12/08/06

How Much House Can You Afford?

The affordability factor is generally one of the first steps lenders look into to determine if a person can purchase a house.  The lender will compare the income of the borrower versus the anticipated debt the borrower will carry.  These are called debt-to-income ratios and there are two numbers that are calculated. 

First is the housing payment, called the front-end ratio.  The front end ratio is the borrowers gross income (pre-tax income) divided by the anticipated housing payment, including principle, taxes, insurance, mortgage insurance (if applicable) and HOA dues (if applicable).  This percentage is generally around 33% but can be flexible based on the borrowers amount of reserves, or liquid assets, one has to fall back on.

The second is back end ratio, which calculates the housing payment plus monthly consumer debt, such as car payments and credit card payments.  Auto or life insurance is not considered consumer debt.  A common ratio for the back end is 38%, or 38% of one's gross income can be allocated towards consumer debt and housing payment. 

Remember that these are just guidelines!  There is plenty of flexibility in the mortgage industry today, so it is best to talk to a qualified loan specialist.  The payment or as reserves, the more flexible a lender will be. 

Example:  You make $5,000/month gross income.  Based upon a 33% front-end ratio, and a 38% back end ratio, your maximum housing payment should be around $1,650 or 33% of your gross income including principle, interest, taxes, insurance, mortgage insurance, and HOA dues.  Your consumer debt plus housing payment should be around $1,900 or 38% of your gross monthly income.

****Trivia Question****  (We will select a winner to receive a $10 Starbucks Gift Certificate.  Email answers to jvolkert@capitalaccess.org

Who was the last Professional Golfer to win the Grand Slam (The Masters, The PGA, The British Open, and The US Open all in the same calendar year?)

          A.  Tiger Woods

          B.  Ben Hogan

          C.  Jack Nicklaus

          D.  No one has ever won it

          Check back next month for the answer!

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11/27/06

Now Is a Good Time to Buy a Home 

Are housing consumers suffering from some form of “market psychosis”?

 During the recent boom years in 2003-2005, sellers were calling the shots – dictating prices and terms to multiple bidders who were knocking down their doors in many markets. 

Today, with the real estate market slowing in many parts of the country, all the market fundamentals show that buyers are now in the driver’s seat. Consider the facts: prices are competitive, interest rates are very affordable, there are plenty of homes in all price ranges to choose from and sellers are ready to bargain.

So why are many prospective home buyers having second thoughts?

It appears they are letting emotions overtake common sense. For instance, many home owners who are looking to sell and trade up to a better house are hesitating because they have seen the value of their current home drop from peak levels.

“If my neighbor sold his house for $250,000 six months ago, why should I have to settle for $225,000 today?” But waiting out the market to recoup a $25,000 “loss” could prove to be a poor decision.

While the value of the buyer’s house may have fallen, that so-called loss has probably already been more than offset by a reduction in the price of the home he is thinking about buying. Furthermore, if he waits too long, he may lose out on the price advantage that currently exists.

First-time home buyers who are choosing to “play it safe” and keep renting are essentially postponing the opportunity to build household wealth. Also, in the current marketplace, with rental vacancy rates tightening, they can probably expect to see a healthy increase in the rent they pay.  No one can accurately predict the peaks and valleys of the housing market. If you sit on the fence and wait for the absolute best deal, you could end up literally waiting for years, and in the meantime miss out on the opportunity to become a homeowner while prices are moderating.

Not to be overlooked are the tremendous tax benefits received by homeowners as they accumulate equity in their homes. History shows that buying a home is one of the very best financial investments available to a typical household, and a relatively small downpayment enables the buyer to see appreciation on the entire value of the property.

 Though local housing markets periodically adjust according to overall economic conditions, over the long term real estate has consistently appreciated. On a national level, home appreciation has historically risen 5-6 percent annually. At that rate the value of a home doubles every 13 years. Not only is homeownership a stepping stone to a future of financial security, it provides a permanent place to call home and enormous personal satisfaction. 

In today’s housing market, the real risk is in waiting to buy a home. We know that interest rates are low today. We know that home prices are leveling off and even declining in some markets. We know that there are plenty of homes on the market to choose from. We know that sellers are willing to bargain. And we know that builders are willing to offer attractive incentives to get your business.

Any or all of these favorable variables could change for the worse six months from today.

(this article was originally published by the HBA)

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11/16/06

Mortgage Market Trends

Welcome back to reality folks. The holidays are here, the parties are here, and my pants are much tighter. So what does the New Year have in store for mortgage rates and the overall economy? Let’s take a closer look.

First let’s look back on what got us to where we are today. At the beginning of 2006 the national economy was experiencing significant growth and all indications were that mortgage rates would hit and possibly even exceed the 7% mark on a 30-year term by the end of the year. Obviously we never made it there and that is because our economy slowed towards the middle of  the year (as a rule, bad economic news is good for home loan rates, while good economic news is bad for home loan rates). After peaking in the upper 6% range, rates began to drop in May/June and in September of 2006 rates reached down to below 6.5% which were as good as they were at the beginning of the year.

We start the new year right where we left off with a slowing economy and inflation levels that are closer to what the Fed has been aiming for, around 2.8% (although the Fed would like to see inflation in the 1 – 2% range). Although there is a chance that economic growth could stall, it looks like we are achieving the nice soft landing that the Fed hoped for. This is all good news for home loan rates for the foreseeable future.

At the time of this writing, rates were as low as 6% for our prime borrowers. While this may not sound like those phenomenal 5% mortgages we saw a few summers ago, by historical standards rates are fantastic right now. If you look back even six years ago mortgages were selling at the 8.5% level.

All indications are that home loan rates should remain relatively stable for the next year and even beyond. Although we will likely see some small increase, especially towards the end of 2007, rates are creating a very strong foundation for a resurgent home building and real estate market. With consistent job growth I am confident Denver’s home building market is poised for significant growth in the coming years.

Did you know:   Many homeowners ARM programs will be maturing this year and their rates could increase as much as a 2 – 3%. Since their payments will be going up anyway (and significantly at that), this is a good opportunity to advise your prospects that are on an ARM to consider purchasing now on a very low fixed rate program.

 Jeff Volkert is the Builder Relations Manager for Capital Access Mortgage a locally owned mortgage banker/broker. He specializes in helping builders grow their business by offering award winning service and access to an extensive portfolio of residential and commercial mortgage programs. He can be reached at 303-357-8136 or jvolkert@capitalaccess.org.  

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