Some people believe there’s a group of homeowners who may be reluctant to sell their houses because they don’t want to lose the historically low mortgage rate they have on their current home. You may even have the same hesitation if you’re thinking about selling your house.
Data shows 51% of homeowners have a mortgage rate under 4% as of April this year. And while it’s true mortgage rates are higher than that right now, there are other non-financial factors to consider when it comes to making a move. In other words, your mortgage rate is important, but you may have other things going on in your life that make a move essential, regardless of where rates are today. As Jessica Lautz, Vice President of Demographics and Behavioral Insights at the National Association of Realtors (NAR), explains:
“Home sellers have historically moved when something in their lives changed – a new baby, a marriage, a divorce or a new job. . . .”
So, if you’re thinking about selling your house, it may help to explore the other reasons homeowners are choosing to make a move today. The 2022 Summer Sellers Survey by realtor.com asked recent home sellers why they decided to sell. The visual below breaks down how those homeowners responded:
As the visual shows, an appetite for different features or the fact that their current home could no longer meet their needs topped the list for recent sellers. Additionally, remote work and whether or not they need a home office or are tied to a specific physical office location also factored in, as did the desire to live close to their loved ones.
The realtor.com survey summarizes the findings like this:
“The primary reason homeowners decided to sell in the last year was the realization that, after so much time spent at home, they wanted different features and amenities, such as walkability, outdoor space, pool, etc. . . . ”
If you, like the homeowners they surveyed, find yourself wanting features, space, or amenities your current home just can’t provide, it may be time to consider listing your house for sale.
Even with today’s mortgage rates, your lifestyle needs may be enough to motivate you to make a change. The best way to find out what’s right for you is to partner with a trusted real estate professional who can provide expert guidance and advice throughout the process. They can help walk you through your options, so you can make a confident decision based on what matters most to you and your loved ones.
While the financial reasons for moving are important, there’s often far more to consider. Non-financial reasons can also be a significant motivating factor. If you need help weighing the pros and cons of selling your house, let’s connect today.
One of the biggest questions people are asking right now is: what’s happening with home prices? There are headlines about ongoing price appreciation, but at the same time, some sellers are reducing the price of their homes. That can feel confusing and makes it more difficult to get a clear picture.
Part of the challenge is that it can be hard to understand what experts are saying when the words they use sound similar. Let’s break down the differences among those terms to help clarify what’s actually happening today.
- Appreciation is when home prices increase.
- Depreciation is when home prices decrease.
- Deceleration is when home prices continue to appreciate, but at a slower or more moderate pace.
Experts agree that, nationally, what we’re seeing today is deceleration. That means home prices are appreciating, just not at the record-breaking pace they have over the past year. In 2021, data from CoreLogic tells us home prices appreciated by an average of 15% nationwide. And earlier this year, that appreciation was upward of 20%. This year, experts forecast home prices will appreciate at a decelerated pace of around 10 to 11%, on average.
The graph below uses the latest data from CoreLogic to help tell the story of how home prices are decelerating, but not depreciating so far this year.
As the green bars show, home prices appreciated between 19-20% year-over-year from January to March. But over the last few months, the pace of that appreciation has decelerated to 18%. This means price growth is still climbing compared to last year but at a slower rate.
As the Monthly Mortgage Monitor from Black Knight explains:
“Annual home price growth dropped by nearly two percentage points . . . – the greatest single-month slowdown on record since at least the early 1970s. . . While June’s slowdown was record-breaking, home price growth would need to decelerate at this pace for six more months to drive annual appreciation back to 5%, a rate more in line with long-run averages.”
Basically, this means, while moderating, home prices are still far above the norm, and we’d have to see a lot more deceleration to even fall in line with more typical rates of home price growth. That’s still not home price depreciation.
The big takeaway is home prices haven’t fallen or depreciated nationwide, they’re just decelerating or moderating. While some unique and overheated markets may see declines, nationally, home prices are forecast to appreciate. And when we look at the country as a whole, none of the experts project home prices will net depreciate or fall. They’re all projecting ongoing appreciation.
If you have questions about what’s happening with home prices in our local area, let’s connect.
