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Monthly Archives: August 2016

Who Pays Closing Costs?

The time has come: You've found the home of your dreams, you've completed the negotiations with the seller, been approved for your loan and are ready to sign the papers closing your loan. Now comes a big question, and a potentially costly one at that - who pays the closing costs?

By this point, your closing costs shouldn't be a surprise. Your lender should have disclosed any fees related to purchasing a home well before the time you reach closing as part of the Loan Estimate during the pre-approval stage. These fees may include:

  • A fee for running your credit report.
  • A loan origination fee.
  • Attorney's or realtor's fees.
  • Inspection, survey and appraisal fees.
  • Discount points.
  • Title insurance.
  • Title search fees and background checks.
  • Escrow deposit.
  • City or county land record.
  • Underwriting.

Added together, closing costs can quickly become anywhere between 2 and 5 percent of the total purchase price. Such a significant cost raises a fundamental question: Who pays these fees?

"Closing costs can be anywhere between 2 and 5 percent of the total purchase price."

Typically, closing costs are paid on some level by both the buyer and the seller, though the distribution of these costs can vary. According to Zillow, buyers typically pay a higher volume of distinct costs while the seller may pay fewer line items, but more significant ones. Since the majority of the aforementioned fees are related to the loan itself, these tend to fall to the buyer to pay.

That said, there is nothing that bars sellers from taking on some portion of the closing costs. Many sellers will do so as an enticement to buyers to close the deal faster, akin to offering a discount on the sale price. Sellers do often pay the real estate commission fee, as well as any existing property taxes incurred by the home so as to clear the title. 


Sales Mixed, but Still Strong

After dipping in June, new-home sales took flight in July.  Sales were up a whopping 12.4% to 654,000 units on an annualized rate.

Strength was concentrated in two regions – the South and the Northeast. As for the former, the South, sales rose 18.1% to 398,000 units on an annualized rate.  As for the Northeast, sales were up a stunning 40%. But because the new-home market is a small market in the Northeast, that works out to only 35,000 units on an annualized rate. 

It appears builders further embraced discounting to move inventory. The median price of a new home fell 5.1% to $294,600 in July. The latest price decline moves the year-over-year median price of a new home to negative from positive. Year over year, the median price is down 0.5%. 

A dearth of supply could lead builders to throttle back on discounting going forward. Given the pace of sales, new homes on the market fell by 7,000 to 233,000. This caused monthly supply to fall to 4.3 months from 4.9 months in June. (The all time record was 12.1 months of supply in January 2009.)

The outlook on housing remains positive. When considering sales, prices, new construction from a long-term perspective, we still see a very healthy market. We don’t expect that perspective to change for years to come. 


The 4 Most Important Mortgage Documents

Regulatory changes to the mortgage process have made it so many new buyers are now working off new and unfamiliar documents. Here is a guide to the most important documents you will encounter and sign on the way to closing on your new home.

The Loan Estimate. A new form that was put into place by the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), this document is issued within three days of applying with a lender, and it replaces the Good Faith Estimate and Truth In Lending disclosures. It will show loan terms, your projected payments over the span of a mortgage, and line item closing costs. It is designed to make it simpler to compare different loan programs and lenders so you can be sure you are getting the best deal.

The Closing Disclosure. Virtually identical to the Loan Estimate, though this form is issued at least three business days before closing on your mortgage and includes a breakdown of costs paid by buyer versus seller versus third parties. This way, the buyer can see if the initial quote and final terms have changed and easily compare the two documents.

The Promissory Note. Also known as "the note," this document is the loan contract, containing the terms of your loan (specifying if it is a fixed rate loan or adjustable rate loan), the interest rate, payment intervals and payment changes or penalties. It also specifies that your home is security for the loan in case of default.

The Security Instrument. Also known as "the deed of trust," this form functions as another form of documentation pledging your home as security. It also specifies if your home is going to be owner-occupied, a second home or non-owner-occupied.

There are, of course, many documents and moving parts that go into obtaining a loan or refinancing, but knowledge of the most important parts, along with a knowledgeable loan officer, can make the process far less stressful than many believe.

Market Preview: Still Sailing on Calm Seas

Mortgage rates have held steady lately.

For most of August, the conventional 30-year loan has been quoted between 3.375% and 3.625%. We expect this range to hold until the next employment report, due September 2. Few credit-market watchers expect the Federal Reserve to move on interest rates until December. 

