What Makes Mortgage Rates Rise And Fall? 10-Year Treasuries

mortgage-rates2-300x249Homebuyers are always interested in mortgage interest rates because it makes a difference in their monthly payments and their buying power. A 1% increase in mortgage interest rates can decrease buying power by 10%! That’s the difference between buying a $180,000 house or a $200,000 house.

Why do mortgage rates fluctuate? Mortgage rates are directly impacted by the rates offered on 10-year US Treasury Bonds.

When rates on 10-year treasuries rise, then mortgage rates rise. When 10-year treasury rates fall, then your mortgage rate falls along with it. And the change is almost instantaneous.

Why Are Mortgage Rates and US Treasury Rates So Tightly Connected?
Home mortgages are bundled by Mortgage Aggregators (mostly Freddie Mac, Fannie Mae, Ginnie Mae) into investments called Mortgage Backed Securities. These investments have an implied government backing (which means safety) so they get a AAA rating. This AAA rating puts Mortgage Backed Securities in competition with US Treasury Bonds.

10-year US Treasury Bills and Mortgage Backed Securities compete head-to-head for investors who want safe, secure medium-term investments. Therefore the two investments must offer competitive returns to attract the investor’s money.

Mortgage rates follow treasury rates. So watch the 10-year US Treasury Bond rates and you’ll know which way mortgage rates are going.

Why Do Mortgages Compete with 10-year Treasuries and Not 30-year?
Investors compare 30-year home mortgages to10-year treasuries and not 30-year treasuries because statistics show that most home mortgages only last for seven years. Homeowners sell the house or refinance the loan, which results in a payoff of the mortgage. Therefore the best correlation is the 10-year US Treasury Bond.

Mortgage Interest Rates Since 2008 and Beyond
Since 2008, mortgage interest rates have been historically low. In 2013, rates were only 3.5%! In 2014, rates have risen to 4.5% or so. However, consider that in the 1980’s, mortgages were as high as 18%…so the 4.5% looks really good by comparison, right?

Since 2010 the Federal Reserve has spent $85 million per month, much of it on 10-year Treasuries. The effect of these purchases is to artificially push down treasury rates, and thus mortgage rates. In 2014 the FED began slowing down their Treasury note purchases, driving up treasury interest rates, so it’s logical that mortgage rates will increase as well. How high will mortgage rates go? No one has a crystal ball to tell us the answer.

My advice is to take advantage of the artificially low mortgage rate environment while you can, if you are in the market to buy a house or refinance. You don’t want to be the person in 10 years who is complaining about missing the opportunity for a cheap loan.



Real-Estate-AppraisalWhen you buy a house, your lender will require an appraisal on the property before they will complete your loan. Why is an appraisal necessary? Because the bank wants to know that they are not loaning more than the property is worth.

What’s an Appraisal?
Appraisals are completed a week to ten days before the closing. Even though lenders require appraisals, you get to pay for them. The cost is $400 to $500.

Appraisals are conducted by – believe it not – appraisers! These are professionals who specialize in determining the “actual value” of properties. The actual value is based on past sales, features, condition, location, and other factors. Appraisers attempt to remove biases and simply look at facts and numbers.

Appraisers vs Real Estate Agents
Instead of “actual value,” real estate agents determine the “market value” of properties. Market value is the price that buyers will pay for a house in the current market. Market value is based on supply and demand, marketing plans, buyer emotion, and market trends. If a market is active and buyers are frenzied, they will often pay higher prices than past sales appear to support.

What to Look For in an Appraisal
From a buyer perspective, your objective is for the appraised price to be at least as high as the purchase price; anything higher is a bonus. You don’t want it to come back lower than the purchase price. The reason is that lenders loan you money based off the appraised value.

For example, if you are buying a $200,000 house with an FHA loan (borrow 96.5%), and the appraisal comes back at $195,000, then the bank will only loan you $188,175 not $193,000.

If the appraisal comes back too low, you have a couple of options. First, make up the difference out of your own pocket. In the previous example, that means you come up with $11,825 down payment (5.9%) rather than $7,000 (3.5%). Another option is to have the seller lower the purchase price to match the appraised value. Your third option is to terminate the contract and walk away.

Think of your appraisal as a reality-check on the price you agreed to pay the seller. It’s nice when a third party agrees that your new home is a good value – or warns you that the house is over-priced.

Homeowner’s Insurance: How Much Coverage Do You Need?

insurance-agentWhen you buy a new home, you are required by the lender to have homeowner’s insurance (aka “hazard insurance”). The question is, how much coverage do you need?

Daryl Alexander, an agent in Fort Collins with State Farm, recommends that you “make sure your home is insured for at least 100% of its estimated REPLACEMENT cost. “

What does Daryl mean by “replacement” cost?

