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5 Coronavirus Real Estate Myths Everyone Thinks Are True—Debunked

July 30, 2020

Luke Sharrett/Bloomberg

Every day, our conversations online and off are filled with “did you hear this yet?” news about the coronavirus pandemic. And, alas, not all of what you hear is true—particularly when it comes to real estate.

For instance: Do you assume, as many do, that it’s a terrible time to sell a home since real estate prices are plummeting? On the contrary, the latest data shows that home prices and buyer demand are through the roof. Or have you heard that the coronavirus has forced all city dwellers to flee to the burbs? Some have, but the mass exodus you might envision is by no means the reality.

There’s a potential cost to these misguided beliefs: missing out on some profitable opportunities. For instance, home sellers sitting on the sidelines might be passing up the chance to make tons of money on their sale. Meanwhile, home buyers who wrongly assume they can’t schedule home tours right now might be forfeiting their chance to snag their dream home this summer—at record-low interest rates no less.

To help you separate the truths from the half-truths from the utter falsehoods that might be filling your social media feeds, here are five prevalent myths about real estate during the COVID-19 pandemic—and some much-needed reality checks.

1. It’s a terrible time to sell your home

Many home sellers who may have hoped to put their house on the market this summer have put those plans on hold. In early July, new home listings dropped 14% compared with a year ago, and total home inventory was 32% lower, according to realtor.com®’s Weekly Housing Trends report for July 11.

Fear of coronavirus exposure is probably the main reason people are keeping their homes off the market, but many might also assume that selling a home right now is just a futile endeavor, plagued by few home buyers and low prices.

But on the contrary, the latest statistics suggest that now is one of the best times in years to sell a home for several reasons.

“Given the pandemic and uncertainty it’s caused, the general sentiment [among some owners] is that now is not a good time to sell your home,” says Danielle Hale, chief economist at realtor.com. “Yet so far, the data suggests the opposite—that buyers outnumber sellers in the housing market, which means it’s better to be a seller than a buyer.”

The aforementioned low housing inventory is one reason why those who do list their homes will enjoy a strong seller’s market, characterized by bidding wars that could fetch them a high price.

“Multiple offers could be fairly common over the next few months,” predicts Lawrence Yun, chief economist at the National Association of Realtors®.

“As long as buyer demand remains strong, I expect the market to remain tipped in favor of sellers,” says Hale.

2. Home prices are plummeting

Data shows just the opposite: Home prices are actually rising.

According to the NAR, the national median price for single-family homes grew 7.7% during the first quarter of 2020, to $274,600.

“We’re seeing home prices grow faster than pre-COVID-19,” Hale says. “In fact, they are on pace with the home price growth we saw this time last year.”

The reason is record-low mortgage rates.

“Record-low mortgage rates boost buying power,” Yun says, “and, when combined with a lack of supply, will result in higher and higher home prices.”

3. Buyers are holding off on home purchases

According to NAR’s Pending Home Sales Index (a forward-looking glimpse at home sales based on contract signings), pending home sales jumped 44.3% in May, the largest month-over-month increase since the index’s inception in 2001.

Record-low interest rates are driving much of the buyer demand, Hale says.

Mortgage interest rates dipped below 3% for the first time in 50 years, to 2.98% as of July 16, according to Freddie Mac.

“Certainly low interest rates help,” says Karl Jacob, CEO of LoanSnap. “You can lock in a rate that you just wouldn’t even have been able to imagine six, seven months ago.”

One caveat: Not all borrowers will qualify for the lowest interest rate, Jacob says. A borrower’s debt-to-income ratio and credit score typically affect the type of loan and interest rates, so someone with large amounts of debt or a low credit score may be offered a higher rate.

And although the market is booming now, it may not remain that way for long depending on what unfolds.

“If [COVID-19] cases worsen and that leads to a broad reversal of reopenings, this could cause longer-term job loss that would put a dent in buyer demand,” says Hale.

