What Happens After the Tax Credit is gone?

Image by reeltor99 via Flickr

With less than a week to go before the tax credit is over, I've been thinking about what the real estate market in Philadelphia will look like for the rest of the year. I was thinking specifically about the real estate market here, because real estate is too local for me to have a sense of what the national scene will look like in May and after.

The tax credit has certainly sped up the market so far this year. All of our offices have outpaced their production for the same period last year (when we were ranked as the number Century 21 company in our area, and number 3 for the state), so its obvious that the tax credit has had some impact. The question is whether is has driven the market or enhanced the market, and my opinion leans towards enhancement. Investors seem to have re-entered our market, and that (to me) is a sing that they percieve value in our real estate. Though activity is speeding up as we near the deadline, my sense is that the market will slow but not stall after the tax credit, because all of the basic reasons to buy a home are in place.

1. Prices are stable and gaining ground. According to Trend MLS, in the first qiarter of this year, closed transactions were up almost 10% (9.6% actually) and the average sale price actually increased over the same period in 2009.
2. Interest rates remain historically low - I don't think I really have to explain this one. Articles speak about rates going up from 5 to 6% as if that were a lot. People wouldn't be happy unless the bank paid them, but frankly, anything under 9% has always been really indicative of inexpensive money.
3. The financial benefits of home ownership are undeniable in the current market. In a recent article, the New York Times once again published its rent vs. buying calculator, and in our market, with no appreciation and no rental increases, a home buyer still makes out better after only 5 years of home ownership - and any prudent landlord would certainly increase the rent at least a few percent over 5 years!

With all of that going for us, it would seem that we have reason to believe that there will be reasonable activity for the rest of the spring market. Certainly if more jobs are created, and we avoid any major economic body blows, it would seem that we might be headed towards the recovery we have heard so much about.

How Your Settlement Date Can Lower Your Rate

Sometimes, saving money on your mortgage is as simple as picking a better closing date.

It's all about Rate Lock Commitments.

A Rate Lock Commitment is a bank's promise to honor a specific mortgage rate for a specific period of time. They are a lender's prediction of what mortgage markets will look like at some point in the future.

The future is murky, of course, so it follows that the longer the rate lock, the higher the bank's corresponding interest rate.

Banks have to compensate for "time risk".

Rate locks typically come in 15-day increments with the 30-day lock serving as the basis for all other pricing:

• 15-day rate lock : 1/8 percent lower than the 30-day rate lock


• 30-day rate lock : The basis for all other pricing


• 45-day rate lock : 1/8 percent higher than the 30-day rate lock


• 60-day rate lock : 1/4 percent higher than the 30-day rate lock

These aren't exact figures, of course. Spreads between rates can (and do) vary from lender-to-lender. On average, though, they're fairly close.

This is why choosing a closing date is so important to your mortgage rate. A 45-day closing may reduce your rate 0.125% versus a 46-day one.

Assuming a $250,000 home loan near today's rates, that's an annual difference of $236.

So, when negotiating a contract on a home, keep in mind how rate locks work to make sure you get the best rate possible. The shorter the length of your rate lock commitment, the more money you might save long-term.

A second money saving trick is adjusting your closing date towards the end of the month. At settlement you will pay interest from the date of settlement to the end of the month you settle in. For example, if you settle on the 5th of the month, you will pay 25 days interest. If you were to settle on the 25th of the month, you would only pay 5 days interest, reducing the cash needed at settlement by 20 days (or 2/3rds of your monthly interest payment). While this doesn't actually save money, it does help your cash flow at the time of settlement (when money always seems a little tight).

You might think it even smarter to settle on the last day of the month to minimize the interest payment, but with so many people trying to settle then, potential problems seem to pop up in timing which might end up with your settling on the 1st day of the following month if anything gets delayed, costing you even more cash than you wished - so keep a little cushion in there for surprises, and you should maximize your cash flow, have a few days to move before your next rental payment, and breath a little easier.

Real Estate Definitions: Amortization

In the widest definition possible, amortization (pronounced: am-ohr-tih-ZAY-shun) is the scheduled process by which a loan's principal balance pays down to $0.

The opposite of an amortizing loan is an interest only loan for which there is no scheduled principal repayment schedule.

With respect to mortgages, amortization is what determines how much of a monthly payment goes to principal, and how much goes to interest. Amortization schedules are the same for all fixed rate, non-interest only home loans including 15- and 30-year fixed rate mortgages, as well as all non-interest only ARMs.

Monthly principal and interest payments on a mortgage are based on the mathematical formula above, where:

• P = principal
• A = payment
• r = monthly interest rate
• n = number of payments

Now, if you've ever paid on an amortizing home loan, you don't need to use the formula to know that mortgage amortization schedules are dramatically front-loaded with interest.

In other words, in the early years of loan, the interest due on a mortgage is relatively high versus the principal due. And, if you've ever heard someone say, "You don't pay down much of a loan in the first few years," now you know -- mathematically -- why that is.

This interest-heavy mortgage repayment schedule helps banks to collect as much loan interest as possible up-front, offsetting potential loan losses.

But, just because the bank sets an amortization schedule doesn't mean that a homeowner can't change it. In any given month, a borrower can prepay extra principal to the lender, thereby changing the formula and accelerated the loan payoff date.

There are calculators online that do the prepayment math for you, but before making extra payments, talk with your loan officer or financial advisor first. Prepaying your mortgage could trigger a stiff penalty from your lender, or put your liquid assets at risk. Prepayment is not a bad plan, but it may be a bad plan for some.

(Image courtesy: Mortgage News Daily)