Equity Matters: Marry the House, Date the Rate & Dump the Rent

It’s no secret that the past couple of years have been especially hot for the housing market.

With interest rates at an all-time low, Homebuyers were scrabbling over each other to purchase their first or next home. This led to the median single family home prices across the nation rising 25% in 2021 and rose another 20% by April of this year. In Hawaii, the July 2022 median single family residence home price soared to $1,107,944 and the condo median sales price edged to $535,000 (Honolulu Board of Realtors). According to hawaiibusinessnews.com, most homes in Hawaii are equity rich. This means that most island homes are worth at least twice as much as what is owed on any mortgages or other debts on the property.

Since the Fed began raising interest rates, many prospective Homebuyers started to worry about whether their window to purchase a home was closing. A Homebuyer that was holding a pre-approval from a mortgage application made this time last year (August 2021), was looking at an average of 2.840% for a 30-year fixed rate note. Comparatively, median mortgage interest rates today for that same note is 5.850%, so it has more than doubled. This means that the monthly principal and interest payment for an $800,000 mortgage loan has increased from $3304 last year to $4720 currently. The increased payment has left many Homebuyers fearing about their homeownership opportunities.

So the Paramount question is … With the interest rate and payment increases, “Is it still a good time to buy a home?”

Marry the House: Real estate is a get rich slow approach and your primary residence is a long-term investment. With a buy and hold strategy, Homeowners gain equity through appreciation and paying the mortgage loan balance down over time. In addition to equity appreciation, the benefits of Homeownership can be the tax advantages of being able to deduct your mortgage interest and closing costs, along with real estate taxes, insurances, energy efficiency and medical improvements, just to name a few. You will want to speak with your tax professional about your specific case, but the beauty of buying a home with a fixed rate mortgage is that when inflation is affecting all other consumer goods and services, your mortgage payment stays the same. It is a dependable obligation towards housing that you can count on and manage, making you feel grounded and stable by giving you control over your expenses. Further, the freedom to personalize and customize your living space, truly allows for your pride of homeownership to blossom. Experts are projecting home prices to continue to appreciate for the next 5 years, especially in Hawaii which has become a destination migration state for those able to work remotely. With home sales prices in certain neighborhoods stabilizing and inventory rising, this is a great time to get matched with your Forever Home.

Date the Rate: Mortgage interest rates are ever changing, and for many Homebuyers, rates are a top consideration. The typical mortgage term can last up to 30 years or more, so it’s tough to think you may be stuck with anything less than the lowest rate possible. As a mortgage professional and real estate investor, there have been many occasions when a property that I wanted to purchase became available during an upward trending interest rate climate and due to market conditions, I landed a rate that was higher than I would have preferred. But one of the greatest challenges in real estate investment is having all the arrows in your pathway pointing in the right direction, to make the acquisition possible. The home must be offered for sale, your income must allow you to qualify, the mortgage program must be available, and the timing must be right to meet your family’s needs. If all these indicators are a green light, then the mortgage interest rate should be a secondary consideration over the main goal, which is to become the owner of that property. That way, when the interest rates drop, you can refinance your current mortgage to reduce your monthly payment. Then, your Forever Home will be even more affordable.

If you are looking for a present way to reduce your monthly payment, there are 3 strategies that can be implemented in this current market: 1. Extended rate lock protection: Also known as lock & shop programs, these programs allow you to lock your interest rate for 3, 6, 9, 12 months, while you shop for your home. There is generally an upfront cost or deposit towards the program, but the benefit is the peace of mind in knowing that your rate is locked in during a rising rate environment. If the market goes up while you’re house hunting, your mortgage will not be affected.

2. Temporary Buydowns: A temporary buydown is when the effective interest rate that a Homebuyer pays during the early years of the mortgage is reduced because of the deposit of a lump sum of money (sometimes called a “subsidy”) into a buydown account that is held by the Lender. A portion of this deposit is then released each month to reduce the borrower’s payments.

A popular strategy is the 2-1 buydown that lowers the interest rate on a mortgage for the first two years before it rises to the regular, permanent rate. The rate is typically two percentage points lower during the first year and one percentage point lower in the second year. An example would be that if the locked rate is 5.85%, then the 1st year would be 3.85%, the 2nd year would be 4.85% and the 3rd year would be the 5.85% through the remainder of the term.

3. Permanent Buydown: A permanent buydown has a lower interest rate for the entire term of the loan. The upfront lump sum payment comes in the form of discount points (1 point = 1% of the loan amount) paid to the Lender as a closing cost to decrease the interest rate permanently. Usually, the temporary buydown will allow for lower payments and rate initially, but this is only for the first 2 years. The permanent buydown rate reduction may be less significant, but the serenity comes in the knowledge that your payment will not change over the term of the loan.

Dump the Rent: This is the big one, you need to decide who’s mortgage you want to pay, yours or your landlords. Should you choose to rent, the landlord can increase your rent over time, there is usually no tax benefit to renting a home, and you cannot make improvements or customize the home without your landlord’s approval. Further, you cannot build equity if you are not the owner. Thus, by renting you are helping your landlord to realize the appreciation gains at your expense. So, make sure to swipe left on rent to make room for your Forever Home match!

The key to navigating the changing mortgage climate is to be sure to align yourself with a knowledgeable mortgage expert that can lead you to financial success. At PRMG, our motto for 2022 is No Homeowner Left Behind, because we pride ourselves in offering traditional as well as creative financing options for those who may find themselves “outside the box”.

We have a dedicated team of Mortgage Experts to help you and we offer free consultations! Visit https://oahu494.prmgapp.com/HonoluluTeam.html today to book your appt with one of our Specialists!

Questions for Judy Meredith? “The Mortgage Professor”

Email me: I welcome the opportunity to help You find solutions! jmeredith@prmg.net

Judy Meredith
“The Mortgage Professor”
PRMG Hawaii Area Manager
Direct: (808) 222-7903
NMLS ID: 716323