by Moe Bedard | Apr 10, 2022 | Mortgage News from LoanSafe.org |
Elon Musk is a well-known entrepreneur and billionaire who is best known for his roles in Tesla and SpaceX.
He has plenty of money, but recently he took out several very large mortgages on five properties in California.
When he borrowed this money, Musk faced some big decisions about which type of loans to go with. There are two options: fixed-rate mortgages or adjustable mortgages.
Fixed-rate mortgages provide the borrower with a guarantee of stable monthly payments.
Adjustable mortgages don’t offer that same benefit, but they do come with substantially lower rates.
Musk chose to take a big risk with his mortgage loans.
Instead of choosing a 30-year fixed-rate mortgage – which would have given him stable monthly payments – Musk chose a hybrid-adjustable loan (ARM).
The Tesla CEO, 49, took out several mortgages worth more than $61 million to buy five adjacent homes in the posh Bel-Air neighborhood of Los Angeles where celebrities like Jennifer Aniston and Kim Kardashian live, according to property records reviewed by Business Insider.
He bought two of the houses – which are located near one another in Bel Air – in 2012 and 2013 for $17 million and $6.75 million, respectively.
Musk bought one of the houses from actor Gene Wilder for $6.75 million, and another from actress Talia Shire for $6.4 million. The other three are located in the Hidden Hills neighborhood of Los Angeles and cost him $24 million combined.
For his new mortgages, Musk secured a floating rate loan with a 3% interest rate for the first six months, which will then increase to 4.5%, according to property records filed with the county recorder’s offices for Los Angeles County, San Mateo County and Alameda County in California.
The loans total $24.6 million from Citibank and $36.3 million from Morgan Stanley.
Musk was able to borrow a high-risk mortgage because he’s a billionaire.
With his wealth, he could afford to take a chance with an ARM mortgage and see his rates go up and payments rise if and when that would happen.
Musk was unlikely to find himself in a position where he couldn’t refinance his loan if needed, especially given his personal wealth and long-established borrowing relationships with major banks.
The typical borrower, however, might not be so equipped to bear the risk of an adjustable-rate mortgage.
The average person would likely find themselves in serious financial hardship if their rates rose — and there’s a good chance they will continue to do so in the forseable future.
by Moe Bedard | Apr 7, 2022 | Mortgage News from LoanSafe.org |
Rising mortgage rates on FHA loans are driving up monthly payments, making it harder for many to afford.
FHA loans have long been touted as one of the most effective ways for first-time homebuyers to get a mortgage. But with rising interest rates — and a lingering threat of more — FHA borrowers are about to face more pain.
For home buyers, the difference between qualifying for a 3.5% down FHA loan and a 5% conventional loan is significant: about $150 per month on a median-priced home in the U.S., according to one analysis from mortgage data provider CoreLogic.
For people who already have a FHA loan, borrowers will likely see their monthly payments increase due to higher interest rates, which could hurt their financial situation if they don’t have other income streams coming in or an emergency fund set aside in case they lose their job.
If you purchased your home a few years ago, or even just last year when rates were at historic lows, you might be surprised to learn how much higher the rate is today.
The average 30-year rate on FHA-backed loans has risen from 3.97 percent in January to 4.68 percent as of this writing, according to data provided by Ellie Mae, an industry software provider.
That’s a rise of 0.71 percentage points in just six months, and it translates into higher payments for all new FHA borrowers:
$1,429 monthly on a $200,000 loan — an increase of $160 monthly or $1,920 annually
$2,073 monthly on a $300,000 loan — an increase of $239 monthly or $2,868 annually
$2,888 monthly on a $400,000 loan — an increase of $328 monthly or $3,936 annually
Each 1-percentage-point increase in mortgage rates is equivalent to a 10 percent drop in home affordability, according to Trulia.
“FHA buyers are going to get squeezed,” said Jed Kolko, chief economist at Trulia. “They’re going to have higher house payments.”
The rate spike isn’t the only problem facing borrowers with FHA loans right now. Insurance premiums are also expected to rise in coming years — and those increases will hit people who took out their mortgages before the hikes were announced.
