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Week of September 11th - September 17th
Property Tips and Tricks
Creative financing: that's a wrap
As previously discussed in a recent newsletter, the opportunity presented by historically low mortgage rates led to a surge in home purchases and refinancing. Remarkably, almost two-thirds of homeowners nationwide now enjoy mortgage rates below 4%, with approximately a quarter benefiting from rates below 3%. Rates have changed quite a bit over the past 18 months and to put it in perspective, securing a $2 million mortgage at today's rates results in an additional monthly cost of around $5,000, marking an increase of approximately 70% compared to the recent past when rates were 3%.
As we navigate through these challenges, an intriguing opportunity emerges. Enter Roam, a newly launched service bridging the gap between buyers and sellers with assumable mortgages. This innovative platform empowers individuals to tap into the advantages of extraordinarily low-rate mortgages, a particularly valuable option given the current high-rate environment. Roam caters to FHA and VA loans, which come with loan amount caps, rendering them less suitable for luxury home purchases.
But what about luxury home buyers? While there isn't a Roam-like service for jumbo-type loans, as many of them are non-assumable, an alternative option does exist.
A mortgage wrap, also known as an all-inclusive trust deed (AITD) or wraparound mortgage, is a creative financing strategy used in real estate transactions. It involves a buyer acquiring a property with an existing mortgage in place and then "wrapping" a new mortgage around it. The buyer makes payments to the seller on the new mortgage, which includes the existing mortgage's balance and an additional amount representing the seller's equity or profit.
Bear in mind, this option is very dependent on both the buyer and seller being on board, and understanding both the mechanics of the mortgage wrap, as well as the benefits and drawbacks, which I will detail below:
Here's how a mortgage wrap typically works and its potential benefits for a buyer:
1. Existing Mortgage: The seller has an existing mortgage on the property, which may have a lower interest rate or other favorable terms.
2. New Mortgage: The buyer obtains a new mortgage from the seller, sometimes at a higher interest rate than the existing mortgage. This new mortgage "wraps around" the existing mortgage.
3. Combined Payments: The buyer makes a single monthly payment to the seller, which includes the payment for the new mortgage and any additional amount negotiated for the seller's equity or profit. The seller, in turn, continues to make payments on the existing mortgage using the funds received from the buyer.
Benefits for the Buyer:
1. Easier Financing: Mortgage wraps can be beneficial for buyers who may not qualify for traditional financing due to credit issues or other reasons, or buyers who simply want to take advantage of a lower interest rate. Buyers may also find it easier to negotiate terms with a motivated seller.
2. Avoiding Loan Approval: Buyers can avoid the lengthy and sometimes uncertain loan approval process required for traditional mortgages.
3. Flexible Terms: Buyers and sellers have more flexibility in negotiating the terms of the new mortgage, including the interest rate, repayment period, and any down payment required.
4. Lower Closing Costs: Mortgage wraps may have lower closing costs compared to traditional mortgages because they don't involve lenders or loan origination fees.
While mortgage wraps offer advantages for buyers, they can limit a seller's credit line in several ways:
1. Risk of Default: If the buyer defaults on the new mortgage, the seller is still responsible for the existing mortgage. Of course, the seller would have the house as the collateral, so they would want to make sure the existing mortgage doesn't exceed the value of the home.
2. Reduced Borrowing Capacity: The seller's ability to obtain new credit or loans may be hampered because lenders may consider the wrapped mortgage as part of the seller's debt obligations.
3. Difficulty in Refinancing: If interest rates decrease, the seller may find it challenging to refinance the existing mortgage because it is tied to the buyer's wrapped mortgage.
4. Due-on-Sale Clause: Many mortgages have a due-on-sale clause, which means that if the property is sold or the mortgage terms are altered without the lender's consent, the lender can demand full repayment of the loan. Sellers should be aware that a mortgage wrap could trigger this clause.
Mortgage wraps can be a useful tool in real estate transactions, but they come with risks and require careful consideration by both buyers and sellers. It's essential to consult with legal and financial professionals to ensure that the terms are fair, legally sound, and financially viable for all parties involved.
Real Estate News
Insurance: change is hard and growth hurts
Recently, California has been facing "growing pains" in the realm of home insurance. Rising construction costs, inflation, and a string of wildfires over the past few years have prompted many insurance companies to stop offering new policies in the state. This situation raises questions. Given California's substantial wealth concentration, one might assume that there's a lucrative market even at higher premium rates. The logical suggestion is to at least give property owners the choice to pay a higher premium rather than denying insurance coverage. However, as you'll read below, this is easier said than done.
Just this week, efforts to reach a last-minute agreement between lawmakers and insurers faltered. This agreement aimed to address the ongoing insurance issues within the state. It sought to allow insurance carriers to set what they consider fair rates for areas prone to wildfires.
One notable issue in California is its unique stance on insurers' reinsurance costs. It's currently the only state in the U.S. that doesn't consider these costs when approving rate increases. In California, when insurance companies seek rate hikes of 7% or more for personal lines or 15% or more for commercial lines, they can face a lengthy "intervenor" process during public hearings. These hearings often lead to significant delays of up to two years in determining whether rate increases are justified. It's essential to keep in mind that insurers' property reinsurance rates have surged by over 60% in the last six years. Due to California's stringent regulations, carriers often aim to avoid these hearings and request rate increases just below the thresholds triggering public scrutiny. However, these modest rate adjustments haven't covered their costs, leading to the withdrawal of insurers from California.
So, what's on the horizon? The legislature comes back in January, so we'll have to check in early next year to see if there has been any progress made. In the meantime, if you are considering a property purchase, it is best to check on property insurability as soon as possible. For properties with a replacement cost below $3MM, insurance is much easier. For properties that exceed that amount, insurance options become far more limited. If you need any insurance recommendations, please do not hesitate to reach out.
Worked with me in the past? Share your experience.
Jonathan Balog
DRE# 01980970
Broker
M: 831.747.0310
[email protected]
Compass is a real estate broker licensed by the State of California operating under multiple entities. License Numbers 01991628, 1527235, 1527365, 1356742, 1443761, 1997075, 1935359, 1961027, 1842987, 1869607, 1866771, 1527205, 1079009, 1272467. All material is intended for informational purposes only and is compiled from sources deemed reliable but is subject to errors, omissions, changes in price, condition, sale, or withdrawal without notice. No statement is made as to the accuracy of any description or measurements (including square footage). This is not intended to solicit property already listed. No financial or legal advice provided. Equal Housing Opportunity. Photos may be virtually staged or digitally enhanced and may not reflect actual property conditions.
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