Archive for June, 2017

Mortgage Rates and the Second Part of the Fed’s Announcement

June 23, 2017

The Federal Reserve’s announcement last week that it was increasing the Federal Funds rate included a second statement regarding the Fed’s bond holdings.  The Fed began buying Treasury and mortgage bonds after the Great Recession to lower long-term loan rates.  In the process, the Fed increased its debt holdings by over five times the previous balance – to over $4.5 trillion.

As part of last week’s announcement, the Fed said it will allow a small amount of bonds to mature without being replaced.  The Fed also said this amount will gradually rise as markets adjusted to the process.  Experts stated, “This process could put upward pressure on long-term borrowing rates.”

With the Fed out of the bond-buying business, the overall demand for Treasury bonds and mortgage backed securities will decrease.  A reduction in the demand for these investments should cause their prices to fall.  Remember that when values of mortgage backed securities fall, mortgage rates rise.

 

That is how the second component of last week’s Fed announcement can push mortgage rates higher.  Not by increasing the Federal Funds Rate, but by no longer buying bonds (and also possibly selling the bonds they already own). We could be entering an environment of lowering bond values and rising mortgage rates.

We can assume that Fed will be careful not to shock the markets too dramatically, so we don’t expect rates to dramatically increase. The goal of the Fed would be to complete the second part of their statement without pushing mortgages rates up.

That being said, mortgage rates are currently at their lowest levels of 2017.  Now is a great time to buy a home – from a mortgage perspective.  If you are looking to buy in Georgia and you want focused service with a keen attention to detail, call me at Dunwoody Mortgage Services.  We will do as much of the “heavy-lifting” as possible so your mortgage experience is as pleasant as possible.

 

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How Fed Decisions Could Affect Mortgage Interest Rates

June 19, 2017

Yesterday, the United States Federal Reserve increased its short-term interest rate by 0.25%.  From a historical perspective, the “Federal Funds Rate” is still very low.   Many people assume that this increase in the Federal Funds Rate means that mortgage interest rates will rise too.  Not so fast…it’s possible that the opposite could happen.  When the Fed raised this rate in December 2015, mortgage interest rates declined in the weeks following the announcement.  Mortgage interest rates remained very low throughout 2016 until immediately following the Presidential election in November.  The Fed raised rates again in December 2016 and March 2017.  Current mortgage interest rates are about 0.5% lower than their level when the December 2016 Fed rate increase occurred. 

Why do mortgage rates sometime move in opposition to the Federal Funds Rate?  It’s complicated, but at a high level, mortgage interest rates tie more closely to the investment markets than to the Federal Funds Rate.  The majority of American home mortgages are purchased by Fannie Mae and Freddie Mac.  Fannie and Freddie then “package” these mortgages into mortgage-backed securities (MBS).  They then sell these MBS as investments. 

So insurance companies, mutual fund companies, and other large investors then buy and sell MBS as a component of their larger investment portfolios.  That means that the MBS must compete with other investments for investors’ attention. 

Many times, if the market for equities increases (as reflected by indices like the Dow Jones or NASDAQ), mortgage interest rates will also increase to keep MBS competitive with the equities.  Similarly, if interest rates on certain Treasury Notes and other bond-type investments increase, mortgage interest rates will follow suit.

Ultimately, it means that in many cases, an increase in the Federal Funds rate does not automatically mean that mortgage interest rates will increase too.  If the stock market reacts negatively to the Fed’s decision or other economic news, mortgage rates can decrease even though the Federal Funds rate has increased. 

Yesterday’s Federal Reserve statement also included another announcement that could affect future mortgage interest rates.  The Fed stated that it will begin reducing its huge holdings of Treasury and mortgage bonds.  Let’s talk about the mortgage impacts of that announcement in another blog post next week.

For now, if you, a friend or family member wants to buy a house and fears that home price appreciation and interest rate increases will hurt your ability to buy, give me a call at Dunwoody Mortgage to discuss your options.  We offer VA, FHA, conventional, jumbo, and Home Ready loans – we offer a mix of mortgage products that can help different buyers’ differing situations.   I would love to explore your options with you.

