The Independent Budget Office of New York City released its preliminary budget analysis for 2009 today, revealing that last year was one of the worst on Wall Street as the mortgages crisis ate into firms’ profits.
“Problems in the U.S. housing market have spilled over into financial services—the industry that drives New York City’s economy,” the report said.
“With financial institutions expected to ultimately write-off several hundred billions of dollars of assets, they have sharply reined in lending and other activities. After near-record profits of $20.9 billion in 2006, IBO projects that the final tally of Wall Street profits in 2007 will be $3.2 billion, their lowest level since 1994.”
The report noted that this year isn’t expected to be much better, with projected profits of just $6.6 billion, followed by $12.2 billion in 2009.
The IBO forecasts a loss of $0.9 billion for the first quarter of 2008, but then expects positive quarterly profits for the remainder of the year.
“Mirroring this weakness, employment in the city’s financial services industry will fall by 12,600 jobs (2.7 percent) in 2008 and another 7,600 jobs (1.7 percent) in 2009.”
“As the financial sector’s woes spread through the rest of the local economy, IBO projects that employment growth will stall this year and next.”
According to the report, a “brief recession” is underway and expected to continue during the first half of 2008, followed by moderate growth in the second half, with New York City likely to be hit harder because of its reliance on the financial sector.
“The effects on employment growth and personal income will be deeper and longer lasting here in the city than in the nation as a whole.”
The IBO said tax revenues in NYC are expected to fall this year and next, the first time since the Sept. 11 attacks, but should rise in 2010 when the U.S. economy begins to rebound.
See the complete list of banks, mortgage lenders, and other financial institutions affected by the ongoing mortgage crisis.
The most expensive homes in the United States experienced the highest rate of depreciation in 2007, according to Zillow’s Q4 Home Value report released today.
The real estate analysis company broke down the U.S. housing market and 125 Metropolitan Statistical Areas into five value bands, including bottom, lower middle, middle, upper middle, and top.
They found that the top band experienced a home price decline of 7.5 percent from 2006, while the bottom band only saw home prices depreciate 0.7 percent.
Additionally, homes in the bottom and lower middle quintiles returned the highest rates of annualized growth at 10.1 percent and 8.4 percent, respectively, over the last five years.
At the same time, higher valued homes outperformed lower valued homes in nearly half of the top MSAs in places like San Francisco, Los Angeles, New York, and Boston.
But cheaper homes outperformed more expensive properties in select MSAs like Chicago, Detroit, Seattle, and Baltimore, so the trend really varies by region.
However, Zillow found that regardless of location, owners of cheaper homes have much less equity than those with more expensive homes, which can be attributed to smaller down payments from the former.
Homeowners who purchased a home last year placed a median down payment of 10 percent and have nine percent of their original investment, leaving 30.4 percent with negative equity.
Comparatively, owners in the bottom quintile placed a median down payment of 3.2 percent and have home equity of just three percent, leaving a whopping 43 percent with negative equity.
Owners in the top quintile came in with 20 percent down and have median equity of more than 20 percent, with just 16.9 percent in the negative equity trap.
Amged Baker, a 40-year-old software developer, wanted to move to a bigger home as the Florida native transitioned into a new role at work that allowed him to be permanently remote. He also wanted more space for his two kids.
But Baker, who works for a real-estate platform, knew that it wasn’t that simple to trade up. Mortgage rates had doubled and home prices continued to rise. In his hometown of Palm Beach County, Fla., home prices soared by nearly 60% over the last five years.
He sold his previous home for $600,000, which had a 30-year mortgage rate of 2.8%. However, he was prepared to give up that rate if he could avoid paying a rate of 7%.
Baker was intrigued byassumable loans. Having refinanced his current home during the pandemic, he was keenly aware of the value of his ultra-low mortgage. He knew his monthly payments would be a lot more affordable with an assumable mortgage — and so his search began.
He’s not alone. It appears to be the housing market’s latest obsession — homeowners, buyers, and real-estate agents are all talking about assumable mortgages.
Across real-estate brokerage sites, listings boast that the home comes with an “assumable mortgage,” described in glowing terms as a “rare find,” “game-changer,” or as one buyer said on social media, “white whale.”
What are assumable mortgages?
With assumable mortgages, the loan — and, importantly, its interest rate — is passed from the seller to the buyer when a house changes hands.
With the U.S. housing market frozen by high rates and low inventory, it’s clear why people have turned their attention to assumable loans. They’re particularly appealing now because they offer homeowners a way to potentially capitalize on their pandemic-era ultra-low mortgage rate by passing it on.
Here’s the catch: Only certain types of loans can be assumable mortgages. The seller must have a government-backed home loan, which is insured by the Federal Housing Administration, Veterans Affairs, or certain loans by the U.S. Department of Agriculture.
“‘Folks don’t want to give up those assumable mortgages because they’re just as attractive to them as they are to you.’”
— Andy Walden, vice president of enterprise research strategy at ICE
These government agencies allow homeowners to transfer ownership of the mortgage to a new home buyer under certain conditions such as the new buyer having good credit, an acceptable debt-to-income ratio, and more.
For the typical home buyer today who is facing a 30-year mortgage with a rate over 7%, assuming an existing mortgage with an interest rate as low as 1.75% is an enticing proposition. It offers an alternative to buying points — fees a borrower pays the lender to cut the mortgage rate on their home loan — or taking out an adjustable-rate mortgage, which comes with its own risks.
For the seller, an assumable mortgage presents another feature to play up when listing their home. There is also, perhaps, some comfort in knowing that their ultra-low interest rate will be inherited by the buyer.
Assumable mortgages were popular in the 1980s
“For the last 40 years, rates have been falling, so nobody cared about assumability,” said Tod Tozer, former president and CEO of Ginnie Mae. “So we’re basically back to the future — we’re back to 40 years ago when 30-year mortgages were close to 13%, 14% back in 1981. And they’ve been falling ever since.”
