Things to Consider
3 Reasons Why Homebuyers Prefer Fixed Rate Mortgages
You have lots and lots of decisions to make as a current or prospective homeowner. Will you live in the city or somewhere more rural? Is a single-family home the best style for you and your family's budget and needs, or do you prefer the accoutrements that come with condo life? Are you interested in something that is move-in ready, or perhaps you're considering a fixer-upper?
And that's just the tip of the iceberg. However, when it comes to interest rates, there is one choice that is overwhelming in terms of popularity: fixed-rate mortgages. More often than not, when asked which they'd prefer, people select it over variable. Indeed, based on the most recent statistics available from government-sponsored enterprise Freddie Mac, 90% of homebuyers pick a fixed-rate loan.
It raises an interesting question, though: Why? What is it about FRMs that makes them the odds-on favorite to be selected over variable?
Here are three reasons industry experts believe fixed-rate mortgages are so consistently well-received:
1. Rates stay the same
It's said that the only constant in life is change; in short, it's the one thing that is guaranteed. But a rare exception to that truism are FRMs. No matter what, the interest rate you pick is locked in for the life of the loan term, which is usually 30 years.
There is great security and comfort in this fact. When the mortgage payment becomes due each month, you know exactly how much you'll spend on principal and interest. This predictability can help you with planning and budgeting for the week, month, or year.
The interest rate environment is subject to change, primarily due to market dynamics of the moment, the state of the U.S. economy and actions by the Federal Reserve. But for several years now, interest rates have remained solidly in affordable territory.
The numbers prove as much. Based on archived data maintained by Freddie Mac, 30-year FRMs never edged above 5% in the entirety of 2019. In fact, they stayed well below that figure for all 12 months, topping out at 4.51% the very first week of the year. They remained in the 4% territory or lower throughout 2018 and 2017 as well.
The same has been true in 2020. While everyone can attest to this being an unusual year with lots of changes, FRMs are in record-low territory, now hovering around 3% for the week ending June 4.
In short, people like to pay less, and generally speaking, FRMs are highly affordable given the fact rates have been low for so long.
This one just may be the main reason as to why FRMs are the overwhelming favorite in comparison to variable. People like the freedom of options, which may explain why homeownership is as popular as ever. In fact, according to a recent survey from the National Association of Realtors, which was conducted in May, nearly 60% of respondents considered buying real estate an "essential" service.
They not only expect to have the freedom to purchase a house at a time that is right for them, but appreciate the ability to pay down their mortgage in a manner that makes sense to them. FRMs offer this kind of flexibility, noted Sean Becketti, former vice president chief economist at Freddie Mac.
"Thirty-year fixed-rate loans are generally prepayable at any time without penalty," Becketti explained. " If the homeowner chooses to pay off the loan before maturity to refinance or sell the home, the homeowner can do so without paying an early prepayment fee."
He went on to note that this option is fairly exclusive to the U.S., as in other parts of the world, it's not unusual to be docked for paying off a loan ahead of schedule.
Another way in which FRMs increase flexibility is this structure can be used in many different loan types. As The Balance noted, they can be leveraged for conventional loans - which are not backed by the government - and also those guaranteed by the Federal Housing Authority or Department of Veterans Affairs for VA loans.
Additionally, while 30-year FRMs are the most common length homebuyers choose, 15 years if also available to them if they so choose. While monthly payments tend to run higher, you wind up spending less on interest overall because the term is significantly shorter. The rate itself is often lower than it is with the long-term option as well.
None of this is to say that variable rates aren't good. They have several positives to them as well. Nor is it to say that fixed rates don't have certain disadvantages. But these are some of the main reasons why FRMs are a smart choice and why so many pick them when given the choice.
For more information on FRMs or other aspects of homeownership, please contact RMS today.
Things to Consider
Improve The Environment – Starting in Your Home
Earth Day is an annual event celebrated around the world on April 22 to demonstrate support for environmental protection. The theme of Earth Day 2020 is climate action. There are many steps that you can take in your own home that will help the environment in your community and the world.
Reducing the amount of water that you are using in your household can make a big environmental impact.
- Install low-flow faucets to save water.
- Turn the water off as you brush your teeth.
- If you have a dish washer, use it. Dishwashers use less water than washing by hand.
