your agent for information and advice but during those periods in between where do you go for counsel?  Sure, you can turn to the Internet but that may not be the best place to get advice for your situation.

We encourage you to think of us as your "source of real estate information"; someone you're comfortable with asking a question and confident that you'll get good advice.  We not only want to be there for you when you buy or sell, but all the years in between.

By helping you with the day-to-day decisions of homeownership, we believe we can develop relationships that will lead to future sales when you move again, as well as recommendations to your friends who need the services of a trusted real estate professional.

Whether you simply need the recommendation of service provider, a trustworthy mortgage professional, an estimate of your current market value, or advice on what kind of improvements are best to consider, we're happy to share that information with you.

Just a few of the kind of questions we get almost every week:

• Can you recommend a good (plumber, painter, handyman, etc.)
• What is the current value of my home?
• How do I challenge a property tax assessment?
• When should a homeowner refinance?
• How often should we update our personal home inventory?

We want to be your "Go-To" person for everything to do with real estate.  If you have a real estate question, please call us at .  If we don't have the answer, we'll find it for you or at least, point you in the right direction.

Waiting for the Mortgage Rates to Come Down?

Waiting for the mortgage rates to come down before you buy a home may not be a good decision.

If you are correct, and the rates do come down by two percent, the savings you benefit from a lower rate will most likely be devoured by the appreciated price increase.

As of 10/27/22, the 30-year fixed-rate was at 7.08% which is the highest level since April 2002.  If the rate drops to 5% in three years but the price increases by 5% a year, a $400,000 home today, will cost $463,050 three years from now.

An increasingly popular option that more buyers are considering is to purchase the home today with an adjustable-rate mortgage that could give them a 5.96% rate for five years.  Then, refinance to a fixed-rate when rates come down.

Not only will the buyer have lower payments with the ARM, but the buyer will also own the home, and benefit from the appreciated prices which will build equity in the home and increase their net worth.

Mortgage rates have increased over 3% in the first three quarters of this year.  Some would-be buyers are wishing they had a do-over so they could get into a home at a lower rate. The current differential between the fixed and adjustable rates are substantial and could lower the monthly payment. 

The lower adjustable-rate would save a buyer $323.90 a month during the first period of five years.  At any point during that period, they could refinance at better interest rate should it become available.  However, if the rates do start trending down, the homeowner might decide not to refinance because the rate on the ARM would have to go down at the next adjustment period to reflect the lower of rates in the market.

Mortgage rates have been low since the housing crisis that caused the Great Recession.  The government kept them low to build the economy.  Then, the Pandemic threatened the economy, and the government spent a tremendous amount of money to bolster the economy which led to inflation which is what is causing the rates to increase currently.

When inflation is under control and back to acceptable levels, the rates should lower.

Home prices are a different situation.  The recent rise in mortgage rates has cause home prices to moderate because it affects affordability.  Inventories are still low and there a pent-up demand for housing from purchasers unable to buy during the pandemic.

This coupled with millennials reaching household formation age and insufficient home building to keep up with demand for the last decade, prices are expected to continue to rise.  The rate of appreciation could even increase when rates come down which would also increase affordability and demand.

Buyers who feel they missed a window of opportunity to buy before rates started increasing should investigate financing alternatives.  Reach out to us and we can discuss the options that are available.

Finding Funds for a Down Payment

A soft second loan, sometimes called a silent second, is subordinate to the first mortgage, whose payment is deferred or forgiven until a specific date or the resale of the property.  This would mean that buyers would not have to contend with regular payments thereby keeping their debt-to-income ratio lower and more affordable.

While normal lending institutions may not be open to such types of financing, family and friends may be.  In some cases, these relatives and friends may be inclined to make a gift to help buyers get into a home.  Instead of an outright gift, if the person makes the loan, they have options to be repaid at some point in the future or in other cases, they could forgive the debt but don't have to make that decision today.

There are more than 2,000 down payment assistance programs nationwide.  State, county, and city governments run many of them.  Other programs could be from churches, employers, non-profit organizations, regional Federal Home Loan Banks, federally recognized Native American tribes and their sovereign instrumentalities or public agencies.

Various local or state Housing Finance Agencies have used "soft second" mortgages for down payment and closing costs to eligible borrowers.  For example, the Indiana Housing and Community Development Authority offers down payment assistance in the amount of 3 to 4 percent of the purchase price of the home at zero percent interest with no monthly payments. The loan is fully forgiven after two years if the borrower remains in the home.

