The case for 15-year fixed-rate mortgages has never been stronger because, in the post-crisis market, the rate advantage over the 30-year has never been larger. The rate advantage is about 0.875 percent, whereas prior to the crisis, it was 0.375 percent to 0.5 percent.
Consider two $100,000 loans, one a 15-year at 3.125 percent and the other a 30-year at 4 percent. The respective payments are $696.61 and 477.42. After 15 years, the borrower with the 15-year loan has paid $39,454 more but is out of debt whereas the borrower with the 30-year loan still owes $64,543.
But there is a counterargument. A disciplined borrower can choose the 30-year loan and invest the difference in payment between the 30- and the 15-year loans, in that way offsetting the higher interest rate on the 30-year loan. Some financial planners recommend this approach to their clients as part of a program to build wealth faster.
The challenge in making such a program work is that the rate of return on the invested cash flow must exceed the rate on the 30-year loan by an amount that depends on how much higher the 30-year rate is than the 15-year rate.
For example, in 2006 when I first looked into this issue, I used rates of 6 percent and 5.625 percent on the 30- and 15-year loans. I found that over a 15-year period, the cash flow savings had to yield 7 percent, or 1 percent more than the rate on the 30-year loan, to just offset the higher interest rate on the 30-year loan. This can be termed the break-even return on the cash flows. To come out ahead, the borrower has to earn a return above the break-even return.
I recently repeated the exercise using rates of 4 percent on the 30-year loan and 3.125 percent on the 15-year. With these rates, the break-even return is 6.15 percent, or 2.15 percent higher than the rate on the 30-year loan. The larger rate spread between the 15- and 30-year loans increases the difficulty of developing a profitable reinvestment strategy.
The challenge looms even larger if the borrower holds the mortgage for less than the 15 years I assumed. The break-even rate is higher over shorter periods because the difference in the rate at which the 15- and the 30-year loans pay down the balance is largest at the outset and declines over time. The shorter the period, the higher the reinvestment rate must be to offset the larger difference in balance reduction.
Average mortgage life today is somewhere between five and 10 years. At 10 years the break-even rate rises to 8.02 percent, and at five years, it jumps to 13.69 percent -- a whopping 9.69 percent above the rate on the 30-year loan.
These calculations assume that the borrower makes a down payment of 20 percent or more. If the down payment is less than 20 percent, the borrower must pay for mortgage insurance, and the premiums are higher on the 30-year loan.
For example, if you put down 5 percent and pay standard insurance premiums, the break-even rate rises from 6.15 percent to 7.01 percent over 15 years, from 8.02 percent to 9.56 percent over 10 years, and from 13.69 percent to 16.88 percent over five years. Note: All the break-even rates shown above are derived from calculator 15b on my website.
These required returns are forbiddingly high for any borrower who would invest the cash flow savings by acquiring financial assets. There is no way a borrower can earn such returns without taking very large risks. Most borrowers probably fall into this category.
But there are some borrowers for whom the cash flow reinvestment strategy might make sense. One is the borrower who is eligible for but not currently utilizing IRA, 401(k) or other qualified tax-deductible or tax-deferred plans. Borrowers who use their cash flow savings to invest in these vehicles, who would not do so otherwise, can earn a very high rate of return because of the tax benefits. If the borrower's employer makes matching contributions, the return is even higher. A second category of borrowers who can earn a very high rate of return are those with high-cost debt. A borrower paying 18 percent on credit card balances earns a return of 18 percent by paying down the balances.
In my 2006 article on this topic, I argued that borrowers who have not fully exploited all tax-advantaged investments, or who have high-rate credit card balances, are unlikely to have the iron discipline required to invest the cash flow savings on their mortgage month after month. But the financial planners who wrote me argued that they have developed special plans for borrowers in such situations that provide the discipline that is required. But until I see such plans along with evidence that they work, I will remain skeptical.
Rental search site Rent.com has identified 10 metro areas it says are "wonderful places to create a fun and affordable lifestyle" for those just tying the knot. Six are in the South, including three in Texas; two are in the Midwest; and two are in the West. No metro in the Northeast made the list.