If rising home prices leave you wondering if it makes more sense to rent or buy a home in today’s housing market, consider this. It’s not just home prices that have risen in recent years – rental prices have skyrocketed as well. As a recent article from realtor.com says:
“The median rent across the 50 largest US metropolitan areas reached $1,876 in June, a new record level for Realtor.com data for the 16th consecutive month.”
That means rising prices will likely impact your housing plans either way. But there are a few key differences that could make buying a home a more worthwhile option for you.
If You Need More Space, Buying a Home May Be More Affordable
What you may not realize is that, according to the latest data from realtor.com and the National Association of Realtors (NAR), it may actually be more affordable to buy than rent depending on how many bedrooms you need. The graph below uses the median rental payment and median mortgage payment across the country to show why.
As the graph conveys, if you need two or more bedrooms, it may actually be more affordable to buy a home even as prices rise. While this doesn’t take into consideration the interest deduction or other financial advantages that come with owning a home, it does help paint the picture that it may be more affordable to buy then rent for that unit size based on nationwide averages. So, if one of the factors motivating you to move is a desire for more space, this could be the added encouragement you need to consider homeownership.
Homeownership Also Provides Stability and a Chance To Grow Your Wealth
In addition to being more affordable depending on how many bedrooms you need, buying has two other key benefits: payment stability and equity.
When you buy a home, you lock in your monthly payment with your fixed-rate mortgage. And that’s especially important in today’s inflationary economy. With inflation, prices rise across the board for things like gas, groceries, and more. Locking in your housing payment, which is likely your largest monthly expense, can provide greater long-term stability and help shield you from those rising expenses moving forward. Renting doesn’t provide that same predictability. A recent article from CNET explains it like this:
“…if you buy a house and secure a fixed-rate mortgage, that means that no matter how much prices or interest rates go up, your fixed payment will stay the same every month. That’s an advantage over renting since there’s a good chance your landlord will raise your rent to counter inflationary pressures.”
Not to mention, when you buy, you have the chance to build equity, which in turn grows your net worth. It works like this. As you pay down your home loan over time and as home values continue to appreciate, so does your equity. And that equity can make it easier to fuel a move into a future home if you decide you need a bigger home later on. Again, the CNET article mentioned above helps explain:
“Homeownership is still considered one of the most reliable ways to build wealth. When you make monthly mortgage payments, you’re building equity in your home that you can tap into later on. When you rent, you aren’t investing in your financial future the same way you are when you’re paying off a mortgage.”
If you’re trying to decide whether to keep renting or buy a home, let’s connect to explore your options. With home equity and a shield against inflation on the line, it may make more sense to buy a home if you’re able to.
If you’ve been thinking about buying a home, you likely have one question on the top of your mind: should I buy right now, or should I wait? While no one can answer that question for you, here’s some information that could help you make your decision.
The Future of Home Price Appreciation
Each quarter, Pulsenomics surveys a national panel of over 100 economists, real estate experts, and investment and market strategists to compile projections for the future of home price appreciation. The output is the Home Price Expectation Survey. In the latest release, it forecasts home prices will continue appreciating over the next five years (see graph below):
As the graph shows, the rate of appreciation will moderate over the next few years as the market shifts away from the unsustainable pace it saw during the pandemic. After this year, experts project home price appreciation will continue, but at levels that are more typical for the market. As Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), says:
“People should not anticipate another double-digit price appreciation. Those days are over. . . . We may return to more normal price appreciation of 4%, 5% a year.”
For you, that ongoing appreciation should give you peace of mind your investment in homeownership is worthwhile because you’re buying an asset that’s projected to grow in value in the years ahead.
What Does That Mean for You?
To give you an idea of how this could impact your net worth, here’s how a typical home could grow in value over the next few years using the expert price appreciation projections from the Pulsenomics survey mentioned above (see graph below):
As the graph conveys, even at a more typical pace of appreciation, you still stand to make significant equity gains as your home grows in value. That’s what’s at stake if you delay your plans.
If you’re ready to become a homeowner, know that buying today can set you up for long-term success as your asset’s value (and your own net worth) is projected to grow with the ongoing home price appreciation. Let’s connect to begin your homebuying process today.
Shopping for a mortgage, you might encounter lenders who pre-qualify you for a higher loan amount than you expected. Many lenders work with standard debt-to-income ratio calculations which don’t take into account other costs of home ownership. If you take the highest loan amount, you risk maxing out your available funds and becoming “house poor,” without liquidity. Here are four steps to follow when deciding how much you should spend on a house.