In a more mainstream application, let's say that a parent or other relative was willing to help a buyer with their down payment and possibly, closing costs to purchase a home now.  However, they will need the money for their retirement at some determinable point in the future, possibly, five to ten years.

The sales contract would disclose a "soft second" together with the terms which could include interest and due date such as ten years from execution of note or when they sell or refinance the property whichever comes first.   It would also specify that no payments would be made until the maturity.

The mortgagor of the "soft second" may also retain the right to forgive the loan.

The lender of the first mortgage must be aware of the intended soft second and it should be mentioned in the sales contract so it can be underwritten by the lender appropriately.  Failure to disclose a soft second to the lender is illegal and borrowers who fail to do so could be prosecuted.  Mortgage fraud is classified as a Class C felony under federal law.

Both liens would be recorded for public record for the safety of all parties concerned.

Since this procedure is not commonplace, the advice is to run this concept past your lender prior to writing the offer.  With full disclosure in the contract and the proper terms to satisfy underwriting, you should be able to structure a transaction to get a qualified buyer without a down payment into a home.

Some things to consider in the second mortgage note is a firm due date far enough down the road that it isn't going to trigger risk issues.  An example would be ten years or when the property is sold or refinanced, whichever comes first.  Specify an interest rate and arbitrary payments which would give the buyer the option to make payments if they wanted.  By doing this, the underwriter can calculate payments and amount owed at the term.

In today's economy, there are a lot of companies that have rich cash reserves, as well as plenty of individuals also.  Once buyers have identified a friend or relative to become the lender on the second mortgage, your agent will help you find a lender for the first mortgage who is willing to participate.

The buyer will become pre-approved and the process of finding the home can begin but not until the other steps have been finished.

"Do you feel lucky? Well, do ya?"

You may remember the famous line in the Dirty Harry movie when Clint Eastwood has just had a shootout with bank robbers and is standing in front of the lone surviving thief who is considering going for his gun. Harry with his gun pointed at the bad guy says to him ""Did he fire six shots or only five? Well, to tell you the truth, in all this excitement, I kinda lost track myself. But being this is a 44 Magnum, the most powerful handgun in the world and would blow your head clean off, you've gotta ask yourself one question: Do I feel lucky? Well, do ya?" 

Our economy has had a long recovery from the great recession, due in most part to the housing crisis of 2007-2009.  Then, the Pandemic hit in 2020 which tanked the worldwide economy but the surprise to homeowners happened to be housing.  2021 became a red-hot market with prices going up by 21% nationally. 

In 2022, mortgage rates have increased by four percentage points and haven't been this high since 2008.  Inflation, at the end of September, reached a 40-year high at 8.2%.  The Fed recently said they'll continue raising rates until they can get inflation near their target of 2% annual rate.

People who own homes have seen their values go up dramatically and so has their net worth. Due to the extremely low inventories and the maturing millennial market, there is a lot of pent-up demand for housing.

This leads us to the scene in the movie.  You may be considering buying a house now but at the same time, you're thinking "Have prices and mortgage rates hit the top of the market so they'll start coming down or will they continue to go up, making it cost more to get into a home?"

The facts are that the U.S. is the strongest economy in the world.  The housing bubble of 2007 was created by over-inflated property values and predatory lending practices.  Those conditions don't exist today.  There is a housing shortage in America due to not enough homes being built to keep up with demand and people staying in their homes longer.

Homeowners have record amounts equity in their homes and foreclosure rate hit a historic low at the end of 2021 even though it edged up a bit in spring of 2022 as reported by CoreLogic.

Homes are expected to continue to appreciate but not as fast as they did in 2021.  The revised predictions for 2022 appreciation vary from Fannie Mae at 16%, Freddie Mac at 12.8% to NAR at 11.5%.

NAR Senior Economist Nadia Evangelou recently said "Mortgage rates are a heartbeat away from the 7% threshold. According to Freddie Mac, the 30-year fixed mortgage rate rose to 6.92% from 6.66% the previous week. While inflation remains elevated, mortgage rates will continue to move up, making homeownership even further out of reach for many."

If the home you could buy this year for $500,000, will cost you $550,000 next year and the mortgage rate goes up from 6.5% to 7.5%, the payment will go from $2,844 to $3,461 based on a 90% mortgage for 30-years.

If interest rates are temporarily high based on the Fed's position to lower inflation, a home could be purchased at today's price and refinanced later when the rates come down.  5/1 adjustable rate mortgages allow a borrower to lock in a lower initial rate for five years which would allow a person to find the best time to refinance.

