Financing a Major Remodel or New Construction

Question: We are deciding between buying a lot to build a new house on or expanding and remodeling our current home. Do you have a recommendation for a lender who can finance these projects?

Answer: Over the years, I’ve found that one of the best banks for construction or major remodeling loans, and a favorite amongst local builders, is Sandy Spring Bank. They are large enough to offer some excellent, customized products with great rates and local enough that relationships with builders and homeowners matter to the success of their business. That’s usually a good combination for a business, especially lenders.

I have worked with Skip Clasper (sclasper@sandyspringbank.com), a loan officer at Sandy Spring Bank, for years so I reached out to him to gather up some details on their popular construction and remodel loan products.

Remodel Loans

Sandy Spring Bank will give you a loan to finance the cost of your remodeling project based on the expected post-construction value of your home. Given how high market values are now, that means you can get a significant amount of financing to expand and remodel your home.

There are a few things that stand-out about the way Sandy Spring Bank handles these loans:

  • They offer 90% loan-to-value (LTV), meaning you can get financing for 90% of the future value of your completed home. Most banks limit their loans to an 80% LTV.
  • They accommodate a flexible draw schedule. Banks give borrowers/builders draws to pay for construction incrementally as the project progresses. Many banks offer their draws on a fixed schedule, but given the unexpected twists and turns construction can take, a flexible draw schedule makes for a better process for everybody.
  • You only pay interest on the money you have drawn from the loan so you only pay interest on the money you’ve used, not the money you will use
  • Interest rates are competitive with rates you will find on standard, non-construction loans. This is noteworthy because oftentimes specialized loan products require paying higher interest rates.

Construction Loans

A construction loan allows buyers more control over building a new home because it allows you to finance the purchase of the lot and construction yourself. That means you can purchase the lot you want (easier said than done) and choose the builder you work with, as opposed to hoping that the builder who acquires a lot you like is also a builder you want to work with.

Here are some highlights and key pieces of information about the Sandy Spring Bank construction loans:

  • You can purchase a tear-down/lot and finance the construction of your home with a single closing. After closing on the tear-down/lot, they will finance the construction, and then the loan will automatically convert into a permanent 30-year loan after the construction is completed.
  • The loan is interest-only until construction is completed, making your payments during the construction phase much lower
  • Sandy Spring allows cross-collateralization on construction loans, meaning they will include equity in your current home towards your future down payment when considering your loan application/qualifications for your construction loan
  • It will take 6-8+ weeks to finalize the loan on your tear-down/lot purchase, which may put you at a disadvantage in some cases if you are competing against buyers or builders who are paying cash or using a standard loan product that can close faster
  • All construction loans are Adjustable Rate Mortgages (ARMs), but can be refinanced into a fixed rate mortgage with a second closing
  • Interest rates are competitive with rates you will find on standard, non-construction loans. This is noteworthy because oftentimes specialized loan products require paying higher interest rates.

If you’d like to talk with Skip Clasper about Sandy Spring’s remodel, construction, or other loan products the best way to reach him is by email at sclasper@sandyspringbank.com or phone at 301-928-7523.

The Right Lender Makes A Big Difference

Question: Does it matter which lender/mortgage company I choose when I purchase a home?

Answer: Choosing a good lender is one of the most important decisions you make during the home buying process. In a competitive market like we’re in now, choosing the right lender goes beyond a low interest rate and access to good loan products; it can be the difference between having your offer accepted or passed over.

Stronger Offers

Better Pre-Approval: When I review offers on behalf of a Seller, I put a lot of value in the quality of the lender/bank who wrote the pre-approval letter for the Buyer. A lender who has taken the time to review credit and financial documents, and get a thorough understanding of the Buyer, means the risk of financing falling through is much lower than with lenders who generate pre-approvals based on a short form with inputs from the Buyer, without verification.

Most agents representing a Seller will contact the lender on the pre-approval letter to ensure they’re responsive, personally familiar with the Buyer’s financial qualifications, and are confident in closing based on the contract terms (price, settlement timeline, etc). Having a lender on your side who will answer the phone and understands the importance this communication can make all the difference in a competitive market.

Close Faster: Online lenders, larger banks, and credit unions often have difficulty closing in less than 35-45 days, but a good lender can often settle in less than three weeks. If you find yourself competing for a property, working with a lender who can close quickly will significantly increase the probability of your offer being chosen compared to a lender who needs at least five weeks.

