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Projected Interest Rates in 5 Years: How Much Will Rates Rise?

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Projected Interest Rates in 5 Years

Unless you have a crystal ball that can predict the future, it's impossible to know how much interest rates will rise in the coming five years. Pent-up demand, especially for travel, means inadequate supply to chains still rocked by COVID-19, but Russia's invasion of Ukraine and energy insecurity have raised oil and gas prices.

It implies central bankers are uncertain how successful monetary tightening will be against many mitigating factors, with rate rises potentially adding pain without resolving rising prices. Interest rates are projected to rise in the near term as policymakers try to ward off 40-year-high inflation, but they are expected to peak soon thanks to expectations of a recession in the US.

According to the OECD forecasts as of February 2023, inflation was expected to continue to fall gradually over the next 18 months, hitting 5.3% by the end of this year and falling to 51% by the end of 2023. Capital Economics predicted inflation to sit at 2.5% by the end of 2023, and between 2026 and 2031, while the CBO expected inflation to average 2.4% between 2028 and 2030.

Interest rates are a crucial factor in the financial markets that have wide-ranging ramifications for the economy. The US Federal Reserve (Fed) sets the Federal Funds Rate (FFR), which influences demand for bonds, prime rates, and the overall economy. Even slight variations in interest rates can have significant effects on the stock market and investment portfolios, affecting both buyers and sellers.

The Federal Reserve is responsible for setting the target range for the federal funds rate, which is the interest rate at which banks lend to each other overnight. This rate has a significant impact on the overall economy, influencing borrowing costs for individuals and businesses, as well as affecting the value of the dollar.

The predictions made by the various analysts and banks provide insight into what the financial markets anticipate for interest rates over the next few years. Based on recent data, Trading Economics predicts a rise to 5% in 2023 before falling back down to 4.25% in 2024 and 3.25% in 2025. Morningstar analyst Preston Caldwell, on the other hand, is skeptical that the Fed will continue raising rates throughout 2023 and has predicted lower rates of 3.75%-4%.

ING predicts rates to range from 5% in the second quarter of 2023, rising to 5.5% in the third quarter, and then falling back to 5% in the final quarter of the year. They also predict interest rates ranging between 3% and 4.25% in 2024, staying at 3% by the end of 2025. The differences in these forecasts may be attributed to the different methodologies and models used to generate them.

Factors That Could Influence Interest Rates in Five Years

The US, like other major Western economies, has enjoyed an unparalleled period of low price and interest rate volatility. The current bout of price rises means investors could need to reassess how they allocate their portfolios. The FFR was below 2% in the 1950s, amid postwar stimulus and income growth across the US. The rate saw-sawed over a 20-year period, rising and falling between 3% and 10% during the 1960s and 1970s before skyrocketing inflation that exceeded 13% in 1980 forced rates to a record high of 19.1%.

As inflation was brought under control, the FFR hovered around 5% through the 90s, before recessions in 2001 and 2008 forced them down to a floor, keeping rates low until 2016. The Covid-19 pandemic imposed another cut to almost 0%, with recent inflationary pressures forcing the Fed to begin tightening policy. The Fed increased rates seven times in 2022 and by another 25 bps in February 2023, bringing it to 4.5%-4.75%, the highest since the aftermath of the 2007-2008 financial crisis.

There are several key factors that could influence interest rates over the next five years. One major factor is inflation, which is currently at historic highs due to a mix of demand and supply factors. The Fed will need to monitor inflation closely and determine whether monetary tightening will be effective in addressing the underlying problem of high prices. In addition to inflation, the strength of the US dollar will also be a significant factor.

While the dollar has enjoyed resilience due to its status as a safe haven currency and the Fed's hawkish monetary policy, its strength has started to slow as monetary tightening has slowed. The possibility of a recession also looms large over interest rate predictions. While the US experienced a contraction in GDP in the second quarter of 2022, GDP has since rebounded. However, if a recession were to occur, the Fed may need to halt its regimen of rate hikes to avoid putting further strain on growth.

Finally, the specter of stagflation could also make policymakers' decisions even more difficult. Stagflation, which is a combination of stagnant economic growth and high inflation, could result in a complex policy response that could further impact interest rates. Overall, while interest rate predictions over the next five years may be subject to change based on a variety of factors, monitoring inflation, the strength of the US dollar, the possibility of a recession, and the potential for stagflation will all be key for policymakers and investors alike.

Mortgage Interest Rate Projections for 5 Years

Projected Interest Rates in 5 Years
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If you're planning on mortgaging your home at least until age 55 and possibly beyond, you should start looking into how much interest rates are likely to go up in the coming decade. If you don't already understand how much interest rates affect your wallet, this article will explain everything you need to know about projected interest rates in the next five years and what that means for you as a borrower.

Mortgage interest rates determine the interest you pay on your home loan. When you get your house loan approved, the lender will usually project what interest rates are likely to be and then you can decide if you want to go with that interest rate or some other available option. But when you ask what is the interest rate, you're not just looking at what rate is listed on the contract, you're also taking into account what rate is likely to go up in the future and what will happen to rates if new laws are passed.

Mortgage interest rates follow the same pattern as the stock market does, with periods of high profitability followed by periods of low profitability. As was the case with stocks, homeowners who take out a mortgage are at a particular advantage, as they can lock in a higher rate of return by waiting until the market is profitable again. If the market performs poorly for a prolonged period of time, homeowners are stuck with high-interest rates. That's not good for you or your house price.

A number of factors can affect your mortgage interest rate, including the total amount of your mortgage loan, the mortgage terms, and the health of the housing market. According to algorithm-based forecasting service Longforecast's interest rate projections, the 30-year mortgage rate in the United States, which is strongly tied to the Fed's base rate, is forecasted to reach 17.81% by November 2026, a significant increase from the present rate of roughly 7.04%.

Mortgage Interest Rate Predictions for 2023

According to Longforecast, the 30 Year Mortgage Rate will continue to rise further in 2023. The 30 Year Mortgage Rate forecast at the end of the year is projected to be 11.87%.

30-Year Mortgage Interest Rate Forecast for January 2023

  • Maximum interest rate 8.32%, minimum 7.62%.
  • The average for the month is 7.91%.
  • The 30 Year Mortgage Rate forecast at the end of the month is 8.08%.

30-Year Mortgage Interest Rate Forecast for February 2023

  • Maximum interest rate 8.53%, minimum 8.03%.
  • The average for the month is 8.23%.
  • The 30 Year Mortgage Rate forecast at the end of the month is 8.28%.

30-Year Mortgage Interest Rate Forecast for March 2023

  • Maximum interest rate 8.66%, minimum 8.16%.
  • The average for the month 8.38%.
  • The 30 Year Mortgage Rate forecast at the end of the month 8.41%.