So, back to the movie scene... "you've gotta ask yourself one question: Do I feel lucky? Well, do ya?" 

When will the market turn?

Housing affordability has declined dramatically in 2022 due to continued rising home prices and a three-percentage point jump in mortgage rates.  Based on the popularity of Google searches for "housing bust" or "housing bubble", it could be surmised that buyers are anticipating relief, but they are probably not going to see it anytime soon.

Home price appreciation is moderating and is down from the 20% level experienced in 2021.  Some of the major industry prognosticators are estimating anywhere from 9% to 14% for 2022.  Interest rates are expected to continue to rise through the end of 2022 and could be at 7%.  Freddie Mac 30-year fixed-rate mortgage was 6.66% on October 6, 2022.

Even though homes currently for sale increased to 3.2 months in August 2022, it isn't that much more than it was for the same month in 2021 when it was at 2.6 months.  Most markets are still entrenched in favor of sellers because a balanced market between buyer's and seller's is at six month's supply.

While buyers may be feeling that a new home is no longer affordable, there are several affordability indexes that provide a baseline for objective measurement.  The National Association of REALTORS� produces a monthly index.  Affordability is determined by indicating a median income person/family can afford to purchase a median priced home with a 20% down payment based on a 25% qualifying ratio for monthly housing expense to gross monthly income. 

The index is structured so that a value of 100 indicates that a family with the median income has exactly enough income to qualify for a mortgage on a median priced home.  When the index is above 100, the family has more than enough to qualify.

The NAR Housing Affordability Index for 2019, 2020, and 2021 was 159.7, 169.9 and 152 respectively.  It was 143.1 in January and by April had decreased to 108.1 and the preliminary number for June is 98.5.  The decrease in the index is directly affected by rising interest rates and home prices outpacing family income.

Home sales were seasonally adjusted in August to be 4.8 million which is down .4% from the previous month and down 19.9% from August 2021.  Lower sales are partly a function of a smaller pool of eligible buyers and concerns about a variety of economic conditions.

This may not sound like good news for buyers whether they are labeled first-time or move-up, but it is an objective view of the market.  It has become more expensive to buy a home now and will continue to increase in the future. 

Getting into a house using whatever devices are necessary can at least put the momentum on your side.  Homes are appreciating faster than inflation and the fact that leverage improves the growth rate due to using borrowed funds to buy the home is also to the buyer's advantage.

So, getting back to the original question "when will the market turn to make homes more affordable?"  It may not be a dramatic change but more likely, a subtle one.  Prices will moderate by still appreciating but not as much as in 2021.  Inventories will increase slightly but won't affect price because the low supply has been almost a decade in the making and it will take time to reach balance in the market.

Mortgage rates are not as low as they were, but they never were before in the history of the U.S.  Millions of people had mortgages in the 1980's that were as high as 18.5%.  Buyers financed the homes at the going market rate, sometimes with creative financing, and refinanced the properties later when the rates came down and the values had gone up.

Real estate is still a great hedge against inflation, and many times, the largest and best investment individuals have.  The Federal Reserve Survey of Consumer Finances found that homeowner's net worth is 41 times greater than renters.

Another Tool to Improve Affordability

The rapid rise in mortgage rates during 2022 coupled with continued appreciation of home prices have limited the number of buyers in the market which is reflected by the lower number of home sales currently.  "It's a fact that many households are impacted by higher mortgage rates as they no longer earn the qualifying income for the median-priced home." Nadia Evangelou, NAR Economist

One of the things that agents are doing to help buyers lower their house payments is to suggest an adjustable-rate mortgage.  The rates on these types of loans are tied to indexes that reflect the current market rates and produce less risk for the lender.  The payments adjust on the anniversary date based on the index plus margin named in the note.

While many people think that they only adjust upward, they also adjust downward when the index indicates it.  For the week of September 29, 2022, the Freddie Mac 5/1 ARM was 5.03% compared to the 30-year fixed-rate of 6.70%.

Another tool that experienced agents are using to address affordability issues are interest rate buydowns.  In recent years, there have not been many buydowns used because interest rates were already very low, but now, more people are considering them again.

A buydown is prepaying the interest on a mortgage at the time of closing to lower the payment for a specific period or for the term of the mortgage.  Obviously, it would be more expensive to buydown the rate for the whole term of the mortgage.