Step 1: Understand what percentage of your income should go toward your mortgage
Take a good look at your monthly income and expenses. This will help you understand how much you can spend on a house. Keep in mind that you’ll need to account for taxes, insurance, repairs and renovations, along with increased utility expenses. That sounds like a lot, but remember that some are upfront costs, some are recurring, and other costs only happen once in a while. The first step is understanding how much you can afford to spend on a mortgage.
Determine your debt to income ratio (DTI). One of the first financial factors a lender will review is your DTI. To determine your DTI, take the total amount you pay in recurring monthly debt and divide that by your gross monthly income before taxes (not your take-home pay). This number is the percentage of income required to make debt payments each month. Be sure to include income and debt for everyone on the loan application. If your spouse, partner, or roommate is a party on the mortgage loan, their gross income and recurring debts also play a factor. Recurring debt can include:
- Student loans
- Car loans
- Credit cards
- Bank or department store credit card
- Personal line of credit with a bank or other financial institution
- Personal loans from any source
- Child support or alimony payment
Use the 28/36 rule to determine what you can afford. According to this rule, also used by lenders, most people can afford to spend as much as 28% of their gross monthly income on a mortgage and up to 36% on debt payments and still manage other typical recurring expenses. Some lenders may approve you for a mortgage if your finances fall outside this ratio, but they will likely charge extra fees and a higher interest rate to cover the increased risk, making your mortgage more costly.
What’s a “comfortable” mortgage payment vs. an “aggressive” one? Lenders rely on industry benchmarks and historical data to determine that a 25-33% DTI will allow borrowers to “comfortably” pay their mortgage and still save consistently for retirement, college, or a home repair fund. At the other end of the spectrum, lenders may still offer a loan to a borrower with a DTI between 33-40%. This DTI range becomes “aggressive” for lenders and puts them at higher risk. And it’s not much better for borrowers at this range. With a DTI of 33-40%, you would need to keep a close eye on all of your expenses at all times. It could be challenging for a borrower with a DTI between 43-50% to get a mortgage. At 50%, you’d be better off paying down your debt to improve your DTI.
With a DTI under 33%, you’ll qualify for better terms and interest rates because you represent a low risk of default. The better your DTI, the more confident lenders will be that you’ll stay on track with your payments and pay back the mortgage. As your DTI approaches the 50% rate, you’ll see less favorable interest rates and terms to cover the potential risk to the lender.
Step 2: Know all your costs when buying a house
It’s not all about your home’s purchase price. To secure a loan, most lenders require some amount of downpayment. To finalize the purchase and paperwork, you will pay additional closing costs. Below are the common costs of buying a house.
Your down payment is your “skin in the game.” It commits you to the mortgage with a significant upfront investment. Among the various loans available, you can find down payment requirements ranging from 3-20% of the home’s purchase price. Most experts recommend that you put as much money as you can into your down payment. Most conventional loans require 20% as a down payment, however, sometimes it’s simply not possible to save up a 20% downpayment. To work with a down payment less than 20%, you’ll need to qualify for an FHA, VA, or USDA loan.
A downpayment of 20% has two key benefits:
- Your total loan will be for a lower amount, so you will owe less in both principal and interest, resulting in a lower monthly mortgage payment. Because you’ve put a significant amount of money down against the worth of the home, you could be saving tens of thousands of dollars in interest payments. As you ask yourself how much to spend on a house, be sure to factor in your down payment. .
- When you put 20% down, you don’t pay for private mortgage insurance (PMI). Lenders require PMI to safeguard them if you default on the loan. Typically, once you have repaid 20% of your loan, you can ask the lender to remove the PMI payment. If you start with 20%, you avoid this extra payment altogether.
Remember to factor in closing costs. These fees cover the title company’s work to ensure you have a clear title. If the seller has unpaid debts (outside his or her mortgage) attached to the house, these liabilities could hold up the sale of the home. Closing costs also cover the fees for appraisals, title insurance, attorney fees, and fees charged by the county to record the property transfer from the seller to the buyer. Expect to pay between 3-6% of the home’s total purchase price for closing costs. For example, purchasing a $200,000 home, you can expect to pay somewhere in the range of $6,000–$12,000 in closing costs.