The lack of movement in mortgage rates has taken some steam out of refinances, which isn’t unusual. Refinances were down 4% last week compared to the previous week, according to MBA data. 

Purchase activity was also down 4% last week. Activity has been trending lower over the past month.  The good news is that activity remains elevated compared to the five-year average. Compared to this time last year, applications are actually up 10%. We’re still looking at a healthy market. 

 Speaking of healthy markets, the new-home market might be the healthiest of them all. The NAHB Home Builder Sentiment Index posted at 60 in August.  This is the second time this year the index has posted at 60 (which is a positive).  Components within the index show gains for both present sales and future sales. Traffic volume was the only negative, reflecting the continued dearth of first-time buyers. 

All told, we like where housing is heading. Then again, we’ve liked where housing has been heading for the past five years. 

How is Owning Cheaper than Renting?

The conventional wisdom is that, in today's market, owning a home is less expensive than renting in many cities nationwide. It almost seems counterintuitive. How can the costs of owning and maintaining an entire home be less than renting an apartment?

According to Trulia, as of 2015, purchasing a home was 23 percent cheaper than renting in America's 100 major real estate markets. Since then, interest rates on home loans have fallen to historic lows, making it even more affordable. However, parsing the costs related to renting versus owning makes it difficult to understand how this can be the case.

"In the long term, owning almost certainly pays off." 


The key is to recognize that owning a home may, in the short term, end up more costly than renting, but in the long term almost certainly pays off. While in many areas a mortgage payment ends up being only marginally larger - or even equal to or less than - equivalent rent, owning requires certain larger up-front costs: a down payment, brokers fees, closing costs and more, all adding up to anywhere from 10 to 25 percent of the total cost of a home. 

Renting seems less financially demanding. A security deposit and several months rent due at lease signing will not likely add up to be nearly as much as a down payment. Yet owning a home can garner you significant tax savings, often making a large enough dent in mortgage payments to bring it under what it costs to rent.

Equity also changes the equation. When you rent, everything you pay goes to a landlord/homeowner. Once you've paid it, it is gone. You cannot get that money back or leverage what you've already paid. With every mortgage payment, however, you own more of your home - a valuable asset that you can later rent, sell or leverage the equity of. Essentially, each time you pay your mortgage, you are metaphorically depositing money into an account you can withdraw from later.

Lenders and borrowers feeling positive about housing market

Two recently released studies paint an optimistic picture of both buyer and lender confidence in the housing market. The first is Fannie Mae's second quarter 2016 Mortgage Lender Sentiment Survey, which consulted with a broad selection of lenders to glean insight into what they think of the current market. 

"Lenders reported demand growth for the quarter was up 70 percent."

Encouragingly, lenders reported that demand growth for the quarter was up 70 percent, compared with 20 percent in the prior quarter (Q1 2016) and 71 percent the previous year. Across all standards, lenders on average have loosened lending standards - specifically credit standards - to make it easier for many Americans to obtain financing.

"Key survey sentiment indicators suggest that lenders remain cautiously optimistic in their market outlook," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Additionally, the trend toward easing of credit standards appears to be tapering off, as the vast majority of lenders, around 90 percent, reported plans to keep their credit standards about the same."

"The survey was conducted before the recent May jobs report, and the weaker reported job gains might potentially temper this optimism," added Duncan. Yet in spite of these weaker than expected gains, the overall picture related to qualifying for a mortgage remains sunny, as reflected in the results of the Harris Poll on behalf of Trulia. The poll showed that, among 2,034 U.S. adults ages 18 and older, only 20 percent thought that interest rates would rise before they decided to buy.

"Homebuyers should be more worried about finding a home than interest rates," wrote Ralph McLaughlin, chief economist at Trulia. "In most markets, mortgage rates rates would have to be between 7 percent to 10 percent for financial advantages of homeownership to fall away."

While worries remained regarding home inventory, the recent narrow avoidance of the promised Fed rate hike seems to suggest that rates will stay low for the foreseeable future. This means that, if you are ready to purchase a home, now is the time. Contact New Penn Financial to get started today. 


Can you still get a home improvement loan with bad credit?

Home improvement loans can help bump up the value of your property in a more meaningful way than a simple coat of paint can provide. While many rely on credit cards, savings or gifts from friends and family to pay for a major renovation, others find that a loan is the only option that allows them to do what they need to do to make their home look and feel its best.

