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Your home equity represents the current market value of your home minus the liens (mortgages) that are attached to the property.

Home equity increases when the value of the home increases and when mortgage principal is paid that reduces the mortgage balance.  In a sense, home equity represents savings that the homeowner has accumulated.  Home equity decreases when the value of the home declines or when a homeowner takes out a loan against the property.  When a homeowner uses their equity, they have made a financial decision to achieve a financial goal or objective today rather than wait to utilize it a later date (such as when they sell the property).

Many people believe that they cannot or should not use their home equity.  First, a homeowner can access and use their home equity when and how they choose subject to qualification guidelines.   Secondly, the question of whether a homeowner should use their housing equity to meet financial or non-financial needs is an individual decision that is unique to their circumstances.  There are good uses of home equity and there are certainly poor uses of home equity.

The key point is that home equity is an asset of the homeowner (for many it is their largest asset) and can be used by the homeowner for any purpose they choose.  After all, it is their money. Among the reasons people choose to use their home equity are the following:

  1. Obtain a mortgage with better terms and/or a lower payment
  2. Obtain cash to meet a financial obligation or need
  3. Make home improvements
  4. Pay off other debt with high payments and interest
  5. Make investments that may provide a better financial return
  6. Meet educational expenses for children
  7. Meet medical or long-term care expenses
  8. Establish an emergency fund

Because the interest rate on any borrowing association with a home is lower than the interest rate on a credit card, a car loan, or other personal loans, using home equity can have significant benefits compared to utilizing any other type of borrowing.  Additionally, utilizing home equity can be a more effective and tax-efficient way to access needed funds than withdrawing funds from a savings account, an investment account, or a retirement account.  Lastly, a unique benefit of using home equity is that borrowing against home equity is not subject to income taxes and the interest paid on any type of home equity borrowing can be tax-deductible under certain circumstances.

Home equity management refers to the process of using equity extraction via loan at favorable and tax-advantaged interest rates to invest or manage cash flow in manner that offers higher returns and cash flow.

Following are the most common strategies to access home equity:

  1. Rate and Term Refinance
  2. Cash Out Refinance
  3. Home Equity Line of Credit
  4. Fixed Home Equity Loan
  5. Home Equity Conversion Mortgage

Each of the above strategies have pros and cons and may not be appropriate in some circumstances and may not be suited to all homeowners.  However, when used correctly they each can provide significant benefits.  For example, with a Home Equity Conversion Mortgage monthly payments are optional and there are unique features that can benefit married individuals who are over the age of 62.

As stated earlier there are many financial and non-financial reasons why a homeowner may want or choose to use the equity in their home.  Our role as mortgage advisors is to help our clients understand the options that are available to them if and/or when they want to determine if using their equity is right for them.  We work with them to explain the pros and cons of each option and provide the information that they need to determine whether utilizing their home equity, their asset, is a good financial option.

Many home buyers are wondering: Is buying a house worth it right now? The short answer is yes. If you are financially ready, buying a house is completely worth it – even in the current market. Buying and owning a home is still a good financial investment and is better than renting for many people.

While there are financial challenges in the current market, there are plenty of reasons to buy. If you or someone you know is on the fence about buying a home, keep these things in mind:

  1. Rising prices lead to equity

The main benefit to owning a home is over time your home builds equity. This adds to your overall net worth. The ability to build equity is what sets homeownership apart from renting, where there is no return on investment. Even though home values are not increasing at the pace they were, they are still going up and the balance is being paid down.

  1. Fixed housing costs

When you purchase a home, your monthly principal and interest payment will remain the same for the entire life of your loan. While rents are increasing at near record levels, buying real estate will help keep your payment fixed.

  1. Opportunities

There are many opportunities for homeowners.

Purchasing a home is not the right move for everyone. There are downsides to home ownership in any market. One thing to be mindful of in our current market is there is not a guarantee your home will continue to increase in value at the rate properties have over the last few years. Home value appreciation is likely to slow down but will not go away.

When deciding to buy or rent, it is good to compare monthly rent versus a mortgage payment. If the mortgage payment would be approximately the same or less than rent for a similar home, it might be a good idea to take a serious look at purchasing.

It is a good idea to consult with a mortgage lender and a real estate agent to see what options are available that meet your situation. We provide free consultations for pre-qualification. Feel free to contact us and see if buying a home is the right decision for you.

Homeowner’s insurance is a necessity for everyone, but not easy to understand. It protects your home and possessions against damage or theft. It is good to understand what your insurance policy covers. Some basic terms to know:

When purchasing your homeowner’s insurance policy, your insurance company or agent will review the characteristics of your home to estimate the cost of rebuilding it. To make sure you have sufficient coverage for as long as you live in the home, you should schedule annual reviews of your coverage with your agent or insurance broker. Many consumers are under-insured. It is important to have an updated valuation on contents and what coverage is needed in the event of a total loss. We have insurance agents that we work with and would be happy to give you a referral.

