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Housing is Strong going into 2019

A recent headline in California suggested that home purchases are slowing down and values are expected to crumble soon.  You can read the article here.  This quite simply is not true and while California has been a predictor for the housing markets in the past, there are new regulations and conditions which determine the strength of overall housing going into 2019.

Market Factors

A first-time Buyer considering a home purchase in 2019 might fear a recession in the next couple years.  Given that most of these buyers were teenagers during the 2008 crisis, it’s expected there is hesitation.  I can promise a recession at some point, but it won’t be because of housing.  We must remember that the 2008 crisis was due in large part to predatory lending practices and inflated home values, much of which was not regulated.

Fast forward to our market today, housing remains strong with low inventory and a high demand.  Check out 6 reasons to buy a home for additional insights.  Remember that jobs, inflation, and consumer consumption drive the market and determine how the economy trends.  Housing is predicated on these core areas and the data suggest a strong outlook in 2019.

 The Fundamentals

Most people do not realize interest rates drive spending and the overall economy.  If you can borrower money cheap, you have more opportunities for investing with a higher return.  Borrow money at a higher than average rate, your margin is less.  Interest rates for housing have gone up, but it is still less than the 30-year average at 7%.  Check out the rates for home loans in 1985.

Source Freddie Mac 

While home prices have increased since this time, so has the appreciation factor for owning a home.  In the Phoenix market, appreciation is consistent at 4% – 6% a year.  Can this slow down?  Yes, and expect appreciation to stabilize to a normal level in 2019 to a 2% – 4% level.  A home’s appreciation will depend on the kind of home purchased.  Consider square footage, amenities, location, year built, renovations, livability, etc.  All these factors influence a Homebuyer’s decision to buy a home.  Less homes on the market means more opportunities to sell your home at a higher price.  But why are there less homes on the market?

Remember that jobs influence a decision to own a home.  What kind of stable jobs are out there in the economy and how are people spending their money?  Consumers by nature want to save monthly on their expenses and plan for the unforeseen so they do not lose everything they worked for.

Homes bought over the last 10 years were purchased at super low rates (some at 3.25% on a 30-year fixed mortgage) and close-out prices.  It’s tough to walk away from an 1,800 square foot home with a $800 a month mortgage payment.

Affordability has Changed

Inflation drives the price of goods and services.  The recession of 2008 taught a lot of first-time and seasoned homebuyers not to overleverage themselves with debt or risky spending.  Most people watch what they are spending and as prices go up, spending curbs and goes down.  Owning a home fixes a lot of monthly expenses and creates stability therefore enabling consumers to afford the things and activities they like.

That’s where the affordability factor comes in.  With home prices and interest rates going up, the cost to own is much higher.  The P&I on a $200,000 30-year fixed loan at 3.875% in 2012 was $940.47.  Today, the P&I on the same loan but at 4.875% is $1,058.42, over $100 higher per month.  Factor that property taxes have increased 2% – 4% during that time, you can see how the differences add up.

The average home price in Maricopa County, AZ is $275,000 making the affordability income to qualify for a home loan at that price point almost $65,000 per year.  Yet, the appreciation gain on this home is projected over $25,000 in the next 5 years.  That’s roughly 3.4% appreciation per year compounding itself over 5 years.  Even if there is a recession and home values slow or drop slightly, your appreciation gain now hedges you from going underwater.

When home sales seem to be falling, remember that inventory is low and affording a home requires more income than the last 10 years.  We are in a stable and normal housing market compared to before the recession and after the recovery.

Source: MBS Highway

Should I sell my Home?

This is a question I get often when helping clients pre-qualify for a new mortgage loan.  The answer really depends on your goals.  Are you paying off debt?  Do you want to be closer to town?  Are you becoming an empty-nester?  Do you need more space because the family grew?  Do you just want to be in a new place?  All are valid questions.  The timing is ripe and the advantage to buying a home now or in the next year are still in your favor.

Conclusion

It seems like I am in favor of homebuying because my business is predicated on originating home loans.  There is a bias there that I admit.  However, the data is reasonable and observing the day-to-day activities in the market tell me we’ve entered a new era in housing that will last well into the next 10 years because the demand for owning housing holds in favor the weight of consumer spending, inflation and jobs.  A lot of people are moving out of California because on the cost of living, creating a strong demand for housing in Arizona.

Chris Gonzalez
(480) 442-4494
info@azmortgageprofessional.com
www.azmortgageprofessional.com

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10% Down NO PMI

Low Maintenance Solution

No PMI with 10% down

The “Low Maintenance” solution to mortgage planning

A lot of loan officers shy away from complex ways to truly give a client the benefit of better terms for the long haul.  Setting up a home loan for someone is an art and looking at a Client’s long terms goals and strategy is taking the colors given and working to make something perfect.  We recently did this and it was awesome!

