You can’t turn on the news these days without hearing about the Federal Reserve Board’s attempt at keeping interest rates low to spur more lending (for mortgages, business lending and other consumer loans) via a plan known as Quantitative Easing part 2 (QE2).
The plan provides for the FED to purchase Treasury Bonds to take them out of the market. When the supply of Treasuries is reduced, the price will increase due to simple supply and demand. When the price of Treasuries increase, the Yield (or return) on those Treasuries decreases. The Yield is the cost of money to lenders so the lower the Yield, the lower rates will be.
Mortgage rates are based on the Yield of Mortgage Backed Securities, which are closely tied to the performance of Treasury bonds. So when Treasury prices increase, typically you will see the price of Mortgage Backed Securities increase as well. When these prices go up, the Yields go down and this is supposed to bring down mortgage rates.
Unfortunately, the immediate effect of this most recent Quantitative Easing has been the opposite. Because many investors had already expected QE2, they had priced the decreased supply of Treasuries into the market. When the announcement was made that the FED would be buying approximately $600Billion of Treasuries, the market was actually disappointed and this drove the price of Treasuries lower – in turn raising the Yield and Mortgage Backed Securities followed in kind. The market had anticipated a purchase closer to the $1 Trillion range.
In the short term, rates have increased a bit and the level of support for lower prices for Mortgage Backed Securities seems to be on the near horizon. This could certainly change so if you are in the market to buy or refinance a home, you will want to work with someone that monitors these changes on a daily basis as we are seeing swings in rates on a daily basis – and often with multiple changes in a single day.
I often equate the Mortgage Backed Securities market to someone buying a Certificate of Deposit (CD) at a bank. Right now, the rates are so low on CD’s that there really is a disincentive to purchase one and tie your money up for a prolonged period of time at such a low return. Imagine purchasing a 30 year Mortgage Backed Security and having to take such a low return for 30 years!
With returns so low for these investors, it may not be likely that they would be willing to accept any less moving forward. If this happens, no amount of Quantitative Easing will entice them to pay more for the Mortgage Backed Securities and therefore it would be unlikely that we will see any significant reduction in mortgage rates. No one can predict if rates will be headed any lower in the short term, however, one thing is certain and that is that rates will increase at some point.
The main hesitation for Mortgage Backed Security investors at this point is that they don’t want to be stuck holding these long term investments for a prolonged period of time with such a low return when rates increase. This is primarily what is keeping the rates from going lower as the FED had intended.
Let’s see what the next few weeks and months hold for mortgage rates. Either way, with rates at historic lows, it would pay to start investigating any buying or refinancing options at this time before they do go up.
Friday, November 19, 2010
Thursday, November 11, 2010
The fact and fiction about rehab mortgages
A few years ago a client called me. They had a small amount of money and a steady income.
They were searching for a home with a purchase price, which at the time was really low. It was what they could afford. A local realtor found them a home. it was a 90 year old, old style colonial. It was ugly, and needed a bit more than just TLC. Old kitchen, very dated bathrooms, a damp basement and drafty windows. The house comprised of very small rooms and didn't flow. It was the only home in their price range and neighborhood.
I put them into a loan, which we seldom hear about. The FHA 203K loan. This is a rehab loan. It is a great product for the client that wants either purchase a home or refinance their home to do construction. There are two challenges that come up when someone is in this situation
A. When purchasing, the client has enough money for the down payment and closing costs but not enough do to the repairs/addition/rehab
B. The house either appraises low or in poor condition. A bank will not lend on a house that is in less than good condition or if it need repairs. On a refinance, a bank will not lend over the as is value of the house. One may want to make an addition that will drastically increase the value of the house upon completion but right now as is, the value is lower so there is not enough equity to do a cash out. On a purchase, it’s almost the same. The bank will not lend over the purchase price because of work that will be done.
How does one finance these renovations? In today’s credit and lending climate, the builders and contractors don't have any venues for rehab/repair/construction funds. The days of the easy Home Equity Lines of Credit are gone.
The FHA 203k is a great option. Let me explain some the details of how this loan works and what are the options that you may have.
The 203K loan is a rehab/construction/repair loan. It does not finance new construction. If you buy a home and tear it down to build a new home, you must build on the original foundation. You can modify, enlarge it etc. but you cannot buy a lot and build a new home.