The average interest rate on 30-year fixed-rate mortgages increased from 4.20% in March to 4.37% in April, according to mortgage finance agency Freddie Mac (FMCC).
Meanwhile, the average rate on 15-year fixed-rate mortgages rose from 3.43% in March to 3.57% in April.
Just a few months earlier, rates were hovering around 3.5 percent. Homeowners with ARMs are also feeling the pain of higher rates, though the impact will be somewhat less immediate.
The reason for the increase is simple: The Federal Reserve has been raising short-term interest rates as the economy improves and unemployment levels drop.
It’s also winding down its monthly bond purchases that have kept mortgage rates at historic lows.
by Moe Bedard | Apr 4, 2022 | Mortgage News from LoanSafe.org |
A new Redfin report says the rush to purchase second homes dropped in February to its lowest level since May 2020. Though demand is still up 35% above pre-pandemic levels, the vacation housing market will cool as rates rise.
The Redfin report shows that vacation home purchases dropped 38% year-over-year in February after falling 34% in January and 27% in December. The drop comes as the cost of borrowing rose at an accelerated pace following an increase in Treasury yields due to rising inflation expectations, soaring government debt issuance, and ongoing fears related to the COVID-19 pandemic.
Over the last couple of years, affluent homebuyers have been snapping up vacation properties at an unprecedented rate amid the pandemic and remote work flexibility. Many are moving out of cities and into suburbs and smaller cities or greener pastures in states with lower taxes and a more reasonable cost of living.
Before the pandemic, demand for second and primary homes grew at similar rates. But pandemic lockdowns and the Federal Reserve’s easiest monetary policies on record, coupled with FOMO and low inventory, unleashed a surge in buying panic in beach towns and mountain areas.
Upscale housing markets in Phoenix and Las Vegas saw double-digit increases in demand for luxury vacation homes this past winter compared with a year earlier as snowbirds flocked to warmer climates for COVID-19 respite and remote work escape options during the pandemic lockdowns.
But as rates rise, the market is more unaffordable to potential second home buyers.
Redfin found that demand for vacation homes declined 7% in February compared to January. The percentage of vacation home searches fell from 7% of all searches in mid-January to 5% at the end of February, “a bigger drop than we saw after last year’s election,” said Daryl Fairweather, Redfin’s chief economist.
“With mortgage rates now over 3%, they are starting to affect buyers’ decisions,” Fairweather added. “The slowdown in vacation home searches is a sign that it may be getting harder for many Americans to afford a second home.”
Mortgage rates on vacation homes have risen to 3.37% from 2.88% in January. A 30-year fixed-rate mortgage for a home purchase is now at 3.12%, the highest rate since July 2020.
The report says: “As interest rates climb toward 3%, that market is going to cool off. Affordability has been bolstered by historically low mortgage rates for much of the past year and a half. As those low rates start to disappear, we could see buying power dip and affordability decline once again. But there will be more sellers on the market this spring and summer than last year, which will help offset some of those effects on affordability.”
“With mortgage rates on an upward trajectory again, it’s likely we’ll see a drop in demand as people reassess what they can afford,” said Taylor Marr, senior economist at Redfin. “The future of the vacation home market will depend on how long mortgage rates stay elevated and if there is another round of stimulus that boosts buyers’ confidence.”
“Vacation home buyers have the most urgency about locking in low rates,” Redfin agent Kathleen Plinske said in a statement. “They’re generally wealthier, more stable and more risk averse than people looking for primary homes.”
by Moe Bedard | Apr 1, 2022 | Mortgage Help |
Figuring out how much mortgage you can afford is a process that involves several steps. Once you have gone through all of them and have thoroughly examined your financial situation, you can have a much better idea as to how big of a loan you can afford, and in turn, how big of a house to look for.
The general rule of thumb is that about a third of a borrower’s income should be dedicated to financing a home. For example, if someone makes an annual salary of $50,000 a year, they should be able to manage a mortgage of $150,000 if their current debt is moderate.
While this tends to be a common rule for some, it will not be the case for every new home buyer.
A good rule of thumb is to examine your current debt, living expenses, and then adjust for future financial obligations, like children, education, and possible retirement.
