Plan To Sell Within 5 Years? Consider An Adjustable-Rate Mortgage.
Which is better — a fixed-rate mortgage or an adjustable-rate mortgage? It’s a common question among home buyers and refinancing households in California.
The answer? It depends.
Fixed-rate mortgages give the certainty of a known, unchanging principal + interest payment for the life of the loan. This can help you with budget-setting and financial planning. Some homeowners say fixed-rate loans they offer “peace of mind”.
Adjustable-rate mortgages do not.
After a pre-determined, introductory number of years, the initial interest rate on the note — sometimes called a “teaser rate” — moves up or down, depending on the existing market conditions. It then adjust again every 6 or 12 months thereafter until the loan is paid in full.
ARMs can adjust higher or lower so they are necessarily unpredictable long-term. However, if you can be comfortable with uncertainty like that, you’re often rewarded with a very low initial interest rate — much lower than a comparable fixed rate loan, anyway.
Freddie Mac’s weekly mortgage survey highlights this point.
The interest rate gap between fixed-rate mortgages and adjustable-rate mortgages is growing. It peaked 2 weeks ago, but remains huge at 1.16 percentage points.
On a $200,000 home loan, this 1.16 FRM/ARM spread yields a monthly principal + interest payment difference of $136, or $8,160 over 5 years, the typical initial teaser rate period.
Savings like that can be compelling and may push you toward an adjustable rate loan.
You might also consider a 5-year ARM over a fixed-rate loan if any of these scenarios apply:
- You’re buying a new home with the intent to sell it within 5 years
- You’re currently financed with a 30-year fixed mortgage and have plans to sell the home within 5 years
- You’re interested in low payments, and are comfortable with longer-term payment uncertainty
Furthermore, homeowners whose existing ARMs are due for adjustment might want to refinance into a brand new ARM, if only to push the teaser rate period farther into the future.
Before choosing ARM over fixed, though, make sure you speak with your loan officer about how adjustable rate mortgages work, and their near- and long-term risks. The payment savings may be tempting, but with an ARM, the payments are never permanent.
April 5, 2011 by Adriel Esparza · Leave a Comment
What’s Ahead For Mortgage Rates This Week : April 4, 2011
In a volatile week of trading, mortgage markets closed unchanged last week. Despite economic data proving stronger-than-expected — a situation that tends to lead mortgage rates higher — concern for persistently high oil prices tempered Wall Street’s excitement and mortgage rates stayed steady.
That’s not to say rates weren’t volatile, however. From day-to-day, mortgage rates showed huge variance last week and several lenders issued five separate rate sheets Friday.
The 12-month average is slightly less than two per day.
Expect the volatility to continue into this week, too. With little economic data due for release, mortgage rates should move on momentum. This would be good news for rate shoppers and home buyers throughout California because mortgage rates ended last week on a downswing.
It’s all because of the March jobs report.
The jobs report is important to the economy because as the number of working Americans grows, so does total earned wages nationwide. In theory, this leads to higher levels of consumer spending, and to larger government tax receipts.
It starts a cycle in which businesses and governments additional workers and the cycle continues.
The U.S. economy added jobs in March for the sixth straight month.
Mortgage rates are 0.69% higher today as compared to their early-November 2010 lows. The jump has added 14 percent to the 30-year, long-term cost of homeownership in Corona. However, as compared to history, rates remain low.
If you’re currently shopping for a mortgage, talk to your loan officer about today’s market and its risks. Rates may not rise this week, but they’re poised to surge along with the economy. Consider locking in today.
April 4, 2011 by Adriel Esparza · Leave a Comment
How Does Your Work Commute Compare To Other Cities?
As part of the Census Bureau’s data collection activities from 2005-2009, a number of interesting charts have been published at http://census.gov.
The data should not be confused with Census 2010 — a separate survey conducted every 10 years. This is the first-ever, 5-year American Community Survey. Based on data from 3 million households, it details social, economic, housing, and demographic data “for every community in the nation“.
Among the surveys:
- Median Household Income, Inflation-Adjusted To 2009 Dollars (Chart)
- Median Housing Value Of Owner-Occupied Housing Units (Chart)
- Percent Of Households That Are Married, With Children Under 18 (Chart)
The ACS survey also charts average commute time by county. The chart is shown at top.