It will not finance luxury items like a swimming pool, hot tub etc
You can borrow from as little as $5,000 up to the FHA limits in our area. On a one family home, the limit in our area of $729,000. The home must be owner occupied, primary residence, not a second home, vacation home or investment property. It can be a 1-4 family or a mixed-use property if the applicant lives in the residential unit.
A normal mortgage has 2 steps. This loan is a 3 step process.
Step 1: Credit. Every loan has a credit portion; this is the analysis and approval of the applicants credit, income and assets
Step 2. The appraisal portion, every loan requires and appraisal. This is provided to the bank so that the bank can make a decision if the collateral is acceptable
Step 3. Construction/rehab/repair. This is unique to the 203K. The bank evaluates the scope of the job and bases the loan on an “after improved value”.
Very basically, the way this loan works is, the bank lends up to 96.5% of the after improved value, basing the loan on the purchase price + the rehab cost. For example, if you buy a home for $300,000 and then you want to do $150,000 renovation, and the after improved value is 450,000, under the 203K program you would get a mortgage of up to $434,250. At closing, the seller would get the $300,000 (purchase price) and the rest of the money would go into an escrow account to be disbursed as needed during the rehab period.
For more information on 203K loans and other loan products contact a local mortgage professional who knows the in’s and out’s of FHA financing. The key to a successful mortgage experience is the professional that you work with.
They were searching for a home with a purchase price, which at the time was really low. It was what they could afford. A local realtor found them a home. it was a 90 year old, old style colonial. It was ugly, and needed a bit more than just TLC. Old kitchen, very dated bathrooms, a damp basement and drafty windows. The house comprised of very small rooms and didn't flow. It was the only home in their price range and neighborhood.
I put them into a loan, which we seldom hear about. The FHA 203K loan. This is a rehab loan. It is a great product for the client that wants either purchase a home or refinance their home to do construction. There are two challenges that come up when someone is in this situation
A. When purchasing, the client has enough money for the down payment and closing costs but not enough do to the repairs/addition/rehab
B. The house either appraises low or in poor condition. A bank will not lend on a house that is in less than good condition or if it need repairs. On a refinance, a bank will not lend over the as is value of the house. One may want to make an addition that will drastically increase the value of the house upon completion but right now as is, the value is lower so there is not enough equity to do a cash out. On a purchase, it’s almost the same. The bank will not lend over the purchase price because of work that will be done.
How does one finance these renovations? In today’s credit and lending climate, the builders and contractors don't have any venues for rehab/repair/construction funds. The days of the easy Home Equity Lines of Credit are gone.
The FHA 203k is a great option. Let me explain some the details of how this loan works and what are the options that you may have.
The 203K loan is a rehab/construction/repair loan. It does not finance new construction. If you buy a home and tear it down to build a new home, you must build on the original foundation. You can modify, enlarge it etc. but you cannot buy a lot and build a new home.
It will not finance luxury items like a swimming pool, hot tub etc
You can borrow from as little as $5,000 up to the FHA limits in our area. On a one family home, the limit in our area of $729,000. The home must be owner occupied, primary residence, not a second home, vacation home or investment property. It can be a 1-4 family or a mixed-use property if the applicant lives in the residential unit.
A normal mortgage has 2 steps. This loan is a 3 step process.
Step 1: Credit. Every loan has a credit portion; this is the analysis and approval of the applicants credit, income and assets
Step 2. The appraisal portion, every loan requires and appraisal. This is provided to the bank so that the bank can make a decision if the collateral is acceptable
Step 3. Construction/rehab/repair. This is unique to the 203K. The bank evaluates the scope of the job and bases the loan on an “after improved value”.
Very basically, the way this loan works is, the bank lends up to 96.5% of the after improved value, basing the loan on the purchase price + the rehab cost. For example, if you buy a home for $300,000 and then you want to do $150,000 renovation, and the after improved value is 450,000, under the 203K program you would get a mortgage of up to $434,250. At closing, the seller would get the $300,000 (purchase price) and the rest of the money would go into an escrow account to be disbursed as needed during the rehab period.
For more information on 203K loans and other loan products contact a local mortgage professional who knows the in’s and out’s of FHA financing. The key to a successful mortgage experience is the professional that you work with.