Either the seller or the buyer can buydown the rate and it would be specified in the sales contract.  From a practical perspective, sellers in the recent past haven't had to consider this option because of the high demand and multiple offers that were commonplace.  Now that sales have slowed, and both inventory and market time is increasing, some sellers want to make their homes more marketable and are seeking a competitive advantage.

A common temporary buydown is called a 2/1 which reduces the payment in the first two years of the loan by calculating the borrower's payment at 2% less than the note rate for the first year and 1% less than the note rate for the second year.  Years three through thirty, the payment would be the normal payment at the note rate.

A buydown is a fixed rate, conforming mortgage that the borrower must qualify at the note rate to indicate that borrowers will be able to afford the mortgage after the first two years of lower payments.

As an example, on a $400,000 sales price with a 90% mortgage at 5.54% interest for 30-years, the normal principal and interest payment would be $2,053.08.  By using a 2/1 buydown, the payment for the first year would be at 3.54% interest, 2% lower than the note rate, making the payment $1,624.61.  The second year, it would be at 4.54% interest, 1% lower than the note rate, making the payment $1,823.63.

The buyers' payment would be $428.47 lower each month for the first year and $220.45 a month lower for the second year.  The total savings would be $7,787.04 which becomes the cost of the 2/1 buydown.  This amount must be paid at the time of closing by either the seller or the buyer.

 

2/1 Buydown Example	1st Year	2nd Year	3rd ... 30th Years
Interest Rate	4.7%	5.7%	6.7%
Principal & Interest Payment	$1,867.10	$2,089.44	$2,323.00
Monthly Savings	$455.90	$233.56
Annual Savings/Total Savings	$5,470.80	$2,802.72	$,8,273.52

The most prevalent providers of buydowns in the past have been builders.  It is a concession like paying closing costs or upgrades for the buyer.  As sales have started to slow, some builders in particular price ranges and areas are currently considering this benefit to close more sales.

To summarize: a buydown is a fixed-rate mortgage where the interest is pre-paid for a period to help the borrower with lower payments for a time.  A 2/1 buydown allows the buyer to have significantly lower payments in the first two years which will give them time to settle into the house while they can be confident of what the payment will be in years three through thirty.

The pre-paid interest is deductible for the buyer, even if the seller pays for it.  This is something that the buyer will want to talk about with their tax advisor when they are doing their income tax for that year.

If you are selling a home, talk to your listing agent about this option to increase marketability.  If you are a buyer, discuss this as an affordability option.  If your agent isn't familiar with buydowns, ask them to research it with a trusted mortgage officer.  Buydowns are legal and have been available for decades.  The determining factor may be whether the market has softened enough that sellers are willing to consider them.

Five Factors that affect the Sale of Any Home

Owners directly control four of the five factors that affect the sale of any home: price, location, condition, terms, and the agent you select.  The one thing you can't control is the location of the home, but you can adjust the other factors to compensate for failings.

The seller controls the price of the home which determines its positioning in the marketplace.  If is priced too high, it will take longer to sell and, in some cases, for less than what it should have sold for because when it doesn't sell immediately, it is assumed that there must be an issue with it.  If it is priced too low, the owner will not realize as much of their equity as they should.

Not pricing the home in the proper search brackets could keep the property from being exposed to potential and likely, buyers.  For example, if a home is priced at $399,000 to follow an age-old retail marketing principle, many of the most likely buyers will never know about it because they are searching for properties in the $400,000 to $450,000 range.

The seller also controls the condition of a property which affects not only the marketability of a home but indirectly, the price.  Homes in the best condition appeal to more buyers because for the most part, they are using their available cash for the down payment and closing costs and may not be able to afford to make cosmetic or more expensive improvements to the property.

Clutter can keep buyers from seeing your home, and more importantly, it will keep them from seeing themselves in your home.  There are three basic causes of clutter: there is too much stuff in the home; there is not enough space in the home; and there is no organization.

Selling a home is about positioning it to sell which sometimes means temporarily or permanently getting rid of things that make the home look small or distracts the buyers from seeing its potential for them.

Terms are the financial preferences established by the seller.  In a competitive market with multiple bids, a seller may not have to offer any terms such as a financing, appraisal, or inspection contingencies.  This will restrict the number of buyers who are financially able to pay cash and are willing to do so.

In lower price range homes, there could be a wealth of qualified buyers that need to use low down payment options, closing cost assistance from the seller, or other things.  When the seller consents to offer a variety of terms, the market of potential buyers increases.  The seller can still select the most qualified if they are not limiting protected classes.