Don’t Miss Settlement

Good lenders do not miss the settlement date. Their reputation and business rely on it. If you miss the contracted settlement date, you’re (usually) in default and expose yourself to risks including loss of Earnest Money Deposit, incurring the Seller’s carrying costs, or having the contract voided by the Seller.

A good question to ask your lender is where their staff works. There are quite a few people involved in getting your loan approved including the loan officer, processor, and underwriters. Lenders with a history of missing settlement deadlines often have staff working in different locations, that don’t regularly work together. If your lender works in the same physical office as those people, that’s a good indication that they can handle issues efficiently and have a higher probability of meeting the settlement date.

Don’t Get Duped (Interest Rate vs APR)

Be careful when you’re comparing interest rates, especially online rates. Make sure you’re comparing the Annual Percentage Rate (APR), not the interest rate. Many lenders advertise lower rates by including points (you pay cash up-front for a lower rate) or they charge higher fees. The APR is a measure of the total cost of the loan, including points, fees, and interest rate and allows for an apples-to-apples comparison.

Additionally, the advertised rates are often based on the ideal borrower profile and loan amounts. A true rate quote requires the lender to have your credit information, debts, income, purchase price, and down payment. Even with that information, I’ve seen lenders quote low rates to capture a Buyer’s attention and then increase the rate/fees once it comes time to lock everything in. Be careful and ask questions.

Reliable Pre-Approvals

A reliable pre-approval gives you the confidence that you’ll qualify for the loan you’re applying for. Weak pre-approval letters lead to surprises during the loan application process, which can lead to rejection letters, delays, and/or a lot of wasted time and money. The last thing you want is to find out you don’t qualify after you’ve spent money on a home inspection, appraisal, and started packing for a move that may not happen. Having a lender review all of your documents early also gives you time to fix credit scores, debt ratios, and more in order to increase your purchasing power and/or lower your interest rates.

Further, in competitive markets like this, it’s common for winning offers to waive the Financing Contingency (protects your deposit in the event you don’t qualify for your mortgage). Having a thorough pre-approval done can give you the confidence needed to waive this contingency, and be competitive, with limited risk.

Loan Consultant

In most cases, buyers should be considering multiple loan products and finding the best fit. This is particularly true if you’re buying and selling a property, if you’re exploring low down payment options, or if you’re planning to own the property for less than 10 years and can benefit from the lower rates of an Adjustable Rate Mortgage (ARM). A good lender will have access to a wide range of great products and be able to advise you on the type of loan that nets you the best long-term results.

If you’re considering buying or in the process of talking to lenders, I’d be happy to make some recommendations based on your financial situation, type of purchase, and goals. Feel free to reach out to me at Eli@EliResidential.com.

It’s a Great Time to Remove Mortgage Insurance

Question: Can you explain what Mortgage Insurance is and if there’s any way to get rid of it?

Answer:

What is Mortgage Insurance?

Mortgage insurance is an additional monthly or up-front fee added to a mortgage, usually set at .1%-1% of the loan amount, offered by either the government or private insurance companies to enable lenders to offer down payments below 20%. Mortgage insurance covers lenders for losses up to a certain amount if a borrower defaults on their mortgage.

Note: there are some sub-20% down payment products on the market for high-earning, high-credit borrowers that do not require Mortgage Insurance.

There are two types of mortgage insurance available:

  1. FHA mortgage insurance: FHA is a government program, which requires a down payment of as little as 3.5% of the sales price, and mortgage insurance is required on FHA mortgages, regardless of the amount of down payment.
  2. Conventional mortgage insurance: Conventional mortgages are home loans that are not insured or guaranteed by the government, as in the case of the FHA mortgage example. Many conventional loans are sold to Fannie Mae or Freddie Mac and thus follow these entities “conforming” guidelines.

Conventional or private mortgage insurance enables lenders to offer conventional loans with a minimum down payment as low as 3.0%-5.0%. Most 3.0% down conventional mortgages are restricted to low-to-moderate income borrowers.

How is the Fee Determined?

