Lower Interest Rates Should Make Homes Affordable to More Buyers
QUESTION: For the last 12 years, I’ve sold houses as a real estate agent. So far, 1989 has been my best year ever for sales commissions. In fact, I’ve earned more in 1989 than I earned in 1988, which was a record year for me. Although interest rates were higher a few months ago than they are today, my sales volume was better then than now. I’ve noticed a slowing down within the last few months. As one of your avid readers, I know you religiously stay away from predicting interest rates and I respect you for doing so, since the economists are often wrong, but how do you think declining mortgage interest rates will affect home sales and home prices?
ANSWER: You asked the million dollar question. If I or anyone else knew the answer for sure, we would be retired and living on Easy Street.
The general rule is when mortgage interest rates decline, home prices rise. The reason is that more prospective home buyers can afford to purchase homes. But, just to confuse the situation, the economy is slowing down.
However, additional factors become important. For example, you said the first six months of 1989 have been very profitable for you. Spring is usually the strongest home buying season and, although mortgage interest rates were high, it was a good selling time in most cities. However, now we are in the summer season when buyer demand normally drops.
Home buyers currently have the advantage of more affordable mortgage interest rates and less competition from other prospective buyers than just a few months ago. As a perennial investor in single-family homes, I think lower interest rates will result in more houses coming on the market for sale, due to a variety of reasons, such as move-ups and profit taking.
However, I don’t expect price reductions, because home sellers are very resilient and they usually won’t sell unless they can get their price. The exception, of course, is the motivated seller who must sell and will accept any reasonable offer.
To summarize, lower mortgage interest rates will enable more people to buy homes, home values should stabilize even though the economy is softening and the next few months should be a great time to buy a home.
Offer Mortgage as a Down Payment
Q: When we sold our home a year ago we took back a $30,000 second mortgage at 10% interest. Since then the payments have come in from the buyer on time every month. But we want to buy some investment property. We tried selling our mortgage but the best we can get is only about $24,000. I hate to see us take a $6,000 loss. Yet, there is no other way we can raise cash for a down payment on investment property. Any ideas?
A: That’s easy. Instead of selling your mortgage at a discount, offer it at the full face value as down payment on an investment property. If the seller won’t accept it, sweeten your offer with a little cash. This technique is called “lemonading.”
Public Adjuster Can Help With Insurance
Q: A few weeks ago you wrote about not over- or under-insuring homes. I fully agree the amount of the mortgage balance has nothing to do with the replacement cost of the home if it were destroyed by fire. But I wish you had gone further to expose how unfairly some insurance companies treat their customers.
Last spring our home was heavily damaged in a strong wind and rain storm. Shingles were ripped off the roof and we also suffered flooding damage. I realize flood damage is not covered by homeowner’s insurance. But our insurance company tried to argue that the water damage which originated at the roof was caused by flooding. Although we have been insured with the same company and same agent over 20 years, they offered to pay us practically nothing.
Fortunately, my wife knew a public adjuster. He came out, got estimates of repair costs, and negotiated a settlement with the insurance company that was more than $16,000 higher than their initial offer to us. Why don’t you mention that public adjusters often can help homeowners receive insurance payments that are far above what the homeowner can obtain alone?
A: Your letter is the first I have received about insurance public adjusters. Most people don’t know these folks exist.
But as you know, public adjusters often can help insured property owners obtain a higher settlement than the homeowner can receive alone. Most public adjusters charge a percentage of the insurance payment, but it is worthwhile if the adjuster gets more from the insurer than the homeowner was offered.
However, there is another viewpoint. Insurance companies often feel public adjusters are not necessary. I have never had a need to use a public adjuster because my insurance company has always treated me fairly. However, if I was ever unhappy with an offered settlement I would contact a public adjuster. If he or she couldn’t obtain a satisfactory settlement, then consultation with an attorney would become necessary.
Lease-Option With 50% Credit Good Deal
Q: Several months ago you suggested that a home buyer moving to a new city lease a home with an option to buy. We took that advice and negotiated a lease-option with a landlord who will give us only a 50% rent credit toward the down payment. As we were hoping for a 100% rent credit, do you think we should keep negotiating?
A: No. A 50% rent credit toward the purchase price is excellent. Now you have an opportunity to try out the house to see how you like it and the neighborhood. If you elect not to exercise your purchase option, perhaps you can sell it and make a small profit. Congratulations on your success.