The fourth marketing factor that the seller controls is the agent they select to represent them in the sale of the home.  Selecting the "right" person to market your home is very important and worth careful consideration.

Your agent will be the manager of the entire marketing process. They'll position your home to be competitive with the other homes in your price range and area while attracting the broadest range of buyers possible.  Your agent will offer advice on what needs to be done before the property is offered for sale.  Your agent can also offer recommendations for a variety of service providers if work needs to be done.

There are a lot of professionals involved in the sale of a home like lenders, title officers, appraisers, inspectors, insurance agents, surveyors, and the buyer's agent, just to name a few.  Your listing agent will coordinate the communications between the other professionals and negotiate directly with them.  Your agent's role as third party negotiator is critical and you need to feel confident in their ability to serve your best interests.

1. Price
   • Too high; not realistic
   • Doesn't acknowledge Internet search range
2. Location
   • A poor location can negatively affect price
   • Since location cannot change, must adjust price for a poor location
   • Condition
   • Clutter
   • Drive-up appeal
   • Deferred maintenance
   • Odors
   • Carpets
   • Lack of updates
3. Terms (applicable to certain price ranges)
   • Buyer concessions like closing costs
   • Incentives like home warranty, appliances, floor covering, etc.
   • Buy-down interest rates
4. The Agent you select
   • Experience
   • Knowledge of neighborhood
   • Promotional expertise

For more information, download our Sellers Guide.

Gift Amount Increased for 2022

The limit for tax free gifts for 2022 is $16,000 and no tax is due to the donor or the donee.  There are provisions that would allow gifts higher than this amount providing the total lifetime gifts above the annual exclusion of $12.06 million for 2022 has not been met.

The donor and donee can be separate persons so that the aggregate tax-free gift for one-year amounts to more money.  For instance, a father and mother can gift $16,000 each to their married son in 2022 and an additional $16,000 each to the daughter-in-law for a total $64,000.

If the son and daughter-in-law used the money as a down payment to purchase a home, depending on how recent the gift occurred, the mortgage company might require a gift letter from the parents stating the amount was a gift and is not expected to be repaid.  Lenders may ask the exact amount of the gift, where it came from and the relationship involved.

Family members and friends with financial resources can become the catalyst that allows buyers with good credit and income but without a down payment to purchase a home.  Sometimes, the gift is looked at as an early inheritance that allows the recipient to show their gratitude and the donor to see the enjoyment and benefit of the gift.

In some situations, the buyers have saved enough money for a minimal down payment, but the gift allows them to put more money down that may help them get a lower interest rate or eliminate the need for private mortgage insurance.

The important thing involving gift funds is to have complete disclosure with the lender.  It is best discussed during the pre-approval process.  Your real estate professional should also know about it so they can guide you through the process.

Housing Affordability - Call to ARMs

Housing Affordability is negatively affected by both rising home prices and mortgage rates.  A 20% increase in nominal home prices and a 2% increase in the 30-year fixed rate mortgage since January have contributed to a 46 point drop in the NAR Housing Affordability Index.

The Index was 143 in June 2021 and is 98.5 in June of 2022. The Housing Affordability Index indicates whether a median income family can qualify for a mortgage loan with a 20% down payment and 25% qualifying ratio for monthly housing expenses to gross monthly income.

100 points is considered the tipping point.  As the Index rises above that point, housing is considered more affordable and as it declines, it is considered less affordable.

With affordability threatening to limit buyer's ability to purchase, more borrowers are considering an adjustable-rate mortgage.  For the last ten years, fixed-rate mortgages have been so low, only about 3% of borrowers used adjustable-rate mortgages.  

There is a lot of misinformation about ARMs that keeps some would-be buyers from even considering them.  Even before the housing crisis of 2007, many safeguards were put into place to protect borrowers.

"As long as the 'spread' between ARMs and fixed-rate mortgages continues, more first-time home buyers may choose ARMs because the lower mortgage rate gives them a purchasing power 'boost' over the 30-year fixed mortgage rate."  Mark Fleming, First American Chief Economist

The potential ARM candidate is probably not a first-time homebuyer.  They should be tolerant to risk and more financially savvy with predictably increasing income.  These buyers may recognize that they do not intend to stay in the home for a long time. 

