It turns out defaulting on the mortgage isn’t as bad as some made it out, per a study from credit bureau TransUnion.
The company noted that mortgage-only defaulters, those who stay current on other lines of credit while letting the mortgage slip away, perform better on new loans versus those with multiple delinquencies.
In other words, those who are late on all types of loans continue to exhibit high rates of delinquency, whereas those who only skip their mortgage payments tend to keep other bills in check.
For example:
60+ days delinquency levels on a new auto loan: – 5.8 percent — mortgage-only delinquency – 13.1 percent — multiple delinquencies
60+ days delinquency levels on a new credit card: – 11.4 percent — mortgage-only delinquency – 27.1 percent — multiple delinquencies
So basically those who were late on everything from credit cards to auto loans and leases continue to make missteps, while those who simply can’t handle their mortgages stay on top of other bills.
Perhaps these were the folks who thought they could afford a house during the peak years, while relying on interest-only home loans, option arms, and other payment-deferring home loan programs.
The study also debunked, or at least did not find strong support for, the “excess liquidity theory,” which suggests consumers who stopped paying their mortgage have increased cash flow to use for other debts.
“This recession was unique in that certain consumers who defaulted on mortgages would otherwise be good credit risks,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit, in a release.
“It appears their actions were driven more by difficult economic circumstances than by any inherent inability to manage debt.”
Good luck trying to explain this to their subsequent mortgage lender or loan underwriter…
“Partnering with Mark and the team at CMG is a dream come true,” Alexandrov said in the company’s press release. “From products to pricing to servicing, to culture, they are top notch. I look forward to helping our many clients and referral sources achieve their goals with CMG’s support.” “CMG is giving us an opportunity … [Read more…]
Mortgage lender HDFC is all set to report a single digit rise in net profit on a 5-15 per cent jump in net interest income (NII). Net interest margin (NIM) is likely to be stable sequentially. Outlook on margins, home loan demand, and asset quality in the non-individual segment would be key monitorables.
Unlike the typical March quarter, said Motilal Oswal Securities, the momentum for housing finance companies (HFCs) may relatively muted this quarter. The transitory impact on margins, owing to the lag in transmitting higher borrowing costs to customers, might have continued in the March quarter, the brokerage said.
Motilal Oswal Securities expects asset quality to improve for HDFC with a sequential decline in credit costs. It sees profit after tax for the quarter (excluding exceptional items) at Rs 3,839 crore, up 10 per cent YoY. Including such items, profit after tax is seen at Rs 3,920 crore, up 6 per cent. NII is seen rising 10.4 per cent YoY to Rs 5,079.50 crore, Motilal Oswal Securities said.
Nuvama Institutional Equities pegs the profit figure at Rs 3,940 crore, up 6.4 per cent. NII is seen rising 7 per cent while credit cost to total loans perecntage is seen at 0.18 per cent.
The stock is up 3.6 per cent year-to-date. It gained 21 per cent in the last one year.
Kotak Institutional Equities sees profit rising 1 per cent to Rs 3,722 crore. IT sees NII growing 5 per cent YoY to Rs 4,829 crore. NIM is seen at 3.1 per cent, down 10 basis points over 3.1 per cent in the December quarter. Core income is seen rising 5 basis points QoQ to 2.6 per cent.
“We expect cost-to-AAUM ratio of 35 bps (35 bps in 2QFY23) and pen down credit cost of 10 bps for the quarter. HDFC reported a loss of Rs 270 crore on FV changes in investments (gain of Rs 270 crore in 4QFY22) and dividend income of Rs 200 crore (Rs 130 crore in 4QFY22),” Kotak noted.
ICICI Securities estimated profit for HDFC at Rs 3,868.30 crore. This brokerage sees 15 per cent YoY rise in net interest income (NII) at Rs 5,024.10 crore.
ICICI Securities said it sees loans growing 15 per cent YoY to Rs 6,51,060 crore, led by healthy demand for home loans.
“NIMs to remain largely steady despite competitive intensity. Provisions to decline marginally YoY at Rs 391 crore leading to standalone profit growth of 6.3 per cent YoY (4.8 per cent growth QoQ) to Rs 3,868 crore. Subsidiaries are expected to report a steady performance,” it said.
Also read: Adani Wilmar Q4 earnings effect: Shares fall after two sessions, down 4.5% since Q3 results
Also read: Tata Motors, Bajaj Auto, Maruti Suzuki, M&M: Stocks that analysts like after muted April sales data
Have you ever thought about doing a cash-out refinance on your home for investment?
A lot of people have.
I received exactly this question from a reader.
Reader Question
Hi Jeff,
Thanks for your videos and educational websites!
I know you are very busy and this may a simple answer so thank you if can take the time to answer!
Would you ever consider approving someone to taking a cash-out refi on the equity in their house to invest?
I have been approved for a VA 100% LTV cash-out refi at 4% and would give me 100k to play with.
With average ROI on peer to peer, Betterment, Fundrise, and S&P 500 index funds being 6-8%, it seems like this type of leveraging would work. However, this is my primary residence and there is an obvious risk. I could also use the 100k to help buy another property here in Las Vegas, using some of the 100k for a down and rent out the property.
BTW, I would be debt free other than the mortgage, have 50k available from a 401k loan if needed for an emergency, but with no savings. I have been told this is crazy, but some articles on leveraging seem otherwise as mortgages at low rates are good at fighting inflation, so I guess I am not sure how crazy this really is.
I would greatly appreciate a response and maybe an article or video covering this topic as I am sure there are others out there who may have the same questions.
