The Do’s and Don’ts of Home Equity Loans

Home equity burning a hole in your pocket? You may want to think twice about that boat.

Home equity is a valued resource, and if you have it, you might be tempted to tap that wealth for other purposes. A home equity loan, which allows you to use your home’s equity as collateral, is a great way to do this. But depending on your personal situation, it may not be the right thing to do.

Here’s when a home equity loan makes sense — and when it doesn’t.

DON’T: Fund a lifestyle

Remember when homeowners yanked cash out of their homes to fund affluent lifestyles they couldn’t really afford? These reckless borrowers, with their boats, fancy cars, lavish vacations and other luxury items, paid the price when the housing bubble burst. Property values plunged, and they lost their homes.

Lesson learned: Don’t squander your equity! Look at a home equity loan as an investment — not as extra cash when making spending decisions.

DO: Make home improvements

The safest use of home equity funds is for home improvements that will add to the home’s value. If you have a one-time project (e.g., a new roof), then a home equity loan might make sense.

If you need money over time to fund ongoing home improvement projects, then a home equity line of credit (HELOC) would make more sense. HELOCs let you pay as you go and usually have a variable rate that’s tied to the prime rate, plus or minus some percentage.

DON’T: Pay for basic expenses or bills

This is a no-brainer, but it’s always worth reiterating: Basic expenses like groceries, clothing, utilities and phone bills should be a part of your household budget.

If your budget doesn’t cover these and you’re thinking of borrowing money to afford them, it’s time to rework your budget and cut some of the excess.

DO: Consolidate debt

Consolidating multiple balances, including your high-interest credit card debts, will make perfect sense when you run the numbers. Who doesn’t want to save potentially thousands of dollars in interest?

Debt consolidation will simplify your life, too, but beware: It only works if you have discipline. If you don’t, you’ll likely run all your balances back up again and end up in even worse shape.

DON’T: Finance college

If you have college-age children, this may seem like a great use of home equity. However, the potential consequences down the road could be significant. And risky.

Remember, tapping into your home equity may mean it takes longer to pay off the loan. It also may delay your retirement or put you even deeper in debt. And as you get older, it will likely be more difficult to earn the money to pay back the loan, so don’t jeopardize your financial security.


Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Originally published February 23, 2016.


Pros and Cons of Refinancing Your Mortgage Right Now

Since April 1, 2009, roughly 16.2 million American homeowners have refinanced their mortgages, according to the latest Housing Scorecard released by HUD.

But as you may or may not know, there are still millions of homeowners who have not, for one reason or another.

Some may not be eligible, while others may be going through foreclosure or have simply given up on making payments.

[Reasons why you can’t refinance.]

And hey, some just may have procrastinated, or simply aren’t that interested in their mortgage.

For example, Obama hasn’t refinanced his mortgage in seven years, but Bernanke has been all about it in recent years.

If you look at the chart below, you’ll notice that refinancing has been pretty steady since the lull in 2008 (when lending came to a standstill), but it’s still nowhere close to that seen in 2003 when things were bubbling up toward implosion.


Yet, mortgage rates are at all time lows, and continue to fall seemingly every week, month, etc., not that anyone seems to care.

So if you’re on the fence about refinancing, let’s look at a few pros and cons of refinancing now vs. later.

Con: Home Prices Rising

Home prices have been on the rise for a while now, and are expected to keep climbing nationwide.

The Housing Scorecard also noted that rising property values have brought homeowner equity to its highest point since the third quarter of 2008.

That pushed 1.3 million homeowners out of an underwater position. That’s great for those looking to refinance, as it should make it easier.


But higher home prices also make refinancing even more attractive to those with equity because their loan-to-value ratio may fall to a lower threshold, pushing their qualifying mortgage rate even lower.

So for those who believe their home value will keep increasing, pumping the brakes on refinancing might be a good move, especially if you’re right on the cusp of a LTV threshold such as 80%, where you can ditch mortgage insurance.

Pro: Record Low Rates

On the flip side of that argument, one could argue that mortgage rates are at unprecedented levels, and you’d be a fool not to refinance now.

After all, what if mortgage rates tick higher and you “miss your chance” at snagging a 30-year fixed near 3%?

You might kick yourself a few times for missing the boat. And how low can mortgage rates really fall?

Con: Even Lower Rates

Well, the housing pundits have said that month after month, and week after week, only to grab their erasers and pretend they didn’t call a mortgage rate bottom.

I’ll admit that I’ve been one of those people.

Yes, rates are absurdly low, but no, they probably haven’t bottomed. There is still so much uncertainty out there that can push rates even lower.

Europe is still unraveling, and whether there has been much improvement locally is still a big question mark.

