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Posts Tagged ‘Sellers’

By Jacob Passy

Generation X home owners with mortgage between the ages of 35 and 50 on average have a loan-to-value ratio of 70%.
The recession is continuing affect one aspect of Generation X’s financial health — and it could be putting their retirements at risk.

Generation X home owners with mortgage between the ages of 35 and 50 on average have a loan-to-value ratio (LTV) of 70%, according to a report released this week by real-estate website Zillow. Comparatively, the average LTV among all home owners is 62%. The loan-to-value ratio measures how much a borrower still owes relative to the value of the property. Having a lower LTV means that a home owner has a lower amount left to pay on the mortgage — comparatively, home owners with high LTVs are at a greater risk defaulting on their loans. Making mortgage payments or providing a larger down payment will lower the LTV for a homeowner, and home owners with lower LTVs can qualify for a lower mortgage rate.

Meanwhile, despite being slower to become home owners in the first place, millennials appear to be building home equity at a faster clip than members of the preceding generation. Based on Zillow’s data, millennial homeowners on average have an LTV of 76% — and in cities such as Chicago and Detroit they actually have more equity in their properties than members of Generation X. Generation Xers in some parts of the country, including Seattle and the San Francisco Bay area, have amassed particularly high amounts of home equity, largely because of the dramatic increase in home values in recent years. In the report, Zillow defined home equity as the amount a home owner could sell their property for less what they owe on it.

What marriage-phobic millennials mean for the wedding-ring industry
Nevertheless, Generation X home owners’ struggle to grow their housing-based wealth is a reflection of how the housing bust hit them harder than other groups. Because many of these homeowners bought at the peak of the pre-recession housing bubble, they were especially burned when home prices plummeted. “They were really scarred during the housing bust,” said Svenja Gudell, Zillow’s chief economist. “Many were almost immediately underwater.”

And that doesn’t even account for the scores of Generation X home owners who sold properties at rock-bottom prices to cut their losses or, worse yet, those that went through foreclosure. Millennials, on the other hand have managed to reap the benefits of the housing bust. “They bought during the recovery, so they’ve built an incredible amount of equity very fast,” Gudell said.

Homeownership is commonly viewed as a means of growing wealth, and home equity is typically one of the largest assets in a home owner’s portfolio. Meanwhile, mortgages are seen as one of the main reasons why a growing number of Americans are going into retirement with debt. And having a mortgage when retired can be problematic for some, since it can be harder to make monthly payments on a fixed-income, particularly if unexpected expenses arise.

As a result, experts suggest that Americans should begin rethinking how they approach homeownership as part of their financial plan. “A house may appreciate in value as an asset but it doesn’t provide a stream of income on a monthly basis,” said B. Brandon Mackie, a certified financial planner and associate with Hennsler Financial, a Georgia-based registered investment adviser. “A ‘paid-off’ house, especially in retirement, does not add money to your bank account every month, which means…it’s not helping you with monthly bills or unforeseen expenses.”

The good news is that home owners appear to be taking a more conservative approach to ensure that a decrease in home prices would not have as devastating an effect on wealth as it did during the housing bust.

Buying a home that’s within budget is now the most important factor for prospective home owners, ahead of other attributes such as neighborhood safety or proximity to good schools, according to another report from Zillow. And home buyers are more likely to make a more significant down payment than during the bubble years (in part because of post-crisis regulations), Gudell said. “That’s a healthier decision than a very small down payment,” she said.

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Real estate is hot, all right. Home prices are soaring, a real estate mogul occupies the White House, and here’s the latest evidence: Americans say housing is their best bet to make some money.

In fact, for the third consecutive year real estate is the favorite way to invest money not needed for at least a decade, according to a Bankrate national survey. No-risk cash investments are a close second — also for the third straight year — while stocks are relatively unloved, in third place.

The results should have you asking yourself: Do I have the right idea about how to build wealth? Because while a home and a bank account may feel like safe bets, especially among millennials, they do carry risks. You could be leaving money on the table.

Reasons we love real estate

There’s a strong appeal to owning property.

“If you have a long time horizon, you will win in real estate,” says Abhi Golhar, a 32-year-old Atlanta-based real estate investor who owns and rents out single-family homes.

Real estate is top investment choice

After bottoming out at the end of 2011 following the worst housing collapse in generations, home prices have gone gangbusters recently, climbing back above their record pre-crisis levels. Prices jumped 6.6 percent during the 12 months that ended in May, according to CoreLogic.

Toss in persistently low interest rates, tax goodies that come with owning a mortgage, and the psychological payoff from planting your roots, and maybe it’s no wonder real estate remains popular.