30-Year Mortgage Interest Rate Forecast for April 2023

  • Maximum interest rate 9.18%, minimum 8.41%.
  • The average for the month 8.73%.
  • The 30 Year Mortgage Rate forecast at the end of the month 8.91%.

30-Year Mortgage Interest Rate Forecast for May 2023

  • Maximum interest rate 9.18%, minimum 8.64%.
  • The average for the month 8.91%.
  • The 30 Year Mortgage Rate forecast at the end of the month 8.91%.

30-Year Mortgage Interest Rate Forecast for June 2023

  • Maximum interest rate 9.72%, minimum 8.91%.
  • The average for the month 9.25%.
  • The 30 Year Mortgage Rate forecast at the end of the month 9.44%.

30-Year Mortgage Interest Rate Forecast for July 2023

  • Maximum interest rate 10.31%, minimum 9.44%.
  • The average for the month 9.80%.
  • The 30 Year Mortgage Rate forecast at the end of the month 10.01%.

30-Year Mortgage Interest Rate Forecast for August 2023

  • Maximum interest rate 10.92%, minimum 10.01%.
  • The average for the month 10.39%.
  • The 30 Year Mortgage Rate forecast at the end of the month 10.60%.

30-Year Mortgage Interest Rate Forecast for September 2023

  • Maximum interest rate 11.58%, minimum 10.60%.
  • The average for the month 11.01%.
  • The 30 Year Mortgage Rate forecast at the end of the month 11.24%.

30-Year Mortgage Interest Rate Forecast for October 2023

  • Maximum interest rate 12.03%, minimum 11.24%.
  • The average for the month 11.55%.
  • The 30 Year Mortgage Rate forecast at the end of the month 11.68%.

30-Year Mortgage Interest Rate Forecast for November 2023

  • Maximum interest rate 12.51%, minimum 11.68%.
  • The average for the month 12.01%.
  • The 30 Year Mortgage Rate forecast at the end of the month 12.15%.

30-Year Mortgage Interest Rate Forecast for December 2023

  • Maximum interest rate 12.23%, minimum 11.51%.
  • The average for the month 11.94%.
  • The 30 Year Mortgage Rate forecast at the end of the month 11.87%.

Also Read: Mortgage Interest Rates Forecast 2022 & 2023

Mortgage Interest Rate Projected Forecast 2024

According to Longforecast, the 30 Year Mortgage Rate will continue to rise further in 2024. The 30 Year Mortgage Rate forecast at the end of the year is projected to be 13.9%.

Month Low-High Close
Jan-24 10.05-10.97 10.65
Feb-24 10.14-10.76 10.45
Mar-24 10.33-10.97 10.65
Apr-24 10.65-11.31 10.98
May-24 10.98-11.66 11.32
Jun-24 10.79-11.45 11.12
Jul-24 10.99-11.67 11.33
Aug-24 11.33-12.22 11.86
Sep-24 11.86-12.94 12.56
Oct-24 12.46-13.24 12.85
Nov-24 12.65-13.43 13.04
Dec-24 12.79-13.59 13.19

30-Year Mortgage Interest Rate Projected Forecast 2025

The 30 Year Mortgage Rate will continue to rise further in 2025. The 30 Year Mortgage Rate forecast at the end of the year is projected to be 16.25%.

Month Low-High Close
Jan-2025 15.37-16.33 15.85
Feb-2025 15.05-15.99 15.52
Mar-2025 15.26-16.20 15.73
Apr-2025 15.16-16.10 15.63
May-2025 15.36-16.30 15.83
Jun-2025 15.53-16.49 16.01
Jul-2025 15.11-16.05 15.58
Aug-2025 15.36-16.30 15.83
Sep-2025 15.58-16.54 16.06
Oct-2025 15.32-16.26 15.79
Nov-2025 15.60-16.56 16.08
Dec-2025 15.76-16.74 16.25

Mortgage Interest Rate Projected Forecast 2026

The 30 Year Mortgage Rate will continue to rise further in 2026. The 30 Year Mortgage Rate forecast at the end of the year is projected to be 17.81%.

Month Low-High Close
Jan-2026 15.72-16.70 16.21
Feb-2026 16.21-17.25 16.75
Mar-2026 16.30-17.30 16.8
Apr-2026 16.11-17.11 16.61
May-2026 16.40-17.42 16.91
Jun-2026 16.28-17.28 16.78
Jul-2026 16.57-17.59 17.08
Aug-2026 16.75-17.79 17.27
Sep-2026 17.27-18.41 17.87
Oct-2026 17.71-18.81 18.26
Nov-2026 17.28-18.34 17.81

It should be noted that analysts' and algorithm-based projections can be incorrect. Interest rate estimates should not be utilized in place of your own study. Always conduct your own research. Furthermore, never invest or trade money that you cannot afford to lose.

Why Should You Care About Projection of Interest Rates?

The higher the interest rate, the less attractive the opportunity to borrow money at that rate is for you as a homebuyer. As a result, it could make more sense to borrow at a lower rate, especially if you have a modest amount to spend on a home and are looking for a low-interest loan. If you are running behind on payments and have a limited amount of equity, a higher interest rate could make you borrow money from your workers' compensation fund or a government program that provides short-term loans.

It could also mean higher insurance costs or a higher cost of living once you move in. If you have money to invest and would instead put that money in something that earns more interest than a mortgage, you should know that rates on savings accounts and mutual funds are likely to go up as well, not down.

Interest rates and their role in financial markets

The Fed sets the FFR, the base interest rate that filters through to banks, affecting demand for bonds and more broadly the economy and stocks. The process begins when the Fed sets the FFR at the Federal Open Market Committee (FOMC) meeting, eight of which occur every year. Those decisions filter through to the prime rate, the basic interest rate banks charge to credit-worthy customers. A hike in the FFR will see the base prime rate rise, affecting the cost of loans and mortgages.

The rising cost of servicing loans takes more discretionary income out of consumers and businesses, reducing demand and reigning in price increases. For stocks, that could mean companies and stocks dependent on consumer spending, like the retail and hospitality sectors, face headwinds. Growth stocks, which rely on lending and capital, could also suffer as investors look for value in profitable companies to ride out market volatility and a downturn.

Mechanically, interest rate rises also hit the value of bonds. When interest rates rise, the yield on a bond becomes less valuable, as it garners less interest than the prevailing base rate, forcing a sell-off. This is particularly true for longer-term interest rates, as the discrepancy is magnified over time. Likewise, fixed-income securities lose their value with rises as the cost of not owning other interest-rate tracking assets increases.

How Much Interest Will You Pay?

This is one of the most important factors to keep in mind when you're looking at projected interest rates. It is not just the price of the mortgage that is important – it is the interest rate you pay on every dollar you borrow. If you are refinancing an existing loan, the amount you will be paying will depend on your current interest rate and the total amount of your loan. If you are buying a new house, your interest rate will be lower than if you are refinancing an existing home as that is the type of loan we refer to as a ” cash-out refinance.”

