Ed Powers
November 2022

Daily News And Advice
Today's Feature Stories

What Factors Drive the Real Estate Market?

There are a lot of discussions going on currently about the real estate market. The Fed has been aggressively raising interest rates for months, and to buy a home now is significantly more expensive compared even to the beginning of this year.  

The Fed also indicates that it’s got more rate hikes coming  as it tries to slow down record inflation.

This, paired with other worrying economic indicators, leaves many wondering if a housing correction is coming. Some feel that it’s already here. Many markets that were the hottest during the pandemic boom are starting to see the effects of a potential correction first.

For example, places like Austin and Phoenix are starting to see significant price dips.

Some analysts say we can expect pricing declines of anywhere from 15-25% in many parts of the country.

It leaves many people wondering exactly what factors drive the real estate market as a whole, affecting home prices in different countries.

Interest Rates

Interest rates holistically drive the real estate market.  If interest rates are low, people will be more likely to purchase a house because they can borrow money cheaply. You can afford a lot more houses if your rate is around 2% versus a rate that’s 6% and higher, and that’s what people are seeing right now.

As interest rates rise, there isn’t always an immediate slowdown in the real estate market. Rates move slowly, so buyers do have time to lock in their rates, but where we’re at right now is a time when the rates have been increasing for months. People no longer have those opportunities to lock in the best rates, and it’s likely to start catching up with the market.

When interest rates are high, there often tends to be a slowdown in the entire market because buyers can’t afford to borrow money at these rates.

There may also be more people looking for cheaper houses to stay within their budget even as rates are high.

The Economy

Bad economies tend to drag housing down with them. In 2008, people were being laid off from their jobs and struggling to pay their bills. Then, making the payments on a current mortgage becomes challenging, let alone thinking about buying a new home.

Even when people don’t lose their jobs, consumers tend to feel negative about making big purchases if the economy is bad. They have a tendency to want to hunker down during bad economies and wait out rather than make a giant leap and buy a home.

The Government

The government can do things that can strengthen the real estate market and encourage people to buy homes, or they can do things that slow it down.

In 2008, the government introduced a homebuyer credit that was meant to help people afford to purchase a home. They also created the HARP program, meant to help people refinance so they could sell their homes. While neither had a massive impact on the market, they did help stimulate some activity.

The government also creates and offers loan programs that can help people afford to buy a home more easily.

Supply and Demand

One of the things that some analysts feel could help the housing market out right now is the relationship between supply and demand. The supply and demand factor can be local, but it can also be national. Right now, even though interest rates are going up, there is a limited supply of homes. That’s a big part of the boom during the pandemic. People were competing for a very small supply of homes relative to how many wanted to buy.

This may not shift much, so it could keep the housing market stronger than otherwise, given the economic situation.


Finally, demographics describe the makeup of a population. These statistics play a significant but often overlooked role in the real estate market, the types of properties in demand, and prices.

When there are big demographic shifts, it can have a significant real estate effect.

For example, more older people are deciding to stay in their homes for as long as possible and age in place, reducing the supply of homes. At the same time, Millennials who delayed buying homes past when previous generations did are at a point where they have more interest in buying, reducing supply and increasing demand.


When Do Mortgage Points Make Sense?

Right now, mortgage rates are rising fast following several years of record lows. This leaves potential homebuyers wondering how they can beat the rates, and one option is buying mortgage points. With mortgage points, you can save money, but they don’t always make sense in every situation.

Mortgage points are a fee you, as a borrower, would pay a lender to reduce your interest rate on a home loan. You’ll hear it referred to as buying down the rate.

Each point you’re buying will cost 1% of your mortgage amount. If you’re getting a $400,000 mortgage, a point would cost $4,000.

Each point will usually lower your rate by 0.25%. One point would reduce your mortgage rate from, let’s say, 6% to 5.75% for the life of your loan.

However, there’s variation in how much every point will lower the rate. How much mortgage points can reduce your interest rate depends on the loan type and the general environment for interest rates.

You can buy more than a point, or you can buy a fraction of a point.

Your points are paid when you close, and you’ll see them listed on your loan estimate document. You receive the loan estimate document after applying for a mortgage, and you’ll also see them on your closing disclosure, which you get right before you close on your loan.

