Category Archives: Investing in Real Estate
In 1968, mortgage rates were 8.5%. The next year, rates went down to 7%. Homeowners could buy a 15-20% larger home for the same payments if they could find someone to assume their mortgage.
FHA and VA mortgages were very popular in certain price ranges and they allowed anyone to assume the mortgage regardless of the credit. If you could find a person to take over your note, you were free to qualify for another mortgage.
In October 1981, mortgage rates reached 18.63%. A $250,000 mortgage had a monthly principal and interest payment of $3,896.46. As astronomical as that rate sounds, people were still buying homes and were good investments.
Four years later, they were still over 12%. The monthly payment was $2,571.53. Believe it or not, people were excited to be paying only 2/3 what they had to pay a few years earlier.
Fast forward to late 1991 when the rates went below 9% and that same payment was to $2,015.16. At the turn of the 21st century, rates were 8.15% and that made the payment $1,860.62. Not much change in rates during that decade.
If we look around the housing bubble, late 2008, the rates were 6.04% and the payment was $1,505.31. By 2009, mortgage rates had fallen below 5%. The lowest mortgage rate was 3.31% on November 2012 with a payment of $1,096.27.
Rates fluctuated for the next few years until now, and most of the experts are expecting them to be above 5% by the end of 2018. Rates have increased each week for the last six weeks to 4.38% with payments of $1,240.12.
The average mortgage rate for the past 47 years is a little over 8%. The real estate and mortgage markets are cyclical. Rates have been historically low for a long period but will probably continue to rise. Most buyers don’t pay cash and mortgages enable them to purchase now. Based on history, even 8% would be an excellent rate. Until it reaches that point again, everything lower is a bargain.
Some buyers think that finding the right home is the critical part of the buying process and that is how they determine which agent to use. While it is important, there may be a broader skill set to consider when selecting your real estate professional.
The most recent NAR Profile of Home Buyers and Sellers indicate that 52% of buyers do want help in finding the right home to purchase. There was a time when the public did not have access to all the homes on the market, but the Internet has changed that.
Helping to negotiate the price and terms of sale were identified by almost 25% of the buyers. No one wants to pay more than is necessary and the terms of the sale can be as important as the price.
The next largest area of assistance that buyers value has to do with financing and the paperwork. Even if a buyer has been through the process before, it very likely could have been several years and things have probably changed.
Since the cost of housing is dependent on the price paid for the home and the financing, a real estate professional skilled in these specialized areas can be very valuable in finding the “right” home. An agent’s experience and connections to allied professionals and service providers is equally important.
Ask the agent representing you to specifically list the tools and talent they have available to address these areas.
The new tax law doubles the standard deduction and it is estimated that over 90% of taxpayers will elect to use it. However, even without considering tax benefits, homeownership has convincing advantages.
Besides the personal and social reasons for owning a home, one of the most compelling is that it is cheaper. Principal reduction and appreciation are powerful dynamics that reduce the effective cost of housing.
Amortized loans apply a specific amount of each payment to the principal amount owed to retire the loan over the term. Some people consider it a forced savings account; when the payment is made, the unpaid balance is reduced.
The price of homes going up over time is appreciation. While there are lots of variables and it is not guaranteed, it is easy to research the history of an area and make predictions based on supply and demand.
Interest rates are still low and can be locked-in for 30 years. Without considering the tax benefits at all, the appreciation and the amortization dramatically affect the “real” cost of owning a home.
Consider a $250,000 that appreciates at 2% a year for the next seven years instead of paying $2,000 a month in rent. In the example, the payment is less than the rent being paid even including the property tax and insurance.
When you factor in the monthly principal reduction and appreciation and consider additional owner expenses like maintenance and possible homeowners association, the net cost of housing is considerably lower than the rent. In this example, reduced cost in the first year alone is more than the down payment required on an FHA loan.
Based on the assumptions stated, the down payment of $8,750 could grow to $73,546 in equity in seven years. Can you name another investment with this kind of potential that also provides you a place to live, enjoy, raise your family and share with your friends?
Use this Rent vs. Own to make projections using your own numbers and price range. We’re available to answer any questions you have and to find out what it will take to own your own home.
Mortgage loans for more than 80% loan-to-value typically require private mortgage insurance. Mortgage insurance reimburses the lender if a borrower defaults on a loan. PMI is expensive, and homeowners should be aware of how to remove it when certain conditions have been met.
