Palm trees, beaches and more than 300 sunny days per year on average - who wouldn’t want to live in the Golden State? And that’s precisely the problem. Demand for homes in California has soared; consequently the prices – and therefore the mortgages – reflect that.
Young couples just starting out are struggling to come up with the sizeable funds needed for a down payment, but once they’ve overcome that hurdle they must negotiate the minefield of rules and regulations governing California mortgage rates and loans. They needn’t feel too badly - the types of loan on offer can confuse even a seasoned home owner looking to refinance or simply move to another house.
It would be pointless for this article to focus specifically on current rates for mortgages in California. They are, after all, changing constantly – sometimes several times a day as the market fluctuates. So any information printed here could be out of date within hours. Nevertheless, there are general trends that govern the housing market and California mortgage rates as well as those in other states - so looking at the national picture can be revealing. Here’s what you need to know.
It should be no surprise to anyone that homes in California are priced much, much higher than comparable properties in other states. A two-bedroom house in Los Angeles proper may cost up to three times as much as a similar home in say, Austin, Texas. Respected real estate website Trulia.com has drawn up a “heat map” of America, grading each state’s average listing price on a temperature scale, ranging from “hottest” (most expensive) to “coolest” (least expensive).
California, along with New York, New Jersey, Connecticut and a few other states, are all colored the brightest shade of red, indicating a sweltering average home price of $449,000 or above. Neighboring Nevada and nearby New Mexico, among others, come in at a distinctly warm orange, with values at a still steep $353,000 to $401,000. For the most bang for your buck, head to North Dakota, Iowa, Indiana or Ohio. Trulia.com has rated these areas a cool deep green to indicate the average house price is just $192,000 or less.
We’ve just seen that Trulia.com has determined the average Californian home listing as $449,000, but residents of the Golden State know that hardly tells the whole story. Try buying a house in Beverly Hills for that. The truth is that prices vary wildly depending on where the property is located. Nowhere is that more apparent than the most populated cities. In fact, eight of the 50th most populous cities in America are located in California, which itself is the nation’s most populated state.
Los Angeles tops the list as California’s number one most populated city, and it is also the second most populous city in the whole of America, second only to New York. A little more than four million people call LA home according to estimates made by the California Department of Finance in January 2009, while there are more than a million people living in San Diego and San Jose respectively. San Francisco, Sacramento and Santa Ana also made it into the top ten list of most populated Californian cities.
Even though these cities are among the most densely populous areas in the country, they are still growing. In 2008, the US Census Bureau announced that New Orleans, Louisiana, was the fastest growing city in the nation, but the Californian cities of Roseville and Irvine came in at sixth and seventh respectively. It’s impossible for such studies of family migration patterns to ascertain why people are moving to those particular cities, but factors such as affordability of housing and a strong local economy or job market likely have something to do with it. One thing is for sure: The popularity of California and increased demand for housing as the population rises won’t do anything to lower real estate prices.
Trying to buy a house varies from state to state. For example, citizens of Georgia have “security deeds” instead of “mortgages”, and those documents have one key difference. While mortgages allow the borrowers to own the legal title of the property (despite the lender’s stake in it), a security deed gives the legal title to the mortgage provider. The foreclosure process for security deeds is consequently much faster than it is for mortgaged properties.
Similarly, the majority of “mortgages” in California are officially named “deeds of trust”. Deeds of trust are pretty much “mortgages” with a different name, but again, they allow the foreclosure process to be speeded up should the borrower default. Wannabe homeowners (or current homeowners looking to refinance) in California can apply for two types of mortgage, although there is also a third option that may be available to them:
This method of borrowing does exactly what it says on the tin. The loans may have to be paid back within 15 or 30 years, depending on your preference. You must also choose whether to go for a fixed interest rate (ie. the amount you pay back each month will never change) or an adjustable interest rate (ARM), where the amount you pay will change over time. The homeowner stands to benefit if the interest falls, but of course, if they rise, as happened during the credit crisis, things could get ugly. If borrowers decide to go for a fixed loan, they must always remember that a rate is never guaranteed until they “lock” into one particular deal. Borrowers may choose to buy a “point” up front (one point is equivalent to one percent of the amount of the loan) to reduce the interest rate, and therefore the monthly payment.
There’s one more thing you have to know: whether your loan is “recourse” or “non-recourse”. Non-recourse loans mean that if your home is foreclosed and sold, and the money raised by the sale is not enough to clear your debts, you won’t have to pay taxes on the amount you have failed to pay back. Recourse loans on the other hand, mean that the homeowner remains responsible for taxes on the debt left over after the repossession and sale of the foreclosed property. In California, home mortgages are usually considered non-recourse debt, although refinancing your home would most likely be considered a recourse debt.
Various federal agencies may provide loans, such as the fixed or adjustable rate mortgages offered by the Federal Housing Administration (FHA) or the fixed rate mortgages offered by the Veterans Administration (VA).
Californians with low (or even “moderate”) incomes may be able to qualify for special loans with various state and local housing departments – such as the California Housing Finance Agency (CalHFA), for example, which works with a list of approved lenders from the private sector.
The “mortgage rate” is the interest the borrower has to pay on the loan they have taken out. Mortgage rates are constantly in flux; they are affected by a myriad of factors and are impacted by the national and even the global economy.
The interest rates on mortgages can vary dramatically across the country. Borrowers will be offered different rates in different states, and there will even be a difference in quotes offered by different lenders. Fees associated with the loans may also vary depending where you live.
Because California real estate is so much more expensive than properties in other states, many loans taken out are called “jumbo loans”. Jumbo loans are mortgages that exceed the amount standards set by the Federal agencies of Fannie Mae and Freddie Mac. Mortgages worth more than $417,000 in 2010 in California are considered jumbo loans. These mortgages usually have higher interest rates because there is an increased risk to the lender who made the loan.
The best way to make sure you are getting a good deal is compare mortgages with several different lenders. Don’t just take the rates into account; borrowers should compare other issues too, such as whether there will be penalties if the loan is paid off early. Other fees should also be taken under consideration, such as the closing costs.
If borrowers are unable to meet their loan payments, and default on their mortgage, the lender will begin the foreclosure process in an effort to get their money by repossessing the property. The borrower will be sent a notice of default, followed by a notice of trustee sale, which sets a date for the auction of the property. The winning bidder will have the title transferred to them. The lender sets the opening bid, so if no one bids higher than that amount then the property automatically remains the lender’s. In that case, the property will be sold to investors directly by the lender or bank as a real estate owned home (REO).