The Second Mortgage

Purchase money second mortgages are making financing terms attractive for prospective homeowners that are generating great income but do not have all the cash for a 20% down payment.  Borrowers want a lower monthly payment without the private mortgage insurance (PMI – more on this topic coming soon!).

Usually the solution, from the lender, is to “refinance later” which comes with a cost.  What about a borrower having 10% for the down payment?  This is how a purchase money second can help you save monthly upfront and for the future.

The Details

Guidelines require a combined loan-to-value (CLTV) of 90% – 95% for a Home Equity Line of Credit (HELOC) that will give you the additional funds for the remaining down payment.  The borrower must have at least a 10% down payment on the purchase price of the home.  See the scenario below:

Both scenarios based on 740 FICOs as of 6/12/2018, includes PMI factor

Combined First & Second Mortgage

Purchase Price: $500,000

Borrower Down Payment 10%: $50,000

Purchase Money Second Loan 10%: $50,000

First Mortgage Loan Amount: $400,000

Rate 5.25%

First Mortgage Payment PITI: $2,631.31

Second Mortgage Payment: $319.39

Total Housing Expense: $2,950.70

Scenario 10% down ONLY

Purchase Price: $500,000

Borrower Down Payment 10%: $50,000

First Mortgage Loan Amount: $450,000

Monthly PMI $138.75

Rate: 5.00%

First Mortgage Payment PITI & PMI: $2,990.70

Results

Notice how the payment is virtually the same putting 10% down and using the purchase money second mortgage option compared to paying monthly PMI.  Remember, the additional down is lowering the monthly principle and interest on the first mortgage making the payment lower, despite a slightly higher interest rate.  In addition, once the PMI drops off at 78% LTV, per the Homeowner’s Protection Act, the mortgage payment, putting 10% ONLY down, drops $138.75.  When the second mortgage is paid off using the first and second HELOC option, the payment drops $319.39.

This set up is designed for the homeowner that wants flexibility to control their housing expenses by paying additional towards the principle and reducing their monthly expenses rather than wait for equity to refinance down the road.  Remember, there is a cost to refinance your home loan, no matter how great the deal is.  This solution is what I consider a “Low Maintenance” mortgage loan.

Updates

The rates and costs described are meant to illustrate the differences and savings in payments even if an interest rate was higher for the First and Second Mortgage option.  It does not represent the current market rates and will vary based on the borrower’s qualifying factors.  This blog post was published after it’s original disclosure date.

Disclosures
*Interest rates and annual percentage rates (APRs) are based on current market rates 06/12/2018, are for informational purposes only, are subject to change without notice and may be subject to pricing add-ons related to property type, loan amount, loan-to-value, credit score and other variables—call for details. Rate data is for illustrative purposes only.  Subject to underwriting approval. Application required: not all applicants will be approved. This is not a credit decision or a commitment to lend. Additional loan programs may be available.
First Scenario with Second Mortgage Principal and interest monthly payment estimates (30 fixed): 359 payments of $2,208.81, and 1 payment of $2,212.86 Second mortgage Principle and interest payment estimates (10-year interest only, 20 year fixed, 30 year amortization) 359 payments of $276.10 and 1 payment of $277.94. 
Second Scenario 10% down only Principal and interest monthly payment estimates (30 fixed): 359 payments of $2415.70, and 1 payment of $2,413.59.
Payment estimates do include amounts for taxes or insurance and assumes mortgage insurance is required for the loan (10% down ONLY scenario), your actual payment obligation could be greater. If an escrow account is required or requested to cover any of these items, the monthly payment amount will increase. APR reflects the effective cost of your loan on a yearly basis, taking into account such items as interest, most closing costs, discount points (also referred to as “points”) and loan-origination fees. One point is 1% of the mortgage amount (e.g., $1,000 on a $100,000 loan). Your monthly payment is not based on APR, but instead on the interest rate on your Note.
These rates also assume the following: 1) Property type/use: Single family residence/owner occupied; 2) Loan-to-value (LTV): 90%, or as user selected. LTV = ratio of loan amount divided by the purchase price; 3) Down payment: 10%; 4) Rate lock period 30 days; 5) Base Loan amount: $400,000 & $450,000; 6) Discount point (s): 0 ; 7) Lien position: First lien; Property location: Arizona; Loan term: 30 year fixed product Conventional.

Chris Gonzalez
(480) 442-4494
info@azmortgageprofessional.com
www.azmortgageprofessional.com

 

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