Homes You Can Own for $1,500 a Month

The Case for Renting: Homeownership Isn't for Everyone

Shirleen Holt’s relief at returning to renting is typical of many former homeowners.

No more fixing leaky faucets; no more time-consuming projects.

A marketing consultant who recently moved to Ashland, OR, Holt expects to own again, but for now she is thoroughly enjoying the renter’s life.

“When something goes wrong, I just call the landlord,” she says. “That right there is worth an extra $100 a month.”

It’s a practical reflection of the added bother and expenses that accompany owning a home.

Although owning is nearly twice as affordable as renting when it comes to monthly payments, those figures don’t tell the whole story. Some people say they’ve made more money – and even become millionaires – because they switched from owning to renting. They invested down payments and other money that went toward mortgages, taxes, insurance and maintenance, and they came out ahead.

The American Dream?

It’s a point of view not often heard in the United States. Although the U.S. homeownership rate has been about 65 percent for the past three decades, lower than in many other countries, our culture continues to value homeownership as a component of the American Dream and a way to reach financial stability.

That’s worth reconsidering, Zillow CEO Spencer Rascoff and Chief Economist Stan Humphries argue in their book, “Zillow Talk: The New Rules of Real Estate.” An entire chapter is devoted to the idea that homeownership should be uncoupled from the American Dream.

“Buying a home is a gamble,” they write. “It’s a gamble that we will want to keep living in one place – and keep making the mortgage payments that come with it – for years and even decades into the future.”

For low-income people, in particular, homeownership can pose too much risk. Rascoff and Humphries say that’s why subsidies for low-income families to buy homes in low-income neighborhoods, where housing values can be more volatile, often hurt the people they say they’re helping.

The risk also doesn’t make sense for people in other situations – for example, those who lose a job and are more likely to move to take another position than to get by on savings until they find work where they live, and those who do not have the savings to sustain a financial hit without downsizing, Rascoff and Humphries explain.

Money matters

Staying put long enough to gain equity is the key to making homeownership a good financial choice – something Zillow lays out in its breakeven analysis, and which strongly influences savvy renters.

“Because mortgages these days are very heavily front-loaded with interest, many homeowners are throwing money away just like they say renters are,” says Kelly Phillips Erb, a tax attorney who rents an old farmhouse outside Philadelphia.

It’s true that homeowners can deduct interest and property taxes, but only if they are itemizing their deductions. That tends to be most beneficial in the early years of homeownership, when the interest portion of mortgage payments is more likely to exceed the standard deduction. That’s also when people are gaining the least amount of equity.

Additionally, home improvement costs are not recouped as frequently as some people think via capital gains breaks after a home is sold, Phillips Erb explains.

A difference in perspective

Owning a home made sense for earlier generations in part because they took out 30-year mortgages and actually lived in their homes for 30 years, gaining enough equity to make the purchase worthwhile, says Phillips Erb, who writes a column for Forbes.com.

That plan can still work – but people do not stay put the way they used to. They move, they restart the 30-year clock by refinancing and they spend their home-sale gains on new cars and vacations rather reinvesting them into another home.

Brian Stoffel, a writer for The Motley Fool who preaches the pro-rent word, rents in Wisconsin and Costa Rica, but says he and his wife might yet buy a home. They believe their down payment would fare better in the stock market (something “Zillow Talk” refutes), but they want a stronger sense of community.

“When we think about why we put money in the stock market anyway – to provide what we want or need in our life – it seems silly to not own a home just so we can have more money,” Stoffel says.

Phillips Erb, the happily renting tax attorney, thinks renters could save money by shopping around and even negotiating with landlords.

“People will search two years for a house but one month for an apartment,” she notes. “I don’t think the market is so inelastic at this point – depending on where you are – that you can’t research where you want to be and figure out what you’re willing to pay.”

Related:

• 15 Cities Where Renting Rules
• Which Makes Sense for You: Renting or Buying a Home?
• 6 Ways Renters Can Get the Most for Their Money

from Zillow Porchlight https://www.zillow.com/blog/the-case-for-renting-168796/

Lauren Conrad Lists Pacific Palisades Home for $5.195M

Should I Buy Down My Rate After 2017 Fed Rate Hikes?

Rates are up .5 percent so far in 2017, and could go higher. This raises the question of whether it makes sense to buy your rate down to control your mortgage costs. Let’s review the market outlook, then answer the question.

Where are rates headed from here?

Rates are tied to daily trading in mortgage bonds, and rates rise when bonds sell on improving economic sentiment - this has been happening in 2017.

Concurrently, the Federal Reserve controls short-term rates in the economy using overnight bank-to-bank lending rates. They hike these rates when they believe the economy is improving. Even though mortgage bonds represent longer-term rates, these Fed hikes still fuel selling of mortgage bonds, pushing mortgage rates higher.

The Fed began hiking rates in December, and has indicated continued hiking if economic data stays positive. Their next three rate policy meetings are March 15, May 3, and June 13.

Mortgage rates will rise as the Fed’s economic tone becomes more optimistic. The Mortgage Bankers Association calls for rates to rise about 1 percent in 2017 versus 2016, and we’ve only seen half of that so far.