Ginnie Mae securitizes all FHA, VA, and USDA mortgages for the secondary market. Tozer has also written about assumable mortgages being a “solution” to today’s frozen housing market, as the seller will be able to “receive top dollar for the sale of their home,” and move to another place.
Assumable mortgages were popular in the 1980s when mortgage rates were in the double digits. Back then, many conventional loans were assumable. “It was the standard of the industry,” Tozer said.
But assumable mortgages aren’t as common as a conventional loan, making them hard to come by.
Based on the market today, only 12 million mortgages are potentiallyassumable, which is less than a quarter of all mortgages in the U.S., according to loan-level data from ICE. Of these mortgages, which are primarily FHA, VA, and USDA loans, about 7.2 million or 14% have a mortgage rate of below 4%.
Assumable mortgages can be difficult to find, and it can also be difficult to get homeowners to part with their loan if the alternative is to buy a house with a much higher interest rate.
“Folks don’t want to give up those assumable mortgages because they’re just as attractive to them as they are to you,” said Andy Walden, vice president of enterprise research strategy at ICE, or Intercontinental Exchange, a data company.
Additionally, even after a buyer takes over the mortgage, they will still need to cover the difference between the outstanding balance and the sale price, Walden told MarketWatch.
How assumable mortgages work
So how do they work? Imagine an aspiring homeowner views a home valued at $375,000, and the home comes with an assumable mortgage of $225,000. The buyer in this situation will need to put down $150,000 in cash, or find other financing after they assume the mortgage.
If the buyer requires secondary financing, it will likely come at a higher interest rate, which will offset some of the savings from the assumable mortgage. Nonetheless, for homeowners who are keen on selling, if they have an assumable mortgage, their house will become more attractive to buyers.
“Veterans across the country are sitting on these ultra-low rates,” Chris Birk, vice president of mortgage insight at Veterans United Home Loans, told MarketWatch. “So they’ve got this incredible marketing opportunity.”
“‘Veterans across the country are sitting on these ultra-low rates. So they’ve got this incredible marketing opportunity.’”
— Chris Birk, Veterans United Home Loans
And yet of the 69,000 VA purchase loans that his company processed in 2022, only about two dozen were assumptions.
There’s a lack of awareness about assumable loans, Jason Mitchell, chief executive of Jason Mitchell Group, a Scottsdale, Ariz.-based real-estate brokerage, told MarketWatch.
The first question real-estate agents should ask homeowners who are listing their homes is whether their mortgage is assumable. “If you can mark it as an assumable mortgage at 3.5%, you’re gonna get a better price on your house,” he added.
What happens if the new buyer defaults on the assumable mortgage?
The person who assumes the mortgage also becomes responsible for paying the loan on time. If the new buyer stops making their mortgage payments and goes into default, that does not mean the original owner will be required to pay up.
With FHA loans, “once the assumption is complete, it is a full release of liability for the previous borrower, which means the new borrower (the borrower that has assumed the mortgage) has full responsibility for all aspects of the mortgage,” a HUD spokesperson told MarketWatch.
Similarly, with VA loans, when another buyer assumes the mortgage, there is a release of liability, Birk added. The veteran who owned the home previously isn’t financially responsible if the new owner defaults.
One man’s search for an assumable mortgage
During his search, Baker, the software developer, contacted Chris Tapia, a 41-year-old real-estate broker with Compass Florida. Tapia had met Baker three years ago when the homeowner bought his first home in Palm Beach, and the pair had become good friends.
Tapia had recently introduced the idea of assumable mortgages to Baker. The agent believed that it was one key way for home buyers to take back the purchasing power they lost as homeownership became more expensive.
“Everything is so phenomenally expensive that no one can really afford anything right now,” Tapia told marketWatch.
In his quest for assumable loans, Baker specifically looked for homes that were financed with a mortgage from the Federal Housing Administration, Veterans Affairs, or the U.S. Department of Agriculture.
He then searched home listings from various online brokerages to identify those that were financed with an FHA or a VA mortgage. He also looked at services such as FHA Pros, a site that provides real-time data for FHA and VA condominium approvals.
But homeowners can also look for listings with assumable loans via Google with the following search term: site:compass.com “assumable.”
MarketWatch found several new and old listings advertising assumable mortgages in the home’s description.
Finding an assumable rate of 3.05%
Baker and Tapia attended 20 open houses in Palm Beach County.
They made four offers and ultimately closed on a four-bedroom single-family home in Palm Beach County for $620,000. Baker took over the seller’s 30-year fixed-rate mortgage, under the assumption rules.It has a 3.05% rate.
He currently holds a Federal Housing Administration loan with an outstanding balance of $324,000. As a result, he put down $269,000 in cash.
The seller had only paid off about 3 years on their 30-year loan,so Baker took it over with a monthly payment of about $1,500. He estimated that buying the home with a conventional mortgage at the prevailing rate would cost closer to $2,300 a month.
Baker closed on the home in June 2023, and because he assumed the seller’s loan he did not have to pay thousands of dollars in closing costs.
“You will be hearing about assumable loans more often,” Tapia, the broker, said.
Baker agreed. “To be honest with you, it was always a good deal — it was always better than going the conventional route,” he said.
“Bidenomics” is taking its toll on the U.S. housing market, as mortgage rates hit their highest level in more than two decades.
On Wednesday, the average rate on a 30-year fixed mortgage hit 8 percent, marking the highest level recorded since 2000. According to the Committee to Unleash Prosperity, this estimate means “that on a $500,000 home purchase, Americans will pay an approximate $1,500 a month Biden mortgage tax” for 30 years. For context, the average rate on a 30-year mortgage was 2.65 percent when former President Donald Trump left office in January 2021.
