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One of the biggest wealth transfers in history is about to unfold.

That is, it’s estimated that more than $68 trillion in wealth – involving 45 million households across the U.S. – will be transferred through inheritance in the next 25 years.

Will you be one of them?

If you’re a Millennial or a Gen Zer, chances are you may be in the group of Americans most likely to benefit from this massive transfer.

If so, you’ll need to know how to plan for an anticipated inheritance, even if you’re not sure of the details.

What’s Ahead:

1. Have a rough idea of the amount that you are set to inherit

How To Plan For An Anticipated Inheritance In 9 Steps - 1. Have a rough idea of the amount that you are set to inherit

Source: shurkin_son/Shutterstock.com

Though this seems like a simple step, it often isn’t.

Not all parents or grandparents are open about their personal net worth (it’s a generational thing). And asking how much you can expect to inherit – or, if you’ll be inheriting anything at all – can seem presumptuous at best, and greedy at worst. 

Some parents and grandparents will be open to this question. Some may even provide the information without you asking. But if that’s not your situation, you’ll need to proceed carefully and delicately. 

How do I find out how much I will inherit?

You probably already have an idea of your parents’ approximate net worth, but if you don’t, don’t beat yourself up. After all, it isn’t always that obvious on the surface.

The best way to find out?

Just ask.

If your parents aren’t forthcoming about their finances, you’ll need to step back. That doesn’t mean giving up, however. You can let some time pass, then approach the subject later. Just be sure to frame it in such a way that you’re interested in protecting all they’ve worked so hard to accumulate.

2. Learn what makes up the inheritance

Some estates are very simple, while others can be incredibly complicated. The best scenario is a parent who rents his or her home (no house to sell) and has nearly all wealth sitting in financial assets, like bank and brokerage accounts.

Things get way more complicated when a large share of the estate is held in real estate, and especially investment real estate. More complicated still is business equity.

Collectibles, like jewelry and artwork, can also be problematic. You’ll first need to get a ballpark estimate of the value. But before they can be sold, they may need to be formally appraised. 

Just as important, your parents may prefer to pass real estate, business interests, or collectibles to specific individuals. That may or may not include you, which is something you need to know before you plan to inherit them.

3. Know if there are other beneficiaries

Source: Motortion Films/Shutterstock.com

This is as delicate an issue as requesting the value of your parents’ estate. If you are the sole beneficiary, it’s a non-problem. But if there are siblings, or others your parents may want to distribute assets to, the waters can get a bit muddy.

In a perfect world, your parents will set up an equal distribution for you and your siblings. But real life isn’t always so simple. 

For reasons known or unknown to you, your parents may choose unequal distributions. This can be due to family politics, like one sibling being favored over the others, or one sibling being closer to your parents than others. In some situations, parents may choose to give a larger share to a child who provides for their direct care in their later years. 

There may still be other situations where your parents want to make special provisions for one of your siblings or even a grandchild.

Yes, it can get worse!

But those aren’t even the most complicated beneficiary situations.

Given that divorce is common, and often involves a second set of children, there may be issues and limitations. 

In some extreme situations, parents may disown one or more children, and exclude them from the inheritance. If that might be you, you’ll need to know.

Finally, complicated family situations can result in probate. That’s where the estate has to go before a judge prior to distribution. This can happen because of the nature of the family situation, or because one or more potential beneficiaries (or even an excluded party) challenge the distribution of the estate proceeds.

If that situation seems likely, it’s one that should be discussed with your parents. They may need to set up a trust to ensure each beneficiary gets the intended distribution so the estate can avoid probate.

4. Understand the intended distribution process 

This primarily has to do with the timing of inheritance distributions. While the conventional distribution method is to distribute all beneficiary shares on a common date when the estate is settled, that’s not always the case.

Parents sometimes arrange to have estate assets distributed gradually.

For example: if one or more beneficiaries is considered to be irresponsible with money, the parents may set up a staggered distribution over a period of several years. 

A staggered distribution is often accomplished through a trust. If your parents have set up a trust, either for part or all of the estate, you’ll need to know of its existence, as well as the intended distribution.

Some trusts are even more specific

For example, they may include provisions that will distribute funds based on certain milestones. Common examples include holding distributions until the beneficiary turns 30 (or some other age), or gets married (or divorced, if the marriage is shaky).

Trusts can be amazingly specific, which is why people set them up. That’s also why you’ll need to know any distribution method that will be used. 

Some estates may also have provisions to make staggered distributions based on asset types.

For example: cash-type assets may be distributed early in the estate process. But real estate and business interests may not be distributed until they have been liquidated. 

5. Estimate your personal finances at the anticipated time the inheritance happen

Source: Prostock-studio/Shutterstock.com

A big part of how you handle an inheritance will be determined by your own financial situation.

If you already have a sizable personal estate, you may be able to simply fold the inheritance into your existing plan. But if your finances are limited, you may need to be more intentional and figure out what you’re going to do with the inheritance when it arrives (ya know, so you don’t blow it all on a bright red Mustang). 

The point is, only when you have a clear picture of your own finances can you make the best use of an inheritance. And to get the greatest benefit, it can help to improve your finances before you receive the money. The better positioned you will be when the inheritance comes in, the more flexibility you’ll have in choosing where to allocate the money. 

If you’ve not been investing up to this point, you may want to begin before the inheritance comes in. It’s best to get investment experience with a small amount of money, so you don’t risk losing your windfall through poor investment choices.

Read more: Best Investment Accounts For Young Investors

6. Design a plan (aka what to do with the inheritance)

If you already have your own personal financial plan, planning for an inheritance will be much easier. But even if you do, you should have at least a loose plan for what to do with the new money. The worst choice is holding off until the inheritance is received. Without a solid plan, you may quickly draw down the new money, financing a series of wants.

Having a plan for the inheritance will ensure the money will provide for a better future. To learn how to set up a financial plan, check out our article: What Is A Financial Plan And Why Do You Need One?

Decide what your priorities are

The main purpose of a plan is to set up a series of priorities.

For example: if your retirement planning isn’t where you want to be, you can make it a priority to fix that with the inheritance. You can either use the new money to enable you to make larger retirement plan contributions or plan to set up an annuity specifically for retirement.