Step 3: Project the costs of owning a home
What does it cost to own and maintain a home? Your mortgage payment is the largest ongoing cost of homeownership. With most 30-year or 15-year conventional loans, homeowners will have a fixed-rate mortgage. This means a fixed monthly payment for the term of the loan. That amount will not change unless you refinance your terms with the lender. A longer mortgage term will often result in a lower monthly payment, and it will take longer to repay. A shorter mortgage term will involve a higher monthly payment and the home will be paid off sooner.
For renters becoming homeowners, utility bills could bring sticker shock. As a homeowner, you can expect your utility bill to be almost four times higher than what you paid as a renter. Some renters even pay the landlord a flat fee for gas, electricity, sewer, and water. If you rent a house already, you may not see this as big of a change. As a homeowner, you pay for each service based on usage. For example, your water usage goes up when you take care of a lawn or garden.
Homeowners need to pay property taxes and insurance. County property taxes commonly cover funding for local government, public schools, roads, emergency services, and libraries. Depending on where you live, your property tax rate will vary. You can look up property tax by county to include in your estimated homeownership costs.
Private Mortgage Insurance (PMI) pays the lender if you default on your mortgage. It applies to buyers whose down payment is less than 20%. You can typically expect your PMI payment to be between 0.5 – 1% of your loan amount per year. For example, on a $200,000 mortgage, your PMI payment would be $1,000 – $2,000 per year, or $83- $163 per month in addition to your mortgage.
If you live in a community with a homeowners association (HOA), you will need to pay a monthly fee to the association. These fees typically cover property maintenance, amenities, and security. HOA fees range between $100-$1,000+ depending on the type of property and its location.
Your home will need repairs and renovations over time so you may want a home maintenance savings fund. A good rule of thumb is to save 1-4% of your home’s value for yearly maintenance and home improvements. Such as, for a $200,000 home, the homeowner should save between $2,000-$8,000 a year for maintenance or significant home improvements.
Step 4: How much should you spend on a house? Calculate the “right” amount
A home affordability calculator estimates how much home you can afford. Four main factors are taken into consideration:
- Where you live
- Your annual income
- The amount you’ll apply as a down payment
- Monthly recurring debts and spending
Use the how much house can I afford calculator to get a sense of the right amount. To determine how much mortgage you can afford to pay each month, start by looking at how much you earn each year before taxes. Consider all your earnings for the year, which could include salary, wages, tips, commission, etc.
Suppose you have a spouse or a partner with an income that will also contribute to the monthly mortgage. Make sure to include that in your gross annual income for your household. Then take your annual income and divide it by 12 to determine your monthly income.
Here are some examples of a comfortable or aggressive purchase price based on different incomes, debts, and down payment amounts.. These examples are not location-specific. Visit the home affordability calculator where you can enter income, debt, location, and come up with a down payment that reflects your situation. Keep in mind you may need to pay PMI if your down payment is less than 20% of the purchase price, this will add an extra $83-$163 to your monthly mortgage payment. The examples below use a 4% interest rate for the estimated mortgage payment.
Make sure you take some time to understand all costs associated with homeownership – and how they affect one another. Examine your DTI to determine if you can afford a loan at a good rate or be better served by paying off debt first. Then estimate your monthly mortgage payment along with other recurring costs to see how much you should be spending on a house.
Are you thinking about selling your current home? If so, the biggest question on your mind may be: if I sell now, where will I go? If this resonates with you, there’s something you should know. The number of homes coming onto the market is increasing and that could make it easier for you to move up this summer.
According to the latest data from realtor.com, the number of homes being listed for sale, known as new listings, has increased consistently this year (see graph below):
While this news has clear benefits for buyers who are craving more options for their home search, what does that mean for current homeowners like you? It gives you two distinct opportunities in today’s housing market.
Opportunity #1: Take Advantage of More Options for Your Move Up
If your current house no longer meets your needs or lacks the space and features you want, this gives you even more opportunity to sell and move up into the home of your dreams. As more options come to market, you’ll have more to choose from when you search for your next home.
Partnering with a local real estate professional can help make sure you see these listings as soon as they come onto the market. And when you do find the one, that professional can advise you on how to write a winning offer to seal the deal.
