What's the purpose of mortgage points?
When would-be buyers apply for a mortgage, it's safe to say no two home hunters are alike. This is true both of their financial profile and the type of house they'd like to buy.
But here's something all applicants have in common: They want the most bang for their mortgage buck.
One way to help lower your monthly mortgage payments is through mortgage points. But when the rubber meets the road, are they worthwhile? Like the home buying process itself, that all depends on the circumstances of the moment. Here's a brief rundown of mortgage points so you can determine what they are and whether they're valuable to you.
What are mortgage points?
Otherwise referred to as discount points, mortgage points are upfront fees that you, a current or potential borrower, pay to your lender. They can ultimately reduce how much you spend in interest. Each point is the equivalent of 1 percent of the overall mortgage. For instance, with the current median for all housing types at $228,200, according to the National Association of Realtors, 1 percent of that total is $2,282. So, if you were to buy one mortgage point, roughly $2,300 is the amount you'd pay for it.
The "point" of mortgage points is reducing how much you spend each month in interest on your home loan. Essentially, they allow you to buy your way to a lower rate.
How much do you stand to save?
As someone who's new to the mortgage shopping process, you're no doubt aware that rates are subject to change. They're influenced by the Federal Reserve, loan type and the borrower's credit situation. The amount you can save by buying one or several mortgage points varies as well. For example, buying a mortgage point worth $2,000 can shave a quarter of a percent off how much you spend in interest, reducing what you pay monthly by about $25 to $30 or so. Sometimes it's less, sometimes it's more. The more points you buy, however, the greater the discount tends to be.
So how do you know when it makes sense to buy mortgage points? If you intend to stay put - the house you're buying isn't a starter or transition home but one you'll be in for the long haul - buying one or several points can pay dividends, as savings will appreciate over time. Someone with a 30-year fixed-rate loan stands to save more than those with a 15-year FRM. Your lender can help you figure out what move is best, but you can determine how long it will take you to reach that break-even point by dividing your total mortgage point(s) with how much those points save you per month. The quotient is how long it will take you to recoup what you spent upfront.
There are choices aplenty when you're in the housing market. Weighing the worth of mortgage points is yet another financing option you ought to consider.
Most renters want to own a home
Just about everyone who's been in the market for a home has addressed the age-old question of whether it's better to rent or buy. A family's circumstances often tell the tale of which is the better bet, but generally speaking, buying beats renting, especially from a dollars-and-cents perspective.
Even today, when a dearth of supply and a glut of demand has caused asking values to increase, most renters still want to own a home, so says a recently released poll. According to new findings from the National Association of Realtors, approximately 75 percent of "non-owners" say they have every intention of buying a house at some point in the future.
The homeownership rate has gone up and down over the years and is still below the all-time high of 69 percent in 2004, according to data compiled by Trading Economics. Currently, about 64 percent of Americans own a home, based on the most recent quarterly figures available from the U.S. Census Bureau.
Cost, limited supply leaving some renters in limbo
If around three-quarters of the country seeks to purchase a house and apply for a mortgage, why isn't the homeownership rate higher? It's largely because of the economics of it. On average, for the whole year, just over half of respondents in the NAR survey said they couldn't afford to buy a home, slightly lower than the 56 percent who indicated as much during the fourth quarter of 2017 alone.
Driving the price increases are the relatively few options would-be buyers have to choose from, noted NAR chief Lawrence Yun.
"A tug-of-war continues to take place in many markets throughout the country, where consistently solid job creation is fueling demand, but the lack of supply is creating affordability constraints that are ultimately pulling aspiring buyers further away from owning," Yun said.
How problematic of an issue dry real estate markets are is a function of where you happen to be looking, as some regions have more properties in listings than others. From a national perspective, however, choices are slim. In January, total housing inventory actually increased to 1.52 million, based on existing-home sales numbers from the NAR. But even with an increase of 4 percent from this past December, inventory is still down 9.5 percent from January of last year.
"These extremely frustrating conditions continue to be most apparent at the lower end of the market," Yun said, "which is why the overall share of first-time buyers remains well below where it should be given the strength of the job market and economy."
Renters feeling the pinch
But the rental situation isn't much more accommodating. To the contrary, 51 percent of the participants in the NAR survey said they anticipate paying more for rent in 2018 than they did in 2017.
As it stands, the average worker today has to earn more than $21 per hour to afford a two-bedroom apartment, according to the National Low Income Housing Coalition. Given that renters currently make an average of $16.38 per hour, this means that many renters are spending more than 30 percent of their income on rent. Because of these affordability pressures, it's time for developers to kick things into high gear.
Speaking of affordability, many renters or would-be buyers operate under the belief that they can't afford a down payment, under the assumption that they have to put down 20 percent of the property's value up front. Based on a separate poll conducted by the National Association of Realtors, 37 percent of millennials believe a 20 percent down payment is required. Not only is this inaccurate, but it's also far above what the average actually is (5 percent).
Regardless of what the supply situation looks like, renters are looking to buy, primarily because they're running out of room. In a Realtor.com poll, nearly 93 percent of respondents said they wanted at least two bathrooms in their future home.
With the inventory situation showing some improvement, prospective buyers should be able to get exactly what they're looking for in the not-too-distant future.
How to best approach the mortgage process when self-employed
The benefits of self-employment are undeniable. If they weren't, then there wouldn't be approximately 41 million Americans who work for themselves, according to estimates from MBO Partners.
Being your own boss is extremely freeing, as you're able to set your own timetable, pursue your passion or simply do something you're particularly good at. But as with any job, there are some challenges to being self-employed. One of them can be applying for a mortgage. It's not that the process itself is any more difficult than it is for those who work for a business, but there is a certain level of due diligence that self-employed applicants must reach in order to check all the boxes.
