Misconceptions of First Time Home Buying & First Time Mortgages

February 4, 2010 by  
Filed under Mortgage Updates

Buying your first home can be an exhilarating experience, but it can also be extremely stressful, especially if your mortgage company fails to keep you informed or help you through the buying process. Although the current housing market in Baltimore provides great opportunities for first-time home buyers–with FHA loans, tax credits, assistance for down payments and closing costs, and low interest rates–the numerous options associated with these opportunities can make first-time mortgages a confusing subject. Even as you take the first step of simply considering to purchase a home, we want to keep you informed, insuring that the mortgage process runs smoothly from start to finish. Some of the most important things to know up-front are the common misconceptions of first-time home buying.

Misconception #1: I can’t afford a home.

Income is certainly one of the factors that determines loan approval; however, that factor is primarily examined to determine that the first-time home owner will be able to make payments on the loan each month. In other words, Maryland mortgage companies are not concerned about whether a borrower is in the highest income bracket, but whether that borrower is seeking to live within his or her means. If you are “house hunting,” for example, searching for homes within a realistic budget should increase your chances of being approved for a loan. Keep in mind that you can usually deduct the interest and property taxes you pay on your home from your income taxes . In fact, the amount saved in taxes from owning a home often makes up some, if not all, of the difference in the cost of buying over renting. Buying beats renting in terms of establishing equity, as well: when you become a home owner, you typically build equity, meaning that the value of your home increases over time. Renting, on the other hand, only benefits the landlord.

In light of the recent extension of the first-time home buyer credit, there is even more incentive to purchase a home. Under the law, “an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010″ (according to the IRS website). Those who are eligible for the credit and purchase homes in 2010 can choose to claim the credit on their 2009 or 2010 tax return. For more information on the tax credit of up to $8,000 or ten percent of the purchase price, feel free to contact us. 

Misconception #2: I can’t buy a home because I don’t have a large down payment:

Perhaps because large down payments were required for loan approvals in the past, this misconception is often the most common. If you are considering a first home mortgage, you may be eligible to receive an FHA (Federal Housing Administration) loan, the choice of many first-time home buyers because it typically only requires a minimum down payment of 3.5%. Under the recently announced FHA policy changes, FHA loan applicants must have a minimum FICO score (a specific type of credit score) of 580 to qualify for the 3.5% down payment. However, there are many loan options for first mortgages, and we will be glad to walk you through those options if you would like more information.

Misconception #3: My credit isn’t good enough to pursue a first home mortgage.

Even potential buyers with the worst credit situations have to start somewhere, though first-time buyers with better credit scores will typically be presented with more options, lower interest rates and lower down payments. If you are considering applying for a loan and are concerned about your credit score, feel free to contact us with questions regarding your unique situation. We will gladly help you find the best  loan option for you.

How Mortgage Rates Are Determined

February 3, 2010 by  
Filed under Mortgage Updates

You are ready to buy a home and now are looking at obtaining a mortgage. As you begin your research you are most likely educating yourself on how mortgage rates are set and what causes them to change.

There are a number of reasons mortgage rates go up and down. The first is Bond Prices. Mortgage rates are backed by mortgage securities, which are also bonds. Mortgage rates will decrease if the price of a bond increases, enabling the banks to sell them at a high price. When bond rates sell at a lower price, mortgage rates will, in turn, increase. Whether a bond’s value is high or low can depend on many things. One influence can be the cost of stocks. Stocks and bonds compete for the same investment dollar on a daily basis and because there is only so much money people will invest, people with either choose the stock or the bond.

Another influence can be the Federal Reserve. When the Federal Reserve feels that interest rates need to be decreased in an effort to stimulate the economy, this reduction in rates can often cause a stock market rally. When the market becomes bullish, the money to invest in stocks comes from the selling of mortgage-backed securities. This isn’t to say The Federal Reserve is a primary indicator of mortgage rates. The Federal Reserve typically affects short-term interest rate maturities, the Fed Funds rate, and the Overnight Lending rate. These factors have a direct impact on the Prime rate. If you took only this into consideration, you may mistakenly conclude that changes made by the Feds will cause a similar movement in mortgage interest rates. However, mortgage interest rates are dictated by the trading of bonds or mortgage-backed securities, which trade on a daily basis.