Tuesday, November 9, 2010
BI Weekly Mortgages
I am on the radio weekly where I do a 15 minute program. In that program I discuss current mortgage trends, tips, the current interest rate environment and I address different mortgage ideas and questions. Last week someone asked me a question regarding a bi-weekly mortgage and whether it is a good idea. It turns out that this was a topic that a lot of the listeners were interested in and since this is offered to almost everyone who has a mortgage I thought it would be a good topic to discuss today, in the Front Page.
First of all, what is a bi-weekly mortgage? A bi-weekly mortgage is your PITI payment (Principal, Interest, Taxes and Insurance) divided in half and then each ½ payment is paid every 2 weeks.
The theory behind it is that a lot of people get paid on a bi-weekly schedule so it would be easier to divide the mortgage payments to match the paychecks and then a home owner could pay the mortgage payment from that check that came in.
The benefit was/is that since there are 52 weeks in a year, there would be 26 mortgage payment installments, which equals 13 payments a year instead of the normal 12 annual installments. By doing the bi-weekly mortgage, the homeowner would seamlessly pre- pay their mortgage loan and finish a 30 year fixed rate loan in 23 years because all additional payments that are made to a mortgage loan are credited towards the principal and the homeowner would be accelerating their principal payments on this schedule and therefore their mortgage would finish that much quicker.
So now: How much does it cost to set it up? Should a homeowner do the bi-weekly mortgage? What happens if you don’t want to continue the bi-weekly schedule?
Some banks will set up the bi-weekly payment initially. Most banks do not. You close on a normal 12 month annual installment mortgage and then after closing the servicing company whom you will be paying your mortgage payments to will send you an offer to convert your loan to a bi-weekly. There is usually a fee of $300-$400.
I must admit that I am not a great fan of bi-weekly mortgages, at least for every one. While it works for some people very well, it also can really tighten a homeowner’s monthly budget. When people by a home they are sometimes very tight and to make the mortgage payment monthly is not easy. While a bi-weekly sounds good, it is an extra payment. This can cause people to fall into credit card debt or to be constantly slightly short which is very stressful on a family. I believe that the most important thing to healthy family finances is not how long you will be paying your mortgage or even how low your interest rate can be, if you took a 20 or 15 year loan instead of a 30 year loan, but to keep the monthly payments manageable; Even if it means never prepaying your mortgage. When the bank approves you for a mortgage, they aren’t factoring babysitting, dry cleaning,lawn service etc. We have to be even more careful not to put ourselves in situations that are financial recipes for failure from the get go.
If you did start a bi weekly and you find that it isn’t working for you, you can back out of the program, but you have to let your mortgage company know. You can’t just sop paying the bi weekly payment. If you miss a biweekly payment you will have to pay a late charge and it will be reported as a late mortgage payment on your credit report.
I met with a new client on Sunday who want to refinance. They are currently in a bi-weekly mortgage. They asked me not to set it up again be-weekly. He said it was working great for him until he lost his job last year. Now in his new job where he is a school guidance counselor, besides him taking a pay cut, he gets paid 10 months a year, twice a month ( the 15th and 30th of every month), not every other week (bi-weekly). In the summer he gets paid for a summer program in one lump sum for the whole summer. He finds it very difficult to manage his finances with the bi weekly. On the flip side I have another client, buying a luxury townhouse condo along the Hudson River and she said she only wants a bi-weekly!!
First of all, what is a bi-weekly mortgage? A bi-weekly mortgage is your PITI payment (Principal, Interest, Taxes and Insurance) divided in half and then each ½ payment is paid every 2 weeks.
The theory behind it is that a lot of people get paid on a bi-weekly schedule so it would be easier to divide the mortgage payments to match the paychecks and then a home owner could pay the mortgage payment from that check that came in.
The benefit was/is that since there are 52 weeks in a year, there would be 26 mortgage payment installments, which equals 13 payments a year instead of the normal 12 annual installments. By doing the bi-weekly mortgage, the homeowner would seamlessly pre- pay their mortgage loan and finish a 30 year fixed rate loan in 23 years because all additional payments that are made to a mortgage loan are credited towards the principal and the homeowner would be accelerating their principal payments on this schedule and therefore their mortgage would finish that much quicker.
So now: How much does it cost to set it up? Should a homeowner do the bi-weekly mortgage? What happens if you don’t want to continue the bi-weekly schedule?
Some banks will set up the bi-weekly payment initially. Most banks do not. You close on a normal 12 month annual installment mortgage and then after closing the servicing company whom you will be paying your mortgage payments to will send you an offer to convert your loan to a bi-weekly. There is usually a fee of $300-$400.