There are also mortgage origination points and fees you pay to a lender for originating, reviewing, and processing your loan. These usually cost 1% of the total mortgage.

These don’t directly reduce your interest rate. Lenders might let a borrower get a loan with no origination points, but usually, that’s in exchange for other fees or a higher interest rate.

To determine when mortgage points make sense, you have to calculate what’s known as your breakeven point. This is when borrowers can recover what they spent on prepaid interest. To calculate this, you start with what you paid for the points and divide that amount by how much money you’re saving each month with the reduced rate.

Let’s say the figure you get when calculating your breakeven point is 60 months. That means you would need to stay in your home for 60 months to recover what you spent on discount points.

If you’re buying a home you plan to stay in for a long time, then the additional costs of mortgage points to lower your interest rate can make financial sense.

If you doubt you’ll stay in your home for the long term, it’s probably not right for you.

If you don’t stay in the home for long enough, you will ultimately lose money.

At the same time, as you consider whether or not mortgage points are right for you, you should consider your down payment. You could be better off putting money towards a more significant down payment than points. If you make a larger down payment, you might be able to secure a lower interest rate. Plus, if you make a down payment of at least 20%, you can avoid the added cost of PMI.

Bigger down payments mean you’re lowering your loan-to-value ratio or the size of your mortgage in comparison to the value of your home.

The takeaway is not to assume that buying mortgage points is always the right option. You need to consider how long you will stay in the home and your breakeven point.


The Pros and Cons of An Adjustable-Rate Mortgage

With mortgage rates rising rapidly and coming off years of record lows, many potential homebuyers are looking for ways to beat the situation. One available option is an adjustable-rate mortgage. An adjustable-rate mortgage has pros and cons, and both have to be carefully weighed before making a decision.

An adjustable-rate mortgage is also known as an ARM. These home loans have an interest rate that adjusts over time based on what’s happening with the market. These loans will often begin with a lower interest rate than a comparable fixed-rate mortgage, and the interest rate doesn’t stay the same forever.

Your monthly payment can fluctuate after your initial period.

A fixed-rate mortgage offers predictability and certainty because, for the life of the loan, the interest rate stays the same, regardless of what’s happening with the market.

An ARM, by contrast, can become more expensive or less expensive.

There are two periods with an ARM. There’s a fixed period, usually the first 5, 7, or perhaps ten years of the loan. During this set period, your interest rate doesn’t change. Then, there’s an adjustment period. Your interest rate during the adjustment period can go up or down based on changes in the benchmark.

Mortgage rates are influenced by a range of factors, including personal factors like your credit score and broad factors such as economic conditions. You might get a teaser rate upfront that’s much lower than the rate you could pay later on in the life of the home loan.

The benchmark in your ARM loan would be the basis of your rate. The contract may name the rate benchmark the U.S. Treasury or the secured overnight finance rate (SOFR). The named benchmark will, at some point in the life of your loan, be the starting point to calculate resets.

The benchmark is used, and the loan is priced at a markup or margin. The margin applied to your ARM will depend on your credit history. A rate cap may be in place with an ARM, which would be the maximum interest rate adjustment your loan would allow at any particular time.

The Pros of Adjustable-Rate Mortgages

Adjustable-rate mortgages can be a good option if your initial goal when buying a home and getting a loan is the lowest interest rate. Your teaser rate isn’t forever, but you’ll get lower initial payments, so you’ll improve your cash flow. You might also be able to put more toward your principal balance every month.

If you’re planning to move fairly soon after buying a home, you might not have to worry about the adjusting interest rate. An ARM can be a good option for someone buying a starter home. You may have plans to upgrade, so you can sell your home before the fluctuation of the interest rates, which keeps your risks pretty low with this type of loan.

When you’re paying less monthly, you have more flexibility in your budget to meet other financial goals.

If you think you’re moving somewhere that you won’t stay for more than five years, an ARM is often the best option.

The Cons of an Adjustable-Rate Mortgage

The biggest downside of this type of mortgage is that you’re taking a risk that your interest rate will go up. That’s highly likely, meaning eventually, your monthly payments will increase. It’s hard to predict what your financial situation will be in the future, and you might at some point find it’s a struggle to make your monthly payments if they’re higher.

