Calling All Homebuyers: How To Navigate A Tough Real Estate Market

Buying a house is an exciting milestone, but it can also be financially daunting. In today’s market it is particularly challenging with a perfect storm of low inventory, fierce competition, and the highest interest rates in decades. When the Federal Reserve decides to cut interest rates, monthly payments will become more affordable, but in the meantime all is not lost. Potential homebuyers do have some strategies available for interest rate reductions, so let’s explore the options here.

  1. Buy Down Your Rate with Points
  • You can lower your interest rate by paying for discount points upfront. Each discount point costs 1% of the loan amount.
  • Suppose you’re borrowing $600,000. Paying $6,000 for one discount point would typically lower your interest rate by 25 basis points (0.25%).
  • To calculate your breakeven point, divide your buydown cost by the monthly savings. For example, if paying $6,000 for one discount point saves you $100 per month on your mortgage payment, your breakeven point would be approximately 60 months (5 years). You’d need to remain in the home for at least that long to recoup your buydown cost and see real savings on your loan.
  1. Consider an Adjustable-Rate Mortgage (ARM)
  • An ARM offers an initial low introductory rate, typically fixed for the first few years (e.g., 3, 5, 7, or 10 years) of a 30-year loan.
  • While the initial rate is lower, be cautious as the rate may increase later based on market conditions. However, if you are considering refinancing or selling before the fixed term is up then this could make sense.
  1. Opt for a Shorter Loan Term
  • Choose a shorter loan term (e.g., 15 years instead of 30). Shorter terms often come with lower interest rates. While your monthly payments may be higher, you’ll pay significantly less interest over the life of the loan.
  1. Make a Larger Down Payment
  • A substantial down payment reduces the loan amount, leading to a lower interest rate. For example, if you’re buying a $800,000 home, putting down 25% ($200,000) instead of 20% ($160,000) will result in a smaller loan balance and potentially a better rate.
  • Benefits of a larger down payment also include a smaller home loan balance that creates a cushion of home equity even if market values decline, and no private mortgage insurance (PMI). Borrowers who put down 20% or more avoid PMI, which can add to monthly costs.
  1. Make Lenders Compete
  • Obtain rate quotes from multiple lenders and compare the terms of their offers. Since rates have risen, the number of people buying and refinancing has dropped sharply. So lenders are eager for business and may be willing to match or beat competitors’ rates to win your business.
  1. Plan for Refinancing Opportunities
  • When the Federal Reserve cuts rates, we will see favorable refinancing conditions, so be ready to act when rates decrease enough to make it worth it to refinance.

While today’s rates are hovering just above 7%, keep in mind that in October 1981 the average 30-year fixed mortgage rate was a staggering 18.5%. So while today’s rates are considerably higher than they were a few years ago, homebuyers in the 1980s faced much steeper costs. Along with evaluating financing options, negotiating with lenders, and monitoring refinancing options, this historical context may make it feel more reasonable to seize an opportunity when it comes your way.

Elder Fraud: Too Close To Home

Ten years ago my grandmother was a victim of elder fraud. In what I now know was a classic scam, a scammer contacted her by phone, claiming to be a grandchild in trouble. (It’s also common for the scammer to pose as someone representing a grandchild in trouble, such as a lawyer or law enforcement agent.) In my grandmother’s case the scammer said he was in jail and needed bail money to get out, convinced her to buy cash cards at a grocery store on his behalf, and intimidated her into staying silent.

At first glance it appears that there were a number of people who could have raised the red flag. My grandmother could have recognized that the voice on the phone was not familiar, the grocery store clerk could have noticed her odd behavior, or our family could have checked in more frequently, as the scam took days to complete. But on closer inspection none of these avenues were likely to stop the scam. Like many elderly people, my grandmother does not hear particularly well, and does not always recognize familiar voices on the phone. Employees at a grocery store are generally not empowered to intervene if they notice suspicious but legal purchases. And at the time of the scam my grandmother lived alone, making the frequent family contact needed for prevention difficult.

While we have since taken steps to prevent such fraud going forward, they were not quick or easy. My grandmother’s finances are now closely monitored by a family member, and she has moved closer to family, making frequent check-ins possible. While these were needed changes, perhaps most important is that the whole family is now aware of these dangers and will be ready to take action if anyone notices something amiss.