Take advantage of annuities

One of the advantages of annuities is that they can be used to shore up an adequate retirement plan.

Read more: What Is An Annuity And Should You Consider One?

The investment earnings on annuities accumulate on a tax-deferred basis, like retirement plans. But the major advantage is that there are no limits to your contributions. You can make a single, large lump sum contribution to an annuity and let it grow tax-free until retirement. You can set a date that distributions will begin, which can even cover the rest of your life.

In addition, Dr. Guy Baker, CFP and founder of Wealth Teams Alliance, also points out:

“Annuities are a fixed-income alternative. The opportunity to get a market return with no downside risk can be dramatically better than the income from an investment-grade bond of comparable risk. The amount to put into an annuity should coordinate with the age of the beneficiary and the investment objectives. In general, an indexed annuity can provide significant benefits for no additional risk.”

However, since annuities are complicated instruments themselves, you’ll need time to do research and evaluate the best one to take. That’s best done in advance of receiving an inheritance.

Consider starting your own business

In a different direction, maybe you’ve been dreaming of starting your own business. If you lack the capital to do that up to this point, the inheritance can make it happen.

In the meantime, you can make preliminary plans for the business, and even get it up and running as a side hustle. When the inheritance arrives, you’ll have an established business to grow, rather than starting a new one from the ground up.

Starting a business is always risky, though, so make sure you carefully consider such a big move if/when you do receive an inheritance.

Read more: How To Start Your Own Business – A Complete Step-By-Step Guide

7. Find out if there will be tax consequences

Source: Southworks/Shutterstock.com

You’ve undoubtedly heard the saying,

“the only things certain in life are death and taxes.”

Well, guess what? Sometimes the two happen at the same time. 

Officially, they’re called inheritance taxes. Because estates can contain a lot of money, governments view them as rich revenue sources. Just like they tax your income, your home, your utility bills, and even your purchases, there are taxes designed to snatch a part of an inheritance before you receive it. 

There’s good news and bad news here.

Let’s start with the good news…

There is a federal inheritance tax, but the good news is that it only applies to very large estates. 

Under current IRS regulations, estates that transfer from one spouse to another are generally tax exempt. But even when they pass to other beneficiaries, like children and grandchildren, there’s a federal estate tax exemption of $11.7 million, for 2021. 

That means if the total value of the estate (before distribution) doesn’t exceed $11.7 million, there’ll be no federal tax on the inheritance.

Now for the bad news…

18 states impose some type of state-level inheritance tax. And while some of those states match the federal estate exemption, there are no fewer than 13 with lower exemptions.

On the low-end, Massachusetts and Oregon can tax estates as low as $1 million. Rhode Island sets the threshold at $1,595,156.

Not many Americans have a net worth of over $11.7 million. But there are many millions with estates of $1 million or more. Even if you’re not affected by the federal estate tax, you may be subject to it at the state level.

If any of the estate tax thresholds may apply in your situation, whether at the state or federal level, you’ll need to be prepared for this outcome. 

So make sure you estimate for a lower inheritance

The best strategy is to estimate a lower inheritance, based on applicable estate tax rates. Fortunately, the estate will pay the inheritance tax before the money is distributed. But you still need to be prepared for a lower distribution amount.

If your parents are open about your inheritance, you may even be able to discuss the tax consequences with them. That way they’ll be in a position to take action to minimize them before the fact.

8. Decide if you’ll need a financial planner

If you believe your net worth is too small to justify a financial planner right now, you may change your mind when you receive a large inheritance. But you don’t have to wait until the inheritance arrives to at least consult a financial planner. 

If you know the approximate size of your inheritance, paying for a meeting with a financial planner may be money well spent. The financial planner can help you to make decisions to both set up your current finances in anticipation of the inheritance, as well as to make intelligent decisions when it actually comes. 

The financial planner may also provide ideas you may want to convey to your parents. They’re often unaware of strategies that will minimize inheritance taxes, or create a strategic plan for a more successful distribution of the estate.

In addition, if there may be questions surrounding the estate, perhaps involving the children of a previous or subsequent marriage, the financial planner may recommend consulting with an estate attorney.

The more you can do in advance, the less likely it is you’ll be blindsided when the inheritance arrives and the stakes are higher.

Read more: Are Certified Financial Planners Worth The Money?

9. Decide if you’ll need a trust

Source: Alla Aramyan/Shutterstock.com

If you don’t have one now, receiving a large inheritance might make a trust advisable. It may even be completely necessary if the inheritance is particularly large, or if you yourself have children from a previous marriage.

A trust is a way to protect your assets, and to ensure the money is distributed as you wish upon your death. 

Shawn Plummer, CEO of The Annuity Expert, explains further:

“You may need a trust if you want to specify how your assets will be distributed without a probate court getting involved. While a will can achieve a similar purpose, wills have to be authenticated by a probate court and can require more time and money.”

Just as important, a trust has the potential to protect your assets from seizure by creditors, or from litigation. With the larger personal estate the inheritance will create, you may need just that kind of protection. 

And don’t worry, you won’t need to pay an arm and a leg to get these documents drawn up. Trust & Will offers estate planning help with plans starting at just $39. This can help you avoid racking up a high bill with an estate planner.

Summary

You’ve probably known of situations where someone came into a large windfall, only to be broke a few short years later. Unfortunately, it’s not an uncommon outcome.

The sudden arrival of a large amount of money can cause an unprepared recipient to blow what could be a life-changing opportunity. It could have the potential to dramatically improve your finances and your life.

You’ll need a plan to make that happen, and it’s never too early to start drawing one up.

Read more:

Source: moneyunder30.com

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Weakening economic outlook, high inflation and affordability challenges took a toll on buyer demand, leading to a drop in both purchase and refi applications last week, according to the Mortgage Bankers Association (MBA).

The market composite index, a measure of mortgage loan application volume, declined 6.3% for the week ending July 15, the MBA said. The refinance index dipped 4% from the previous week, falling to a 22-year low, and the purchase index decreased 7%.

“Mortgage applications declined for the third week in a row, reaching the lowest level since 2000,” Joel Kan, associate vice president of economic and industry forecasting at MBA. “The decline in recent purchase applications aligns with slower homebuilding activity due to reduced buyer traffic and ongoing building material shortages and higher costs.”

