VA_Investor has a strategy to consider:
"FHA loans are assumable at the original rate and terms. The new buyer must qualify under FHA underwriting guidelines.And this from Calculated Risk: FHA Delays Fiscal Report. They might need a bailout.
This could be a huge hedge against rate increases causing your home value to drop or simply freezing the Market. Your house will sell with 5% financing when the going rate is 8+. Conventional loans have a due on sale clause and cannot be assumed.
I'd be going FHA if it were me buying now."
Also, the Senate's finally done it. They passed a bill today (98-0) extending the housing tax credit:
"The measure would also extend through April 30 an $8,000 first-time homebuyer tax credit and create a new $6,500 credit for homebuyers who have been in their current residence for the last five years or more".
14 comments:
Beating us all to the punch.
Regarding VA_Investor’s FHA Plan strategy, it makes sense in that I expect mortgage rates to rise in the coming years and an assumable mortgage may be a valuable component when selling a house.
However, I am not fully versed on FHA loans – but, I believe, that FHA loans must be at least 7 years old before they can be assumed, the new borrower must meet lending requirements, FHA loan rates seem to be approx. 50 basis points higher than conventional loans, FHA loans require an upfront PMI payment of 1.5% of loan amount at closing, FHA Loans require at least 5 years of PMI payments equal to annual premiums of .50% of the balance, and FHA Loans seem more costly to refinance later. So, you would have to weigh all these higher costs against the expected value of an assumable mortgage at resale.
Assuming one can put down 20%, it’s not clear to me that putting down 5% and taking a higher-cost FHA loan is better than putting down the full 20% and taking a conventional loan --- this is really the question. Regardless, I fully expect rates to be significantly higher in 2, 5, 10 years.
Purpleman,
If your 15% or 16.5% can earn the difference between the two costs, then you've given yourself a hedge at zero net cost.
(not that we're likely to do this plan anyway for purely psychological reasons)
So, let's call it 2% extra paid on 95% of the purchase amount, as opposed to 0% extra on 80% of purchase, that's equivalent to a 2.375% higher interest rate on just the 80%, so if I'm thinking about this right, your 15% extra DP would need to return a 12% annual return to make this trade-off cost-neutral. (taking the DP down to 3.5%, brings this down to 11.7%).
Actually, no I'm doing this wrong, because you need to amoritize the debt, and compound the earnings, but I think it gets across the concept that the additional earnings on the withheld DP amount offsets part of the higher cost of the FHA route.
Cara,
I'm not sure about the math either, but I suggest that it may aggregate to significantly higher borrowing costs (1.5% upfront PMI cost at closing, at least 5 years of PMI payments, and higher interest rate on loan). Yes, you may mitigate/overcome this by passive income earned on the money not spent on a 20% downpayment & an expected resale bonus for having an assumable mortgage. But it's far from a certainty.
Here's a question, can you put down 20% on a FHA loan and avoid all PMI costs altogether? In that case, the only higher cost would be the higher interest rate --- which may likely be entirely offset by the assumable mortgage resale bonus.
Purple
Purpleman,
But if you put 20% down, your assumable mortgage won't cover the next buyer's purchase price unless prices fall about 20%....
I've never been clear on what's the maximum you can put down on an FHA loan.
But if you're buying now and you think prices might fall another twenty percent and you'd like to mitigate any further losses beyond that, I guess it's worth looking into.
RE: FHA
You can put down as much as you want, but still have to pay PMI as far as I know. I've never heard of the seven years. I'd have to talk to a mortgage lender familiar with the process. In the past, there was no seasoning required and no new appraisal. As far as I know, PMI is currently tax deductible, but can never be cancelled.
I believe streamline FHA refi's are a cake-walk (again, unless things have changed drastically). This would be moot anyway, unless you anticipate lower rates.
PurpleMan,
Imagine 20 houses for sale in your neighborhood with the going rate at 9%. I am not saying that you will get a huge premium in price, but I can guarantee that your house will be out the door (no pun intended).
