We will (hopefully) be closing on our new home next Friday. Maybe you can benefit from our experiences.
It is very hard to image mortgage interest rates being this low again any time soon, very possibly in our lifetimes. The bottom was on 03 Aug and now, thanks to a surprise new fee announced by Fannie Mae and Freddie Mac, they are up off the bottoms -- but still in truly record low territory. You can get 30-year par rates right at 2.5% (with 20% down and excellent credit) and 15-year rates around 2.25% at par. You can even buy down the 30-year loan to 1.99% and the 15- and 10-year loans to 1.75%. Even if something else happens that brings them even lower, there just isn't much lower for them to go. My first home had a mortgage at 7.875% and I remember the days of 18% mortgage rates.
Having said that, it is very much a seller's market, at least in our area, right now. That might soften as we move into the winter and with school now back in session, but there's actually little sign of it. The house we are finally closing on is the third we've had under contract and the sixth or seventh we've made an offer on. Most of the houses that were very attractive to us were on the market for only two or three days and in many cases it was two or three hours. So you want to be in a position to move quickly. Get your documentation all ready to go and have a pre-approval in place.
Don't forego the inspections. In addition to the usual home inspection, we paid for sewer and radon inspections and it paid off. Two of the houses we had under contract had broken sewer lines. One would have cost over $20k to repair and the other was quoted at $10k. In both cases we got the seller to either agree to do the repairs before closing or to lower the price by the bid amount (once it's discovered, they have to disclose it to future buyers, so they don't have much incentive to let the sale fall through and hope the next buyer doesn't do the inspection). One place had high radon and the seller agreed to pay for a mitigation system.
So what, you may wonder, killed those two sales? In the first case, the Flood Cert came back as being in the flood plain and flood insurance is outrageous at $13,000/yr (or $8,000/yr with a $10,000 deductible). The seller wouldn't lower the price further in compensation and so we terminated -- and ironically the next day my side efforts paid off and FEMA allowed the mortgage company to waive the flood insurance requirement). In the second case we got into a bit of a bidding war and our agent, without us asking, pulled comps and raised concerns that we had agreed to a price that was too high for the area. So even though we had been approved for an appraisal waiver we went ahead and paid for the appraisal and, sure enough, it came in $10k below the contract price. The seller was unwilling to reduce the price further (in addition to the sewer bid) and we weren't willing to bring additional money to closing to buy a house at above-appraised value, so that fell through.
Normally I am a huge proponent of shorter-term mortgages and, even then, aggressively paying them off ahead of schedule. I've paid off my last two homes and there really is something almost euphoric about being 100% debt free. But after running the numbers for the new house we opted to take the 30-year, 2.5% note and our daughter will likely have to settle the note when she inherits the house because we're not planning on paying it a cent ahead or a day early. What we will do instead is take the thousand dollars a month difference in the loan payment and invest that in the market and rental real estate. If we make just 8% average over the first 15 years we would have enough to pay off the mortgage (were we inclined to) with $115k left over and at 30 years the difference is over $1.5 million. Being debt free has value, but all things have a price and these numbers found mine.
If you are looking for a mortgage, shop rates and fees carefully. Just in looking at a few lenders the costs for the same rate varied as much as $20k. Also, run the numbers out carefully -- it's easy to get fooled by back-of-the-envelope calculations that don't take the opportunity costs of the points into account. Set up a spreadsheet simulation that makes an apples-to-apples comparison. We found that it made clear sense to go with the 30-year and spend a little to buy it down to the 2.5% (since rates had gone up slightly) but that it didn't make sense to buy it down any further.
Finally, most people don't pay much attention to the closing disclosures, assuming that the mortgage and title companies know what they are doing. They just sign them and bring the indicated funds to closing. Well, this is a very bad assumption. This is now the seventh real estate mortgage loan (purchase or refinance) I've closed and not one of them has been correct. This one had seven primary errors (and several derivative errors) totaling several thousand dollars to our detriment. It really does amaze me; this is what these "professionals" do for a living, yet they spend weeks putting the financials together and I can count on being able to find numerous errors in less than ten minutes. So you will need to assume that they will mess things up -- because they will -- and verify every single number on the document. It's actually not that hard (though obviously too hard for the "professionals").
