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!
Home Ownership in other countries
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.
For anymore information you may need at Priority Lending LLC we can help make things clearer for you.
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.
Once, many years ago, a very wise person shared with me a small but very powerful insight that has helped me in practically every aspect of my life – it’s easy to remember, too: Seek first to understand, then to be understood. Whenever I rush headlong into any situation with the goal to be understood first, I hit resistance or find my argument to have more holes in it than I had thought possible. Just the opposite: whenever I pause to ask questions and digest the answers, I find it so much easier to reach my goal(s) because I’ve either found a way to build a bridge without the need to take a leap or that my original goal needed to be adjusted because it had holes in it. There’s a great line from the novel (and movie) To Kill a Mockingbird that sums it up: “You never really understand a person until you consider things from his point of view . . . until you climb in his skin and walk around in it.” (I chose not to open this week’s article with that line for fear you might have thought I was going in a different direction with a different movie about lambs and how quite they can be.)
Recently, I was meeting with two real estate agents who handle a lot of higher-priced properties, and I wanted to steer the conversation to a topic that I thought was perfect for who I thought was their ideal clientele. Just as I was about to launch into my presentation, I stopped myself and asked this question: What’s the makeup, demographically, of most of your cash buyers? Of course, I KNEW the answer to this question – older folks who were close to retirement or who were already retired and wanted to downsize – but I asked the question because I’m big-hearted and noble that way. Their response, though, absolutely shocked me: Millennials. What?!!! They explained that most of their cash buyers were folks in their early 30s who have been saving for quite some time and have amassed enough capital to purchase a small home without a mortgage. This not only pulled the rug out from under me as to what I wanted to discuss, it went against practically everything I had believed and read about Millennials.
The focus of this week’s article isn’t really Millennials and the unexpected saving/spending habits of some of them (because my gut still tells me that Millennials buying houses with cash isn’t THAT big of a group in the grand scheme); it’s about being open to the unexpected and learning from new revelations. Because I asked the question and waited to digest the answer, I was able to make a completely different pitch on the fly that gave these two agents something that they could use to market AND take to their existing cash buyers that they’ll find very attractive (and should increase more selling/buying options for those agents). This exchange was a two-way street: I now possess a piece of information that I can add to my repertoire and trot out with other agents when the moment is right. Not bad for asking just one question, right? When you think you have all the answers, that may be true – because you’ve stopped asking questions. Whether you’re an agent or a buyer/seller of property, not asking questions severely limits your options.
I’ll close with this Chinese proverb: “He who asks a question is a fool for five minutes; he who does not ask a question remains a fool forever.” Depending on your personality, five minutes might FEEL like forever, but it beats the alternative, right? So ask the question(s) NOW, and get it over with.
Whether you’re a flipper of TV channels or a die-hard fan of one particular news source (television, radio, internet, or some weird thing called a newspaper), you can’t help but come across a story or twelve on a semi-regular basis about the housing market and whether we’re on a “bubble”. There are those pundits who claim everything points toward the market being on a bubble and how close we are to it bursting, and there’s an equal number who blow off the idea like that’s the most ridiculous thing they’ve ever heard. What you don’t hear, though, is actual data supporting their arguments concerning a “bubble” in the housing market because it makes for a better story to watch people wring their hands and make emotional pleas and/or flash artificially whitened and perfectly aligned teeth at the camera and say these end-of-days kooks have it all wrong. Well, buckle up, kids! THIS is about to become your favorite news source (at least for the next two or three minutes) because here’s some data to let you decide what’s going on in the housing market – taken from the Housing Finance Policy Center’s housing affordability index:
In 2006, in the run-up to the ugliness of 2008-09, there was a $22,000 shortfall between what the median household income could afford and the median sales price of a home. In some parts of the country, that shortfall was an even greater chasm between what could be afforded and the price at which homes were selling.
Today, the median household can afford a home that is $70,000 higher than the price of the median house sold.
For the former, it doesn’t take Einstein to figure out that promising to spend money you don’t have at present along with the distinct possibility that you won’t be getting annual raises or increases to your income to make up that shortfall in the near future is a surefire recipe for things going sideways fairly quickly. Using that same set of sub-Einstein analytical skills, it’s not hard to see the makings of the bubble back in the day and why it eventually burst.
From the latter, we can see that income today is staying ahead of the prices – that could change, and there’s no guarantee that it won’t, but it’s pretty safe to say it’s not going to change drastically in the next 5-6 months – so the makings of a bubble, at present, are fairly absent.
I’m not trying to make any specific forecasts or prognostications about the near and/or distant future – I’m just presenting you with the data, and my interpretation of the data, that’s all. It’s up to you decide what to do with it Think of it this way: if your child – we’ll call him Jack – comes running into the living room where you’re holding a small cocktail party and says, “Jimmy was blowing bubbles, and one of them popped right in Cathy’s eye,” do you wring your hands and lose your cool or do you pat Jack on the head and ask him to join his diminutive friends back outside? Well, it might all depend on whether the source of the bubble was soap or chewing gum. Having a little bit of data can make all the difference, right?