Tag Archives: FHA

Trump Reverses Obama’s Mortgage Fee Cuts on First Day

At the risk of making people angry by posting about anything mildly political I feel compelled to inform anyone brave enough to trust me by clicking on my site that there is news to take note of as of late in regards to the new administration and real estate. Any prospective home buyers planning to get an FHA loan should be aware of some moving parts in relation to their Mortgage Insurance (PMI or MI). FHA loans require mortgage for the life (or 100%) of the loan, while conventional loans typically require this insurance until the homeowner has at least 20% equity (ownership) in their property. This insurance protects banks against people foreclosing/defaulting on their loans.

With that being said the politics of what just happened can be left up to someone else, but the rates were said to be going down by the Obama administration at the very last leg of their tenure, and on day one President Trump signed an executive order to nullify that proclamation. So, rates will be higher than some expected for FHA borrowers, but this could change in the not so distant future considering how quickly some things seem to be moving. Put a pin in this if you plan to get an FHA loan anytime soon.

Grady Carter
Realtor®, GRI
Metro Brokers of Oklahoma
Lic. #160723

Trump Reverses Obama’s Mortgage Fee Cuts on First Day

by

  • Obama sought to reduce fees by a quarter percentage point
  • Loan program is popular among first-time home buyers

What Will President Trump Tackle First?

Soon after Donald Trump was sworn in as president, his administration undid one of Barack Obama’s last-minute economic-policy actions: a mortgage-fee cut under a government program that’s popular with first-time home buyers and low-income borrowers.

The new administration on Friday said it’s canceling a reduction in the Federal Housing Administration’s annual fee for most borrowers. The cut would have reduced the annual premium for someone borrowing $200,000 by $500 in the first year.

The reversal comes after Trump’s team criticized the Obama administration for adopting new policies as it prepared to leave office. In the waning days of the administration, the White House announced new Russia sanctions, a ban on drilling in parts of the Arctic and many other regulations.

No Consultation

Last week, Obama’s Housing and Urban Development secretary, Julian Castro, said the FHA would cut its fees. The administration didn’t consult Trump’s team before the announcement.

Republicans have argued in the past that reductions put taxpayers at risk by lowering the funds the FHA has to deal with mortgage defaults.

Shares of private mortgage insurance companies, including MGIC Investment Corp. and Radian Group Inc., erased earlier losses, trading up about one percent as of mid-afternoon. They closed little changed from the day before. Private insurers, which back loans guaranteed by mortgage-finance companies Fannie Mae and Freddie Mac, compete with the FHA for market share and have been critics of fee cuts in the past.

A letter Friday from HUD to lenders and others in the real-estate industry said, “more analysis and research are deemed necessary to assess future adjustments while also considering potential market conditions in an ever-changing global economy that could impact our efforts.”

Senate Democratic leader Chuck Schumer of New York took to the chamber’s floor to denounce the reversal.

“It took only an hour after his positive words on the inaugural platform for his actions to ring hollow,” Schumer said. “One hour after talking about helping working people and ending the cabal in Washington that hurts people, he signs a regulation that makes it more expensive for new homeowners to buy mortgages.”

Mark Calabria, director of financial regulation studies for the libertarian Cato Institute, said it was appropriate for the administration to examine last-minute decisions by its predecessor, “especially when those decisions appear to be purely motivated by politics.”

Ben Carson, Trump’s nominee to lead HUD, FHA’s parent agency, said at his confirmation hearing last week that he was disappointed the cut was announced in Obama’s final days in office.

FHA Role

The FHA sells insurance to protect against defaults and doesn’t issue mortgages. It is a popular program among first-time home buyers because it allows borrowers to make a down payment of as low as 3.5 percent with a credit score of 580, on a scale of 300 to 850.

The Obama administration announced last week it would cut the insurance premium by a quarter of a percentage point to 0.60 percent, effective on Jan. 27.

Some housing industry groups lauded the change, saying it could increase home buying by offsetting recent rises in mortgage rates. Supporters of the reduction were disappointed that the Trump administration reversed course.