Opportunity #2: Sell Before You Have More Competition
Just know that, in order to make sure your house shines above the rest, it may make sense to put your home up for sale before your neighbors do the same, creating more competition in your area. The increase in the number of homes being listed for sale is expected to continue, and a recent study from realtor.com says two-thirds of homeowners looking to sell say they’ll do so by August.
A real estate professional can advise you on what you need to tackle to get your house ready to list so they can put that for sale sign up in your yard sooner rather than later. That’s because the process of getting a home ready to sell isn’t taking as long as you may think. As a result, you can capitalize on today’s sellers’ market and get ahead of the competition.
If you’re a current homeowner looking to sell, let’s connect to begin the process. You have a unique opportunity to benefit from the additional homes being listed today and sell before your house has more competition.
There are signs that the housing market is easing off the record-high prices it’s seen during the past few years, but bidding wars for homes are far from over—especially in competitive markets. And the difference between landing your dream home and going back to square one can come down to something as silly as minor misunderstandings or misinterpretations of real estate lingo.
Take, for example, the subtle difference between the terms “highest and best” and “best and final,” which are used to describe the types of offers a buyer makes on a house. Many home sellers are asking buyers to submit one of the two types of offers in anticipation of—or amid—a bidding war.
Are you sure you know the difference between these two types of offers? Read on for the definition—and for savvy tactics from real estate experts—so you can put your best foot forward and land the home you have your heart set on.
What does ‘highest and best’ offer mean?
When sellers ask for a buyer’s “highest and best” offer, they’re typically trying to spark a bidding war and plan to play potential buyers off one another.
“When I see a seller asking for ‘highest and best,’ I read that as code for the seller wanting a firm final number for price and great terms,” says Melissa Dorman, a real estate broker with Living Room Realty in Portland, OR.
It often also entails accepting a home as is, which leaves little wiggle room for negotiations after an offer is accepted.
What does ‘best and final’ offer mean?
A request for a buyer’s “best and final” offer means the seller wants to move fast and is not interested in prolonged negotiations.
“When I see a seller asking for ‘best and final,’ it means they are not planning on pitting buyers against each other,” Dorman says. “They want to give everyone an equal shot and end—or avoid—the bidding war.”
Strategies for a ‘highest and best’ offer
Winning a bid amid stiff competition—without regrets later—is no easy task, but it can be accomplished with a firm plan in place.
“Buyers should ask their agent to garner as much detail as possible about the offers already received during ‘highest and best’ negotiations,” says Ian Katz, a licensed real estate broker with Compass in New York City. “They should find out what the seller deems most important in a winning offer aside from price. It’s always smart for a buyer’s agent to find out what will get the deal done in these situations.”
For example, will the seller be requiring a rent-back agreement after closing, meaning that the buyer won’t be able to move into the house right away? Or is the seller eager to unload the home and looking for a buyer who’s able to make an offer with a quick closing of 30 days or less?
Gregg Cantor, president of homebuilding and remodeling company Murray Lampert Design in San Diego, insists that “cash is king” and can often seal the deal, even if other offers are slightly higher.
If cash isn’t an option, he recommends including a pre-approval letter from a bank—and staying relentlessly upbeat.
“Don’t bring up any issue about the home before the offer is accepted,” Cantor advises.
Strategies for a ‘best and final’ offer
For “best and final” bids, Glen Henderson, a broker associate at Premier Homes Coronado in San Diego, recommends using an escalation clause.
An escalation clause is when buyers offer a range of prices and say they will beat any other competing number by, for example, $5,000.
“You can outline how much you’re willing to pay over the highest offer,” Henderson says. “If you have a cap you don’t want to exceed, you can say you agree to pay $5,000 above the highest verified offer, not to exceed whatever your upper limit is.”
Kelly Edwards, a real estate agent at Compass in Los Angeles, says one strategy she’s seen work again and again is simply “having an offer stand out.”
“Instead of offering $470,000, why not offer $470,427,” Edwards says. “It can really help you stand out.”
Edwards also recommends other more mainstream—and usually successful—tactics, including paying closing costs, waiving certain contingencies, forgoing inspections, and “asking to be put in first position” (essentially, putting yourself on the seller’s waitlist) in case their accepted offer doesn’t work out.
In the end, buying a house—even one you feel emotionally tied to—is a business decision for both parties. Put your best foot forward, be prepared, and, if the first few homes don’t work out, try not to take it personally.