Last Sunday the Federal Reserve announced they were cutting “Rates” to zero. Unfortunately, often borrowers assume that means mortgage interest rates will also go down. Many lenders have had borrowers calling saying that they heard “Rates” are at zero. This is unfortunate and causes lots of confusion for borrowers. The media reporting adds to the confusion.

Let’s start here. The Federal Reserve controls the Federal Funds Rate. This is the rate that applies to overnight loans (1 day) between the largest financial institutions in the U.S. The Federal Reserve does not dictate mortgage interest rates and their rate setting does not directly affect any mortgage rates except for home equity lines of credit.

At times, the Federal Funds rate and mortgage rates move in the same general direction and at times (like now) they do not. However, they are fundamentally different types of loans since one is for one day and the other is most often for 30 years. Lenders and investors have different priorities for a one-day loan versus a 30-year mortgage.

HOW ARE MORTGAGE RATES DETERMINED?

There is a market where mortgages are traded daily. The participants are institutional investors and financial professionals. It is called the Mortgage Backed Securities market and what is traded are mortgage bonds. This market is like the stock market and there are thousands of trades a day that involve mortgage bonds.

The prices of mortgage bonds are determined by the buyers and sellers. When buyers have better investment alternatives, they will demand lower prices in order to invest in mortgage bonds, which results in the investor receiving a higher interest rate for their investment. When the investor receives a higher rate to purchase mortgage bonds, that means mortgage interest rates to the consumer will go up. Conversely, when investors are looking for less risky and more predictable assets the demand for mortgage bonds will increase and the price/interest rate offered will go down since there are many buyers and mortgage bonds are in high demand. When the investor receives a lower rate to purchase mortgage bonds, that means mortgage interest rates to the borrower decrease.

Because mortgage bonds trade on a daily basis, mortgage interest rates can and do change on a daily basis (sometimes many times a day). By contrast, (except in emergencies) the Federal Reserve meets 8 times a year and may or may not adjust the Federal Funds rate.

Additionally, mortgage interest rates can be influenced by the broader bond market. The 1-year, 10-year and 30-year Treasury bonds often move in the same direction. However, what is generally true is not always true since the treasury bond market tends to be more stable in times of stress. Additionally, there are other factors that also influence the mortgage bond market that could cause mortgage interest rates to be disconnected from the treasury bond market.

WHERE ARE WE NOW

By some accounts the last two weeks have been the most volatile in the history of the mortgage bond market. Seven or eight days ago, 30-year mortgage rates for the most credit-worthy borrowers were in the low 3% range. The past week closed with the lowest rates being offered at close to 4%. Don’t believe the advertisements on the internet and on the radio. The mortgage bond market has been very fluid and has been very volatile, so getting accurate pricing is not possible when rates are changing 5 or 6 times a day. The internet and radio ads cannot keep up.

Unlike 2008, which was the last time the mortgage markets were this chaotic, the reasons for the volatility have nothing to do with the banking or mortgage industries. First, the reaction to the Coronavirus has created an unprecedented situation and general uncertainty for the economy, at least in the short term. When there is uncertainty, investors want liquidity (cash), which means they sell their assets. In the past two weeks, investors have been selling all asset classes, which includes stocks, treasuries, corporate bonds, and mortgage bonds. The selling of these assets results in mortgage bond prices going down, which increases the mortgage interest rate to consumers.

The other factor weighing on the mortgage bond market is the fact that prior to the current situation, a large volume of mortgage bonds was issued in the first 2 months of 2020 due to the volume of refinancing that has taken place as interest rates declined. There simply are not enough buyers for all the new mortgage debt generated in the past two months. The problem is now amplified by investors wanting to hold cash. This depresses the price of mortgage bonds and causes mortgage interest rates to the consumer to rise.

To summarize, mortgage interest rates are not currently at zero and will never be at zero since no investor would ever invest in a mortgage bond with an interest rate of zero.

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While mortgage interest rates have increased over the past 7 or 8 days, there is strong belief when things calm down, that mortgage interest rates will back closer to where they had been. There is no way to know if they will get as low or what the time frame for that is.

I am advising my clients that if they are looking to refinance at a certain rate and we are above that rate then we should get prepared and have everything ready to go so that when rates fall to their desired level that we can be opportunistic and lock right away. Often when rates fall, they may only stay low for a few hours or a few days.

The week was dominated by comments of the Federal Reserve Chairman and the ongoing trade dispute between the U.S. and China.  However, the impact of these items on investors was minimal and the economic news that was released this week also had minimal impact.  As a result, mortgage interest rates ended the week largely unchanged.

Next week the following events will occur and economic data will be released:

  1. The Durable Orders report will be released on Monday;
  2. The second estimate for second quarter GDP will be released on Thursday; and
  3. The Core PCE Index will be issued on Friday.