With higher mortgage rates, homebuyers are becoming increasingly wary of purchasing a new home in the current market. For example, a recent Fannie Mae survey found 83 percent of consumers “believe mortgage rates will stay at their current elevated level or rise further in the next 12 months.” Separately, 84 percent agreed that “now is a bad time to buy a home.” The latter percentage is the “highest share on record,” according to Yahoo Finance.
Higher rates have conversely led to a limited number of homes on the market, as sellers are fearful of having to purchase a new home under the current rates.
“Mortgage rates are expected to remain elevated for the time being,” Hannah Jones, an economic research analyst, told Yahoo. “It seems that [mortgage lock effect] is going to be the mode of operation until something shifts substantially, [such as] inflation has made big improvements.”
Despite President Joe Biden and his administration’s insistence that the U.S. economy is all hunky-dory, everyday Americans are struggling to afford basic necessities due to high inflation rates. According to the Bureau of Labor Statistics, in September, the Consumer Price Index increased 3.7 percent year-over-year and rose 0.4 percent for the month after rising 0.6 percent in August.
As noted in a Las Vegas Review-Journal op-ed, that 3.7 percent year-over-year increase is “a long way from the Federal Reserve’s inflation target of 2 percent” and “is building on 7 percent annual inflation in 2021 and 6.5 percent in 2022.”
Shawn Fleetwood is a staff writer for The Federalist and a graduate of the University of Mary Washington. He previously served as a state content writer for Convention of States Action and his work has been featured in numerous outlets, including RealClearPolitics, RealClearHealth, and Conservative Review. Follow him on Twitter @ShawnFleetwood
Rent prices are on the rise, with the average cost increasing 18% between 2017 and 2022. But buying a home requires a hefty down payment and good credit. Renting to own your home can give you the best of both worlds, but there are some downsides.
If you’re thinking about signing a rent-to-own agreement, it’s important to weigh the pros/cons of rent-to-own home deals. Here’s what you need to know before you sign on the dotted line.
What are rent-to-own homes?
When you own a home, part of your monthly payments goes toward paying off the principal. If you stay in the home long enough, you’ll own it.
The same doesn’t apply to rentals. Your monthly rent solely covers your costs of living in that home, whether it’s a condo, apartment, townhouse, or single-family house.
A rent-to-own home lets you pay rent to live on the property, with the option to buy it when the lease runs out. In some cases, a portion of your rent goes toward the purchase price, but that isn’t always the case.
How does rent-to-own work?
A rent-to-own agreement is essentially a lease agreement with an option to buy. Rent-to-own contracts should be read thoroughly. Those options can vary from one contract to another.
When you sign a rent-to-own contract, you pay an upfront fee called an option fee. This is typically 1 to 5% of the home’s purchase price, and it’s non-refundable.
It’s important to note that a lease does not relieve you of the requirements to buy a house. You’ll still have to qualify for a mortgage and make a down payment. It’s merely a way to buy yourself some time and possibly put some of your rent toward the purchase price of a home.
Lease Option vs. Lease Purchase
Before you sign, pay close attention to the lease agreement you’re signing. There are two types, and one contractually obligates you to buy the property.
Lease Option Agreement
A lease option agreement is the best deal of the two for you, the buyer. You’re signing a lease option contract that merely gives you first rights to the house when the lease is up. If you change your mind, find a better deal, or can’t qualify for a mortgage, you can find somewhere else to live and move your belongings out.
Since the option fee is nonrefundable, it’s important to note that you will lose money if you choose not to buy. Calculate this loss when you’re deciding whether to buy.
Lease Purchase Agreement
Unlike a lease option agreement, lease purchase agreements obligate you to buy at the end of the lease. Since it’s a contract, that means you’re legally obligated to purchase the house.
This can be risky for a couple of reasons. Once you’re in the house, you may see issues you didn’t notice when you were first touring the house. Things could change with the neighborhood or your circumstances that you couldn’t know at the outset.
But the biggest issue with a lease purchase contract could simply be that you aren’t eligible for a mortgage to buy the house. Make sure you know, up front, what penalties or liabilities you’ll face if you can’t buy the house when your lease is up.
Even though both agreements operate differently on your end, they do obligate the seller to give you the option to buy when your lease expires. This puts you in a position to own a home at a predetermined future date, giving you the opportunity to start planning.
Length of a Rent-to-Own Agreement
Rent-to-own contracts start with a lease period that can be up to five years but is usually less than three. The thought is that the rental period will give a renter time to qualify for a mortgage. During this time, you’ll work on building your credit, if necessary, and saving for a down payment.
In some cases, a rent-to-own arrangement could have renewal terms. That means if you reach the end of the lease and want more time, you can extend the lease. With this option, though, the property owner could increase your monthly rent or the purchase price.
Preparing for Homebuying
During your lease term, you’ll make each monthly rent payment in exchange for remaining in the house. But it’s important during that time that you work toward purchasing the house when your time is up. Here are some things to do to boost your chances of landing a mortgage once your lease expires.
Boost Your Credit Score
Your rent-to-own deal requires that you qualify for a mortgage once the term is up. To do this, you will need to meet the minimum credit score requirements. You can get a free copy of your credit report each year at AnnualCreditReport.com, but there are also credit monitoring services that can help you stay on top of things.
Although requirements can vary from one lender to the next, Experian cites the following credit scores as necessary to land a mortgage:
FHA: If you qualify, a Federal Housing Association loan will accept credit scores as low as 500.
USDA loans: Those who meet the requirements can qualify with a score as low as 580.
Conventional loan: Generally 620 or higher, but some lenders require 660 at minimum.
VA loans: Eligible military community members and their families can obtain loans with scores as low as 620.
Jumbo loan: These loans cover houses at a higher price, so you’ll need a score of at least 700.