Market value is the amount a buyer would pay for a home. Replacement cost is the rebuilding cost necessary to repair or replace the entire home.

Over the years, the cost of materials and labor increase, sometimes faster than the market value of a property. If you have a fire, water leak or hail claim, and you’ve owned your house for many years, the cost to repair your house could be really high.

Cost of Premium
It sounds like replacement cost is the way to go, right? Then why would anyone get market value insurance?

The premium for market value insurance is lower than replacement insurance, which is why many homeowners buy it.

That’s being penny-wise and pound-foolish, as the expression goes. For the minimal increase in cost, replacement insurance gives you the coverage you’ll need in case of a disaster. Remember, you are buying peace-of-mind that your family and possessions are protected.

Review Your Policy Occasionally
As the years go by, it’s a good idea to get together with your insurance agent to ensure you still have the right coverage for your home. This is particularly true if you have remodeled bathrooms and kitchens, finished basements, or added on rooms or living spaces.

The worst time to find out you DON’T have enough insurance is when a disaster occurs. Avoid the heartache and trauma of insufficient coverage; find a trustworthy, reputable insurance agent, listen to his/her advice, and buy the coverage he/she recommends.

If you would like a referral to some trustworthy insurance agents, please contact Gary Clark.

Breaking Down the Home Mortgage Deduction

Sacred-CowThe home mortgage deduction is one of the few tax write-offs available to the middle class, and it reduces the cost of home ownership. For that reason, it has become a “sacred cow” to many people.

While popular and worthwhile, the perceived value of the home mortgage deduction may be greater than its actual value. Let’s break down the home mortgage deduction and see what it is and what it is it not.

Tax Credit vs Tax Deduction
You need to understand the difference between a tax DEDUCTION and a tax CREDIT. A deduction reduces the amount of your income tax that is subject to taxes, and a credit directly reduces your tax bill. Say you are in the 25% federal income tax bracket. For every $1000 in mortgage interest you pay (over the standard deduction), your tax bill will be reduced by $250. In contrast, a $1000 tax credit would reduce your total tax bill by $1000.

Itemizing Deductions
To take advantage of the home mortgage deduction, you must itemize your deductions. To be eligible to itemize deductions, the dollar value of your itemized deductions must exceed the value of the standard deduction, which was $11,900 for married joint filers in 2012.

If you have a $193,000 loan that is five years old, you will pay $8,104 in interest. So you need $3,796 more deductions before you can itemize and take the home mortgage deduction. If you don’t, then you have to take the standard deduction and you cannot take advantage of the home mortgage deduction.

According to USA Today, only about 25% of tax payers are able to itemize deductions and take advantage of home mortgage deductions. Most of these tax payers are in high cost of housing states, such as California, Hawaii, Washington, Virginia, Maryland and Nevada.

Amortization and Interest
Another concept you need to understand is amortization. It’s the mathematical system that banks use to calculate the payback schedule of interest and principle. In general, the early years of the loan are heavily weighted to paying interest and light on principle. Latter years of the loan are light on interest and heavy on principle.

Using the $193,000 loan example, in the second year your interest payments are $8,562.49 and principle payment are $3,172.35. In the 16th year of the loan you pay $5,785.42 in interest and $5,949.42 in principle, about even. By the 30th year of the loan, the interest payments are $577.30 and the principle payments are $11,157.53.

As the years go by, the value of the home interest deduction diminishes because it gets harder to beat the standard deduction.

Early Loan Payoff
At some point, you may find yourself in position to pay off your loan early. No mortgage payment sounds great, but people worry about the trade-off of losing their home mortgage deduction. There are three things to consider.

1. What is your tax bracket? From our tax deduction example, we know that if your tax bracket is 25%, you get about .25 in benefit for every $1 in tax you pay. So in essence, you are spending a dollar to save a quarter. On the other hand, without a mortgage payment, you’d pay .25 to the IRS and keep .75 for yourself.

2. How many years do you have left on your loan? From our amortization example, we know that if you are past the mid-point of your loan you pay less interest and more principle every year. Therefore there’s less and less interest to deduct as time goes on. Most people in position to pay off mortgages are past the mid-point of their loan.

3. Do your take standard or itemized deductions? If you don’t have enough deductions to itemize, then you can’t take advantage of the home mortgage deduction anyway. So why keep paying interest to the bank?

Did you know that on a $193,000 30-year loan, you will end up paying $159,044.95 in interest! By shaving five years off the loan you’ll save at least $5266 in interest, which goes directly into your pocket. The deduction on that interest: only $1316 (assuming a 25% tax bracket).

The home mortgage tax deduction is a great thing; if you have to have a mortgage you might as well get to write off the interest. However, talk to your CPA and financial advisor to decide if the deduction is a good financial tool for you.