With the Fed pledging to buy mortgage securities until the cows come home, waiting could pay off.

Pro: Lower Payments Today

But, the longer you wait to refinance, the more you’ll pay each month in the form of a higher interest rate.

So if you keep riding it out, waiting for that perfect time to refinance, you’re essentially missing out on a lower payment during those months (or years).

Make sure you factor in all that money once you finally make the decision to refinance. The savings could be skewed as a result.

Con: Big Picture Savings

Of course, you might just say, “hey, I might be spending more each month now, but once I get a 2.50% 30-year fixed, I’ll be ahead in no time.”

That could be true, and someone who waits a bit longer could wind up with an even better rate and a lower monthly payment, which could spell bigger savings over the years ahead.

[Locking vs. floating]

After all, refinancing costs money (unless it’s a no cost loan), and serially refinancing isn’t always possible (nor fun), especially if your credit takes a hit or something else makes you ineligible.

Pro: You’re Eligible Now

Speaking of, if you’re eligible now, and the interest rate is dynamite, letting it ride might not be the best move.

What if something does bar your eligibility, such as unemployment, a mindless missed payment that leads to a lower credit score, or simple program changes?

There’s been talk about all types of stuff on the horizon, like a qualified mortgage, which Romney mentioned in the first presidential debate.

You wouldn’t want to be caught out by a future change or misstep, would you?

In summary, you can’t really go wrong by refinancing right now, assuming it saves you money, but yes, waiting could prove to be better.

In any case, take the time to really think it over!


Mortgage Rates, Delinquencies, and Negative Equity All Drop

Last updated on January 11th, 2018

It sounds like we just hit the housing recovery trifecta, all in one stellar news day.

The 30-year fixed fell to its lowest point on record, 3.34%, according to the latest survey from Freddie Mac.

That’s down from 3.40% last week and 4% a year ago, not that those prior high mortgage rates were a roadblock for anyone looking to purchase a home or refinance an existing mortgage.

Then there’s the national mortgage delinquency rate (at least one payment past due), which fell to 7.40% in the third quarter, down from 7.58% in the second quarter and 7.99% a year ago, per the Mortgage Bankers Association.

The serious delinquency rate (90 days or more past due) also dropped, from 7.31% to 7.03%, and is nearly a percentage point below the 7.89% rate seen a year earlier.

It’s at its lowest point since 2008, which is surely good news seeing that the world seemed to be ending at that time.

There were also fewer loans in the process of foreclosure at the end of the third quarter, with the rate dropping from 4.27% to 4.07%.

The foreclosure start rate also hit its lowest point since 2007, thanks in part to improved loan modification programs, increased property values, and perhaps better efforts by loan servicers and lenders to explore other options first (or maybe they’re just taking their sweet time to foreclose).

All of this points to a smaller shadow inventory, which is that nasty supply of homes that don’t show up in the officially reported numbers that could keep downward pressure on home prices.

Negative Equity Dips Below 30%

negative equity chart

Finally, negative equity has also been dropping like a rock. During the third quarter, it fell from 30.9% to 28.2%, according to the latest Negative Equity Report from Zillow.

It was the biggest quarter-over-quarter drop since the first quarter of 2011, and the first time negative equity has been below 30% since Zillow revised its methods for determining negative equity.

Another 1.3 million homeowners were able to get their heads above water during the quarter, though more than 14 million are still unable to breathe.

Still, negative equity levels continue to be downright scary in many hard-hit regions.

In Vegas, 63% remain underwater, and 50.4% of Atlanta residents have no home equity. Not good by any stretch.

Housing Market at a Crossroads

Yes, mortgage rates are down, delinquencies keep marching lower, and home values are slowly rising.

But we remain in a perilous position. The biggest buzzword lately has been the “fiscal cliff,” which is a series of spending cuts and tax increases expected to take place on January 1, 2013 if Congress doesn’t act soon.

At risk is the mortgage interest deduction, along with the special treatment short sales get so ex-homeowners aren’t forced to pay tax on the forgiven amount.

Clearly any major changes to housing initiatives will dampen the recovery. And if the economy at large is hurt as a result of the fiscal cliff, you better believe housing will come down with it.

There are already negative indicators, such as the fact that the housing inventory has shrunk yet home prices are unmoved.

The next six months will be a key period for housing, and hopefully we’ll be able to determine if this recovery is for real, or just another artificial boost set to lose steam before another downward cycle.

Buckle up, it’s going to be a bumpy ride.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.


Median 30-Year Mortgage Rates Over the Past 42 Years

Last updated on February 2nd, 2018

Everyone knows mortgage rates are low. But just how low are they compared to historical averages, or should I say, medians?