The cost of mortgage insurance will vary greatly, depending upon several factors:

  1. The amount of the down payment
  2. The qualifications of the borrower like credit score and debt-to-income ratio
  3. Whether the mortgage is an FHA or conventional loan
  4. The type of the mortgage such as a 30-year or 15-year loan

Mortgage Insurance Can Be Removed

If you have a Conventional Loan (not FHA), you can request that your Mortgage Insurance premium be removed from your payments once your equity reaches or exceeds 20% (loan-to-value/LTV is 80% or less). This can be a result of a natural equity increase through your monthly payments and/or through appreciating home value.

To qualify, you cannot have a late payment in the last two years and if you are making your case based on a higher market value of your home, the loan servicer will require a new appraisal (cost is usually around $500).

For Conventional Loans, your Mortgage Insurance is automatically removed once your LTV reaches 78% (equity reaches 22%) or you reach the midway point in your loan (15 years into a 30 year loan). Prior to hitting a 78% LTV, it is up to your loan servicer to decide whether to approve the removal of your Mortgage Insurance payment.

Key Takeaway

Given how much townhouse and single-family homes have appreciated recently, if you have Mortgage Insurance and have not made a late payment in the last two years, it’s a good idea to contact your loan servicer about having your home reappraised to see if you now have 22% or more equity and qualify for automatic removal or have 20%-21.99% equity and can apply for early removal.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

2021 Interest Rate Projections

Question: Do you expect mortgage rates to increase in 2021?

Answer: Happy new year everybody! Historically low mortgage rates in 2020 were one of a few factors that drove real estate prices up across the country (except in the condo market). This time last year, the Mortgage Bankers Association and Freddie Mac each predicted that rates would remain near 2019 levels through 2021, with an average 30yr Fixed Rate hovering around 3.7-3.8% through that period.

As it turns out, rates averaged about a full percent less than those projections. Rates fell consistently throughout the year, except for a brief but sharp increase in mid-March when markets went crazy with the first news of COVID-related shutdowns, until the Fed stepped in with liquidity. Below are some charts from Freddie Mac showing average mortgage rates over the last 50, 10, and 1 year.

Average Mortgage Rates Since 1971

Average Mortgage Rates Since 2010

Average Mortgage Rates in 2020

Rates in 2021+

The Mortgage Bankers Association and Freddie Mac each predict that 30yr Fixed Rates will increase slightly in 2021 and hover around 3%-3.2% in 2021. Beyond 2021, the Mortgage Bankers Association sees rates averaging 3.6% in 2022 and 4.1% in 2023.

An increase to 4% or higher mortgage rates will likely cause the rapid appreciation we’ve seen over the last couple of years to slow down, but I don’t think it will lead to a pull-back in prices unless it is combined with a migration from the DC Metro due to major changes in telework policy.

If you’re considering purchasing in 2021, I wrote a column in 2019 about my favorite mortgage programs that you might find helpful. If there’s anything I can do to help you prepare for a purchase, don’t hesitate to email me at Eli@EliResidential.com.

Starting Your 2021 Home Search

Question: We are looking forward to buying our first home in 2021. Do you have any recommendations on how we should start the home buying process?

Answer: Google “home buyer tips” or “what to know before buying a home” and you’ll find plenty of advice on the topic, so I’ll include some suggestions I don’t see on most of those lists and also put my own spin on others that you have heard before.

 

Weighted Criteria

It’s easy to come up with 3-5 things that are most important to you, but challenge yourself early to come up with 12-15 things that are important to you. Then give yourself 100 points and allocate points to each based on how important they are to you and you’ll end up with a weighted criteria list to help you focus your search and objectively compare properties.

If you want to take it to the next level, bring your weighted criteria list with you on showings and score each house out of the total points allocated to it.

 

Length of Ownership

This is one of the most important conversations to have with yourself/your partner. You should focus on the following:

  1. Likely length of ownership
  2. Difference in criteria for a 3-5 year house vs a 10-12+ year house
  3. Difference in budget requirements for a 3-5 year house vs a 10-12+ year house

 

Appreciation is not guaranteed and difficult to predict, but the value of longer ownership periods is undisputed. One way longer ownership adds value is the potential for eliminating one or more real estate transactions, and the associated costs (fees, taxes, moving expenses, new furniture, etc) and stress that comes with moving, over the course of your lifetime.

