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Doing nothing may be a lot more costly than doing something. With rates twice what they were in 2021 and the first half of 2022, many buyers are sitting on the sideline. For some, it has to do with not being able to afford the home they want at today’s mortgage rates and for others, it is not willing to accept that the low rates that were available are not only gone, but may never be available again.

In the late 70’s, rates were around 10% and in the early 80’s went up to 18%. Interestingly, many buyers went ahead and purchased at those record level highs and refinanced a few years later when rates came down. By the end of the decade, prices had continued to increase so that buyers had a significant equity in their home.

Tenants who waited for the rates to go down didn’t see savings because the price of homes had gone up. More importantly, they missed the opportunity to build equity in their home through amortization and appreciation.

If you purchased a $400,000 home today on an FHA loan at 6.3% for 30 years, your total payment with taxes, insurance, and mortgage insurance premium would be about $3,459 a month.

That payment could save you a little bit if you were paying $3,500 for rent. However, when you consider the monthly appreciation, assuming a 3% annual rate, and the monthly principal reduction due to amortization, the net cost of housing would be $2,229. You would be paying $1,270 more each month to continue to rent which would amount to over $15,000 in one year alone.

That loss would be about twice the amount of the down payment to get into the home. Furthermore, in seven years, at the same 3% appreciation, your $7,500 investment in a down payment would grow to $138,000 in equity in seven years. If the appreciation is greater than that, the equity would be much more.

You’re going to be paying rent to live in a home; you might as well benefit from the equity buildup from amortization and appreciation that is only available to the owner.

The benefit of acting now is that sales are down which are affecting prices, although not dramatically. When the Fed gets a handle on inflation, and interest rates do moderate some, more buyers will be in the market and supply and demand will again cause prices to rise. Then, you can refinance to a lower rate but your investment in the home will be at a lower basis.

To run your own numbers, use our Rent vs. Own. If you have questions, call me and I’ll explain how to use it and what to expect for the home you’d like to have.

There are fees and expenses associated with mortgages that must be paid by the closing date for closing costs, and pre-paid items, in addition to the down payment. These amounts can vary according to the type of loan, mortgage company, customary practices of the area, and the terms of the contact.

According to Freddie Mac, the amounts could vary between 2-5% which is considerable. Most buyers want a more specific number and that can depend on the conditions mentioned previously.

For buyers, the largest amounts are loan origination fees which is usually one percent of the amount borrower, points paid by buyer which are one percent or more of the mortgage amount, owner’s title policy if paid by the buyer, and the pre-paid items mentioned above.

Certain types of mortgages allow the seller to pay specific closing costs for the buyer with full disclosure in the sales contract. For example, all the buyers’ closing costs can be paid by the seller for VA mortgages up to 4% of the sales price. FHA and USDA allow sellers to pay up to 6% of the sales price to be used for closing costs and pre-paid items.

For conventional loans, underwritten by Fannie Mae or Freddie Mac, sellers can contribute up to 3% if the down payment is less than 10% and up to 6% if the down payment is 10-25%.

Asking a seller to pay a buyer’s closing costs is tantamount to lowering the price of the home. In a highly competitive market, the seller may be less willing to pay a buyer’s closing cost than in a soft market.

Settlement dates affect the amount of pre-paid interest. Mortgage interest is paid in arrears, after the money has been used. The principal and interest portion of the payment is allocated to pay for the interest on the principal balance for the previous month and the remainder is applied to reduce the principal of the loan. Each succeeding payment has less going to interest and more going to principal until the loan is fully retired.

When a buyer closes on the sale of a home, the first payment will not be due until first of the month following the next full month after closing. The buyer is also responsible for interest from the funding date, usually at closing. This amount is usually reflected on the buyer’s closing statement, as interest to the end of the month. It pre-pays the interest from closing until the next first of the month.

If the buyer closed on the 2nd of the month, the pre-paid interest would be far greater than if the buyer had closed on the last day of the month. To minimize this out of pocket expense, many times closings will be scheduled toward the end of the month.

Another large buyer’s closing cost is property insurance. The lender will require that the home be insured for at least the amount of the mortgage being borrowed. Insurance must be paid for in advance, usually at closing. In addition to the annual premium, the lender may require an escrow account be established to collect 1/12 of the annual property taxes and property insurance to be paid with the payment so there is enough money in the account to pay them when they are due.