Whether you live in a “long commute” town like Richmond, NY (40 minutes), or a “short commute” town like King, TX (3.4 minutes), rising gas prices have made commute times and distances relevant to everyone.
Since the start of 2011, the average price for gasoline is higher by 54 cents per gallon. Assuming 22 miles per gallon on a passenger car, that’s an increase of 2.5 cents of gasoline per mile driven in the last 90 days. It’s a cost that adds up quickly, and can affect a household budget. Plan for higher pump prices moving forward, too. Historically, gas prices surge between April and June.
The American Community Survey is loaded with charts and data. It can tell you a lot about your current neighborhood, and any neighborhood to which you may want to relocate. Then, to bridge the ACS data with community details such as school performance and typical home prices, talk to a real estate professional.
April 1, 2011 by Adriel Esparza · Leave a Comment
Lock Now? Friday’s Job Report Expected To Push Mortgage Rates Up.
Friday is a pivotal day for mortgage markets and conforming mortgage rates across California. At 8:30 AM ET, the government will release its March Non-Farm Payrolls report.
More commonly known as “the jobs report”, the monthly Non-Farm Payrolls is a market-mover and home buyers would do well to pay attention. Depending on the report’s strength, mortgage rates could rise, or fall, by a measurable amount tomorrow morning.
It’s because so much of the today’s mortgage market is tied to the economy, and economic growth is dependant on job growth.
With more job growth, there’s more consumer spending and consumer spending accounts for the majority of the U.S. economy. Additionally, it generates more payroll taxes to local, state and federal governments. This, too, puts the broader economy on more solid footing.
Between 2008 and 2009, the economy shed 7 million jobs. It has since recovered 1.5 million of them. Friday, analysts expect to count another 190,000 jobs created. If the actual figure falls short, expect mortgage rates to ease.
Otherwise, look for rates to rise. Probably by a lot.
If you’re shopping for a mortgage right now, consider your personal risk tolerance. Once the BLS releases its data, it will be too late to lock in at today’s interest rates. If the idea of rising mortgage rates makes you nervous, execute your rate lock today instead.
On a 30-year fixed rate loan, each 1/8 percent increase to rates adds roughly $7 per $100,000 borrowed.
March 31, 2011 by Adriel Esparza · Leave a Comment
January 2011 Case-Shiller Index : Weak And Flawed
Standard & Poors released its Case-Shiller Index for the month of January this week. The index is a home valuation tool, measuring the monthly and annual changes in home prices in select cities nationwide.
January’s Case-Shiller Index gave a poor showing. As compared to December 2010, home values dropped in 19 of the Case-Shiller Index’s 20 tracked markets. Only Washington, D.C. gained. The results were only modestly better on an annual basis, too.
18 of 20 markets worsened in the 12 months ending January 2011.
According to the report, values are down 3.1% from last year, retreating to the same levels from Summer 2003. As a buyer or seller in today’s market, though, don’t read too much into it. The Case-Shiller Index is far too flawed to be the final word in housing.
The index has 3 main flaws, in fact.
The first flaw is the Case-Shiller Index’s lack of breadth. The report is positioned as a national index, but its data is sourced from just 20 cities nationwide.
Putting that number in perspective: the Case-Shiller Index tracks home values from fewer than 1% of the 3,100 U.S. municipalities – yet still calls the report a “U.S. Average”.
A second flaw in the Case-Shiller Index is how it measures home price changes, specifically. Because the index only considers “repeat sales” of the same home in its calculations, and only tracks single-family, detached property, it doesn’t capture the “full” U.S. market. Condominiums, multi-family homes, and new construction are ignored in the Case-Shiller Index algorithm.
In some regions, homes of these excluded types represent a large percentage of the market.
And, lastly, the Case-Shiller Index is flawed because of the amount of time required to release it.
Today, it’s almost April and we’re talking about closed home resales from January which is really comprised of homes that went under contract in October — close to 6 months ago. Sales prices from 6 months ago is of little value to today’s Corona home buyer, of course.
The Case-Shiller Index can be a helpful tool for economists and policy-makers trying to make sense of the broader housing market, but it tends to fail for individuals like you and me. When you want accurate, real-time housing figures for your local market, talk to your real estate professional instead.