It is very hard to image mortgage interest rates being this low again any time soon, very possibly in our lifetimes. The bottom was on 03 Aug and now, thanks to a surprise new fee announced by Fannie Mae and Freddie Mac, they are up off the bottoms -- but still in truly record low territory. You can get 30-year par rates right at 2.5% (with 20% down and excellent credit) and 15-year rates around 2.25% at par. You can even buy down the 30-year loan to 1.99% and the 15- and 10-year loans to 1.75%. Even if something else happens that brings them even lower, there just isn't much lower for them to go. My first home had a mortgage at 7.875% and I remember the days of 18% mortgage rates.
Having said that, it is very much a seller's market, at least in our area, right now. That might soften as we move into the winter and with school now back in session, but there's actually little sign of it. The house we are finally closing on is the third we've had under contract and the sixth or seventh we've made an offer on. Most of the houses that were very attractive to us were on the market for only two or three days and in many cases it was two or three hours. So you want to be in a position to move quickly. Get your documentation all ready to go and have a pre-approval in place.
Don't forego the inspections. In addition to the usual home inspection, we paid for sewer and radon inspections and it paid off. Two of the houses we had under contract had broken sewer lines. One would have cost over $20k to repair and the other was quoted at $10k. In both cases we got the seller to either agree to do the repairs before closing or to lower the price by the bid amount (once it's discovered, they have to disclose it to future buyers, so they don't have much incentive to let the sale fall through and hope the next buyer doesn't do the inspection). One place had high radon and the seller agreed to pay for a mitigation system.
So what, you may wonder, killed those two sales? In the first case, the Flood Cert came back as being in the flood plain and flood insurance is outrageous at $13,000/yr (or $8,000/yr with a $10,000 deductible). The seller wouldn't lower the price further in compensation and so we terminated -- and ironically the next day my side efforts paid off and FEMA allowed the mortgage company to waive the flood insurance requirement). In the second case we got into a bit of a bidding war and our agent, without us asking, pulled comps and raised concerns that we had agreed to a price that was too high for the area. So even though we had been approved for an appraisal waiver we went ahead and paid for the appraisal and, sure enough, it came in $10k below the contract price. The seller was unwilling to reduce the price further (in addition to the sewer bid) and we weren't willing to bring additional money to closing to buy a house at above-appraised value, so that fell through.
Normally I am a huge proponent of shorter-term mortgages and, even then, aggressively paying them off ahead of schedule. I've paid off my last two homes and there really is something almost euphoric about being 100% debt free. But after running the numbers for the new house we opted to take the 30-year, 2.5% note and our daughter will likely have to settle the note when she inherits the house because we're not planning on paying it a cent ahead or a day early. What we will do instead is take the thousand dollars a month difference in the loan payment and invest that in the market and rental real estate. If we make just 8% average over the first 15 years we would have enough to pay off the mortgage (were we inclined to) with $115k left over and at 30 years the difference is over $1.5 million. Being debt free has value, but all things have a price and these numbers found mine.
If you are looking for a mortgage, shop rates and fees carefully. Just in looking at a few lenders the costs for the same rate varied as much as $20k. Also, run the numbers out carefully -- it's easy to get fooled by back-of-the-envelope calculations that don't take the opportunity costs of the points into account. Set up a spreadsheet simulation that makes an apples-to-apples comparison. We found that it made clear sense to go with the 30-year and spend a little to buy it down to the 2.5% (since rates had gone up slightly) but that it didn't make sense to buy it down any further.
Finally, most people don't pay much attention to the closing disclosures, assuming that the mortgage and title companies know what they are doing. They just sign them and bring the indicated funds to closing. Well, this is a very bad assumption. This is now the seventh real estate mortgage loan (purchase or refinance) I've closed and not one of them has been correct. This one had seven primary errors (and several derivative errors) totaling several thousand dollars to our detriment. It really does amaze me; this is what these "professionals" do for a living, yet they spend weeks putting the financials together and I can count on being able to find numerous errors in less than ten minutes. So you will need to assume that they will mess things up -- because they will -- and verify every single number on the document. It's actually not that hard (though obviously too hard for the "professionals").