Save for a Down Payment
In addition to a good credit score, you’ll need to put some money down on your new home. Down payment requirements vary by loan type, but it’s recommended that you put at least 20% down. That means if you’re buying a $200,000 home, you’ll need at least $40,000 by closing.
There are lower down payment options, but if you choose those, your mortgage payments will include something called private mortgage insurance. This will increase your monthly payment by $30 to $70 per $100,000 borrowed.
If you can’t save up 20%, you may qualify for an FHA loan, which requires as little as 3.5% down. Both VA and USDA loans have zero down payment options, and there are programs offering down payment assistance to those who qualify.
The best part about rent-to-own properties, though, is that some come with rent credits. With a rent credit, a percentage of your rent will go toward your required down payment. Calculate in advance how much you’ll have in that escrow account at the end of your lease to make sure you save enough to supplement it.
What are the pros of rent-to-own?
Rent-to-own homes can be a great option, especially during a tight housing market. If there’s a house you want to buy, but you can’t make a down payment or your credit isn’t where it should be, it could be a great workaround. Here are some of the biggest benefits of rent-to-own agreements.
Rent May Go Toward Purchase Price
Depending on the terms of the rental agreement, renting to own could help you work toward paying for the home. Instead of the full amount of your rent being pocketed by a landlord, a percentage of your rent could go toward the eventual purchase price. Before signing, pay attention to rent credits and try to negotiate the best deal possible.
The Purchase Price Is Locked In
When a landlord agrees to a lease option, the home’s purchase price is written into the contract. That price will typically be higher than what the market says it’s currently worth. This means if the U.S. housing market sees an unexpected increase, you’ll be buying the home for less than its value. Even if the market dips, once you purchase the house and remain there for a few years, you may be able to sell it at a profit.
You’ll Buy Extra Time
For many renters, the rent-to-own period provides time to qualify for a mortgage. If you’ve researched all the options and found you’re close but not quite there yet, a rental period could be just what you need.
Before you choose this option, though, take a look at your circumstances. If substantial existing debt and poor credit mean you won’t qualify, you may need more than the few years you’ll get with a rent-to-own agreement.
No Moving Necessary
Let’s face it. Moving can be a pain. You have to pack everything up, line up a moving truck and get help moving, and unpack your items once you’re in the new location.
With a rent-to-own agreement in place, you skip the hassle of moving. You’ve already been in that home, making monthly rent payments, for at least a couple of years. You’ll simply go through the closing process and switch from rent payments to mortgage payments.
What are the cons of rent-to-own?
If you can get a mortgage, that’s always going to be a better option than renting or leasing to own. But there are some instances where renting without the buy option could be better for you. Here are some things to consider.
Rent-to-Own Home Maintenance
Before you sign any lease agreement, it’s important to read the fine print. One thing to note, specific to own agreements, is who will be responsible for maintenance during the rent-to-own period. If you rent without the promise of eventual ownership, your landlord will take care of those costs. In some cases, rent-to-own agreements require the renter to handle all repairs.
But there’s an upside to handling repairs on your own. To your landlord, the property is technically yours. That means you likely will give it more TLC. Still, it’s well worth it to pay for a home inspection before you agree to a rent-to-own agreement. This will identify any serious issues that will need to be addressed before you buy.
Option Fee
One distinguishing feature of a rent-to-own property is the option fee. This is usually between 1 and 5% of the purchase price and is non-refundable. That means if you don’t ultimately qualify for a mortgage, you’ll lose that money.
Home Values Could Drop
Property values aren’t guaranteed. Your landlord estimates the value of the property, but if you’re in a rising market, you might get that home at a steal. While that’s good news for you, the reverse can happen. If housing prices drop substantially during that time frame, you could find yourself buying a property for more than it’s worth.
Contract Breaches Can Be Costly
Rental agreements are a legal obligation. If you don’t pay your rent, your landlord can evict you and keep your security deposit. But rent-to-own contracts bring an additional level of risk. Missed payments mean you could be evicted and lose all the money you’ve put in. That includes the upfront fee and any rent credit you’ve earned.
All that money will also be lost if you can’t qualify for a mortgage when your rental time is up. These agreements can give you some breathing room. However, if your low credit scores, income, lack of a down payment, or employment situation make you ineligible for a mortgage, you could be searching for another rental while losing everything you’ve paid on the lease-to-own home.
Steps to Buy a Rent-to-Own Home
Once you’ve decided renting to own is the route you want to take, you may wonder what to do next. The following steps can help you ensure you get the best deal in a rent-to-own agreement.
1. Find a Home
This is more challenging than it might sound, especially if you’re looking in a competitive real estate market. Rent-to-own homes are extremely rare, so you may have to find a home for sale and try to negotiate this type of setup.
Typically, homeowners become renters when they can’t sell their homes. This means your rent-to-own contract might be on a home that’s in a less desirable or convenient area of town. For someone whose home has been on the market for a while, being able to collect rent money with the promise of a sale in a few years can be a huge relief.
For best results, find a real estate agent who can help you track down a home and negotiate with the seller. The National Association of REALTORS® maintains a directory of real estate agents, but you can also ask for a referral or find real estate agents nearby who have brokered these types of deals recently.
2. Research the Home
Even if it’s tough to find a lease-to-own home in your area, don’t snatch up the first one you find. Crunch the numbers to make sure the rent and purchase price make financial sense for you. Look at the sale history of the home to verify that the owner’s estimated purchase price is somewhat within what the median home price will likely be when your lease expires.
3. Research the Seller
The seller needs to be looked into as well. This is even more important with rent-to-own agreements since this person will be your landlord for the entire lease period. If you see any red flags during your interactions with the seller, move on.
4. Choose the Right Terms
Before you make a real estate purchase, you would have a closing attorney review the documents. The same goes for a rent-to-own agreement. Run all the paperwork past a real estate attorney to make sure there’s nothing in the contract that will hurt you in the long run.