When setting up the account, the lender may require an additional two months of reserves for the insurance to be renewed in advance of the policy expiring.

The amount of reserves for the taxes depends on when the taxes must be paid. At closing, the seller will credit the buyer with the amount of taxes from January 1 to the closing date since taxes are also paid in arrears. The lender will probably have the buyer pay two to three months’ taxes additionally at closing so the tax bill can also be paid before it is due. Some states give the taxpayer a discount for paying them in advance.

Your real estate agent will be able to give you an estimate of closing costs that should prepare you to purchase a home. The lender is required by law to supply you with a Loan Estimate within three days of receiving your loan application.

A Closing Disclosure will provide the final details of the mortgage loan you have selected. It includes loan terms, estimated monthly payment, and the fees and other costs incurred with the mortgage. You must receive it three business days before you close on the mortgage loan so that you can compare it with the Loan Estimate.

Sales in February 2023 were up 14.5% month over month and still down 22.6% year over year according to the NAR Housing Snapshot. The median sales price dipped 0.2% to $363,000 and there are 2.6 months supply of homes on the market compared to 1.7 months a year ago.

"Inventory levels are still at historic lows, and consequently, multiple offers are returning on a good number of properties." According to Lawrence Yun, Chief Economist for the National Association of REALTORS�.

It is still important to have a strategy for potentially competing with other buyers on the house you want to buy. The plan should include several available provisions and options, so that at the time of drafting the sales offer, you can consider exactly what to include based on the situation.

Unless a person is paying cash, you need to be pre-approved by a trusted mortgage professional long before you start looking at homes. Include the written pre-approval letter along with the offer. When you are making an offer on a home, have the mortgage professional available to reassure the listing agent by phone who will convey that to the seller.

If you’re concerned about multiple offers, make your best offer first because you may not get to counter and simply lose out to another buyer. Starting with a low offer and gradually coming up doesn’t work in highly competitive situations. In some cases, a low-ball offer could cast a pall on any consideration of your purchase contract altogether.

The listing agent will calculate the expenses on the different offers for the seller to show them what their net proceeds will be on each contract. Some types of financing have more costs incurred to the seller. Asking the seller to make repairs or other financial concessions could lower their net even though your offer may be higher.

From a buyer’s standpoint, contingencies provide options for things that may be uncertain like qualifying for a mortgage, discovery of major impediments to the condition of the home, and other things. To the seller, they are obstacles that may invalidate the contract causing the home back on the market. If the contingencies are necessary, try to make them as palatable to the seller as possible.

Instead of waiving your rights to make inspections, consider a very short inspection period to minimize the time the property is in limbo. Instead of asking for repairs, provide a simple "accept or reject" once the inspections have been made.

Try to accommodate the seller’s desired closing and possession dates. Sometimes an earlier date may be more desirable for a seller and other times, it might be a later date based on the home they’ll be moving into. Your agent can do some research and find a flexible alternative that may appeal to the seller.

Increase your earnest money deposit more than the minimum. It is a pecuniary indication that you are serious. Your agent can tell you what that amount should be and alternatives like increasing the earnest money after certain contingencies have been met.

Escalation clauses state that you are willing to increase your offer by a certain amount up to a specified maximum, subject to another bona fide offer being received before yours is accepted. Your agent will be able to further explain how these might work in your situation as well as share their experience with them in other similar negotiations.

You as a buyer and your offer to purchase need to be seen as the solution to the seller’s situation in price, terms, and reliability to close. Working with an experienced agent with seasoned negotiation skills is key to your success in buying a home in a competitive environment. Download our Buyers Guide.

The housing market in 2021 and part of 2022 was anything but normal. Mortgage rates were at all time lows and may never reach those levels again. Double-digit appreciation drove prices to new heights. Low inventories fueled by high buyer demand made multiple offers a normal expectation.

As we look at the market snapshots provided by MLS in the various markets across the U.S., it appears that things may be returning to normal, but not necessarily in all areas. While there are more homes on the market now than a year ago, there are less sales due primarily to the doubling of mortgage rates in 2022.

Time on the market is lengthening but that can be explained by the removal of approximately 15 million homebuyers who now have affordability issues. When the market shifted, sellers expectations for what they thought their home is worth are not keeping pace with current conditions.

Some sellers who didn’t put their home on the market in 2021 and 2022 for whatever reason, remember the peak of the prices they could have sold their home for and now that they are ready, instead of looking at today’s prices, still expect to get the higher value.