What Are Other Factors That Affect Your Payment?

When you compare interest rates for different cities, you are ignoring other factors that could affect your monthly payment. For example, if you are refinancing an existing loan and are in a city where house prices are low, you will pay less interest than if you were in a city where house prices are higher. These other factors can include taxes, insurance, building costs, and utilities.

Conclusion

When it comes to the future of mortgage interest, we don't know exactly what will happen. That is why it is important to get a feel for what the projected rates are so you can plan ahead and decide if any of these rates are right for you and your financial situation. If you are currently working with a lender and are interested in switching providers, you should know that most lenders are required to give you 30 days' notice before changing rates. Even then, you will only be given a 25% discount on the new rate if you want it.

Sources:

  • https://data.oecd.org/price/inflation-forecast.htm
  • https://capital.com/projected-interest-rates-in-5-years
  • https://longforecast.com/mortgage-interest-rates-forecast-2017-2018-2019-2020-2021-30-year-15-year
  • https://www.noradarealestate.com/blog/mortgage-interest-rates-forecast/

Financial Crisis 2008 Explained: Causes and Effects

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What Caused the Financial Crisis in 2008?

What Caused the Financial Crisis in 2008?

The financial crisis of 2008 is a significant event that affected the global economy. The crisis was caused by several factors that led to the collapse of the housing market in the United States, which eventually spread to the entire financial system worldwide. It began in 2007 and reached its peak in September 2008 when Lehman Brothers, one of the largest investment banks globally, filed for bankruptcy.

One of the main causes of the crisis was the housing market crash in the United States. Banks and other financial institutions gave out loans to people who did not have the creditworthiness to repay them. These loans were then packaged and sold to investors as mortgage-backed securities. When homeowners began defaulting on their mortgages, the value of these securities decreased, leading to significant losses for investors.

The use of complex financial instruments like credit default swaps and collateralized debt obligations also fueled the crisis. These instruments allowed banks to take on excessive risks without adequate capital reserves to cover potential losses. When the housing market collapsed, these institutions faced insolvency, leading to a widespread credit freeze.

The financial crisis of 2008 had far-reaching consequences for the global economy. It led to a deep recession in many countries, with millions of people losing their jobs and businesses struggling to stay afloat. The crisis exposed the vulnerabilities of the global financial system and highlighted the need for stronger regulatory frameworks to prevent future crises.

The financial crisis of 2008 also had significant social and political consequences. The bailout of banks and financial institutions with taxpayer money led to a public outcry and a loss of trust in the government and financial institutions. This, in turn, fueled the rise of populist movements and contributed to a broader skepticism towards globalization and free trade.

The crisis also highlighted the growing income inequality in many countries, as the wealthy were able to recover more quickly from the crisis while lower-income individuals and communities continued to struggle. The crisis amplified the urgency for policymakers to address income inequality and the need for social safety nets to support those most affected by economic downturns.

Furthermore, the crisis exposed the limitations of relying on market-based solutions for complex social and economic problems. The deregulation of financial markets in the 1990s and 2000s was based on the belief that market forces would regulate themselves, resulting in greater efficiency and economic growth. However, the crisis demonstrated that markets can be subject to irrational behavior, speculation, and bubbles that can lead to systemic risks.

In response to the crisis, many countries implemented significant regulatory reforms, such as the Dodd-Frank Act in the United States and the Basel III framework globally. These reforms aimed to increase transparency, improve risk management practices, and strengthen capital requirements for financial institutions. However, some have argued that these reforms do not go far enough to prevent future financial crises and that more significant structural changes are necessary.

The financial crisis of 2008 was indeed a complex event with far-reaching consequences for the global economy, society, and politics. It was caused by a combination of factors, including the housing market crash, the use of complex financial instruments, and inadequate regulatory frameworks. While significant reforms have been implemented since then, the possibility of another financial crisis remains, highlighting the need for continued vigilance and structural changes to prevent similar events from happening again.

How Did the Financial Crisis of 2008 Affect the Global Economy?

The financial crisis of 2008 had a significant impact on the global economy. It led to a deep recession in many countries, which means that the economy of those countries shrank for a significant period of time. In some cases, it took several years for the economies to recover fully.

The crisis affected many different parts of the global economy. One of the most significant impacts was on the job market. As businesses struggled to stay afloat during the recession, many had to lay off workers or freeze hiring. This led to high levels of unemployment in many countries, which further impacted the economy by reducing consumer spending.

The crisis also had a significant impact on the housing market. The collapse of the housing market in the United States led to a significant decline in property values. This, in turn, led to a wave of foreclosures and evictions, as many homeowners found themselves unable to keep up with their mortgage payments. The impact of the housing market collapse was not limited to the United States, as many countries around the world had invested in mortgage-backed securities and other financial instruments that were affected by the crisis.

The financial crisis also had a significant impact on the banking sector. Many banks and financial institutions had invested heavily in the housing market and other risky investments. When these investments began to fail, many of these institutions faced insolvency. This led to a widespread credit freeze, as banks and other financial institutions were reluctant to lend money to one another or to consumers.

The global nature of the financial crisis meant that it impacted many different countries around the world. Some of the countries that were hit the hardest included the United States, the United Kingdom, Spain, and Ireland. However, many other countries also experienced significant economic disruptions as a result of the crisis.

Governments and central banks around the world responded to the crisis by implementing a range of measures designed to stabilize the economy. These measures included fiscal stimulus packages, interest rate cuts, and bank bailouts. While these measures helped to prevent a complete collapse of the global financial system, they were not enough to prevent the recession from occurring.

The financial crisis of 2008 also had an impact on international trade. The recession that followed the crisis led to a decline in consumer spending, which resulted in a decrease in demand for goods and services. This, in turn, led to a reduction in international trade, as countries were less likely to import goods and services from other countries.

The decline in international trade had a significant impact on many developing countries, which rely heavily on exports to support their economies. As demand for their products declined, many of these countries experienced significant economic disruptions, including high levels of unemployment and reduced government revenues.

The financial crisis also had a significant impact on the global financial system. It exposed weaknesses in the regulatory frameworks that govern the financial sector and highlighted the need for stronger international coordination to prevent future crises. In response to the crisis, many countries have implemented new regulations designed to strengthen their financial systems and prevent a similar crisis from occurring again.

Another impact of the financial crisis was the erosion of public trust in the financial sector. Many people felt that the crisis was caused by the greed and recklessness of the financial industry, which had taken excessive risks and engaged in unethical behavior. This led to calls for greater transparency and accountability in the financial sector, as well as demands for more significant penalties for those who engage in unethical or illegal behavior.

