Pay More or Less

Paying more for your house payment does not make your home more valuable. It does mean that the mortgage rate may be higher than it has to be.

Even though fixed rates may never again be as low as they are currently, an adjustable rate mortgage may provide the lowest cost of ownership depending on how long a borrower plans to own a home. There are different types of ARMs but the one in this example is a 30 year mortgage with the rate fixed for five years and can adjust every one year after that based on independent indexes.

Another feature of a FHA ARM is the maximum rate change in one period is 1% and the maximum lifetime cap is 5% over the initial rate.

In the example below, the payment on the adjustable is $153.48 lower for the first five years or 60 payments. Another interesting thing is that lower interest rate loans amortize faster than higher interest rate loans. In this example, the ARM has a lower unpaid balance at the end of the first five years by $4,239.

The total savings on the ARM at the end of the first period is $13,477. If a borrower felt confident they would sell the home prior to the breakeven point of 8.5 years, the ARM would produce a lower cost of housing even if the mortgage rate escalated the maximum at each adjustment period.

To help determine whether you pay more or less, consult with a trusted mortgage professional and your real estate agent to learn the advantages and disadvantages of different programs. To try your own comparison, check today’s rates at the Freddie Mac Mortgage Rate Survey and plug your numbers into an Equity Accelerator

Basic Legal Documents

Many times, young adults feel “bullet-proof” and don’t consider the urgency to get involved or spend the money to take care of certain legal aspects of their lives because they think they’re going to live forever.  Since no one is guaranteed longevity of life, if you want to be in control of who gets what and who is in charge now based on an untimely incapacitation or death, it is important to investigate these basic legal documents.

Will – This is a legal instrument that specifies your desires to care for your minor children and to distribute your personal property after you die and who will manage the process.  Anyone who has property and minor children needs a will.

Living Will – This legal instrument specifies your intentions regarding end of life decisions or to designate an individual to make those decisions on your behalf.  Many times, a person who had been diagnosed with a terminal condition or who is facing a serious surgery or hospitalization might feel a sense of urgency to have this document.

Power of attorney – This document allows you to appoint someone you trust, not necessarily an attorney, to handle important legal and financial matters for you if you are unable to make decisions for yourself.  The time limit can be for a specified period of time or indefinitely.

Trust – This arrangement involves an entity called a Trustee who takes control and manages property for someone else’s benefit called a beneficiary.  When property is placed in a trust, the trust becomes the owner of the property.  There are different types of trusts and a qualified advisor can explain and recommend which type would be best suited for your situation.

HIPPA Release Form – The Health Insurance Portability and Accountability Act, known as HIPPA, was created by Congress to protect the privacy of a person’s health information.  Health care providers are prohibited from discussing any aspect of your medical information with anyone who is not directly involved in your care.  To allow friends or family who do not have legal responsibility for you to have access to this information, this release form is necessary.

Most of the issues affecting these types of documents are determined by state law.  Since they are legal documents, it is recommended that you seek sound financial and legal advice.

Are You Ready?

For whatever reason you’ve delayed buying a home, it may be time to reconsider that decision based on today’s conditions and what is expected to happen in the future.

Rents are continuing to increase to the point that in most markets, it is significantly less expensive to own than to rent.  Even after you factor repairs into the equation, the low interest rates, principal accumulation due to amortization, appreciation and tax savings lower the monthly cost of housing.

Low inventories coupled with strong demand cause a rising effect on prices.  Another reason for higher values is that builders, especially in certain price ranges, have not ramped up new home starts to keep up with the demand.

Recently, the Federal Reserve announced that they intend to start raising rates. Most experts agree that higher interest rates are a foregone conclusion; it is just a matter of when it will happen.

A $300,000 home today could cost considerably more one year from now.  With a 20% down payment, if prices go up by 3% and the interest rates increase by .5%, the principal and interest payment at 3.625% would be $1,094.52 for 30 years compared to $1,198.05 at 4.125%.

The question is not necessarily “can you afford the additional $103.53 more per month that you’d have to pay for the home during the 30 year term?”  More importantly, “How would you feel about having to pay more because you weren’t ready to make a decision and what would you have spent it on if you didn’t have to pay a higher payment?”

Rent Again?

After you take the training wheels off your bike and learn to ride it, you’d never consider putting them back on again.  Similarly, once you’ve owned a home, you might think you’ll own a home from now on but there may be some situations where it might make sense to rent again. 

Big shifts in a person’s life like a divorce, death of spouse, empty nesting or a temporary transfer to a new city are certainly things that may warrant renting, at least temporarily, until those circumstances develop the particulars.

A good example might be that you think you’d like to move downtown.  Before selling your home and purchasing a condo, it might be enlightening to rent an apartment to see how you’ll adapt to the changes in that style of living.

The sales and purchase expenses incurred with real estate are absorbed over the period ownership which is usually between ten and twelve years.  When the holding period involves only a few years, it can negatively impact a homeowner’s equity.

Like any move, especially coordinating the sale and purchase of two homes, there are a lot of issues involved.  Your real estate professional can provide information that will help you to make better decisions on whether to buy, sell or rent again.