Homebuyers squeezed out of the market

June 13, 2017

Last week there were a series of articles published by the Wall Street Journal, CNN Money, and more describing how Millennials are being squeezed out of buying homes. For the most part, articles focused solely on lending requirements. Honestly, that misses the mark on what is really going on out there right now. Let’s dig into this a little more.

The articles primarily focused on how lending guidelines are stricter. While that is true when compared to 2007, lending requirements have loosened up quite a bit over the past several years. Here are some quick examples:

  • Conventional loans allow borrowers with a credit score of 620 (the same as FHA). Average credit is 660-680 depending on what article/source you read, so home buyers with below average credit can qualify to purchase a home.
  • Smaller down payments are back. VA and USDA loans do not require a down payment, FHA only requires 3.5% down, and Conventional loans can be used to buy a home with as little as 3% down.
  • Self-employed borrowers with an established business of 5+ years can qualify to buy a home with only one year of tax returns.
  • Condos can be purchased with as little as 3% down.
  • Rental income from investment properties can be used even if the property hasn’t been rented out for two years.

Lending guidelines are much more lenient today than they were just a few years ago. That isn’t really the problem.

A Washington Post article from January discussed the elephant in the room, and nailed it when it comes to the issue that all home buyers are facing – inventory.

I attended a Realtor meeting recently where a stat was given stating there is less than a 3-month supply of homes available in in-town Atlanta. A balanced market is a 6-month supply, and nationwide the supply of homes is well under 6 months. That’s not good. Think it is bad in Atlanta? It’s worse in Seattle. The lack of inventory puts Millennials (and any home buyer with a smaller down payment) at a disadvantage. Also, it is pushing home values higher than a normal market due to the impact of supply and demand.

How does one compete in this market? A few things come to mind.

  1. Home buyers must go out and look at homes as soon as they are listed. This can be difficult depending on one’s schedule, but homes are going under contract in a few days in most cases.
  2. Home buyers should be underwritten prior to going out to look at a home. This way the offer letter isn’t a prequalification letter or pre-approval letter, but the letter can read the home buyers are “approved to purchase a home pending a satisfactory appraisal, clear title, and sufficient insurance coverage.” That is much stronger than a simple “prequalification” letter, and I go into more detail this in a previous blog post.

By planning and being ready to move on a home at a moment’s notice, home buyers can increase their odds of getting under contract on a home.

Looking to purchase in Georgia? Wanting to get ahead of the game? Contact me today, and we’ll get started toward achieving the goal of your home ownership!

Home Ready Example Case

June 6, 2017

So let’s take a look at a scenario where the Home Ready program can really help a home buyer, let’s call him “John Doe.”  John’s mortgage credit score is 680.  John wants to buy a house priced at $200,000 and he only has about $10,000 in cash.  In addition to his down payment, he will need to use some cash for closing costs and prepaid escrow, so he can really only afford a 3% down payment.

With a standard conventional loan, John would pay a “premium” for a loan with only 3% down.  His monthly principal and interest payment would be around $985.  And his private mortgage insurance (“PMI”) would be expensive at an estimated $226 per month.  So with the standard conventional loan, John would be looking at a mortgage payment of around $1,200, before we add in the escrow payments for homeowner’s insurance and property taxes.

Now let’s assume that John qualifies for Fannie Mae’s Home Ready program.  John can therefore win approval for a 3% down conventional mortgage without having to pay the “premium price” for the low down payment.  He simply must take the $75 online class and pass the quiz at the end.  In this case, John’s monthly principal and interest payment would be around $940.  And John’s PMI would be an estimated $186 per month.  By taking the class and paying $75, John has used the Home Ready program to reduce his mortgage payment (before escrow) to about $1,126.  If John qualifies for the program, Home Ready will save him about $74 per month in this scenario.

Ultimately John will recoup his $75 online class investment in about one month.  That’s a pretty good return, in my opinion.

Now this is just one example using the assumptions provided, but it provides a realistic picture of how the Home Ready program works.  Do you want to buy a house in Georgia soon?  Do you have average to below average credit and not much money for a down payment?  If so, the Home Ready program might be a great way for you to buy that home you want.  Call me at Dunwoody Mortgage and we can review the Home Ready program and other options that could work for you.