March 30, 2011 by Adriel Esparza · Leave a Comment
Pending Home Sales Rebound; Suggest Brighter Spring For Housing
On a seasonally-adjusted basis, the Pending Home Sales Index rose 2 percent last month, according to the National Association of REALTORS®. A “pending home sale” is defined as a home under contract to sell, but not yet closed.
February’s Pending Home Sales Index rebound breaks a 2-month losing streak, and reverses the recent downward momentum in housing. Both Existing Home Sales and New Home Sales volume showed a sizable loss last month.
For buyers and sellers of real estate in Corona , the Pending Home Sales Index is of particular import. It’s one of the few forward-looking indicators in housing, and February’s data suggests a stronger spring season than was the winter.
Region-by-region, Pending Home Sales data varied:
- Northeast Region: -10.9%
- Midwest Region : +4.0%
- South Region : +2.7%
- West Region : +7.0%
3 of 4 regions showed marked improvement, which is good for housing. In the fourth — New England — it’s likely that inclement weather hampered results.
February was colder-than-normal and the month capped a record-breaking snowfall season for the region. Anecdotally, fewer homes are sold in the cold-and-snow of winter and it’s likely that the weather affected local housing markets.
Looking to March and April, therefore, we should expect Existing Home Sales data to rebound. This is because 80% of “pending” homes close within 60 days, and because improving weather should release pent-up demand for housing.
More sales plus higher home demand tends to lead home prices higher. If you’re in the market for a new home, consider that your best negotiation leverage comes in a weak market. As the seasons turn, your leverage looks poised to slip.
The best time to buy this year may be right now.
March 29, 2011 by Adriel Esparza · Leave a Comment
What’s Ahead For Mortgage Rates This Week : March 28, 2011
Mortgage markets worsened last week as nuclear meltdown concerns eased across Japan, and the war within Libya moved closer to a potential finish.
Wall Street voted with its dollars, and a return to risk-taking emerged. “Safe haven” buying softened last week and, as a result, conforming mortgage rates in California made their biggest 1-week spike since late-January.
Mortgage rates remain historically low, but well above their November 2010 lows.
This week, rates could run higher again. Friday’s jobs report is a major story and it will affect mortgage rates in Corona and across the country. Jobs are a key component of the nation’s economic recovery, and as the economy has improved, mortgage rates have tended to rise.
Economists expect that 190,000 jobs were created in March. If they’re correct, it will raise the 12-month tally to 1.3 million net new jobs created nationwide. This is still less than the 2 million jobs lost in the 12 months prior, but it’s a positive step that suggests sustained growth.
A positive net new jobs figure for March would mark the first time since June 2007 that jobs growth was net positive 6 months in a row. If March’s final figures are better than expected, expected mortgage rates to rise. If the figures are less, look for rates to fall.
The Unemployment Rate is expected to stay sub-9.0 percent, too.
Other news that could change rates this week include Monday’s Pending Home Sales report, Tuesday’s Consumer Confidence data, and any one of the 4 speeches from members of the Fed. In general, data and/or rhetoric that suggest more growth in 2011 will cause mortgage rates to rise.
If you are still floating a mortgage rate and have yet to lock one in, this week may represent your last chance for low rates. Good news about the economy will put pressure on mortgage rates to rise.
March 28, 2011 by Adriel Esparza · Leave a Comment
15-Year Fixed Rate Mortgages Look Cheap Compared To Comparable 30-Year Fixeds
It’s a great time for Corona buyers and homeowners to look at the 15-year fixed rate mortgage.
According to Freddie Mac’s weekly Primary Mortgage Market Survey, the relative “discount” of a 15-year fixed rate loan as compared to a comparable 30-year product is the largest in recorded history. The interest rate spread between the two benchmark products is now 0.77%, nearly double the recent, 5-year average of 0.44%.
Despite its lower rates, however, homeowners that opt for a 15-year fixed mortgage should be prepared for higher monthly payments. This is because the principal balance of a 15-year fixed is repaid in half as many years as with a 30-year amortizing product.