Reasons we ought to re-think that

Still, “it’s a rather poor investment,” says RBC Wealth Management financial advisor Darla Kashian. “It’s highly illiquid, and markets aren’t always rational.”

One study by professors at the London Business School found that housing returned only 1.3 percent per year after inflation from 1900 to 2011, while stocks tended to perform more than four times better.

Homes are costly to maintain and can be difficult to sell in both good markets and bad. During a downturn, there can be so few available buyers that your ability to ask for a higher price is diminished.

And what about stocks?

Stocks, meanwhile, continue to lag as an investment choice, even trailing cash.

Which is weird.

The current bull market turned 8 years old in March, making it the second longest-lasting winning streak for stocks since the end of World War II.

“If you look at historical averages comparing stocks and cash, it’s not close,” says Matt Becker, a fee-only financial planner and the founder of Mom and Dad Money.

Over the past 10 years, even including the financial crisis, stocks have returned an average of 8.6 percent per year, far above the earnings for money-market accounts and other cash investments.

Cash is a bad 10-year investment

Putting your money into very safe investments can actually cost you money, if you consider inflation. You do need some cash in a liquid account available at a moment’s notice in case of an emergency, but it shouldn’t be your top investment pick.

Young vs. old

The millennial money mind turns out to be a bit more complicated than conventional wisdom might have you believe.

“Contrary to the notion that millennials don’t want to buy homes, their preference for real estate as a long-term investment is exceeded only by their counterparts in Gen X,” says Greg McBride, CFA, Bankrate chief financial analyst.

Young adults split their vote evenly between real estate and cash (at 30 percent for each), with stocks trailing far behind (at 13 percent, behind gold). Compare that to baby boomers, who choose stocks second after real estate, with cash third.

Favorite investment? Millennials love cash

Millennials have years to earn and invest, so why would they seem more eager to play it safe than people who are in or near retirement? Here’s one possible reason: their relative lack of overall wealth compared to their parents and grandparents.

With fewer dollars to play with, millennials are less likely to want to take on risk, even if that means settling for weaker returns.

Americans’ financial security still solid

Regardless of how they would invest, Americans remain confident about their personal finances.

Bankrate’s Financial Security Index — based on survey questions about how people feel about their debt, savings, net worth, job security and overall financial situation — has hit its third-highest level since the poll’s inception in December 2010, despite dropping slightly from the record high seen in June.

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Source: Yahoo Finance

Is now the right time to refinance? If you’re a homeowner, it’s a question you’re bound to ask yourself at some point during the life of your mortgage.The short answer is … It depends on your specific situation and goals.

There are a few reasons to refinance your mortgage– maybe interest rates have dropped since you took out your initial loan and you want to take advantage of the lower rate, or you want to shorten your loan’s term.

For instance, if you have an adjustable-rate mortgage you might want to switch to a fixed-rate loan in order to lock in the lower interest rate.The good news is that mortgage rates are still near historic lows.
The national average for a 30-year fixed mortgage is currently about 4%, according to Bankrate.com.

But before you decide to take the plunge, you’ll want to ask yourself a few questions. First, do you own at least 20 percent of your home? Many banks won’t even consider refinancing until you do.

Ask yourself how long you have left on your loan and how long you plan to stay in your home.

If you have five years or more left on your mortgage and plan to live in your home for at least another three years, it may pay to spend the money and refinance now.

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If you bought a house with a down payment of less than 20 percent, your lender required you to buy mortgage insurance. The same goes if you refinanced with less than 20 percent equity.

Private mortgage insurance is expensive, and you can remove it after you have met some conditions.

How to get rid of PMI

To remove PMI, or private mortgage insurance, you must have at least 20 percent equity in the home. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80 percent of the home’s original appraised value. When the balance drops to 78 percent, the mortgage servicer is required to eliminate PMI.

Although you can cancel private mortgage insurance, you cannot cancel Federal Housing Administration insurance. You can get rid of FHA insurance by refinancing into a non-FHA-insured loan.

Canceling PMI sooner

Here are steps you can take to cancel mortgage insurance sooner or strengthen your negotiating position:

Refinance: If your home value has increased enough, the new lender won’t require mortgage insurance.
Get a new appraisal: Some lenders will consider a new appraisal instead of the original sales price or appraised value when deciding whether you meet the 20 percent equity threshold. An appraisal generally costs $450 to $600. Before spending the money on an appraisal, ask the lender if this tactic will work in the specific case of your loan.
Prepay on your loan: Even $50 a month can mean a dramatic drop in your loan balance over time.
Remodel: Add a room or a pool to increase your home’s market value. Then ask the lender to recalculate your loan-to-value ratio using the new value figure.
Refinancing to get out of PMI

When mortgage rates are low, as they are now, refinancing can allow you not only to get rid of PMI, but to reduce your monthly interest payments. It’s a double-whammy of savings.