But what if the issue standing in the way of home improvement is your credit? Bad credit can limit your options when it comes to financing a major renovation, but it does not have to be a dealbreaker. Here are a few mitigating factors that could qualify you for a home improvement loan, even if you have poor or insufficient credit: 

"Bad credit can limit your options for financing a renovation."

Higher interest rates
Poor credit may not automatically rule you out for qualifying for home improvement loans, but it may result in higher interest rates to help borrowers mitigate the risk. While not ideal, this may not be a bad thing if you are able to pay off your loans relatively quickly.

Tapping your equity
Have you already paid in a significant amount to your home? Tapping your home equity allows you to leverage what you already own into cash - which you can, in turn, funnel back into your home and raise its value.

Adding a co-signer with solid credit can often assuage the apprehension of a lender. When applying for a loan with a co-signer, the lender will typically either average out the credit scores of the applicants or - depending on the loan product - look at the highest score only. 

To learn more about home improvement loans, call New Penn Financial today.

Market Preview: Slow and Easy, For Now

We mentioned that with the Brexit vote fading into a distant memory and the lack of any important news pending domestically or internationally, financial markets would likely go on hiatus. We even predicted that lending rates we saw last week would persist into this week and beyond.  

So far, we’re right. Rates haven’t done much of late, and we shouldn’t be surprised. Second-quarter gross domestic product (GDP), reported last Friday, wasn’t particularly encouraging. Growth posted at a 1.2% annualized rate, below most economists’ expectations.  

No need to fret, though. Within the GDP report, nuggets of good news could be found; most could be found in housing. Residential investment remains robust. The segment includes new single-family structures, multifamily structures, home improvement, brokers’ commissions, and other ownership transfer costs.

Current investment in single family homes is roughly 1.3% of GDP. From a historical perspective, that’s low. Annual single-family-structure investment has historically averaged between 2% and 2.5% over the past 55 years. 

People frequently overlook this fact – investment drives the economy as much as spending. Residential investment should continue to do its part to drive the economy forward. 

Home Equity and Retirement

One of the best things about owning your own home is that, simply by buying it, you are investing in your future. Unlike renting, every time you make a payment on your mortgage, you are building more equity and own more of your home.

This makes homeownership a potentially important element of retirement planning. With Social Security in some hot water and people living longer, the need to save up for your post-retirement life is paramount. If you have done the math and need extra income in your golden years to bridge the gap between your savings and your expenses, then your home can be a viable and valuable asset to maintain a high quality of life.

But how exactly do you access the equity in your home in retirement? A home offers possible value to retirees in several distinct ways:

Sell your home 
Maybe the home you bought was perfect for a growing family, but now that the kids have found their own places, it may be too big. Heating, cooling and powering a larger home can be costly. Not to mention that multistory homes may pose difficulties for older residents with mobility issues. One of the simplest ways to generate extra income is to sell your home and downsize to something that matches your current lifestyle. 

Market Preview: No rate hike for now

No one was surprised.

On Wednesday, Federal Reserve officials again decided to hold the federal funds rate between 0.25% and 0.50%.

The vote wasn’t close – nine-to-one to keep rates where they are. That said, the Fed did leave the window open for a rate increase when officials meet again in late September. In the statement that accompanied the latest decision to maintain the status quo, the Fed noted a “strengthened” labor market and that household spending was “growing strongly.”

We remain skeptical that a rate hike is coming. We wouldn’t call the economy a one-trick pony, but let’s be honest, housing has been performing most of the tricks. Fed officials have all but thrown in the towel on 3% annualized growth. Without the housing recovery, we can only guess what the annual growth rate would be. Housing is more interest-rate sensitive than many other sectors of the economy. Fed officials will tread carefully on raising interest rates. No one wants to stall the one engine – housing – that’s hitting on all cylinders.

With the Brexit vote digested, the US presidential candidates settled, the lack of anything of importance pending domestically or internationally, we don’t expect to see much movement in lending rates until September (when action in financial markets usually kicks into a higher gear). In other words, the lending rates we have now are likely the lending rates that will prevail for the next four or five weeks.

Then again, we do have two employment reports between now and Labor Day. These two reports, more than most other scheduled reports, have the potential to move lending rates one way or the other.