A borrower can request in writing for the lender to cancel the PMI when the mortgage balance has reached 80% of the home’s original appraised value. However, they are required to eliminate it when the balance reaches 78%. It is a good idea to monitor this, especially if additional principal contributions are being made to pay off the loan early.
Other methods to eliminate PMI sooner than through normal amortization include the following:
- If the value of the home has increased, the owner may consider refinancing with a loan that does not require PMI. There will be refinancing charges involved but you can determine how long it will take to recapture those costs from the monthly savings.
- Some lenders will consider using a new appraisal to verify that the home’s mortgage is below the 80% requirement. Find out in advance from your lender if they will accept this procedure and get the names of approved appraisers they will recognize. The cost of an appraisal could range between $450 to $600.
- Another strategy is to make additional principal contributions on a regular basis to reduce your mortgage balance to 78-80% level that would allow the lender to eliminate the PMI.
Mortgage insurance is not required on VA loans regardless of the loan-to-value. FHA mortgages made after June 3, 2013 are required to have Mortgage Insurance Premium for the life of the loan. For FHA loans made prior to that date, the MIP should automatically cancel when the loan-to-value ratio reaches 78% and has been in effect for a minimum of five years.
To obtain additional information specific to cancelling your mortgage insurance, contact info can usually be found on the annual statement provided by your mortgage servicer.
It can be shocking to hear how many people spend more time planning their vacation or next mobile phone purchase than planning for retirement. It is hard to imagine that they are expecting Social Security will take them through their golden years. A person who has paid in the maximum each year to social security can assume to receive about $30,000 a year.
Every adult in the work force, should go to SSA.gov to find out what they can expect 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 much you’ll be short so that you can devise an investment plan.
There’s an easy rule of thumb used to estimate the investable assets needed by the time they retire to generate a certain income. The target annual income is divided by a safe, conservative yield to determine the investable assets needed.
A person who wants $80,000 annual income generated from a 4% 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. They would need to save about $100,000 a year to be ready for retirement in 15 years.
If saving that amount does seem possible, an IDEAL alternative could be to invest in rental homes. The familiarity of rental homes like owning a personal residence can reduce some of the risk. Rentals also enjoy other characteristics like income from the operation, depreciation in the form of tax shelter, equity buildup from the amortization of the loan, appreciation and leverage from the borrowed funds controlling a larger asset.
Some investors explain the strategy by buying good rentals with mortgages and having the tenant to retire the debt for you. Single family homes offer the investor an opportunity to meet their retirement and financial goals with an investment that is easily understood and controlled.
An Retirement Projection calculator can give you an idea of how many rental homes you’ll need to supplement your social security and other investments.
The benefit of insurance is to transfer the risk of loss to a company in exchange for a premium. The deductible is an amount the insured pays out of pocket before the insurance starts covering the cost of the loss. The challenge is to balance the risk an insured can accept with the premium being charged.
To manage insurance premiums, policy holders often consider adjusting their deductibles. Lower deductibles result in less money out of pocket if a loss occurs in return for higher premiums. Higher deductibles will lower premiums but require that the insured bear a larger amount of the first part of the loss.
Insurance companies offer deductibles as a specific dollar amount or as a percentage of the total amount of insurance policy. The amount is usually shown on the declaration page of homeowner and auto policies.
A small fire in a $300,000 home that resulted in $5,000 of damage might not be covered because it is less than the 2% deductible which would be $6,000. If the homeowner can afford the cost of repairs in exchange for lower premiums, it might be worth it. On the other hand, if that loss would be difficult for the homeowner, a change in the deductible for higher premiums could be considered.
Raising deductibles can save money in the present when paying the premium but could cause problems later if a claim occurs. Homeowners should review deductibles with their property insurance agent to be familiar with the amounts and make any changes that would be appropriate.
The new tax law that was signed into effect at the end of 2017 will affect all taxpayers. Homeowners should familiarize themselves with the areas that could affect them which may require some planning to maximize the benefits.
Some of the things that will affect most homeowners are the following:
- Reduces the limit on deductible mortgage debt to $750,000 for loans made after 12/14/17. Existing loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap.
- Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the existing mortgage being refinanced.
- Repeals the deduction for interest on home equity debt through 12/31/25 unless the proceeds are used to substantially improve the residence.
- The standard deduction is now $12,000 for single individuals and $24,000 for joint returns. It is estimated that over 90% of taxpayers will elect to take the standard deduction.
- Property taxes and other state and local taxes are limited to $10,000 as itemized deductions.
- Moving expenses are repealed except for members of the Armed Forces.
- Casualty losses are only allowed provided the loss is attributable to a presidentially-declared disaster.