My Thoughts
But rather than answering the question directly, I’m going to present the pros and cons of the strategy.
At the end, I’ll give my opinion.
The Pros of a Cash-Out Refinance on Your Home For Investment Purposes
The reader reports he’s been told the idea is crazy.
But it’s not without a few definite advantages.
Locking in a Very Low-Interest Rate
The 4% interest rate is certainly attractive.
It will be very difficult for the reader to borrow money at such a low rate from virtually any other source. And with rate inching up, he may be locking into the best rates for a very long time.
Even better, a home mortgage is very stable debt. He can lock in both the rate and the monthly payment for the length of the loan – presumably 30 years. A $100,000 loan at 4% would produce a payment of just $477 per month. That’s little more than a car payment. And it would give him access to $100,000 investment capital.
As long as he has both the income and job stability needed to carry the payment, the loan itself will be fairly low risk.
So far, so good!
The Leverage Factor
Let’s use an S&P 500 index fund as an example here.
The average annual rate of return on the index has been right around 10%.
Now that’s not the return year in, year out. But it is the average based on nearly 100 years.
If the reader can borrow $100,000 at 4%, and invest it and an average rate of return of 10%, he’ll have a net annual return of 6%.
(Actually, the spread is better than that, because as the loan amortizes, the interest being paid on it disappears.)
If the reader invests $100,000 in an S&P 500 index fund averaging 10% per year for the next 30 years, he’ll have $1,744,937.That gives the reader a better than 17 to 1 return on his borrowed investment.
If everything goes as planned, he’ll be a millionaire using the cash-out equity strategy.
That’s hard to argue against.
Rising Investment, Declining Debt
This adds an entire dimension to the strategy. Not only can the reader invest his way into millionaire status by doing a cash-out refinance for investment purposes, but at the end of 30 years, his mortgage is paid in full, and he’s once again in a debt-free home.
Not only does his investment grow to over $1 million, but over the 30 year term of the mortgage, the loan self-amortizes down to zero.
What could possibly go wrong?
That’s what we’re going to talk about next.
The Cons of a Cash-out Refinance on Your Home
This is where the prospect of doing a cash-out refinance on your home for investment purposes gets interesting.
Or more to the point, where it gets downright risky.
There are several risk factors the strategy creates.
Closing Costs and the VA Funding Fee
One of the major disadvantages with taking a new first mortgage are the closing costs involved.
Whenever you do a refinance, you’ll typically pay anywhere from 2% to 4% of the loan amount in closing costs.
This will include:
origination fees
application fee
attorney fee
appraisal
title search
title insurance
mortgage taxes
and about a dozen other expenses.
If the reader were to do a refinance for $100,000, he would only receive between $96,000 and $98,000 in cash.
Then there’s the VA Funding Fee.
This is a mortgage insurance premium charged on most VA loans at the time of closing. It’s usually added on top of the new loan amount.
The VA funding fee is between 2.15% to 3.30% of the new mortgage amount.
Were the reader to take a $100,000 mortgage, and the VA funding fee set at 2.5%, he’d owe $102,500.
Now… let’s combine the effects of both the closing costs in the VA funding fee. Let’s assume the closing costs are 3%.
The borrower will receive a net of $97,000 in cash. But he will owe $102,500. That is, he will pay $102,500 for the privilege of borrowing $97,000. That’s $5,500, which is nearly 5.7% of the cash proceeds!
Even if the reader gets a very low-interest rate on the new mortgage, he’s still paid a steep price for the loan.
From an investment standpoint, he’s starting out with a nearly 6% loss on his money!
I can’t recommend taking a guaranteed loss – upfront – for the purpose of pursuing uncertain returns.
It means you’re in a losing position from the very beginning.
The Interest on the Mortgage May No Longer be Tax Deductible
The Tax Cuts and Jobs Act was passed in December 2017, and applies to all activity from January 1, 2018, forward.
There are some changes in the tax law which were not favorable to real estate lending.
Under the previous tax law, a homeowner could deduct the interest paid on a mortgage of up to $1 million, if that money was used to build, acquire or renovate the home. They can also deduct interest on up to $100,000 of cash-out proceeds used for purposes unrelated to the home.
That could include paying off high interest credit card debts, paying for a child’s college education, investing, or even buying a new car.
But it looks like that’s changed under the new tax law.
Borrowing up $100,000 for purposes unrelated to your home, and deducting the interest looks to have been specifically eliminated by the new law.
It’s now widely assumed that cash-out equity on a new first mortgage is also no longer deductible.
Now the law is still brand-new and subject to both interpretation and even revision. But that’s where it stands right now.
There may be an even bigger obstacle that makes the cash-out interest deduction meaningless, anyway.
Under the new tax law, the standard deduction increases to $12,000 (from $6,350 under the previous law) for single taxpayers, and to $24,000 (up from $12,700 under the previous law) for married couples filing jointly. (Don’t get too excited – personal exemptions are eliminated, and combined with the standard deduction to create a higher limit.)
The long and short of it is with the higher standard deduction levels, it’s much less likely mortgage interest will be deductible anyway. Especially on the loan amount as low as $100,000, and no more than $4,000 in interest paid.
Using the Funds to Invest in Robo-advisors, the S&P 500 or Peer-to-Peer Investments (P2P)
The reader is correct that these investments have been providing steady returns, well in excess of the 4% he’ll be paying on a cash-out refinance.
In theory at least, if he can borrow at 4%, and invest at say, 10%, it’s a no-brainer. He’ll be getting a 6% annual return for doing virtually nothing. It sounds absolutely perfect.