The site chose the metros based on availability of rental inventory, cost of living, annual average wages and unemployment rates. After choosing the top 25 markets by rental availability, the site compared the remaining three factors for the metro to national averages, giving unemployment double weight. The 10 resulting metros are not ranked in any particular order.
In addition, market research firm RedShift Research conducted an online survey of 1,000 cohabiting couples in November 2010 on behalf of Rent.com. The vast majority of respondents were married, 92 percent, while 2 percent were engaged and 6 percent were neither.
According to the previously unreleased findings, 75 percent of all respondents reported that their quality of life had improved since moving in with their significant other, while the remaining 25 percent reported that they found cohabiting "stressful," the site said. The principal stressors for this group included not having their own space (cited by 42 percent), sharing household expenses (33 percent), and divvying up household chores (25 percent).A majority of all respondents, 62 percent, said their financial situation had improved as a result of moving in with their significant other.
When it came to combining household items, 62 percent of all respondents said they kept everything from both previous homes when moving in together. Nearly a fifth, 19 percent, said they got rid of almost everything previously owned and bought new items, according to Rent.com.
Q: I have a house that I don't want to sell right now, but I would like to move and am thinking of renting the house. I hear terrible stories about renters, in which they destroy the property and don't pay the rent. What have you heard? Are there any experiences that can be shared?
A: Interestingly enough, I've actually had exactly this thought process myself! My father was (and is) an avid real estate investor, and as a child I frequently accompanied him on trips to check on his investment properties. Boy oh boy, the things I saw! Broken windows he felt responsible to replace, filthy flooring, the list goes on.
Recently, I've thought about renting out my own home for a short period of time, and decided against it, for the time being, due to some of the same concerns. A friend reported that her mother recently had to spend $10,000 to refurbish a home she'd leased out while she was thinking about whether to sell it, due to tenant damage. I took my own friends' and clients' experiences and talked with my dear (not-so) old dad and put together this list of 5 suggestions to helping you make the decision about whether to rent yours, and how to minimize the tenant issues you fear, if you do.
1. What's the current state of your state? Ultimately, the reason I decided against doing a short-term rental of my own home is that I'd just spent six figures completely renovating it, and couldn't afford to have someone trash it for the upside of a short-term lease. And none of the stuff in my home is really tenant-proofed (see No. 2, below), so I also had to take that into consideration. If you feel like the property has pricey upgrades that would be relatively destruction-prone, factor that into your decision-making, and into the deposit and monthly rent price you set if you do decide to rent it out. If the paint and flooring is livable, but you'd want to upgrade it before you sell, renting it out in its current condition might make sense.
2. Research your local rental market. Talk to a realtor who specialize in rentals to get estimates of how rentable the place is, and what rent you can realistically expect to receive. Then, before you make a decision, do a conservative cash flow analysis, getting clear on what you think you could rent the place out for and how that maps against your existing monthly obligations, like your mortgage payment (if any), property taxes and insurance, as well as any increased expenses you'll have for maintenance or property management. Talk with these same local professionals or visit your local landlords association and request a briefing on whether there are any rent- or eviction-control ordinances that would apply to your property. It can be extremely expensive to evict even nonpaying tenants in areas with tight eviction-control laws; that should definitely be a factor you toss on the scales as you balance the factors relevant to your decision.
3. Tenant-proof the place. My dad's experience has been that there are certain property features that make a place less prone to being completely annihilated by tenants. Replace carpet with tile, trade out fancy lighting fixtures and window coverings with standard issue equivalents, and if you have high-end appliances, consider switching them out for Craigslist buys. Keep in mind that if the property is a luxury home, and you plan to charge a premium rent for it, you might need to keep higher-end touches in it, even if that means putting them at risk.