4. Homes can’t be viewed in person

As states issued stay-at-home and social distancing mandates to stop the spread of COVID-19, many in-person home showings and open houses were put on hold temporarily in favor of virtual home tours. But by now, most of these restrictions are being lifted across the country so homes can be viewed in person—and real estate agents are taking extra precautions to protect buyers and sellers.

Peggy Zabakolas, a licensed real estate broker with Nest Seekers International, who specializes in Manhattan and Hamptons markets, says she’s been showing homes virtually. If a buyer is interested, she schedules an in-person showing that follows social distancing guidelines, and requires everyone involved to fill out a COVID-19 disclosure form and limitation of liability form. And, she’s sure to have gloves, masks, shoe coverings, and hand sanitizer on hand.

Hale says she’s also heard some real estate agents are requiring potential buyers to have pre-approval letters or review a home inspection report before they can see a home in person.

“These extra steps also weed out the nonserious buyers,” Zabakolas says. “If someone is willing to go through all those steps and then schedule a physical tour, you know they are serious.”

Important to note: With infection rates in some parts of the country rising, some restrictions on home showings may take hold again. Check with your local real estate professionals for current guidelines.

5. Everyone’s fleeing cities for the suburbs

This is probably the most rampant myth of all, and it certainly makes sense from a pure impulse level. Since urban centers like New York City make social distancing far more challenging than in less densely populated areas, why wouldn’t city dwellers flee en masse and try to buy a house in the burbs?

Well, this is only partly true. Yes, listings in the suburbs are drawing more attention these days. In May, the number of views on properties with suburban ZIP codes increased 13%, almost double those in urban areas, according to realtor.com data.

“We have seen home-buying demand recover faster in the suburbs and rural areas than urban areas,” Hale says. “There’s also evidence of home shoppers in cities that were hit early and hard by COVID-19, such as New York and Philadelphia, seeking homes in nearby smaller communities at a higher pace, like the Poconos.”

That doesn’t mean everyone is fleeing to the suburbs, though.

For one, unless you’re extremely wealthy, it’s not that easy to pick up and move. This is particularly true since, while a few companies have announced that their employees can work from home indefinitely, most firms haven’t decided yet whether their employees will one day have to return to the office.

As a result, many of those people surfing suburban real estate listings might not be all that serious about following through. They might fantasize about moving, but when it comes to making an offer on a house and packing up their belongings, many may prefer to stay put and see how the coronavirus pandemic shakes out first.

“This pandemic, although bad, will eventually pass,” points out Jacob. “And when it does, are people really going to stop wanting to be in a city? I just don’t think that’s the case. Even though you can get delivery from Grubhub every night, it doesn’t mean you’re never going to want to go out to a restaurant, and if you have to drive 30 minutes to a restaurant versus being able to walk around the corner, that’s a different lifestyle.”

The post 5 Coronavirus Real Estate Myths Everyone Thinks Are True—Debunked appeared first on Real Estate News & Insights | realtor.com®.

What Are Mortgage Points? Upfront Fees That Could Save You Money

September 25, 2019

What Are Mortgage Points

skynesher/iStock

What are mortgage points? The interest rate your mortgage lender offers you when you buy or refinance a house is not necessarily the rate you have to stick with. In fact, you can lower your mortgage rate by shelling out at closing for something called mortgage points. But what are mortgage points and how can they save you some serious cash (like, thousands of dollars over the years you make monthly payments)? Read on for the answers from loan experts.

What are mortgage points?

There are two types of mortgage points:

  • Discount points: These points, also known as prepaid points, lower your interest rate but increase your closing costs, because payment for them is due at closing. Discount points are a kind of prepaid interest you “buy” from your lender, based on your loan amount, for a lower mortgage rate.
  • Origination points: These points are charged to recover some costs of the mortgage origination process. This would include compensating your loan officer, notary fees, preparation costs, and inspection fees.

