# When the rate goes up

It’s not “if” the rate goes up but “when” the rate goes up; it could make a big difference for some buyers. Freddie Mac predicts that mortgage rates will be at 4.5% a year from now.

If buyers can afford a home with higher interest rates, it means higher payments. Higher payments might mean they won’t have the money to spend on other things like furniture or improvements to the home or an unrelated purchase like a new car.

When the rate moves 0.50% on a \$250,000 mortgage, the payment goes up by \$70.66 a month. If it moves 1.00%, the payment goes up by \$143.74 per month, each and every month for the entire term of the mortgage which means paying over \$50,000 more for the house.

The question facing every borrower in this situation is “How will you feel about having to pay more to live in the same house because you were not ready to commit?”

Then, there’s the borrower who is absolutely maxed out as to what they can qualify for or sometimes, it is a borrower who just refuses to pay a higher payment. When that’s the case, the buyer has to make a larger down payment. In the same example, a 0.50% increase in rate would require \$14,873 more in down payment. That could make the purchase impossible or require the buyer to buy a lesser price home that will not have the same amenities.

Mortgage rates have been low for so long that some people think that is what they should be. There are some economists who believe that the economy will not be strong again until mortgage rates are in the 7% range.

To see how this type of scenario might affect you, go to the If the Rate Goes Up calculator.

Some people wait to buy a home until they have 20% down payment to avoid paying the mortgage insurance which is required by lenders when the loan-to-value ratio is greater than 80%, with the exception of VA loans.

To illustrate a typical situation, let’s assume that buyers have \$10,000 for a down payment on a \$200,000 home. They could purchase it today with a 95% loan or save another \$30,000 in order to get an 80% loan without mortgage insurance.

If it took three years to save the additional down payment, the \$200,000 home at 3% appreciation would cost \$218,545. A 20% down payment on the increased sales price would be \$43,709, less the \$10,000 the buyers currently have leaves them \$33,709 to save which would amount to \$936.36 a month. They would secure a \$174,836 mortgage at the then current mortgage rates, which in all likelihood, will be higher than today’s rates.

The alternative is for the buyer to purchase the home today with a 95% loan at today’s low interest rates plus approximately \$85 a month for mortgage insurance depending on their credit score. At the end of three years, the unpaid balance would be \$179,548. Assuming the home will be worth the same \$218,545, the buyer’s equity would be almost \$39,000. To reduce the mortgage to the same amount as the first example, the buyer would need to make an additional \$125 a month principal contribution above the normal payment. Then, the mortgage would have an unpaid balance at the end of three years of \$174,775.

When there is sufficient equity in the home, the mortgage insurance is no longer required. Some lenders may drop the mortgage insurance requirement with an appraisal to provide proof. In other situations, it may require refinancing to eliminate the insurance. Call to discuss options that may be available to you.

# Dust-Free Home

Having a dust-free home isn’t difficult, but it takes a serious commitment and a housekeeping strategy that addresses the dust and its causes. Whether your motive is cleanliness or to eliminate the cause of some allergies and asthma symptoms, it will be worth it.

• Try to dust your home at least twice a week. Dust the tallest items and work your way down. Dust picture frames, blinds, baseboards and anything that stands out from the wall.
• Feather dusters can spread more dust than they collect compared to microfiber cloths that attracts dust because they have an electrostatic charge.
• Filters on heating and air-conditioning systems should be changed often not only to remove dust from the air but to increase the efficiency of the units themselves. Special HEPA filters can improve the overall indoor air quality.
• Frequently changing the bag or emptying the container in your vacuum is helpful in eliminating dust.
• Vacuum the floors at least once a week. Vacuum under furniture and periodically, move appliances to clean behind and underneath. Use the proper attachments to vacuum upholstered furniture and under cushions.
• Eliminate dust magnets like carpet, heavy drapes and upholstered furniture. Consider hard surface flooring like wood or tile instead of carpet.
• Keep windows closed to keep dust out.
• Clean your pillows and drapes.
• Damp mopping and dusting with plain water helps hold the dust and is environmentally friendly.
• A humidifier can eliminate static electricity which holds dust.
• Air purifiers circulate air and capture dust and other pollutants.

# Getting to Value

Fair market value is the price that real estate would sell for on the open market without any unusual forces being involved. The definition is relatively simple but there certainly different methods of determining what it is.

A homeowner could order an appraisal before they put their home on the market but would incur the expense of an appraisal and more likely than not, it won’t or can’t be used by the buyer or their lender. The advantage is that an appraisal is a professional approach by a disinterested party to establish value.

Licensed appraisers use three approaches to value: the market data, the replacement cost and the income approach. The appraiser can put more weight on one approach than another based on his/her assessment of what would be appropriate.

The replacement cost looks at what it would cost to rebuild the property today less the depreciation it has experienced by age and wear and tear plus the value of the lot.

The income approach uses a capitalization rate based on the net operating income of a property to determine value. It is more applicable to commercial properties than it is for homes used by homeowners and not rented.

The market data approach relies on recent sales of similar properties near the subject. The appraiser will make monetary adjustments for differences in the comparables that are used to create a more accurate comparison.

Real estate agents use a similar approach to determine fair market value by performing a Competitive Market Analysis, CMA. Like the market data approach of an appraisal, it looks at recent sales of similar properties, it also considers properties currently for sale and what homes were unsuccessful in their attempt to sell. This approach is sensitive to supply and demand and may be more reactive to rapidly rising or declining markets.

Both appraisals and CMAs have a distinct advantage because of the personal opinion as a professional compared to online website estimates using raw data and mathematical formulas. Regardless of which method is used, it is an estimate. Obviously, some estimates are more accurate based on the experience of the person making the estimate. A price is placed on the property by the seller but value is ultimately determined by the buyer when a final sale is achieved.