New U.S. home building activity fell 2% to a seasonally adjusted annual rate of 1.56 million units in June, marking a nine-month low since September 2021, according to the U.S. Department of Commerce. Permits for future homebuilding fell 0.6%, to a rate of 1.69 million units, also the lowest since September. 

While the refinance share of all mortgage activity slightly increased from 30.8% the previous week to 31.4% of total applications, the refi index was 80% lower than the same week a year ago.

“With most mortgage rates more than two percentage points higher than a year ago, demand for refinances continues to plummet,” Kan said.

What lenders should know about today’s economic climate

Between navigating a post-pandemic world, rate hikes and the threat of a recession, mortgage lenders across the country are managing a volatile housing market. Learn how updating your mortgage technology stack can help you get ahead in today’s unpredictable lending environment.

Presented by: Polly

Mortgage rates have been volatile in recent weeks, following the Federal Reserve‘s interest rate hike of 75 basis points last month. After falling 40 bps two weeks ago to 5.30%, purchase mortgage rates climbed back last week to 5.5%, according to the latest Freddie Mac PMMS. A year ago at this time, 30-year fixed-rate purchase rates were at 2.88%.  

The trade group estimates the average contract 30-year fixed-rate mortgage for conforming loans ($647,200 or less) rose to 5.82%, from the previous week’s 5.74%. Jumbo mortgage loans (greater than $647,200) also increased to 5.31% from 5.25%. 

The Federal Housing Administration‘s (FHA) share of total applications rose to 12.4% from the previous week’s 11.7%. The United States Department of Agriculture‘s (USDA) share also increased to 0.6% from the week prior’s 0.5%. Meanwhile, the Veterans Affairs‘ (VA) share of total applications fell to 10.6% from 11.2%.

The share of adjustable-rate mortgages (ARM) applications also declined, accounting for 9.5%. According to the MBA, the average interest rate for a 5/1 ARM decreased to 4.6% from 4.71% a week prior. 

The survey, conducted weekly since 1990, covers 75% of all U.S. retail residential mortgage applications.

Source: housingwire.com

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Think mortgage rates are high now? Connie Strait remembers when she was starting her career in real estate in the early 1980s and buyers were contending with rates three times higher.

Strait recalled one couple who were actually relieved when they locked in a 30-year fixed-rate mortgage at 19% in September 1981. The couple had told her they were hoping to close on their new home before rates moved any higher.

“They were so delighted to be closing at 19%,” said Strait, who now works at William Raveis Real Estate in Danbury, Connecticut. “They said, ‘We made it in just under the wire, next week it is going to 20%!’”

The following month, in October 1981, the average weekly interest rate for a 30-year, fixed rate loan hit an all-time high of 18.6%, according to Freddie Mac. The average mortgage rate is based on a survey of conventional home purchase loans for borrowers who put 20% down and have excellent credit. But many buyers pay even more.

This week, the 30-year fixed-rate mortgage rate hit an average of 6.70%. Although it may come as cold comfort to someone who let a 3% rate slip through their fingers just seven months ago, today’s interest rates are, historically speaking, still relatively low.

“Unfortunately, now people don’t remember how Baby Boomers were getting rates of 10%, 12% and higher for most of the 1980s,” Strait said. “Meanwhile, our kids are shocked by 6%.”

Those ultra-high rates made homeownership less affordable in the early 1980s than it is now. By the mid-1980s though, mortgage rates had fallen somewhat, making financing more affordable, even with rates near 10%.

But many things have changed since the 1980s.

Given wage growth, sky-high home prices and rapidly rising interest rates, homes today are the least affordable they have been in 35 years.

Home affordability has worsened

Mortgage rates were high in the 1980s, but home prices were a lot less expensive, too.

In October 1981 a typical home cost $70,398. But with mortgage rates averaging 18.45% that month, the $870 monthly payment took up about 55% of the median income at the time, according to Black Knight, a mortgage data company.

By October 1986, rates had dropped to 9.97% and a typical home was $91,488. That brought the monthly payment down to $640, and took up just 30% of the median income.

“If you reduce interest rates by 8.5% that doubles your buying power,” said Andy Walden, vice president of enterprise research at Black Knight.

With the typical home currently costing $434,978, and rates over 6%, the monthly mortgage payment of $2,061 eats up more than 36% of the median monthly income, according to Black Knight.

“When we lower interest rates it allows home prices to grow much more quickly than incomes,” said Walden. “It gives folks the ability to buy more home with the same amount of income. So a 1% decline in interest rates allows you to buy 10% to 12% more home, with the exact same amount of money.”

Interest rates have been below 5% for the past 11 years, with the weekly average reaching an all-time low of 2.65% in January 2021. That’s part of the reason why home prices are so high today.

Incomes aren’t keeping up

Making affordability matters worse, home prices are significantly out of whack with income levels.

Over the past five years, while the average home price has gone up 60%, the average income has risen less than 15%.

“We now have the highest ratio of home price to income that we’ve seen in the past 50 years plus,” said Walden. “We have data going back to 1970 and it is the highest we’ve seen by far.”

Historically, home prices were between three to four times the median income, a ratio that remained consistent from 1975 until 2000, according to Black Knight. In 2000, as interest rates began to drop below 8%, the ratio began to rise, reaching a point in 2005 where home prices were almost five and a half times the median income.

The sharp rise in 2005 was largely fueled by expanded credit in the mortgage market, said Walden, with mortgages being offered based on a buyer’s unverified income, and through products like interest-only, adjustable-rate and negative amortizing loans.

“That allowed those shopping to buy more home than their income level would traditionally support,” he said. It also created a bubble that led to the 2008 housing crash.

Today, the typical home price is six times the median household income of about $71,000.

Credit availability has greatly increased

Another reason why rates were so high in the 1980s was that there was less credit available to borrow, making it more difficult and costly for buyers to secure a mortgage. Banks had to charge higher rates for taking on the risk. But today’s mortgages are often bundled and sold into investment products. That secondary market makes it profitable for lenders to give loans to many more people, and at lower interest rates.