Supply and Demand is another large factor in not only the cost of a home but also in the value of a mortgage. The price of almost everything is often determined by supply and demand. If there is a high demand for homes typically interest rates will increase based on the demand for credit. If there is a low demand for credit then interest rates will decrease. Supply and demand is often affected by national financial trends.

Banking Costs also affect mortgage rates. COFI or Cost Of Funds Index determines how much interest banks have to pay on sources of money such as savings accounts or CDs. If bank rates increase or the cost at which they can loan money, so do mortgage rates. If it is lowered, banks can pass on this discount. COFI is often determined by national and international economic conditions.

The ways people keep their money in banks can also be behind COFI interest rate changes as well; if fewer people put their money in savings accounts, which generally pay little interest, and place more money in higher-paying Certificates of Deposit, mortgage rates may increase because of the higher interest cost being paid to account holders.

There are many reasons mortgage rates can drop, all stemming from a few core influences. Typically it is not just one more two events but a number of factors that come in combinations of many direct and indirect economic factors and indexes which they influence.

HUD Toughens FHA Program

January 20, 2010 by  
Filed under Mortgage Updates

HUD Toughens FHA Program
The FHA announced changes to its mortgage insurance program today intended to shore up its capital reserves and increase lender enforcement. FHA Commissioner Dave Stevens said the upfront fee on FHA loans will increase 50 basis points from 1.75 percent to 2.25 percent sometime in the spring, and HUD will ask Congress for the authority to increase the annual fee past its statutory cap of 0.55 percent. FHA borrowers with credit scores less than 580 will be required to make a 10 percent down payment instead of the traditional FHA minimum of 3.5 percent. Some industry observers noted that most lenders aren’t doing business with credit scores less than 620. In addition, HUD will reduce allowable seller concessions from 6 percent to 3 percent and pursue legislative authority to require that FHA lenders indemnify the agency for loans they originate or underwrite.

Mortgage Forecast for 2010

January 11, 2010 by  
Filed under Mortgage Updates

The first full week of the new year wasn’t one of the more encouraging weeks. It began with a dour report on pending home sales, which tumbled 16% in November, raising concerns among many economists that the housing recovery could be poised for a relapse.

The most repeated explanation for the drop in pending sales was that October’s numbers were buoyed as buyers rushed in to take advantage of the federal tax credit before its initial expiration on November 30. Of course, we now know that the credit has been extended through April and expanded to include a $6,500 incentive for some buyers who already own a home.

The good news is the November report did not account for the new-and-improved federal tax credit. So after we work through November’s bout of housing dyspepsia, we will likely see sales rates gradually pick up and home inventories gradually decline.

That is, if employment – the most important variable in any recovery – improves. The news is not as encouraging as we would have liked. Friday’s employment report showed the official unemployment rate held steady at 10% for December, though employers shed an unexpectedly high 85,000 jobs.

The first question that pops to mind is, “How can the unemployment rate hold steady if job losses increased?” Once people stop looking for jobs, they are no longer counted among the unemployed, which is why there is a supplemental employment report. When discouraged workers and part-time workers who would prefer full-time jobs are included, the “underemployment” rate in December rose to 17.3% from November’s 17.2%.

December’s employment numbers have led a few pundits to believe the job situation will not improve much in 2010. We think it is too soon to consider throwing in the towel. It’s worth noting that the Federal Reserve still thinks the economy is improving, saying in the minutes of its last meeting of the Fed governors that “ economic growth was strengthening in the fourth quarter, that firms were reducing payrolls at a less rapid pace, and that downside risks to the outlook for economic growth had diminished a bit further.”

It is not a ringing endorsement of the economy, to be sure, but it is an endorsement.

 

 

The Big Overhang

The Federal Reserve is on lenders’ minds these days, and for good reason: They are concerned how the Fed’s plan to wind down purchases of mortgage-backed securities will influence the lending market.

Over the past year, the Fed has bought $1.25 trillion of mortgage-backed securities to ease lending markets and keep longer-term rates low. The program has succeeded on that front by pushing mortgage rates below 5% to levels unseen since the early 1950s. The big fear now is that when the Fed stops purchasing these mortgage-backed securities (and that is the plan for late March) mortgage rates will start rising and the housing market will start back peddling.

