Brexit and Mortgage Rates

Brexit happened and mortgage Bonds, thus mortgage rates, reacted delivering a great opportunity to homeowners and homebuyers. But what the heck is Brexit and what does it have to do with mortgage rates?

What is Brexit?

Brexit is a term coined from the withdrawal of Britain from the European Union – the British Exit. The people voted last night and the expectation was Britain would remain in the EU. Surprise, surprise…instead, the British walked out, withdrew from the union and the Prime Minister resigned.

What does Brexit have to do with Mortgage Rates?

Financial markets around the global had been expecting the Brits to remain in the union. Today, financial markets are roiled in response to the unexpected decision. Global markets are tanking. Our stock market plunged 500 points early this morning and ended the day down 611 points.

The capital markets – both stocks and bonds – hate uncertainty. As usual in uncertain times, people seek safety. As a result, money flows into the SAFE HAVEN of Treasuries, gold,and bonds, including mortgage bonds. This is what is happening today! Mortgage rates are tied to mortgage bonds, so when bonds improve, so do mortgage rates.

Low-Mortgage-RatesThere is an expression that begins, ‘be greedy when others are fearful”…meaning, today could represent a historic time to lock an interest rate on what is clearly a “fearful” day for investors. Be greedy – take advantage of this golden opportunity.

There are many things to be uncertain of…this is not one of them. Rates are incredibly low and we are in a window of the best time you may ever see again to finance or refinance.

If you’ve been sitting the fence, especially regarding a refinance, it’s a good time to make your move. Contact a mortgage planner and get a Total Cost Analysis to see if it makes sense for you to refinance.

Here’s the thing…this could disappear in a blink. Don’t wait! See if you can benefit…now.

Home Affordability: Down Payment vs Interest Rates

Home affordability is a hot topic! When considering “affordability” most people unknowingly focus on the wrong thing.

Home Affordability Study

The New Yord Federal Reserve Board conducted a study on the factors impacting housing affordability and a buyer’s willingness to pay.  The goal was to gauge the sensitivity of housing demand to specific financing conditions. Click here to read the study.

In the study, households were surveyed with the respondents to assume a hypothetical.  They are to assume a move today to a town or city similar to their current one.  Respondent are asked how much they would be willing…and able…to pay for a home similar to the one they currently live in.
 
HomeAffordability-FB

 

What is more important, down payment or interest rate?

According to the study, home affordability increases by 15% (40% among renters) when down payment requirements are reduced.   Conversely, a whopping 2% difference in interest rates has only a 5% impact on housing affordability. Can you imagine  what impact a small difference in interest rates, such as a quarter or half a point, would make? It would be an insignificant difference based on this study.

Consider This

If you were buying a home for $200,000 with 20% down, that is $40,000 of your hard earned cash.  At an interest rate of 4%, your principal and interest payment would be $764.  

If you reduced your down payment to 5%, you would only need $10,000.  At the same interest rate, your payment would be $908*, and at a 2% higher rate the payment would be $1,140*.  

It will take nearly 80 months before the $30,000 down payment difference will consume the payment difference of $376  (difference between $764 and $1140).

*does not factor in mortgage insurance.

It bears repeating!  Home affordability improves by 15% or more when down payment requirements are reduced. This is great news for homebuyers who qualify for some of the low down payment programs.  There are many available in today’s mortgage market. Today, programs are available with 3%, 3.5%, and 5% down payment options. Here is a link to a mortgage payment calculator so you can explore the various down payment scenarios.

It seems the most common question surrounding the topic of mortgage is “what is the rate?” This study shows respondents strongly increase their housing affordability and willingness to pay in response to a lower down payment rather than a lower interest rate.

When considering a home purchase, be sure to work with a Mortgage Planner who can provide analysis to demonstrate your down payment and interest rate options.  This will help you maximize your home affordability.

100% Home Financing with USDA Home Loans

You may not know, The U.S. Department of Agriculture (USDA) offers a home loan program as part of its Rural Development Guaranteed Housing Loan Program as a means to promote homeownership in rural areas. The Rural Development (RD) loan program, as it is also known, is a favorite because it offers an incredibly affordable way to become a homeowner.