There’s also an inherent sense of uncertainty that can cause anxiety for some buyers.

Finally, you also have to consider the risk that if you are planning to stay in your home for five years or fewer, you may not be able to sell it before your rate adjustment. If you’re in an ARM situation and can’t sell it, an alternative would be to refinance to a fixed-rate loan or maybe a  new adjustable-rate mortgage.


What Does It Mean to Make a Principal-Only Payment?

You’ll hear the terms principal and interest when you get a home loan. Your principal is the amount you borrow for your home loan, and your interest is what you pay monthly to use the loan.

To calculate the principal of a mortgage, you would subtract your down payment from the final sales price of the home you’re buying. The principal you borrow starts accumulating interest right when you take it out.

Your interest payment is the second part of a monthly mortgage payment. You’re paying your mortgage lender to give you a loan, which is reflected in your interest. Most lenders will calculate your mortgage rate in terms of an annual percentage rate or APR. APR is what you pay on your loan per year in interest. If you borrow $200,000 and your APR is 5%, you’re paying $10,000 a year in interest.

Your principal is high at the start of your loan, so during this time, your monthly payment is primarily going towards paying your interest.

A few percentage points of interest significantly affect how much you ultimately pay for your loan. If, for example, you borrowed $150,000 and your interest rate on a 30-year loan was 4%, your monthly payment would be around $716. If you had the same loan but a 6% interest rate, your monthly payment jumps to more than $899.

A difference of just 2% in interest rates, for example, can make a difference of tens of thousands of dollars in how much you pay in interest over the life of your loan.

When you make a payment on your loan, your lender will apply part of your payment to interest and fees before reducing the principal. The lender will use the same formula to pay the interest if you make additional monthly payments. The lender adds up interest accrued during the month, using a part of your payment to pay accrued interest before it’s then applied to your principal.

So, What is a Principal-Only Payment?

A principal-only payment is going entirely toward reducing your principal. Since the amount of interest you pay is based on the principal, your interest charges are smaller when you reduce your principal.

You can pay off debt faster with principal-only payments and save on interest.

Not all lenders will allow a principal-only payment, and some lenders will let you make additional payments during the month, but you need to specify it should go toward only the principal.

Regarding a home loan, you’re making an additional principal payment that’s supplementary and applied directly to your principal mortgage amount, which goes beyond your scheduled monthly payment.

Your monthly payments stay the same, no matter how many principal-only payments you make. You will save more money in interest throughout your loan life.

You might want to recast your mortgage if you want lower monthly payments.

Mortgage Recasting

Finally, if you want to save on your home loan, mortgage recasting can help you pay less interest costs and maybe cut down on the total number of payments you must make before you pay your mortgage in full.

You make a lump-sum payment towards your loan’s principal balance with a mortgage recast. Your lender amortizes your mortgage, reflecting your lower balance. You can lower your monthly payments because your principal went down, but your term and interest rates stay the same.

One example of when someone might recast a mortgage is if they bought a new home before selling their old one. Then, once they sell their previous home, they can use that money to recast their new mortgage.

If you get a bonus or windfall of money for some reason, you might also want to do a mortgage recast. Many lenders will charge a servicing fee for this, but not usually more than a few hundred dollars.

Not every lender will offer this option, and some types of loans aren’t eligible.

You can’t have a government-backed loan and it must meet minimum standards for principal reduction. For example, you usually have to make a minimum payment of $5,000. You’ll also probably need to meet equity requirements, and you have to meet requirements set by your lender for your payment history.


6 Things You Can Do to Prepare for a Home Appraisal

Getting your home appraised is a necessary step in putting it on the market and the appraisal will influence your asking price. This means you want your home in its best possible condition, so it will be appraised at the highest potential value. While undertaking massive renovations may not be an effective process, there are smaller things you can do to raise the market value of your home.

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Start Small with a Little Spackle


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Mortgage Rates
Averages as of November 2022:

30 yr. fixed: 7.08%
15 yr. fixed: 6.36%
5/1 yr. adj: 5.96%

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Ed Powers
Direct: 970-690-3113
Ed Powers Real Estate
Cell: 970-646-3610
2044 Terry Lake Road
Fort Collins, CO 80524

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