Jim Valentine: Lending in Today’s Market
Jim Valentine on real estate
Many buyers expect rates to drop in the near future. What is the near future? Maybe, the next two to five years. If they fall 1.5% or more, it will be profitable for them to refinance at that time at the then lower prevailing rate. What are they doing in the meantime? Remember adjustable rate mortgages? Yes, those loans that start at a low interest rate and then grow with the market.
Many buyers obtain ARM loans knowing that they will cost less in the interim while waiting for rates to drop than if they obtained the loan at the typical going rate. If you’re considering getting an adjustable rate mortgage, there are a few things to consider. Look at the starting rate, that’s what you’ll qualify for. Look at the adjustment parameters of annual or semi-annual interest rates, how much they can increase or decrease in a given period. Adjustment limits should be reasonable, ie no more than 2% or less. Some of these loans will convert to fixed rate after some time.
Look at all the details when evaluating the loan. Once you know the details, assess the cost of the loan and see how you will be affected over the expected period before you refinance or sell the property. Then you can consider the current price of the property. If the value is down 10% from two months ago, you might find very favorable numbers with which to make your purchase. These numbers should include what your closing costs and payout would have been in the prior market given prices and interest rates compared to where they are today when you structure your purchase.
Some borrowers choose to pay points to redeem the rate. By doing so, they eliminate the risk of being dependent on an interest rate adjustment, as this allows you to secure a fixed rate loan for the period of time you choose to repay it i.e. say 15 or 30 years. Buying a reduced rate costs money upfront, but when you take this course, you’re looking at a longer holding period and it will pay off over time. Each point represents 1% of the loan amount. Discuss with your lender what it would take to buy the rate up to a point you are comfortable with and how the process would work for you. You can usually include your paid points in your loan amount if you have enough “skin in the game”.
Remember the real but intangible value of the emotional return on your investment. If you are able to buy a home and have the security of not being evicted, enjoy the improvements you make to the property, and the pride of ownership you and your family will feel, you will have an additional return. on your investment in your home far beyond the obvious financial return. Only you can measure this investment reward, so be sure to personally reflect on this concept during the process of evaluating your purchase money loan.
Real estate and loan markets will always change. You know that the only thing that is constant is change itself. With that in mind, be flexible in your approach to the market and adapt to what happens when the time is right for you to buy. You will always be right if you wait to act because you will never know whether your action taken or not is right until years have passed. Without glaring signs to the contrary, it’s usually in your best interest to take the initiative, be proactive, and take action. Make your plan and work your plan. History shows you’ll be glad you did more often.
When it comes to choosing professionals to help you with your real estate needs… experience is priceless! Jim Valentine, RE/MAX Realty Affiliates, 775-781-3704.[email protected]