But as the saying goes, if it looks too good to be true, it probably is.
I often recommend all of these investments, but not when debt is used to acquire them.
That changes the whole game.
Whenever you’re thinking about investing, you always must consider the risks involved.
The last nine years have somewhat distorted the traditional view of risk.
For example, the stock market has been up nine years in a row, without so much as a correction of greater than 10%. It’s easy to see why people might think the returns are automatic.
But they’re not.
Yes, it may have been, for the past nine years. But if you look back further, that certainly hasn’t been the case.
The market has gone up and down, and while it’s true that you come out ahead as long as you hold out for the long term, the debt situation changes the picture.
Matching a Certain Liability with Uncertain Investment Returns
Since he’ll be investing in the market with 100% borrowed funds, any losses will be magnified.
Something on the order of a 50% crash in stock prices, like what happened during the Dot.com Bust and the Financial Meltdown, could see the reader lose $50,000 in a similar crash.
But he’ll still owe $100,000 on his home.
This is where human emotion comes into the picture. Since he’s playing with borrowed money, there’s a good chance he’ll panic-sell his investments after taking that kind of loss.
If he does, his loss becomes permanent – and so does his debt.
The same will be true if he invests with a robo-advisor, or in P2P loans.
Robo-advisor returns are every bit as tied to the stock market as an S&P 500 index fund is. And P2P loan investments are not risk-free.
In fact, since most P2P investing and lending has taken place only since the Financial Meltdown, it’s not certain how they’ll perform should a similar crisis take place.
None of this is nearly as much a problem with straight-up investing based on saved capital.
But if your investment capital is coming from debt – especially 100% – it can’t be ignored.
It doesn’t make sense to match a certain liability with uncertain investment gains.
Using the Funds to Buy Investment Property in Las Vegas
In a lot of ways, this looks like the most risky investment play offered by the reader.
On the surface, it sounds almost logical – the reader will be borrowing against real estate, to buy more real estate. That seems to make a lot of sense.
But if we dig a little deeper, the Las Vegas market in particular was one of the worst hit in the last recession.
Peak-to-trough, property values fell on the order of 50%, between 2008 in 2012. Las Vegas was often referred to as the “foreclosure capital of America”.
I’m not implying the Las Vegas market is doomed to see this outcome again.
But the chart below from Zillow.com shows a potentially scary development:
The upside down U formation of the chart shows that current property values have once again reached peak levels.
That brings the question – which we cannot answer – what’s different this time? If prices collapsed after the last peak, there’s no guarantee it can’t happen again.
Once again, I’m not predicting that outcome.
But if you’re planning to invest in the Las Vegas market with 100% debt, it can’t be ignored either. In the last market crash, property values didn’t just decline – a lot of properties became downright unsalable at any price.
The nightmare scenario here would be a repeat of the 2009-2012 downturn, with the reader losing 100% of his investment. At the same time, he’ll still have the 100% loan on his home. Which at that point, might be more than the house is worth, creating a double jeopardy trap.
Once again, the idea sounds good in theory, and certainly makes sense against the recent run-up in prices.
But the “doomsday scenario” has to be considered, especially when you’re investing with that much leverage.
Putting Your Home at Risk
While I generally recommend against using debt for investment purposes, I have an even bigger problem when the source of the debt is the family homestead.
Borrowing money for investment purposes is always risky.
But when your home is the collateral for the loan, the risk is double. You not only have the risk that the investments you’re making may go sour, but also that you’ll put your home at risk in a losing venture.
Let’s say he invests the full $100,000. But due to leverage, the net value of that investment has declined to $25,000 in five years. That’s bad enough. But he’ll still owe $100,000 on his home.
And since it’s a 100% loan, his home is 100% at risk. The investment strategy didn’t pan out, but he’s still stuck with the liability.
It’ll be a double whammy if the money is used for the purchase of an investment property in your home market.
For example, should the Las Vegas market take a hit similar to what it did during the Financial Meltdown, he’ll not only lose equity in the investment property, but also in his home.
He could end up in a situation where he has negative equity in both the investment property and his home. That’s not just a bad investment – that’s a certified nightmare!
It could even lead him into bankruptcy court, or foreclosures on two properties – the primary residence and the investment property. The reader’s credit would pretty much be toast for the next 10 years.
Right now, he has zero risk on his home.
But if he does the 100% cash out, he’ll convert that zero risk to 100% risk. Given that the house is needed as a place to live, this is not a risk worth taking.
Final Thoughs
Can you tell that I don’t have a warm, fuzzy feeling about the strategy? I think you figure it out by the greater emphasis on Cons than on Pros where I come down on this question.
I think it’s an excellent idea in theory, but there’s just too much that can go wrong with it.
There are three other factors that lead me to believe this is probably not a good idea:
1. The Lack of Other Savings
The reader reports that he has “…50k available from a 401k loan if needed for emergency, but with no savings.”For me, that’s an instant red flag. Kudos to him for having no other debt, but the absence of savings – other than what he can borrow against his 401(k) plan – is setting off alarm bells.
To take on this kind of high risk investment scheme without a source of ready cash, exaggerates all of the risks.
Sure, he may be able to take a loan against his 401(k), but that creates yet another liability.
That that will need to be repaid, and it will become a lien against his only remaining unencumbered asset (the 401k).
If he has to borrow money to stay liquid during a crisis, it’s just a question of time before the strategy collapses.
2. The Reader’s Risk Tolerance
We have no idea what the reader’s risk tolerance is.