One mortgage origination or discount point typically costs 1% of the loan amount. For example, 1 point on a $250,000 mortgage would equal $2,500.

How do mortgage points lower your interest rate?

The primary purpose of buying discount points from the lender is to reduce your interest rate on your mortgage, and thus lower your monthly payment.

You can pay points during the home-buying process, or when you refinance your home. One point usually reduces the borrower’s interest rate between 0.125% to 0.25%, depending on the lender’s terms, although 0.25% is typical.

For example, if you took out a 30-year, $400,000 loan at an interest rate of 5%, you would pay $2,147 in mortgage payments a month (not including taxes, insurance, or anything else). Paying 2 mortgage points to the lender at 0.25% per point would lower the interest rate to 4.5% and drop the monthly payment to $2,027. You would also need to foot the upfront cost of $8,000 to buy discount points at closing.

Should you buy mortgage points?

Buying points from a lender makes the most sense for borrowers who plan on living in their house and making monthly mortgage payments for many years, either for the life of the loan or close to it.

Consider how long you think you’ll stay in your house and keep your home loan. Generally, if you buy points, you want to stay longer to break even and recoup the money it took to buy the points on the loan. If you sell the house or pay off the loan too soon, you won’t reach the break-even point, and you can lose money.

Let’s go back to the above example of the 30-year, $400,000 loan. The 2 mortgage discount points for $8,000 at closing saves you $120 in monthly payments. It would take about 5.5 years to reach the break-even point of $8,000, before you could start to save money.

However, it would also save you $43,394 in interest over the life of the loan. Deduct that $8,000 in point-buying costs from money saved in interest and you will have actually saved a total of $35,394. Of course, that’s if you see out the life of the loan. If you sell after six or seven years and pay off your mortgage, buying those points from the mortgage lender wasn’t worth it. Know your future plans and move forward accordingly.

You should also consider how much money you have to use for a down payment at the time of closing. If you are looking to pay the least amount possible in mortgage closing costs, and you can’t afford out-of-pocket points on your loan, you may need to opt for a zero-point loan program.

Tax breaks and mortgage points

Because discount points are a form of interest you pay on your loan, they’re usually tax-deductible as mortgage interest for the year you buy your home. However, origination points that are basically document fees for your mortgage are not deductible.

If you’re considering buying discount points, consult your tax adviser to determine if you qualify for these mortgage deductions.

When you refinance your home and pay for mortgage discount points, you amortize the cost of the points over the years you have the loan. If you sell the house or pay off the loan, you can deduct any remaining points in the last year you have the mortgage.

Generally, the bigger the mortgage, interest rate, and mortgage length, the more money discount points will save you. Buying points on mortgages with only a few years left, or on those with already very low mortgage rates, could yield monthly savings of only a few bucks and never reach a break-even point for your closing costs, so be sure to do the math before you finalize any mortgage decision.

The post What Are Mortgage Points? Upfront Fees That Could Save You Money appeared first on Real Estate News & Insights | realtor.com®.

A Guide to Mortgage Interest Rates: Why They Go Down and Up, and What to Do

April 11, 2019

Mortgage interest rates are a mystery to many of us—whether you’re a home buyer in need of a home loan for your first house or your fifth.

After all, what does “interest rate” even mean? Why do rates swing up and down? And, most important, how do you nab the best interest rate—the one that’s going to save you the most money over the life of your mortgage?

Here, we outline what you need to know about interest rates before applying for a mortgage.

Why does my interest rate matter?

Mortgage lenders don’t just loan you money because they’re good guys—they’re there to make a profit. “Interest” is the extra fee you pay your lender for loaning you the cash you need to buy a home.

Your interest payment is calculated as a percentage of your total loan amount. For example, let’s say you get a 30-year, $200,000 loan with a 4% interest rate. Over 30 years, you would end up paying back not only that $200,000, but an extra $143,739 in interest. Month to month, your mortgage payments would amount to about $955. However, your mortgage payments will end up higher or lower depending on the interest rate you get.