4. Pick your tenant carefully. It's tough to rent any property you own out to tenants, but it's especially tough when that place is or once was your personal home. You might be especially anxious that they will destroy things that have particular personal value to you, and it's tough to know from someone's credit report how they will actually live in your home. Be mindful of this when you consider decisions like how to find a tenant (i.e., by posting a free ad or by hiring a property manager with a tough screening process for prospective tenants) and whether to allow pets. In fact, the landlords I know who have had the best experiences renting out their homes include people who found their tenants through their own personal on- and offline social networks. These anecdotes support the idea that there's something about the unwritten social contract involved in renting to a friend or a friend of a friend that boosts your chances of a successful landlording experience.
5. Consider "rent to own." Lease-options can be a great deal for all sides in the current market climate. You might be able to charge a premium sales price, and a renter who might not qualify for a mortgage right now because of a recent short sale or foreclosure might be able to move his or her family back into a long-term home.Also, even those lease-option tenant/buyers who end up not exercising their option to buy do tend to take better care of their homes than tenants who have no long-term interest in or commitment to the home. While I can't give you a concrete answer regarding whether to rent out your home, you should be able to use these steps and strategies to scope out the opportunity and how feasible and sensible it is for you.
When it comes to dating, homeownership can be the ultimate aphrodisiac. In a survey of 1,000 single people, more than a third of women and 18% of men said they would much rather date a homeowner than a renter.
Only 2% of women said they preferred to date a man who rents, while only 3% of men said they would choose a woman who rents over one that owns her home, according to the survey, which was conducted by Harris Interactive for real estate site Trulia. Both sexes also clearly prefer it when there's no roommate in the picture; 62% of survey respondents, men and women, prefer to date singles who live alone.
Five years after the housing bubble burst, America's wealthiest families are now losing their homes to foreclosure at a faster rate than the rest of the country -- and many of them are doing so voluntarily. Over 36,000 homes valued at $1 million or more were foreclosed on -- or at least served with a notice of default -- in 2011, according to data compiled by RealtyTrac, which tracks foreclosures. While that's less than 2% of all foreclosures nationwide, it represents a much bigger share of foreclosure activity than in previous years. "These properties are accounting for a bigger piece of the foreclosure pie," said Daren Blomquist, vice president of RealtyTrac.
Out of all foreclosure activity, the share of foreclosures on properties valued at $1 million or more has risen by 115% since 2007 while the share of multi-million dollar foreclosures -- or homes valued at more than $2 million -- jumped by 273%. Meanwhile, the share of foreclosures on mid-range properties valued between $500,000 and $1 million fell by 21%.
In addition, lenders are typically more amenable to working with homeowners that have other resources, said Ron Shuffield, president of Esslinger-Wooten-Maxwell, a real-estate firm in Miami where homes priced over $1 million represented 9% of all foreclosures last year.
Its no secret, men and women are wired differently. But recent research shows that when it comes to features that motivate them to buy, the connection between the sexes isnt a battle.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
While theres a small difference in what they love the most, our recent survey showed both men and women agree on which top features make them fall in love with a home.
When we asked first-time home buyers which home amenity would make you, personally, fall in love with a home?, here were the top answers:
While men and women agree that the master bath, walk-in closet and gourmet kitchen are top priorities when it comes to finding their dream home, not all features are created equal. Among the top features, women and men each showed they had a little more love for a few key features at the top of the list:
Modern gets the thumbs up. Spa-like and eco-sensitive, the New American Home 2012 being unveiled in Orlando this week by the National Association of Home Builders in conjunction with the International Builders Show, is a warmer take on the classic White Box of mid-20th century modern design.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
A lot of people want a spa feeling and a spa look thats very analogous to modern, said Luis Juaregui, a Texas based American Institute of Architects accredited architect. The 4,200 square foot, $3.5 million gray stone and glass home has free flowing entertaining spaces, floor to ceiling sliding glass doors, a stone staircase with open risers, clear glass balustrades and clean geometric lines, tempered by dark wood cabinets, area rugs and soft furnishings.