Therefore, the financial crisis of 2008 had a significant impact on the global economy. It led to a deep recession in many countries, high levels of unemployment, and a credit freeze in the banking sector. The crisis also had an impact on international trade and exposed weaknesses in the global financial system. While significant reforms have been implemented since 2008, it is essential to remain vigilant and continue to strengthen regulatory frameworks to prevent a similar crisis from occurring again.

Could a Financial Crisis Happen Again?

Yes, another financial crisis could happen again. Despite the efforts made to prevent a similar crisis, there are still vulnerabilities in the financial system that could lead to another crisis.

One of the main factors that could contribute to another crisis is the high levels of debt in the global economy. Many countries and individuals have taken on significant amounts of debt, which could become unsustainable if interest rates rise or if there is an economic downturn.

Another potential risk is the continued use of complex financial instruments, such as derivatives, which can be difficult to understand and value. These instruments can allow banks and other financial institutions to take on excessive risk, which could lead to significant losses if their bets go wrong.

Furthermore, the interconnectedness of the global financial system means that a crisis in one country or sector can quickly spread to other regions and industries. For example, a crisis in the housing market in the United States led to a global financial crisis in 2008.

In addition, the lack of effective regulation in some parts of the financial system could also contribute to another crisis. Despite efforts to strengthen regulation, there are still gaps in oversight, particularly in the shadow banking sector, which includes hedge funds and other non-bank financial institutions.

However, there have been significant efforts to strengthen the resilience of the financial system since the 2008 crisis. Many countries have implemented stricter regulations on banks and other financial institutions, including requirements for higher capital reserves and more rigorous stress testing.

In addition, there have been efforts to increase transparency and reduce the use of complex financial instruments. For example, new regulations require derivative contracts to be traded on exchanges, which can increase transparency and reduce counterparty risk.

Central banks have also taken steps to prevent another crisis by implementing policies such as low-interest rates and quantitative easing, which can provide liquidity to the financial system and support economic growth.

Despite these efforts, the possibility of another financial crisis cannot be ruled out. It is essential to remain vigilant and continue to strengthen the resilience of the financial system to reduce the risk of another crisis.

How Can We Prevent Future Financial Crises?

Preventing future financial crises is essential to ensure the stability of the global economy. Here are some ways in which we can prevent such crises from happening:

Strengthen regulations: Strengthening regulations is crucial in preventing another financial crisis. Financial institutions must be monitored to prevent them from engaging in risky behavior that could destabilize the economy. Regulators need to ensure that banks have enough capital reserves to cover potential losses and that complex financial instruments are regulated. Regulators must also have the power to enforce penalties and sanctions when banks and other financial institutions do not comply with regulations.

Increase transparency: Transparency is important to ensure that investors have access to accurate information. Governments and financial institutions need to enforce transparency in financial markets, including increasing disclosure requirements for financial institutions and promoting transparency in trading activities. When investors have access to accurate and timely information, they can make informed decisions about investments.

Enhance risk management: Financial institutions need to improve their risk management practices to prevent excessive risk-taking. This includes developing better models for assessing risk and improving the management of counterparty risk. By implementing better risk management practices, financial institutions can ensure that they are not taking on too much risk, which could lead to insolvency.

Encourage responsible lending: Responsible lending practices can help prevent future financial crises. Financial institutions must ensure that borrowers have the means to repay their debts and have adequate creditworthiness. By providing loans only to those who can repay them, financial institutions can reduce the risk of default, which can lead to a chain reaction of losses.

Promote financial education: Financial education can help individuals and businesses make better financial decisions. Governments and financial institutions can work together to provide education and resources to promote financial literacy. Financial education can help people understand the risks associated with financial products and services, which can prevent them from making risky decisions.

International cooperation: International cooperation is essential to prevent future financial crises. The global economy is interconnected, and financial shocks in one part of the world can quickly spread to other regions. Governments, regulatory bodies, and financial institutions need to work together to develop coordinated responses to potential crises. Cooperation can include sharing information, coordinating policy responses, and providing financial support to prevent the spread of financial shocks.

In conclusion, preventing future financial crises requires a comprehensive approach that includes stronger regulations, increased transparency, better risk management, responsible lending, financial education, and international cooperation. By taking these steps, we can prevent another financial crisis and ensure that the global economy remains stable and resilient in the face of potential shocks.

Real Estate Notes Investing: Should You Buy Notes in 2023?

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Mortgage note investing is one of the most profitable real estate investment strategies accessible, yet it receives little attention. We will explore the many forms of mortgage notes and how to invest in them in this article. Mortgage note investing is the process of owning real estate without managing it or becoming a landlord, in which the homeowner pays the investor rather than the bank. It is a low-cost method of investing in real estate.

Note investing can be an incredible vehicle for building passive income but there are many things that you should be aware of. Mortgage notes are also known as real estate lien notes and borrower’s notes and they have become a popular asset class over the past few years. Investing in mortgage notes has many benefits such as — rates of return that are higher than the bank's traditional low-yield bonds; and higher than most stock dividends.

Notes are available through note exchanges, note brokers, and organizations. Both performing and non-performing notes are almost always sold at a discounted price, although non-performing notes will likely sell for steeper discounts, and real estate investors can realize significant profits. Consider using a mortgage broker or an investment advisor to help you find the best options. If you are experienced enough, you can potentially find and purchase your mortgage notes. 

What is a Mortgage Note?

real estate mortgage note investing

A real estate mortgage note is a promissory note secured by a mortgage loan. It’s a way of saying promissory notes secured by a piece of property. That security instrument can be either a mortgage or a Deed of Trust. It depends on what state you’re doing business in or which security instrument you’re using.

So, you’ve got a note, which is the promise to pay, or a promissory note. Then that is piggybacked with another document which is the security instrument, and that’s either a mortgage or a Deed of Trust depending on what state you’re in. It’s a two-part instrument and they move together.

The promise to pay is called a promissory note, which states how big the loan is, the interest rate, and the terms of the loan. That security instrument which is the mortgage note or the Deed of Trust, that’s the thing that ties that note to the piece of property, and what makes that promise to pay have much strength.

It’s either the borrower pays you as agreed or you get to foreclose on that property, and ideally foreclose on that property for pennies on the dollar. The difference between a mortgage and a Deed of Trust is that a Deed of Trust is what’s called a non-judicial foreclosure action. If someone doesn’t pay you, then you file a notice in the public record that it’s such and such a date.

On the courthouse steps, this property will be auctioned for sale. That’s it. As long as you comply with the timing and the noticing, then that sale goes through. A mortgage is different from a Deed of Trust in that you have to go to court to get the court to foreclose on the property for you. As an example, when you take out a home loan, the lender will probably require you to sign both a promissory note and a mortgage.

Suppose you want to buy a property worth $150,000 but you don't have enough cash. In this case, you can apply for a loan whereby you can pay part of the purchase price as a down payment and borrow the remaining amount from a lender. Normally, you need to pay 20% as a down payment.