“Back in the early 1980s, rates were in the mid- to upper-teens,” said Pete Miller, senior vice president for residential policy at the Mortgage Bankers Association. “Part of the reason was that the supply of mortgage credit was more constrained. We didn’t have the secondary market liquidity we have today.”

Miller – who bought his first home in California in the mid 1980s with a 13% adjustable rate mortgage – said 6% for a fixed-rate 30-year loan is historically a very good interest rate.

“I remember when interest rates went to single digits and saying, ‘I thought that would never happen.’”

Source: cnn.com

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If you’re looking for personalized service, instead of a call-center home loan, you might want to check out Summit Mortgage.

The privately-owned direct lender was started by husband and wife loan originators Diana and Robert Carter way back in 1992.

The goal was to create a business from an originator’s point-of-view, focused on providing an “unparalleled homebuying experience.”

That meant identifying the traditional pain points of getting a home loan and taking steps to avoid them.

After all, buying a home is supposed to be an exciting moment, one they believe shouldn’t be overshadowed by a miserable mortgage experience.

Summit Mortgage Fast Facts

  • Direct-to-consumer mortgage lender
  • Offers home purchase loans and mortgage refinancing
  • Founded in 1992, headquartered in Plymouth, MN
  • Licensed to do business in 17 states
  • Funded more than $6 billion in home loans last year
  • About two-thirds of last year’s volume was home

Summit Mortgage Corp. is a direct-to-consumer mortgage lender that offers home purchase financing and mortgage refinances.

The Plymouth, Minnesota-based company got its start way back in 1992, making them one of the older lenders in existence.

Last year, they produced more than $6 billion in home loans, with a 67% home purchase share and 33% refinance share.

This tells me they have strong relationships with local real estate agents, and the ability to close loans on time.

Summit Mortgage is a big-time mortgage lender in their home state of Minnesota, which accounts for about 40% of total production.

In fact, they ranked 6th there in 2021 behind only the big players such as Rocket Mortgage, U.S. Bank, and Wells Fargo.

They are also very active in the states of Florida, Pennsylvania, and Colorado.

At the moment, the company is licensed in 17 states nationwide, including California, Colorado, Florida, Idaho, Minnesota, Montana, New Jersey, North Dakota, Oregon, Pennsylvania, South Dakota, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.

For the record, they are known as “Summit Home Mortgage” in the states of Oregon, Utah, and Washington.

How to Apply with Summit Mortgage

To begin, you can visit their website to find a loan officer near you. Their online directory allows you to search by property location or loan officer name (if you’ve been referred).

You can review profiles online and obtain licensing and contact information. Once you find the individual you want to work with, you can apply for a home loan directly from their personal webpage.

When you’re ready to move forward, you’ll be prompted to create an “Ascent App” account, which will also give you the option to download a free smartphone app.

Whether you apply on a computer or smartphone, there is an easy to follow step-by-step application process.

Benefits of using the app include a document scanner to upload required paperwork, along with a built-in auto-save feature.

The Ascent App will automatically save all data entered so you won’t need to re-enter fields that have already been completed.

And you can even take a break and return to the loan application from a different device, which allows you to work at your own pace.

It’s all powered by SimpleNexus, a leader in the digital mortgage space.

Aside from a digital application, you should be able to eSign disclosures and closing documents, message your loan officer, and track loan status from start to finish.

Your Summit Mortgage loan officer can also get you a pre-approval letter if you’re currently shopping for a home.

To that end, Summit Mortgage also offers a $10,000 underwriting guarantee in which they’ll pay the seller $10k if your loan doesn’t close.

This can help your offer stand out in a competitive housing market or even compete with all-cash buyers.

Summit Mortgage Rates

But before you begin the application process, it might be wise to get a mortgage rate quote.

There is a rate quote request form on the Summit Mortgage website, but it’s probably quicker just to call a loan officer directly.

Once you give them the details of your loan scenario, they’ll be able to provide a real-time mortgage rate quote.

Be sure to take note of any lender fees associated with your rate, such as an application fee or loan origination fee.

Also pay attention to any discount points required for the quoted rate, as they will increase your closing costs.

Unfortunately, Summit Mortgage doesn’t list daily sample mortgage rates on their website, nor do they list their lender fees.

So you’ll need to get all these details from a loan officer before you proceed.

Take the time to shop around and gather quotes from other banks, lenders, and mortgage brokers to ensure they are competitively priced.

Loan Programs Offered by Summit Mortgage

  • Home purchase loans
  • Refinance loans: rate and term, cash out, streamline
  • Home renovation loans: FHA 203k and Fannie Mae HomeStyle
  • Conforming loans
  • Jumbo loans
  • FHA loans
  • USDA loans
  • VA loans
  • Down payment assistance: State grants and tax credits
  • Fixed-rate and adjustable-rate mortgages in various loan terms

Summit Mortgage Corp. offers a wide range of loan programs to suit aspiring home buyers and existing homeowners.

If you’re short on funds, they can tap into a variety of down payment assistance programs to help you across the finish line.

Those who are purchasing a fixer-upper can take advantage of programs like Fannie Mae’s HomeStyle Renovation or the FHA 203k loan program.

They got the full suite of government-backed home loans available, including FHA, VA and USDA.

And jumbo loans are a possibility if you’re purchasing an expensive home.

All major property types are acceptable, including single-family homes, condos/townhomes, vacation homes, and investment properties.

Both fixed-rate and adjustable-rate mortgages are available in various loan terms, such as 15-year mortgages and 5/1 ARMs.

In short, you should have plenty of options to choose from no matter your personal situation or preference.

Summit Mortgage Reviews

On Experience.com, Summit Mortgage has a solid 4.94-star rating out of 5 from roughly 15,000 customer reviews.

You can fine-tune those reviews by individual if you want to narrow down your list of loan officers.

They have an even better 4.98-star rating on Zillow from over 1,500 reviews, which is pretty much flawless.

But wait, there’s more! A perfect 5.0-rating from over 250 Google reviews, along with a 4.9-star rating on Trustpilot from about 500 reviews.

Additionally, they are an accredited company with the Better Business Bureau (BBB) and currently hold an ‘A+’ rating based on customer complaint history.

In closing, Summit Mortgage appears to be a good candidate for home buyers thanks to their personalized service, $10,000 underwriting guarantee, wide range of loan programs, and many 5-star reviews.