What is “Rural?”

Rural isn’t quite what it sounds like. It isn’t just for some remote location like Timbuktu. Because of the way USDA defines rural, many suburban neighborhoods are eligible for USDA financing. In fact, buyers often use this program just outside of major metropolitan areas. According to the USDA eligibility map, approximately 97% of the U.S. is in USDA-eligible territory!

You can check for eligible areas on the USDA site map.

USDA-Blog

 

What are the Benefits?

The USDA home loans require no down payment. Zero. Zip. Nada. This allows a homebuyer to finance a home for 100% of the sales price. This is very attractive, especially to first-time homebuyers, making it easier for renters to become homeowners. Plus, with the zero down benefit comes very attractive interest rates, lower than conventional loans.

Very similar to FHA home loans, the USDA mortgage requires two types of fees: an upfront guarantee fee and a monthly fee. The upfront guarantee fee is currently 2.75% of the loan amount, and the “annual fee” is currently 0.50%, paid in twelve equal installments and included in each monthly mortgage payment. With USDA, the upfront fee may be added to the loan amount at the time of closing, so you don’t have to pay it out of pocket.

But it gets better! The United States Department of Agriculture (USDA) recently announced lower upfront and monthly fees for its home loan program beginning October 1, 2016. This could make the USDA home loan one of “the” most affordable home loans available, coming in a close second to the VA home loan which is exclusively available to veterans. The USDA upfront fee will be reduced from 2.75% to 1.0%. And the monthly fee will also drop from .50% to .35%. Again, this becomes effective in October of this year.

This one change will make the USDA home much more attractive and more affordable than FHA home loans.

How Do You Qualify?

In order to qualify for a USDA home loan, homebuyers must meet two primary eligibility requirements.
First, the property must be located in a USDA eligible area which is governed by census tract data. Parts of Southlake, Trophy Club, Lantana, Prosper, Little Elm, Mckinney are all USDA eligible! You can search the eligible areas here.

Secondly, your household income may not exceed 115% of the area’s median income. USDA income limits vary by area. You can look-up your local USDA income limits here. All sources of household income must be counted. The USDA is tough on this requirement, they will not bend. There is an allowance for household size, and your household income cannot exceed the USDA maximum limit based on that allowance. A mortgage professional can tell you if your income meets the program requirements.

In addition, your debt ratios cannot exceed 29% for the housing costs and 41% for your total debt (housing costs, car payments, student loans, revolving credit card payments, etc).

Most lenders will require a credit score of 640 for a USDA loan. If you do not have a credit score, many lenders will accept alternate tradelines such as utilities to establish a credit history.

The USDA loan is available to first-time homebuyers as well as repeat buyers, however it is only available for primary residences.

These are just the broad strokes of what the USDA home loan offers and allows however it does cover the basics. For more information, talk to a mortgage professional who can explain the details of the program and answer all your questions.

Mortgage Rates and the Federal Reserve

Mortgage rates are often thought to be directly linked to the Federal Reserve.  It’s common for many people to mistakenly think The Federal Reserve actually sets mortgage interest rates.  The media contributes to this misunderstanding.  But it is incorrect.  Mortgage rates are based on the pricing of mortgage bonds which are collateralized by mortgages, known as mortgage-backed securities.

The Federal Reserve

The Federal Reserve sets the Fed Funds Rate (FFR). The Fed Funds Rate is a short-term overnight rate banks charge one another to borrow money. Banks borrow money overnight to meet reserve requirements. This rate is a fixed interest rate and is a tool used by the Fed to manage the economy– either slow it down or speed it up. This rate is not tied directly to mortgage interest rates.

While the Fed does not set mortgage rates, its actions do have an influence over the mortgage market.

Mortgage Rates

Mortgage interest rates are derived from the buying and selling of bonds, specifically mortgage-backed securities (MBS). Mortgage bonds trade all day long, every day of the work week. The price of a mortgage bond changes constantly throughout the day based on supply and demand.

Mortgage-backed securities and mortgage rates move in the opposite direction. As prices of MBS rise, mortgage rates fall. But there’s an easier way to think of it. When MBS prices improve, mortgage rates improve.