If you have an opportunity to significantly increase your length of ownership by stretching your budget, it’s often justifiable. On the other hand, if your budget or future plans restrict you to housing that’s likely to be suitable for just 3-4 years (and buying now still makes sense), it’s generally better to stay under budget.

 

Influencers (not the Instagram ones)

Family, friends, colleagues…they’re all happy to offer opinions and contribute to your home buying process, but the input can be overwhelming and unproductive if you don’t set boundaries. Try to determine up-front who you want involved in the process and how you’d like them to be involved.

Think about how you’ve made other major decisions in life – what college to attend, what kind of car to buy, where to get married, whether to change jobs – and if you’re the type of person who likes input from your friends and family, you’ll likely do the same when buying a house. Plan ahead with those influencers so their input is productive.

 

Does Your House Exist?

Before jumping too far into the search process, spend a little bit of time searching For Sale and Sold homes on your favorite real estate search website/app to see if the homes selling in the area you want and within 10% of your upper budget are at least close to what you’re looking for. If not, spend some time adjusting price, location, and non-critical criteria to figure out what high-level compromises you’ll need to make and then compare those compromises to your current living situation and/or continuing to rent.

 

Know Your Market

We’re in a strong seller’s market for single-family and townhouses right now with low supply, high demand, and increasing prices, but the condo market is becoming more favorable for buyers.

Each sub-market behaves a bit differently and comes with its own unique set of challenges and opportunities, so take time early on to understand the sub-market(s) you’ll be involved in and what you’re likely to experience. This is something your agent should be able to assist with.

 

Pre-Approval & Budget

There is a lot of value in working with a lender early on in the search process. For starters, you’ll have somebody who can provide real rates and advice based on your specific financial situation/needs. A lender can only do this if they’ve reviewed your financial documents and credit. The more you put in, the more you get out.

You’ll need to have a lender pre-approval to submit an offer (seller has to know you qualify for the purchase you’re offering to make) so if you have to do it anyway, why not doing it early on so you get the most value out of your lender? It also means that you’ll be prepared to make an offer if you find the right home before you expect to be ready.

Given how competitive the Arlington/Northern VA/DMV real estate market is, the quality of your pre-approval can make a big difference when you make an offer. You should strongly consider partnering with a local lender with a great reputation to give yourself an advantage (or not put you at a disadvantage) when making an offer. Pre-approval letters from big banks and online lenders don’t go over as well in our market. If you’re looking for a recommendation, consider Jake Ryon of First Home Mortgage (JRyon@firsthome.com).

 

Find an Agent

The least surprising suggestion on this list! Agents come in many different forms and finding somebody who suits your personality and goals is important. Ask friends, colleagues, and family for referrals and meet with multiple people until you find the right fit.

The worst thing you can do is choose your agent based on whoever responds to an online showing request faster. A good agent can provide a ton of value being involved in your buying process 3-6+ months before you’re ready to buy. Be wary of anybody who wants you to “wait until you’re ready” before working with you.

 

If you’re considering buying (or selling) in the DMV in 2021 and would like to meet, feel free to email me at Eli@EliResidential.com!

2020+ Interest Rate Predictions

Question: Do you expect interest rates to remain low in 2020?

Answer: Mortgage rates increased sharply in 2018, peaking at 7+ year highs in the fall of 2018, and most experts expected that trend to continue into 2019 and for 30yr rates to clear the 5% mark for the first time since spring 2010. However, changes in economic policy and financial markets pushed rates down at the end of 2018 and throughout 2019, coming close to all-time lows in the 2nd half of 2019.

Average 30yr Fixed Mortgage Rate Since 1971
Average 30yr Fixed Mortgage Rate Since 2010
Rates in 2020+

The Mortgage Bankers Association and Freddie Mac each predict that rates will remain low, right around current levels, through 2021 with an average 30yr Fixed Rate hovering around 3.7-3.8% through that period. The Mortgage Bankers Association predicts that rates won’t start increasing until 2022, when they’re predicting the average rate to increase modestly to 4.1%.

If these projections are accurate, it should support strong price growth over the next few years in Arlington, Northern VA, and the greater DC Metro.

However, keep in mind that just over 12 months ago, most experts predicted that mortgage rates would be over 5% by 2020 and, according to Freddie Mac, the average 30yr Fixed Rate last week was 3.64%. Changes in the global or US economy, the election, and the stock market can all change the course of rates in 2020 and beyond.