If their pricing is also on point, they could be an excellent choice for an existing homeowner in need of a refinance as well.

Summit Mortgage Pros and Cons

The Good

  • Can apply for a home loan online or via smartphone
  • Offer a digital mortgage application process
  • $10,000 underwriting guarantee
  • Good selection of loan types to choose from
  • Thousands of excellent customer reviews
  • A+ BBB rating, accredited business
  • Free smartphone app
  • Free mortgage calculator and home loan guides

The Maybe Not

  • Only licensed in 17 states currently
  • Do not publicize mortgage rates or lender fees

(photo: Andy Harbach)

Source: thetruthaboutmortgage.com

Apache is functioning normally

It’s almost mid-December, which means it is time for another round of mortgage and real estate predictions for the upcoming year.

I think it’s safe to say that 2021 has been another stellar year for both the mortgage industry and the housing market.

But it’s going to be hard to top or even match what we’ve experienced this year in terms of mortgage origination volume and home price gains.

However, the party might not be over yet, with additional home price gains on the horizon due to similar factors in play.

Let’s see what 2022 might have in store as we once again look into the crystal ball.

1. Mortgage rates will go up, but only slightly.

Experts have been calling this for years to no avail. We have been told year in and year out that the low mortgage rates are leaving the station.

But year after year, they remain. In 2022, I do expect them to rise somewhat, but not by a meaningful amount.

Sure, your 30-year fixed rate may go from 3% to 3.5%, but that’s not a huge jump. And any 30-year fixed in the 3s is generally very favorable.

It will put pressure on prospective home buyers who also have to grapple with rising home prices and a lack of inventory.

And it will certainly dent mortgage refinance demand, as most existing homeowners have already locked in a lower rate.

However, as I said in my 2022 mortgage rate predictions post, there will likely be opportunities during the year to snag a very low mortgage rate.

Why? Because the economy continues to be a bit of a mess and we’re still sorting out COVID. Until we put that stuff behind us, interest rates could swing in both directions.

2. Home prices will continue to rise a lot

Don’t be fooled by the old mortgage rates up, home prices down fallacy. There’s not a negative correlation, despite what everyone plainly assumes.

Both can go up at the same time, and that’s exactly what I expect to happen in 2022. Granted, mortgage rates will probably only rise slightly, while home prices will continue to surge.

For some reason, a new year gives folks new hope that a trend will simply come to an end.

But why would home prices just stop going up because it’s a new calendar year? The answer is they won’t.

As I’ve said before, the same fundamentals that have been at play for some time, continue to be in play.

There’s a severe lack of inventory and a surplus of would-be home buyers out there. It doesn’t take a genius to figure out what happens with prices.

When there’s a shortage of something people want/need, a premium must be paid until production ramps up.

Unfortunately, production (new home building) is still way behind and won’t catch up for a while.

In the meantime, expect more of the same, and higher 2022 home prices across the board.

The only difference is that estimates are all over the place, with some calling for just a 2.5% increase (CoreLogic) and others saying 11% (Zillow) or even 16% (Goldman Sachs) .

Personally, I’m bullish and going with the higher figures out there, but recognize gains will probably be lower in 2022 than they were this year.

3. Cash out refinances will finally get hot

cash out share

Housing pundits have been talking about the massive pile of collective home equity we’ve been sitting on for years now.

And it has only grown even larger since then, with equity levels the highest on record.

In short, American homeowners have a ton of equity in their properties that is ripe for tapping via a cash out refinance or a second mortgage, such as a HELOC.

But we have yet to see a massive cash out boom like the one experienced in the early 2000s housing market.

I expect cash out refis and HELOCs to have their day in the sun in 2022 as more and more homeowners realize how much their properties have appreciated.

Per Freddie Mac, about 42% of refinances resulted in cash out this year, which is up a bit from prior years, but nowhere close to the 80%+ share seen in 2006 and 2007.

Despite slightly higher mortgage rates, it may still be worth unlocking this valuable equity to pay for upgrades, college tuition, and other expenses.

After all, a 3% 30-year fixed rate is still phenomenal, and many homeowners can take out a large sum of money while keeping their loan-to-value (LTV) ratio very low.

And you can expect mortgage lenders to aggressively pitch this product now that rate and term refinances have mostly been exhausted.

4. The bidding wars will remain (and may even worsen)

It won’t get any easier buying a home next year. Even if mortgage rates are slightly higher, this won’t “bring prices down to earth.”

I keep hearing that line and it just doesn’t make any sense. Financing has never been the problem here. It’s always been a lack of supply.

And there will continue to be a lack of supply well into 2022, so why should competition be any less?

If anything, I could see more desperation fueled by these expected higher interest rates as buyers won’t want to miss out on their low rate too.

If you think about the last few years, at least mortgage rates were rock bottom. Now that you’ve got to worry about a rising rate and finding a home, the panic could be even more pronounced.

As always, prepare yourself adequately, start looking for a home immediately, and be aggressive if you want to win the bidding war.

Oh, and make sure you use an experienced real estate agent who knows how to get the job done.

5. Home sales volume will be flat or even lower next year

2022 home sales

While Redfin believes new listings will hit a 10-year high next year, I’m not so sure.

As much as there is motivation to sell a home due to sky-high asking prices, there remains the dilemma of where to go next.

Sure, you might be able to move to a different state, but those “cheap states” aren’t so cheap anymore.

At the same time, supply chain issues and a lack of workers is making it hard for home builders to ramp up supply of new homes.

Collectively, this will make it difficult for home sales to increase next year, as much as we all want to make a mint selling our homes.

This also reinforces the idea that home prices will continue to go up, and that the housing market will remain super competitive.

That being said, it will be a very lively housing market in 2022, just not one that necessarily sees a lot of growth.

6. Home buyers will continue to flock to new states

2022 hot housing markets

Yes, the cheap states aren’t so cheap anymore. But that won’t stop people from getting out of town.

Many young, prospective home buyers have been priced out of their local markets in California and other hot spots.

This, combined with the work-from-home new normal (sprinkle in some politics), will fuel a continuation of migration seen in recent years.

This means more folks from the Golden State will make the move to nearby states such as Arizona, Idaho, Nevada, Texas, and Utah.