The MS Society

MS Society LogoWhen you sell or buy a property with me, I make a donation to the MS Society after your property closes. It’s one way I contribute to this worthwhile organization and fight Multiple Sclerosis.

The national MS Society conducts important research to find a cure for Multiple Sclerosis. Over the years the MS Society’s made significant advancements in detecting the cause of Multiple Sclerosis and developing treatments.

The local MS Society chapter provides services directly to people in our community. I’ve seen firsthand the great work they do, the need, and I’ve come to trust the people running the chapter.

The MS Society is important to me because my wife, Bettie, lives with Multiple Sclerosis. I would love to see a cure for her sake and everyone else impacted by Multiple Sclerosis.

To learn more about Multiple Sclerosis or the MS Society, please visit http://www.nationalmssociety.org/chapters/COC/index.aspx

Getting Out of Your Lease and Into Your Own Home

burning-wasting-moneyIt’s the first of the month and your rent is due. As you write out the rent check, you say to yourself, “I can’t believe I’m paying this much money in rent! I’m just throwing my money away! I need to buy a house while interest rates are still low!”

Great idea. But there’s just one little problem: How do I get out of my lease when I find a house to buy?

While you can’t break a lease whenever you want, you do have a few options.

You Could Sublet Your Place. If your lease has six months or more on it, your best bet could be to sublet your place to another person.

You Could Start Searching Near the End of Your Lease. If timing works in your favor, you could start your search with 60-75 days left on your lease. That should be enough time to find a place, get under contract, and close on it.

You Could Negotiate a Month to Month Lease. Some landlords will allow you to have a month-to-month lease and vacate with a 30-day notice. When you get a property under contract, 30 days is enough time to give your notice.

You Could Involve a Real Estate Agent. Your best bet is to engage an agent, like me, and inform him or her or me that you are motivated to buy a home. In addition to selling real estate, I own Rooftop Property Management, LLC and have lots of experience with leases, landlords and tenants. I would be happy to read your lease and talk to your landlord about your options of exiting your lease.

If your landlord is also a real estate agent, watch out for this trick. He or she may offer you a month-to-month deal without a rent increase in exchange for his services. Wow, what a nice person! Except here’s what is really happening: the landlord/agent has threatened to increase your rental rates unless you work with him.

If you want to work with your landlord to buy a home, that’s fine. But if you don’t, and there’s another agent with whom you’d rather work, then let him or her deal with the landlord/agent. A house is the biggest purchase you’ll make. You should be able to work with whomever you want, and not feel coerced into a relationship you’re not comfortable with.

If you feel the time is right to buy a home, don’t let your lease stop you. It’s a minor issue that is easily handled, especially if you enlist a real estate agent who is experienced with leases to help you.

Please contact me if you would like a Free Consultation about your lease and buying a house.

The Home Buying Process

Home Buying Process GraphicHave you ever wondered about the steps involved in buying a home? This is a brief overview of the process I use when working with home buyers.

Buyer Interview
I like to start by learning about you, your goals, and your dreams.

Our Relationship
By law, I need to go over the two types of relationships under which we can proceed. It is your choice which is best for you.

  • Buyer Agent – Agents work as fiduciaries that put your interests ahead of their own.
  • Transaction Broker – Brokers work to put a deal together that is fair for both parties.

Oddly enough, it’s best to start with money in mind. Visit with a lender to see how much you can borrow and what payment you can handle, and get a Pre-qualification Letter. This letter will come in very handy when we go to write an offer.

The fun begins! Based on what I learned from our interview, I’ll look for houses that match your criteria. Then we’ll go out and visit houses with a goal of finding “the one.”

Eventually we’ll find a house that you want to buy. After discussing the price and terms of an offer, I will write a contract and present it to the seller. It’s normal to negotiate one or more counter-offers between the seller and you. Most counter-offers revolve around price, timelines, and inclusions.

Loan & Due Diligence
Once we are officially under contract, we will work on two parallel tracks: getting a loan and conducting due diligence.

  • Loan – You’ll work with your lender to secure a loan on the property. The lender will want to appraise the property to ensure its value is at least as much as how much you offered to pay the seller.
  • Due Diligence – You’ll have the house inspected, make sure you have clear title, and get quotes on hazard insurance (home owner’s policy).

The final step is to attend the closing, which is a meeting between the buyer and seller. Conducted by the title company, the closing formalizes the transfer of ownership. Basically, you sign a bunch of papers, hand over your money, and get the keys to your new home!

For More Information
If you want more information than this brief overview, you have several options.

  • Download an extended presentation (click here).
  • Schedule a personal consultation with Gary.
  • Schedule an introductory seminar for a group of people.

Gary Clark
Century 21 Humpal