Adjustable-rate mortgages, generally start out at a lower-rate than a fixed-rate but can adjust, up or down, based on an independent index plus a specified margin and anniversary date that are referenced in the note.  Most ARMs have stated interest rate caps that limit the amount of adjustment of the rate both on a periodic basis and a lifetime.  FHA ARMs have a limit of 1% per adjustment period and a 5% lifetime cap over the original note rate.  Conventional loans, more commonly, have a 2% per adjustment period and a 6% lifetime cap.

A particularly popular type of adjustable-rate mortgage is referred to as a 5/1 which means the rate for the first period lasts five years and then, each adjustment period after that is for one year.  This allows a buyer to have stability in the rate during the first five years.  If they plan to sell in less time than that, they will not have to deal with the adjustment.

A 5/1 ARM will have a lower payment for five years because of the lower initial rate and assuming a worst case scenario, a conventional ARM could increase a maximum of 2% at the end of the first period which would put the rate at higher than the fixed rate at the time they started.  However, that is not where the breakeven point occurs.  It is not until all the savings from the initial period have been exhausted, that the ARM will become more expensive than the fixed-rate alternative.

An ARM Comparison can help buyers to determine breakeven point.  Let's compare a 5.66% FRM with a 4.51% 5/1 ARM with 2 and 6 caps.  A $450,000 30-year term loan amount will have a P&I payment of $2,600.41 for the fixed compared to $2,286.76 for the ARM.  The $317.65 monthly savings will accumulate for 60 months plus a $6,673 lower unpaid balance on the ARM due to a lower interest rate. 

The total savings in the first period would be $25,732.  If you assume that the payment would increase to the maximum at each adjustment period, the breakeven point will occur at 7 years and 4 months.  If you were to sell the property prior to the breakeven, the ARM would produce a lower cost of housing. 

One of the benefits for lenders making adjustable-rate mortgages is that they have less risk because the yield can change to reflect the current market.  Most ARMs must adjust down as well as up which means if rates do come down, the buyer can continue with the ARM at a lower rate or convert it to a fixed-rate at the, then, current rate.

Use the ARM Comparison to see where the breakeven point will be for you.  Get mortgage rates for FRM and ARM mortgages from Freddie Mac and download our Buyers Guide.

Surviving Spouse Sale Period

Married couples who own a home as joint tenants with rights of survivorship, the surviving spouse inherits the home, along with their basis, and it does not trigger a taxable event.  Unfortunately, the capital gain exclusion is reduced to a single person's share unless the survivor disposes of the property in the granted time.

Married couples, filing jointly, have up to $500,000 of capital gain exclusion on qualifying sales.  As a single taxpayer, the survivor is only entitled up to $250,000 exclusion of capital gain.  For instance, if the home at the time of death is worth $900,000 with a basis of $400,000, the gain is $500,000.  If the surviving spouse sells the home, their exclusion is only a maximum of $250,000 which would make the other $250,000 subject to long-term capital gains tax.

However, there is an exception to the rule that if a sale occurs within two years of the death of their spouse, the survivor is entitled to the $500,0000 exclusion if the ownership and use tests are met prior to the death.  The two-year period begins on the date of death and ends two-years after that date which means the property needs to close and fund by that anniversary. 

For more information contact your tax professional and download IRS Publication 523 and download the Homeowners Tax Guide.

Are prices and rates going to continue to rise?

One of the most talked about questions in the real estate market has to do with "Will prices continue to rise now that interest rates have increased dramatically this year?"

It is understandable to think that if the Federal Reserve is using interest rate increases to slow consumer demand, that it would also slow homebuyer demand to moderate prices.  Unfortunately for would-be homebuyers, it isn't the case.  High inflation, strong economic growth, low unemployment, and increased wage growth have been associated with high home price appreciation.

In a recent newsletter from First American, Chief Economist, Mark Fleming stated that historically, 90% of total inventory is from existing homes and homeowners are not moving as often as in the past.  Prior to 2007, the average tenure was five years.  After the housing crisis, between 2008 and 2016, the length of time spent in a home went to eight years.

Lawrence Yun, Chief Economist with the National Association of REALTORS� when talking about the May 2022 statistics: "Nonetheless, homes priced appropriately are selling quickly and inventory levels still need to rise substantially ... almost doubling ... to cool home price appreciation and provide more options for home buyers."  Median sales price rose to a new high of $403,800, up 10.8% from July 2021, while sales are down 20% year over year and inventory increased slightly to 3.3 months from 2.6 months in July of 2021.