‘Average People’

“This action is completely out of alignment with President Trump’s words about having the government work for the people,” said John Taylor, president of the National Community Reinvestment Coalition, through a spokesman. “Exactly how does raising the cost of buying a home help average people?”

Sarah Edelman, director of housing policy for the left-leaning Center for American Progress, in an e-mail wrote, “On Day 1, the president has turned his back on middle-class families — this decision effectively takes $500 out of the pocketbooks of families that were planning to buy a home in 2017. This is not the way to build a strong economy.”

The FHA came under severe stress after the financial crisis. In 2013, it needed $1.7 billion from the U.S. Treasury, its first bailout in 79 years, due to a wave of defaults. To replenish the FHA’s coffers, the Obama administration several times increased the fees the agency charges. The law requires the FHA’s capital reserve ratio to stay above 2 percent, and the agency hit that level in 2015 for the first time since the bailout.“It is important to ensure that the FHA fund remains strong to support homeownership in the future while minimizing taxpayer risk,” Teresa Bryce Bazemore, president of Radian Group, said in a statement.

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Mortgages – Home Loans, Rates, Points and Terms

Being a Realtor® is a funny thing. I like to compare it to being a party planner. I don’t make the ice sculpture, prepare the food – but if the band needs someone to fill in on the mic I’d be happy to :-). I say that to mention that I personally like to see myself as a consultant and an advisor. I am not a lender or a mortgage expert, but I have tried very hard to educate myself on how loans function. In the chart included you’ll see a simplified visualization of an amortization schedule – which shows the life of a loan assuming you simply pay the minimum payment. If you make extra payments that amount over the minimum payment goes 100% to principal assuming that the loan doesn’t have a prepayment penalty. One of the main things that I’d like to convey to home buyers is that the longer that you own your home the more equity and wealth you’ll gain from owning that property. So buying and selling homes more regularly is inherently more expensive. However, if you do need to buy or sell a home it’s important to make sure that you know what you’re moving parts are. Call your HomeBoy if you want to talk about your moving pieces, but in the meantime read this article to get started.

Grady Carter
Realtor®, GRI
Metro Brokers of Oklahoma
Lic. #160723

“Mortgages are liens on a specific piece of property, which enable borrowers to borrow money to live or do business on that property.”

amortization-schedule

Mortgages

If you’ve decided to buy a house, a townhouse, condominium or apartment, it’s almost a certainty that you will join the millions of Americans who are bound to their home by one thing — a mortgage.

Although many people believe a mortgage is a loan, a mortgage is actually the lien on the property. When a bank holds a mortgage on a house, it means the lender has a claim to the property in case the borrower defaults on the loan.

A mortgage loan is similar to a car loan. Both are secured by real property and require a monthly payment to cover principal and interest. Mortgage loans are amortized: they are calculated so that the principal and interest payments are spread out over the loan period (usually 10 to 30 years) gradually until the principal is paid off.

A mortgage is generally the largest debt that the average family carries. At of the end of 2012, Americans families had more than $13.1 trillion in total mortgage debt.

It is important to understand all that is involved when you apply for and maintain a mortgage account.

You monthly payment is calculated by a combination of factors:
  1. The loan amount
  2. The length of the loan
  3. The interest rate of the loan

There is also an initial cost of a getting a mortgage. Those costs can involve traditional and non-traditional lender fees. Common questions that prospective borrowers have include: How do mortgages work? What are the different factors to consider? And how do you know if you qualify?

How Does a Mortgage Loan Work?

When you decide on a home you wish to buy, your mortgage lender works with you, your real estate agent and the seller of the property to close the deal. The deal begins by you being pre-qualified to borrow up to a specified amount of money to pay for the house.

Once you are pre-qualified and you have an offer on a home accepted by the seller, you will work with your mortgage lender to ensure that you have the financial ability to pay for the mortgage every month.

When you’ve met all requirements of the transaction, the lender sets a closing date so that you can sign paperwork to finalize the loan. At closing the bank’s agent issues the cash required to buy the home to the seller and distributes all required fees to the other parties as well.

After closing you must begin making regular payments on your account to avoid default. Defaulting on a mortgage loan could eventually lead to foreclosure, where the bank reclaims the home.

