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Have you thought about building your dream home?

Finding and getting an offer accepted on any home is tough in today’s housing market, but what if you could build your own dream home? You could design it how you want and potentially build your own equity in the process. Either buy land and finance it into the costs of the loan or build on land you already own while using its equity as a down-payment. With a construction loan from Homeseed, there are plenty of options and adjustments available throughout the process as you build your dream home.

“Nothing worth having comes easy” is the mantra to remember when going through the building process. The whole process can be daunting but having a can-do attitude will be your ticket to success. 

Here’s a simplified checklist for the construction process:

  1. Research land: location, available utilities, cost for development
  2. Research type of home:  layout, cost to build, finishes
  3. Research builders: reputation, easy to work with, attention to detail, cost per square foot
  4. Research loan options:  which loan option fits your project and financial goals.

Doing your own research will help you prepare for the challenges ahead. Depending on how you like to organize a project, you will want to keep a digital or paper record of all the details and information you discover. Tip: check out the local jurisdiction in the location you are wanting to build for building requirements and costs. Some building departments have super helpful websites as well. 

Getting the financial piece nailed down is one of the early important steps.  Here at Homeseed, we offer Conventional (conforming and Jumbo loan amounts), FHA, VA, and USDA construction loans. Speaking with a loan advisor about your financial goals will help you decide which loan option is best. 

Homeseed’s Forecast for Mortgage Rates in 2021

Mortgage rates reached all-time record lows in 2020 and are expected to remain low through the end of the year. COVID-19 has created a crisis for many economic sectors, and as a general rule of thumb, weak economic data tends to cause lower mortgage rates. However, there are numerous indicators suggesting rates will increase in 2021 that we will discuss in this blog post. Fannie Mae is predicting the 30-year fixed rate to remain near 2.8% for 2021 and 2.9% for 2022. The National Mortgage Bankers Association is predicting we will reach 3.3% by end of 2021, and 3.6% by end of 2022.

The record low rates we are currently experiencing have been brought on by weak economic data shown in the poor numbers for the labor market, employment rate, and consumer spending. With news of successful vaccine trials giving hope for ending global lockdown restrictions, prospects for economic growth will gradually improve and likely push mortgage rates up in 2021. So far, the stock markets have also seemed to welcome news of a Biden presidency. Continued optimism in the stock market would persuade investors to shift money out of safer investments like mortgage-backed securities and into riskier assets like stocks, further increasing the potential for rising mortgage rates.

Lastly, while we expect mortgage rates to rise, we don’t expect them to rise quickly or very much. The fallout from a global pandemic will take time to recover from, and the housing industry is one of few current bright spots of the economy being supported by low mortgage rates. The Federal Reserve has also committed to keeping its Federal Funds Rate low, which indirectly impacts a broad range of markets including mortgages. If we were to see rates rise half a percent from its current 2.75% to 3.25% in 2021, we can expect an average borrower who qualified for a $400,000 loan to lose about $25,000 in purchasing power as a result of the 0.5% increase in rate.

Links/Notes:

  1. Market Watch – COVID-19 vaccines would improve prospects for economic growth and push overall interest rates up
  2. National Mortgage News – Fannie Mae predicts 30-year to remain near 2.8% for 2021 and 2.9% for 2022. MBA predicts rates will reach 3.3% by end of 2021, and 3.6% by end of 2022
  3. Bank Rate – “My gut feeling is that rates are going to rise in the next year,” Johnson said. “You’re just not going to get investors willing to accept 1 percent returns,” he added. “As COVID ebbs away, these record low interest rates will ebb away.”
  4. The Mortgage Reports – Markets welcomed news of Biden presidency, leading to more money flowing into stocks.
  5. How rates impact a borrower’s purchasing power:
    1. $400,000 Loan’s Monthly Principal & Interest = $1632.96 (30-Year Fixed at 2.75%)
    1. $375,000 Loan’s Monthly Principal & Interest = $1632.02 (30-Year Fixed at 3.25%)

Cost of Waiting

Should you purchase a home now, or should you wait? Like most big decisions in life, answering that question depends on a lot of factors such as the economy, real estate market, finances, and personal life. If you are now in a position to responsibly take on a mortgage payment after considering those factors, and are instead waiting for the absolute lowest price on a home, read on to learn more about why you should act now to avoid the potential cost of waiting.

Low Interest Rates

The average 30-year fixed mortgage interest rate about a year ago was 3.75% according to Freddie Mac’s Primary Mortgage Market Survey. Today’s average comes in at 3.01%. Interest rates for mortgages are currently at all-time lows, and lower interest rates mean greater home affordability for potential home owners. To give you an example, a borrower with a $475,000 loan amount and 3.75% interest rate on a 30-year fixed mortgage would have a monthly principal and interest payment of $2,200. If the same borrower now had today’s lower rate of approximately 3%, their loan amount could increase to $520,000 and they would still have a lower monthly principal and interest payment of $2,192. That’s an increase in purchasing power of $45,000 because of today’s lower interest rates than a year ago. With uncertainty in the economy, there is a potential that interest rates will rise again at any time.

Home Values Continue To Rise

Demand for housing in the Seattle metropolitan area remains very strong and property values continue to appreciate at a fast pace. We’ll use a $500,000 home purchase price and conventional financing to illustrate how home appreciation will require more additional cash at closing. Conventional financing typically requires a minimum 5% down payment. If the home is valued at $500,000 today, that would require a $25,000 down payment. At the current appreciation rates projected by MBS Highway for King County, the same home would be valued at approximately $529,028 in a year and would then require a higher 5% down payment of $26,451. Other monthly costs would also rise accordingly such as mortgage insurance and the principal and interest payment.

Loss In Property Appreciation

In a market with high appreciation rates and rising home values, it can be difficult to out-save the appreciation you would be earning on your home. In our previous example, the $500,000 home would appreciate to an estimated $529,028 after one year in King County. That’s $29,028 in lost appreciation value over a year, or about $2,419 in savings per month.

Benefits of Refinancing

RECORD HIGH REFINANCES

Refinance applications have surged to decade highs over the last few months and rightfully so. According to Freddie Mac’s Primary Mortgage Market Survey, average mortgage rates have also set new all-time lows within the same period and many home owners are hoping to take advantage of these lower rates. So what are the benefits of refinancing and should you start the process now? Read more to find out!

BENEFITS OF REFINANCING

There are multiple benefits to refinancing your mortgage. We’ll dive into some of them below:

  1. Lowering your interest rate. If you qualify for a new mortgage, lowering your interest rate will reduce the overall interest charged on the loan and can save you thousands of dollars over the life of the loan.
  2. Eliminate mortgage insurance. If your current mortgage includes mortgage insurance, and you have 20% equity in your home’s current value, you can refinance to remove the mortgage insurance and potentially save hundreds off your monthly mortgage payment.
  3. Cashing out your equity. On a cash-out refinance, lenders will generally limit you to borrowing no more than 80% of your home’s value to ensure you maintain 20% equity in the home. You can use the cash from the refinance to fund home improvements or consolidate high interest debt.
  4. Shorten your mortgage term. Pay off your home quicker by refinancing into a shorter term length. A 15-year term mortgage typically offers lower rates compared to a 30-year term, so your monthly payment might not increase by much. 

IS IT THE RIGHT TIME FOR YOU?

There are many things to consider before refinancing such as how long you plan to remain in the home and if the potential savings make sense when compared with the associated closing costs. Contact us today to schedule a free consultation where you’ll work with one of our highly experienced and knowledgeable loan advisors!

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