Still, to fit into more traditional looking neighborhoods, architects are increasingly going hybrid, mixing distinctly modern, techno-savvy interiors with colonial details, Tudor-style roofs or Craftsman-inspired touches on the exterior. A home to call ones own has long been part of the American Dream. But as tastes, technologies and regional preferences change, propelled by demographics and the socio-economic climate, the style, scale and comforts of that coveted real estate evolve.
During the bigger- is-better 1980s and 1990s, homes ballooned in size. Compact single story ranch and cape cod styles gave way to ever grander two-story neo-colonials. When the economic bubble burst, they retrenched. These days, downsizing is cool; supersized McMansions towering over smaller homes are not. Stephen Melman, director of economic services at the National Association of Home Builders said that houses shrank about 10 percent from their 2,500 square foot peak in 2007, and are expected to get smaller and more efficient with open floor plans, master bedrooms on the first floor and dining rooms distinguished only by a chandelier or architectural detail.
One-story ranch homes, post World War II suburbias signature easy style, are slowly regaining favor, thanks to first time buyers with tiny tots and aging baby boomers seeking accessibility.
Craftsman style homes, popular before World War II, are also enjoying a revival, said Gary D. Cannella, an architect in Bohemia, NY. Its the style not the size. Adaptable to sizable abodes or small bungalows, these one or one and a half story homes boast low-pitched rooflines, tapered columns, oversized eaves, gables and the front porches that everyone wants and no one sits on.
The split level, a hallmark of suburbia in the Brady Bunch era, is nearly obsolete. Despite the aerobic benefits of tri-level living, all you do is walk up and down stairs all day long, Cannella says. You cant go anywhere without steps.
So what do the new changes to the governments Home Affordable Refinance Program (HARP) mean for you? If youre an underwater homeowner, it could mean a lot. In fact, it could be the thing that finally allows you to refinance your mortgage at some of those all-time low interest rates youve been hearing about, but couldnt qualify for. Heres a look at some of the key elements of the changes to the government-backed mortgage refinance program, announced Monday by the Federal Home Finance Agency (FHFA).
The main thing is that you no longer have to worry about how far your home has fallen in value since you took out your mortgage. Previously, you couldnt get a HARP refinance if your mortgage balance exceeded your home value by more than 25 percent. That limit has been totally eliminated, meaning you can still refinance even if your home value is a third of what you owe on your mortgage, or even less.
The new rules waive certain fees charged at closing, particularly for borrowers who choose to refinance into 15- or 20-year fixed-rate mortgages. High closing costs have been seen as a barrier to refinancing under HARP, so the administration hopes that waiving these fees will enable more homeowners to refinance. Since home value is no longer an issue, appraisals are no longer required, as long a reliable automated estimate is available, though some lenders may still insist on one. There will still be some fees associated with closing costs on the new loan, which can be financed as part of the new mortgage.
The HARP underwater refinance is available only to borrowers who have mortgages backed by Fannie Mae or Freddie Mac. Since theyre already on the hook if the loans go bad, its in their interest to enable underwater borrowers to refinance so theyre less likely to default. It doesnt really matter to them if the interest rate is reduced, since the interest is paid to the investors who buy the guaranteed loans from Fannie Mae or Freddie Mac. You can find out if yours is a Fannie Mae or Freddie Mac loan at the agencies web sites.
To qualify for the new HARP refinance, you need to have been current on your mortgage payments for the last six months and been late no more than once in the past year. The mortgage must have been transferred to Fannie Mae or Freddie Mac no later than May 31, 2009. The mortgage must be on a one-to four unit dwelling that serves as your primary residence.
Underwater borrowers refinancing through the program will save an average of $2,500 a year on their mortgage payments, or more than $200 a month, according to Shaun Donovan, Secretary of the Department of Housing and Urban Development. The government estimates the changes to the program will benefit up to 1 million people, although Moodys Analytics puts the figure at 1.6 million. The Obama administration may be a bit cautious after their original estimates for borrowers helped by the current version of HARP and its companion HAMP loan modification program turned out to be too optimistic.