Well, fortunately John Burns of John Burns Consulting did the math for us in a recent newsletter.

Currently, 30-year fixed mortgage rates for conforming mortgages sit at 3.51%, on average, per the latest Freddie Mac survey released this morning.

They’ve been pretty steady of late, changing no more than five basis points (0.05%) in the past month, at least, according to the Freddie Mac survey.

And with the Fed pledging to continue buying mortgage-backed securities, they’ll ideally stay put for a lot longer.

Where Mortgage Rates Used to Be?

So we know where rates are now, but just how high were they in the past?

Well, as noted, John Burns ran the numbers for 30-year, fixed-rate conforming mortgages over the past 42 years.

Below are the medians to put it in perspective:

– 8.15% over the past 42 years
– 7.45% over the past 30 years
– 6.52% over the past 20 years
– 5.72% over the past 10 years

FYI: The median is the middle of a set of numbers, and is a good measure to avoid outliers skewing the data.

As you can see, mortgage rates have inched lower and lower over the past several decades, and that median will drop even more thanks to the near-record low rates available today.

Low Mortgage Rates Boost Purchasing Power

Clearly this has had a major impact on purchasing power for prospective homebuyers.

In fact, Burns noted that back in November 2008, a family who could afford a $1,000 monthly mortgage payment could take on a $165,000 loan amount.

At that time, the 30-year fixed stood at a reasonable 6.05%, before the Fed took action with its ongoing quantitative easing.

Today, that same family’s $1,000 mortgage payment would afford them a $222,000 mortgage.

This means they can afford a home that is 34% more expensive, simply because the interest rate is so much lower.

While this may be viewed favorably for those looking to buy today, and existing homeowners hoping their values rise, it presents a problem down the line.

In the future, if property values rise as a result of this newfound affordability, and mortgage rates eventually rise as well, home prices will once again be too expensive.

Bubble Trouble?

This could lead to another bubble, especially if banks and lenders are forced to get “creative” again with their financing in order to keep payments manageable.

However, Burns notes that with rates as low as they are, home prices can rise another 28% nationally before equaling the typical housing affordability seen over the past decade.

Looked at another way, 133 of 134 markets in the U.S. are “underpriced” from a payment/income standpoint. But only 69 of 134 markets are underpriced from a price/income standpoint, which reveals that home prices are being propped up by the low rates.

[Mortgage rates vs. home prices]

This hasn’t historically been the case. In fact, in the past both home prices and mortgage rates have increased in tandem because both tend to move higher when the economy is growing.

And assuming home prices do rise 28%, price/income ratios will wind up 27% higher than their historical norms, which can create major problems.

[Mortgage vs. income]

Unfortunately, there’s no turning back now. The Fed didn’t want to let home prices fall back down to earth, so we’re looking at ongoing inflated prices.

Of course, this is good news for existing homeowners looking for an exit, along with new buyers who stand to see some pretty stellar appreciation.

It just appears as if we’ll have to deal with the consequences again in the future. But hey, that’s what we always do anyway.

Read more: How much house can I afford?

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.


11 Ways to Build Home Equity

These days, home equity is booming thanks to rapidly appreciating property values.

At last glance, total equity on mortgaged properties exceeded $10 trillion, with more than $6.5 trillion of it tappable, per recent figures from Black Knight.

tappable equity

Yes, that’s a “T” not a “B.” But you would of never guessed it less than a decade ago after the housing bubble burst and put millions in underwater positions.

In the early 2000s, it was all about tapping into your home equity with a line of credit or a cash-out refinance, often at absurdly high loan-to-value ratios (such as 100%).

The whole using your house as an ATM thing to make lavish purchases or even just pay the bills each month became the norm.

As a result of all that excess, the narrative quickly changed to overpriced homes, declining equity, negative equity, underwater mortgages, loan modification programs, foreclosures, and so on.

Funny how that works…

This reversal of literal fortune was caused by crashing home prices and zero down mortgages, many of which weren’t properly underwritten to begin with.

Most of those who got into trouble purchased homes at the height of the market at unsustainable prices, while at the same time relying on 100% financing to get the deal done.

This caused lots of homeowners to leave or think about walking away, as home price deprecation was found to be the leading driver of default.

But many of those who stuck around and rode it out are actually in great shape, and even better positions than when they first took out their mortgages.

In fact, those who held on, even if they purchased a home in 2006, could be up 50% today thanks to the recent boom.

However, others are still feeling the negative effects of the housing crisis, even after several years of double-digit home price gains.

If you’re one of those homeowners, or even if you’re not, you may be wondering how to build some home equity.

That way, when it comes time to sell your home (or refinance your mortgage), you can do so without worry.