In most cases, to close a mortgage loan you must come prepared with a down payment. The amount varies from about 3.5 percent to 20 percent of the home sales price depending on the lender and the loan program offered.

How to Qualify for a Mortgage

Besides being able to make a down payment, you must meet an extensive list of factors to qualify for a mortgage loan. First, your credit score must be good to excellent. A 2010 U.S. Housing and Mortgage Trends report by CoreLogic showed that 60 percent of borrowers who secured conventional mortgages had a credit score of 780 or higher. More than half of FHA borrowers needed a score of 680 or better.

Additional minimum requirements normally include:
  • A housing expense debt-to-income ratio of 28 percent (called the front-end ratio)
  • A total debt-to-income ratio of 36 percent (called the back-end ratio)
  • A job that you’ve held for at least two years
  • Employment and salary verification
  • Extensive paperwork to document your financial situation
  • A professional appraisal
  • Cash for closing costs

Also, some lenders require private mortgage insurance (PMI) on mortgage loans, particularly when the down payment is less than 20 percent.

Types of Mortgages: Conventional, FHA and VA

There are a number of mortgage options available to you as a borrower. The three general types are conventional loans, FHA loans and VA loans. Each has specified qualification factors.

Conventional loan: This is a loan that is not backed by a government agency. It is a straight agreement between a bank and a buyer. You usually need very good credit and a substantial down payment of at least 10 to 20 percent to secure a conventional mortgage loan.

A Federal Housing Administration (FHA) loan: This is one that is backed by the federal government. This type of loan is common for applicants with credit problems or who cannot afford a substantial down payment.

A U.S. Department of Veterans Affairs (VA) loan: A VA loan is similar to an FHA-backed loan except the VA is the guarantor. It is available to qualified military personnel who are veterans or on active duty.

Fixed vs. Adjustable Rate Loans

Mortgage loans come in all shapes and sizes. They come with short terms (five years, often with a balloon payment at the end); medium terms (15 years) and long terms (30 and 40 years). They also come with fixed interest rates and adjustable (or variable) interest rates, and there are also reverse mortgages.

Fixed-Rate Loans

A fixed-rate loan is just what the name suggests: An interest rate is agreed upon before the mortgage is signed, and that rate never changes for the life of the loan, no matter the length of term.

For generations, the staple loan of the mortgage industry has been the 30-year fixed mortgage. That means a borrower will make 30 years of payments of the same principal and interest payments. This type of loan is the least risky type of mortgage loan.

The popularity of the fixed-rate loan was two-fold. Lending institutions like banks and credit unions liked it because they could count on long-term income at a specified rate. Borrowers liked the loans because they knew what their monthly payment would be for the life of the loan. There are no surprises.

Adjustable-Rate Mortgage Loans

Adjustable rate mortgages (ARM) loans are more complex than fixed rate loans. The bank offers you a low introductory rate for a period of time (usually one to five years) then the rate begins to adjust. The rate varies depending on certain financial indices — usually the Cost of Funds Index (COFI) or the London Interbank Offered Rate (LIBOR).

ARMs are attractive to borrowers who want to enjoy a low monthly payment for a while, but they can become a major burden when the rate goes up.

Other programs include balloon and buy-down loans. With a balloon loan the borrower agrees to make a large lump sum payment at the end of the loan. A buy-down loan is similar to an ARM except the rate change occurs toward the end of the loan period and the interest may vary up to three times instead of every month, quarter or year like ARMs.

Mortgage Rates

The rate of your mortgage means the interest rate of your home loan. It is one of three key drivers – along with the amount of money you borrow and the length of time for which you borrow – of your monthly payment.

As a result of the Great Recession and the bursting of the U.S. housing bubble, home interest rates are at some of the lowest points in history. Lenders are agreeing to 30-year fixed loans with interest rates of less than 4 percent.

How Interests Rates Are Determined

The federal government has three quasi-government institutions that are the primary agencies dominating the secondary mortgage market.