Therefore, the loan amount would be $120,000. In exchange for $120,000, the lender would make you sign a promissory note and a mortgage. Here a promissory note is being signed by you as a borrower, and it is a promise to repay the debt incurred by you in the purchase of your property.

The note will state who borrowed money from whom, the loan amount, the interest rate, the tenure of repayment, and what happens in the event of a default. A mortgage is a separate document that collateralizes the lender and is secured by the property. It is a contract that hypothecates a lien on the property, or the mortgage deed may be updated to specifically give the lender foreclosure property if contractual terms aren’t met. It will say who is personally responsible for the debt, whether it is an individual, a couple, or a corporation.

The Contract For Deed vs Mortgage

A contract for deed is an agreement to buy a home from a seller, while the seller keeps ownership of the home. It is not the same as a mortgage loan. The buyer agrees to pay the seller monthly payments, and the deed is turned over to the buyer when all payments have been made. Buyers make their payments directly to the seller for a certain number of years and then a balloon payment (or remaining balance) is due.

One major difference is you do not have the same protection rights, since the seller retains ownership. The seller determines the
interest rate and how much of your payment is used to pay the principal (or balance). Generally, you pay the seller directly for property taxes and insurance. Unlike a traditional mortgage, a defaulting buyer in contact for deed may only have 30-60 days to cure the default or move out.

With a mortgage note secured by the mortgage deed, sellers don’t have to go through foreclosure proceedings to seize the property. A seller can terminate the contract right away without going through all of the legal procedures required for a mortgage holder to foreclose on a home.

If the seller cancels the contract you have 60 days to resolve the reason. If the contract is not reinstated, you are required to leave the home. You also lose any money you have paid the seller.

Different Types of Real Estate Mortgage Notes

There are both commercial and residential mortgage notes, and both are open to investors. They’re both promissory notes secured by a certain property. All mortgage notes should specify the roles and responsibilities of all parties and what qualifies as a breach of the agreement. One of the major differences between real estate mortgage notes is the loan terms.

Fixed-Rate Mortgage Loans

A fixed-rate mortgage or FRM is a loan that has a fixed interest rate and set payments. This is the most common type of mortgage offered by banks, but it can be offered by private individuals. The greatest benefit of this loan is that the borrower has the same payment every month.

The Graduated Payment Mortgage

The graduated payment mortgage or GPM has a fixed interest rate with adjusting payments. It typically has a low initial monthly payment that increases over time. These loans are sometimes used for student loans, but they can be found in real estate, too. This is a type of negative amortization loan. There is a risk that the person who purchased the home will be unable to make the later, higher payments.

An Adjustable Rate Mortgage

An adjustable-rate mortgage or ARM has an interest rate tied to some third-party indices. Banks will tie the interest rate on the adjustable rate to the interest rate offered by the Federal Reserve, and the interest rate on the mortgage will rise and fall with it. This is why they’re sometimes called variable-rate mortgages. For consumers, the ARM may result in lower payments when interest rates are low.

However, it brings the risk that they can’t afford their house payment when interest rates rise. Lenders are protected from losses if interest rates rise. Private lenders have to deal with more complicated loan administration. Buyers have the option of sending in the same monthly payment, but the amount of principle applied to the loan with each payment varies.

A Balloon Payment Mortgage

A balloon payment mortgage is generally a fixed-rate mortgage with a large payment due at the end. This is in contrast with traditional mortgages where the final payment pays off the debt entirely. Balloon payments may be accepted by a borrower who can’t manage the monthly payments without them.

They may hope to qualify for a conventional home loan at the end of the private mortgage to get the money to pay off the balloon payment. The occupant runs the risk of losing the home if they can’t make the balloon payment. This is separate from the mortgage acceleration clause that makes the entire amount due after a payment is missed.

The Interest-Only Loan

An interest-only loan is a mortgage where the person only pays interest on the loan. Some people take out an interest-only loan because they can’t afford to pay on the principle. This borrower demographic is very high risk. Yet interest-only loans are attractive because of the low monthly payments. This is a popular loan for property developers. You get the money to buy the property. You expect to sell it for a profit and pay off the mortgage note.

Interest-only loans were commonly used in hot real estate markets before the Great Recession, but they’ve almost disappeared from the residential real estate market because people aren’t making progress on the loan balance. This left many people underwater, owning more than their home was worth.

In these cases, people are expected to be able to refinance the interest rate mortgage into a fixed-rate mortgage once the home’s value has appreciated. The interest-only mortgage had the benefit of allowing them to get into a home now before prices went up further. These loans often became negative amortization loans, because financially stressed people missed payments and saw the total loan balance increase.

Minimum payments that didn’t even cover the full interest payment led to an accrued interest to compound, as well. We consider interest-only loans to be a high risk unless you’re dealing with a real estate developer. Interest-only hard money loans would fall into this category. You can issue an interest-only loan with a recast period, where you force them to refinance the loan or pay off your loan with a third-party mortgage after a set period of time.

Real Estate Mortgage Note Investing

Mortgage notes can be a good real estate investment for people seeking passive income. When you buy a mortgage note, you receive monthly payments that include both interest and principle. It is a steady stream of income like you’d receive from a rental property, but there is no need to maintain the property like a landlord.

It is far easier to invest in real estate located around the country because you don’t have to deal with local rules regarding real estate licensing or taxes. The mortgage note spells out the loan duration. You know how long you’ll receive loan payments, and it may be 10 to 30 years. You may be able to increase the value of the mortgage note by buying from a distressed note holder. For example, you may find a farm or family property sold via owner financing.

The person sold their home, but now they have to manage the loan. They may require the money, whether it is to allow them to buy a new home or simply get cash to fund their retirement. In these cases, you might offer 80,000 dollars to buy a 100,000-dollar note. If they accept, you receive the interest and principal on a 100,000-dollar loan but only paid 20,000 dollars for it.

Another class of desperate sellers is the private lender with a slow or non-paying borrower. They’re not getting the income they expected. They may be reluctant to foreclose on a slow-paying family member. Or they may not want the property back.

You can buy these notes for far less than their face value. However, you’re going to either need to ramp up collection efforts or foreclose on the property. Only buy notes like this if you have a plan for how to monetize the property, whether you rent it out, sell it to someone else or redevelop the property.

Advantages of Buying a Real Estate Mortgage Note

  • High Yield Returns – Rates of return that are higher than the bank's traditional low yield bonds; and higher than most stock dividends.
  • Monthly Income – If you are looking for additional monthly income for retirement, for living expenses, or to build your savings account, we can help.
  • IRA Friendly – This investment provides investors with a way to put to use their self-directed traditional IRA or Roth IRA.  We can recommend several custodian companies that handle the paperwork and hold your IRA while the funds are invested with us.
  • Rollover Option – Option to automatically roll over your investment so you don’t miss out on earning interest or future investment opportunities.