Your real estate agent should be able to negotiate the best terms for you, including how each rent credit will help you build equity and what happens at the end of the lease.
5. Get a Property Inspection
Any time you make a home purchase, it’s essential to know what you’re buying. The same is true for rent-to-own properties. A home inspector can check things out and make sure you aren’t purchasing a home with serious issues.
6. Start Preparing to Buy
Once you start making rent payments, it’s time to start preparing for your eventual home purchase. Chances are, you’ll have to make a sizable down payment on a home loan, so plan to have that ready. Also, keep an eye on your score with all three credit bureaus and make sure you’ll qualify.
A rent-to-own contract can be a good deal for both the buyer and the seller. It can give you time to save money and improve your credit score. A real estate lawyer should take a look at your contracts and make sure your best interests are protected.
Bottom Line
Rent-to-own homes present a unique option for potential homeowners. This approach offers the opportunity to enter the homeownership arena at a slower pace, allowing individuals to build credit, save for a down payment, and experience living in the home before making a final purchase decision.
However, the rent-to-own path isn’t free from drawbacks. Potential buyers should be wary of unfavorable terms, higher monthly payments, and the risk of losing money if they decide not to buy. Ultimately, like all significant decisions in life, choosing a rent-to-own option requires careful consideration and thorough research.
Frequently Asked Questions
Where can I find rent-to-own houses?
Rent-to-own houses can be found through specialized websites dedicated to these types of listings, local real estate agents familiar with the concept, or sometimes through classified advertisements in local newspapers or online platforms.
Can I find rent-to-own homes on Zillow?
Yes, Zillow does list rent-to-own homes. When searching for properties, you can filter the search results to show only rent-to-own options. However, availability may vary based on the region and market conditions.
How long is the typical rent-to-own contract?
The typical lease term ranges from one to five years, but terms can vary based on the agreement between the homeowner and tenant.
Do I have to buy the house at the end of the lease?
No, the decision to buy is optional. However, if you decide not to purchase, you may lose any upfront fees or additional monthly amounts set aside for the potential purchase.
Can the seller change the purchase price once set?
Generally, the purchase price is fixed in the initial agreement. However, some contracts may have clauses allowing price adjustments based on market conditions.
What happens if the property value decreases during the lease period?
If the home’s value decreases and you’ve agreed on a set purchase price, you could end up paying more than the current market value. It’s crucial to negotiate terms that protect your interests.
Who is responsible for repairs and maintenance?
The agreement should clearly outline these responsibilities. In most cases, the tenant bears the responsibility for maintenance and repairs during the lease term.
What’s the benefit of a rent-to-own agreement for sellers?
Sellers can generate rental income while waiting to sell, often at a premium. It also widens the pool of potential buyers, especially those who need time to improve their credit or save for a down payment.
How do property taxes work in a rent-to-own agreement?
In a rent-to-own scenario, the property taxes are typically the responsibility of the homeowner, as they still retain ownership of the property during the rental period. However, the specific arrangement can vary based on the terms of the agreement.
Some contracts may stipulate that the tenant pays the property taxes directly or reimburses the homeowner. It’s crucial for both parties to clearly understand and agree upon who will cover the property tax obligation before entering into a rent-to-own contract.
If I don’t buy, do I get a refund for the extra money paid?
Typically, the extra money paid above regular rent, often referred to as “rent premium,” is forfeited if you decide not to buy.
Is the rent in a rent-to-own agreement higher than usual?
Often, yes. A portion of the monthly rent may be used for the potential down payment or purchase price, making it higher than the average rent for similar properties.
What’s the difference between rent-to-own and mortgage?
Rent-to-own is an agreement where a tenant rents a property with the option to buy it at the end of the lease. No bank is involved initially, and the tenant isn’t obligated to buy. A mortgage, on the other hand, is a loan specifically for purchasing a property. The buyer borrows money from a bank or lender and agrees to pay it back with interest over a predetermined period.
Does rent-to-own hurt your credit?
A rent-to-own agreement, in itself, doesn’t usually affect your credit. However, if the homeowner reports late payments to credit bureaus, it could hurt your credit score. On the positive side, consistently paying on time and eventually securing a mortgage can benefit your credit.
What is another name for rent-to-own?
Rent-to-own agreements can go by various names, including:
Lease to purchase
Lease option
Rent-to-buy
Rent-to-purchase option
Lease purchase
Each of these terms represents the concept of renting a property with the potential option to buy it after a set period.
Could a collapse in the U.S. housing market wreck the nation’s economy in 2023-2024, like it did in 2008? Financial experts are publishing their predictions amid a troubling backdrop of elevated home prices and high mortgage rates. Some of these forecasts are quite alarming, to say the least.
Surely, you’ll recall the Federal Reserve hinting at a “higher for longer” interest rate policy at last month’s Federal Open Market Committee (FOMC) meeting. The upward pressure on mortgage interest rates has been unmistakable. This begs the question of what’s in store for the housing market and how stock investors can prepare for what’s coming.
Housing Market Alert: Expect Home Prices and Mortgage Rates to Rise in 2024
As we embark on the final quarter of 2023, all eyes are turning to 2024. Understandably, people want to know what to expect in the housing market. Suffice it to say home prices and mortgage rates are very likely to increase.
They’re already elevated, to put it mildly. Believe it or not, the median sale price of an existing home in the U.S. reached $406,700 in July. That figure is only $7,000 less than the all-time high.
Furthermore, the average annual interest rate for a 30-year mortgage reached 7.36% in late August. And with few signs that the “higher for longer” interest rate policy will end soon, housing could become even less affordable.
So, what are the experts predicting? National Association of Realtors (NAR) Chief Economist Lawrence Yun expects home prices to increase by around 3% to 4% in 2024. Meanwhile, the supply of houses is “likely to remain below what we would deem a balanced market,” according to Chen Zhao, who leads the economics team at Redfin.
