BusinessCasualBlog.com

A 15-Year Mortgage: Not A Good Idea

Link: Realty Times

...I do not favor the 15-year loan. While there are those who praise what they perceive to be the benefits of a 15-year mortgage, in my opinion, such a mortgage rarely makes sense for the average homeowner...

The major advantage, in my opinion, of the 30-year loan is that it gives you the right -- but not the obligation -- to make larger monthly payments. If a better investment comes your way -- or if you need additional money for emergency purposes -- you can resume making the regular (lower) monthly payment and use the extra cash elsewhere...

Still a great time to buy.

The past week showed mortgage rates still holding their own against some pretty good economic data. In fact, Freddie Mac's weekly survey showed mortgage rates lower after some increases in the previous two weeks. The average 30-year fixed rate, for example, dropped a bit in last week's survey to 5.74%.

Meanwhile, despite a reported 25% fewer home sales in Orange County over the past year, we've still seen about a 21% increase in the median home price. Not as hefty as the 36% annual rate we saw in May, but a significant increase, nonetheless.

That news is hot & cold: If you own property, you've probably seen another 20% increase in your equity. Congratulations! On the other hand, if you were thinking about buying property in October last year and waited until last month, then you're now likely paying about 17% more in payments, according to DataQuick--a difference of as much as $300 to $400 a month on a median-priced home with 20% down.

The short of it: With lots of inventory to choose from, mortgage rates near 40-year lows, and a trend of year-over-year home value appreciation, it's still a great time to buy.

Financing investment property as primary residences

Link: RealEstateJournal | Legal, Tax, Finance.

Some landlords prefer to seek loans on their primary residence rather than trying to meet the higher standards of a loan for an investment property. For example, if you live in a house, one solution is to locate a new primary residence and apply for financing based on your plans to move into the new property. As soon as the transaction is complete, you move into the new home and convert your current residence into a rental. You'll continue making the same mortgage payments on your current home (which was financed originally based on your occupying the property as your primary residence) and rent the property out.

If you time it right, you may be able to accumulate several rental properties by moving into a series of new owner-occupied homes. The only requirement on the part of a conventional lender is that the property being financed must be your primary residence at the time the loan is approved. You could change your mind the day after the loan was approved and convert the new property to a rental. However, you also could be accused of making a false claim on your loan application. Therefore, it's safer and wiser to move into the new home and convert your former primary residence to a rental as a bonafide change of status, even if only for a few months.

The decision to treat a specific property as a rental or as your primary residence should be based on practical considerations. If you ask your family to move to a property that is poorly located, too small for your needs or too uncomfortable, you're risking personal dissatisfaction and conflict at home. One advantage of moving to a series of newly acquired homes is that you apply the same standards to rentals that you apply to your own home. If you've maintained your current primary residence well, it will be a pleasant place to live. A tenant will be willing to pay a reasonable level of rent based on how well you've cared for the property.

The strategy of financing properties as primary residences and moving from one property to another should be viewed cautiously. You should plan to actually move into the new property to avoid being accused of misleading your lender. Once the transaction is complete, the lender will be satisfied, especially if you continue making timely mortgage payments. When you're established in the new property and you convert your previous residence to a rental, the lender on that home will not care whether you live there -- as long as you keep the property insured and the payments continue arriving on time.

Is it a good time to buy?

Last week, Freddie Mac's survey indicated interest rates climbed a bit from the prior week. This week, I regret to say that they're reporting yet another rise for a second consecutive week.
:-(

But, despite those upward movements, mortgage rates are continuing to be extremely affordable and, to echo the words of Freddie Mac's Chief Economist, "...the outlook for the housing sector appears bright."
:-)


I'm often asked by prospective buyers whether or not to wait for prices to come down further before buying. There are several considerations including: your holding period and local market trends. However, one question that I usually like to begin with is, what if interest rates rise?

Consider this: a 1/2-point rise in interest rates, for example, can add as much as 5% to 10% to your monthly payments, depending on the type of loan. Translation: on a $500,000 home, that could mean as much as $120 to $160 a month if you wait for rates to rise. To keep the same monthly payments on an interest-only program after an interest rates bump of 1/2-point means that instead of targeting a $500,000 home you would now have to settle on the equivalent of a home priced at about $45,300 LESS.

Is it a good time to buy today? Rates are still largely under 6%. Absolutely I think it's a great time to buy!

There's a relevant article that came out recently in the Wall Street Journal (November 10th, "Renting vs. Buying..."). Here's the link: (Click here.)