In the beginning of 2022, Fannie Mae, Freddie Mac and NAR predicted home price appreciation would be 7.6%, 6.2%, and 5.1% for the year.  Their revised forecast has been increased to 16%, 12.8%, and 11.5%.  Buyer demand still exceeds inventory levels which is driving prices higher.

While the Fed does not set mortgage rates, it does determine the Fed Funds Rate which is charged by banks to each other for overnight funds.  The increases often affect the U.S. Treasury rates to increase and there is generally a reaction when the 10-year U.S. Treasury Note yields increase for the 30-year mortgage rates to increase also.

The National Association of REALTORS�, on their website, states "The Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data."  The Index uses the 30-year fixed rate mortgage as provided by Freddie Mac's Primary Mortgage Market Survey (PMMS).

Mortgage rates have gone up over 2% in the first half of 2022.  That dramatically affects the affordability of the home even if the price didn't increase, which it did.  A $360,000 mortgage at 3.05% in December 2021 would have a principal and interest payment of $1,528 for 30-years.  At 5.22% as of August 11, 2022, the P&I payment is $1,981 or a difference of $453 dollars or a 30% increase.

As of May 2022, homeowners are now staying in their homes 10.6 years.  Part of the reasons can be contributed to the pandemic, but a large degree is attributed to the lack of inventory.  Existing homeowners can sell their home for premium prices and in unusually short time frames, but the problem is finding a home to replace it.

The demand for housing still exceeds the supply and price are continuing to rise, although, maybe not as the same pace as 2021.  Many economists predicted that price appreciation would slow but CoreLogic reported "Home prices nationwide, including distressed sales, increased year-over-year by 20.9% in April 2022 compared with April 2021.  In the same report, CoreLogic predicted "...home prices are forecast to increase on a year-over-year basis by 5.6% from April 2022 to April 2023."

Another frequent question homeowners have is whether to wait to see if prices moderate and interest rates decline.  The probability is more likely for prices to continue to increase along with mortgage rates.  The consequences of waiting, in hopes of lower prices and rates, could totally price a person out of the market for the home they want.

Using a $400,000 home that could be purchased today at 5.22% on a 90%, 30-year mortgage, the P&I payments would be $1,981.  If the price appreciated only 5% in the next year and the mortgage rates were to go up by 1%, the payment would increase by $339 a month.  If a person stayed in the home for 7 years, the increased cost would be $28,458 and if they stayed for full term, it would cost them $121,965 more by waiting.

Increases in rates and prices have forced some people out of the market, at least temporarily.  For the fortunate ones, who can still afford to buy, even with the increases, acting now could save them tens of thousands and maybe hundreds of thousands depending on the price of the home.

Make an appointment with your real estate professional to get the facts on what you home is worth, the mortgages available, and the logistics to put it together for your best advantage.

Indecision Can Be Expensive

With all that is going on in the world, a global pandemic, supply chain issues, highest inflation in 40 years, the economic effects of a war in Ukraine, it can be overwhelming to think about when the right time is to buy a home.

On a local level, there is a pent-up demand for homes that have been building for years.  Builders haven't kept up with demand for new housing for almost 15 years.  Low inventory, especially in the past three years, have driven up prices nationally in 2021 by 20% and even though, the rapid appreciation seems to be moderating, in June, NAR reported that the median price home was up 13.4% from one year ago.

Then, of course, there are mortgage rates that have gone up by 2% since the beginning of 2022.  Appreciation and rising interest rates are a double whammy for people looking for their first home or to move up. It is completely understandable that many people are faced with so much that they are sitting on the sidelines waiting to see if things will improve.

Let's look at a hypothetical situation where buyers have the money for a 10% down payment on a $400,000 home but have decided to wait for three years to see if things improve.  They need to park their money somewhere safe so that it will be available when they feel comfortable to buy but also earn as much as they can to ward off the effects of historically high inflation.

If they were to put the $40,000 into a certificate of deposit for three years that pays 2%, they would earn $2,448 in interest.  With current inflation at 8.5%, the purchasing power of their down payment would diminish.

A slightly riskier alternative would be to invest it in the stock market or a mutual fund.  Assuming they picked the right stock or fund that earned 7%, their $40,000 would grow to $49,002 in the same three-year period.

The problem is that homes are appreciating much faster and the buyers would either pay more to get the same home or to pay the same price in three years, the home would not have the same amenities.    