Why do interest rates fluctuate?

Mortgage rates can change daily depending on how the U.S. economy is performing, says Jack Guttentag, author of “The Mortgage Encyclopedia.”

Consumer confidence, reports on employment, fluctuations in home sales (i.e., the law of supply and demand), and other economic factors all influence interest rates.

“During a period of slack economic activity, [the Federal Reserve] will provide more funding and interest rates will go down,” Guttentag explains. Conversely, “when the economy heats up and there’s a fear of inflation, [the Fed] will restrict funding and interest rates will go up.”

How do I lock in my interest rate?

A “rate lock” is a commitment by a lender to give you a home loan at a specific interest rate, provided you close on your home in a certain period of time—typically 30 days from when you’re pre-approved for your loan.

A rate lock offers protection against fluctuating interest rates—useful considering that even a quarter of a percentage point can take a huge bite out of your housing budget over time. A rate lock offers borrowers peace of mind: No matter how wildly interest rates fluctuate, once you’re “locked in” you know what monthly mortgage payments you’ll need to make on your home, enabling you to plan your long-term finances.

Naturally, many home buyers obsess over the best time to lock in a mortgage rate, worried that they’ll pull the trigger right before rates sink even lower.

Unfortunately, no lender has a crystal ball that shows where mortgage rates are going. It’s impossible to predict exactly where the economy will move in the future. So, don’t get too caught up with minor ups and downs. A bigger question to consider when locking in your interest rate is where you are in the process of finding a home.

Most mortgage experts suggest locking in a rate once you’re “under contract” on a home—meaning you’ve made an offer that’s been accepted. Most lenders will offer a 30-day rate lock at no charge to you—and many will extend rate locks to 45 days as a courtesy to keep your business.

Some lenders offer rate locks with a “float-down option,” which allows you to get a lower interest rate if rates go down. However, the terms, conditions, and costs of this option vary from lender to lender.

How do I get the best interest rate?

Mortgage rates vary depending on a borrower’s personal finances. Specifically, these six key factors will affect the rate you qualify for:

  1. Credit score: When you apply for a mortgage to buy a home, lenders want some reassurance you’ll repay them later! One way they assess this is by scrutinizing your credit score—the numerical representation of your track record of paying off your debts, from credit cards to college loans. Lenders use your credit score to predict how reliable you’ll be in paying your home loan, says Bill Hardekopf, a credit expert at LowCards.com. A perfect credit score is 850, a good score is from 700 to 759, and a fair score is from 650 to 699. Generally, borrowers with higher credit scores receive lower interest rates than borrowers with lower credit scores.
  2. Loan amount and down payment: If you’re willing and able to make a large down payment on a home, lenders assume less risk and will offer you a better rate. If you don’t have enough money to put down 20% on your mortgage, you’ll probably have to pay private mortgage insurance, or PMI, an extra monthly fee meant to mitigate the risk to the lender that you might default on your loan. PMI ranges from about 0.3% to 1.15% of your home loan.
  3. Home location: The strength of your local housing market can drive interest rates up, or down.
  4. Loan type: Your rate will depend on what type of loan you choose. The most common type is a conventional mortgage, aimed at borrowers who have well-established credit, solid assets, and steady income. If your finances aren’t in great shape, you may be able to qualify for a Federal Housing Administration loan, a government-backed loan that requires a low down payment of 3.5%. There are also U.S. Department of Veterans Affairs loans, available to active or retired military personnel, and U.S. Department of Agriculture Rural Development loans, available to Americans with low to moderate incomes who want to buy a home in a rural area.
  5. Loan term: Typically, shorter-term loans have lower interest rates—and lower overall costs—but they also have larger monthly payments.
  6. Type of interest rate: Rates depend on whether you get a fixed-rate mortgage or an adjustable-rate mortgage, or ARM. “Fixed-rate” means the interest rate you pay remains fixed at the same level throughout the life of your loan. An ARM is a loan that starts out at a fixed, predetermined interest rate, but the rate adjusts after a specified initial period (usually three, five, seven, or 10 years) based on market indexes.