Those with more home equity will walk away with more cash in their pocket, and if refinancing, may be able to qualify for a lower interest rate.

Let’s look at the many ways you can build equity in your home:

1. Rising home prices – Here’s an easy one that requires no effort on your part.

When property values climb higher, you will gain equity simply because your home or condo will be worth more. It’s as simple as that.

For example, if your home was worth $200,000, and then rose to $250,000 after five years, you’d have $50,000 more equity.

This is the beauty of homeownership, and one of the many advantages of owning a home versus renting.

In fact, the most recent Survey of Consumer Finances (SCF) from the Federal Reserve revealed that homeowners had a net worth of $255,000 versus just $6,000 for renters. A lot of that can be attributed to home equity.

Of course, the opposite can also occur if home prices drop, as we all now know. But at the moment, everything appears to be on the up and up.

2. Falling mortgage balance – Here’s more low-hanging fruit. As you pay off your mortgage each month, you pay a portion of interest and a portion of principal (assuming it’s not an interest-only home loan).

Any principal payments made will boost your equity as your home loan gets paid down.

For example, you’d gain $343 in principal during the first month on a 30-year fixed with a $200,000 loan amount set at 3%.

After a year, that’s about $4,000. And after five years, more than $22,000!

Every time you make your mortgage payment, you’ll gain some home equity. And when combined with an appreciation, it can be a powerful one-two punch.

3. Larger mortgage payments – This one requires more money out of your pocket, but can save you money at the same time.

If you make larger payments each month, with the extra portion going toward principal, you will pay off your mortgage much faster and gain home equity a lot quicker. Simple and effective.

While it will cost you more initially, you’ll pay a lot less interest over time.

For example, your total interest expense would fall from $104,000 to $59,000 if you paid just $200 extra each month, and your mortgage would be paid off nearly a decade early.

4. Biweekly mortgage payments – Here’s another way to save on interest with very little effort.

You can go with a biweekly mortgage payment plan, where you make 26 half payments throughout the year, which equates to 13 monthly payments.

This will shave down your mortgage term, save you a ton in interest, and help you build home equity a lot faster.

There’s also a simple way to do this without having to sign up for a program that may cost money where you just add 1/12 to each monthly payment.

5. Shorter mortgage term – If you’ve got the means, and want to extinguish your home loan earlier, think beyond the 30-year fixed.

It’s possible to refinance into a shorter-term mortgage with a lower mortgage rate, such as a 15-year fixed, which will increase the size of your payments, but build equity at a much higher rate than a traditional 30-year mortgage.

You might also be able to pick something in between, like a 20- or 25-year fixed, or even something that matches your original term, like a 22-year loan term.

This will keep you on track, or even ahead of schedule, and also help you avoid resetting the clock.

6. Avoid refinancing – Conversely, if you don’t refinance and pull cash out, you’ll retain all the equity in your home.

During the prior housing boom, scores of homeowners refinanced their loans over and over until they sucked their equity dry.

This was actually one of the reasons why many chose to walk away, or were forced to sell short or foreclose.

Had they just paid down their loans over time, most would of been in pretty good shape.

Simply put, it’s fine to tap equity, but like everything else, moderation is key.

7. Home improvements – Here’s a potential win-win that you can actually enjoy.

If you make smart home improvements, where the expected value exceeds the cost, you’ll increase your home equity by owning a home that’s worth more.

While it’s seemingly the same exact house, smart home devices, quartz countertops, and stainless steel appliances still draw buyers in, and you might be able to sell for more.

You can even do it for free if it’s your own sweat equity. And in the meantime, you get to enjoy a better house.

8. Maintenance – Now let’s talk about being a responsible homeowner.

Keep your home in tip-top shape and you will be rewarded when it comes time to sell.

If you can unload it for more as a result of proper maintenance, you’ve essentially created more equity in your home.

Home buyers often hit sellers with costly repair requests, but it’ll be more difficult for them to ask for concessions if you took great care of your home.

It could even be prudent to get a home inspection yourself, before you sell, to address any red flags before a buyer tries to get you to pay for them.

9. Curb appeal – This is one of my favorites and something anyone can do to boost their home value, and therefore equity if selling.

I’m referring to curb appeal and also home staging. Make your home look good when you list it and there’s a better chance it’ll sell, and sell for more.

Simple things can make a big difference, such as new paint, carpet, bright lighting, plants, flowers, and even basic cleanliness or a lack of clutter.

Or even how you arrange your home. For example, if home offices are en vogue, make a room that served a different purpose into an office to bring in more buyers.