Lender Advice

If you’re considering purchasing in 2020, I wrote a column a few years ago about the value of a good lender that I’d encourage you to review. If you’d like to talk to somebody, I suggest reaching out to Jake Ryon of First Home Mortgage at JRyon@firsthome.com.

If you’d like to meet to discuss buying or selling in the area, don’t hesitate to reach out to me at Eli@EliResidential.com.

The 20% Down Payment Myth

Question: Is it possible to buy a home with less than 20% down?

Answer: I’m always surprised by the number of people who assume they have to put 20% down to buy a home and delay their goal of becoming a homeowner for years because of it. Studies show that the most common reason people give for not buying a home is that they don’t have enough for a down payment.

In reality, about 1/3 of Arlington buyers purchase a home with less than 20% down and for many buyers, especially first-time home buyers, they’re putting as little as 3-5% down.

Programs For Everybody

For those with good credit, there are popular Conventional Loan programs allowing for as little as 3% down and for those with lower credit scores, FHA Loan programs range from 3.5%-10% down. There are also some exceptional programs available to those with great credit and strong incomes allowing for 10%-15% down at great rates.

Specialty Programs For Military and Doctors

If you are an active-duty or former servicemember you likely know about VA Loans that allow purchases with zero down. Doctors also have access to special loan programs offering great rates with low down payments for large loan amounts.

Mortgage Insurance

Most loans with less than 20% down will include mortgage insurance, which I wrote about here. It will increase your monthly payment and generally represents a higher percentage of your loan amount the less you put down. However, there are options to get rid of the mortgage insurance fees by buying it out or applying for early removal after a couple of years. There are also some programs that do not include mortgage insurance at all.

Impact on Negotiations

Clients often ask me how much a lower down payment will impact their ability to negotiate, so last year I ran the numbers on the impact of different down payments on the percentage buyers were negotiating off the sale price. The results showed that only cash buyers (100% down) and buyers not putting any money down were materially impacted by their down payment, the negotiation leverage was pretty similar for everybody in between.

However, it would be misleading to suggest that down payment percentage doesn’t have any impact. Most sellers will respond more enthusiastically to higher down payments and this comes into play in competitive scenarios (multiple offers), which has become common in Arlington and the surrounding DC Metro neighborhoods. When sellers are choosing between multiple, similar offers, buyers with higher down payments have an advantage.

Buyers can combat the potential negative impact of a lower down payment in multiple offer scenarios by getting a strong pre-approval letter from a reputable local lender, offering to get pre-approved by a lender of the seller’s choosing, increasing the Earnest Money Deposit, or a number of other tweaks to the contract that will be looked at favorably by the seller, without increasing risk to the buyer or increasing the offer price.

Favorite Mortgage Programs

Here’s a link to an article I wrote with some of my favorite mortgage programs and contact information for great lenders who offer them.

If you’d like any additional information or recommendations on lenders or loan programs, don’t hesitate to reach out to me at Eli@EliResidential.com. If you’re thinking about buying a home in Arlington or the surrounding Northern VA/DC Metro neighborhoods, I’d be happy to meet with you to discuss your options.

Are Appraisal Values Keeping Up With Sale Prices?

Question: Given the recent appreciate in real estate values, are you seeing more homes appraise for less than the sale price?

Answer: As we saw in last week’s column, the Arlington real estate market has appreciated rapidly over the last six months which increases the chances that an Appraiser cannot find past sales to support the price the buyer and seller have agreed to, thus increasing the amount of low appraisals in Arlington over the last six months (unfortunately there’s no data to back that up so it’s based on what I’ve seen and heard in the market). Generally, appraisal values lag behind actual market appreciation by a few months.

Banks Often Require Appraisals

If a buyer is getting a mortgage, the bank almost always requires a third-party appraisal to assess the property’s market value. While one can easily make the argument that the price the buyer and seller have agreed to is the market value, banks don’t look at it that way, hence the third-party appraisal.

Appraisals are largely based on comparable home sales over the last six months. It’s a common myth that Appraisers can only use sales from the last six months, but more recent sales are given more weight than sales 6+ months ago. Ultimately, it’s the Appraisers job to determine the market value of a home using the best available information.