Lease Options Provide Agent a Commission
Q: I have been trying to acquire a house on a lease-option. But my biggest obstacle seems to be the real estate agents. They don’t want to help me negotiate a lease-option. Last weekend one agent told me candidly her broker said not to work on lease-options because there is no sales commission. Is this true?
A: No. Many real estate agents have brought me lease-option transactions and every agent either received or will someday receive their full sales commission. I suggest the agent receive half of the commission when the lease-option is signed and the other half when the option is exercised. However, a few greedy realty agents refuse to work on lease-option transactions because they want the full sales commission immediately. I suggest you find another realty agent who is in the business for long-term sales benefits and not for short-term “quick buck” commissions.
Legal Remedies If Seller Backs Out
Q: We signed a contract to buy a home. But about a week before the scheduled closing date the seller told her agent she decided not to sell because she can’t bear to move out of her home of over 30 years. However, we already sold our old home, moved out and are now living in a motel. The agent is as upset as we are because he was planning on a big sales commission. What should we do?
A: Run, don’t walk, to the nearest real estate attorney’s office. You have several legal remedies. One is to sue for specific performance of the contract to force the seller to deliver the deed as agreed. If you elect this remedy, your attorney will probably recommend recording a lis pendens to cloud the title and prevent the seller from selling to another buyer.
Another remedy is to sue for your damages, such as expenses of living in a motel while you search for another house. If you must pay more for a comparable home, the additional cost would be part of your damages, too.
Interest-Only Loan Sometimes Preferable
Q: We are in the process of buying a brand-new home, which will be finished in about two months. The builder has arranged several mortgage alternatives, but we are free to shop for our own home loan. I checked with my bank. In addition to the usual array of mortgages, they were pushing an interest-only loan at the prime rate.
Although the prime interest rate is currently higher than we can get on a fixed-rate home loan, our monthly payment will be lower because it is an interest-only loan. We expect to stay in this home about five years and are primarily interested in maximizing our tax deductions. Our goal is not to own our home free and clear someday because I get transferred about every five years. Do you think an interest-only loan is a good idea?
A: Yes. I have several interest-only mortgages on my investment properties and am very pleased with the way they have turned out. Many lenders like interest-only loans because it keeps their money working every minute earning interest. Surprisingly, most lenders are not especially anxious to have loans repaid because that means they must constantly work to make new loans.
The life of lenders would be much easier if all their loans were interest-only. However, most homeowners and investors prefer amortized loans so their mortgages are eventually paid off. But for people in situations like yours, an interest-only mortgage can be a perfect solution. But I suggest you insist on a maximum interest rate “cap” just in case we have runaway inflation again like we did when Jimmy Carter was president.
Don’t Sign Up for ‘Budget Mortgages’
Q: We are in the process of obtaining a mortgage on a new home we are buying. The S&L; mortgage lender encouraged us to take a “budget mortgage” where we pay one-twelfth of our annual property taxes and insurance along with our monthly mortgage payment. At first we thought that was a good idea but then we heard you on a radio talk show explaining the horrors of monthly escrow impound payments. Do you think we should take the budget mortgage option?
A: No, no, no. Unless you are obtaining a VA, FHA or PMI (private mortgage insurance) home loan which requires monthly escrow impounds for property taxes and insurance don’t let the lender hoodwink you into such an account.
Mortgage lenders are notorious for messing up those accounts. To make matters worse, most lenders pay little or no interest on such accounts, which are bigger rip-offs than Christmas Club accounts. To make matters worse, some of these lenders forget to pay the property taxes and insurance on time with their borrowers’ money, thus causing further problems. You will be much happier if you pay your property taxes and insurance directly.
Bankruptcy Hindered Obtaining Mortgage
Q: The seller accepted our purchase offer to buy her home. But we are having trouble getting a mortgage because my husband filed for bankruptcy three years ago, before we got married. I didn’t even know about his bankruptcy until the lender told us it showed up on the credit report. If we can’t obtain a mortgage, can we get our $3,000 deposit back?
A: You should have included a mortgage finance contingency clause in your purchase offer. Shame on the realty agent for not including that important clause. Without such a contingency, if you cannot obtain a mortgage, you may have to forfeit your earnest money deposit. Please consult a real estate attorney for further details.