They are:
  • The Federal Mortgage Association – aka Fannie Mae
  • The Federal Home Loan Mortgage Corporation – aka Freddie Mac
  • The Government National Mortgage Association – aka Ginnie Mae

Each agency serves a different function in the mortgage business, but all three help keep money flowing into the market by bundling mortgages. These mortgages are purchased with funds borrowed from investment banks. Fannie, Freddie and Ginnie sell to other investors and large financial institutions, such as pension funds and insurance companies.

In this way, money is continually being pumped back into the lending system. The three agencies provide the funding to individual lenders so they can continue to offer mortgages to new homebuyers. In effect, then, the real supplier of your mortgage is not your bank, which is merely servicing your loan, but the agencies and financial institutions that buy and sell the mortgage-backed securities in an endless cycle of commerce.

It is in this secondary market that interest rates for mortgages are set. These rates are constantly fluctuating based upon the amounts that the various players in the game – the three primary agencies and their customers – set as their profit margins, or “spread,” when buying and selling mortgage-backed securities.

Your Monthly Mortgage Payment

When negotiating a mortgage, it is important to understand that the interest rate does not truly reflect your total monthly costs. The Truth in Lending Act requires all lenders to state on loan documents the Annual Percentage Rate, also known as the APR. The APR is defined as the cost of credit to a borrower in relation to the amount borrowed, expressed as a yearly rate.

Your APR will most always be slightly higher than your interest rate because it includes other items associated with obtaining a mortgage, such as origination fees, any points purchased, prepaid mortgage interest, mortgage insurance premiums, and various other lender fees.

What is most essential to remember is that your interest rate is only one piece of the borrowing puzzle and must be considered in context when applying for the most appropriate and affordable mortgage you can find.

The modern mortgage industry offers a huge array of products. There are also many government-backed mortgage programs, which have their own sets of qualifications and conditions. Take the time to explore all options and don’t believe lenders who advertise unrealistically low interest rates. These are the ones who make up your “savings” in exorbitant lending fees.

Your mortgage payment will likely be a considerable part of your monthly expenses for some time to come. It pays to use your head before signing on the dotted line. Compare offers, be prepared to ask many questions and take the time to do the math, so that your dream home is not accompanied by a nightmare of a mortgage.

Mortgage Points

HOW MANY POINTS
SHOULD YOU BUY?

Mortgage: $90,000

Interest rate: 7.5 percent

Monthly payment: $629.30

Each point costs $900 and will lower your interest rate by one-quarter of a percentage point.

If you purchase two points for $1,800, you are left with:

Interest rate: 7 percent

Monthly payment: $598.78

————————————-

Monthly savings: $30.52

Now divide the cost of the points by the monthly savings.

$1,800 / $30.52 = 58.98

This means it will take 59 months to break even. If you plan on staying in your home for five years or longer, you would be saving money by purchasing those two points.

Although there are many diverse offerings among mortgage lenders, you will find some similarities no matter where you turn. For instance, every mortgage offer will come with an interest rate, a payback period (term), processing fees and the option of paying “points” on the loan.

A point is equal to 1 percent of the principal amount of a mortgage. For example, if the mortgage is for $100,000, each point is worth $1,000. By paying more points on a loan, future home owners can get negotiate down their interest rate, thereby lowering their monthly payment.

One type of points — origination points — is actually a fee that you may be charged when you take out a mortgage. These points do not provide any value to the borrower and should be avoided if possible. Discount points, on the other hand, can be paid to a lender in order to obtain a loan at a lower interest rate.

Depending upon the lender and the daily fluctuations in the mortgage market, each point you pay will reduce your interest rate from one-eighth to one-quarter of a percentage point. You may have the option of paying for up to four discount points or more.

When deciding whether to pay for points —  or how may to buy —  you need to consider how long you plan on staying in the home. That will determine your break-even point, the length of time you’ll need to stay in your house to make the purchasing of points an economically advantageous choice. The longer you stay in your house, the more money you save with a lower interest rate.

Tax Rules and Negative Mortgage Points

In addition to lowering your interest rate, discount points are considered pre-paid interest by the Internal Revenue Service and are tax-deductible. Origination points are not deductible.