That’s important, especially when you’re constructing a complex investment strategy.
While it might seem the very fact he’s contemplating this is an indication he has a high risk tolerance, we can’t be certain. He’s basing his projections on optimistic outcomes – that the investments he makes with the borrowed money will produce positive returns.
What we don’t know, and what I ask the reader to consider, is how he would handle a big reversal.
For example, if he goes ahead with the loan, invests the money, and finds himself down 20% or 30% within the first couple of years, will he be able to sleep at night? Or will he instead contemplate an early exit strategy, that will leave him in a permanent weakened financial state?
These are real risks that investors face in the real world. At times, you will lose money. And how you react to that outcome can determine the success or failure of the strategy.
This is definitely a high risk/high reward plan. Unless he has the risk tolerance to handle it, it’s best not to even start.
On the flip side, just because you have the risk tolerance, doesn’t guarantee success.
3. Buying at a Market Peak
I don’t know who said it, but when asked where the market would go, his response was “The market will go up. And the market will go down”.
That’s a fact, and one that every investor has to accept.
This isn’t about market timing strategies, but about recognizing reality.
Here’s the problem: both the financial markets and real estate have been moving up steadily for the past nine years (but maybe a little bit less for real estate).
Sooner or later, all markets reverse. These markets will too.
I’m worried that the reader might be borrowing money to leverage investing at what could turn out to be the absolute worst time.
Ironically, a borrow-to-invest strategy is a lot less risky after market crashes.
But at that point, everyone’s too scared, and no one wants to do it. It’s only at market peaks, when people believe there’s no risk in the investment markets, that they think seriously about things like 100% home loans for investments.
In the end, the reader’s strategy could be a very good idea, but with very bad timing.
Worst Case Scenario: The Reader Loses His Home in Foreclosure
This is the one that seals the deal against for me. Doing a cash out refinance on your home for investment is definitely a high-risk strategy.
Heads you’re a millionaire, tails you’re homeless.
That’s not just risk, it’s serious risk. We don’t know if the reader also has a family.
I couldn’t recommend anyone with a family putting themselves in that position, even if the payoff were that high.
Based on the facts supplied by the reader, we’re looking at 100+% leverage – the 100% loan on his house, then additional (401k) debt if he runs into cash flow problems. That’s the kind of debt that will either make you rich, or lead you to the poor house.
Given that the reader has a debt-free home, no non-housing debt, and we can guess at least $100,000 in his 401(k), he’s in a pretty solid situation right now. Taking a 100% loan against his house, and relying on a 401(k) loan for emergencies, could change that situation in no more than a year or two.
A new survey from real estate listing service Trulia revealed that 59 percent of renters aspire to be homeowners, but there are six core issues holding them back.
Let’s take a closer look at what they are, and what you can do to overcome them if you want to make the transition from renter to homeowner.
Saving Enough for a Down Payment
This is the biggest obstacle for prospective homeowners. It always has been and probably always will be. The dreaded down payment. But what many may not realize is that you can still buy a home for as little as 3.5% down with an FHA loan.
Or if you buy a Homepath property via Fannie Mae, you can come in with as little as 3% down, all while avoiding mortgage insurance. And there’s now an even broader 3% down option offered by both Fannie Mae and Freddie Mac that allows just about any home to be purchased with that small a down payment.
So there are certainly plenty of options if you don’t have a ton of assets. There are even no money down options in some “rural” parts of the country thanks to USDA home loans, and of course VA loans that require nothing down for veterans and their families.
If you don’t qualify for those programs, all is not lost. You may be able to borrow the money from a family member to meet the minimum down payment requirement. This is known as a gift and will allow you to circumvent the issue as long as someone is willing to help you out.
Qualifying for a Mortgage
The second biggest roadblock is actually qualifying for a mortgage. This is why I stress preparation so much on this blog. You can never be too prepared, and it can takes months or even years to get all your ducks in a row.
This means getting your income, assets, and employment information together long before applying for a loan.
In other words, holding a steady job for two years or longer, seasoning the assets you plan to use in your bank account (not your mattress) for several months, and getting pre-approved for a mortgage so you know what mortgage amount you can actually obtain.
And finally, making sure your credit scores are all in great shape.
A Good Credit Score
Along these same lines, you need pristine credit to ensure you qualify for a mortgage at the lowest interest rate. In fact, without a great credit score, your inflated mortgage rate alone could make you ineligible for financing.
While there are mortgage options for those with low credit scores, you’ll be much better off it you apply for a mortgage with an excellent credit score.
Not only will you have a much easier time qualifying, you’ll also save a ton of money in interest over the years. There’s no reason to cut corners unless you absolutely must get a mortgage immediately.
Take the time to fix what’s wrong so you can save money on your mortgage year in and year out.
[Credit score needed for a mortgage.]
Existing Debt
Another mortgage killer is existing debt. If you’ve got a ton of credit card debt, car loans or leases, and who knows what else, it’ll work against you when applying for a mortgage.
Mortgage lenders use a measure called the debt-to-income ratio to determine how large of a housing payment you can handle.
Put simply, the more existing debt you have, the less you’ll be able to borrow for your mortgage. So pay down/off what you can before applying for a mortgage without exhausting your assets.
Two prospective borrowers making the same exact salary could qualify for totally different maximum loan amounts based on the outstanding debt they have.
This should also give your credit scores a boost, so you actually get two benefits for the price of one!
In short, the less debt you’ve already got, the more you can take on, which translates to being able to afford more house.