How To Buy To Real Estate Mortgage Notes?

It is hard to find the farmer who sold their property to an up-and-coming farmer or family member who wants to sell the note so they have the money they need to pay for long-term care. This is why many investors go through brokers to find mortgage notes for sale. These brokers specialize in locating both private and public deals.

There are even online marketplaces like NotesDirect to help you find, vet, and buy notes. You can try to find deals through real estate investor groups. In this case, you’re buying notes from people who trade future income for liquid funds. Mortgage notes are often associated with owner financing.

You might find mortgage notes for sale by going through for-sale-by-owner groups and making offers to former property owners who are desperate for cash. Furthermore, mortgage notes may be sold by real estate investor groups or real estate investment trusts.

In the latter case, you could even buy a mortgage for a multi-family apartment building. If you are buying a nonperforming mortgage, investing in real estate notes is one of the cheapest ways to acquire such properties.

how to invest in mortgage notes

Buying a Non-Performing Note vs Performing Mortgage Note

A non-performing note is a note where the borrower is not paying as agreed. The borrower who is behind on their loan payments or regularly made late payments is the reason why you have non-performing notes. Performing notes are those where the payments are made on time and in full. Performing notes sell for 75 to 100 percent of their current value. Sub-performing notes can be found for 50 to 80 percent of their current value.

That lower price tag is what attracts some investors. They’re also priced to factor in the risk of someone who hasn’t paid their mortgage in the past 15 to 60 days or has had missed payments in the past.

Non-performing notes are notes that are already in default. They are attractive to investors because you might buy the property for 10 to 30 percent of its actual value. It can be a cheap way to buy a real estate investment property. It does come with the hassle of renegotiating the deal (rarely done) or foreclosing on the property.

If you’re considering buying a mortgage note for a multifamily property, you cannot consider the property without doing detailed research. It doesn’t matter if they have almost every unit full if only half the tenants are paying their rent. What is the property’s condition? You don’t want to buy a multi-family property that is falling apart.

The Risks of Investing in Mortgage Notes

These notes are not FDIC insured. Instead, it is secured by a property whose condition may not be great. And you’re not responsible for its upkeep. Yet you want to verify the condition of the property before you buy it, or else you’re paying less than the property is worth. You run the risk of having to pay money to get what you’re owed.

You will have to pay various legal fees to foreclose on the property. You may have to sue to get back mortgage payments, too. Know the foreclosure laws for the area where the property is located, especially if you’re considering buying a non-performing loan. Non-performing assets also depreciate because while your expenses continue the property is most likely not be well kept. Even if there is some appreciation in the property value, it is usually offset by the expenses you are spending. They have a high risk of default which is bad for your cash flow.

The mortgage note investing industry is not very regulated as of now. Before entering the mortgage note investing space know the fact that this is a risky business. You can buy a mortgage note without the permission of the person who lives in the property. When you buy a note and mortgage from the lender, you're buying the debt that remains to be paid on the note, secured by the asset outlined in the mortgage.

You're not buying the property. Sometimes, you do run the risk of property owners initially refusing to pay you because they don’t think they owe you the money. The solution to this is good communication, including the initial note holder informing them that the loan is being transferred.

Do your research. Don’t buy a multi-family property note before you know the percentage of the units that are occupied by rent-paying tenants. Know if you have a say in the property manager in charge of the property because putting a good one in could increase occupancy rates, payment rates, or even the average monthly rent.

Know how to get a copy of the original note along with all amendments and assignments. You don’t want to buy a mortgage note and get sued by someone else who had the title. You may want to pay a title search company to do such a search before you buy the note, though this is an expense you have to pay out of pocket even if you don’t buy it. Know your lien position, so that the house isn’t sold to pay a different creditor while you get less than you’re owed.

Summary

Real estate mortgage notes may allow you to get a regular stream of income without the hassles of a landlord, or you can buy the note and sell it later to another investor. Or it can be a way to secure properties for less than their market value. But real estate mortgage notes are a good way to invest in real estate with relatively little work beyond the initial search and purchase.

Also Read: Mortgage Interest Rates Forecast 2023

References

  • https://en.wikipedia.org/wiki/Mortgage_note
  • http://www.differencebetween.net/business/finance-business-2/difference-between-mortgage-and-note
  • https://www.fool.com/millionacres/real-estate-investing/articles/complete-guide-investing-real-estate-mortgage-notes/#
  • https://www.realtor.com/advice/finance/what-is-a-mortgage-note/
  • https://www.multihousingnews.com/post/6-things-to-consider-before-purchasing-non-performing-notes
    https://money.usnews.com/investing/real-estate-investments/articles/why-buying-mortgage-notes-are-good-real-estate-investments
  • https://www.multihousingnews.com/post/6-things-to-consider-before-purchasing-non-performing-notes
    https://www.biggerpockets.com/blog/2011-02-09-differences-performing-and-non-performing-notes
  • https://noteinvestor.com/how-to-buy-mortgage-notes

What is a Reverse Mortgage: Everything You Need to Know

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Reverse MortgageA reverse mortgage (or home equity conversion, as it is sometimes called) involves selling the equity in a home while retaining the right to live in that home until death (a life estate). It turns a home's equity into regular cash payments.

However, there are age restrictions on this procedure, as well as other disadvantages that might outweigh the benefits for some people. Reverse mortgages can provide a source of supplemental income, but it's important to understand the terms and potential drawbacks, such as the impact on inheritance and increased debt.  Consult with a financial advisor or legal counsel before making a decision

What is a Reverse Mortgage?

A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash but retain your home ownership. Reverse mortgages work like traditional mortgages, only in reverse. Rather than making a payment to your lender each month, the lender pays you through advances against your equity.

Unlike conventional home equity loans, most reverse mortgages do not require any repayment of principal, interest, or servicing fees for as long as you live in your home. Funds obtained from a reverse mortgage may be used for any purpose. This type of remortgage was originally designed so that seniors whose homes are paid for, or nearly so, can finance living expenses without having to sell their property.

To qualify for a reverse mortgage, you must own your home, occupy the home as a principal residence for more than six months out of a year, and be at least 62 years of age. If you have any debt against the home, you must either pay it off before getting a reverse mortgage or use an immediate cash advance from the reverse mortgage loan to pay it off.

The reverse mortgage funds may be paid to you in a lump sum, in monthly advances, through a line of credit, or in a combination of the three. The amount you are eligible to borrow generally is based on your age, the equity in your home, and the interest rate the lender is charging. The greatest cash amounts generally go to the oldest borrowers living in the homes of greatest value on loans with the lowest costs.