We think the fears over a rate-induced reversal are overdone. Lower rates have done their job, but they have done about all they can do. We’ve argued in past editions that a rising interest-rate environment wouldn’t be the worst thing to happen, because it would motivate people to act, particularly if rising rates are accompanied with rising economic activity and rising employment levels – both of which we still see as likely for 2010.

When the economy does officially improve, all the goodies we have become accustomed to will go away as well. However, that is not bad either. Sound markets are reflective of their ability to stand on their own two feet. At this point, just about everybody would like to see the mortgage and housing markets do just that.

In the meantime, mortgages rates and home prices remain very attractive. We just cannot say for how long. With the proposed changes in FHA lending standards, likely additional mortgage-market oversight, April’s impending expiration of the federal home buyer’s tax credit, and the Fed backing out of the mortgage securities market, the deals we see today might not be so attractive a few months down the road.

Federal Reserve MBS Purchases on Hold at 16 Billion

December 14, 2009 by  
Filed under Mortgage Updates

The Federal Reserve today reported on their weekly purchases of agency mortgage-backed securities (MBS).

In the five trading days between December 3 and December 9, the Federal Reserve purchased a total of $27.25 billion agency MBS. In those five days the Federal Reserve sold $11.25 billion agency MBS, most of which were Fannie 5.0 coupons (dollar rolls). The Fed’s weekly net purchase total was $16.00 billion. This is the fourth consecutive week purchases have come in at $16.00 billion.

The goal of the Federal Reserve’s agency MBS program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally. Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for the program. The program includes, but is not limited to, 30-year, 20-year and 15-year securities of these issuers.

Since the inception of the program in January 2009, the Fed has spent $1.07 trillion in the agency MBS market, or 85.65 percent of the allocated $1.25 trillion, which is scheduled to run out in March 2010.

Mortgage Rates Follow Bond Yields Higher This Week

December 14, 2009 by  
Filed under Mortgage Updates

McLean, VA – Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey (PMMS) in which the 30-year fixed-rate mortgage (FRM) averaged 4.81 percent with an average 0.7 point for the week ending December 10, 2009, up from last week when it averaged 4.71 percent. Last year at this time, the 30-year FRM averaged 5.47 percent.

The 15-year FRM this week averaged 4.32 percent with an average 0.6 point, up from last week when it averaged 4.27 percent. A year ago at this time, the 15-year FRM averaged 5.20 percent.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.26 percent this week, with an average 0.5 point, up from last week when it averaged 4.19 percent. A year ago, the 5-year ARM averaged 5.82 percent.

The 1-year Treasury-indexed ARM averaged 4.24 percent this week with an average 0.7 point, down slightly from last week when it averaged 4.25 percent. At this time last year, the 1-year ARM averaged 5.09 percent.

“Following an upbeat employment report, long-term bond yields rose slightly and fixed mortgage rates followed,” said Frank Nothaft, Freddie Mac vice president and chief economist. “The economy shed only 11,000 jobs in November, far fewer than the market consensus forecast, and the unemployment rate unexpectedly fell to 10 percent. In addition, revisions added 159,000 jobs to September and October.”

“Notwithstanding, rates on 30-year fixed mortgages are almost 0.7 percentage points below those at the same time last year. This translates into an $81 lower monthly payment on a $200,000 conventional mortgage

UNDERSTANDING TRADITIONAL MORTGAGES

July 5, 2009 by  
Filed under Mortgage Updates

mortgageWhen shopping for a mortgage, consumers have more choices than ever before. Many lenders now offer specialty mortgages that help make homeownership more affordable but have risks that consumers should fully consider (see our brochure on specialty mortgages). But for most consumers, the traditional fixed-rate mortgage and adjustable-rate mortgage (ARM) continue to be excellent options. However, even these traditional financing options require a number of important decisions. Should you get a 15- or 30-year loan? Should you get a fixed-rate mortgage to lock in today’s interest rates for the term of the loan—or take an adjustable-rate loan with a lower current rate and payment, but with the risk of rate and payment increases in the years ahead?

You can also tap the equity in your home by refinancing your existing mortgage, taking out a second mortgage, or obtaining a home equity line of credit. This brochure helps you consider these options as well.

We hope this brochure will help you understand traditional mortgages and make the choice that is best for you.

Fixed-rate mortgages

With a fixed-rate mortgage, you are guaranteed the same interest rate over the life of the loan. Your monthly payments never change, and the loan is paid off completely over the term you select.