A Stable Job
As mentioned earlier, a stable job is very important for mortgage qualification purposes, and also plain confidence in knowing you’ll be able to keep making your mortgage payments for the next 30-some odd years.
Without a job you can count on, it’d be a foolish decision to purchase a home. After all, you certainly don’t want a foreclosure on your record.
The general requirement is at least two years of steady employment, meaning no gaps during that time. Also, you’ll want to ensure any position changes are in the same industry, or at least make sense.
If you go from being a doctor to a real estate agent, the underwriter likely won’t feel confident in your ability to make a steady income unless you’ve been at it a couple years.
Any major changes in employment will be scrutinized and may also require a letter of explanation, depending on what transpired.
Falling Home Prices
Lastly, there’s the issue of declining home prices. Yeah, it can be pretty scary to see your main “investment” lose value. But when it comes down to it, a home is a home first, and an investment second.
Is it a good time to buy right now? That’s debatable. Mortgage rates are certainly at their lowest levels in history, which makes it attractive to carry a mortgage.
But do home prices still have some more downward pressure? Absolutely. I wouldn’t be surprised if they fell more.
Interestingly, home prices don’t necessarily go down when interest rates rise. In the past, rates and prices have risen together. So now might be a decent time to get a low rate and a home for a discount.
All that being said, I wouldn’t say there is a rush to buy a home, but now could be the perfect time to get your finances in order for a possible purchase next year.
Interest rates should remain low for a fair period of time, and if home values slip a bit lower, it could be an ideal time to become a first-time homeowner.
I’d hate to call it deceptive, since that’s a term used by the FTC and other government outfits to call out shady companies doing less than kosher things. So that may be a bit harsh.
But I would define some of the mortgage advertising out there at the moment as slightly “misleading.”
You see, there are ads, whether they’re in your local newspaper, on a billboard, at a bus stop, or online, which advertise a “low fixed rate” on your home loan.
Unfortunately, many of these aren’t really fixed-rate mortgages. In fact, they’re quite the opposite.
Your Fixed-Rate Mortgage Is an ARM
There’s a new trend in mortgage advertising
Where lenders advertise ARMs as if they’re fixed
Using the initial fixed-rate period on hybrid ARMs to their advantage
Then explaining that it can adjust in the fine print below
Say what? That’s right. These purported fixed-rate mortgages are often adjustable-rate mortgages, otherwise known as ARMs, and more harshly referred to as “exploding ARMs” by those who got burned by interest rate resets.
You see, somewhere along the way mortgage lenders got the bright idea that they could advertise super low mortgage rates on popular 30-year mortgages by exploiting the amortization period.
Most mortgages, whether they’re truly fixed for the life of the loan or adjustable, have a 30-year term.
So a 5/1 ARM is still a 30-year mortgage, but the mortgage rate is only fixed for the first five years before becoming annually adjustable for the remaining 25. That’s a pretty important detail.
This makes it a so-called “hybrid ARM” because it has both a fixed and adjustable-rate component during the full mortgage term.
A 30-year fixed mortgage, on the other hand, has an interest rate that’s fixed for 30 years. That means the mortgage rate never changes. Ever.
As a result, you would expect the hybrid ARM to come cheaper than the 30-year fixed for that future interest rate uncertainty. In fact, a whole 25 years of uncertainty.
And indeed, the 30-year fixed is currently pricing around 4%, while the 5/1 ARM is pricing around 3%, per the latest Freddie Mac data.
[30-year fixed vs. ARM]
The Gray Area in Mortgage Advertising
If you take the time to read the advertisement closely
It says 5-year fixed 30-year term mortgage
So if we break that description down
It means it’s adjustable for the remaining 25 years, a pretty important detail
Advertisers can use this gray area to offer you a remarkably low mortgage rate by highlighting the fixed portion of hybrid ARMs, while brushing aside the adjustable period that follows.
So that “3% 30-year mortgage rate” you’re seeing is indeed too good to be true. You’re simply being offered an ARM at the standard market price, while probably thinking the rate is fixed for 30 years.
That isn’t to say this won’t be explained before you sign on the dotted line, but the blaring bold-texted rate may be enough to get you in the door before the bait-and-switch happens.
For this reason, it’s very important to read the fine print and ask plenty of questions before agreeing to anything.
Mortgage professionals know home loans are complicated business, and some bank on borrowers not knowing the difference between one product and another.
Home loans, the mainstay of retail lending, witnessed a dip in demand in the December quarter, a credit information company said on Wednesday.
However, there has been a “marked increase” in demand for credit cards and personal loans, which constitute the more stressful unsecured loans portfolio for banks, Transunion Cibil said.
The demand for unsecured lending products is being driven by the adoption of consumption-led credit products, the CIC said.
Inquiry volumes for home loans for the three months ending December 2022 were 1% lower than the year-ago period, while the same for personal loans and credit cards shot up by 50% and 77%, respectively, it said.
From a loan origination perspective, home loans witnessed a 6% dip by volume and 2% by value in the December quarter against a healthy uptick in personal loans, credit cards and two-wheeler loans segment.
It can be noted that the period saw a surge in interest rates, which led to concerns over the impact on home loans that are longer term in nature, and any increase in interest rates pushes up either the monthly loan servicing costs or increases loan tenors.
The CIC said young consumers now account for a major share of the demand for loans, pointing out that 43% of the inquiries were by people between 18–30 years of age in the December quarter compared to 40% in the year-ago period and 36% in the December 2020 quarter.
From a geographical perspective, there has been an increase in the share of inquiries from the rural and urban segments at the expense of inquiries from metro areas, it said.