The payment increase is 41% higher at today’s rates. If you can manage that, though, you’ll reap dramatic interest payments savings over time. For each $100,000 borrowed at today’s market interest rates, your mortgage interest costs on a conforming 15-year term mortgage will be lower by $56,000 versus an identically-structured 30-year term. The more you borrow, the more you save.
That said, not everyone should use the 15-year product.
One reason you may want to avoid 15-year products is because the higher payments may lead to financial stress. Unless your monthly income far exceeds your monthly debts, choosing a 30-year product may feel safer for you.
Another reason is that, with less mortgage interest paid, 15-year mortgages don’t allow for as many mortgage interest tax deductions. This can have tax implications to you each year. Or, maybe you prefer to have your home leveraged, investing “spare dollars” in stocks and bonds.
These are all legitimate cases to stick with a 30-year term, but if you’ve ever explored the idea of using a 15-year fixed rate mortgage for your home, today, the math is in your favor. Talk to your me before the rates start rising.
March 25, 2011 by Adriel Esparza · Leave a Comment
New Home Sales Fall To All-Time, Recorded Low. Maybe.
Sales of newly-built homes plunged 17 percent to an seasonally-adjusted, annualized 250,000 units in February, and the supply of new homes rose to 8.9 months in February — a 1.5 month jump from January.
It’s the lowest New Home Sales reading in recorded history, according to the Census Bureau, and the third straight report to signal that home values may be slow to rise in Corona and nationwide this season.
Earlier this week, the National Association of REALTORS® reported Existing Home Sales down 10 percent from February, and the Federal Home Finance Agency said home values slipped 0.3 percent between December and January.
The media has picked up on the trend, too.
- No Spring In Housing’s Step (WSJ)
- Is Housing Really In Recovery (CNBC)
- Experts See Weak Recovery (UPI)
There’s two interesting angles here. First, the one that’s largely neglected in the stories online.
Although New Home Sales read -17% last month, the data’s Margin of Error read ±19%. This means that, once additional homes are added to February’s New Home Sales tally, it’s possible that the reading actually rose 2%.
Because the Margin of Error exceeds the measured reading, February’s New Home Sales figures are of “zero confidence”. The Census Bureau even says as much in its report.
Or, if the initial reading is accurate, a second story emerges. Namely, how an increase in home supply may help this season’s buyers to negotiate better prices for a home, and upgrades from a builder.
There’s often more to a real estate story than its headline and February’s New Home Sales proves it.
March 24, 2011 by Adriel Esparza · Leave a Comment
10 U.S. Cities With The Steepest Rent Increases (2010)
Home sales data is easing so far in this calendar year. Home resales and new construction have dropped to multi-month lows and, in many cities, home supplies are rising. One housing sector that’s not slowing, however, is rentals.
The rental market is booming.
As reported by the Wall Street Journal, the average apartment vacancy rate is 6.6% nationwide, down from 8.0% last year. In addition, the number of occupied apartments rose by more during Q4 2010 than during any comparable period of the last 10 years.
It’s a major reason why rents are up 2.3%.
Some areas, however, fared worse than others. This study of rent increases as published on MSNBC, for example, lists the 10 U.S. cities in which rents increased the most last year. And they may not be the cities you’d expect.
In order:
- Greenville, SC (+11.2%; $669 average monthly rent)
- Chattanooga, TN (+10.4%; $726 average monthly rent)
- Savannah, GA (+8.4%; $866 average monthly rent)
- Portland, OR (+8.1%; $875 average monthly rent)
- San Jose, CA (+8.0%; $1,716 average monthly rent)
- Nashville, TN (+8.0%; $786 average monthly rent)
- Tacoma, WA (+8.0%; $900 average monthly rent)
- Denver, CO (+7.5%; $873 average monthly rent)
- Washington, DC (+7.4%; $1,473 average monthly rent)
- Raleigh, NC (+7.4%; $785 average monthly rent)
Big cities New York (#18), San Francisco (#19), and Chicago (#24) showed modest gains, by comparison.
Not everyone across California wants to be a homeowner, but renters are facing a squeeze. With mortgage rates historically low and home values slow to recover, in many cities, the cost-benefit analysis is shifting toward buying.
March 23, 2011 by Adriel Esparza · Leave a Comment