- Make sure your garden and landscaping plants are native so no extra watering is required. Native plants only need the rainfall that happens naturally, so you don’t need to turn on your sprinklers or fill up your watering cans to keep them looking healthy.
Swap out your harsh household cleaners. You do not need to buy expensive, “green” cleaners to avoid harsh chemicals. Instead try using some basic household products to make your own.
- All-purpose cleaner: Combine 1 part water, one part white vinegar, and lemon rinds to make a solution to replace your current all-purpose cleaner. Let the mixture infuse for a week before using. Do not use this mixture on granite, acidic cleaners can damage stone. (These are not replacements for disinfectants)
- Baking soda is a powerhouse when it comes to cleaning the kitchen.
- Make a paste with baking soda and water to clean your kitchen appliances and give them a great shine.
- Put baking soda in your fridge to neutralize odors.
- Unclog your drain and deodorize your sink by pouring baking soda down the drain followed by white vinegar. Let the mixture sit for 10-15 minutes and then flush the sink with boiling hot water.
- You can even make shampoo out of baking soda and water.
Find ways to save energy in your home, it is good for the environment and it can save you money!
- Wash your clothes in cold water.
- Take advantage of warmer days by hanging your laundry out to dry.
- Turn on your fan so it runs counter-clockwise while using the air conditioner so you can raise your thermostat 4 degrees without any difference in comfort.
- Install a programmable thermostat to use less heat or air conditioning during the hours you are not home.
- Clean and replace your air conditioning system’s filters. Dirty filters can slow air flow and cause your system to use more energy.
- When running your dishwasher skip the heat and let them air dry.
Avoid single-use products whenever possible.
- Use reusable bags when you shop. If you need to use plastic bags reuse them as liners for your bathroom trashcans.
- Use reusable travel cups and water bottles when you are out.
- Bring a mug to your office instead of using disposable paper cups for coffee.
- Use reusable containers instead of sandwich bags and disposable containers to carry your lunch.
There are many simple steps that you can take to help the environment from the comfort of your own home. Being conscious of the decisions you are making as a consumer and a homeowner can make a big impact on your carbon footprint.
Things to Consider
How financial literacy can affect your kids' homeownership decisions
Many parents are now homeschooling their children for the foreseeable future, and it's virtually impossible to overstate the importance of literacy. The ability to read and write serves as the building blocks to ongoing education, and the earlier parents help their children learn their ABC's, the better off they're likely to be as they grow older.
Similarly as crucial is financial literacy. In many ways, it's the foundation to personal economic prosperity and can provide young people with the intellectual ammunition to make smart, well-informed money-related decisions in their teenage years and into adulthood, including choices that relate to homeownership.
However, based on the infrequency with which financial literacy is taught in many of the country's schools, many students lack the solid grounding they need to succeed. Take this homeschooling opportunity to teach your children basics of personal finance, from looking over a budget, to writing a check and balancing a checkbook.
In the United States at large, only public high schools in just five states - Missouri, Tennessee, Utah, Virginia and Alabama - require students to take personal finance courses, according to statistics compiled by Visual Capitalist. That's the equivalent of only 16% of students overall who must successfully complete personal finance-related curriculum to graduate, a rate that drops to a mere 8.6% when excluding the aforementioned states.
What does financial literacy mean?
As the National Financial Educators Council defines it, financial literacy is the ability to comprehend how money works, both in the macro sense - the world economy, for example - as well as the micro, such as being able to maintain a budget, write a check or understand how interest works.
But financial literacy goes well beyond these basic fundamentals. It also applies to saving. For example, while most Americans anticipate retiring at some point in their lives, their ability to actually do that is almost entirely dependent on building the economic resources they need to draw from to finance the costs of day-to-day living. According to polling conducted by Gallup, more than half of Americans in the workforce at the time of the poll believed they would be able to retire comfortably. Of these individuals, roughly 1 in 3 said they would rely on Social Security as a major source of income.
However, with the worker to beneficiary ratio at 2.8 to 1 - meaning around three people are paying into Social Security for every person drawing from it - most financial experts agree that retirees will not be able to live comfortably off of Social Security income alone.
