Navigating a Home Loan

In an article from the The New York Times, the topic of closing costs is explained, with emphasis on how to handle high closing costs.

Closing costs can increase the price of a home by as much as $10,000, sometimes more. Borrowers who are “cash-poor” can ask for assistance, or talk to their lender about a lender credit toward closing costs.

Some lenders advertise that if borrowers agree to accept a mortgage interest rate from a quarter to a full percentage point higher than they would ordinarily qualify for, they can receive credit toward their closing costs.

These mortgages are sometimes called no-closing-cost loans, though the term is misleading. The credit usually covers only fees charged by the mortgage broker or bank, like the loan origination fee, the underwriting expense, and the appraisal. That generally leaves title insurance, mortgage-recording taxes, insurance, and escrowed taxes to cover.

The amount of credit depends on total closing costs and other loan details. Generally, for every one-eighth of a point increase in interest rate, borrowers receive a credit worth half a percentage point of the principal amount.

While these mortgages can be helpful to some, borrowers should carefully review all the details. There are pluses and minuses to these loan types. A downside is the higher rate and monthly payments remain in place through the life of the loan.

Doing a side-by-side comparison of loans with and without the credit can be helpful.

Why Home Values Are So Misunderstood

Home values – it's a topic we hear about a lot in the news, and one of great concern to home buyers and sellers, but one I feel many people gravely misunderstand. A survey released last week from Zillow underscores this misunderstanding.

The survey's headline reads: "42% of Home Buyers are Unrealistic About Home Value Appreciation," and goes on to explain that despite the recent economic downturn and volatility in the nation's housing markets, 42% of those surveyed said they believe home values typically appreciate by 7% per year.

On a national level, home values declined for five consecutive years during the downturn. Historically, in a "normal" market, home values tend to appreciate at an average 2-5% per year. What is it that creates such an unrealistic view on home values – even now as much of the economy is still suffering?

Psychology of ownership: I think part of the reason home buyers are so optimistic about values appreciating is because they truly believe in the value of home ownership. In their minds, owning a home is the ultimate economic security, and one that will return financial value to their lives in many ways. Because it is so valuable to them, they feel like the numbers on appreciation move faster than historically they have.

Leftover boom mentality: Many buyers today witnessed the insane appreciation seen during the 10-year housing boom. News headlines constantly read crazy stats like "California home values up 20% from a year ago." I think that collectively, we got used to this and quickly lost sight of history, which shows home values increasing at a much slower pace.

In a fast-moving society, home ownership is a slow means of financial gratification. However, even the stock market requires 10+ years to truly profit for the average investor. But you'd never know that by the programs you see on TV and the offerings of being able to pick and trade stocks online while you eat lunch.

I think it's important as real estate service providers to give consumers the context around home values and what is so-called "normal." Home ownership is a long-term investment that should be made first and foremost as a way to provide a stable place to live, then secondly as a way to create financial security. We can't let consumers assume that buying a house is their ticket to retirement, just like we can't let them assume that values will continue to decline forever.

A house is a different kind of asset than other financial investments. You can't unload a house like you can with other investments. And home values only really matter when it's time to buy or sell anyway. I say we promote the true value of owning a home as what it was always meant to be: owning your own home, the place you live, the place where you build a family and create your life's memories. If its value appreciates in the process (which, historically, it normally does over the long-term), then that's great. But keep those expectations in line with reality and don't make any buying decisions based on what you think the resale value will be a year from now. That's just the kind of boom mentality that got us into this mess in the first place.

We Can Sell Anything ... if the price is right...