When exploring the benefits of homeownership, it’s more than just having a place to call your own. Among its many advantages, homeownership stands as a formidable safeguard against inflation and a strong vehicle for long-term wealth accumulation. This article will delve into the dynamics of appreciation and amortization, explaining why owning a home can be one of the most impactful financial decisions you can make.
Inflation, the overall upward price movement of goods and services in an economy, erodes the purchasing power of money. In simpler terms, as inflation rises, each dollar you have buys a smaller percentage of a good or service. The same inflation that is driving rising mortgage rates is putting upward pressure on home prices.
Over the past sixty years, homes have appreciated in value at an annual appreciation rate of 5.56% according to the Federal Reserve Economic Data. As a homeowner, you want to benefit from the appreciation. Inflation for the same period averaged 3.7% (Bureau of Labor Statistics) making homes an effective hedge against inflation.
Real estate, unlike many other assets, is a tangible, real asset. History has shown that over the long term, the value of real assets tends to rise at a rate that at least matches, if not outpaces, inflation. So, as the price of goods and services increases, so does the value of real estate, making homeownership a strategic move against inflationary pressures.
With a fixed-rate mortgage, your monthly principal and interest payment remains constant. As a result, while other costs may rise due to inflation, your primary housing cost (if you exclude taxes and maintenance) remains stable, shielding you from the full impact of inflation.
Home appreciation refers to the increase in the home’s value over time. Given the finite nature of land and the ever-growing demand for housing, especially in thriving areas, real estate often appreciates. This appreciation can result in substantial equity gains for homeowners, creating a form of ‘forced savings’ and making it a powerful tool for wealth accumulation.
Amortization has been considered the silent wealth builder. Each time you make a mortgage payment, a portion of that payment goes toward the loan’s interest, and the rest pays down the principal, thus retiring your debt incrementally. This process means you’re gradually building equity in the home with each payment. Over time, a larger portion of your payment goes towards the principal, accelerating your equity buildup.
Combined, appreciation and amortization can lead to significant wealth growth for homeowners. As the home’s value rises and the mortgage balance decreases, homeowners often find themselves sitting on a substantial asset, which can be leveraged in various ways, from securing loans to planning retirements.
While the emotional and social benefits of homeownership are often celebrated, the financial benefits are equally compelling. In a world of economic uncertainties and inflationary pressures, owning a home emerges not just as a source of stability but also as a strategy for long-term financial prosperity. By understanding and leveraging the twin forces of appreciation and amortization, homeowners can pave a path to meaningful wealth accumulation even during periods of relatively high mortgage rates.
American homeowners have a record amount of equity in their home. Many of these homeowners would like to cash out part of that equity but don’t want to trade an historically low interest rate for one that is as high as it’s been in 20 years.
Instead of refinancing their home, an option is to get a fixed-rate second-lien. This is different than a HELOC, home equity line of credit, which gives you continual access to your equity at a variable rate. A HELOC has a draw period where you only must pay the interest.
A second mortgage is a loan against the equity where the homeowner will receive a lump sum and will make payments to repay the loan and interest over a specified period. Generally speaking, lenders want the combination of the existing first-lien and the new second-lien not to exceed 75-80% of the home’s current value.
To calculate how much would be available in a second-lien, subtract the existing unpaid balance on the first-lien from 75-80% of the home’s current value. The remaining amount would be available in the form of a second-lien mortgage.
The borrower, which is the homeowner, would have to qualify for the new second mortgage with sufficient income, acceptable debt-to-income ratios, good credit, and other underwriting requirements.
The advantage of this option is that the homeowner retains the lower interest rate first mortgage which may represent a larger percentage of the value of the property. The second mortgage will have a higher interest rate but will only be on a smaller percentage of the value of the property. The blended rate of the two mortgages will be less than the cost of refinancing the home at current interest rates.
Your lender can run an analysis to determine the blended rate on your first and second mortgages so you can see the benefit of keeping your low rate first mortgage in place and accessing your equity through a fixed-rate second mortgage. Sources for home equity loans could be traditional banks, community banks, credit unions, mortgage brokers, and mortgage companies.
A fixed-rate second mortgage is a solution for homeowners who would like to cash out part of their equity but feel trapped because they don’t want to trade an historically low interest rate for a much higher one.
With mortgage rates having doubled what they were in early 2022, getting the lowest rate possible could mean the difference in being able to buy a home or at the very least, makes it much more affordable. Some people are waiting for rates to come down and while they are expected to come down some this year, most experts agree that they’ll never return to the three or even four percent range.
There are things that a buyer can do to be eligible for the best rate available. Obtaining the most favorable terms is based on the loan-to-value, your credit rating, and your ability to repay the mortgage.
While lenders can impose their own underwriting criteria, the basic qualifying guidelines are identified as the 4 Cs:
Capital – money and savings, plus other investments providing for down payment, closing costs, and reserves for unexpected expenses in the future. It could also include gifts from family members, grants, and down payment assistance.