The key choice involves how long you have to pay back the loan. The most common options are 15- and 30-year loans, with the 30-year being the most popular. As this chart illustrates, a shorter-term loan comes with both a lower interest rate and higher monthly payments (so that you pay the loan back faster). Rates, and the differences between rates for 15- and 30-year loans, change daily.
15-Year 30-Year
Interest rate 5.5% 6%
Amount financed $200,000 $200,000
Monthly payment $1,634 $1,199
Loan balance after 5 years $150,578 $186,109
Loan balance after 10 years $85,553 $167,371

Adjustable-rate mortgages

The initial interest rate on an adjustable-rate mortgage (ARM) is generally lower than that for a fixed-rate loan. However, with an ARM, the interest rate may increase or decrease in the future, and the size of your payments will go up or down along with the rate.

Most ARMs are “hybrids,” meaning that the interest rate is “fixed” for a certain number of years—after which the rate begins to “float.” The most common ARMs fix the initial rate for three, five, or seven years. ARMs are probably most appropriate for people who have sufficient financial resources to handle potential payment increases or know that they plan to sell their home around the time the loan’s interest rate is set to change.

Important features of adjustable-rate loans

Before agreeing to an ARM, you should ask the following questions:

How long does the initial interest rate apply?

How frequently can the interest rate change?

How is the adjusted interest rate determined? (Generally, a specified amount—the “margin”—is added to a current published rate—the “index.”)

How high can the interest rate go?

Does the loan set a minimum interest rate?

Are there any limits on how much the interest rate can change each year?

Do the monthly payments still pay off the loan even if interest rates increase? (With some loans, the amount you still owe—your “loan balance”—can increase rather than decrease each month. This is called negative amortization.)

What is the maximum monthly payment that you could be required to pay?

Potential pitfalls of ARMs

Even small changes in your interest rate can increase your monthly payment significantly, resulting in “payment shock.” Even a change of 1% or 2% in interest rates can result in a very big jump in your monthly mortgage payment. For example, if the interest rate on your mortgage changes from 4% to 6%, your monthly payment could rise by as much as 50% (from $1,000 to $1,500).

ARMs can be complicated, and many specialty ARMs (with risky terms appropriate only for a small group of borrowers) are now being marketed widely. Be sure to avoid loans with terms that you don’t understand. Get a copy of our brochure on “Specialty Mortgages: What Are the Risks and Advantages?” to learn more about these ARMs.

Understanding Home Equity

People who have paid down their mortgage or seen their home’s value rise have equity in their home. Equity is the difference between the home’s value and what you owe the mortgage lender. One benefit of homeownership is the ability to build equity. Homeowners draw on equity for emergencies and for retirement income. Equity also allows you to pass wealth (the home or the money made by selling that home) from one generation to the next.

Refinance loans

In recent years, many people have refinanced their home loans to take advantage of low interest rates. Some have also refinanced in order to obtain cash. In a refinance, you pay off your mortgage with a new loan. In a “cash-out refinance,” you increase the size of your debt in order to get cash at the closing table that you can use for other purposes.

In any refinance, it’s important to ask about the fees you will pay. Sometimes, even substantial fees are easily hidden, as lenders may roll the fees into the loan balance. Of course, increasing the loan balance decreases your home equity.

Borrowing against your equity

Many people borrow against their equity. Two options for doing this are a traditional second mortgage and a home equity line of credit.

With both methods, you use your house as collateral—which means that you risk losing your home if you can’t repay the loan according to its terms. The lender decides how much money to make available by considering, in part, how much of the mortgage debt you still owe.

Traditional second mortgage loans

A second mortgage provides a predetermined amount of money that the homeowner is obligated to repay over a fixed period. Second mortgages generally come with fixed interest rates. Home equity lines of credit

A home equity line of credit (HELOC) is a form of revolving credit. Generally, you can borrow up to a certain amount (the “credit limit”) over a predetermined period of time (the “draw period”).

The repayment terms of HELOCs vary. For example, many HELOCs are structured so that monthly payments cover only interest for the first ten years.

A HELOC generally carries a variable rate. If you consider a HELOC, you should ask the same questions about how this rate is set (and may change over time) that you would ask when considering any other adjustable-rate mortgage.

If you sell your home, you will have to pay off or refinance your HELOC.