So you have 20% to put down for a single family home in Scottsdale AZ. Your FICO scores are higher than Willie Nelson on Bob Marley Day in Montego Bay. You have been gainfully employed in the same W2 position with the same company for years. The American Express card with a $124 balance and the $112 payment on your 2002 Honda Accord make up the sum total of your earthly debt. Congratulations, you are one of the few buyers in today’s market in a position to call your own shots.
Surely the right play is to go the conventional financing route, right?
No private mortgage insurance, the lowest possible rate, less red tape than government sponsored financing vehicles.
From a strictly cost-based approach, all signs point to a nice, vanilla 30 year fixed conventional loan at a microscopic rate as the biggest no-brainer in the history of money.
Of course, as we have learned all too well, there is more to your choice in financing than today’s consideration. In fact, there is more to your choice in financing than even the total cost to you over the life of the loan. While we may not know where the market and its attendant values are heading, one fact is indisputable:
Interest rates will rise.
Maybe not today, maybe not tomorrow, but soon. Inflationary pressure makes it inevitable that rates will take off at some point. All of the warning signs are there. It will happen. Rather than banging the tired gavel of “buy today, rates on the way up,” let’s steer the discussion in a less self-serving direction.
Q: What is today’s buyer?
A: Tomorrow’s seller.
If you are buying a home in 2010, you need to consider the market forces that may shape 2015 or 2020. When we agents prognosticate, we tend to focus exclusively on home values. This is a fool’s errand. What we really should be thinking about is the buyer pool’s (in)ability to buy.
If interest rates manage to climb into the double digits in several years’ time, the difficulty of selling the property you are buying today may be compounded by a further contraction of able buyers. How does one counteract the specter of such a looming boogeyman? By going back to the future for familiar, but forgotten solutions to a similar problem.
What saved home sellers in the era of 18-20% interest in the ‘70s and ‘80s? Owner financing and assumable loans. For the purpose of this post, I wish to focus on the latter.
With the low to zero down conventional financing options in the market for my first decade in the business, it was a rarity to consummate a transaction with anything other than non-assumable financing. Now that FHA loans have forcefully elbowed their way back into the marketplace, however, assumable financing has returned. Most borrowers are not considering this aspect of the financing in the least, mind you. They simply jump on whatever they can qualify for that provides the least cost and lowest rates. I maintain that the assumable nature of a loan will be incredibly important moving forward.
While a new buyer would have to qualify for the loan to assume it, imagine how much wider your future buyer pool will be with such an option in place. Your 30 year fixed at 4.75% may not look quite as good to you if you find yourself in a position in which you have to sell your home in the midst of 12% interest rates. Not to sound the bell of an alarmist, but it’s not difficult to foresee a future in which many buyers who have migrated to the security of 30 year fixed conventional mortgages in the wake of the mess spawned by more creative financing find themselves imprisoned within those non-assumable safety nets.
Moving forward, your mortgage might not just be your mortgage. It could potentially be your future buyer’s. As such, when shopping for financing, there is more to consider than just the nuts and bolts of your own cost. Your mortgage could eventually prove either an enticement or a hurdle to a sale.
I will close with that which should have served as a preface: I am not a mortgage professional. DO NOT rely on my speculation in any manner when making a choice in financing. The nuances and new rules/regulations in the financial world are changing so fast that even those who wade in those murky waters on a daily basis are having a hard time keeping their raft of sanity afloat. For some, the internal debate is academic anyway, as there are qualification constraints on all financing types. Only your lender, with a full view of your financial picture can provide competent advice as to which programs you may ultimately qualify for, and which is the best fit for you. I do, however, want you to add this question to the typical inquiries about rates, fees, penalties, etc when speaking with your chosen loan officer:
“Is this loan assumable?”
I expect it will matter more than the attention it is currently being afforded in most Real Estate circles.