Impact of a Low Appraisal

If the appraised value comes in at or above the purchase price, all is good in the eyes of the bank so things continue as planned (note: a higher appraised value has no impact on your assessed value for tax purposes).

If the appraised value is lower than the purchase price, the bank usually requires you to negotiate a reduced sale price to match the appraised value or put more money down to cover the difference between the sale price and appraised value, multiplied by your loan-to-value (LTV) ratio. In some cases, you can also change the type of loan you’re using to satisfy the bank.

The easiest way to calculate LTV is subtract your down payment percentage from 100%. In other words, if you’re putting 20% down, your LTV is 80%. If there’s a $10,000 difference between the sale price and appraised value, you’ll usually be required to bring an extra $8,000 ($10,000*.8) to the table.

All of this can change depending on your loan program and down payment, so it’s important to understand the impact a low appraisal will have on your deal prior to making an offer.

Protection Through An Appraisal Contingency

The Appraisal Contingency is one of the “Big Three” contingencies that are common to sales contracts in Northern Virginia. The Home Inspection and Financing Contingencies are the other two.

The Appraisal Contingency gives buyers an out, with a full return of their Deposit, in the event the appraisal is below the sale price and the seller is unwilling to reduce the sale price or the buyer is unwilling to make up the difference or change loan products.

If you include an Appraisal Contingency in your offer, it’s a good idea to ask your lender how long it will take to order and complete the appraisal so you can structure the contingency period around that timeline. Remember, shorter contingency periods are more attractive to sellers and longer periods generally favor the buyer.

When To Waive The Appraisal Contingency

Sometimes waiving an Appraisal Contingency is the right strategic decision when making an offer. If you’re competing against other offers, especially if they’re cash (no appraisal needed), you should talk with your agent and lender about the risk and reward of giving up this protection. In some cases, sellers will choose an offer with less risk (fewer or no contingencies) instead of the highest offer, especially when the sale price is well above recent comparable sales.

Removing the Appraisal Contingency altogether isn’t your only option either. There are ways to reduce the seller’s risk exposure, thus making your offer more competitive, while also limiting your risk exposure in the event of a really low appraisal.

Disputing a Low Appraisal

If you disagree with the appraised value, ask your lender about the dispute process. First review the appraisal report to understand what sales and details the Appraiser used to determine the value. The best chance you have at getting an appraisal adjustment is to provide the Appraiser with different sales that more accurately represent the subject property’s value, with an explanation.

Managing appraisal risk/contingencies is one of many strategic decisions you’ll make as a buyer or that you’ll have to assess as a seller. Don’t hesitate to reach out to me by email at Eli@EliResidential.com if you have any additional questions!

Question: Do I have to put 20% down to buy a home?

Answer: This is the most common question I’m asked by buyers and there are a surprising number of people who are well-qualified and want to purchase a home, but sit on the sidelines trying to save for a 20% down payment. Over the last 18 months, nearly one third of buyers in Arlington put less than 20% down and most of those people put 10% or less down.

Popular Low-Down Options

  • Conventional loans are available at 3%, 5%, 10% and 15% down
  • FHA loans are available at 3.5% down
  • If you or your spouse are active or former military, you can qualify for a zero-down loan through the VA. I detailed VA loans in this post from May 2016.
  • Typically, if you have a Jumbo Loan (loan amount exceeds $679,650) you are required to put 20% down unless you qualify for one of many preferred mortgage programs available in the market, which I mention in this post from November 2017.

What’s The Downside?

If you use a non-VA loan with less than 20% down you will have to pay Mortgage Insurance (option to pay it off up-front), which is essentially a monthly penalty/fee assessed on top of your mortgage payment that increases the less you put down and the higher your loan amount.

I explain Mortgage Insurance in this post from July 2016, and explain the process for removing these payments in this post from February 2016.

How Much Are Arlingtonians Putting Down?

Below are statistics pulled from the MLS on the amount Arlingtonians put down to purchase homes over the last 18 months.

These numbers are manually entered by the listing agent at the end of the deal and I think that in some cases agents write 0% financed (cash) instead of entering the correct info so it’s my belief that the number of loans with low down payments is actually a bit higher than the statistics reflect.

