Mortgage Article

  • Why would I sell my home, give up my three percent mortgage, and buy a new one with an eight percent mortgage when my payments are five times greater? Low interest rates have trapped most homeowners in their current homes. They could not qualify for an eight percent mortgage. Owning a property with an owner-occupied home is part of the American dream. Family, kids, two dogs, and two cats in the yard is still a dream. Keeping up with the Joneses is still part of the American psyche. More home space in the suburbs, better schools, better air to breathe, and safer shopping opportunities are all good and truthful arguments. Dreams and finances sometimes conflict.

    A family's desire to move upward:
    A family with a $700,000 home is considering trading up to a $1,500,000 home. It is an excellent idea for all the reasons except for the financing barrier and inadequate monthly cash flow to pay the bills.

    1) A family purchased a $400,000 home and financed 80%, with a $320,000 mortgage. They have lived in the property for five years, and because of amortized loan payments, their balance has been reduced to $310,000. They refinanced their current home loan at the best time for a 3%, amortized over a 30-year loan. It appeared like free money because inflation rose to 10% or more.

    The refinanced house payment was $928.89 principal and interest monthly. Over the life of the loan, the total payments were $668,800.60, with real interest paid of $358,800.60, excluding tax deductibility.

    Their property taxes are based upon Proposition 13 in California, which calculated the beginning tax of about 1.25% per annum and allows for only 2% per year increases. Their initial property taxes were $5,000 but increased to $6,000, and Homeowners dues were $300 but have gone up to $500 per month.

    Their property insurance, with various endorsements, including a $1,000,000 liability rider, originally cost $1,000. But insurance costs have increased, so the current outlay is $2,500 annually.

    The monthly costs of homeownership, excluding maintenance and capital improvements, are as follows:
    • Loan payment of $929.
    • Property tax 500.
    • HO dues 500.
    • Insurance 208.
    • Total $2,137.

    In addition, there are monthly outlays for electricity, natural gas, water & and trash, possibly adding $1,000 in living expenses.

    2) It’s time to move up to a larger home for all the obvious reasons and purchase that beautiful new home for $1,500,000. The down payment would be 20%, $300,000 out of the equity from their existing house, and some additional cash. They saved extra cash because they were not strapped with super-high house expenses. The new loan will be $1,200,000, payable with an 8% amortizing loan over 30 years.

    If they could obtain the same 3% mortgage as their current home, on $1,200,000, the payment would be $3,596, but interest rates have dramatically increased.
    Interest rates on jumbo loans are now 8% and rising. The new house payment would be $8,067.46 per month. Over 30 years, payments will be $5,808,570.63, with interest payments of $4,608,570.63, excluding tax deductibility.

    • Loan Payment $8,067.
    • Property taxes: 1,770.
    • HO dues 700.
    • Property insurance 400.
    • Total $10,937.

    The move would allow the family to more than double the home's square footage, a larger lot size in a suburban setting, with a great school district, tree-lined streets, park-like open space, less urban clutter, less crime, less traffic, better shopping opportunities, in a charming, planned unit development with an association to take care of the common area. More crudely, some may also think that they can escape the cesspool of high-density-stack-and-packed, homeless tent-lined streets and crime-ridden city environments. The tradeoffs are extremely difficult for improving family well-being vs. the pocketbook.

    Families thinking about upward movement in the social strata must answer the question of financial feasibility. Is it a sound economic decision if my monthly house payments increase from $2,136.89 to $10,937.? The family's monthly house payments would grow five times greater.

    The above example illustrates the primary reason for stress in real estate sales, mortgage sales, and related real estate support services. Expect continued fallout. When the real estate salesperson does not make the sale with corresponding commissions, the loan agents do not earn commissions, and escrow and title do not occur. The local Starbucks, the favorite restaurant, the dry cleaner, new clothes, car payments, and maintenance are all eliminated or at least deferred. The list of affected service providers suffering from a financial downturn is long.