But you can only deduct discount points in the year they are paid, and only if several requirements are met, including:
  • Your main home secures the loan.
  • The points you paid conform to established rates and practices in your area.
  • The points were not paid for inspection, appraisal, title, attorney fees or property taxes.
  • The points were computed as a percentage of the principal amount of the mortgage.
  • The amount is shown as points on your settlement statement.

Buyers cannot pay points on Federal Housing Administration (FHA) or Veterans Administration (VA) loans, but on most mortgages, either the buyer or the seller can pay the points or split the cost between them. Points work in a similar fashion in the refinancing of a mortgage, but those points must be deducted on your taxes over the life of the loan and not all at once.

While less common, a lender may also offer you negative points. In that case, a bank would pay you points so that you would agree to pay a higher interest rate. This cuts down on your closing costs, which usually run several thousand dollars, and increases your monthly mortgage payment. This option would only be attractive if you could not come up with the necessary cash at closing.

It’s important to remember that just because a loan is advertised with “no points” does not mean it is the best loan for you. Points are just one item in a complex set of circumstances that you will have to consider when negotiating for a loan. Make sure you understand points and how they relate to the other details in your mortgage application, and compare several offers and combinations before making a final decision.

Reverse Mortgages

A reverse mortgage is a loan that allows you to take advantage of equity in your home. Instead of you paying the bank, the bank pays you a monthly stipend that depends on the value of the home and other factors.

Older borrowers who have paid off most or all of the mortgage balance on their homes and need additional income to cover basic needs commonly apply for reverse mortgages.

The FHA has a special program called the Home Equity Conversion Mortgage (HECM) to help homeowners in need who are over the age of 62. However, it is important to note that the lender has a claim on the property and unless the loan is paid off the homeowner may have to sell the home in the future.

Other Key Mortgage Terms

If you’re new to mortgage loans, here are a few more key terms that you should be aware of before talking to a lender or broker:

Fixed rate loan: A mortgage loan that maintains the same rate throughout the loan period

ARM (adjustable rate mortgage): A mortgage loan that starts off fixed and then varies

Discount points: Up-front payments made to the lender to get a discount on your mortgage interest rate; one point is equal to one percent

Origination fee: A processing cost commonly charged by the lender; included in closing costs 

LTV (loan to value): The amount of the loan divided by the value of the property

Seller’s assistance: A program that allows the seller to contribute up to 6 percent of the purchase price toward your closing costs

Appraisal: A valuation of the home you wish to buy

Closing costs: Fees and expenses due to the lender and other parties to the loan

Escrow: An amount held by the lender to pay for property taxes and hazard insurance; built into monthly payment

Private mortgage insurance (PMI): An insurance policy to protect the lender in case of default; built into your monthly payments if required as a condition of the loan

Amortization schedule: Shows the breakdown of interest and principal you pay with each monthly installment payment over the course of the loan

Underwriting: The process of carefully evaluating a loan application to decide if the borrower is a good credit risk

Source: Mortgages – Home Loans, Rates, Points and Terms

Where 15 Can Beat 30 – What Kind of Loan Should I Get?

With rates changing (if you don’t know about this it’s ok, but they are…) have you wondered how that might affect the loan that you should consider taking out for your home? Well, here is a very wonky article that can help you dive into this under discussed, and very important topic. It might be a good idea to play around with a mortgage calculator to see what the difference might be for you.

-Grady

 

The Federal Reserve Board is on track to raise interest rates as soon as today. It’s a move that will mean higher mortgage rates, higher monthly payments, and reduced purchasing power for new borrowers. Homebuyers, who haven’t seen an interest rate increase in nearly 10 years, may be tempted by lower-rate 15-year mortgages.

Where 15 Can Beat 30

A 15-year mortgage is a smart choice for households in housing markets where price increases have been modest, but a tougher call for households in hotter markets.

The Federal Reserve Board is on track to raise interest rates as soon as today. It’s a move that will mean higher mortgage rates, higher monthly payments, and reduced purchasing power for new borrowers. Homebuyers, who haven’t seen an interest rate increase in nearly 10 years, may be tempted by lower-rate 15-year mortgages. But do the advantages of a 15-year mortgage outweigh the costs? The answer depends partly on where you live.