In what should be a data point keenly looked on by the lenders, potential borrowers classified as “below prime consumers” saw a 4 percentage point increase to 40% in the December quarter compared to the same period a year ago.
Home loan approval rates have come down marginally to 41%, while both personal loan and credit cards saw sharper corrections at 21% each, the report said.
From an outstanding balances perspective, home loan balances were up 16% in December 2022 compared with a 19% growth in credit cards and 33% in personal loans, it added.
The credit card segment has displayed a 0.25% increase in non-payments for over 90 days at 2.31%, while the same for personal loans has improved by 0.14 per cent to 1 per cent, and home loans have seen a 0.39% improvement to 1.21%.
“In view of the impact of global headwinds, it is crucial to continue to carefully monitor credit risk, especially early delinquencies and leverage ratios,” Managing Director and Chief Executive Rajesh Kumar said.
While there are some specific steps pertinent to those using their VA loan benefits, the overall process is similar for all homebuyers.
The good news? It’s not complicated.
The VA home program has allowed millions of veterans, active-duty service members and surviving spouses to purchase or refinance homes. If all of those fellow military members managed it, so can you.
Check your VA home buying eligibility. (May 1st, 2023)
VA Home Loan Program Offers Valuable Benefits
VA loans are backed by the U.S. Department of Veterans Affairs and offer considerable benefits for eligible borrowers. Some of the most valuable aspects of the VA home loan benefit include:
Low or zero down payment
Competitively low mortgage interest rates
No private mortgage insurance (PMI)
12 Steps To Buy a Home With a VA Loan
1. Work out what you can afford
The first step toward your home purchase is determining what you can afford to spend. This involves taking a close look at your household budget.
Once you know where your money is going each month, you’ll have a sense of your potential buying power and the monthly mortgage payment amount you can handle. Keep in mind that homeowners have extra expenses including property taxes, homeowner’s insurance and home repairs.
Creating a budget isn’t a requirement for loan qualification, but it makes you a more informed consumer.
2. Get pre-approved
Getting pre-approved gives you “serious buyer” status in the eyes of sellers and real estate agents. It means you’ve talked to a mortgage lender who has run your finances.
Getting pre-approved includes establishing your eligibility for a VA loan, checking your credit, confirming your income, and working out how big a mortgage you can afford.
Once completed, the lender sends you a letter confirming your loan amount. This means sellers and agents take you way more seriously. And, gives you an advantage when negotiating the price, especially when up against other potential buyers who aren’t approved.
Don’t get confused between pre-approval and pre-qualification. Pre-qualification is better than nothing, but it only means the lender asked you a few questions and relied on your answers (with zero verification) to estimate how much you can borrow. It’s less credible than pre-approval.
VA Loan Eligibility Requirements & Your Certificate of Eligibility (COE)
Your mortgage lender can help you request your Certificate of Eligibility (COE), a document that establishes your VA loan eligibility. Your COE includes information about your military service (confirming you meet the VA’s service requirements), along with the amount of your VA loan entitlement and your VA funding fee.
3. Shop for lenders
You may think all VA loans are the same. While these loans are government-backed, your loan will be issued by a private lender. Some lenders offer great deals and others less great — or flat-out bad.
You should shop around between lenders to find the very best deal for you. But, it’s not just us saying that.
Last year, the Consumer Financial Protection Bureau (CFPB) wrote:
Mortgage interest rates and loan terms can vary considerably across lenders. Despite this fact, many homebuyers do not comparison shop for their mortgages. In recent studies, more than 30 percent of borrowers reported not comparison shopping for their mortgage, and more than 75 percent of borrowers reported applying for a mortgage with only one lender. Previous Bureau research suggests that failing to comparison shop for a mortgage costs the average homebuyer approximately $300 per year and many thousands of dollars over the life of the loan.”
Lenders are required to send you a loan estimate detailing everything you need to know about the mortgage you’re being offered. The CFPB has an exceptionally helpful guide about how to read these — and how to compare them.
Read more: Questions To Ask Before Picking A Lender.
4. Find a reputable buyer’s real estate agent
Usually, as a buyer, retaining a real estate agent costs you nothing. This is because sellers generally pay the buyer’s real estate agent’s commissions. Not every buyer has an agent, but it’s a good idea. Your real estate agent can be one of your greatest assets throughout the transaction. (Just don’t use the same one the seller is using. Their first duty is to the seller.)
A good real estate agent helps you with the following:
Finding your dream home
Negotiating the best possible purchase deal
Completing the buying paperwork
Guiding you throughout each step of the transaction
Troubleshooting any issues
5. Find your home
This is the fun part: picking out your new home.
Depending on your local real estate market, it may take time to find the right property.
Think ahead about your future needs as well as your existing ones. Choose a home that meets your requirements for many years to come if possible and realistic.
Don’t be tempted by a quick-fix purchase with the expectation that you can move again in a few years. Buying and selling a home is expensive and the real estate market unpredictable — you don’t want to do it more often than you absolutely have to.
6. Make an offer
This is the moment when a good real estate agent proves most valuable. So listen to their advice.
It’s a real estate agent’s job to get you the best deal and they should have the knowledge and expertise to achieve that. So leave the negotiations up to them. Of course, your real estate agent should talk through tactics with you. Basically, how to pitch an offer that won’t alienate the owner but will have you paying the smallest amount possible.