Mortgage-Rates-Federal-ReserveMortgage-backed securities are an asset-backed security which is secured by a mortgage. Mortgage-backed securities are traded in the secondary market where lenders as well as private and public investors buy and sell every day. These securities are held by many institutions and sometimes may be found in retirement funds as they are a “safe” investment.

Influences to Mortgage Rates

The natural push-pull of supply and demand causes mortgage rates to rise and fall. Demand for mortgage bonds changes for a variety of reasons, however the most common is safety. In troubling times, investors flock to safe investments and mortgage bonds are a safe haven. When times are great, money leaves the safety net of the bond market and flowes into more exciting instruments such as stocks.

There are six primary factors that move the mortgage market. They influence safe haven trading which causes mortgage rates to rise and fall. These factors are commonly referred to as “fundamentals” and they are:
1. Inflationary Pressure
2. Economic Data
3. Stock Market
4. The Federal Reserve
5. Geo-poloitical News
6. World Events

Mortgage bonds react to the news, both good and bad. What is good for the economy is bad for mortgage bonds, thus mortgage rates rise. Conversely, bad news for the economy will tend to result in improvements to mortgage-backed securities and mortgage rates will move lower.

In the absence of economic, geo-political, and world news, bonds will respond based on technical factors. Technical factors are trends, moving averages, support and resistance levels…statistical type data.

Mortgage rates change with little or no advance warning based on the dynamics of the mortgage-backed security market. Make sure your mortgage lender is watching mortgage-backed security pricing in real time and has an understanding of how the bond market prepares and reacts to these key market movers.

5 Factors That Determine Your Credit Score

Your credit scores usually determine the price you pay for your money, whether it be your mortgages, your auto loans and leases, your credit cards, business loans, your homeowners insurance, and so on.  Perhaps the most significant part of your credit report is your credit score. Credit scores range from 350 to 850, with 850 being the best possible credit score that you could receive (and nearly impossible to achieve), and 350 being the worst possible credit score. 

CreditScore-Blog

There are five factors that determine your credit score:

Your Payment History: 35% impact on your credit score

Paying debt on time and in full has a positive impact. Late payments, judgments, charge-offs, collection accounts and bankruptcies have a negative impact. If you have had any bankruptcies within the last 7 years, it will seriously affect your ability to borrow or establish new credit accounts. If you have had any judgments within the last several years, it is very important that you pay off the judgment and get a “satisfaction of judgment” from the court. Any unsatisfied or recent judgments will make a bad dent in your credit scores and adversely affect your ability to borrow. Usually, judgments and liens must be paid prior to the home loan closing. 

Timely mortgage payments are weighted heavily by the scoring systems and are one of the most vital requirements that lenders look for when evaluating your credit history. Many times a single late mortgage payment within the last 12 months can hold up your file or spell the difference between the best interest rate and the next credit level. Your payment history on other debts (car payments, credit cards, etc.) is also given a lot of weight.

The credit scoring systems evaluate how many late payments you have had and whether they were 30, 60 or 90 days late, or whether they are currently in default, with default being the worst situation. Additionally the systems look at whether the late payments were consecutive. If you only have one or two minor late payments on your report with no other derogatory marks, your score will not be terribly affected, but you will have a tough time getting over the critical 700 level. 

The Balance You Owe vs. Your Available Credit Lines: 30% impact on your credit score

Keeping your credit balances below 50% of your available limit is very important. Keeping your balances below 30% of your available credit is even better. For instance, if you owe $10,000, and you have $100,000 of credit available to you, you are only using 10% of your available credit line. On the other hand, if you owe $10,000 and you only have $10,000 available to you, you have “maxed out” your available credit and your credit scores will be very negatively impacted. Therefore, it is not how much you owe, but how much you owe compared to what you are able to borrow.

Your Credit History: 15% impact on your credit score

The longer your accounts have been opened, the higher your score will be; newly opened accounts will bring your score down. If you don’t have much of a credit history, and you are planning on taking out a mortgage in the future, it may be a good idea to establish a few open credit lines with little or no balance on them. Although newly opened accounts tend to lower your score initially, they will improve your score once they’ve been open for awhile, somewhat active and paid off with little or no balance.