Because you retain title to your home, you also remain responsible for taxes, repairs, and maintenance. Failure to carry out these responsibilities could result in the loan becoming due and payable in full. Depending on the plan that you select, although you generally are not required to repay the loan as long as you live in the home, it becomes due with interest when you permanently move, sell your home, die, or reach the end of the pre-selected loan term.

The lender does not take the title to your home when you die, but your heirs must pay off the loan. The debt is usually repaid by refinancing the loan into a forward mortgage, if the heirs are eligible, or by using the proceeds from the sale of your home.

What Are the Different Types of Reverse Mortgages?

There are three reverse mortgage plans available: FHA-insured, lender-insured, and uninsured. All three plans are rising-debt loans. This means that the interest is added to the principal loan balance each month, resulting in a significant increase over time, in the amount of interest you will owe. All three plans charge loan origination fees and closing costs, the legal obligation to pay back the loan is limited by the value of the home at the time the loan is repaid, the loan is nontaxable, and in neither plan will Social Security or Medicare benefits be affected, although eligibility in Supplemental Security Income could be put at risk.

FHA-insured reverse mortgage

This plan offers all three payment options: lump sum, monthly advances, and line of credit. The FHA-insured reverse mortgage is not due as long as you live in your home. Interest is charged at an adjustable rate on your loan balance; any interest rate changes do not affect the monthly payment but, rather, how quickly the loan balance grows over time.

This plan permits changes in payment options at little cost and it protects you by guaranteeing that loan advances will continue to be made to you if the lender defaults. However, FHA-insured reverse mortgages may provide smaller loan advances than lender-insured plans and they likely will cost more than an uninsured plan.

Lender-insured reverse mortgage

These reverse mortgages offer monthly loan advances, or monthly loan advances plus a line of credit, for as long as you live in your home. Interest may be assessed at a fixed rate or an adjustable rate, and additional loan costs can include a mortgage insurance premium and other loan fees.

Loan advances from a lender-insured plan may be larger than those provided by FHA-insured plans, but the loan costs will most likely be greater. The lender-insured plan also may allow you to mortgage less than the full value of your home, thus preserving home equity for later use by you or your heirs. Some lender-insured plans include an annuity that continues making monthly payments to you, even if you sell the home. However, these payments may be taxable and could affect your eligibility for Supplemental Security Income.

Uninsured Reverse Mortgage

This reverse mortgage plan is dramatically different from both FHA-insured and lender-insured plans. An uninsured plan provides monthly loan advances for a fixed term only: a definite number of years that you select when you first take out the loan. Your loan balance becomes due and payable when the loan advances stop. Interest is usually set at a fixed interest rate and no mortgage insurance is required.

If you have short-term but substantial cash needs, the uninsured reverse mortgage can provide a greater monthly advance than the other plans. However, because you must pay back the loan by a specific date, you need to have a source of repayment. If you are unable to repay the loan, you may have to sell your home and move.

Difference Between a Reverse Mortgage and a HECM?

A HECM (Home Equity Conversion Mortgage) is a type of reverse mortgage backed by the Federal Housing Administration (FHA). In other words, a HECM is a specific kind of reverse mortgage. The key difference between a HECM and a reverse mortgage is that a HECM is a government-insured program, while a reverse mortgage may or may not be insured and can be offered by private lenders. HECMs have specific eligibility requirements, interest rates, and loan limits, and are subject to additional regulations, but they offer more protection for the borrower and their heirs.

What Type of Reverse Mortgage is the Least Expensive?

The type of reverse mortgage that is least expensive is typically a HECM (Home Equity Conversion Mortgage) loan, which is insured by the Federal Housing Administration (FHA). HECM loans have lower upfront costs and monthly mortgage insurance premiums compared to other types of reverse mortgages. However, it's important to compare the costs and fees of different reverse mortgage options and consider the specific needs and circumstances of the borrower before making a decision.

What Are Three Major Requirements to Qualify for a Reverse Mortgage?

To qualify for a reverse mortgage, there are typically three major requirements:

  1. Age: The borrower must be at least 62 years old.
  2. Homeownership: The borrower must own the property or have a significant amount of equity in it.
  3. Home type: The property must be the borrower's primary residence and must meet certain standards, such as being a single-family home, townhouse, or approved condominium.

It's important to note that reverse mortgage lenders may have additional requirements, such as a minimum credit score or proof of income, and that the terms of the loan can vary depending on the lender and the borrower's specific circumstances.

What Do You Have to Pay?

Do not sign a service agreement for anyone to help you find a reverse mortgage lender or apply for a loan. This help is available at little or no cost from a HUD-approved housing counseling agency or your nearest HUD office. Applying for a reverse mortgage should only include the cost of an appraisal and a credit report.

The best way to compare the cost of reverse mortgages is to use the Total Annual Loan Cost (TALC) rates that the federal Truth-In-Lending law (Regulation Z) requires lenders to disclose to you. TALC rates are generally greatest in the first five years of a reverse mortgage and grow smaller over time.

They can be especially high in the first years of a loan if you select monthly advances or use a small part of a credit line. Ask for TALC rates early in your decision-making, and before you sign a contract check the repayment conditions to be sure you understand all the reasons for any cost differences.

How Do You Pay Back a Reverse Mortgage?

A reverse mortgage is typically paid back when the borrower sells the home, permanently moves out or passes away. The loan amount, including interest and fees, is due and payable at that time and is typically paid back from the proceeds of the sale of the home. If the sale proceeds are not enough to pay off the full amount of the loan, the borrower or their estate is not responsible for the deficiency. It's important to understand the terms of the reverse mortgage and to plan for the eventual repayment of the loan, as it can impact the inheritance and equity in the home.

What is the Downside to a Reverse Mortgage?

A reverse mortgage can provide homeowners with supplemental income, but it is important to understand the potential disadvantages and risks before making a commitment. Among the disadvantages of reverse mortgages are:

  • Reduced inheritance: The loan amount, interest, and fees will reduce the borrower's home's equity, potentially affecting the borrower's heirs' inheritance.
  • Required property maintenance: The borrower is still responsible for property maintenance, property tax payments, and insurance coverage.
  • Upfront costs: Reverse mortgages typically have greater up-front expenses than conventional mortgages, including loan origination fees, appraisal fees, and mortgage insurance premiums.
  • Increased debt: Over time, the loan amount and associated interest and fees can grow, thereby increasing the borrower's total debt.
  • Reduced eligibility for government benefits: Depending on the number of funds received from the reverse mortgage, the borrower's eligibility for government benefits such as Medicaid may be reduced.

Conclusion

If you are age 62 or older and are house-rich and cash-poor, a reserve mortgage may be an option to help increase your income. However, because your home is such a valuable asset, you may want to consult with your family, attorney, or financial adviser before applying for a reverse mortgage. Knowing your rights and responsibilities as a borrower could help to minimize your financial risks and avoid any threat of foreclosure or loss of income.