While more affordable for them, it will exacerbate those local markets and make them more expensive for the people who already rent there.

Some of the hottest housing markets of 2022 include Salt Lake City, Utah, Boise, Idaho, Spokane, Washington, Indianapolis, Indiana, and Columbus, Ohio.

Basically any metropolitan area that was/is considered cheap and desirable will be less so next year as the out-of-state home buyers storm in.

So no matter where you happen to be, expect a fierce seller’s market.

7. First-time home buyers will purchase a second home or investment property (first)

This is an interesting one that I’m borrowing from Zillow because it’s seemingly odd, yet kind of savvy. And so 2021 and beyond.

Typically, a first-time home buyer will purchase a home to live in nearby where they work.

But because the real estate market is so hot and in such short supply, high-earning, cash-rich Millennials and Gen Zers may actually buy a second home or investment property instead.

The thinking is that they can get in on the real estate market by making an investment, even if it’s not in their overpriced backyard.

For example, a well-earning Gen Zer who lives in Santa Monica that may be priced out there could purchase a more affordable second home in Phoenix, Arizona, or an investment property in Las Vegas, Nevada.

Of course, this isn’t necessarily for the faint of heart, and this is exactly the type of thing that leads to trouble down the road.

But as long as mortgage lenders don’t get too careless with underwriting standards, it doesn’t signal the start of a housing crisis.

It does tell you just how crazy real estate has gotten though.

8. Home buyers will return to the city

condo search

While the suburbs have been hot in our post-COVID-19 world, I do believe more buyers will start to consider the city life again.

We will get through this pandemic, and once life returns to mostly normal, lots of folks will wish they owned in an urban center.

Prices in many once-hot areas close to lots of cool restaurants, bars, etc. have been deflated, but I expect that to reverse course in 2022.

The urban living trend isn’t going to disappear, even if more people work from home, or desire abundant outdoor space.

So look out for condo prices to see more price gains in 2022 and beyond, and play catch up with single-family residence gains.

There’s already proof in data here – Redfin noted that users filtered searches to single-family homes only (excluding condos/townhomes) in just 28% of searches in September.

That was down from a high of 37% in July 2020, when living in a city seemed unthinkable.

Condos also tend to appreciate the most at the tail end of a housing boom, which we could be approaching, so it all kind of makes sense.

9. There will be more layoffs, closures, and mergers

While there is some hope that cash out refis and home purchase loans will keep mortgage volumes afloat, it won’t be enough for all mortgage lenders out there.

For example, Freddie Mac is forecasting $2.1 trillion in home purchase origination in 2022, up from $1.9 trillion this year.

But also expects refinance origination volume to fall from $2.5 trillion to $995 billion. That’s gonna be a problem for the shops that specialize in refinances.

Ultimately, total volume dropping from $4.5 billion to $3 billion will be an issue and there’s no way around it.

As a result, you can expect more mortgage layoffs, similar to the Better.com layoffs, along with some outright closures.

I also believe there will be more consolidation in the fragmented mortgage market, with bigger banks and lenders swallowing up smaller ones.

10. The housing market won’t crash in 2022

I already said home prices will go up, but I’ll reiterate that the housing market won’t crash in 2022, either.

There is a large group of people who believe the housing market is due for a correction, mostly just because home prices have gone up a ton.

Sure, it’s easy to raise eyebrows these days when looking up what your house is worth, or your neighbor’s.

But that alone isn’t enough to make them reverse course, especially when there is a continued, historic lack of supply.

Additionally, mortgage lenders have yet to return to the loose underwriting that dominated the space in the early 2000s, and ultimately created the mortgage crisis.

For me, that means another year of strong housing appreciation, and another year without a housing market crash.

At the same time, it does mean we will be one year closer to a crash, which as history tells us, is inevitable.

(photo: Quinn Dombrowski)

Source: thetruthaboutmortgage.com

Apache is functioning normally

It’s been some time since I’ve done mortgage Q&A, so without further delay, let’s explore the following question: “Do you need 20% down to buy a house?”

If you chat with anyone older than 50 (maybe 60), they’ll probably tell you that you need to (or should) put 20% down if you want to buy a house.

For them, it’s the normal, or should I say traditional, down payment needed to secure a mortgage.

And while it might be conventional wisdom when it comes to home buying, it’s not necessarily the reality anymore.

In fact, the median down payment is just 12%, per the National Association of Realtors (NAR) 2021 Home Buyer and Seller Generational Trends report. Despite this, a lot of people still seem to think you need 20% down to purchase a home.

You Don’t Need a 20% Down Payment…

typical down payment

A few years back, the NAR 2017 Aspiring Home Buyers Profile report found that 39% of non-owners believed they needed more than 20% for a mortgage down payment on a home purchase.

And 26% assumed they needed to put down 15-20%, while 22% said they needed a down payment of 10-14% in order to buy. None of those answers are true.

A 2020 study from NAR also had a whopping 35% of respondents going with the 16% to 20% down payment tier, easily the number one answer.

In reality, you may not even need a down payment if you take out a certain type of home loan, or receive gift funds for the down payment.

Even if a down payment is required, it’ll be a lot less than 20% in most cases, most likely less than 5%.

Last year, the typical down payment for first-time home buyers was just 7%, while it was 17% for repeat buyers, per NAR.

It’s common for repeat buyers to use the proceeds from their original home to buy a replacement, making it easier to come up with a larger down payment.

Conversely, first-timers often have a tough time coming up with funds because they can’t tap into home equity.

You’ll notice both figures have moved lower over the years, though average down payments have ticked higher recently, perhaps due to home buyer competition in this hot housing market.

20% Down Payments Used to Be the Norm

20 percent down payment

  • Your parents probably put down 20% or more when they bought a house
  • But back then home prices were a lot lower than they are today (and interest rates a lot higher)
  • You might only need to put down 3% or 3.5% when you purchase a property these days
  • But there are still key advantages to putting down at least 20% like no mortgage insurance and a lower interest rate

Back in the day, it was customary to come in with 20% down (or more) when purchasing a property.

But property values were significantly lower those days, and mortgage rates a lot higher.

Times have changed as home prices skyrocketed and mortgage lenders got more competitive (and less risk-averse).