Tap into the right resources

Whether you’re looking to buy a home or a homeowner looking to refinance, there are many mortgage tools online to help, including the following:

  • A mortgage rate trends tracker lets you follow interest rate changes in your local market.
  • mortgage payment calculator shows an estimate of your mortgage payment based on current mortgage rates and local real estate taxes.
  • Realtor.com’s mortgage center, which will help you find a lender who can offer competitive interests rates and help you get pre-approved for a mortgage.

 

The post A Guide to Mortgage Interest Rates: Why They Go Down and Up, and What to Do appeared first on Real Estate News & Insights | realtor.com®.

What Is PMI? Private Mortgage Insurance, Explained

February 21, 2019

If you need a mortgage to buy a house but lack the funds to make a 20% down payment, you might end up paying an added fee called private mortgage insurance, or PMI.

So what exactly is PMI? In the same way homeowners insurance protects you in case of problems in your home, PMI protects your lender in case you default on your loan.

Who needs private mortgage insurance?

There are two types of mortgage insurance: private and government. If you have a government-backed loan, such as an FHA loan, you pay mortgage insurance to the government. If your loan is not government-backed, you pay private mortgage insurance (PMI) to a corporate entity.

Lenders typically require PMI of home buyers if they put down less than 20% of the home’s value. The reason: Lenders see buyers with less money invested in a property as more likely to default on their mortgage and go into foreclosure, so these lenders are trying to protect themselves from that. It’s the trade-off for being able to buy a home with as little as a 3.5% down payment (which is the minimum required for an FHA loan).

In case you do default on your mortgage, PMI pays benefits to your lender to cover the loss.

How much private mortgage insurance costs

Expect your PMI payment to range from about 0.3% to 1.15% of your home loan. The most common way to pay PMI loan premiums to your lender is in monthly installments, but you may also be able to make your PMI payments in an upfront cost at your home closing, or roll it into the cost of the loan. Ask your lender for its PMI options. Then do the math for both the long term and short term, and compare it with your homeownership plans.

How to get rid of private mortgage insurance

Once you have at least 20% equity in your home, you can ask your lender to cancel your PMI. Once you have 22% equity, the lender is required to automatically cancel the coverage.

However, if you have an FHA loan, mortgage insurance payments will last the lifetime of the loan. But these payments last that long only if you keep the loan through its entirety—you can still refinance out of an FHA loan into another PMI-free mortgage when you have at least 20% equity.

How to avoid private mortgage insurance

If your loan isn’t government-backed, PMI payments are not necessarily an absolute. You may be able to avoid PMI payments by doing the following:

  • Paying a higher interest rate. This is known as lender-paid PMI. Keep in mind this can’t be canceled and you’ll need to refinance to get a lower rate.
  • Using a piggyback loan to cover all or part of the down payment. Piggyback loans come with a higher interest rate, so use caution and do the math.
  • Reappraising your house if you think property values and updates have boosted your equity (be aware you’ll need to foot the appraisal bill).

 

Finally, some lenders may not require PMI for certain loan programs even if the buyer has less than a 20% down payment. These loans usually require sterling credit and other requirements. Consult your lender for more details.

A note on private mortgage insurance tax deductions

PMI has been tax-deductible since the Mortgage Forgiveness Debt Relief Act of 2007—and it’s still tax-deductible today! Yes, you’ll have to itemize your deductions; but if you do, here’s a ballpark figure of how much you’ll save: If you make $100,000 and put down 5% on a $200,000 house, you’ll pay about $1,500 in yearly PMI premiums—and cut your taxable income by $1,500.

Updated from an earlier version by Laura Sherman

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