Instead of trying to spend all your earnings on buying a home, a more modest approach is sometimes necessary. There’s no better way to be well-prepared for homeownership than making a budget and sticking to it!
Aside from considering your regular monthly costs such as utility bills, car insurance, health insurance, etc. – finding out the exact mortgage costs you will be facing will help you determine whether or not the purchase is a sound financial investment.
You also need to keep in mind that a mortgage loan pays not just for your house, but also for the costs of owning a home, such as insurance, property taxes, and home maintenance. All of these things should be factored into your calculations when you are calculating your mortgage.
There are also many more factors such as your interest rate, credit score, debt-to-income ratios and down payment that affect the amount you can afford to borrow.
The best way to determine exactly what fees you’ll pay is to find a lender and pre-qualify for a mortgage. This process will allow a borrower to receive a loan estimate from the lender, which will have all of the exact costs associated with the mortgage.
Below I will discuss the steps and most effective ways for an individual to calculate how much they can realistically afford.
* If you need to quickly see how much mortgage you can afford and you do not want to read this entire article, please call me at 619-379-8999 or email me at [email protected].
STEP 1: Calculate Your Monthly Income
To qualify for a mortgage, you and your spouse must prove that you have enough income to cover all of your housing costs, including homeowner association dues and property taxes.
You should also add up all sources of your monthly income, including your spouse’s if you are married, alimony if you are getting some and any other income that you receive.
If you have a fixed-term employment contract or receive a salary from your job, then the calculation is easy. Just add up all of your monthly income and divide it by 12 to get the average amount of money you make each month.
Gross monthly income is the total amount of money earned before any deductions have been made. For example, if you make $45,000 per year and work 40 hours per week, then your gross monthly income is $3,750 ($45,000 divided by 12 months).
If your spouse earns $50,000 per year and works full-time. Her gross monthly income is $4,167 ($50,000 divided by 12 months). Adding these two together gives you a gross monthly income of $7,917 ($3,750 + $4,167).
If you receive variable or irregular income from self-employment, there are several things that you can do. For example, let’s say that you are self-employed and your income varies from month to month or year to year due to market conditions or seasonal factors.
To account for this in the calculation of your monthly income for mortgage purposes, simply average out the last 2 years of your income tax returns and use this figure as your monthly income when applying for a mortgage. These calculations can, however, be slightly tricky because some of the deductions on your tax return are added back into your net income like depreciation, depletion and one-time expenses/repairs.
If you were getting alimony every month or had another source of income such as an investment property, then include that as well. Also include any investments in stocks and bonds or annuities (regular payments) as well as any government benefits.
If you receive Social Security, Alimony, Child Support or any other income source that is Non-Taxable a lender may be able to qualify 25% above what you receive which will allow you to qualify for a slightly higher purchase price/loan if needed.
STEP 2: Calculate Your Monthly Expenses
In addition to this information about your monthly income, lenders will also want to know about your existing debts. This includes credit card debt and any other type of installment loans that you carry each month.
Lenders will take the sum of these debts and add it to your estimated mortgage payment to see if you have enough room in your budget before approving your loan application.
This will include any rent or mortgage, food, transportation, taxes, insurance, and other regular costs of living such as your car payment, credit card payments, utility bills, and other recurring costs.
STEP 3: Debt-to-Income Ratios
Mortgage lenders look at your gross monthly income and your monthly debts to determine how much of a mortgage loan you can afford. This is called the debt-to-income ratio.
Debt to income ratio applies to the comparison of an individuals monthly expenses to their monthly income. Lenders use strict debt-to income ratios when qualifying a borrower for a mortgage, so it is imperative that you get a basic understanding of how this is done.
The housing to payment ratio is referred to as your front-end debt-to-income (DTI) ratio and includes all expenses associated with the mortgage – including principal, interest, property taxes and homeowners insurance. To calculate an affordable front-end DTI, multiply 0.3 by your gross (pretax) annual income, then divide by 12.
In contrast, your back-end DTI is the percentage of your gross monthly income that is applied to all other installment debts (i.e., mortgages, student loans, car payments, credit cards, child support etc). One of the first things to do is itemize all of your debts, including credit card bills, personal loans, and car payments.