The refinancing tactic works if your home has gained substantial value since the last time you got a mortgage. For example, if you bought your house four years ago with a 10 percent down payment, and the home’s value has gone up 15 percent over that time, you now owe less than 80 percent of what the home is worth. Under these circumstances, you can refinance into a new loan without having to pay for PMI.

Many loans have a “seasoning requirement” that requires you to wait at least two years before you can refinance to get rid of PMI. So if your loan is less than 2 years old, you can ask for a PMI-canceling refi, but you’re not guaranteed to get approval.

What mortgage insurance is for

Mortgage insurance reimburses the lender if you default on your home loan. You, the borrower, pay the premiums. When sold by a company, it’s known as private mortgage insurance, or PMI. The Federal Housing Administration, a government agency, sells mortgage insurance, too.

Know your rights

By law, your lender must tell you at closing how many years and months it will take you to pay down your loan sufficiently to cancel mortgage insurance.

Mortgage servicers must give borrowers an annual statement that shows whom to call for information about canceling mortgage insurance.

Getting down to 80% or 78%

To calculate whether your loan balance has fallen to 80 percent or 78 percent of original value, divide the current loan balance (the amount you still owe) by the original appraised value (most likely, that’s the same as the purchase price).

Formula: Current loan balance / Original appraised value

Example: Dale owes $171,600 on a house that cost $220,000 several years ago.

$171,600 / $220,000 = 0.78.

That equals 78 percent, so it’s time for Dale’s mortgage insurance to be canceled.

For a fuller explanation of the above formula, read this article about figuring the loan-to-value ratio to remove PMI.

Other requirements to cancel PMI

According to the Consumer Financial Protection Bureau, you have to meet certain requirements to remove PMI:

You must request PMI cancellation in writing.
You have to be current on your payments and have a good payment history.
You might have to prove that you don’t have any other liens on the home (for example, a home equity loan or home equity line of credit).
You might have to get an appraisal to demonstrate that your loan balance isn’t more than 80 percent of the home’s current value.
Higher-risk properties

Lenders can impose stricter rules for high-risk borrowers. You may fall into this high-risk category if you have missed mortgage payments, so make sure your payments are up to date before asking your lender to drop mortgage insurance. Lenders may require a higher equity percentage if the property has been converted to rental use.

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Homeowners think their homes are worth an average of 1.70 percent more than appraisers do, according to Quicken Loans’ National Home Price Perception Index (HPPI). This marks the first time in seven months that the gap between the two opinions of value narrowed.

Despite differing opinions in appraisals, home values continue to rise across the country. Quicken Loans’ National Home Value Index (HVI) showed appraisals rose an average of 1.25 percent from May to June and increased 5.35 percent year-over-year.

Homeowners are still estimating their homes at higher values than the appraisal, although the spread is now slightly narrower. Nationally, appraisals were an average of 1.70 percent lower than what homeowners thought they would be, as measured by the HPPI. This is compared to June when estimates were 1.93 percent higher. There is a wide range of perceptions across the country. The Midwestern and Eastern regions kept with the national trend of a lower appraiser opinion. On the flip side, the Western markets were more likely to have owners underestimate their home value.

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The housing market crash, which started in 2007 and kicked off the Great Recession, blighted both the financial and real estate industries. Among the many participants whose reputations were ruined, few took more damage than the mortgage brokers who sold adjustable-rate mortgages. Known as ARMs, they became a four-letter word within the industry.

But nine years after their fall from grace into near oblivion, ARMs are making a slow, but steady, comeback. They’re getting a boost from rising interest rates, which make them more attractive, better government regulations and, perhaps, more restraint from the mortgage brokers who sell them and are looking for redemption.

“ARMs carry the stigma of being the villains of the housing crash,” said CEO Mat Ishbia of United Wholesale Mortgage, a national lending institution. “But they’re still around and could be the right product for a lot of borrowers.”

Prospective homebuyers, who can’t afford to pay cash, have two basic mortgage options. The first is a fixed-rate loan, usually with a 30-year payback term to spread out the interest and principal payments. The other is an ARM, which comes in many different forms.

A simple ARM allows the buyer to obtain a fixed-rate loan for an initial set number of years, say, five or seven. Then over the rest of the loan term, the mortgage rate is adjusted, say, yearly or every three years, to the prevailing rate — plus a margin — that the mortgage lender pays to borrow the money it then lends out as a mortgage.