Of course, well before determining when to retire are decisions about homeownership. For most people, buying a home is the biggest purchase they make in their lives, as the current median in the country overall stands at approximately $274,500, according to recent statistics available from the National Association of Realtors. Aside from the creature comforts that derive from buying a house, homeownership comes with a variety of short-term and long-term advantages. Chief among them is equity, meaning the valuation of a property. According to ATTOM Data Solutions, more than 14 million homeowners in the third quarter of 2019 in the U.S. were considered equity-rich. Being in a state of positive equity typically enables homeowners to sell their house for a higher selling price than they purchased it for and to apply for certain types of loan products, like home equity loans or home equity lines of credit (HELOC).
While most polls illustrate that young people want to become homeowners and take advantage of these perks, some of their financial decisions are preventing that from happening. For example, as a survey from Zillow showed, approximately 50% of Americans who currently rent are unable to purchase a home because of student loan debt. The same goes for 39% of buyers, meaning that unpaid tuition is delaying them from moving on from a starter home.
Of course, serious debt - which can come in many forms - isn't necessarily a function of poor financial literacy. Things happen over the course of a lifetime that can't be avoided, like medical emergencies and sudden job loss. Yet at the same time, a firm grounding in the fundamentals of money management can make overcoming life's adversities easier.
Financial literacy can also help individuals decide between whether they should rent an apartment or buy a home. According to estimates from Zillow, in the last decade, tenants spent a combined $4.5 trillion in monthly rent. To give this figure some context, that's a larger amount than the gross domestic product of Germany and the market value of Alphabet - which owns Google - Apple, Microsoft and Amazon - combined!
Because there are no down payments or ongoing maintenance costs that come with renting, it can seem like it makes the most sense from a cost perspective. More often than not, though, buying a home is the better bargain. Indeed, as ATTOM Data Solutions found, it's cheaper to purchase a three-bedroom house than a three-bedroom unit in more than half of the country, or in 455 of the 855 counties that were analyzed.
Todd Teta, chief product officer at ATTOM Data Solutions, said that even though sticker prices are higher these days, homeownership beats renting in the lion's share of the U.S.
"Owning a home can still be the more affordable option, even as prices keep rising," Teta explained.
Given the importance of financial literacy, you may be wondering what you as a parent or guardian can do to improve your children's understanding of money and how they manage it. Here are a few suggestions, as recommended by the Financial Industry Regulatory Authority:
Consult with your child's school
Depending on their age, your kids spent much of their day within the four walls of a classroom, learning about math, science, history and the like. But what, specifically, are they learning about as it pertains to finances? You may want to ask about that the next time you connect with their teacher(s). If the school isn't adopting some of the lessons you'd like them to, consider reaching out to the school board or PTA to see what can be done to include more financial literacy-related material in the curriculum.
Talk to your kids about money
How you interact with your children in terms of their ongoing education will play a key role in their interests as they grow and develop. Depending on their age, you should talk to them about the value of a dollar and introduce concepts that they'll be able to understand. For instance, if they're in junior high, you may want to discuss the principles of saving, investing, or how interest works for financial products like credit cards or savings accounts. If they're in high school, you may want to introduce slightly more complicated concepts like what a mortgage is or how credit works.
Show them a credit report
Credit, in many ways, is the financial equivalent of your reputation. And a credit report allows lenders to see how effective you are with money management. Your kids may not know how credit works or how to interpret a credit report, so consider showing them one. Again, how in depth you go will largely depend on their age, but it never hurts to provide them with some of the basics, like how credit scores are determined. FICO® has some helpful resources, blogs, charts and short videos available at its website.
Much like a well-built house, your children's ability to learn and grow depends on a solid foundation. You can lay down the necessary groundwork by making their financial literacy a priority.
Things to Consider
Pay less in taxes with this deduction for new homeowners
Whether you have someone file them for you or you do it every year on your own, the tax return process is something that most people don't particularly look forward to. There are plenty of other things you'd rather do, as it takes time and effort just gathering all your documents - never mind the computations and manual input. And if you itemize, tax preparation is a whole lot longer. It's part of the reason why the chore is put off until the last minute - sometimes literally!
However, there's some pretty good news to report on the tax filing front, as a highly popular deduction that was originally introduced in 2007 - and rescinded - is back. Taking advantage of it can help reduce your taxable income and potentially add to your refund.
If you're unfamiliar with the mortgage insurance premium deduction, here's a little bit more about its history and the finer details so you can determine if you're eligible:
What exactly is the mortgage insurance premium deduction?