Type of Credit that you have open: 10% impact on your credit score

A good mixture of auto loans and leases, credit cards and mortgages is always best. Too many credit cards is not a good thing, and having a mortgage does increase your score. It’s always best to having a good mix of auto loans, credit cards and mortgages rather than having only credit cards.

Number of Recent Inquiries made by creditors: 10% impact on your credit score

Inquiries affect the score for one year from the time they’re made. Your score isn’t impacted when you check your own report. It’s only affected if a potential creditor checks your credit. These include department stores, as well as credit card, auto finance and mortgage companies.  Multiple auto and mortgage inquiries are treated as only one inquiry if made within 45 days of each other. So, it’s better to shop for a car or a mortgage over a two week time-frame, rather than to prolong it over a longer timeframe. 

3 Different Mortgage Loan Programs

When you buy a home there are a couple of decisions to be made regarding the type of home loan, the program, term, and the product.  Once you’ve determined the type of home loan that is right for you, the next decision is the program type.  

It may seem a bit dizzying, but think of it like a drop down menu.  First you select the type of home loan, then the sub menu gives you the home loan program options.  And yes, there is another drop down menu from there, but I promise – it’s really not that complicated!

3Programs

Fixed Rate Mortgage 

The fixed rate mortgage is a mortgage that has a rate that never changes. Your interest rate and monthly principal and interest payments never change. Once you lock in your rate, prior to closing on your home loan, you have secured that rate for the life of your loan.

30-Year Fixed Rate Mortgage: The traditional 30-year fixed rate is the most widely used mortgage program. When interest rates are low, fixed rate mortgage loans are generally not that much more expensive than adjustable rate mortgages and may be a better deal in the long run, because you can lock in the rate for the life of your loan.  And when rates are low, like they are now…wow, what a great time to lock in for life…even if you only end up staying in this home for 7-10 years.

15-Year Fixed Rate Mortgage: This loan is fully amortized over a 15-year period and features constant monthly payments, just like its sister the 30-year loan. It offers all the advantages of the 30-year loan, plus a slightly lower interest rate and you’ll own your home twice as fast. On the flip side, your payments will be higher due to the shorter term. This is a great program for many people but not everyone. You should have reserves and established investment/retirement accounts before committing to a shorter term.

Adjustable Rate Mortgage (ARM) 

3/1 ARM, 5/1 ARM, 7/1 ARM 

Adjustable rate mortgages are mortgages with a fixed rate for a short period of time. The term can be: One, Three, Five, Seven and Ten years. The rate is fixed for the term, then adjusts at the pre-established interval and amount.
Adjustable mortgages rates are made up of two components: an index and a margin. The margin is fixed at the time of locking in your rate. The index, most commonly the Treasury , Cost of Funds or Libor Index, is the component of the mortgage rate that adjusts. When the adjustment period arrives, the calculation of the adjustment is made by taking the current index figure plus the pre-established (fixed) margin (avg. 2.75%). The sum of the two is the new rate, provided that it does not exceed the established maximum amounts.

The loan adjusts at pre-determined intervals and has a maximum lifetime cap that the interest rate can adjust. This product is attractive to financially savvy borrowers as well as geared to borrowers that anticipate moving prior to the adjustment.

Interest Only Loans 

Interest only loans are available for jumbo loans (non-conforming conventional loans) and borrowers with strong credit. This loan is tied to a specific index and the borrower is billed monthly, interest only on the outstanding principal balance. Typically rate adjustments occur monthly, have no periodic cap but have life time cap. This product allows the borrower to make principal reductions during the interest only period up to 20% per year. This product is attractive to financially savvy borrowers who most often are maximizing their assets.

There are various products within loan types and programs such as low down payment options and renovation loans.  It’s very important that you discuss this with a mortgage professional who can explain your options clearly and answer all your questions.  After all, financing a home is a huge financial decision and transaction – make sure you are getting your information and advice from a qualified professional, not your well meaning friends and family.

 

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