Leading up to the housing crisis seen in the mid-2000s, a zero down mortgage was a common theme. In fact, there were lenders that named themselves after that lack of a down payment…

Of course, we all know what happened next – home prices tanked and low down payment options began to evaporate.

That led to increased FHA loan lending, which requires only 3.5% down if you have at least a 580 FICO score.

And over time, Fannie Mae and Freddie Mac introduced a competing product that allows for loan-to-value ratios (LTVs) as high as 97% (just 3% down).

So we’ve kind of come full circle, though we’re not quite at the zero-down stage just yet.

Though lenders have offered mortgages with just 1% down, such as Quicken, Guaranteed Rate, and United Wholesale Mortgage thanks to the use of grants.

Should You Put Less Than 20% Down on a Home?

median down payment

  • You may not need to put 20% down on a home purchase in many cases
  • But it will cost you more money monthly if you don’t via a higher rate, PMI, and a larger loan amount
  • It may also make your offer less desirable to home sellers if they have competing bids with larger down payments
  • So it can beneficial to put down more, especially in a seller’s market

We’ve already answered the original question. You don’t need a 20% down payment to purchase a home.

In fact, you don’t need any down payment in some cases if you consider a home loan from the VA or USDA, both of which offer 100% financing.

You also don’t need to put down 10% or even 5% thanks to widely available programs from the FHA and Fannie and Freddie.

The median down payment is quite a bit lower, around 12% at last glance, and even lower (6%) for the 22 to 30 age cohort.

This age group also said saving for the down payment was one of the most difficult steps of the home buying process.

Now assuming you can muster a 20% down payment, should you come in with less?

This answer is a bit more elusive because it depends on a variety of factors, which include your household balance sheet and your financial goals.

Perhaps it’s better to frame the question the other way around.

Why You Should Put 20% Down on a House

In short, the less you put down on a home, the more you pay each month via your mortgage payment. This happens for three main reasons:

– Larger loan amount (less down means more financed)
– Higher mortgage rate (rates tend to rise as down payments fall)
– Mortgage insurance (added cost to account for risk)

If you put down less than 20%, you wind up with a bigger loan amount (obviously), a higher mortgage rate (usually) because of pricing adjustments, and you have to pay mortgage insurance to protect the lender.

This means your monthly housing costs go up, but you keep more cash in-hand, or at least not in your house.

Let’s assume the home you want to purchase is selling for $350,000 and you plan to take out a 30-year fixed mortgage. This comparison chart shows us how things might look.

3% Down vs. 20% Down: The Math

$350,000 Home Purchase 3% Down Payment 20% Down Payment
Down payment $10,500 $70,000
Loan amount $339,500 $280,000
Mortgage rate 4.125% 3.875%
Monthly P&I payment $1,645.39 $1,316.66
PMI $125 n/a
Total monthly cost $1,770.39 $1,316.66
Difference +453.73

As you can see from the chart above, the 3% down mortgage payment is roughly $454 more expensive each month thanks to those three things I mentioned.

That higher payment equates to an additional $27,223.80 spent over the course of five years.

Additionally, because the loan balance and mortgage rate are higher, more of your payment goes toward interest every month.

After 60 months, the 3% down mortgage would have a balance of $307,684.69, whereas the 20% down mortgage would be whittled down to $252,738.50.

The tradeoff is basically more money in your pocket versus the home, and the ability to buy more house now in exchange for a higher monthly payment.

This assumes you lack the down payment funds, but can afford the higher payments, which can be a common scenario for young high-earning individuals without significant savings (HENRYs).

At the same time, I’ve argued that it’s possible to buy more house if you put more money down because less income is required.

This assumes income is the problem and not assets, which can result in debt-to-income issues, which are prevalent and often grounds for denial.

Of course, it’s entirely possible for a low-down payment to be voluntary, for a homeowner who wants to park their money elsewhere.

That decision really comes down to how you value your housing investment, and if you think you can do better putting the money in the stock market or some other place.

For those who don’t have that choice, take comfort in the fact that you don’t need a 20% down payment to buy a home, or anywhere close to it.

But you will pay extra for that convenience, and you might have more hurdles to clear, such as convincing a seller to take your offer when another prospective buyer offers to put down 20%.

Alternatively, you could get a gift for a portion of the down payment and get the best of both worlds.

Can You Put More Than 20% Down on a House?

  • You can put as much down as you’d like (or even buy all-cash to avoid the mortgage entirely)
  • There are advantages to putting down more than 20% on a home purchase
  • Such as a lower mortgage rate thanks to fewer pricing adjustments
  • And an even stronger offer if buying a home in a hot market
  • Also a lower monthly payment and much less interest paid

You sure can. It’s generally possible to put down as much as you’d like on your home purchase, though if you put down too much you could run into issues with minimum loan amounts from lenders.

Of course, this probably isn’t going to be an issue in most cases with property values so high these days.

I’ve heard of home buyers putting down 50% just because they are debt-averse, but again, most folks don’t have that type of cash lying around.

The obvious benefit of putting a large down payment on a house is that you’ll have a smaller mortgage balance and pay less interest as a result.

You’ll also enjoy lower monthly payments, which will free up cash for other expenses or investments.

Conversely, you’ll have that much more money locked up in your property, which you’ll only be able to access if you sell or take out another home loan.

When it comes to mortgage rate pricing, it’s possible to obtain a slightly lower interest rate when you put down more than 20%, though it likely won’t be much.

We’re talking .125% to .25% lower depending on the scenario in question, so there are diminishing returns, especially when interest rates are already low.

But if you have bad credit the pricing impact can be greater with a larger down payment, so in those cases it could make sense to put down more than 20%, assuming you’ve got the cash available.

However, once you’re at 65% LTV (35% down payment) the pricing incentives tend to stop, so there wouldn’t be a benefit mortgage rate-wise after that threshold.

In summary, consider how much money you want locked up in your home, what your money could be doing (earning) otherwise, and how much it’ll cost you to put less down.

Lastly, don’t forget home sellers favor those who come in with larger down payments!

Read more: 2021 home buying tips to get the deal done.