With many signs pointing to higher rates, let’s address the rate buy down question.

What is buying down my rate?

“Buying your rate down” or “paying points” means you’re paying an extra fee on top of standard loan fees like appraisal, underwriting, and credit report to get a lower rate.

If you were getting a 30-year fixed loan of $325,000, you might get two options with and without points. Today the option with zero points might show the rate as 4.25 percent, and the option with 1 percent in points - equal to $3,250 - might show the rate as 4 percent.

Paying $3,250 at closing to lower your rate by .2 percent lowers your payment $42 per month, and lowers your interest cost $68 per month.

How do I calculate if I should buy my rate down?

To determine if you should buy down your rate, calculate how long it takes your monthly interest cost savings to repay the cost of the points. In our example, we divide the $3,250 you’re paying at closing by the $68 in monthly interest cost savings, showing it takes 48 months for the interest cost savings to repay the points.

If you’re going to live in the home longer than four years, then paying the points makes sense. Note, however, that it doesn’t make sense if you’re getting a 5-year ARM instead of a 30-year fixed - because the 5-year ARM would adjust to a higher payment just one year after you broke even on buying your rate down.

What are the dangers of buying down the rate?

Work with your lender to calculate how long it takes interest cost savings from paying points to repay the points. If you’re in the home (or the loan) longer than this breakeven timeline, you won’t lose money.

But if rates drop after you pay points, your risk is that you’d need to spend money on a refinance to keep you in the market, but that refinance cost could come during the time you’re still waiting to break even on the points you paid.

Given the rate projections noted above, that risk is low for now.

What if I need to buy down my rate to qualify?

Rising rates make your payment higher, which reduces your affordability.

Lenders allow you to spend up to 43 percent of your income on housing and non-housing bills each month. If rising rates don’t push you over this threshold and your budget is still manageable, you can proceed.

But if rising rates push you over this qualifying threshold, you don’t have to rely solely on buying your rate down to qualify.

You can also reduce your purchase price. Or if you don’t want to resort to that, the smartest way to qualify is to find other debt to trim.

How do I know if a rate buy down is being disclosed to me correctly?

Federal law requires lenders to give you a disclosure called a Loan Estimate within three days of a complete loan application.

The Loan Estimate’s second page shows Points in the top left section called Loan Costs. This will show the exact percentage of the loan amount for any points being quoted. It also shows the dollar amount of the points.

Looking for more information about financing a home? Check out our Mortgage Learning Center.

Related:

• When You Should Buy Down Your Interest Rate
• How 2017 Rate Volatility Impacts Home Affordability
• Home Buyers: 5 Things to Know As You Wait for Closing Day

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

from Zillow Porchlight https://www.zillow.com/blog/should-i-buy-down-my-rate-213670/

How 2017 Rate Volatility Impacts Home Affordability

Rising mortgage rates decrease how much home you can afford, but you have more flexibility than you might think because of how lenders qualify you.

Let’s recap the wild ride rates have been on since November, then review how this impacts affordability, and how you can qualify for the most home possible.

2017 rate recap and outlook

Mortgage rates rose .75 percent between the election and Christmas last year, driven by a belief that the new administration’s proposed policies of infrastructure spending, tax cuts, and deregulation would be inflationary if enacted.

Rates rise on inflation threats, and this is what happened post-election.

We said back then the dramatic rate spike might level off, and now that’s happening, albeit in a very volatile way. Rates are up and down daily as investors react to new government policies. One day investors bet inflation will be muted by policy delays or roadblocks (lower rates), and another day investors return to the post-election inflationary bet (higher rates).

The net effect is that rates are off post-election highs, and now are up about .5 percent since the election.

Rate volatility will continue as investors and the Federal Reserve try to predict rate direction under the new administration, so let’s see how it impacts your home-buying plans.

How rates impact home affordability

On a $350,000 home purchase with 20 percent down, a rate spike of .5 percent reduces the home price you can afford by about $17,000.

This measure can make you think you’re doomed to a smaller house or worse neighborhood. But if you understand how lenders think, you can find solutions.

Mortgage lenders use a debt-to-income (DTI) ratio to qualify you, meaning they divide your bills (for housing, car payments, credit cards, etc.) by your income to get a percentage of how much of your monthly income you spend on bills. Most lenders don’t lend to you if your monthly bills are more than 43 percent of your income.

If you earn $65,000 per year and have car, student loan, and credit card bills totaling $615 per month, you qualified for that $350,000 home purchase when rates were .5 percent lower, but now you don’t.

The reason: your DTI percentage was below 43 percent pre-election, but now it’s above 44 percent after rates rose.

On the surface, the only solution would be to reduce your purchase price by $17,000 to $333,000 to get your DTI back below 43 percent.

How to increase home affordability

But instead of reducing your price by $17,000, you can reduce your other non-housing bills.

For example, let’s say your credit card payment was $125 on a balance of $3,125. You need to get that payment down to $45 to qualify for your original $350,000 home purchase price, and you can do so by paying down the balance by $2,000.

That’s a lot better than reducing your purchase price by $17,000, and if you’re light on cash, you can negotiate a seller credit at closing to recoup the $2,000.