The adjusted rate for an ARM could be higher or lower than the original rate, depending on whether interest rates have risen or fallen. For example, if rates rise four percentage points, the ARM would also increase by that much.

That means you need to keep a close eye mortgage rates if you buy a home with an ARM. Otherwise you can wind up paying twice as much for your monthly mortgage bill if the ARM is repeatedly adjusted upward.

ARMs were immensely popular in the early 2000s, but fell into obscurity due to their connection with the subprime market crash (subprime loans are those made to borrowers whose credit rating isn’t so good). Buyers who wanted to turn a quick profit on a home purchase used them as a way to “flip” houses and cash in on the soaring real estate market.

Banks and mortgage lenders expanded the types of ARMs they offered to the market during the housing boom to include “nontraditional options,” said Chief Economist Mark Fleming of First American Financial, which provides title insurance and settlement services for the real estate market.

Tactics included “teaser rates” to lure buyers into special ARMs, which would reset every year or two, often without their owners realizing it. And “negative amortization,” whereby you paid less than the minimum interest each month so the amount owed on the total mortgage increased rather than declined.

Subprime borrowers were given ARMs with no or limited documentation, meaning they didn’t have to prove what their income was or even if they held a job (also known as “liar loans”).

But many buyers still saw them as a good deal. In the greater Los Angeles area, a house hunter could buy a $400,000 home with just $10,000 down. ARMs represented more than 50 percent of the mortgage market in 2005. But when the recession came and foreclosure filings began to inch toward almost 4 million a year, ARM originations dropped close to zero.

It has taken a long time for ARMs to rebound, but that’s the situation today. “They’re about 5 percent of the market right now,” said United Wholesale’s Ishbia, “and we expect it to grow to 17 percent in two years.” That would still be only third of its former size, according to Black Knight Financial Services, which provides data and analytics to the real estate industry.

The market also appears to be healthier this go around. Federal government-sponsored agencies such as Fannie Mae (the Federal National Mortgage Association), Freddie Mac (the Federal Home Loan Mortgage Corp.) and Ginnie Mae (the Government National Mortgage Association) are now offering ARMs. Also, the U.S. Consumer Financial Protection Bureau is placing tighter restrictions on the ARM market and is educating consumers on how best to use these loans.

According to a study by the Federal Reserve, ARMs are a play on rising interest rates. When rates are low, as they have been for many years, homebuyers prefer a fixed-rate 30-year mortgage. But the Fed is gradually raising interest rates due to an improving U.S. economy.

When mortgage rates head toward 5 percent, some borrowers may move to ARMs, which usually carry an interest rate more than half a percentage point lower than the 30-year fixed rate. During the life of an average mortgage, which is around nine years (because so many people sell before paying off their mortgage), the borrower of a $300,000 ARM could save more than $8,000, according to lenders.

And that’s particularly true for first-time buyers, who are millennials these days. “Why borrow with a higher interest rate and pay a mortgage for 30 years, when the odds that you’ll actually reside that long in the first house you buy are slim to none,” said First American’s Fleming.

But most prospective buyers still remember the homeowners who lost their houses because they gambled on ARMs in an overheated market. Even advocates of ARMs admit they’re more complicated than fixed-rate loans and that you can’t just shop online or go to your local bank and demand the best rate.

“Go to a broker,” urged Ishbia. “It sounds counterintuitive to use a middleman, but they will shop for you and get you the best deal.”

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The Fannie Mae Home Purchase Sentiment Index® (HPSI) decreased 0.5 percentage points in May to 86.2. The slight decrease can be attributed to decreases in three of the six HPSI components being larger on net than the three increases. The net share of Americans who reported that now is a good time to buy a home reached a record low after falling 8 percentage points, while the net share who reported that now is a good time to sell a home reached a record high, increasing 6 percentage points.

This is only the second time in the survey’s history that the net share of those saying it’s a good time to sell surpassed the net share of those saying it’s a good time to buy. Americans also expressed greater belief that mortgage rates will go down over the next 12 months, with that component increasing 5 percentage points. Finally, the net share of consumers who think home prices will go up fell by 5 percentage points this month.

“High home prices have led many consumers to give us the first clear indication we’ve seen in the National Housing Survey’s seven-year history that they think it’s now a seller’s market,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “However, we continue to see a lack of housing supply as many potential sellers are unwilling or unable to put their homes on the market, perhaps due in part to concerns over finding an affordable replacement home. Prospective homebuyers are likely to face continued home price increases as long as housing supply remains tight.”

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