We’ve crunched the numbers for the largest U.S. metros, and found that:

  • With the median US household income, a 30-year mortgage allows homebuyers to purchase 46% more house, but a 15-year mortgage provides triple the paid equity in just 5 years.
  • Homebuyers in areas where prices have a history of rising will benefit greatly from faster equity-building with a 15-year mortgage.
  • Buyers in areas with historically slow growing to flat housing prices will benefit less from shorter-term mortgages and potentially more from the borrowing power of a 30-year loan.

The Tradeoffs Between 30- and 15-year Mortgages

In general, 30-year mortgages have three advantages:

  • Monthly payments are lower
  • Borrowing power is higher
  • Tax benefits are greater

The primary advantage of a 30-year mortgage is lower monthly payments. On the median valued U.S. home, a 30-year mortgage comes with a payment that is $320, or 27%, lower than a 15-year mortgage. Lower payments also mean that a borrower’s debt-to-income (DTI) ratio is lower than a 15–year loan. This allows middle class buyers (a household earning the U.S. median income) to borrow $77,000, or 46%, more with a 30-year mortgage than a 15-year. Last, borrowers with a 30-year mortgage can write off nearly $68,000 more than a 15-year mortgage via the mortgage-interest deduction on their federal income taxes.

Trulia 15v30

A 15-year mortgage has three advantages over a 30-year mortgage:

  • Equity builds faster
  • Interest rates are lower
  • Loan term is shorter

The primary advantage of a 15-year mortgage is that a larger share of each monthly payment goes towards paying off the loan principal. After five years (the number of years the average young household moves), equity gained from paying off the loan balance is more than $39,000, or three-times greater with a 15-year mortgage on the median value home. In addition, the 15-year rate is 3.36%, compared with 4.12% for a 30-year note. And over the loan term, borrowers with 15-year mortgages pay just under $40,000 in interest with a 15-year compared to over $107,000 with a 30-year on the median value home.

In Bargain Markets, 15-year Mortgages Are A Homebuyer’s Best Bet For Equity

Home equity can come from three sources: down payment, principal reduction, and home value appreciation. This means that in markets with slow appreciation, a larger share of equity will come from homeowners paying down the loan balance when compared to home value appreciation. In such markets, 15-year loans offer a relatively faster route to building equity.

Trulia_15yrmortgage_LineGraph

We’ve identified the 10 markets in the country where, after five years of ownership, homeowners will have the most equity from principal reduction relative to home price appreciation. At the top of the list are markets exclusively in the Bargain Belt (Midwest and Southeast). In each of these markets, 15-year mortgages can provide over twice the equity relative to home price appreciation. For example, homeowners in Dayton, Ohio, can earn $22,018 in equity from mortgage payments with a 15-year mortgage, which is 2.37-times greater than the $9,295 gained from price appreciation. With a 30-year mortgage, payments would net households just $7,393. Clearly, household in these markets would gain much more equity by paying down their mortgage principle with a 15-year loan than from home value appreciation.

Markets where Principal Repayment is Key to Equity Growth
# U.S. Metro 5-year Equity from Principal Repayment, 15-year 5-year Equity from Principal Repayment, 30-Year 5-year Equity from Home Value Appreciation 5-year Principal Repayment Relative to Appreciation, 15-year* 5-year Principal Repayment Relative to Appreciation, 30-year
1 Dayton, OH $22,018 $7,393 $9,295 2.37 0.80
2 Cleveland, OH $26,906 $9,034 $11,960 2.25 0.76
3 Toledo, OH $21,193 $7,116 $9,667 2.19 0.74
4 Akron, OH $26,993 $9,063 $12,420 2.17 0.73
5 Rochester, NY $27,704 $9,302 $12,862 2.15 0.72
6 Detroit, MI $13,171 $4,422 $6,180 2.13 0.72
7 Greensboro-High Point, NC $24,924 $8,369 $11,778 2.12 0.71
8 Lake County-Kenosha County, IL-WI $43,508 $14,608 $20,620 2.11 0.71
9 Memphis, TN $23,289 $7,819 $11,093 2.10 0.70
10 Winston-Salem, NC $26,544 $8,912 $12,668 2.10 0.70