Every experienced agent knows that all real estate is local and while you can look at trends on a national basis, it takes a knowledgeable professional to assess the local market, even on a neighborhood basis, to determine what a property will reasonably sell for currently.

A seller who has owned their home for several years is going to realize a good profit and return on their investment. If they are ready to sell in today’s market, that should be their focus and not on what might have been, had they sold at the recent high.

There is no way to predict when prices will achieve their high whether it is in stocks, bonds, commodities, or housing prices. It is only after it has hit the pinnacle and started retreating, that It can be identified.

Don’t be concerned about the market you missed regardless of whether you are a buyer or a seller. When real estate is viewed as a long-term investment, time takes care of things that can be incredibly stressful in the short term.

The average 30-year fixed-rate mortgage for the last 50 years is 7.76% according to the Freddie Mac PMMS survey. The current 6.60% is considerably below that benchmark and it appears to be trending lower. The current rate is what today’s buyer must pay to borrow.

Home prices have experienced 7.16% appreciation for the last fifty-five years according to the Federal Reserve Economic Data of the St. Louis Fed. Compared to the average inflation rate of 4.3% for the same period, homes provide a hedge against inflation and a significant contribution to personal net worth.

If you’re in the market to buy or sell, contact your real estate professional to find out what your market is doing and what options you have available.

Like with any professional, there are tools and techniques available to help with particular situations. They might be more popular at certain times and might even be put aside or forgotten at others. For real estate professionals, one of those is the backup offer.

In a situation where there are multiple offers, the seller can accept any offer for whatever reasons are important to them, leaving the makers of the other offers disappointed. There is always some uncertainty that the buyers on a contract will close accordingly. To hedge on that possibility, the seller may choose to make a counteroffer to one or more of the other offers to be a backup should the primary contract not close.

From a buyer’s perspective, the purpose of a backup offer is to be next in line to have the chance to purchase the property should the first contract fall through. The benefit is that you’ll be next in line to purchase the home without having to submit another offer and possibly, get into a bidding war. It simply moves from the first backup to the primary contract position.

The buyer in the backup position also experiences uncertainty if it will work and possibly, feeling like they could be wasting their time while waiting to hear the outcome of the first contract. Some of these buyers will continue to look at homes in the likelihood that another acceptable or better property becomes available.

Should this situation occur, the buyer in the backup position may or may not have the ability to withdraw from their contract. It will depend on how the agreement is written. It is important to understand the rights and limitations, as well as when they can be exercised.

A backup offer can lock you into a binding contract until the primary contract’s buyer is approved and closed or until it fails to close and the backup buyer becomes the primary. The backup may or may not have a unilateral way to withdraw the offer prior to one of these outcomes.

Considerations that need to be understood by sellers and buyers alike are:

• Can a buyer in a backup contract unilaterally withdraw at any time?
• Will the earnest money be deposited on a backup offer?
• Will the timelines for contingencies like mortgage or inspections need to be made before becoming the primary contract?
• Will there be any fees incurred by the backup buyer?

Sellers sometimes use a backup offer to apply leverage to the primary contract’s buyer. For instance, if the seller feels the buyers’ demands on repairs are too high, the seller might say something like "if you’re not willing to accept it ‘as is’, I have another buyer waiting to do so."

Many buyers, as well as their agents, don’t want to obligate themselves to a back-up offer. However, in certain situations, it is a good tool to have the opportunity to purchase a home that meets their needs.

In the highly competitive market experienced in 2021 and part of 2022, some buyers may have been reluctant to use a backup because of the slim possibility that it would become the primary. With the shift in the market due to the interest rate increases, a backup offer could be a viable tool to get the home of your dreams.

Your real estate professional can help you understand the advantages and disadvantages of backup offers. Recognizing that contracts are legal and binding agreements, you can also consult an attorney who can confer with your agent to understand the situation.

Download our Buyers Guide

If you’ve ever been in a Monopoly game after most of the properties have been purchased and developed, it can be a relief to land on Free Parking, knowing the dice must rotate to the next player giving you a respite from paying rent. Like the game, in real life, it would be nice to avoid paying rent and even better to have people paying you rent for property you own.

Winning in the game of Monopoly is all about investing. If you travel around the board, trying to buy the ultimate property and pass Go to get another $200, you’re missing the opportunity to purchase good properties along the way that could lead to upgrading into your dream home.