I must admit that I am not a great fan of bi-weekly mortgages, at least for every one. While it works for some people very well, it also can really tighten a homeowner’s monthly budget. When people by a home they are sometimes very tight and to make the mortgage payment monthly is not easy. While a bi-weekly sounds good, it is an extra payment. This can cause people to fall into credit card debt or to be constantly slightly short which is very stressful on a family. I believe that the most important thing to healthy family finances is not how long you will be paying your mortgage or even how low your interest rate can be, if you took a 20 or 15 year loan instead of a 30 year loan, but to keep the monthly payments manageable; Even if it means never prepaying your mortgage. When the bank approves you for a mortgage, they aren’t factoring babysitting, dry cleaning,lawn service etc. We have to be even more careful not to put ourselves in situations that are financial recipes for failure from the get go.
If you did start a bi weekly and you find that it isn’t working for you, you can back out of the program, but you have to let your mortgage company know. You can’t just sop paying the bi weekly payment. If you miss a biweekly payment you will have to pay a late charge and it will be reported as a late mortgage payment on your credit report.
I met with a new client on Sunday who want to refinance. They are currently in a bi-weekly mortgage. They asked me not to set it up again be-weekly. He said it was working great for him until he lost his job last year. Now in his new job where he is a school guidance counselor, besides him taking a pay cut, he gets paid 10 months a year, twice a month ( the 15th and 30th of every month), not every other week (bi-weekly). In the summer he gets paid for a summer program in one lump sum for the whole summer. He finds it very difficult to manage his finances with the bi weekly. On the flip side I have another client, buying a luxury townhouse condo along the Hudson River and she said she only wants a bi-weekly!!
Sunday, October 17, 2010
Schedule A
What is on the schedule A of your tax return that impacts the mortgage approval?
On schedule A is the itemized deductions and un-reimbursed employee expenses. This is a concept that I never had to deal with in the past, but last month alone 4 clients of mine were negatively impacted by the non re-imbursed expenses. What this means is that if the client is a w-2 earner, we still have to deduct these "un-reimbursed expenses. This impacts your approval. I now actually asked to see a tax return prior to issuing a pre-approval letter. The worst thing would be for me to pre-approve a client and then a realtor will spend time showing them homes and negotiating a purchase of the home of their dreams and then to find out well into the process, that they don't qualify!!
On schedule A is the itemized deductions and un-reimbursed employee expenses. This is a concept that I never had to deal with in the past, but last month alone 4 clients of mine were negatively impacted by the non re-imbursed expenses. What this means is that if the client is a w-2 earner, we still have to deduct these "un-reimbursed expenses. This impacts your approval. I now actually asked to see a tax return prior to issuing a pre-approval letter. The worst thing would be for me to pre-approve a client and then a realtor will spend time showing them homes and negotiating a purchase of the home of their dreams and then to find out well into the process, that they don't qualify!!
Wednesday, September 1, 2010
Mortgage Rates May Be Low, But They’re Tough To Pin Down — Especially This Week
Vacation days contribute to jumpy mortgage rates
Mortgage rates are low right now but pinning them down this week could be a challenge. As Labor Day Weekend nears and Wall Streeters take their head-start on the holiday, trading volume will fall, which will cause mortgage rates to get jumpy.
As mortgage rates change, so does the long-term cost of owning a home. Every 1/8 percent adjustment changes a household budget.
Meanwhile, the relationship between “vacation days” and mortgage rate volatility is an interesting one; based more in scarcity than market fundamentals.
Rates tend to get volatile near holidays because of two inter-related facts:
1. Conforming mortgage rates are based on the price of mortgage-backed bonds
2. Mortgage-backed bonds can’t trade without a buyer and a seller at a specific price
So, as the week progresses and more traders leave for their respective “extended” 3-day weekends, there’s fewer buyers and sellers left on Wall Street to connect for a trade. As a result, mortgage bond prices move across larger gaps than on a “normal” day which, in turn, translates into faster, larger changes in rates.
This phenomenon can be exaggerated during periods of economic uncertainty — like what we’re in now — and, furthermore, there’s a bevy of important data set for release this week including the FOMC Minutes, inflation data, and August jobs figures.
In other words, rates would have been volatile without the vacation week. The presence of Labor Day just piles on.