Get the highest mortgage you can at 96.5% and stash the rest in a prudent investment. Then, when you go to sell, there will be a significant assumable and (assuming price appreciation) you can hold a second to bridge the gap for your purchaser and turn to your stash for the move-up downpayment.
VA_Investor & Cara,
Sorry for the confusion, I already own with a 5% conventional 30yr fixed (bought late 90s). I just thought it was an interesting idea is all.
Don't get me wrong, an assumable mortgage may be a big plus in resale yielding a higher purchase price and/or faster sale (especially if rates really escalate). I just wanted to point out that it is not a free lunch, FHA loans have higher borrowing costs (interest rate & PMI).
When you think about it, it makes sense that an assumable fixed rate mortgage would have a higher interest rate. It's an option for borrowers, and options always have a cost. Perhaps this option is already priced in, under the VA_Investor plan you are judging that the option is under-priced.
Cara, since you're a near-term buyer - would you consider a FHA loan for this reason?
Purple
Purple
Purpleman,
It's something I'm actively considering, yes.
However, I, unlike almost everyone else on this blog, don't think we're going to see mortgage rates over 7% anytime in the next 5-7 years. And I doubt we'll see them at 6 (for conventional loans) for the next 2 years.
Since I'm looking to purchase a home where the price is such that we can continue to save at a similar rate as we are now towards our DP, I'm minimizing the loss potential in other ways, (1)you can only lose as much as you purchase, (2) I'll have plenty of new savings to be earning money on and putting aside towards any shortfall and a new DP fund.
But it's definitely something I'll be seriously frantically running the numbers on once we find a place. For instance if we found a place now, that would stretch our savings too thin, but that we truly loved, I'd definitely be prepping the hubby with this idea. Keeping more of our savings liquid is strongly appealing to him, and having the loan assumption as a loss mitigation mechanism on the higher purchase amount, might be enough to convince him that it's not crazy to go for a place we really love.
passed the house:
Realty Check
Home Buyer Tax Credit Expansion Heads to Obama
Cara,
Well it's official. One of those classic "I should've stuck with my first guess" circumstances. Months ago I was confident they would extend it but then all those false signs that they would not tricked me. Of course, they had to trick as many of us that they would not do it so people felt some pressure to buy before the credit expired.
Cara,
If you were around in the early '80's and sat by watching rates climb and climb and climb, you might feel differently. 12% to 17%+ in a few years! I'm not sure what they were in the '70's. I was blissfully unconcerned!
Va_investor,
But I think the fact that "most" loans are not assumable makes a big difference. (1) It makes all loans more like 5 to 7 year ARMs, because the median lifetime of a given loan is what? 7 years? (2) Because loans are not assumable the inflation/interest rate connection can be spread out by banks over a much larger portion of their balance sheet (or investors, take your pick).
Finally, I'm very confident that price increases here will precede any significant mortgage rate increases. We're one of the sturdiest markets in the country. Our housing recovery will precede everyone else's, and a housing recovery is required before the GSE's/Treasury/Fed can risk raising rates over 6%. Rates on conventional loans would have to exceed that of the FHA loan with all its premiums in order for the interest rate hedge to be meaningful.
That said, talked to the hubby last night and he agrees that if we buy a fixer-upper for under $290k (such that a 96.5% mortgage balance is still do-able on my salary) this is the route we're going to take. Because if there's other reasons you'd rather keep that cash on hand anyway, why not also get the interest rate hedge.
Cara,
Great minds think alike!
Unfortunately, I have no way to go FHA. It only applies to a primary home (not even a vacation home). If FHA is the same as other loan products, the income treatment of rentals is a killer (2 yrs seasoning required and only 75% of rent is counted).
My back-up plan is that my house will be paid-off in 8yrs and I can hold the first at below Market should the need arise.
The old adage in RE is "if you can finance it, you can sell it".
p.s. I checked the HUD site for info on FHA assumptions and saw no seasoning requirement. It used to be that the only closing cost was $45.00. The assumptor takes over and benefits from your upfront MIP, but if you sell outright you can apply for a partial refund; the amount of which will be determined by the default rate in the loans originated in your year. I've received from substantial $$ back.
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