How to make the right decisions

Just like all real estate is local, all lending is individual.  So don’t automatically assume rising rates push down the price you qualify for.

A good lender will examine your full financial profile and goals, then dive into the math to find solutions for you.

Looking for more information about mortgages? Check out our Mortgage Learning Center.

Related:

• 5 Questions to Ask Potential Mortgage Lenders
• 3 Common Mistakes First-Time Home Buyers Make
• Can I Buy a House with Bad Credit?

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

from Zillow Porchlight https://www.zillow.com/blog/rate-volatility-and-affordability-213488/

City Living Costs Families Up to $9,000 More a Year Than Suburban

Urban living has its perks, but they come at a cost: It turns out families spend $9,073 more a year to cover basic living expenses in the city than in the suburbs, according to a new analysis from Zillow and Care.com. Those costs include mortgage payments, property taxes and child care.

The urban-suburban disparity varies considerably depending on the metro area.

In the New York City area, families spend $71,237 more a year to cover living expenses in the city than in the suburbs. That’s nearly $6,000 extra each month. In Chicago, the city costs $18,472 a year more, and in Dallas, it’s $14,128 extra.

For some metros, the opposite is true. The cost of living in the suburbs of Philadelphia, for example, is $13,849 a year less than living in the city. In Baltimore, living expenses in the suburbs are $10,790 less, and in Cleveland, they’re $9,034 less.

Home costs are a big part of the equation. Nationally, the median property taxes and mortgage payments on an urban home totals more than $22,000 a year, which is $7,000 more than the median homeowners would spend on a suburban home.

Lower child care costs in the suburbs can offset the mortgage and taxes. In Minneapolis, for example, the annual cost of housing is similar between urban and suburban areas, at just under $15,000. But in the suburbs, families with two children can save $4,119 a year on a child care center or $1,759 a year on a nanny.

Most homeowners live in the suburbs, with just 23 percent choosing urban settings, according to the Zillow Group Housing Trends Report. Millennials lean more heavily toward city living (33 percent), but nearly half of them live in the suburbs — where they are making their mark by opening high-end restaurants and other businesses.

Check out more insight into metro-level child care data from Care.com.

Related:

• Millennials Drive the Housing Market, and More Surprises From Zillow Research
• America’s Most Competitive Renters: Why Many Are Choosing to Rent
• Why May Is the Magic Month for Home Sellers

from Zillow Porchlight https://www.zillow.com/blog/cost-of-living-report-213208/

What Is the Difference Between Interest Rate and APR (Annual Percentage Rate)?

Home shoppers who have begun looking into mortgages often wonder about the difference between interest rate and APR (Annual Percentage Rate). Basically, think of the interest rate as the starting point in what you will pay for a mortgage loan, then tack on associated fees to calculate the APR.

To better understand these concepts, let’s begin with some definitions:

What is the interest rate?

The interest rate is the percentage of the loan amount that is charged for borrowing money. We can consider this the base fee.  It is very important when comparing loan quotes since it directly affects monthly payments.

What is the APR (annual percentage rate)?

The APR is a calculated rate that not only includes the interest rate but also takes into account other lender fees required to finance the loan.  The idea behind APR is to help consumers understand the tradeoffs between interest rate and the fees paid at closing (such as paying higher fees to lower interest rates or increasing interest rates to cover closing costs).  The government thought this was important so they required it to be shown next to the interest rate as part of the Truth in Lending Act.

How APR is calculated?

Conceptually:
To calculate the APR, the lender fees (fees required to finance the loan) are incorporated into the interest rate.  This is done by amortizing the fees out over the life of the loan as if they were additional payments, and then calculating a new rate.

Specifically:
The fees are added to the original loan amount ($200,000 + $3,000) to create a new loan amount ($203,000).  This new loan amount, along with the interest rate (5.00%), is used to calculate a new monthly payment ($1,089.75).  The APR is then calculated by working backwards to figure out what the rate would have to be for a loan with the new monthly payment ($1,089.75) and the original loan amount ($200,000).  This is your APR (5.13%).  The APR is typically higher than the interest rate because it includes the fees.

Limitations of APR

As useful as the APR can be, it has its limitations.  APR spreads the fees paid upfront over the life of the loan.  So the comparison of APR is only accurate if you plan to keep the mortgage for the entire length of the loan.  Since most borrowers do not keep their loan for the full period (they typically refinance or move), the APR can make some loans look artificially better.  In the example above, if you only kept the loan for 3 years, the second loan would be much more expensive even though it has a lower APR.  This is because the $6,000 in fees is paid upfront whereas the higher interest rate in the first loan is amortized over the life of the loan.  See my post on whether or not you should pay points to learn more about the tradeoffs of paying interest upfront vs. over the life of the loan.

The other problem with APR calculations is that different lenders may include different fees in their APR calculations for various loan programs.  Remember to always ask your lender what is included and not included in your APR.

You can search for lenders on Zillow and review different loans by APR.

from Zillow Porchlight https://www.zillow.com/blog/what-is-the-difference-between-interest-rate-and-apr-annual-percentage-rate-1005/