Here are a few smart ways to approach the process and simplify it:
1. Prep your paperwork
Paperwork is the name of the game in mortgage approval. An accountant can provide tips for obtaining the proper documentation, such as tax forms, profit and losses, etc.
2. Contact a mortgage professional
Rely on the expertise of a real estate or mortgage professional rather than going about it on your own. They understand exactly what it takes to be approved for a home loan and can offer sound advice.
3. Maintain a clean credit profile
A high credit score speaks well to your fiscal responsibility, which will go a long way toward improving the likelihood of authorization.
Interest rate are climbing, but how high will they go?
The answer is a bit foggy, as is their effect on conventional mortgage rates. However, should they head higher, newly released information suggests that many would-be buyers say they wouldn't let this get in the way of entering the market.
On March 21, the Federal Reserve - as expected - raised the benchmark funds rate to 1.75 percent, following several quarter-percent increases in 2017 and a few more in previous years. This most recent hike puts short-term interest rates at their highest level in a decade.
When key interest rates rise or fall, they cause a ripple effect that impacts savings, credit card fees and mortgage rates. Indeed, tracing back to when the Fed first started raising interest rates in earnest, mortgage rates have followed suit, although at a more moderate pace. For instance, according to data from Freddie Mac, 30-year fixed-rate mortgages used to average below 4 percent. Now they average around 4.5 percent.
Additional rate hikes may be in store
Economists seem to agree that the central bank isn't done. According to The Washington Post, some predict as many as two or three more rate hikes before 2018 concludes. But even if this comes to pass and mortgage interest levels run higher in response, most Americans wouldn't let it deter them from buying a house.
That's according to a poll conducted by SurveyMonkey, which found that, of the 4,000 individuals who participated, just 6 percent said they'd change their mind about buying a house if mortgage rates surpassed 5 percent.
Recent evidence seems to suggest as much. Home sales continue to spring up like roses. In February, purchases for all housing types rose 3 percent compared to January, according to the National Association of Realtors. This translated to a seasonally adjusted total of 5.5 million properties bought across the U.S. in February.
This gives credence to the general consensus among real estate agents who say their clients aren't altogether bothered by rates on the rise. In fact, financial advisor Peter Boockvar believes it's having the opposite effect.
"Higher rates are actually spurring buyers to step up and lock in with a purchase and a funding rate before they head even higher," Boockvar told CNBC. He added that weekly mortgage application data, maintained by the Mortgage Bankers Association, is further evidence of this. In early March, purchase loans were - and likely continue to be - the most popular mortgage type.
5 percent is the norm for interest rates
Historical context may also be playing a role in how prospective buyers are seemingly unperturbed by rates elevating. After all, the historical norm for short-term interest rates is 5 percent, and 30-year FRMs once averaged in the double-digits during the 1970s.
Real estate experts are none too bothered either, but admittedly they would rather see inventory levels do the climbing.
"To fully satisfy demand, most markets right now need a substantial increase in new listings," National Association of Realtors chief economist Lawrence Yun told CNBC.
With the economy on firmer footing and consumer sentiment at 17-year highs, that just might happen. But much like the direction of interest rates, only time will tell.
Have you ever heard the expression that "what you don't know can't hurt you?" While this may be true some of the time, it isn't exactly accurate when it comes to buying a house or applying for a mortgage. That's because many people, it turns out, have preconceived notions about how much they need to spend on a down payment, believing it costs more than it actually does.
Nearly 45 percent of baby boomers think that a 20 percent down payment is required in order to be eligible to buy, according to a 2016 poll conducted by the National Association of Realtors. Many first-time buyers are also of this mindset: 37 percent of respondents 35 years of age or under thought the same thing.
What is the average down payment on a house?
This 20 percent down payment myth has been circulating for a while, but it's time to put an end to it. For several years, the average median down payment for U.S. homebuyers has hovered around 5 percent of the purchase price, according to NAR research.
This may also provide greater clarity as to why prospective buyers at the state level can't help but have some misgivings about entering the market. A 2017 survey conducted by the Michigan State Housing Development Authority found that the cost of a down payment was the chief concern for 55 percent of individuals living in the state and aspiring to buy a house for the first time.
Lawrence Yun, chief economist at the NAR, said this is a thinking process of millennials as a whole and could explain why homeownership among people age 35 and under is less robust than it's been.
"It's possible some of the hesitation about buying right now among young adults is from them not realizing there are mortgage financing options available that do not require a 20 percent down payment, which would be north of $100,000 in some expensive areas in the country," Yun explained.
Many millennials admit they haven't saved enough
However, there are those situations where millennials really aren't saving enough for the down payment portion of a real estate transaction. According to survey data from Apartment List, two-thirds of 18- to 34-year-olds have down payment savings of less than $1,000. Perhaps if more people spread the word about down payments, they will encourage more people to save in order to achieve a dream that is much more attainable than they once thought.
Although 5 percent is the typical down payment for first-time borrowers, conventional mortgages allow for 3 percent. And if you're currently serving in the military, are an eligible veteran or surviving spouse of a service member, the down payment could be waived altogether, as no down payment options are available to qualifying borrowers through the Department of Veterans Affairs. There are also zero down payment options available to qualifying borrowers and homes through the USDA Rural Development program.
Although not being required to pay 20 percent of a home's worth surely comes as good news for would-be buyers, in many cases it may still be a good strategy to put more toward the down payment in order to reduce your monthly mortgage expenses. These are the kinds of decisions that are good to examine with a loan officer.
For more help on the financing program that makes the most sense for you, talk to an RMS loan officer today.