    The difficulty in upward social mobility:

    There is a natural inclination for families to desire to climb the social ladder with the hypothesis that bigger, better, faster, and higher quality is all part of economic success. Yet there is a steep price to pay breaking through each level.
    Maintenance and utility expenses would double from their prior home, bringing the expense to about $13,000 per month. Assume the family has personal expenses of another $5,000 per month for two average economy cars, food, medical insurance, dental, I care, dinners out, daycare, pet care, and IRA contributions. The total of $18,000 monthly expenses using a backend ratio of 45% would require an annual income after federal and state taxation of $480,000. To pay federal and state taxes, this family must make about $750,000 annually and only tread water.

    The American economic system has created this untenable situation that systematically excludes most hard workers and keeps those who can afford it on a financial treadmill. Credit card expenses are at a crisis level. That seems like an efficient payment method, but it is economic exploitation because interest rates could increase to 30% annually. A Chase Visa credit card’s interest on purchases is 19.49%, cash advances 29.99%, and late fee is $39. per month, plus interest. Banks require minimum interest-only monthly payments because they keep the loan outstanding longer.

    Current consumer credit card debt in the U.S. is 1.03 trillion dollars, with 93% of consumers having an average of $8,000 outstanding. Debt is an enslavement system by design. Bankers take in deposits and lend them out at 8% to 30% per annum. The central banking system has allowed the creation of new money deposits out of thin air, lending them out at 8% to 30%. It is a great business model that exploits the taxpayers and the borrowers.

    The crisis in move-up housing:

    The above examples are the reason for the young homeowner-purchasing crisis in housing. It is economically infeasible for the average young family to move upward. This family is stuck with their low-interest rate loan. Less than 10% of home purchasers can qualify for home loans at higher interest rates.

    New and resale home markets are systemically frozen not because of a lack of demand but because potential buyers cannot afford to move. By the second quarter of 2024, there will be a significant downturn in real estate sales.

    However, many investor purchasers expect to turn the homes into rental income, which has caused reasonable price stabilization while renters are being locked out from the opportunity of homeownership.

    There are three subsets of home purchasers who will still buy homes:
    Large corporations like BlackRock purchase single families as a long-term rental strategy. They pay cash for homes.
    Super-rich with accountants to direct them to the correct decision because of interest tax deductibility or because it is an income investment rental strategy. Many can pay cash.
    Government with plans on subsidizing home purchases with your tax dollars. The result of subsidizing is to redistribute from the productive members of society to the less or nonproductive members. If the government had its way, every welfare recipient and indigent family would own a home; they contributed nothing to get and will contribute nothing to own and maintain. Apply or show up at the border and get your new life dream home for free. Tax dollar redistributions will pay for this insane strategy.

    Additional Comments

    • Inherited homes by beneficiaries of deceased parents are a source of home transfers that the kids may occupy but do not provide for an additional supply of homes for sale. These transfers are usually not considered demand-supply or market-driven sales.
    • Some families who can qualify are resigned to paying the extra interest payments and purchasing owner-occupied homes even at 7 to 8% fixed interest or an adjustable rate with a low-interest teaser rate. Even with the higher interest rate, purchasing is sometimes better than renting, where the rents go up faster than the consumer price index.

    Alternative financing sources are still doing well: • Non-qualified mortgages (non-QM). Non-QM loans allow borrowers to qualify based on alternative underwriting methods instead of traditional income verification and debt-to-income ratios.
    • Debt-service coverage ratio loans (DSCRs). The debt-service coverage ratio measures the cash flow available to pay debt obligations.
    • Equity lines of credit (HELOCs) or second trust deeds consolidation of existing debts.
    Mortgage agents should pursue private money loans for borrowers who are unable to obtain bank financing. Also, there are dozens of reasons that borrowers need privately funded loans, and the escrow periods are very short, resulting in a quick payday for the loan agent.

    I hope you find value in this article. Please forward this to your friends and associates.

    Thank you!
    Dan Harkey