There are many factors that enter into the decision to buy a house or what kind of loan to obtain, and interest rates are an important part of that. But borrowers should also consider the loan term, and whether or not to put more money into a down payment.
An interest rate is the price of money, and a mortgage interest rate is the price of money loaned against the security of a specific property. The interest rate is used to calculate the interest payment the borrower owes the lender. When you see a rate quoted by an agent, it is an annual rate although on most home mortgages the interest payment is calculated monthly. For a fixed-rate loan, the interest rate stays the same, but as months and years pass the interest payment portion of the total payment drops because the principal balance is lower – the loan is “amortizing”
The interest rate is important in the sense that the lower the interest rate, the better off you, the borrower, are. You can’t say that about interest payments, which depend not only on the rate but also on the loan amount and the term. Reduce the loan amount and/or shorten the term and interest payments will fall. Reduce the loan amount and you need to come up with more cash for the down payment. Shorten the term and you have to make a larger monthly payment. Borrowers can reduce the term on their own at no cost, either by taking a shorter term at the beginning, or by systematically making extra principal payments.
We are seeing increasing numbers of buyers entering the market. Rates are still relatively low, and values have come down and in many areas seem to not only have bottomed out but are also moving higher. It is always very difficult to pick the bottom, or top, of any market, but housing has not been this affordable for quite some time. Buyers are experiencing tighter underwriting standards than in previous years.
But we remind our customers that there are still superb advantages of buying over renting. Your agent can easily go through the “buy versus rent” numbers with you. While renting offers few, if any, tax breaks, buying a home offers several tax benefits that can make homeownership more affordable and a wise choice.
For example, home owners can take an itemized deduction on interest paid on home loans of up to $1 million for a principal residence and/or second home. This deduction could potentially reduce the cost of borrowing by one-third or more. Owners are able to deduct from their federal income taxes the state and local property taxes that you pay on the home. Several closing costs in a home purchase are also deductible, such as loan origination fees (points), prorated interest on a new loan, and prorated property taxes paid at settlement.
Homeowners who have lived in their home for two of the prior five years prior to its sale do not have to pay income tax on the majority of their profit — $250,000 for single homeowners and $500,000 for married homeowners who file jointly. And we see many homeowners who rent out their homes for part of the year - home owners can rent the home up to 14 days during the year and pay no tax at all on the rental income.
Any underwriter can tell you that one of the three “C’s” in making a decision stands for “Collateral”. Yes, the property is important. Properties have, for the most part, been appreciating in the last year or two, but problems still pop up with appraisals.
It is important for LOs and borrowers to know that comments on listings in the MLS can impact future home values in the area. "Puffing" listings to get more shows has been around in real estate sales as long as the weekend open house, and helps the seller feel better about the property, but unfortunately the practice does more harm than good.
By over-stating, or dressing up the condition of a property, agents are impacting future values and home sales: appraisers who do not view active listings, but instead review MLS data and comments, do not know how truthful the comments may be. As a result many homes that sell for near the lower end of the market due to condition of the property but are listed with remarks of ‘gorgeous throughout, remodeled kitchen and baths, re-carpeted’ create a comparable for appraisers for many months of a low price sale for a high condition property.
In other words, many low value appraisals are the result of the information provided to the appraiser by real estate agents in their MLS comments. A good loan officer, and Realtor, when viewing listings will often suspect when there is a great disconnect between the agent comments in the MLS and the reality of a home's condition. A good loan officer will often contact the listing agent and ask them to amend their comments to more accurately reflect the condition, or suggest leaving the comments regarding condition blank. Instead of "gorgeous throughout" say "great opportunity for new homeowners" or "easy to show and priced well for the market."
Famed bank robber Willie Sutton told a reporter he robbed banks “because that’s where the money is.” Today, he’d conduct wire transfer scams, because that’s one of the easiest ways to currently steal money. Unlike checks or other forms of payment, once a wire transfer goes through, there’s no way to stop or recall the remittance.
Increasingly, hackers are penetrating the real estate industry, making off with funds meant for home buying. Here’s how it works: The buyer receives an email, purportedly from their realtor, lawyer or title company, instructing them to wire settlement money to a certain account. The buyer complies, but the money is actually going to the hacker, deposited in an overseas account and gone for good. Victims have lost hundreds of thousands of dollars, ending up ruined financially.
Real Estate Wire Transfer Fraud
If you’re in the process of buying a home, your real estate agent and/or the title company have all the pertinent information regarding your closing date. The hacker breaks into those email accounts, and takes note of individual sale details. He or she learns the name of the seller, buyer and all parties – lender, title company, escrow provider and attorney – involved in the transaction. These hackers are good, and their work is convincing and sophisticated. From viewing the agent’s or other's email accounts, they soon learn to sound like them online. These are not the hackers of past decades with poor spelling and communication skills. Their emails appear to come from the genuine source, and only careful examination reveals they are actually “dummy” accounts.
When the closing date approaches, the hacker moves in for the kill, emailing the buyer to make the wire transfer to a different account. There’s always some excuse about why this is necessary and urgent, perhaps due to some “last minute circumstances” or “technical problems.” If the buyer complies, they are out of luck. The money is gone – and so is the dream of home ownership.
Report Suspicious Activity
If you do receive an email requesting a wire transfer, report it to the bank immediately. Notify whoever reportedly sent the email that their account has been hacked. Contact the Federal Trade Commission and let officials know of this wire transfer scam.
Preventing Wire Transfer Fraud
A hacker can’t steal information that’s not online. That’s the simplest, most effective way to prevent becoming a victim of these thieves. When you need to send personal information to parties involved with the home purchase, do so via courier or phone, or stop by the office. From the outset of any home buying venture, the real estate agent and title company representative should make it clear –in writing – that no email request to wire money will take place. Real estate agents should have informational material available for all clients warning of the wire transfer fraud scam.
Keep Your Computer Secure
It’s never been more important to maintain good computer security, whether in a professional or personal capacity. Change passwords often, don’t open attachments unless you are sure they are legitimate and use up-to-date, high-quality security software. Life on the internet means staying one step ahead of the hackers, and that’s not going to change.
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Sometimes lenders are asked about the “secondary” markets by borrowers. It is a legitimate question, especially as the existence of a secondary market for home loans leads to lower rates for borrowers, and also helps why Fannie Mae and Freddie Mac exist.
Let’s start with a simple example. Let’s say a person (“Joe”) has $1,000 in savings. Joe is approached by his brother who wants to borrow $1,000. They have a good relationship, the brother is a good credit risk, a deal is struck and the $1,000 is loaned out by Joe.
The following day Joe is approached by his sister, an equally good risk, who wants to borrow $500. In spite of wanting to help, and earn interest, Joe has no money to lend, so must say “no” to his sister, and in fact must say no to every other opportunity to lend money out until his brother pays him back. If someone approached Joe, however, and offered to “buy” the first loan from him, and pay him $1,001, two things would happen. First, Joe’s brother would start sending his payments to the buyer of the loan. But second, and more importantly, Joe would make $1 and have $1,000 to lend out to his sister or other good credit risks.
This is exactly what happens with many lenders: they make a loan, and then sell the loan to a buyer (who commences collecting the monthly payments), and turn around and make more loans to other good credit risks. In many cases the buyer of the loans are Freddie Mac or Fannie Mae, or large banks who then begin collecting the monthly payments from the borrower. And lenders have the ability to do what they do best: offer good financing rates to their clients.
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