The capital gains exclusion applying to principal residences remains unchanged. Single taxpayers are entitled to $250,000 and married taxpayers filing jointly up to $500,000 of capital gain for homes that they owned and occupied as principal residences for two out of the previous five years.
Not addressed in the new tax law, the Mortgage Forgiveness Relief Act of 2007 expired on 12/31/16. This temporary law limited exclusion of income for discharged home mortgage debt for principal homeowners who went through foreclosure, short sale or other mortgage forgiveness. Debt forgiven is considered income and even though the taxpayer may not be obligated for the debt, they would have to recognize the forgiven debt as income.
These changes could affect a taxpayers’ position and should be discussed with their tax advisor.
Planning to go to the Masters next April 2-9th and don’t have a place to stay. Each year, there are homeowners who rent their home for a big premium during the Masters because hotels are in short supply and demand for private homes is up.
Homeowners go on vacation and make tax-free income while temporary tenants rent their home. Homeowners can benefit from a little-known provision in the tax code that does not require taxpayers to recognize the income derived from renting their home for less than 15 days per year. See Plan Ahead for Tax Time When Renting Out Residential or Vacation Property- special rules.
This situation can particularly benefit homeowners where there are large sporting events nearby like golf and tennis tournaments, championship games or other high attendance venues. The demand for a private residence can be more attractive than staying in a hotel which makes the price go up.
Obviously, there are challenges with personal belongings and damage but getting a premium rental rate and not having to recognize the income could be worth it. You’ll certainly want to discuss this with your tax professional prior to making this decision. You’d probably also want to get some help from an experienced real estate professional.
Some police departments report as high as 98% of calls are false alarms. Not only is this an incredible waste of police resources that could be available for legitimate emergencies, it annoys neighbors, startles pets and results in expensive false alarm fees.
Know your codes – entering an incorrect keypad code is a common mistake leading to false alarms. The solution is to create codes that are easy for all members of the family to remember without them being obvious to potential burglars like your street number. Let everyone know when you change your code.
Secure windows and doors – be sure that all windows and doors are closed before activating your alarm. Disarm your system before opening a window or door.
House guests – tell visitors that you have an alarm system and when you normally arm it. Housekeepers, baby sitters, outside family and close friends also need to be aware of your procedures and possibly give them a code to disarm the system if it is accidentally activated.
Batteries – most systems have battery backup in case the power goes out. Know how often you need to replace the batteries; some last considerably longer than others.
Motion detectors – pets can trigger a motion detector and then, the alarm. There are sensors made for households with pets providing an alternative to turning them off. Other things that could activate motion detectors are helium balloons or curtains and plant leaves being blown in front of a sensor.
Home alarm systems are valuable to homeowners by increasing security, providing peace of mind and lowering insurance premiums. Some municipalities require a license fee for any home with an alarm. Use your alarm wisely.
During the holidays as throughout the year, getting cash from an ATM is normal for many people. ATM’s are available 24 hours a day and they’re located in bank branches, convenience stores, grocery stores, malls, airports, sports venues and on street corners.
Unfortunately, the convenience aspect can compromise personal safety especially if you are distracted on not paying attention. Planning for an ATM withdrawal and applying common sense can help you avoid trouble.
- Be aware of your surroundings throughout the entire transaction like people sitting in a nearby parked car or someone offering to help you.
- Safeguard your PIN. Don’t share it with anyone. Don’t write it down. Don’t use your birthdate, last four digits of your phone number or other obvious numbers.
- If there are other people at the ATM to make a withdrawal, shield the keypad when entering your PIN number.
- Keep your car doors locked and windows raised, except for your driver’s window, when using a drive-up ATM.
- Minimize the time spent at the ATM by being prepared with your card ready, what you plan to do and do not count your money until you are in a safe place away from the ATM.
- Take your receipt with you and destroy it if you decide to discard it.
- Be aware that some thieves use skimming devices to steal account and PIN numbers. If something doesn’t look “just right”, consider finding another machine to use.
- Especially at night, pay attention to locations with adequate lighting and being visible from the street. Don’t compromise your safety just because it is convenient.
- After you have your money, pay attention to see if someone might be following you. If you are concerned, go to a nearby police or fire station or well-trafficked business and call the police.
- If you feel uneasy during a transaction, cancel it, remove your card and LEAVE.
There may be a time in the not too distant future when we don’t have a need for cash anymore. Until that time, paying attention to simple safety precautions can help protect us during the holidays and throughout the year.