The back-end DTI shows the lender exactly how much of your earnings go towards your total debt obligations. Generally, they will look for a borrower with a DTI of around 43-55%. If your DTI is below 43% then you have a better chance of qualifying for a loan.
If your DTI is above 43% then you may have a more difficult time meeting the requirements. FHA mortgages allow a higher number with a front-end DTI of 47% of your gross monthly earnings, and a back-end DTI of 57-59%.
How to calculate your debt to income ratio (DTI)
To determine the size of a mortgage you can afford, your total monthly payment, taxes and insurance (PITI) should not exceed 2x to 2.5x your take-home pay or salary after taxes and other withholding are taken into consideration.
The first step is to calculate your gross monthly income.
To do this, simply figure out how much money you are making each month from all of your documentable sources throughout the year and now divide that by 12. If you are married, figure both incomes into the equation.
Remember I said “documentable”.
If you can’t prove it, it didn’t go into your bank account and or you do not claim it on your taxes, then it is not provable income.
Add up all your monthly debts
Things like a car, credit cards, and stuff that will show up on your credit report are what we are looking for. Figure out what percentage of your income is going towards paying off debts. Generally, figures like 5%, 10%, or 20% are used.
Of course, the lower the better, as you will be more likely to be able to keep up with the payments. So, if your income is $4,000 per month and your debts are $500, this would mean that you are currently at an approximate 13% debt to income ratio.
STEP 4: Calculating Your Mortgage Payments
These are some of the major costs a homebuyer faces when buying a home. Once you have all the costs figured out, you’ll want to sit down with your lender or loan officer to locate a realistic mortgage option.
These expenses include, but are not limited to:
Monthly mortgage payment: Principal, interest, taxes, homeowners insurance (PITI) and HOA dues (if applicable).
Homeowners Insurance
Homeowner’s insurance is required to obtain a mortgage. In fact, you’ll be paying for homeowner’s insurance before you even close on the property. Your lender will require that you pay your first year’s insurance premium when you close on your home loan, and it will be included in your monthly mortgage payment.
Homeowners insurance covers the structure of your home and your personal property inside, up to the policy limits. Most policies also cover liability and additional living expenses if something happens to your home.
For example, if a tree falls through your roof or an electrical fire damages half of your house and you can’t stay there for several months while it’s being repaired, homeowners insurance would cover the cost of temporary housing until your home is again habitable.
How much does homeowners insurance cost?
The typical homeowners policy costs between $1,000 to $5,000 per year, depending on where you live. Premiums vary based on factors like location, coverage limits and replacement cost value (RCV) as well as high risk areas for fire or natural disasters.
In general, if you have a $100,000 mortgage on a house that’s worth $550,000 (the value of the house is also called the replacement cost), your lender requires that you have at least $450,000 in liability coverage and $550,000 in coverage for the structure itself. In addition, you’ll want to protect any personal items inside the home with a rider or floater policy.
The more coverage you take out, the higher your premium will be.
Interest Rate
The two main variables that you will have to consider when determining how much you can afford are the loan amount and your interest rate.
Home loans are typically broken up into two types:
Fixed-rate mortgages have an interest rate that is set and does not change for the length of the loan. This provides stability, but if interest rates go down you will miss out on the lower rate. The most common fixed-rate mortgage is a 30-year loan.
Adjustable-rate mortgages (ARMs) start out with a low, fixed rate and then adjust upward or downward after a certain period of time, depending on market conditions at that time. Most ARM loans provide a fixed-rate payment for three to five years and then adjust every year thereafter.
These are also called 3/1 and 5/1 ARMs, which means they start with a fixed-rate and payment for five years, then adjust annually after that.
Private Mortgage Insurance (PMI):
If you do not have a 20% down payment to purchase the home, you will more than likely be subject to paying PMI. If so, this cost will be figured into your monthly mortgage payment.
You pay PMI as part of your monthly mortgage payment until you reach at least 20 percent equity in your home,, but there is no obligation for your lender to do so. This can take quite some time, especially in a rising real estate market where the value of the home increases faster than you can pay down your loan.
