I got my real estate license in 1978. All we ever knew then was 30-year fixed-rate loans, and the rate was 10.3 percent per annum and the closing costs were exactly 3.3 percent of the loan amount. I sold a lot of houses that were financed under that loan.
By the fall of 1981, 30-year fixed-interest rates were sky high at 18.5 percent, but we quickly adjusted to the new Federal Housing Administration 245 program, which featured a new concept called “negative amortization.”
Under this brilliant idea, payments started small but grew every year. At the end of the sixth year, they leveled off and remained constant for the remainder of the life of the loan. The down payment was only 5 percent of the purchase price, and the rate was slightly lower than the fixed rate. But the borrower qualified for the loan based on the first-year payments, which were artificially low.
In fact, they were so low that the total payment did not even equal the monthly interest charge, so the difference was added every month onto the mortgage balance. That’s right — the mortgage balance grew monthly until about year five.
I sold a lot of new houses in Gwinnett County that were financed under that loan.
And here we are in the fall of 2012. Thirty-year fixed-rate loans are at an unsustainably low 3.5 percent, and 15-year loans are a giveaway at 2.75 percent.
So here is my advice for you:
BUYERS: I would run (not walk) to the nearest phone and call any real estate agent you can find and buy anything in sight before the sun goes down today. Lock in a rate as soon as can be done and rest confidently in the knowledge that you caught one of the greatest financial bargains in the history of commercial enterprise. I believe inflation is coming. If it does, your home could easily double in value in the next few years. If it doesn't, you still got a great deal.
SELLERS: The Atlanta market is still in the process of liquidating the flood of foreclosures that has decimated values. Even so, we are beginning to see values firm up, even in distressed sale situations. I know you are unhappy with the price you will get when you sell, but you will more than make it up on your replacement house if you act now. More importantly, you may miss the chance to put a super-low rate loan on your replacement house. Sell now, then buy now.
INVESTORS: Demand from outside Atlanta has driven up the price of bank-owned homes to the point that there are now "bidding wars" for these homes. Even so, it's still easy to find fixed-up rental houses that can generate cash-on-cash returns of 10 percent or more, and that doesn't take into account the price appreciation I expect over the next decade. Now is the time to lock in returns in real estate and watch the values climb.
OWNERS: If you have a high-balance loan, try to refinance immediately. If your current rate exceeds 4.25 percent or if you have an adjustable-rate loan, you should take action now.
DEBT-FREE OWNERS: If you carry a small mortgage balance or if you own free and clear of debt, you have a unique opportunity right now. I know this advice will give my friend Clark Howard a heart attack, but it might make sense to borrow now at historically low rates and dollar-cost-average into investments that have proven track records of substantially higher yields. This is particularly valid for those who carry nondeductible debt, such as credit card or automobile debt, and are often paying rates in double digits.
As always, I recommend that you talk with your financial adviser before implementing any major financial strategy. No one knows for sure what will happen in the future, but I know this: Rates can’t get much lower than they are right now. Seize the day!
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