Even if you haven’t been following real estate news, you’ve likely heard about the current sellers’ market. That’s because there’s a lot of talk about how strong market conditions are for people who want to sell their houses. But if you’re thinking about listing your house, you probably want to know: what does being in a sellers’ market really mean?
What Is a Sellers’ Market?
The latest Existing Home Sales Report from the National Association of Realtors (NAR) shows housing supply is still very low. There’s a 2-month supply of homes at the current sales pace.
Historically, a 6-month supply is necessary for a normal or neutral market where there are enough homes available for active buyers. That puts today deep in sellers’ market territory (see graph below):
What Does This Mean for You When You Sell?
When the supply of houses for sale is as low as it is right now, it’s much harder for buyers to find homes to purchase. That creates increased competition among purchasers which can lead to more bidding wars. And if buyers know they may be entering a bidding war, they’re going to do their best to submit a very attractive offer upfront. This could drive the final price of your house up.
And because mortgage rates and home prices are climbing, serious buyers are motivated to make their purchase soon, before those two things rise further. That means, if you put your house on the market while supply is still low, it will likely get a lot of attention from competitive buyers.
The current real estate market has incredible opportunities for homeowners looking to make a move. Listing your house this season means you’ll be in front of serious buyers who are ready to buy. Let’s connect so you can jumpstart the selling process.
You don’t need a real estate license to find your dream home, but it does help to become familiar with real estate jargon you might encounter during the process. When searching for a home or applying for a mortgage, you may hear your real estate agent or lender use any of the terms or acronyms below.
Keep this four-part guide handy — you’ll be fluent in the language of home buying before you know it.
Real estate terms to know when you’re searching for a home
Affordability or home affordability refers to the amount of money you can comfortably afford to spend on a home. Home affordability takes into account your income, down payment, and monthly debts. Try this affordability calculator to see how much house you might be able to afford.
Approved for short sale
A term that indicates that a homeowner’s bank has received an offer from a buyer and has determined the reduced listing price on a home meets their short sale criteria based on the seller’s circumstances and how much is owed.
Buy-rent breakeven horizon
A concrete point at which buying a home makes more financial sense than renting one.
Market conditions that exist when homes for sale outnumber buyers. Homes can sit on the market for a long time, and prices tend to drop.
Comparative market analysis (CMA)
An in-depth analysis, prepared by a real estate agent, that determines the estimated value of a home based on recently sold homes of similar condition, size, features and age that are located in the same area.
Or comparable sales, are homes in a given area that have sold within the past several months that a real estate agent uses to determine a home’s value.
Days on market (DOM)
The number of days a property listing is considered active.
The price of a home, as set by the seller.
Multiple listing service (MLS)
A database where real estate agents list properties for sale.
Market conditions that exist when buyers outnumber homes for sale. Bidding wars are common. Prices are often higher than average.
The sale of a home by an owner who owes more on the home than it’s worth. The owner’s bank must approve a lower listing price before the home can be sold.
Study these real estate terms when you’re applying for a mortgage
Adjustable-rate mortgage (ARM)
An adjustable-rate mortgage, or ARM, has an introductory interest rate that lasts a set period of time and adjusts every six months thereafter for the remaining loan term. After the set time period your interest rate will change and so will your monthly payment.
One of two debt-to-income ratios that a lender analyzes to determine a borrower’s eligibility for a home loan. The ratio compares the borrower’s monthly debt payments to gross income.
Banks, savings and loans, and credit unions. These institutions underwrite as well as set home loan pricing in-house.
Debt-to-income ratio (DTI)
A ratio that compares a home buyer’s expenses to gross income. Try this debt-to-income calculator to learn more.
One of two debt-to-income ratios that a lender analyzes to determine a borrower’s eligibility for a home loan. The ratio compares total housing cost (principal, homeowners insurance, taxes and private mortgage insurance) to gross income.
A three-page document sent to an applicant three days after they apply for a home loan. The document includes loan terms, monthly payment and closing costs.
Loan-to-value ratio (LTV)
The amount of the loan divided by the price of the house. Lenders reward lower LTV ratios.
A fee, charged by a broker or lender, to underwrite and process a home loan application. An origination fee is not a single fee. It’s a set of lender-specific fees that are part of your costs when closing a mortgage loan.
