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Posts Tagged ‘amortization’

Historic Decline in HomeOwnership affects Economy, Bodes well For Investors

In a Wall Street Journal article from March 27, 2017, by Laura Kusisto, as well as in a few blog entries on WSJ, the point is made that homeownership in the US is at a historic low. At 63.7% homeownership, it is the lowest such number for the past 48 years!
The reasons given for it include more strict lending practices following the recession. Perhaps another issue is that the recession is still fresh enough to have taken the belief away that your home will “always appreciate “ in value and will serve not only as a residence but as a major lifelong investment. Some people may no longer think so.
Add to that the natural desire of people to be free to move at will, and we have only 63.7% of homeowners in the US as of the 4th quarter of 2016.
As investors, of course, we are quite familiar with the powerful financial effect owning houses can have on our future, especially if we finance them with the incomprehensible 30-year fixed loans still available, and at still super low rates.
Having 63.7% homeownership percentage means, of course, that a full 36.3% of the population are renters! That is about 117,000,000 people!
Those of us who know the value and power of investing in houses and holding them as rentals can only look at this statistic as a positive – obviously, these renters need a place to rent and we will have a larger renter pool available for our homes. Sure some single people may want to rent an apartment, but families usually prefer renting a single-family home.
Coupling this data regarding the highest number of renters available to us in nearly 50 years, with the still-low interest rates available on 30-year fixed rate loans, means this is an excellent time to stock up on single-family homes as investments.
Interest rates are on the way up. The fed keeps reminding us they will continue to raise rates. Having a period of such low rates (despite the small “Trump Bump” we experienced recently), makes it a special time to buy and hold.
If you are under the FNMA allotted 10 loans per person (20 per married couple if they buy separately), it is high time for you to go out there and purchase brand-new single-family homes in good areas, finance them using these great 30-year fixed rate loans, which will never ever keep up with inflation (thus they will get eroded by inflation as to their real dollar value). The homes will be managed by local property managers we use ourselves in the various cities in which we invest.
We will discuss this as well as many other important topics for investors, at our quarterly ICG 1-Day Expo near the San Francisco Airport on Saturday, May 20th. We will have experts lecturing on important topics, lenders, market teams from the best markets in the U.S., and lots of Q&A, networking, and learning. Just send us an email at info@icgre.com. Just put in in the subject line, “Saw your blog on homeownership” and list your name and those of your guests. We will confirm!  See you on May 20th. 
 

 

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Loan Resets to Start Kicking in – Will Your Payment Jump Up? What Should You Do?

In the period between 2006 and 2008, a large number of interest-only loans were taken. These loans are not really interest-only for all eternity. These are typically loans that were interest-only for 10 years, and then were due to become fully amortized until the end of the loan period. One detail that many borrowers may have missed, is that if the total loan period is 30 years (the most common), and the loan is interest-only for 10 years, then the amortization that follows the 10 interest-only years will be amortization OVER 20 YEARS!

Thus when the loan resets to being fully amortized after the first 10 years, the borrower will experience the high payment jump of going from interest-only to going to a 20-year full amortization. For a lot of borrowers, this will be a shock! Of course, the “silver lining” is that the principal is being paid under the new fully amortized schedule, so the loan balance gets lower every month. However, even when the loan was interest-only, inflation was constantly eroding it anyway.
What is the borrower to do?
If the borrower can afford the increased payment with no problem, there is not much that needs to be done. Let the loan be paid off and just continue as before. If the payment load is too heavy, and the owner’s credit and income are good (especially if the owner has under 10 properties with loans on them), a refinance would a be a logical step – good credit can get 30-years fixed-rate loans at a bit over 4% – fixed for 30 years. The payments will be higher than the interest-only payments from before, but the low-interest rate and the 30-year amortization (as opposed to 20 years), will likely make the payment far lower than the alternative. Another benefit – the old loan is likely NOT a true fixed-rate loan so as interest rates climb in the future (if they do), the already-high payment is only going to get higher still. With a 30-year fixed-rate loan, such a thing cannot happen.
If a refinance is not possible, the next thing to look into is the possibility of selling the house. In some markets, over the past few years, much equity was built as home prices appreciated significantly. A sale will pay off the unpleasant loan, and most likely will generate a profit (perhaps a handsome profit at that).
One thing to do if a sale is not possible, if the house is underwater (can still be the case in some markets), or if the equity is thin so the sales expenses will create a net shortage, is to consider selling to an investor for essentially no-money-down on a contract-for-deed in states that allow it. That investor may be attracted to the no-down (or low down) purchase and may have the resources to pay the 20-year amortization loan while increasing his/her equity via doing so.
Of course, an option of last resort is to simply walk away. There are lots of investors whose credit is still damaged from the aftermath of the recession, so the credit hit is not devastating to an already-low credit score. Nevertheless, such an act will increase the time it will take for the investor’s credit to bounce back and start the count from zero again. This is not a recommended action to take.
Most important is to be aware of the upcoming reset, and prepare before it hits.
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