PMI can cost between 0.3% to 1% of the original loan amount on an annual basis. That means that if you borrowed $200,000, you may be paying as much as $2,000 a year — or around $167 per month — assuming a PMI rate of 1%.
There are different ways to eliminate mortgage insurance with less than 20% down; you can buy it out as a single premium, which is a lump sum at closing, or through an option called lender paid, which is a less common direction where you would have a higher interest rate that covers the cost of the premium.
Real Estate Taxes:
Real estate taxes are simply the taxes you pay for your home. All residential property requires the homeowner to pay property taxes – prices will vary from city-to-city, state-to-state.
Each town and county sets their own tax rate and the assessor determines the property value. This information is provided to you by your mortgage company, but you may also contact the local tax assessor’s office to confirm or to find out other important information.
Taxes may be paid annually, twice a year or quarterly. Most of the time when you put less than 20% down the lender will require you to include your taxes and insurance with your mortgage payment. In addition to property taxes, some municipalities also charge a municipal tax or supplemental tax – which is usually a fixed amount that doesn’t change year-to-year.
Down payment:
A down payment is required to purchase real estate. The down payment is subtracted from the purchase price of your home. Your mortgage loan will cover the rest of the price of the home.
The minimum amount you’ll need for your down payment depends on the purchase price of the home you’d like to buy and the type of mortgage.
Most conventional loans will require at least 20% down to obtain favorable terms and avoid private mortgage insurance (PMI) however many borrowers choose to only put 3-5% down in today’s market.
Some lenders offer special programs for buyers, however, which may lower the amount needed for a down payment. FHA loans, for example, may allow buyers to qualify with only 3.5% down if they have a credit score of 580 or higher. Down payment assistance programs may be available for buyers in certain areas who meet income qualifications.
In addition to the down payment, you will also need cash reserves on hand to cover closing costs and repairs that come up during the home inspection process.
Closing Costs:
In addition to a down payment, lenders and third parties associated with the transaction will charge fees to close the loan.
These fees may include loan origination fees, credit report fees, attorney fees, appraisal fees, underwriting fees, etc. In general, borrowers can expect to pay approximately 2-4% of the purchase price in closing costs.
While most of these closing costs must be paid by the borrower, some of them can be paid by the seller, split between buyer and seller or even credited by the lender. It is important that you ask your lender what costs are negotiable and which ones are non-negotiable before making an offer on a home.
Points:
Mortgage points are an upfront loan cost that could save money throughout the life of your loan. Mortgage points can be purchased in order to lower the overall interest rate on your loan. A lower interest rate means lower monthly payments as well as less money being paid over the life of the loan.
The cost of a point is 1% of your total loan amount. For example, if you’re borrowing $500,000 to buy a home, each point will cost you $5,000. Usually every 1% paid to buy the interest rate down equates to .25% in rate.
If you are planning on living your home for a long period of time and expect interest rates to rise, it can be a very wise idea to consider that is also typically a tax-deductible expense, of course consult with your accountant or tax professional the impacts to your taxes when you purchase a home.
Bonus Tips
It is always good to undershoot the number you can most afford. It is better to buy a cheaper house and to have extra money, than it is to overdo it and come up short.
Use a mortgage calculator to determine how much you can afford
Lenders tend to use a formula that is very complex to help decide how much a borrower is able to afford. By using a mortgage calculator you will be able to decide for yourself how much you can afford to pay by factoring in your income, debt, and other expenses to see if you qualify for a home loan.
You can start by calculating your gross income on a monthly basis. Then, you can use a mortgage calculator to determine how much house you can afford.
Here are a couple of sites that offer free calculators: Mortgagecalculator.org or Mortgagecalculator.net
These tools will allow prospective home buyers to get a good estimate as to what their monthly mortgage payments should be.
But be aware that this tool will only be able to give an estimated amount, so it would be wise to speak with a mortgage counselor to get concrete numbers.
Interest rates and guidelines may also vary from lender to lender, so it is always important to first shop around for the best deal before you make your purchase. And in the end, the mortgage lender will have the final say as to how much the monthly payment will be.
If you would like to know exactly how much mortgage you can afford, please call me at 619-379-8999 or email me at [email protected].