Starting early to buy your first home gives a buyer a chance to acquire a property with a minimum down payment, and inevitably, have a lower payment than paying rent for a similar home. As the home appreciates and the loan amortizes, the equity grows. Within a few years of average appreciation, the down payment can double or triple based on the leverage of using other people’s money.

They could use the equity to stair-step their way into a larger home and finally, their dream home. Or, if that homeowner’s goal is to acquire rental properties, they could convert that home to a rental and buy another home on a low-down payment, owner-occupied mortgage to allow that property’s equity to grow in the same way.

Multi-unit properties could be another option. Finance it with the same type of owner-occupied, low down payment mortgage to achieve leverage that isn’t available to non-owner-occupied investors; live in one unit and rent the others. FHA, VA, and conventional mortgages allow for owner occupants to purchase up to a four-unit building with minimum down payments.

It is very impressive to see the portfolios of properties that some young people have built by focusing on their goals, living within their means, and not getting distracted along the way. You can learn a lot from them but be careful about getting into a game of Monopoly with them; they know how to play the game.

Let’s connect and talk about some of the specifics.

The biggest shock to homebuyers is the soaring mortgage rates of 2022 that doubled in one year resulting in approximately 15 million mortgage ready buyers displaced from the market due to affordability issues.

As of February 23, 2023, the 30-year fixed rate mortgage was at 6.5%. While that is twice as high as it was on January 6, 2022, it is still lower than the 7.75% average rate since April 2, 1971, according to the Freddie Mac Primary Mortgage Market Survey.

When rates increase at a rapid pace like this, it takes time for the public to adjust and begin to accept it as the new normal.

Prior to the housing bust that led to the Great Recession, the normal for mortgage rates was in the 6% range and existing home sales were over 6.5 million for three years. From 2007 to 2014, home sales were closer to 5 million with 2008-2011 at just above 4 million annually.

From January 17, 2008 to March 5, 2020, mortgage rates averaged 4.32%. In this 12-year period, buyers experienced some of the lowest mortgage rates ever and became to expect that rates would always be that low.

Then, during the hardest part of the pandemic, the government took unprecedented actions to influence rates even lower to where they averaged 3.06% between March 5, 2020 and March 17, 2022.

It appears that mortgage rates have peaked in this latest cycle. In December 2022, the rates came down for four straight weeks following two weeks of slightly higher rates. The question is what to anticipate for 2023.

The National Association of REALTORS� is expecting mortgage rates to be below 6% in the last half of 2023 possibly, 5.5% to 5.7%. Zillow’s chief economist believes rates will drop to around 5.5% for 2023. The Mortgage Bankers Association expects that "30-year mortgage rates will end 2023 at 5.3%." Fannie Mae forecasts rates will end 2023 at 5.7%.

Relying on the experts, rates are not going to return to the unusual levels during the pandemic or even in the past 12-14 years. The new normal may well indeed be at the mid-5% level and when the public gets use to it, sales will begin to rise again.

Some buyers may need to adjust their price points because higher payments are directly impacted by the higher rates. Even if they could have afforded more with the lower rates, that was a missed opportunity. When the Fed gets inflation under control and the market rebounds from the pent-up demand, another window could be lost.

David Stevens, CEO of Mountain Lake Consulting, and former Assistant Secretary of Housing recently said in a LinkedIn post talking about the housing market in 2023 "So be advised…this may be the one and only window for the next few years to get into a buyers’ market. And remember…as the Federal Reserve data shows…home prices only go up and always recover from recessions no matter how mild or severe. Long term homeowners should view this market…right now…as a unique buying opportunity."

Locking your interest rate protects you from increases due to market conditions. Locking early safeguards your budgeted payment. By locking the rate, if the market goes up, you get the lower rate; if it goes down after the lock, you may be able to pay a fee and lower the rate.

Knowing when to take the lock is determined by which direction you think the market is going. If you think rates are going up, lock in early. If you think rates are going down, ride the rate to within a few days of closing.

Some lenders may allow a borrower to lock a rate after pre-approval but is more common to not offer a lock until there is a signed contract on a home. Even with a pre-approval, it could easily take 30 days or more to close a transaction and the rates can move a lot in that period.

There may be a fee charged to lock a rate which is determined by the lender. Generally, the longer the time for the rate lock, the higher the fee.