Capacity – ability to pay back the loan. Lenders look at income, job stability, savings, monthly debt payments, and other obligations to approve a borrower for a mortgage. They’ll ask for several years of tax returns, W2s, and current pay stubs. Self-employed borrowers require additional documentation. Some of the recurring debt can include car payments, student loans, credit card payments, personal loans, child support, alimony, and other debts which could include co-signing for another’s debt.
Credit – your credit history and score exhibit your experience for paying bills and debts on time. While there are minimum credit scores for different types of mortgages, the best rates are only available to borrowers with the best credit scores. Credit ratings are established over time and borrowers need to improve their scores before they need to use them.
Collateral … lenders look to the value of the home and other possessions when pledged as security for the loan.
Based on the Ability-To-Repay Rule, effective 1/10/2014, financial information must be supplied and verified; borrower must have sufficient assets or income to pay back the loan; and, teaser rates can no longer hide a mortgage’s true cost. Even after a lender gives a loan approval to a borrower, they will generally run additional verifications a few days prior to the closing to make sure that nothing has changed that would affect their underwriting decision.
The financial preparation for homebuyers begins long before they start looking at homes. They need to be aware of their credit by asking for copies of their credit reports from the three major reporting agencies: Experian, TransUnion, and Equifax. Congress mandated consumers be provided this free service through AnnualCreditReport.com. Other websites may offer free services, but their real objective may be to encourage you to purchase additional services.
Once you’ve received the credit reports, read them to discover errors that could negatively affect your credit score. The website will tell you the process of correcting the errors which includes notifying both the credit bureau and the reporting party of the error.
Most borrowers understand that payment history is the major contributor to a credit score; it is expected of borrowers to pay on time and as agreed. Sometimes, borrowers are surprised to find out that if their borrowing approaches their available credit that it could actually hurt their score.
The credit utilization ratio is the percentage of credit used to that which is available. If you had $10,000 credit available and your balance of a credit card was $2,500, the ratio would be 25%. Ideally, lenders want your credit utilization to be below 25%. Again, this could be one of the things you work on before you meet with a mortgage officer.
Once you have an accurate credit report and have saved for the down payment and closing costs, you’re ready to meet with a trusted mortgage professional who can take you through the process of preapproval. They may be able to suggest things you can do to raise your credit score to be eligible for a lower mortgage rate.
All lenders are not the same and there is a significant difference with the online lenders who have limited counselling advice and working with a local mortgage officer you can discuss face-to-face what your situation is and if it can be improved.
You may feel comfortable with more than one recommendation and your agent will be able to supply you with lenders who they are familiar with from their experience in situations like yours.
An appraisal gap describes the difference between the sales price and the lower amount of the appraisal required by the mortgage being obtained by the buyer. It becomes an issue if the seller is not willing to lower the price or the buyer is not willing to pay the difference in cash.
Looking at the issue from the seller’s perspective, “if the buyer wants my home and he can’t get the loan he wants, he’ll have to make up the difference in cash.” The buyer might have a different view like “If an independent appraiser can’t justify the price, I’m not going to pay more than appraised value.”
Pay the difference in the appraised value and the purchase price in cash.
Solution – Assuming the buyer has adequate cash reserves and is willing to pay above appraised value, this will satisfy the lender.
Decrease your down payment percentage to apply toward the appraisal gap. It may trigger mortgage insurance which will increase your payment.
Example:
$400,000 Sales Price with 20% down payment of $80,000; Home appraises for $390,000
Possible solution … buyer could take $10,000 of the $80,000 he was going to use for the down payment and make up the gap. That only leaves him $70,000 which is a good downpayment for this size home, but it may require that he pay mortgage insurance because the loan-to-value is more than 80%.
Renegotiate the contract with the seller. Assuming both parties are willing to negotiate on the terms, the seller could lower the price to the appraised value, or any other number of possibilities.
Include an appraisal gap clause – “Buyer and seller agree that if the appraised value comes in lower than the purchase price, buyer agrees to pay up to $XX,000 above appraised value, but not exceeding the purchase price.“An appraisal gap clause addresses what the buyer is willing to do within the parameters included. It provides limited comfort to both the seller and buyer to address the issue of the home appraising for a lower amount than necessary. This clause provides a way for the buyer to compete in a seller’s market.
Terminate the contract.
Appraisals can be a confusing but necessary part of the process when the buyer needs a mortgage. I’m available to answer any questions and share our experience with you. Our goal is to be your source of real estate information.
Buying or selling a house is an exciting and sometimes confusing experience that includes expenses called “closing costs” that can often catch us by surprise. Closing costs are simply the fees and expenses incurred by buyers and sellers during a real estate transaction’s closing or settlement process.
Typical closing costs can vary depending on what is customary in an area, the mortgage type, property value, and other factors. The largest expenses can be the real estate commission and the title policy. Total closing costs for a buyer can characteristically range from 2% – 5% of the sales price and 4% – 7% for a seller.
The most common buyer’s closing costs include loan origination fee, title insurance, attorney fees, appraisal, homeowner’s insurance, underwriting, miscellaneous fees associated with a new mortgage, and prepaid interest to the end of the month.