A thorough assessment of a borrower’s income, assets and other data to determine a loan amount they would qualify for. A real estate agent will request a pre-approval or pre-qualification letter before showing a buyer a home.
A basic assessment of income, assets and credit score to determine what, if any, loan programs a borrower might qualify for. A real estate agent will request a pre-approval or pre-qualification letter before showing a buyer a home.
A process a lender follows to assess a home loan applicant’s income, assets and credit, and the risk involved in offering the applicant a mortgage.
Learn these definitions before shopping for a mortgage
A home loan not guaranteed by a government agency, such as the FHA or the VA.
A certain portion of the home’s purchase price that a buyer must pay. A minimum requirement is often dictated by the loan type.
A government-sponsored enterprise chartered in 1938 to help ensure a reliable and affordable supply of mortgage funds throughout the country.
Federal Housing Administration (FHA)
A government agency created by the National Housing Act of 1934 that insures loans made by private lenders. The Federal Housing Administration is part of the U.S. Department of Housing and Urban Development.
A rehabilitation loan backed by the federal government that permits home buyers to finance money into a mortgage to repair, improve or upgrade a home.
Loans from private lenders that are regulated and insured by the Federal Housing Administration (FHA). FHA loans are different from conventional loans because they can be approved for borrowers with lower credit scores and may allow for down payments as low as 3.5 percent of the total loan amount. Maximum loan amounts can vary by county.
A mortgage with principal and interest payments that remain the same throughout the life of the loan because the interest rate does not change.
A property repossessed by a bank when the owner fails to make mortgage payments.
A government agency chartered by Congress in 1970 to provide a constant source of mortgage funding for the nation’s housing markets.
One who originates, sells, and services mortgage loans and resells them to secondary mortgage lenders such as Fannie Mae or Freddie Mac.
A licensed professional who works on behalf of the buyer to secure financing through a bank or other lending institution.
Mortgage interest rate
The price of borrowing money. The base rate is set by the Federal Reserve and then customized per borrower, based on credit score, down payment, property type and points the buyer pays to lower the rate.
A combination of loans bundled to avoid private mortgage insurance. One loan covers 80% of the home’s value, another loan covers 10% to 15% of the home’s value, and the buyer contributes the remainder.
A prepayment penalty is a fee some lenders may charge if you pay off some or all of your mortgage early. Not all mortgages carry a prepayment penalty. Be sure to read the fine print carefully.
Prime rate is the interest rate charged by a lender to customers who are the least likely to default on their loans. The most credit-worthy customers (mainly large corporations), receive the best or lowest rate that the lender would offer any of its customers. Each lending institution sets its own prime rate. Typically, most consumers’ mortgage interest rate is going to be higher than the prime rate.
Principal, interest, property taxes and homeowners insurance (PITI)
The components of a monthly mortgage payment.
Private mortgage insurance (PMI)
A fee charged to borrowers who make a down payment that is less than 20% of the home’s value. The fee, 0.3% to 1.5% of the yearly loan amount, can be canceled in certain circumstances when the borrower reaches 20% equity.
Prepaid interest owed at closing, with one point representing 1% of the loan. Paying points, which are tax deductible, will lower the monthly mortgage payment.
Real estate terms you might hear when you’ve chosen a home
American Society of Home Inspectors (ASHI)
A not-for-profit professional association that sets and promotes standards for property inspections. Look for this accreditation or something similar when shopping for a home inspector.
A homeowners insurance policy that pays the replacement cost of a home, minus depreciation, should damage occur.
Fees associated with the purchase of a home that are due at the end of the sales transaction. Fees may include the appraisal, the home inspection, a title search, a pest inspection and more. Buyers should budget for an amount that is 2% to 5% of the home’s purchase price. Read more about closing costs here.
Conditions written into a home purchase contract that protect the buyer should issues arise with financing, the home inspection, etc.
A security deposit made by the buyer to assure the seller of his or her intent to purchase.
Mortgage escrow account
An account required by a lender and funded by a buyer’s mortgage payment to pay the buyer’s homeowners insurance and property taxes. A portion of your monthly payment goes into the escrow account to cover taxes and insurance. If your mortgage doesn’t have an escrow account, you may pay the property-related expenses directly.