10. Rent it out – One of the best ways to build equity is to have someone else do it for you.

If you rent out part or all of your property, it’s possible to build equity via the rent you receive from your tenants each month.

Having someone else pay off your mortgage is pretty sweet, especially if the property appreciates at the same time.

11. Bigger down payment – Finally, you can make a larger down payment at the outset to automatically acquire home equity and build it faster thnaks to a lower outstanding balance.

While this may seem like you’re putting money in an illiquid investment, more equity means a lower loan-to-value ratio, which may equate to a lower interest rate, no mortgage insurance, and easier-to-obtain financing.

Over time, that lower mortgage rate and smaller loan balance will mean less interest paid and more equity accrued.

It’s also possible to recast a mortgage or complete a cash in refinance to get your loan balance down and increase your equity.

Just remember that any extra money might be better served elsewhere, such as the stock market or a retirement account.

Bonus: If you happen to be an underwater homeowner, get the bank to grant you principal forgiveness and you’ve essentially built home equity, even if you’re still just above water as a result.


So You Want to be President of Your HOA?

Before you buy a home in an HOA-governed community, make sure you review the rules thoroughly.

What does HOA mean?

HOA means homeowners association. It can also be referred to as HOD or Home Owners Dues. HOAs can exist in planned housing developments, town homes, and condos. It is generally billed on a monthly basis.

Most people think of homeowners associations (HOAs), legally known as Common Interest Developments, as related to attached housing structures like condominiums or town homes. But this is not always the case.

Around the 1980s, developers started building communities of single-family homes that were actually Common Interest Developments. These communities came with their own sets of rules, regulations and HOA fees.

The reason builders starting developing communities in the HOAs structure was to maintain order and the aesthetics of a community. Their rules keep home paint colors and front yards in harmony, restrict building additions that don’t fit into the neighborhood, and stop owners from parking broken-down vehicles in their driveways or front yards. Such regulations assure new and existing owners that a neighbor’s behavior and choices will not diminish property values.

But they also mean that you must follow the rules yourself, and typically contribute monthly fees to manage and run the HOA for the benefit of all owners. When residents violate these rules — which can cause stress for other owners and hurt property values– the HOA will typically step in and enforce them with violation notices, fines and possibly litigation, if the issue gets that far.

The root of the issue

Often, the problem is not the rules, it’s that people don’t read the rules and regulations before they buy into a community, and then they violate the rules. But ignorance is no excuse — those rules are recorded on the property title, and likely given to every buyer to review before they purchase a home in a standard transaction. Owners are still bound by those rules whether they received and read them or not.

If you are buying into an HOA-governed community, be sure to read the rules and regulations before you buy. Once you’ve read them, if you don’t like them, then you should avoid buying a property in that community.

What if you already own in an HOA, and don’t like the rules or how the elected HOA board of directors interprets and enforces them? Luckily, an HOA is a democracy and the owners can vote out the board of directors and change the rules!

Any member-owner can try to get elected to the board and change the regulations. They just have to get enough other community members to support their opinion and vision for the community.

Unfortunately, most community members never go to a board meeting and never get involved. They just complain about the board — who are all volunteers, by the way — and complain about HOA fees, rules, and special assessments, etc.

If you are one of those owners who doesn’t like the rules, then get involved and take the time to campaign in your community, get on the board, and change the regulations.

Do Renters Pay HOA Dues?

“The landlord cannot force you to pay the HOA unless that is what is required in the lease. If it is part of the lease, then you have to pay. If not, you don’t, but the owner may decide to find another tenant when the lease is up.

If the HOA is not doing their job in clearing snow, I would write them a letter and send copy to the landlord. You are not the owner so they may not listen, but it gives you proof of the issue and may prompt the owner to act.”


Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.


Should You Only Buy a House If You Can Afford a 15-Year Fixed Mortgage Payment?

Posted on June 10th, 2019

I’ve already written at length about the pros and cons of a 15-year fixed mortgage, but some financial experts claim you shouldn’t even buy a home if you can’t afford this shorter-term mortgage option.

You know, guys like Dave Ramsey, and perhaps more reasonable folks like that financial planner you visited recently.

The problem is that many, many Americans simply can’t afford the higher monthly payments tied to a 15-year fixed mortgage, for better or worse.

And that shouldn’t necessarily stop them from purchasing a home.

15-Year Mortgage or Bust?

  • Some financial gurus argue if you can’t afford the 15-year fixed mortgage payment
  • You’re buying too much home or simply shouldn’t be buying
  • But this “rule” is simply too rigid for my liking
  • You can always pay more each month, refinance, or put your cash to use elsewhere

Let’s talk about the rationale behind this theory first to see why it is often suggested.