Experts with Zillow see home values increasing by 3.4% in 2024. Moreover, the National Association of Home Builders anticipates that America’s housing shortage will persist through the end of this decade.
On the other hand, Moody’s Analytics and Morgan Stanley both expect that U.S. home prices will decline slightly in 2024. This just goes to show that consensus is, as always, hard to find on Wall Street.
What You Can Do About It
Should you prepare for a housing market collapse in 2024? Not necessarily, though real estate buyers and sellers need to factor in elevated home prices and mortgage rates.
This might involve altering your budget for the next year. At the same time, it’s not a bad idea to cut back on real estate stocks. Two clear-cut examples would be Realty Income (NYSE:O) and Rocket Companies (NYSE:RKT). Finally, always keep an eye on the Federal Reserve for hints about future interest rate policy changes.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.
As mortgage rates began to spike last year, homebuilders across much of the country began to reduce their profit margins—which had grown to record levels during the boom—to do things that would entice buyers back into the market. For some builders, that meant offering aggressive rate buydowns, which in some cases lowered buyers’ mortgage rate below 5%. In some communities, it required cutting prices by 5%, 10%, or even 15%.
Many of the best builder deals disappeared earlier this year as the U.S. housing market started to show signs of life amid the seasonally stronger spring and summer windows.
However, the fact that the mortgage rate shock has regained bite just as the housing market entered into the seasonality softer fall window has translated into many homebuilders once again rolling out juicer incentives.
Look no further than Lennar, a homebuilder ranked No. 119 on the Fortune 500, which is presently promoting a “fixed [mortgage] rate of 4.25%” in Colorado for buyers who “sign a purchase agreement on a select move-in ready home in Colorado between 09/18/23 and 09/25/23 and close by 10/31/23.” That’s quite the mortgage rate buydown considering that on Tuesday the average 30-year fixed mortgage rate sat at 7.30%.
The fact that big homebuilders, including Lennar, still have profit margins that are well above pre-pandemic levels gives them wiggle room to offer aggressive buydowns when needed.
But just because Lennar is offering a 4.25% mortgage rate buydown in Colorado doesn’t mean buyers across the country can find that level of a buydown in their home market.
Among U.S. housing markets, Colorado markets have seen greater softening as a result of strained fundamentals.
“In normal times, we’ll have a 10% to 15% premium over resale [prices] in that zip code, it’s that localized. When the market was running prior to Fed rates going up, and mortgage rates going up, in some locations our premium got as high as 30% over resales in certain areas. So then you’re out of whack with your biggest competition, which is resale. You can do it as long as it works, but once the market starts to normalize, you have to come down. Over time it tends to revert to the means, which is a 10% to 15% premium over resale,” KB Home’s CEO Jeff Mezger recently told Fortune.
Mezger says that Denver—where Lennar is offering its 4.25% mortgage rate buydown—is still their weakest housing market.
“The [housing] market where the premium to resale got too far out there, and the market has been correcting, and it has been difficult for the industry, would be Denver. Where prices just moved very quickly, and moved away from affordability, and we’re continuing to adjust there, and demand remains a little more sluggish than average,” Mezger says.
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This article is reprinted by permission from NerdWallet.
Mortgage rates have risen to their highest levels in more than 20 years, making it harder to afford a home. And yet, out of necessity or desire, hundreds of thousands of people buy homes every month.
With the 30-year fixed rate topping 7%, NerdWallet asked real estate agents and mortgage loan officers for advice on how home buyers can stretch their homebuying dollars in this time of high interest rates. Here are nine tactics that they suggested.
1. Ask the seller to reduce the mortgage rate
Temporary mortgage rate buydowns have become commonplace since rates surged in early 2022. With a temporary rate buydown, the seller pays a portion of the buyer’s interest payments upfront. This reduces the house payments for the first one, two or three years of ownership.
“This is a common strategy for new-home builders, but it can also be used in the purchase of resale homes,” said John Bianchi, executive vice president for loanDepot. (All sources in this story commented via email.) “Negotiating a temporary buydown with the seller can help soften the blow of high interest rates, reducing your monthly payment for one to three years.”
In one typical setup, the seller’s payment effectively cuts the buyer’s interest rate by 2 percentage points in the first year, and by 1 percentage point in the second year. After that, the buyer pays the full interest rate. This is known as a 2-1 buydown.
Another option is to reduce the mortgage rate permanently, using discount points. One discount point equals 1% of the loan amount; each point typically reduces the interest rate by around 0.25 percentage point.
“Home buyers have an opportunity to get a seller to pay for these methods to lower their interest rate,” said Chuck Vander Stelt, a real estate agent in Valparaiso, Indiana. “Some home buyers should seriously consider offering a more generous price to the seller in exchange for a large closing cost concession and then use those funds to buy down the interest rate as much as possible.”
Also see: Avoiding the 30-year mortgage loan trap can save you hundreds of thousands of dollars
2. Use part of your down payment to pay down debt
When you apply for a mortgage, the lender considers your total debt payments for the house, car, student loans and credit cards. Sometimes it makes sense to divert some of your intended down payment money to cut the higher-rate debt first, said David Kuiper, vice president and senior mortgage banker for Dart Bank in western Michigan.
“While the mortgage payment will be slightly higher, the total debt/payments is lower, making the proposed purchase more affordable,” Kuiper said.
3. Use home buyer assistance programs
State and local governments sponsor an abundance of programs to make homes affordable for home buyers, especially first-timers. Some programs offer down payment assistance and help with closing costs. Others offer favorable interest rates or tax credits.
Details differ from state to state. Some programs are targeted to certain counties, cities or neighborhoods. Others are intended for specific groups of people, such as teachers, first responders or renters who live in public housing. Some programs have income limits.