A state in which an escrow agent is responsible for closing.
A visual evaluation performed by a licensed home inspector to look for any potential defects or items of note related to the property, building(s), and the systems in a home. Inspection occurs when the home is under contract or in escrow.
A policy that protects the structure of the home, its contents, injury to others and living expenses should damage occur. Learn more about homeowners insurance here.
A period of time (typically 30 days or more) after a buyer has made an offer on a home and a seller has accepted. During this time, the home is inspected and appraised, and the title searched for liens, etc.
Insurance that protects the buyer and lender should an individual or entity step forward with a claim that was attached to the property before the seller transferred legal ownership of the property or “title” to the buyer.
Fees imposed by the state, county or municipality on transfer of title.
A period of time (typically 30 days or more) after a buyer has made an offer on a home and a seller has accepted. During this time, the home is inspected and appraised, and the title is searched for liens, etc.
A buyer’s final inspection of a home before closing.
Words to know when you own a home
Repayment of a mortgage over the loan term through regular monthly installments of principal and interest, based on an amortization schedule. If you have made your required monthly payments, at the end of the loan term (e.g., 15 or 30 year mortgage), you will own your home.
A deed is the legal document that establishes ownership of real property, and is also used to transfer the ownership of real property to another person or entity.
A percentage of the home’s value owned by the homeowner.
Homeowners association (HOA)
The governing body of a housing development, condo or townhome complex that sets rules and regulations. They charge dues used to maintain common areas. Learn more about HOAs here.
A lien is any legal claim upon a property for a debt or a non-monetary interest in the property. A lien is a security interest that can give a creditor the right to take possession of a property secured by a loan, such as a mortgage, when the borrower defaults on the loan obligations. Most lenders will require title insurance to protect their interests should there be outstanding liens on the property securing their security interest.
Property tax exemption
A reduction in taxes based on specific criteria, such as installation of a renewable energy system or rehabilitation of a historic home.
The act of paying off one loan by obtaining another. Refinancing is generally done to secure better loan terms, such as a lower interest rate.
The government’s legal claim against property when the homeowner neglects or fails to pay a tax debt.
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There’s never been a truer statement regarding forecasting mortgage rates than the one offered last year by Mark Fleming, Chief Economist at First American:
“You know, the fallacy of economic forecasting is: Don’t ever try and forecast interest rates and or, more specifically, if you’re a real estate economist mortgage rates, because you will always invariably be wrong.”
Coming into this year, most experts projected mortgage rates would gradually increase and end 2022 in the high three-percent range. It’s only April, and rates have already blown past those numbers. Freddie Mac announced last week that the 30-year fixed-rate mortgage is already at 4.72%.
Danielle Hale, Chief Economist at realtor.com, tweeted on March 31:
“Continuing on the recent trajectory, would have mortgage rates hitting 5% within a matter of weeks. . . .”
Just five days later, on April 5, the Mortgage News Daily quoted a rate of 5.02%.
No one knows how swiftly mortgage rates will rise moving forward. However, at least to this point, they haven’t significantly impacted purchaser demand. Ali Wolf, Chief Economist at Zonda, explains:
“Mortgage rates jumped much quicker and much higher than even the most aggressive forecasts called for at the end of last year, and yet housing demand appears to be holding steady.”
Through February, home prices, the number of showings, and the number of homes receiving multiple offers all saw a substantial increase. However, much of the spike in mortgage rates occurred in March. We will not know the true impact of the increase in mortgage rates until the March housing numbers become available in early May.
Rick Sharga, EVP of Market Intelligence at ATTOM Data, recently put rising rates into context:
“Historically low mortgage rates and higher wages helped offset rising home prices over the past few years, but as home prices continue to soar and interest rates approach five percent on a 30-year fixed rate loan, more consumers are going to struggle to find a property they can comfortably afford.”
While no one knows exactly where rates are headed, experts do think they’ll continue to rise in the months ahead. In the meantime, if you’re looking to buy a home, know that rising rates do have an impact. As rates rise, it’ll cost you more when you purchase a house. If you’re ready to buy, it may make sense to do so sooner rather than later.
Mark Fleming got it right. Forecasting mortgage rates is an impossible task. However, it’s probably safe to assume the days of attaining a 3% mortgage rate are over. The question is whether that will soon be true for 4% rates as well.