With a 15-year fixed mortgage, you own your home in, you guessed it, half the time, just a decade and a half, versus the lengthy three decades it takes to pay off a more common 30-year fixed-rate mortgage.

That’s the first big benefit, obviously. Another is you save an absolute ton on interest because the amortization period is cut in half (and the interest rate is lower as well).

So on a $300,000 mortgage, the interest savings are $127,000 over the life of the loan. Yes, you read that right.

You can save a staggering amount of money simply by going with a 15-year fixed instead of the more commonplace 30-year fixed.

Aside from saving a boatload of cash, you also own more of your home a lot faster.

So if you need/want to move out at some point in the near future, you can probably do so with the 15-year mortgage in place.

With the 30-year, you might not accrue enough equity to afford a move-up home, or simply another home in a similar price range.

After five years of on-time mortgage payments, our hypothetical $300,000 mortgage balance is only paid down to around $270,000.

Meanwhile, during that same span the 15-year fixed is left with a balance of just over $214,000.

A homeowner who maybe wisely opted for the 15-year fixed would have over $85,000 in home equity (not to mention any home price appreciation during that time).

That could be plenty for a down payment to move up to a larger home.

The 30-year fixed buyer would only have $30,000 to play with…factor in costs to sell the home and it’s not as awesome as it sounds.

It’s for these reasons that financial gurus will tell borrowers to go 15-year fixed or bust.

The argument is essentially that the 30-year fixed mortgage is a bad deal for homeowners and should be avoided at all costs.

So if you can’t afford the higher payments, don’t buy a house because a 30-year mortgage just shouldn’t exist, and as such, you shouldn’t be a homeowner.

There’s a Reason the 30-Year Mortgage Exists

  • Home prices vary considerably by region
  • In some areas they’re far too expensive for most home buyers to pay them off in 15 years
  • You can also argue that paying off your mortgage isn’t always the best investment
  • Especially when mortgage rates are at or near historic lows

The problem with the argument above is that most home buyers probably can’t go with the 15-year fixed because in reality it’s unaffordable. You can blame high home prices for that.

Sure, in areas of the country where homes regularly sell for $150,000 it might not be a big deal.

The difference in monthly payment could only be a couple hundred bucks.

But in areas where homes sell for much, much more, we’re talking a night and day difference in monthly payment.

The mortgage payment on the 15-year fixed from our example above is around $700 higher, even when factoring in a lower mortgage rate (I chose 3% on the 15-year vs. 3.75% on the 30-year, a reasonable spread).

Many individuals barely qualify for the mortgages they take out, and that’s with the much lower 30-year fixed payment. Adding another $500 or more in monthly outlay probably won’t fly for most.

Does this mean they shouldn’t own homes? Absolutely not. It just means the bank will own most of your home for a lot longer. And that you won’t be as heavily invested in your property.

While it sounds great on paper to throw everything toward the mortgage, a lot can go wrong when you’re in too deep on one investment.

Remember the old “all your eggs in one basket” idiom?

Shouldn’t these same financial gurus be wary of that as well, especially if home equity makes up the overwhelming majority of your personal wealth?

It Can Backfire

  • Imagine a period of declining home prices
  • If you pay off your mortgage in 15 years you might have all your money locked up in your home
  • Whereas the 30-year fixed borrower will have cash for other expenses
  • One could argue that a longer-term mortgage enhances diversification

We all saw what happened a decade ago when the housing market collapsed.

I’m assuming those who made 15-year fixed mortgage payments weren’t too happy that their property values were sliced in half.

The 30-year fixed mortgage folks probably weren’t thrilled either, but at least they could cut their losses or continue to make smaller payments as they assessed the rather dismal situation.

Even in good times, you can get pretty house poor making massive mortgage payments each month if they’re barely affordable.

And you may neglect other, arguably more important investments such as a retirement account or college fund, along with other higher-interest debt.

When it comes down to it, you always have the option to make a larger payment (or extra payments) on a 30-year mortgage.

It’s also possible to refinance into a shorter-term mortgage once you’re in a better position financially, perhaps once you’re a bit older.

So starting out with a 30-year fixed mortgage could be a great strategy for someone sick of renting, which these financial experts probably also advise against.

And there are lots of savvy individuals who recommend putting your extra cash somewhere other than the mortgage.

That’s not to say a 15-year fixed won’t save you a ton of money, or that it’s perhaps a cool rule of thumb when setting out to buy a home.

In a perfect world, it’d be great if we could all afford the 15-year fixed mortgage payment. But that’s just not today’s housing market.

Of course, results will vary based on where in the country you intend to buy. And how much you make. But don’t be discouraged or feel you can’t take part based on mortgage product alone.


