Each week, I’ve tried to take both simple and complex mortgage-related topics/issues and put them into terms here in this newsletter that make them more easily understood. Since I’ve been doing that for quite a while, I have to be honest and admit this: I’ve come up dry this week on what to talk about, so I thought I’d do a little internet research (I believe the technical term is Googling) into what mortgages are like in other parts of the world –and after a relatively brief Googling, I’ve found that we here in the United States, well, have it pretty good. True story!
In a lot of other developed countries, mortgage interest isn’t tax deductible at all or there’s only a very limited tax benefit to be enjoyed from it –in Germany, they give tax incentives to encourage people to continue RENTING! In many of those same countries, a 30-year fixed mortgage is only a thing of myths. What? How do they afford a mortgage in other countries? Here’s a breakdown of what is most common in some of these countries:
Canada, Britain, Australia, New Zealand: no fixed-rate loans, only Adjustable Rate Mortgages and Hybrid ARMs with fixed rates for only 10 years.
Germany: fixed-rate loans up to only 15 years, ARMs and interest-only loans.
Japan: fixed-rate loans up to only 20 years, ARMs.
Switzerland: generally, it’s a first and second mortgage; the first has an indefinite repayment period while the second has a fixed repayment period up to 15 years (or until an individual’s retirement age) at a higher interest rate.
I learned two other interesting tidbits:
Prepayment Penalty: in the US, you can get a loan with NO prepayment penalty; in other countries, the banks/lenders have a guarantee that they get their interest even if you pay off your mortgage early.
Non-Recourse Loans: these are available in the US, which means you can lose the property if you default on payment, but the lender cannot seek further compensation from the borrower even if the property’s value doesn’t cover the full value of the defaulted amount; in other counties, they can come after you and your assets and metaphorically bleed you dry to get back the full value.
As difficult as it is to save for a down payment –whether it’s 5% or 20% –the sacrifice is worth it because home ownership isn’t just possible, it’s encouraged here in the United States. If this doesn’t convince you that it’s better to buy than rent, maybe it’s time to learn German and move.
Full disclosure: this is a reprint from a few years back – I’ve updated the numbers to reflect the conditions occurring in the market today.
The New York Federal Reserve’s economists conducted a study and published the results: changes in down payment requirements have MORE influence over home buyers’ willingness to buy than changes in rates. Surveying both buyers and renters, the Fed found that the effect of interest rates may be overrated when compared to even small changes in down payment requirements. The study found:
• Dropping the down payment from 20% to 5% increases the willingness to purchase, on average, by 15% among buyers and 40% among renters
• Decreasing the interest rate on a 30-year fixed-rate loan only raised the willingness to purchase by 5%, on average
As you straddle the fence between BUY RIGHT NOW with a higher interest rate and WAIT AN UNKNOWN PERIOD OF TIME to save 20% of the purchase price, here’s an example to give you a push. Take a look at the numbers for a house with the purchase price of $250,000 with a 30-year fixed mortgage: (1) WAIT: $50,000 down payment, $200,000 total loan amount, 4.5% interest rate, monthly mortgage (P&I) payment – $1013.37; OR, (2) BUY NOW: $12,500 down payment, $237,500 total loan amount, 4.875% interest rate, monthly mortgage (P&A) payment – $1256.86.
No doubt $1013.37 is better than $1256.86 for a monthly payment – that’s not what’s at stake here. The difference between those two payments is $243.49. In order for a person to save the additional $37,500 to go from a 5% down payment to a 20% down payment at the rate of $243.49/month, it would take 154 months – 12 years and 10 months! – to get to that point, which is almost half the life of a 30-year mortgage. Obviously, for many perspective buyers, that additional $244issignificant. Wehave a number of strategies to help make up that difference so you can get into a home as soon as possible!
When this was originally written, interest rates were fairly steady –even stagnant –so the scenario of waiting to amass a larger down payment to get a better interest rate was much more plausible. As we’ve seen recently, though, rates are not going to be stagnant –this is not a pronouncement that they’re going to skyrocket overnight –so this has taken on a greater sense of immediacy to get into a home rather than sitting on the rental sidelines for who knows how long.
Real estate agents and home buyers alike are feeling the squeeze from the lack of homes on the market. Don’t despair! For both real estate agents and home buyers, there’s a great untapped source for finding deals before they ever hit the market: your lender. If any of you are a bit confused by what I mean when I say “your” lender, I mean . . . well, us.
How do we do this, you ask? Two words: equity watch. For the real estate agent who helped their client buy a home, say, seven years ago, we let them know when their client has reached a certain level of equity in their home and prompt the agent to give their client a call with the good news. It’s a good excuse for them to call, catch up, deliver the great news, and see if their client is ready to sell their home and either upgrade or downsize, depending on their station in life. Statistics have shown that almost 70% of people selling their existing homes DON’T call the real estate agent who originally helped them purchase it. If the agent can get out in front of this and be the one bringing this type of news to their clients, that number is going to swing in the other direction, right? And with one call, you’ve picked up a new listing AND the chance to help them purchase another house. You’re welcome!
For home buyers, could help you get a jump on the huge number of buyers vying for just a small number of homes in a certain price range. Before doing anything else, come in and get qualified for a mortgage. Once we know what you’re qualified to purchase, the moment a home comes up on our equity watch that fits your parameters, you can be notified immediately. That sure beats getting three years of spam emails because you entered your contact information on a particular website that shall remain nameless but possibly rhymes with Killow.
If the benefits to real estate agents and home buyers aren’t enough to convince you of the awesomeness of this service we offer, let me give you an example of what this can do for a home SELLER. Recently, we reached out to an agent who sold a home to her client about seven years ago and let her know that her client now how a decent amount of equity in his home. With a bit of prompting (none of us is perfect), she remembered the gentleman and gave him a call to let him know. While the agent was able to pick up an instant listing AND a subsequent purchase for her client (absolutely NOTHING wrong with that!), the client himself did EXTREMELY well: with the money he made off the sale of his home, he was able to use a portion for the down payment on his new (BIGGER) house and use the rest to pay off some debts. Upshot: not only was he able to upgrade to a bigger house, the elimination of debt increased his monthly cash flow by $1700. I’m fairly sure we made it onto his Christmas card list for the next ten years.
In conclusion, let me assure you that there’s nothing creepy or voyeuristic about our equity watch –no matter how nicely you ask.