Your real estate agent will also advise you on any “contingencies” that should be included in your offer. These are items that allow you to walk away at no cost if certain eventualities arise like an inspection contingency (if the home inspection uncovers unexpected issues) or a finance contingency (in case your mortgage loan has problems). There may be others as well.
7. Pay earnest money
You’ll typically be expected to pay earnest money when your offer is accepted. Your agent can negotiate the amount, but expect to pay between 1 to 5 percent of the purchase price.
As its name implies, earnest money indicates to the seller that you’re a serious (aka earnest) buyer. This isn’t lost money, though. You’ll get it back either as a deduction from your closing costs, or if your closing costs are covered by a third party, you’ll be refunded the amount.
8. Get a home inspection
Home inspections aren’t required to purchase a home, but they’re highly recommended — especially if you’re buying an older home. A home inspection gives you a top-down evaluation of the home and property, including the roof and home exterior, and shouldn’t be confused with a VA home appraisal.
Typically, you can back out of your offer and receive your earnest money back as long as there is an “inspection contingency” written into the purchase contract.
The VA home appraisal is required for a VA home loan and is arranged by your VA lender. It evaluates the property according to the VA’s minimum property requirements (MPRs) and is intended to protect you from purchasing a property that isn’t safe, sound, and sanitary; it also establishes a fair value of the property.
Read more: VA Appraisal & Home Inspection Checklist
9. Update your lender documentation
Every document used to approve your loan must be the most recent. Ultimately, your lender will ask for what it needs, but you can avoid delays by having it all ready in advance. Gather copies of your personal documents, including your latest pay stubs and bank statements.
You’ll also send a copy of the signed purchase contract to your lender. This allows your lender to order the VA appraisal and update your loan application with the address for your next home.
At this point, you may be asked to sign mortgage disclosure documents. These are sent to you by your lender and lay out the terms of your loan in detail — terms may have changed now that a specific home was found and purchase price agreed upon.
Read more: VA Mortgage Loan Document Checklist
10. Meet your lender’s underwriting conditions
Once it has all the required documentation, your lender submits your application to its underwriting department. This is the final step to officially approve your mortgage loan. It’s not uncommon for underwriters to request more information — called conditions — at this stage. Usually, additional documentation is all that is needed.
After the underwriter gives final loan approval, your lender sends your final loan documents to an escrow company.
11. Sign the final paperwork
You’ll likely go to the escrow agent’s office to sign all the final paperwork. Review all the documents carefully. Compare your most recent loan estimate with the closing disclosure. (Closing disclosures provide a final breakdown of all your loan’s details, including “projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs),” according to the CFPB.)
If there are discrepancies between your closing disclosure and your last loan estimate, your lender must justify them. While some costs can increase at closing, others legally can’t. Call your lender immediately if something doesn’t look right.
If you need to pay any closing costs, you’ll pay those at this time too. Bring a cashier’s check or other certified funds to the escrow office when you sign your documents; your escrow company provides the total amount needed.
12. Monitor the status of your loan
Unfortunately, your loan is not complete when you sign the documents. Your lender could take up to a week or more to finalize your loan and transfer the money. Once the lender funds the loan, the seller and all other parties are paid. (The final step: when the transaction is recorded in your jurisdiction’s official records.)
You might think now’s the time to relax. You can, soon. But, not quite yet.
Few home buyers realize that lenders routinely carry out a second (or third) credit check before closing. If your credit score has taken a hit, your lender could cancel your loan — or increase your mortgage rate. That means no late payments and no new credit cards until the loan process is complete.
Buy a home one step at a time
If you’re just getting started, then consider the VA loan program. VA loans can save you a lot of money and make your homeownership dreams come true.
VA loans typically come with lower interest rates than most other mortgages. The ICE Origination Insight Report shows they’re consistently lower than FHA and conventional loan interest rates. VA home loans also require zero money down and no continuing private mortgage insurance.
See if you’re eligible for a VA home loan (May 1st, 2023)
A new Zillow survey of landlords reveals the most burdensome rental management activities
SEATTLE, May 1, 2023 /PRNewswire/ — Peak rental season is approaching, and a new set of landlords could be entering the market. Zillow economists predicted that 2023 would bring a surge in first-time landlords after record-low mortgage rates spurred increased investment in second homes in 2020 and 2021. In March 2023, Zillow saw a 22% year-over-year increase in landlords listing their properties for the first time using Zillow Rental Manager (Zillow’s suite of free property management tools).
To provide insight into the commitment of managing a rental property to this new class of landlords, Zillow surveyed first-time and repeat landlords to learn what the most burdensome parts of the process are for them. The typical (median) landlord who completed the survey reported having two rental properties.
According to Zillow’s survey data1, almost all landlords (92%) said repairs or maintenance were among the top three most demanding responsibilities of managing a rental property, and 40% considered it the No. 1 most burdensome. Screening tenants (reading applications, completing background checks and credit checks) was a close second, with 71% of landlords reporting it among their top three most burdensome activities.
More than one-third of landlords (36%) said they wished they would have known how hard it would be to find reliable renters, and managing the rental (communicating with tenants, accounting, etc.) was more time-consuming than they had anticipated. Thirty-four percent also noted that they wished they would have known the leasing process (processing applications, scheduling tours, writing a lease, etc.) would take more effort than expected.
“Investing in a rental property can provide reliable income and housing for a renter who needs it, but it’s crucial for landlords to understand the responsibilities,” said Manny Garcia, a population scientist at Zillow. “Many landlords wish they had known more about the effort required to find tenants and keep the property in good condition.”