Don’t miss: We bought a falling-down 100-year-old home. We tried to renovate, but things took a turn for the worse.
4. Ask the seller to finance the purchase
You can give the seller an IOU for part of the home’s value and make monthly payments directly to the seller at an interest rate that’s lower than you could get from a bank. This arrangement is called “seller financing” and has its roots in the early 1980s, when mortgage rates zoomed as high as 18%.
You might wonder why a seller would agree to such a deal. “They will often do this in order to get the price they want,” said Janie Coffey, who leads the Coffey Team with eXp Realty in St. Augustine, Florida. The seller gets full price while you get a break on the interest rate.
Seller financing usually has an end date: Within three, five or 10 years, the buyer must get a mortgage from a lender to pay off the amount owed to the seller. Coffey explained that the type of seller open to this arrangement often has paid off the mortgage “and is OK to wait for their big payoff.”
Seller financing is complex. Use an experienced real estate attorney to draw up the contract.
Related: How the U.S. housing market got stuck in the ’80s
5. Don’t wait for a rate you like better
“If the right house comes along and the payment is affordable (even if you don’t like the interest rate), you should buy the house,” Kuiper said.
You often hear that you should buy now and refinance someday, after interest rates fall. That’s not Kuiper’s point. His point was this: If mortgage rates fall, more buyers will rush into the market. They’ll make competitive offers and drive home prices higher, “essentially wiping out any advantage of the lower interest rate.”
6. Don’t get distracted by things you don’t need
Some sellers want flexibility about the closing date, would prefer the buyer to make repairs, and are scared of accepting an offer from a buyer who ends up failing to qualify for the mortgage.
Vander Stelt advises staying focused on price with these hassle-avoidant sellers, while being flexible on the rest of the offer on the house. “Do this by offering the best terms you can, including buying the home as-is, a closing date and possession that works best for the seller, and illustrating how strong of a candidate you are to get your mortgage approved,” he said.
You can demonstrate that you’re a strong mortgage candidate by showing a preapproval letter and by sharing financial information, such as account balances that prove you have the cash for the down payment.
7. Buy a house that needs work
Buying a fixer-upper is an old-fashioned, time-tested way to save money. “If you can be patient, it’s worth buying a home that needs work and slowly fixing it up over time or taking a renovation loan to acquire the home and do the work upfront,” said Brian Koss, regional sales director for Movement Mortgage, in Danvers, Massachusetts.
Read: Should you buy a fixer? These are the 5 cheapest states to make home renovations.
8. Build a house or buy a brand-new one
“Building a new home can provide more certainty around how long you will have to wait to move in, it can provide more cost certainty, and it can save you money in the short and long term by avoiding costly remodels, appliance repairs and unexpected repairs of older parts of the home,” said Jeffrey Ruben, president of WSFS Mortgage in the Greater Philadelphia area.
Buying a new home in a development has some of the same advantages. And today’s buyers have good reason to shop for new construction because there’s a shortage of existing homes for resale.
Read: U.S. construction spending rose in June, marking seventh straight monthly increase
9. Rent out part of the house
Coffey suggested using an old strategy with a trendy name — house hacking — “buying a property like a duplex, where you live in one unit and rent out the other,” she said.
If you buy a duplex, triplex or quadplex, and you live in one unit, you can include the expected rental income for the others when qualifying for a loan. In some cases, you can qualify for a mortgage using expected rental income from an accessory dwelling unit, such as a basement apartment or a tiny house in the backyard.
Also see: Homeowners locked into ultralow mortgage rates consider short-term rentals, but cities are cracking down
If you buy a home today, you’re stuck with high mortgage rates for the time being. But by employing some creativity, you might find a way to afford homeownership.
More From NerdWallet
Holden Lewis writes for NerdWallet. Email: [email protected]. Twitter: @HoldenL.
The U.S. housing market is short by at least 6.5 million homes. After more than a decade of under-building relative to population growth, there are simply not enough affordable entry-level and first-time move-up options available for buyers. Renters are finding themselves priced out of areas within a reasonable commuting distance to work.
The scarcity of housing has driven home prices and rents prices to an all-time high and pushed affordability to a multi-decade low. Over the next decade, there will be more than two million adults added annually to the U.S. population, due to a combination of aging and immigration. This shift will drive a voracious need for more housing, especially among entry-level and first-time move-up homes at lower price points given structural affordability challenges.
Reasons for the housing shortage plentiful
Housing has been materially unbuilt for the past 15 years. Most production builders have focused on ever larger and more expensive new homes, and relatively few new homes have been built that cater to lower-income households and entry-level buyers, especially in high-cost coastal markets.
Most recently, rising interest rates have intensified the fight for housing. From February 2011 to April 2022, mortgage rates never rose above 5%, making the cost to borrow money and buy a home very cheap. However, since 2022, there has been a rapid rise in rates that has created a “lock-in effect” and stalled many families who would have otherwise considered moving. Homeowners who “locked-in” a mortgage rate of 3-4% during the pandemic are unwilling to buy a home at a 7%+ on a new mortgage, which means even fewer homes are going on the market as existing homeowners choose to stay put.
For those hoping to buy a home for the first time, the rise in rates means that monthly payments are effectively double what they would have been a year ago, a reality that has priced many people out of buying. Couple that with rising costs of home insurance and the general price inflation, and there is a massive housing affordability problem facing the majority of the country.
A need for alternatives
This persistent housing shortage has generated a pressing need for alternatives that can bridge the gap between demand and supply, while accounting for a limited availability of land in top areas.