Making Smart Savings Choices

In today’s unsettled economy, many people are looking for ways to stretch their money—but sometimes this includes altering insurance coverage to dangerously low levels or eliminating coverage entirely. If you’re thinking about changing your coverage to save money, consider these key issues below:

Some decisions to avoid

It is just as important to understand what not to do as you look for cost savings. Here are some scenarios you should avoid:

It may be unwise to carry only the minimum state-required amount of uninsured/underinsured motorist coverage on auto policies, or to cancel it entirely if it is not required in your state: According to the Insurance Research Council (IRC)*, the correlation between the percentage of uninsured motorists and the unemployment rate is high — when the economy is struggling, more people go without insurance. You want to make sure you’re protected in this instance.

Saving money is important, but so is making sure that what you’ve got is protected. If you’re looking for ways to save, or want to review your coverages, call Corda or Robert Jellum at 720-962-8700 for more information.  They can help make sure you’ve got the right protection at a price you can afford.

*Insurance Research Council, January 21, 2018

Mortgage interest rates trended lower this week based on lower projections for economic growth globally.  While the U.S. economy remains relatively strong many other areas, particularly Europe, are experiencing slow downs.

Next week the following economic reports will be released and events will occur which could have an impact on mortgage interest rates:

  1. The JOLTS report will be released on Tuesday;
  2. The Consumer Price Index will be released on Wednesday; and
  3. The Retail Sales report is scheduled to come out on Thursday; and

The economic data that was released this week was stronger than expected causing mortgage interest to continue to move higher.  All of the data was strong and rates ended the week higher than last week.

Next week the following economic reports will be released and events will occur which may impact mortgage interest rates:

  1. The Consumer Price Index report and the JOLTS report will come out on Thursday.
  2. There will be Treasury auctions on Wednesday and Thursday; and
  3. Mortgage markets will be closed on Monday in observance of Columbus day.

The economic data released this week should have been favorable for mortgage interest rates however mortgage interest rates continued to rise this week and end the week at their highest levels in the past four months.

Next week the following economic new will be released and events will occur which may impact mortgage interest rates:

  1. Housing Starts will come out on Wednesday; and
  2. Existing Home Sales will be released on Thursday.

There was not a lot of economic news that impacted mortgage interest rates released this week.  The main news was the Employment Report that was released on Friday and reported better results than expected.  Mortgage rates declined early in the week and following the Employment Report rose slightly, although for the week mortgage interest rates were slightly lower.

Next week the following events will occur and economic data will be released:

  1. Factory Orders will be released on Monday;
  2. The ISM National Services Index will come out on Tuesday; and
  3. The JOLTS Report will be released on Wednesday.

Identity theft can happen to anyone. Since more people are going online to shop, bank, or file their taxes, there is an increased risk for thieves to steal personal information from consumers.  Even if you are careful, a thief can obtain your information by hacking into systems of businesses, as millions of people learned last year with the Equifax data breach.  Cyber breaches increased in 2016 with most of the breaches impacting the medical and health care organizations, educations, and government.  There have been over 1,000 breaches exposing millions of records.  Stolen information can sell for more than $30 on the black market according to CNN.  However, in time and frustration alone, it will cost a victim much more than that.  Stolen information allows thieves to open bank accounts, lines of credit, new credit cards, get a driver’s license, file taxes to steal your refund and more.  What can you do if you find out your information has been compromised?

As we have seen, you may not know if you are the victim of a breach until you hear about it on the news. The first thing you should do if you suspect you are a victim is to check your credit with the major credit bureaus – Equifax, Experian, and TransUnion.  You are able to access your credit report for free annually at annualcreditreport.com.  If you have already accessed your credit report this year, you may have to pay a fee.

Although credit card microchips have curtailed counterfeiting, thieves have become focused on opening new accounts with stolen information. If you learn your information has been compromised, here are some steps to take to regain control of your information.  In every situation, you will want to continue to check your credit report and report any additional unauthorized activity.

Mortgage interest rates moved higher late in the week even though there appeared to not be a catalyst for the move higher.  Generally the overall market is not favorable to mortgage interest rates with a tightening monetary policy by the Federal Reserve, accelerating economic growth and the fear that inflation will become a more significant factor.

Next week the following event will take place and economic data will be released:

  1. The Existing Home Sales report will be released on Monday;
  2. The New Home Sales report will be released on Tuesday;
  3. The Durable Orders report will be released and the European Central Bank will meet, both on Thursday; and
  4. First quarter GDP will be released on Friday.

This week there were a range of events and economic data that influenced mortgage interest rates.  While some of the news was positive for mortgage interest rates, overall the news was mixed and rates ended the week slightly higher than last week.

Next week the following events will occur and economic data will be released:

  1. The Consumer Price Index will be released on Tuesday;
  2. Retail Sales will be released on Wednesday;
  3. The Housing Start report will come out on Friday; and
  4. There will be Treasury Auctions on Monday and Tuesday.