Interest is paid in arrears on mortgages after the borrower has used the money. The payment due on the first of the month pays the interest for the previous month and is calculated for a full month. The prepaid interest covers the time from the closing date to the end of that month. The borrower’s first payment will usually not be the first of the month following the closing date but the next one.
Separate from the closing costs, lenders usually itemize the additional fees collected at closing used to pre-pay portions of the property taxes and insurance to establish the escrow account. Insurance is always purchased annually in advance which would be due at closing.
The seller will owe the taxes from January 1st to the closing date, and it will generally show as a credit to the buyer if they haven’t been paid to the taxing authority for the year yet. Lenders generally like to have two months of funds for the annual insurance and taxes so they can be paid or renewed before it is due.
Some expenses are paid outside of closing like the inspection fees that would be due to the provider at the time they are made.
While both buyers and sellers are responsible for paying certain closing costs, it is possible for a buyer to negotiate for a seller to pay part or all their closing costs. VA loans restrict the buyer from paying certain fees and they become the responsibility of the seller. Such fees include attorney fees, agent fees, escrow fees to establish the account, rate lock fees, appraisal fees or inspections ordered by the lender.
The actual expenses will be determined by the lender and special provisions in the sales contract. Your agent can supply you with an estimate of closing costs you typically will be responsible for at the beginning of the transaction and again at the time the sales contract is written. Buyers will receive an estimate from their lender at the time of application.
Scammers will use any means to extort money from those they deem to be the most vulnerable. Often, they target senior citizens. Many seniors are targeted on a daily basis by predatory scammers and con-artists looking to take advantage of them, and keeping your elderly loved ones informed has never been so crucial.
If you’re worried that you or a loved one is being targeted, this guide will help you learn about common scamming methods, how to avoid becoming the target of a scam, how to recognize signs that someone is being affected by a scam, and what to do when you’ve discovered that a scam has taken place.
Social Security was established in 1935 to alleviate poverty among the elderly during the Great Depression. Millions of Americans continue to depend on Social Security today, either as their primary source of income or a supplement to their pension and/or personal savings.
Back in 2011, in order to save $70M annually, the Social Security Administration stopped sending out annual benefit statements except to workers age 60 or older who are not yet receiving Social Security benefits. Now all individuals must go online to get their annual benefit statement. Benefit payments are also going electronic only. If you are currently receiving Social Security benefits, go to www.ssa.gov or call 1-800-772-1213 to set up direct deposit.
The key word in the title “Social Security Planning” is “Planning”. This is the crucial process of thinking about and organizing the activities required to achieve a desired goal. Social Security Planning is critical because it allows you to maximize the benefit you can receive from Social Security.
Are you 62 or older?
Do you own you home (or are you close)?
Do you live there the majority of the year?
Do you plan to live there for many more years?
Do you need money to modify your home to make it more supportive for age related changes or to meet rising medical costs or other needs?
If you answered yes to any of these questions, you may want to learn more about “reverse mortgages”. This form of financing enables many seniors to remain in their homes. Reading this article will help you determine if a reverse mortgage might be an option for you. If it is, you may want to do more research and/or you may want to see someone who can explain a reverse mortgage in detail. Reverse Mortgage Counselors, Inc. is an neutral, non-profit HUD certified organization that educates people about reverse mortgages; you can reach them at 651-368-8516. (more…)
Seniors are learning a reverse mortgage can be used to take advantage of current favorable real estate conditionsto buy their retirement home
Last June, Andy and Beatrice Hollimon traveled from their Midwest home to Florida for vacation. There, they looked at a few homes to see what local real estate was available. “For about 15 years, we’d been dreaming of someday retiring in Florida,” Andy explained.
Having kept an eye on real estate trends, Andy felt that buying a property sooner would be financially advantageous due to favorable real estate market conditions. The challenge: Andy didn’t think they would be able to fully retire and make that move for another ten years.
Now May be the Time to Buy
According to CNBC, strong economic growth and low interest rates have created the perfect economic mix for a strong housing market in the first part of 2015.[i] In fact, a recent Zillow report indicated that buying a home in most markets is now more affordable than it was 15 years ago.[ii]
Like the Hollimons, many Americans nearing retirement dream of moving for better weather, to find a smaller home or to be closer to family. For Andy and Beatrice, a Home Equity Conversion Mortgage (HECM) for Purchase — a reverse mortgage loan used to purchase a home — made it possible for them to buy their dream home and retire a decade sooner than they imagined. HECM loans have provided a host of benefits for more than one million U.S.seniors who have leveraged this flexible retirement planning tool. (more…)
A Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage. A HECM is federally insured by the Department of Housing and Urban Development. There are other types of reverse mortgages, but the HECM is the most widely used. You need to be counseled by a HUD certified reverse mortgage counselor before you proceed. Certain states have specific requirements and if you are pondering a reverse mortgage and reside in Minnesota, you must have counseling by an agency that is physically located in Minnesota, such as Reverse Mortgage Counselors, Incorporated. For more information call 651-368-8516. (more…)
All information is dynamic and can change by the respective companies listed herein at ANYTIME. Use this guide as a reference point ONLY. We believe the information herein it is accurate but not guaranteed and may not be current as we are not able to update all information.