If the buyer purchased the home today that appreciates an average of 5% per year, the equity in the home in three years would be $118,000 based on two dynamics: appreciation and amortization.  The wealth position at the end of the three years in the home is almost three times what it would be with the certificate of deposit and over twice as much as the stock investment.

Homes have appreciated more than inflation over the last fifty years.  The average home price appreciation from 1970 to 2020 was 7.16% compared to the average inflation for the same period which was 4.3%.  In 2021, home prices were up close to 21% nationally compared to 7% inflation. 

Connect with your real estate professional to find out the facts about the market, the various mortgages available, what you can expect to buy, and if you have a home, what it will sell for.  Good information can make a difference in making a good decision.  Download our Buyers Guide.

Moving Down in an Up Market

Selling and buying a lower priced home in an "Up" market can be to your advantage.  The advantage is to maximize the sales price on your existing home and replace it with a less expensive one.

Moving down in an "up" market may be to your advantage in multiple ways.  It is possible that your present home doesn't meet your current needs like it once did.  Making a move can allow you to "re-balance" the equity in your home to better reach your future goals.

The "up" market maximizes the sales price you can expect to receive, and it will free the equity in your home. A lower priced home will result in reducing your housing costs with lower property taxes, insurance, utilities, and maintenance...while improving your liquidity position.

It is not required to reinvest the proceeds of the sale.  You may decide to get an 80% loan-to-value mortgage on the replacement home to get the best interest rate and avoid private mortgage insurance.  This would allow you to put the excess proceeds into an income producing or growth investment, start a business, fund an education, buy a second home, take a spectacular trip, gift a down payment to a relative, or any other different projects.

The expression "other people's money" describes borrowing money and using it to invest with the expectations of earning more than the rate you're paying.  Mortgage interest is one of the most attractive ways to borrow money because it is generally the lowest rate compared to other types of loans while having the option to get a fixed-rate mortgage for up to 30 years.  Most other borrowed funds involve short terms and floating interest rates.

Rental real estate could be a possibility to invest part of the funds.  There is a shortage of available rentals which has caused rents to increase like homes have appreciated.  Single family homes for rentals provide large loan-to-value mortgages at fixed interest rates for long terms on appreciating assets with defined tax advantages and reasonable control not found in many other investments.  For more information, download our Rental Income Properties Guide.

Homeowners who have owned and occupied their principal residence for two of the last five years are entitled to exclude up to $250,000 of gain for single persons and $500,000 of gain for married persons filing jointly.  For more information, see IRS topic #701.

Contact your real estate professional to find out more information like potential sales price, what net proceeds you can expect to receive on a sale, available replacement homes, and the types of mortgages and rates available.

Showing How Earnest You Are

The expression "putting your money where your mouth is" demonstrates a monetary sincerity to what could be empty words.  In today's competitive market where multiple offers are common, sellers want as much assurance as possible that the buyer is sincere and will close on the sale.

The seller who accepts a contract expects the buyer to follow through but, in most cases, doesn't know the buyer either personally or by reputation.  The earnest money submitted by the buyer with the contract shows their commitment to the terms of the offer.

If the amount is relatively small, the seller could be concerned that the buyer may walk away from the contract if they change their mind before closing.  The lost time could be injurious to a seller who is trying to meet a deadline.

The more earnest money a buyer deposits indicates to the seller a higher level of commitment to the contract.  Except for stated contingencies in the sales contract, if the buyer fails to close on the sale, the earnest money could be forfeited.  Significant earnest money makes the seller feel more secure that the contract will indeed close. 

There certainly are a lot of things that can dictate how much earnest money is appropriate.  Local customs, price of the home and type of mortgage can all help to determine the proper amount.  In some areas, it may be common for it to be one to five percent of the purchase price.  In other areas, it might be a specific amount like $1,000 to $10,000 depending on the sales price.  It really comes down to whatever the buyer and seller agree is the proper amount. 

Another strategy is for the buyer to put up an adequate amount initially prior to inspections or other contingencies, and then, to put up an additional amount when the contingencies have been removed. 

The earnest money demonstrates the buyers' sincerity in making the offer and proceeding according to the agreement so the seller can take their home off the market and start making plans to move and give possession of their home.  A higher-than-normal amount could also help the seller to choose yours in a multiple offer situation.  Ultimately, both parties want to close as anticipated according to the contract and the earnest money helps facilitate that. 

Your agent can explain what is customary for your area and price range.  Many times, a disinterested party, like a title company, will hold the earnest money and the sales contract will provide how to dispose of it should the contract not close.