Passed by Congress in 2007 and signed into law by then President George W. Bush shortly thereafter, the mortgage insurance premium deduction allows homeowners who have a mortgage insurance policy out on their home to use those funds as a tax write-off, thus reducing the cost of homeownership. Originally included in the Tax Relief and Health Care Act, this deduction has been extended several times by lawmakers over the years, largely because of its popularity and the fact that so many people have mortgage insurance, which is generally required for those with FHA loans or who make down payments that are below 20% of a property's purchase price.
Based on the most recent statistics available from the National Realtors Association, the current down payment average among first-time homebuyers is 7%. It's more than double that - 16% - for those who have bought residential real estate previously. In 2017, an estimated 2.2 million homeowners across the country took advantage of the mortgage insurance premium tax deduction, which has slashed an average of between $1,000 and $1,550 off their taxable income, according to estimates from U.S. Mortgage Insurers.
For whatever reason, lawmakers decided not to extend the deduction beyond 2017 when it came to a vote and has sat dormant since. However, thanks to its reintroduction by California Rep. Julia Brownley and enthusiastic support of legislators on both sides of the political aisle, the mortgage insurance premium deduction has returned - much to the delight of homeowners and housing authorities.
"Mortgage insurance has helped millions of middle income Americans become homeowners and for nearly 10 years, the tax deductibility of MI premiums has helped to reduce the cost of homeownership," USMI President and Executive Director Lindsey Johnson explained, shortly after the extension was made official. "In a bipartisan manner, our elected lawmakers in Congress demonstrated today their commitment toward helping low down payment first time homebuyers by keeping mortgage insurance tax deductible."
Cost of homeownership still an issue
Affordability of homes has been an ongoing problem for the past several years, largely due to the balance between supply and demand, as builders can't quite keep up with the pace at which people are buying. In December, for instance, purchase activity for existing homes rose 3.6%, according to NAR data. This contributed to the 14.6% dip in total housing inventory, which now stands at three months as of the end of December, at the current sales pace. Additionally, for the 94th month in a row, median existing-home prices across the U.S. climbed, with the typical property selling for $274,500.
Every extra dollar saved helps, and supporters of the mortgage insurance premium tax deduction are hopeful that its return will provide extra breathing room for new, repeat and would-be buyers.
How to determine if you're eligible
The mortgage insurance premium tax deduction is much like most others in the tax code - certain restrictions apply. It's designed for middle-class families, specifically those whose annual income before taxes is less than $100,000. Given the typical American household earns a yearly salary of $63,179, according to the latest figures published by the U.S. Census Bureau, the vast majority of homeowners in the U.S. should be able to take advantage of this deduction if they so choose. Roughly 40% of borrowers with mortgage insurance earn a salary of $75,000 or less, based on USMI calculations.
Another caveat of the mortgage insurance premium deduction when it comes to eligibility is when you actually first bought the house you currently reside in. Given the original deduction wasn't in the tax code until the late 2000s, the tax break only applies to those who applied and were approved for a home loan by Jan. 1, 2007 and afterward.
But let's say that you bought a house in 2018, which was one of the rare years in which the mortgage insurance premium deduction wasn't in effect. Does that mean you're out of luck? To the contrary. The IRS generally allows you to amend your tax return retroactively for the past three years that you filed. This means that you should be able to take advantage of it well after the fact.
How you can go about claiming the deduction
Although tax filing is increasingly paperless, the same can't be said for forms - there are loads of them. To claim the mortgage insurance premium deduction, you'll need Form 1098. If you haven't already received this from your lender, be sure to ask them for it, as you'll need it to enter the appropriate data. As noted by The Balance, what you actually spent in mortgage insurance premiums can usually be found in Box 4 and reportable on line 13 of Schedule A. If you're doing your own tax preparation with a software program, be sure to itemize rather than using the standard deduction method.
As Tax Day fast approaches, you should consult a tax advisor for further information regarding the deductibility of the mortgage insurance premium. Thus, ensuring you can take advantage of the deduction allowing you to fully realize the ongoing benefits that derive from your wise investment
Things to Consider
Non-rate reasons for refinancing your mortgage
When it comes to the very latest in residential real estate events, stories that tend to make the news are usually related to asking prices, and the availability of homes for first-time or move-up buyers. But another newsmaker is the state of interest rates, which fell rather sharply in 2018.