There is a lock period established by the lender that guarantees the rate, if the loan is closed by the expiration date. Normal lock periods can be between 30 to 60 days. Longer periods may be available but will probably require higher fees.

Things that could affect your rate lock are:

• The appraised value comes in lower than what was expected in the sales contract.
• The borrowers’ credit changes considerably before the closing.
• The loan amount changes after the rate lock.
• The loan type changes.
• The down payment decreases before the closing.
• Some income, like bonuses or overtime, could not be verified.

If a higher rate at closing means that you will no longer be able to qualify for the mortgage, it may be more important to lock in early. Looking at what the rates have done for the preceding weeks may indicate a trend but at the same time, markets have turned overnight and started moving in the opposite direction.

A trusted mortgage professional can give you good advice and why they feel you should either lock the rate or let it ride. Your real estate agent can help also but ultimately, the decision is yours.

Sellers, who last year, were not willing to make any concessions, are much more likely to do so this year due to the softening of the market because of inflation and higher mortgage rates affecting affordability for buyers.

Concessions can take place in different forms. A seller could offer to pay the buyer’s closing costs or pay points for the buyer to get an FHA or VA loan. Another option would be to pay for a 2/1 buydown that would lower the buyer’s payments in the first two years of the mortgage.

Buydowns can be temporary or permanent and are achieved by pre-paying the interest at the time of closing. Typically, the seller will do this as an inducement to the buyer. While individual lenders set the price for permanent buydowns, a common rule-of-thumb would be two points, or two percent of the mortgage amount, to buydown the rate 0.5% for the life of the mortgage.

A more common type of buydown is a 2/1 where the payment is calculated at 2% lower than the note rate for the first year and 1% lower for the second year. The third and following years, the payment would be calculated at the note rate.

In the example above, the seller would pre-pay the interest on the buyer’s mortgage for the first two years to subsidize the difference in the note rate and the payment rate.

A 2/1 buydown is a fixed interest rate mortgage where the buyer must qualify at the note rate. It is a standard, conforming loan and applies to FHA, VA, or conventional. The benefit is that the buyer will have lower payments for the first two years which can help them settle into the home and not exhaust their resources initially.

Closing costs and pre-paid items are commonly included in seller-paid incentives for the buyer. Many times, they are described in the listing and/or sales agreement as "Seller to pay up to $X,000 in closing costs or pre-paid items on behalf of the buyer."

The benefit to the buyer is that less money is needed to close the loan. Lenders are agreeable to this type of provision if it is stated in the sales contract.

Car dealers have been providing incentives in the form of upgrades, below market interest rates, pre-paid regular service for a period, and other things to incentivize a buyer to purchase now. It is also common practice for new home builders to do the same.

In the resale home market, while these things have been done in the past, there wasn’t a need for sellers to incur the additional expenses with such a short supply of homes. The market certainly changed in 2022 with fewer qualified buyers in the market due to the higher interest rates. Now, sellers are starting to offer incentives but regardless, buyers can include the incentives in a sales contract for the seller to consider.

Your agent will be able to help you understand what things are common in your market to help with some of the concerns facing buyers today.

The TCJA of 2019 dramatically increased the standard deduction so that many homeowners benefit from taking that rather than itemizing their deductions. Taking the standard deduction may result in a larger deduction even if you have no expenses that qualify for claiming itemized deductions.

Another thing reinforcing taking the standard deduction was low rates at the time and the interest plus property taxes were less than the standard deduction.

In 2022, mortgage rates more than doubled, so, anyone who purchased a home or refinanced at the higher rates might benefit from itemizing rather than taking the standard deduction. The takeaway in this article is to compare both methods each year to see which way provides the larger deduction.

For 2022, the standard deduction for married couples filing jointly is $25,900, for single filers and married individuals filing separately is $12,950, and for heads of households is $19,400. There are increased amount for seniors over 65.

Mortgage interest, points paid to purchase a home (paid by seller or buyer), and property taxes are deductible on Schedule A. Other items allowed as deductions are charitable contributions, medical expenses in excess of 7.5% of taxpayers’ adjusted gross income, and casualty and theft losses from a federally declared disaster.

In 2019, IRS reported that 89.5% of people took the standard deduction which is easier to file, doesn’t require receipts, and may yield a higher deduction than itemizing but the only way to be sure is to compare both ways.

For more information, download Publication 529 or contact your tax professional. Download our Homeowners Tax Guide for more information on homeowner taxes.