Staying on top of the needs of current tenants and leasing a rental take time and effort. Zillow Rental Manager provides landlords with the right tools to support them throughout the process, for free. In addition to offering housing providers an easy way to create their listing and get free access to the most visited rental network2, Zillow Rental Manager has a ton of resources available now (and coming soon) to help them manage their portfolio and optimize their investment. Among those resources:
Applications and Tenant Screening: Landlords using Zillow Rental Manager can enable Zillow’s universal application process for prospective tenants. Applicants pay a one-time screening fee on Zillow — and it doesn’t cost landlords anything. Landlords receive a potential tenant’s application, including a background check, credit report, eviction history and income verification.
Leases: Landlords can upload and sign an existing lease or customize a brand-new one. Zillow’s free online lease builder guides housing providers through each step of the drafting process, so they don’t have to guess what’s covered. In 34 states, landlords can access templates tailored to their region and customize based on parameters regarding parking, pets, etc.
Payments: Rent payments can be deposited directly into a landlord’s account when that landlord opts into payments via Zillow Rental Manager. Plus, renters can set up autopay so landlords know when they’ll get paid each month. Zillow’s online payments are free for landlords, and there’s no fee for tenants who pay with ACH. Tenants can also pay rent with a credit or debit card for a small fee.
Maintenance Tracker (coming soon!): When launched, landlords will be able to create a checklist of maintenance needs for each of their properties as well as track their tenants’ requests, keeping everything organized and in one place.
About Zillow Group Zillow Group, Inc. (NASDAQ: Z and ZG) is reimagining real estate to make it easier to unlock life’s next chapter. As the most visited real estate website in the United States, Zillow® and its affiliates offer customers an on-demand experience for selling, buying, renting, or financing with transparency and ease.
Zillow Group’s affiliates and subsidiaries include Zillow®; Zillow Premier Agent®; Zillow Home Loans™; Zillow Closing Services™; Trulia®; Out East®; StreetEasy®; HotPads®; and ShowingTime+℠ , which houses ShowingTime®, Bridge Interactive®, and dotloop® and interactive floor plans. Zillow Home Loans, LLC is an Equal Housing Lender, NMLS #10287 (www.nmlsconsumeraccess.org).
1 Zillow Group Population Science conducted a nationally representative survey of more than 1,000 U.S. adults who own at least one property that they rent out. 2Comscore Media Metrix® Multi-Platform custom-defined list: Zillow Rentals, the Apartments.com network, Rent., ApartmentList.com and Zumper Inc. Total Audience, January–-December 2022, U.S.
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Despite signs that the economy might be slowing, mortgage rates crept higher for the second week in a row.
The interest rate on a 30-year fixed-rate mortgage averaged 6.43% in the week ending April 27, according to Freddie Mac. That’s up a little from last week’s 6.39%, and up a lot from last year’s 5.10%.
These rising rates, combined with higher home prices, have taken a toll on homebuyers’ budgets, with the cost of financing a typical house costing $611 more per month than it did a year ago, according to the Realtor.com® March housing trends report.
Yet homebuyers might find that the crushing affordability crisis they’re facing may soon ease up a little, particularly if the economy and inflation continue cooling.
“With the rate of inflation decelerating, rates should gently decline over the course of 2023,” predicts Sam Khater, chief economist of Freddie Mac. “The prospect of lower mortgage rates for the remainder of the year should be welcome news to borrowers who are looking to purchase a home.”
We’ll explore what it all means for hopeful homebuyers and prospective sellers on this latest edition of our column “How’s the Housing Market This Week?”
The latest trend in home prices
In addition to the prospect of lower mortgage rates, home prices—currently hovering at $424,000 in March—might also soon be on the wane. For the week ending April 22, listing prices were just 2.4% higher than a year ago. That’s the slowest growth rate we’ve seen since May 2020.
Plus, listing prices are simply what home sellers hope to get, and cash-strapped buyers these days are driving a harder bargain than ever.
“Even though potential sellers are still listing homes at higher prices, they aren’t necessarily getting what they’re asking for,” notes Realtor.com Chief Economist Danielle Hale in her weekly analysis.
In fact, the national median sale price of homes that actually reached the closing table declined on a yearly basis for the second straight month in March, the National Association of Realtors® said last week.
But that data is a bit deceptive, Hale points out, because the March decline “was driven entirely by declines in the West,” where prices have grown so much that many homebuyers set their sights elsewhere.
“Median home sale prices actually rose modestly in the Northeast, Midwest, and South,” Hale adds. This reflects migration to areas that remain relatively affordable by comparison.
Is it still a seller’s market?
Yet until mortgage rates start falling, homeowners who are thinking of selling seem to be stuck in wait-and-see mode. For the week ending April 22, the number of homeowners who’ve just listed their homes for sale is down by 21% compared with a year earlier.
“We are not seeing as many new home sellers as one year ago,” says Hale.
The reason for this standoff is yet again mortgage rates, with 82% of home sellers who hope to buy admitting that they feel “locked in” by the mortgage rate they have on their current property, which is often several percentage points lower than what they’d get now.
Granted, there are more homes for sale in total—39% more, to be exact—but much of that supply is either new construction or stale listings, which have been lingering on the market for months with no takers.
Plus, the pace of home sales has been slowing for the past 38 weeks, with homes spending an average of 17 days longer on the market for the week ending April 22 than at this time last year.
However, now that spring is slowly giving way to summer, the homebuying season is bound to pick up.
“We expect to see a growing number of home sellers, consistent with typical seasonal trends,” Hale predicts. And as supply expands, this translates into “better opportunities for buyers.”