How To Get Rid of PMI, or Private Mortgage Insurance

Private mortgage insurance removal is on the minds of many homeowners because it makes up a significant portion of their monthly payment. When you put a low- or medium-sized down payment on a home, PMI is the insurance you are required to buy to help the lender not have quite so much risk. 

Once you’ve paid off a particular chunk of your loan, or hit a certain timeframe, you have opportunities to learn how to remove PMI. There are a few ways to trigger this removal but if you want to get rid of it as soon as possible, you can pay particular attention to your loan-to-value ratio (LTV) and the way your home’s value has changed in the marketplace.

In this article

Ways to get rid of PMI 

At some point in your loan, your lender will remove PMI for you, so you don’t have to learn how to get rid of PMI if you don’t want to. However, many mortgage holders are paying $100 a month or more in PMI, so getting rid of it could put some cash back in your pocket sooner rather than later.

  • Automatic cancellation: The magic number for an automatic cancellation of PMI is 78% loan to value ratio. Loan to value ratio means how much principal you still have to pay compared to the value of the home. Lenders see that the risk that they wouldn’t be able to recoup their losses through foreclosure is much lower when you’ve paid off at least 22% of the value of the house. They also know you have a lot invested in this home at this point, so when that value hits (based on purchase price, not current value), you’ll no longer pay PMI.
  • 80% of your home’s original value — 78% is the automatic point, but most lenders will go ahead and remove PMI if you request in writing that they do so at 80% of your home’s original value. Those 2% may not seem like a lot, but it can take many months to pay that much of the house’s value, so you may find it worthwhile to follow your lender’s guidelines for requesting the removal of PMI. That being said, the lender may not grant the PMI removal if you have a history of late or very late payments or if you have other debts like second mortgages or lines of credit on the home. They also may require some proof that the house has held its value, like an appraisal or a broker’s opinion on the value.
  • Request PMI cancellation sooner — If you are willing to pay ahead a bit, you can make extra payments on the principal of your loan to get to 80% early, and then accompany those payments with a request in writing for PMI to be cancelled. Make sure to ask when you are getting your loan to begin with whether the lender charges any kind of fee for extra payments or early repayment of the loan.
  • New appraisal — Some lenders will let you remove PMI earlier than you might otherwise do so if it turns out that your home has gained a lot of value according to an independent appraiser. If your lender allows this option, you’d have an appraiser evaluate how much your home has grown in value and they’d report that to the lender. Let’s say you bought a home that was worth $200,000, and you’ve only paid off $30,000 in principal, so you have $170,000 left to pay for a 85% LTV. If the appraiser says the home is now worth $250,000, your loan to value ratio is now down to 68%, meaning you qualify for the PMI removal due to that big increase in value.
  • Refinance — While many people don’t refinance just because it’s how to get rid of PMI, that can be one benefit. If you’ve noticed that property values in your area are going up, and if you see that interest rates are competitive now, refinancing your mortgage can lock in a better rate and showcase that your home is worth more now. If this will also put your LTV below 80%, your loan won’t require PMI either, saving you money. Just know that closing on a new loan comes with its own fees, so make sure that you work out whether that is a worthwhile trade-off in your case.

Know your PMI rights

Private mortgage insurance is a protection for the lender, not for you, so it can be frustrating to pay it (especially if you know that you are going to pay your debts on time). There are protections you can rely upon, however, and you can hold lenders accountable if they try to violate any of these rights.

First and foremost, you deserve to know what the lender’s practices are. You should be very wary of any lender who cannot give you their PMI cancellation policy in writing before you take out the loan. This policy allows you to follow their guidelines and get PMI removed when you were promised you could.

Second, the 78% LTV rule should be observed as an automatic cancellation as long as your payments are current. If your lender gives you other reasons why they cannot remove PMI, you can reach out to the Consumer Finance Protection Bureau to find out more about whether they are allowed to require PMI under your particular circumstances or if they are dragging their feet illegally.

Even if you haven’t reached 78% LTV, the halfway point in your loan (for instance, 15 years into a 30-year loan) is a time when you should be able to stop paying PMI and it should be automatically cancelled. You have the right to ask why it hasn’t been done as long as you are current on payments.

Get to know the Homeowners Protection Act if you worry that your lender isn’t allowing you to remove PMI even when you have completed one of the standard ways to do so. Lenders can set some of their own PMI removal guidelines but if they contradict the HPA, you have the right to point that out and learn how to get your PMI removed anyway.

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Are Home Prices Going to Surge in 2020?

It’s a new year, and with that comes old questions, like will mortgage rates go up or down in 2020? And will home prices rise or fall?

Well, a few months ago, you would have probably thought the answer to the home price question was a no-brainer.