My grandmother’s experience is distressingly common. In 2022, adults over the age 60 reported 88,262 complaints to the FBI’s Internet Crime Complaint Center, with a total loss of $3.1 billion. This represents an 84% increase in losses as compared to losses reported in 2021. The average loss per victim was more than $35,000, and more than 5,000 victims lost over $100,000. California has the highest number of elderly victims of fraud, and the collective amount of reported losses incurred in California was $624,509,520 in 2022.[1]

The Department of Justice’s Office for Victims of Crime list the following common scams[2]:

  • Grandparent scams such as the one described above.
  • Romance scams where the scammer takes advantage of people looking for romantic partners or companionship through dating websites or social media.
  • Government investigation scams where the scammer claims to be a government employee and threatens to arrest or prosecute victims unless they agree to provide funds or other payments.
  • Sweepstakes/lottery/charity scams where the scammer claims to work for a charitable organization and tells the victims they won a lottery or sweepstakes, which they can collect after paying “fees/taxes”.
  • Tech support scams where the scammer acts as a technology support representative and offers to fix non-existent computer issues. The scammer gains remote access to a victim’s computer or phone and their personal information.
  • Phishing scams where the scammer uses emails and websites that claim to be associated with financial companies and manipulates victims to disclose personal and financial data. 
  • Email extortion scams where the scammer shows evidence that they have one of the victim’s online passwords and claims to have put malware on the victim’s computer that lets them capture keystrokes, watch the webcam, and track online history that may be private, such as visits to adult websites. They threaten to share this information with the victim’s contacts unless the victim pays hush money in the form of Bitcoin.
  • Cryptocurrency scams where the scammer sends a message about a virtual currency investment opportunity and claims that the virtual currency investment involves no risk and sure profits.
  • Fake check/overpayment scams where the scammer sends a bad check to pay for an item, a sweepstakes award, lottery winnings, a grant, or a scholarship and then asks that some of the money be returned for fees to claim the award or overpayment.

An increased focus on education and assistance can thwart scam attempts. One, let’s do our best to educate our elders about the pervasiveness of scammers and the types of scams they might come across. Two, let’s be sensitive to our elders who may be filling new financial shoes and walk them through how to handle everything. Three, if they are unable to take charge of their finances, agree on a trusted person to assist them whenever needed. This could be as casual as helping make a phone call to a credit card company or as involved as creating a joint account with the trusted person’s name on it. If our elders don’t feel as alone and are willing to ask for help when uncertainty arises, then as families we can better fight back against the exploitation of some of the more vulnerable members of the population.

For prevention resources or if you or someone you know has been a victim of elder fraud, visit the Office for Victims of Crime website or call the National Elder Fraud hotline at 833-FRAUD-11.

 

[1] https://www.fbi.gov/contact-us/field-offices/losangeles/news/fbi-los-angeles-raises-public-awareness-about-elder-fraud-announces-arrests-made-this-week-of-men-who-allegedly-targeted-elderly-victims-in-timeshare-scheme

[2] https://ovc.ojp.gov/program/stop-elder-fraud/common-scams-and-warning-signs

Breaking the Home Equity Piggybank

For the vast majority of people “home sweet home” is their most valuable asset. Borrowing against a home can free up cash for many purposes that would otherwise be out of reach. Enter home equity loans and home equity lines of credit (HELOCs), both ways to access home equity without the homeowner having to sell. Home equity loans and HELOCs are essentially second mortgages that are secured by the home as collateral.

To calculate equity, subtract the amount you owe on your mortgage from your current property value. Generally, lenders will let you borrow up to 85% of your home equity, depending on your credit score and history, employment history, and monthly income and monthly debts. However, if you default on payments for either a home equity loan or a HELOC, the lender can foreclose on the property. That said, tapping into your home equity can be a sound strategy to raise cash for large purchases if and when you need it.

The rundown on home equity loans:

  • Lump sum
  • Fixed interest rate
  • Conventional loan structure separated into interest and principal
  • Monthly payments are predictable and don’t change.
  • Monthly payments are for a set period.
  • Monthly payments are made in addition to mortgage payments.

The rundown on home equity lines of credit:

  • Revolving credit line, money is withdrawn as needed (like a credit card).
  • Variable interest rate often begins at lower rate than home equity loans.
  • Conventional loan structure separated into interest and principal or interest-only payments
  • Monthly payments adjust up or down based on a benchmark interest rate.
  • Rising interest rates can increase payment.
  • You only pay interest on the money you withdraw, not the total credit available.
  • Some lenders allow partial or full conversion to fixed rate home equity loans.
  • The typical borrowing period is 10 years followed by a repayment period of 10 or 20 years.
  • During the borrowing period, you have to make minimum monthly payments on the amount you owe..
  • Once the borrowing period ends, you have to repay the remaining balance, like a conventional loan..
  • Interest may be tax-deductible.
  • You can make additional principal payments.
  • You can refinance.

Which option is right for you? Home equity loans could potentially be better for people who have an upcoming one-time expense with a known cost. For example, this might include home improvement projects, a down payment on another property, wedding expenses, emergency expenses, even credit card debt consolation. Home equity loans could also benefit people who want to avoid overspending. On the other hand, HELOCs could potentially be better for people who have upcoming variable or periodic expenses and would benefit from access to a revolving line of credit. For example, this might include home improvement projects, college expenses, medical bills, long-term care expenses, or a new business venture. As with most financial planning questions, the answer to this question depends on each homeowner’s unique circumstances, so this is a great question to discuss with a financial advisor.