Enter the Accessory Dwelling Unit, commonly known as an ADU, or more informally called an in-law suite, granny flat or backyard home. ADUs are small, self-sufficient structures that usually have one to three bedrooms, a private entrance, and all the amenities that a resident would require including kitchens and bathrooms. ADUs are one of the most effective ways to add density and rental properties in a higher cost market. These generally detached structures can be built in less than a year and cost far less to build than primary homes. Depending on where you live, there are also various state-run programs such as the CalHFA ADU Grant in California that can bring down building costs tremendously.
For homeowners, ADUs offer an opportunity to provide affordable housing on the rental market or house relatives that would otherwise be unable to afford the neighborhood. These structures can generate rental income to offset rising mortgage payments, and create more long-term rental supply, ultimately lowering the average rental cost for tenants. For local governments, ADUs can increase the number of tenants in areas where high-rise dwellings are not a desirable option. ADUs also offer a compelling option for multi-generational living, which can be a tremendous help with families that want to reduce burdens of childcare and senior care.
Changing policies good for ADUs
Fortunately, we are seeing many government authorities focusing on changing housing policies and zoning codes to make ADUs a more actionable solution. It’s a rare example of government housing policies driving the private market to solve a critical problem. For example, California’s changes in laws and regulations have made ADUs much easier to build. The momentum from these regulations has resulted in a large increase in ADU construction activity: permits for ADUs in California have increased nearly 22x from around 1,100 in 2015 to nearly 24,000 in 2022 and roughly 68,000 ADUs were built across California between 2017-2021. As a result, there are a large number of new housing units that have been added to high-cost locations where people hope to live and work.
Nationwide, many local and state governments are starting to follow the California example. Washington, Oregon, Florida, and Colorado, to name a few states, are starting to make ADUs a more prevalent part of solving the housing affordability issue. Ultimately, ADUs alone won’t solve decades of housing issues. But they can close the gap between the number of people looking for affordable housing and the number of homes available for rent or purchase.
Sean Roberts is CEO of Villa, an ADU builder in California.
This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.
To contact the author of this story: Sean Roberts at [email protected]
To contact the editor responsible for this story: Tracey Velt at [email protected]
On Good Morning America today, self-made real estate millionaire and Shark Tank star, Barbara Corcoran, shared her thoughts on the U.S. housing market and answered a few questions from viewers. And of course, the first question that came from ABC’s Robin Roberts: Why are mortgage rates so high?
“It’s the only tool the federal government has for controlling inflation and getting hold of our economy, and they’ve wanted to slow it down, and it’s worked. A year ago, it was 9%, that was our inflation rate, now it’s down to 3%, and they’re going to hold firm until it gets exactly where they’ve targeted,” Corcoran answered. And that magic number for the Federal Reserve is 2%.
The average 30-year fixed mortgage rate reached 7.49%, as of the latest reading per Mortgage News Daily’s rate index. In the 52-week range, that’s the high (and it’s much higher than the low of 5.72%). It’s also a 22-year high, signaling that the era of 3% rates are long gone. But, Corcoran says, they’ll come back down, without specifying what they’ll come down to or when that’ll be—she only hinted that mortgage rates will come down enough to bring would-be buyers back to the market. Still, she said, the effect of record-high mortgage rates on the housing market isn’t necessarily what you’d expect.
“The housing market is surprisingly strong; everybody’s surprised by it,” Corcoran said. “Houses are not staying on the market. They all sell. One-third of them sell for over-ask price, and there are just not enough houses to go around, so as a result of that, the housing market is as strong as ever—and it’s so frustrating for buyers.”
And she’s right; there aren’t enough houses to go around. There’s a shortage of homes across the country, and what’s happening with mortgage rates has only tightened new supply further because of the so-called lock-in effect. Borrowers with a below-market mortgage rate are much less likely to sell their homes (and buy something new) because their monthly mortgage payments are almost guaranteed to be much higher, with rates hovering above 7%. That’s one less seller and buyer, which constrains both sides of the market. After giving a brief rundown on the housing market, Corcoran pivoted to answering viewers’ questions. The first asked if housing would be more affordable in future, given that it’s hard to find a home that’s not overpriced at this time.
“There’s not a lot out there,” Corcoran said, adding that everyone is having a hard time right now: “But I can tell you this, house prices are not going to come down.”
When mortgage rates come down, Corcoran nearly said, all hell would break loose, before she realized she might not be able to say that on TV. Buyers waiting on the sidelines will jump into the market, “and houses are going to go up in price all over again,” she added. “I wouldn’t be surprised if they go up by as much as 10% or 15% when that happens.”
It’s not the first time she’s said as much. Corcoran, again on Good Morning America, previously noted that home prices are going to “explode” the minute mortgage rates come down, as would-be buyers rush back into the market. So her advice for people looking to buy a home in the current market is to adjust their expectations, which, she noted, isn’t easy, especially when you know your neighbor bought their house at a lower price and lower mortgage rate. But Corcoran also explained that buyers should shop around for their mortgage rate, which can help. When answering another viewer’s question, Corcoran said it’s a good time to consider an adjustable rate mortgage, (which is simply a home loan with an interest rate that adjusts over time based on the market). Her advice, however, for people that have adjustable rate mortgages that are about to reset was a bit more blunt.
“Well, you really only have two choices: You either pay the bank or you get out of town,” Corcoran said, eliciting laughter.
Lastly, Corcoran was asked about any tips she can give to those thinking about selling their home. And while she said sellers have it easy, Corcoran did suggest that they hold off, at least for now.
“You really don’t need any help,” Corcoran said. “Everything is selling today…But if it was my house, I would wait until next year when all the buyers come off the sidelines when interest rates come [down]. I’m going to get a lot more for my house than I would get right now. So they have no problems. Nobody’s feeling bad for the sellers.”
While national house prices have held firm over the past year—only falling 1% between May 2022 and May 2023 according to the Case-Shiller National Home Price Index—home prices in some overheated markets like Austin are down over 10%. Then again, some Midwestern and Northeastern markets are up over 8% during the same time period.