In Pricey Markets, 15-year Mortgages Are A Tougher Call

In markets with strong home price appreciation, deciding between a 15-year and 30-year mortgage is a tougher call. Like bargain markets, 15-year loans provide more equity from principal repayment than from appreciation. The difference, however, is much smaller. In pricey San Francisco and San Jose, Calif., 15-year mortgages provide just 1.35 times more equity from principal payoff than appreciation. Still, the difference in equity from principal repayment is great between a 30-year and a 15-year mortgage. For example, households in Orange County would stand to gain nearly $100,000 more in equity after 5 years by choosing a 15-year mortgage.

Markets where Appreciation Drives Equity Growth
# U.S. Metro 5-year Equity from Principal Repayment, 15-year 5-year Equity from Principal Repayment, 30-Year 5-year Equity from Home Value Appreciation 5-year Principal Repayment Relative to Appreciation, 15-year 5-year Principal Repayment Relative to Appreciation, 30-year
1 San Francisco, CA $247,382 $83,061 $184,397 1.34 0.45
2 San Jose, CA $203,060 $68,179 $150,088 1.35 0.45
3 Orange County, CA $139,362 $46,792 $96,300 1.45 0.49
4 Los Angeles, CA $112,946 $37,922 $76,446 1.48 0.50
5 Oakland, CA $136,768 $45,921 $92,323 1.48 0.50
6 San Diego, CA $106,895 $35,891 $72,083 1.48 0.50
7 Ventura County, CA $111,904 $37,573 $73,109 1.53 0.51
8 Boston, MA $90,176 $30,277 $58,567 1.54 0.52
9 Austin, TX $50,860 $17,077 $32,778 1.55 0.52
10 Charleston, SC $44,599 $14,975 $28,684 1.55 0.52

Even though 15-year mortgages provide more equity through loan repayment than appreciation, they also come at the expense of borrowing power. In high-priced markets, the difference in nominal terms can be substantial. For example, middle class families in San Francisco (households making the median income of $104,000 per year) could purchase a $628,000 home with a 30-year mortgage but only a $430,000 home with a 15-year. This makes house hunting hard when the median priced home costs more than $1 million. As a results, this could be the difference between buying their dream-home or a starter for some households.

To show why households in expensive housing markets have a much tougher decision, we’ve put together a scatterplot of median home values for each of the 100 largest U.S. metros and matched it with the relative amount of equity a household can gain from payments on a 15-year mortgage. As you can see, households in cheaper markets (bottom axis) stand to gain relatively more equity (left axis) from paying down their mortgage with a 15-year note than through home value appreciation when compared to pricier markets. For example, households in affordable Cleveland, which has a median home value of $123,000, can reap 2.25 times the equity from loan repayment than appreciation. In San Francisco, the land of million dollar homes, the added value is only 1.34 times the equity.

Trulia scatter 30v15

The takeaway: 15-year mortgages are a great option for those wanting to build equity, regardless of how expensive or how fast growing a market is. However, in places with historically low appreciation, 15-year mortgages are a much better deal for building equity because it’s about the only way to do so though paying of the loan balance. On the other hand, in areas with historically high price appreciation that also happen to be expensive, households need to consider the tradeoffs between the borrowing power of 30-year mortgages, expected equity from home price appreciation, and whether or not they will use equity from their existing home as a down payment on their next one.

Methodology

To compare 30- and 15-year mortgages, we estimate the amount of equity a household would gain from both appreciation and from paying off the principal after 5-years of homeownership of the median valued home. We estimate this separately for each of the 100 largest U.S. metros, and use an annualized 20-year Federal Housing Finance Administration (FHFA) house price growth rate to project home values 5 years into the future. Last, we compare the nominal and relative amount of equity a household would gain by choosing either a 30- or 15-year mortgage and comparing that to the expected gain in equity from home value appreciation.

Source: Where 15 Can Beat 30 – Trulia’s Blog

 

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