Pros of Putting Down 20% on a Home Purchase

– Smaller loan amount
– No mortgage insurance required
– Lower mortgage rate
– Pay less interest over the life of the loan
– Ability to tap equity or take out a HELOC
– Lower closing costs
– Better chance of getting your offer accepted in a hot market
– More lender choice and loan options available

Cons of Putting Down 20% on a Home Purchase

– Requires a lot more money up front
– May make you house poor (little leftover for repairs/maintenance)
– Money tied up in the home that could lose value (and thus access to it)
– Could invest that money elsewhere for a better return
– Inflation makes dollars worth less over time
– Difference in monthly payment may not be all that substantial

Source: thetruthaboutmortgage.com

Apache is functioning normally

If your appraisal is so low that you owe more on the house than you could sell it for, there are several options for you to consider.

The 30-year fixed mortgage rate keeps getting lower and lower, making it a great time to refinance your mortgage and cut your monthly payment. But as Pat Esswein, associate editor of Kiplinger’s Personal Finance magazine, reports, homeowners have to clear a few hurdles before they can refinance.

One of those hurdles is the appraisal, which determines the value the bank will assign to your home.

That’s an important number because it determines your refinancing options and affects your monthly payment and interest rate. For example, if your home value drops and your loan-to-value is higher than your lender allows, typically 80 percent, you have to either increase your equity with cash or pay for mortgage insurance.

I recently spoke with Esswein about ways to get the highest possible value before the appraisal, and what to do if your appraisal comes in low.

What to Do Before an Appraisal to Get a Higher Home Value

There are a few things you can do to get highest possible appraisal possible.

First, consider researching the appraisal company. “This may be a little bit of a stretch, but when looking for a lender, ask what appraisal management company they order appraisals from,” says Esswein.

What you want is an experienced appraiser who really knows your local market, and you’re most likely to find that kind of appraiser at “a smaller, local appraisal management company that probably pays more and therefore attracts the best appraisers,” says Esswein. “Some companies go for the cheapest hires who also are willing to travel really far, so that means they’re inexperienced and they don’t know your area very well.”

Second, get your home in shape. “Make your house show well,” says Esswein. “Clean, declutter and fix things that need to be fixed so that when the appraiser comes, they’ll note that your house is in the best condition it can be.”

While you’re at it, create a house file for the appraiser that documents any upgrades or recent repairs, such as the new roof you installed two years ago. “When the appraiser actually comes to your home, have the file ready for them and walk around with them to point out the upgrades,” says Esswein.

Third, research recent comparable home sales. “Even though you may feel that prices are rising in your market, and in many markets they have, the appraiser still has to find comparable recent sales to support the value,” says Esswein. “One recent comp doesn’t make a trend, and appraisers may be adjusting prices more slowly than you wish.”

Instead of hoping the appraiser will pull a complete list of comps, Esswein suggests contacting a real estate agent to ask for a list of recent comparable sales, which you can add to your house file. “An experienced real estate agent will know what’s most comparable to your house,” she says.

What to Do If Your Appraisal is Low

So what happens if your appraisal is lower than expected? Is it possible to get another appraisal from a different company?

Esswein says you could shell out $250-$350 for a second opinion, then appeal to your loan officer with the new appraisal. “But before you do that, you should ask your loan officer if they’ll even consider the second appraisal,” says Esswein.

It’s more likely that the first appraisal will stick, but you still have options for refinancing.

Let’s say your home is appraised for $180,000. You still owe $162,000 on the mortgage, which is 90 percent of the value of the home. What are your options?

When it comes to maximum allowable loan-to-value, 80 percent is usually the magic number, so there are three things you can do if you aren’t at 80 percent.

Option one: Bring more cash to closing. If you can afford to put in an additional $18,000 in cash, you’d reduce the loan balance to 80 percent of the value of your home.

“Keep in mind that even if you anted up that money, you still have to have enough money in your reserves to satisfy any lender requirements for adequate savings, which is usually two months’ worth of mortgage payments, but can be more,” says Esswein.

Option two: Refinance into an FHA loan. An FHA loan is a Federal Housing Administration-backed mortgage loan.

Although an FHA loan requires just 3.5 percent equity, “with recent increases in FHA’s upfront mortgage insurance and monthly premiums, private mortgage insurance (PMI) could be cheaper,” says Esswein. Which brings us to…

Option three: Pay for PMI. PMI protects the lender if you stop making payments. “Because home values have fallen, many homeowners who didn’t need PMI when they bought their home will need it when they refinance,” says Esswein.

If you opt to refinance and need PMI, there are two ways you can pay for it.

One way is to simply pay for PMI yourself, which typically costs 0.5 percent to 1.5 percent of your loan amount per year. “Your lender will add the cost of PMI into your monthly mortgage payment,” says Esswein. “You would continue to have to pay the extra premium each month until you have 20 percent equity, at which point you can contact the lender and ask them to cancel PMI. Otherwise, when loan-to-value reaches 78 percent, they have to drop PMI automatically.”

The other way you can pay for PMI is lender-paid mortgage insurance. With lender-paid mortgage insurance, the cost of PMI is folded into your interest rate. The less equity you have, the higher your rate. “The higher rate applies for as long as you have the loan, so this option makes sense only if you don’t plan to own your home for the long term,” says Esswein. “You’re going to have to pay the higher rate for as long as you have that loan, it’s not going to fall away when you reach 20 percent equity.”

Before you decide to take lender-paid mortgage insurance, Esswein says to calculate your monthly payments and the total interest you’ll pay over the life of the loan, based how long you plan to keep loan.

So if you have to take on PMI, is it worth it to refinance? After all, you’re trying to lower your payments, not add extra fees!

Esswein says that as long as you’re saving money, it’s worth it. “PMI is a tool you can use if you need it, and if you’re still reducing payments and saving on interest, then it makes sense,” says Esswein.

And even if you have enough cash to bring your loan-to-value to 80 percent, you might think twice about spending it. “Before you bring cash to the table, decide what else you might want to spend that cash on,” says Esswein. “Don’t drain your emergency fund to avoid PMI.”

Finally, if your appraisal is so low that you owe more on the house than you could sell it for, you have options, too. Esswein recommends makinghomeaffordable.gov, which highlights home loan programs and refinance options for people who are underwater on their homes.

Source: getrichslowly.org