After so many years of seemingly unsustainable appreciation, there’d just be no way home prices could eek out more gains, let along big ones.

But that logic has just been turned on its head thanks to a new report from Zillow, which claims we’re running out of homes again.

For-Sale Inventory Hits Lowest Point Since 2013

  • Uptick in housing inventory appears to have been short-lived
  • Lowest number of for-sale homes on the market since at least 2013
  • Supply is only expected to worsen from here with little home building and lots of demand
  • Could be the recipe for even higher home prices in 2020

This isn’t the first time we’ve run out of homes, but after an uptick in inventory over the past couple years, it appeared things were turning around.

However, that “inventory bump a year ago proved to be short-lived,” per Zillow, as we now have the lowest number of for-sale homes in at least seven years.

Yes, inventory is basically back to levels not seen since 2013, and if you recall, home prices were bottoming just before and around that time.

To make matters worse, supply is supposed to get even tighter before we see any relief.

While this is pretty much excellent news for existing homeowners, who will likely see their property values continue to surge, it’s especially bad news for renters trying to get into the game.

Zillow said there were just 1,489,417 homes listed for sale in December, some 120,000 fewer than there were a year ago.

That represents a 7.5% annual drop, and the lowest total dating back to 2013, when Zillow first began collecting such data.

The company referred to the temporary inventory relief seen in 2018 as a “false dawn,” led by a stock market swoon and a jump in mortgage rates, not the beginning of a “sustained trend.”

It turned out that the stock market only surged higher, and mortgage rates have since trickled down close to record lows again.

That has home buyers chasing after whatever’s out there, meaning demand continues to outweigh supply.

Where Housing Inventory Is Down the Most

Remember, real estate is local, and some metros are experiencing more inventory constraints than others.

In fact, housing supply actually went up year-over-year in four out of the 35 largest U.S. housing markets, including San Antonio (+8.1%), Detroit (+7.6%), Atlanta (+1.8%) and Chicago (+0.6%).

Here’s where inventory has dropped the most over the past year:

  1. Seattle (-28.5%)
  2. San Diego (-23%)
  3. Sacramento (-21.7%)
  4. Phoenix (-21%)
  5. Cincinnati (-16.8%)
  6. San Jose (-16.6%)
  7. Los Angeles (-16.5%)
  8. Portland (-15.7%)
  9. Austin (-15.6%)
  10. Riverside (-15.5%)

Home values increased the most in Phoenix (+6.5%), Columbus (+5.9%) and Charlotte (+5.9%) during 2019, and fell in only two markets, San Jose (-6.4%) and San Francisco (-1%).

Inventory is down quite a bit in the Bay Area, so it might not be everything when it comes to home price gains, especially when affordability hits the ceiling. But we’ll see how 2020 plays out.

Home Price Gains May Accelerate in 2020

  • Home prices rose 3.7% from December 2018 to $244,054
  • Significantly lower than the 7.6% annual increase seen a year earlier
  • With supply and interest rates low, we could see a reacceleration
  • Especially when you factor in the wave of coming-of-age home buyers

If 2019 was the year of slowing home price growth, 2020 might be the year it kicks back into gear.

Zillow pointed out that annual rate of home value growth slowed in December, marking the 20th consecutive month it had done so.

But perhaps more importantly, the gap seen between November and December was the smallest one-month decline since home price appreciation began to slow.

And with the traditional spring home buying season just around the corner, we could see a serious jump in home prices, given this supply and demand imbalance.

Last year, home prices rose 3.7% to an average of $244,054, markedly lower than the 7.6% increase seen a year earlier.

However, the value of the U.S. housing market is now a staggering $33.6 trillion. In the 2010s alone, U.S. property values increased by $11.3 trillion, a more than 50% increase.

Roughly 14% of the gain came from new construction, while the remainder was a result of higher prices on existing housing stock.

Now it appears we might be in for even more. This speaks to how long booms and busts take to actually play out.

You always assume it’s done before it goes up (or down) another notch. Just like the stock market, which continues to hit milestone after milestone. And I believe that’s what we’re seeing here.

Once you factor in the 45 million Americans reaching the average first-time home buyer age of 34 over the next decade, it becomes pretty clear. We need more homes, and fast.

Unfortunately, it also means trouble might be brewing since housing affordability has been a concern for several years now.

That might put us at a crossroads. Either we build more homes and deal with the supply issue head-on, or financing gets “creative” again to help more prospective buyers into homes they may not be able to afford.

If it’s the latter, that bust we were worried about in 2019 could be right around the corner. Just remember, it takes a little longer than you expect to get to the corner…

Read more: When will the next housing crash happen?