The general rule of thumb is if you can lower your interest rate by 0.5% or more, refinancing is worthwhile by virtue of helping you save potentially thousands of dollars over the life of the loan. However, a low-interest rate environment is not the sole reason why refinancing can be a smart move. Here are a few other reasons why it can be worth the time and effort:
Reduce the loan's term
Generally speaking, there are two options you can choose from when it comes to how long you intend to pay off your home loan: 15 and 30 years. Overwhelmingly, the most common choice is 30 years. However, with the economy in bull territory, salaries increasing, job availability outnumbering those looking for work and the national unemployment rate as low as it's been in over half a century, you may be in a better position to pay more per on a per-month basis. The upshot here is, you'll be able to pay off the entirety of the loan more quickly and ultimately pay less than you would with a 30-year mortgage.
You can find out exactly how much you stand to spend per month by changing to a 15-year term length - and how much you'll save - with a mortgage calculator.
Switch from FRM to ARM
Just as you typically have two choices of terms, you also have dual options for the type of interest rate: Fixed Rate Mortgage (FRM) or Adjustable Rate Mortgage (ARM). Fixed is the most common choice because it provides borrowers with the predictability they need to make the appropriate adjustment with their budget and how much they can expect to spend.
However, depending on how long you've owned your residence, your circumstances may have changed, making an adjustable-rate mortgage a better option. For example, if you're thinking about moving in a few years - which you may not have considered when you first applied for a mortgage - an ARM may be a wiser option, in part because rates at the outset may be lower than they are with fixed.
Alternatively, if you no longer plan on relocating, switching to fixed with rates where they are now can help keep your monthly payments in historically low territory so you never have to worry about the impact rising rates will have on your wallet when - not if - they do climb.
Tap into home equity
It's said that real estate is one of the best investments you can make. This is largely due to the direction of home prices, as they've risen consistently on a year-over-year basis for 92 months in a row, according to the most recent figures available from the National Association of Realtors. Similarly, home equity levels have also surged. In the third quarter of 2018, over 54 million homes were equity-rich, according to estimates from ATTOM Data Solutions. That's the equivalent of more than 1 in 4 homeowners. Meanwhile, just 3.5 million mortgages were underwater.
Tapping into the equity your home has built up can provide you with more options when it comes to decisions that cost money. For example, if you want to refurbish your kitchen, bathroom or dining room, cashing out can supply you with the funds necessary to pay for the equipment and labor involved. You may also want to use the proceeds to purchase a business or make a down payment on an investment property. All this can be done by refinancing.
Forego mortgage insurance
Many people are under the assumption that they have to make a 20% down payment in order to buy a house. In reality, you can buy a house with as little as 3.5% down, and if you're a veteran or active duty member of the military, or purchase in a designated area, you may not need a down payment at all.
Perhaps the main reason why this 20% down requirement myth has persisted is due to mortgage insurance. If you put down less than 20% of the house's listed price, mortgage insurance is generally required so the lender can be made whole if the borrower defaults.
If you're someone that currently has mortgage insurance and you want to avoid paying the premiums associated with keeping the policy current, you may be able to eliminate it by refinancing into a conventional mortgage. Since more properties these days are equity-rich, you may have the 20% equity that is necessary to waive mortgage insurance.
There's a caveat
As you can see, the reasons why refinancing can make a lot of sense aside from taking advantage of historically low mortgage rates run the gamut. However, just because a variety of other scenarios exist does not necessarily mean that you should - or will even be able to.
Whether you should or not depends on your goals first and foremost. If you don't know or they're still a work in progress, avoid refinancing until you're sure of the path forward. You may want to speak with a financial advisor for some direction. A loan officer may also be able to help you to chart out a strategy for real estate investing decisions.
The other thing to be mindful of is refinancing qualification. Refinancing a mortgage is just like a purchase mortgage, in that you need to have the appropriate qualifications in order to be eligible. Some of the things your lender will look at are your income, your loan-to-value ratio, credit history and FICO® score. Talk to your lender about the documentation necessary to refinance. Much of the material you'll need is similar to what's required in order to pre-qualify.
Talk to your lender for more news and information on refinancing and whether you're in a situation that makes you an ideal candidate.