  • 32% of all purchases were made with less than 20% down, 26% with 10% or less down, and 18% with 5% or less down
  • 39% of townhomes, 37% of condos and 22% of detached/single family homes are purchased with less than 20% down
  • 14% of purchases were not financed (cash)
  • Only 3% of purchases required FHA financing and less than 2% were FHA-financed condo purchases, so consider this if your Condo Association is setting rental caps simply to qualify for FHA financing

Feel free to reach out with any questions you have about your loan options for purchasing a home anywhere in Virginia, Washington, DC or Maryland. I’m happy to answer any specific questions you have or connect you with a lender who specializes in the type of loan you’re looking for. I’m available any time via email at Eli@EliResidential.com.

Question: As interest rates have increased over the last 6-12 months, how will the market react to higher rates and do you expect them to come back down in 2018?

Answer: The rates I’m seeing today are about 1-1.5% higher than what I’ve seen on average over the last few years and about .5% higher than where they’ve been over the last 6-12 months. Generally, most economists are projecting growth in the US and there are similar signs in Europe so if that holds true, expect interest rates to continue their upward trajectory.

Higher Mortgage Rates In 2018

According to Freddie Mac, the average Mortgage rate from the 1970s-2000 was about 7%, the average rate from 2000-2008 was 6% and we’ve been hovering around 3.5-4% since 2008. Freddie Mac currently predicts that rates will reach about 5% by the end of 2018.

  • Mortgage rates are at the mercy of the US and global economies so predicting their direction is no different than predicting how the stock market will do.
  • Contrary to popular belief, mortgage rates are not directly correlated to the Fed rate that you regularly hear about in the news. So when you hear that the Fed is planning to increase rates by .25%, that does not mean your mortgage rate will be .25% higher the following day. See chart below for historical trends of Fed rate vs mortgage rates:

 

  • We are currently experiencing high daily and weekly volatility in mortgage rates, which is frustrating for many. Some weeks see swings of .25% so you can either benefit or lose out from those swings based on when you lock your rate. Discuss this risk with your loan officer.
  • You may have missed the lowest rates over the last few years, but historically mortgage rates are still well below average as you can see from the chart below from Freddie Mac:

 

The Impact Of Higher Rates

For my clients, the ones who feel the rates increases the most are those who have been in the market for 6-12 months but have not purchased yet either due to lack of suitable inventory or urgency.

It’s tough to accept that rates were about 1% lower when they started looking and now they feel like they’ve lost. Those who are just now entering the market tend to be much better at brushing it off. It also impacts my clients who are not also selling a home because those who are selling will realize the benefits of the stronger market vs those who are just buying are at its mercy.

First time buyers are also more sensitive to rate fluctuations because most are already struggling to adjust to the hefty price tag of buying what they want in the DC Metro area.

Redfin recently asked 4,000 buyers who planned to purchase in the next 12 months how increasing rates would impact their purchase and found that only 6% would cancel their plans to buy while nearly 50% wouldn’t change anything or would increase their urgency to buy.

This might seem like a good result for homeowners, but losing 6% of buyers, having 21% reduce their budget, and 27% waiting for rates to drop is a bad sign. Especially if rates continue to go up and the 27% who were waiting for rates to drop decide to either stop their search or reduce their budget.

 

I think the biggest reason increasing rates will slow the market is the psychological effect of higher rates vs the actual impact to buyers’ budgets. For buyers struggling to internalize the “loss” they’ve taken now that rates are higher, consider the following:

  • On a $400,000 loan, a .25% increase in rate represents $60/month. Try to decide if a $50-$150 change in your monthly mortgage cost is worth giving up on a home purchase or compromising on what you want/need. Most buyers decide to spend less than what they’re approved for, so there is usually some cushion.
  • The reason rates are higher is because the economy/stock market have done so well lately so your investments and/or income are hopefully increasing at a rate on pace with or above what you’re giving up in increased mortgage rates.
  • In 2017 the S&P 500 returned about 20% to investors so maybe you earned enough in the market to allow for a higher down payment?

Hopefully the net effect of everything that factors into mortgage rates is still positive for you.

With so much volatility around mortgage rates, it’s even more important that your lender be able to advise instead of just being a pass-through for today’s rates.

My clients have found Jake Ryon of First Home Mortgage (jryon@firsthome.com) and Troy Toureau of McLean Mortgage (ttoureau@mcleanmortgage.com) to be valuable resources during their home purchases and I’d encourage anybody to reach out for advice.