This is a significant change from the current HARP. The administration is encouraging underwater borrowers to refinance into short-term 15- and 20-year fixed-rate mortgages by waiving most or all program fees for those loans. The current program mandates that borrowers refinance into 30-year fixed-rate mortgages only. Homeowners will still be able to refinance into 30-year loans if they wish, but theyll have to pay more fees if they do. Combined with the ultra-low rates now available on 15-year mortgages, thats a significant prod for borrowers whove been in their homes a number of years to shorten up their term and start building back more quickly toward positive equity.
Fannie Mae and Freddie Mac are scheduled to provide full details of the program, including information to lenders, by Nov. 15. The FHFA says some lenders may be able to start offering the program by Dec. 1, although most estimates are of a rollout in the first quarter of 2012 for most participating lenders. Chase Bank and mortgage lender Genworth have already indicated they look forward to participating.
Like the current HARP, the new version is voluntary, so not all lenders may participate. But if you have a Fannie Mae or Freddie Mac mortgage, you can refinance with a participating lender even if your current one is not in the program. Because the program is voluntary, lenders may have their own requirements they overlay on top of the HARP guidelines, though there will likely be limits on what they can do. However, there will still likely be credit score and income requirements, the same as for any mortgage.
Its also not yet clear how the new guidelines will address loan-level price adjustments, which are tacked onto the interest rate to reflect certain risk factors. Since being underwater in itself is considered a major risk factor, interest rates offered to homeowners under the current program have sometimes been considerably higher than they expected, even above what they are currently paying. But if seriously underwater borrowers are able to get near-market interest rates when refinancing, this could be a real bonanza for financially stable underwater homeowners.
Florida remained the most popular U.S. property search destination among foreign house hunters during the last three months of 2011, according to a quarterly report from real estate technology and marketing company Point2.
Point2's International Real Estate Traffic Report, which debuted in December, tracks visits from non-U.S. consumers to listings pages on the company's public-facing property portal, Point2Homes.
During the fourth quarter. Point2Homes had an average of 800,000 U.S. listings, and international traffic accounted for 35 percent of traffic to the site.
The 10 most popular areas -- nine states plus Puerto Rico -- captured 84.9 percent of the site's international traffic overall, little changed from the third quarter of 2011 and the same period a year ago.
"International interest presents a good opportunity for the savvy (real estate) agent. Those who can effectively market to international buyers interested in their city, by better understanding who they are, will be better equipped to tap this opportunity," said Saul Klein, senior vice president for Point2.
Florida was by far the most popular state, capturing 31 percent of international traffic to all U.S. listings, a slight drop from its 33 percent share in the third quarter. Arizona and Nevada held their No.2 and No. 3 spots, each increasing market share to 19.4 percent and 8.6 percent, respectively. California, U.S. territory Puerto Rico, Michigan, Texas, Hawaii, Georgia and New York also stayed in the top 10, though Michigan and Texas traded the No. 6 and 7 spots.
No metro areas west of El Paso, Texas, earned a spot among the top 10 U.S. hot spots with the highest year-over-year hikes in median list price during 2011. Another Texas metro, San Antonio, ranked fifth on the list, based on data provided by online real estate portal Realtor.com.
The Fort Myers-Cape Coral, Fla., metro area experienced the largest increase, by far, among the top 10 metros, with a 20.77 percent rise in median list price increase during 2011, to $175,000.
The No. 2 market on the list, Shreveport-Bossier City, La., experienced a 7.37 percent increase in median list price during 2011, to $167,500. No. 10 El Paso experienced a 3.22 percent increase, to $144,450.
Washington, D.C.'s two metro areas, Virginia and Washington, D.C., both appear on the list, at No. 3 and No. 6, respectively, with by far the highest end-of-year list prices: $349,990 and $385,000, respectively. The top 10 metro with the next-highest end-of-year median list price is the No. 1 Fort Myers-Cape Coral metro.
Editor's note: This article is based on data compiled by online real estate portal Realtor.com. The top 10 markets were determined based on the largest annual percentage increase in a metro's median list price of homes displayed at Realtor.com during 2011.