How to Calculate Market Value of Property in 2023?

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When a real estate housing market crashes, there are so many foreclosure and bank REO sales, figuring out the real value of a property can be difficult. When there is a large supply of properties available for sale in the housing market, it can be challenging to determine the true value of a specific property.

In a market with a high number of properties for sale, competition among sellers can drive down prices, making it difficult to determine what a property is worth based on current market conditions. Additionally, there may be a wide range of properties available, with varying sizes, locations, and features, making it challenging to compare properties and determine the true value of a specific property.

As a result, it can be difficult to determine the real value of a property in a housing market where there are many properties for sale. The comparable sales method is the most commonly used — and still the most accurate one — to determine the value of single-family homes, condominiums, and smaller multi-unit properties (two to four units).

How to Find Property Value Online

Start by researching information about sold properties on your local government websites for your target area. Many tax assessor's offices and county courthouses offer searchable online databases that allow you to view the prices for properties within a specific area. They usually list full details about the properties, including square footage. Plus, subscriber websites such as Electronic Appraiser (www.electronicappraiser.com) give you detailed information, particularly in areas where online data is scarce.

Free websites such as Zillow (www.zillow.com) also offer property data, but the information is less detailed than the paid sites. For example, the seller's name may be missing, which could be relevant if the seller was a bank, as in the case of a foreclosure sale. If that's the case, it can't be considered a comparable sale because the property was sold in distress.

Be careful about using websites that offer a computer-generated valuation. These are called automated valuation models (AVMs), which aggregate sales data from comparable properties to determine an estimated price. While AVMs can be a benchmark for determining value, they can be off by as much as 10% or more. With a little research, you can pinpoint the value to as close as 3 to 5% percent.

The most useful computer database for getting information about comparable properties is the local MLS. This database shows the number of days on market and includes notes that indicate whether the property was updated, whether the seller offered concessions on the sale, and so on. This additional data is generally not available through other sources, so asking a real estate agent or appraiser to help you will be crucial because most MLS systems aren't accessible to the general public.

While many factors come into play when you're evaluating a residential property's value by “comps” (comparable sales), the three key factors are location, the size (square footage) of the home, and the number of bedrooms and bathrooms. Obviously, you'll need to look at many other aspects before you can pinpoint the exact value of a property, but these are the “big three”. You should be able to look at comparable sales involving properties with these three factors and get a good idea of the value of the property you're selling

Location

Location is extremely important when you're comparing sold properties. A professional appraiser typically looks at houses within a one-mile radius or less, and so should you. In the case of a subdivision — where the houses are all similar and built in the same time period — you need to compare similar houses with similar styles in the same subdivision to get an accurate valuation.

If there's a wide mix of properties in the subdivision, you may need to go outside of it to get comparable sales. Just be careful with “dividing lines”. Geographic lines such as opposite sides of the river, the park, or a main highway can be invisible dividing lines that put the property in another school district and may not garner equitable comps.

Square Footage

When determining a home's value, be sure to evaluate the square footage. Note that appraisers typically look at homes that are within 20% up or down in square footage as comparables. Generally (especially within a subdivision), most homes fall within a fairly limited size range. Therefore, you should be able to develop a good gauge for the selling price of homes in those particular sizes.

Of course, not all square footage is created equal. Most people think that if a house has 1,000 square feet and is worth $100,000, then the 1,100 square-foot house next door would be worth $110,000. Wrong! The extra 10% in square footage equals only a few percentage points in value.

If these two houses offer the same location, style, and number of bedrooms and baths, the 10% additional square footage won't change the valuation much. Why? Because there is a fixed cost on a house based on the value of the land, cost of construction, sewer, subdivision plans, and other factors. An extra few hundred feet of space involves very little cost — only wood, nails, carpet, and possibly some minor electrical and plumbing costs.

Rooms

The number of bathrooms and bedrooms is more relevant than simply the raw square footage. In other words, a three-bedroom home with 1,200 square feet might be worth more than a two-bedroom home with 1,250 square feet. It also matters where the bedrooms and bathrooms are located – on the main floor or the basement.

While finished basements can add value, the amount of that value is less than it is for above-ground living areas. Plus, this greatly varies depending on different regions of the country. In humid areas, below-ground living space isn't as valuable to homeowners as in dryer areas of the country.

To determine a home's value using comps, also look at the quality and number of bedrooms and bathrooms. Three-bedroom homes are generally a big plus over two-bedroom homes, but four or five-bedroom homes don't add as much over a three-bedroom if they are roughly the same size in square footage. Likewise, two bathrooms are a big plus over one bathroom, but three or more don't add as much value.

When comparing bathrooms, make sure you understand the different types of bathrooms and compare them correctly. A full bathroom includes a shower, bath, toilet, and sink. A three-quarter bath has a shower but no tub, plus a toilet and sink. A half bath has a toilet and sink but no tub or shower.

A three-quarter- or full-bath creates roughly the same value, particularly if another bathroom in the house has a tub. A half bath has less value unless there are enough other bathrooms in the house. Also, a five-piece bath (separate shower and tub) generally wouldn't add more value than a regular full bathroom with a combination shower and tub.

Other Factors

There are other factors to consider that affect the value of a home, but generally, you’d give this less weight than the location, size and number of bedrooms and bathrooms. Some houses have one-car or two-car garages, some have carports and others have neither. The garage factors in some value, depending on the rest of the neighborhood.

For example, if the neighborhood comps all have two-car garages, this can affect the value as much as 10% on the subject property if it only has a one-car garage or no garage. However, if the houses are all small and there's a mix of garage options, the garage won't be as big of an issue.

Likewise, a four-car garage in a three-car garage neighborhood probably won't count for much either. One exception is with condominium developments.  Parking spots or garages are generally sold with condominiums and can have substantial value, particularly in large cities where parking is limited to the street.

In addition to looking at properties sold in your target area, you need to look at properties that are for sale. While asking prices are not sold prices, it will give you an idea of where your local market is heading – up or down. Also, keep in mind that if your strategy is to flip the property, the properties for sale are your direct competition, and thus the asking prices are very relevant.

For example, if you find properties that have sold for $150,000 but the current inventory on the market is priced at $140,000, the asking prices of your competition become just as relevant, if not more, as the sold prices of other homes.

If you regularly invest in the same neighborhood, take some time to build yourself a “due diligence” notebook of properties that have sold, are under contract, and are for sale within your area. Have your realtor check the MLS every week for new listings and sold properties so that your information is constantly up to date. Remember, you are only as good as your data, and the more information you have, the more accurate your values will be!

It's important to note that no single method is perfect and that different methods may result in different valuations. A professional appraiser or real estate agent can help to determine the most accurate market value by considering multiple methods and factors such as location, size, condition, and recent market trends. Additionally, obtaining a professional appraisal is often required when obtaining a loan or selling a property.

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