Mortgage rates may rise this week, or they may fall. Either way, if you have a chance to lock something favorable and within your budget, consider doing it. Rates are at all-time lows and likely won’t last.
Mortgage rates are low right now but pinning them down this week could be a challenge. As Labor Day Weekend nears and Wall Streeters take their head-start on the holiday, trading volume will fall, which will cause mortgage rates to get jumpy.
As mortgage rates change, so does the long-term cost of owning a home. Every 1/8 percent adjustment changes a household budget.
Meanwhile, the relationship between “vacation days” and mortgage rate volatility is an interesting one; based more in scarcity than market fundamentals.
Rates tend to get volatile near holidays because of two inter-related facts:
1. Conforming mortgage rates are based on the price of mortgage-backed bonds
2. Mortgage-backed bonds can’t trade without a buyer and a seller at a specific price
So, as the week progresses and more traders leave for their respective “extended” 3-day weekends, there’s fewer buyers and sellers left on Wall Street to connect for a trade. As a result, mortgage bond prices move across larger gaps than on a “normal” day which, in turn, translates into faster, larger changes in rates.
This phenomenon can be exaggerated during periods of economic uncertainty — like what we’re in now — and, furthermore, there’s a bevy of important data set for release this week including the FOMC Minutes, inflation data, and August jobs figures.
In other words, rates would have been volatile without the vacation week. The presence of Labor Day just piles on.
Mortgage rates may rise this week, or they may fall. Either way, if you have a chance to lock something favorable and within your budget, consider doing it. Rates are at all-time lows and likely won’t last.
Monday, August 30, 2010
What’s Ahead For Mortgage Rates This Week : August 30, 2010
What’s Ahead For Mortgage Rates This Week : August 30, 2010
Existing Home Supply (July 2009 - July 2010)Mortgage markets improved last week despite a major mortgage bond sell-off Friday afternoon. Prior to the jump, conforming mortgage rates had cut new, all-time lows by Thursday, only to lose up to 0.250 percent on the last day of the week.
Meanwhile, the same type of news that drove rates lower Monday through Thursday also contributed to rates rising Friday — revised projections for the U.S. economy.
Early in the week, “bad” news piled on which, in turn, lowered expectations for the economy and pushed mortgage rates down:
* Existing Home Sales dropped 27% from June
* Single-Family New Home Sales dropped 12% from June
* Purchases of “big ticket” items plunged
Then, on Friday, two events revised the market’s expectations back higher:
* Q2 GDP was revised lower, but not as low as had been expected
* Fed Chairman Ben Bernanke said the economy will keep expanding through the end of the year and into 2011
When Chairman Bernanke talks, markets listen. His comments about the U.S. economy helped fuel that late-Friday surge in mortgage rates last week.
This week, the momentum could continue — depending on the data.
There’s a lot for markets to digest this week including key inflation figures from the government; home value data from Case-Shiller; Fed Minutes from the Federal Reserve; and, the always-important jobs report due Friday.
Since April, mortgage rates have been on a downward trajectory and that may continue this week. Or, it may not. If you own a home and haven’t talked to your loan officer about a refinance, now is as good a time as any — rates are at historic lows and could rebound at any time.
Last June, mortgage rates rose 1.125% in 10 days. Under the right circumstances, it could happen again.
Existing Home Supply (July 2009 - July 2010)Mortgage markets improved last week despite a major mortgage bond sell-off Friday afternoon. Prior to the jump, conforming mortgage rates had cut new, all-time lows by Thursday, only to lose up to 0.250 percent on the last day of the week.
Meanwhile, the same type of news that drove rates lower Monday through Thursday also contributed to rates rising Friday — revised projections for the U.S. economy.
Early in the week, “bad” news piled on which, in turn, lowered expectations for the economy and pushed mortgage rates down:
* Existing Home Sales dropped 27% from June
* Single-Family New Home Sales dropped 12% from June
* Purchases of “big ticket” items plunged
Then, on Friday, two events revised the market’s expectations back higher:
* Q2 GDP was revised lower, but not as low as had been expected
* Fed Chairman Ben Bernanke said the economy will keep expanding through the end of the year and into 2011
When Chairman Bernanke talks, markets listen. His comments about the U.S. economy helped fuel that late-Friday surge in mortgage rates last week.
This week, the momentum could continue — depending on the data.
There’s a lot for markets to digest this week including key inflation figures from the government; home value data from Case-Shiller; Fed Minutes from the Federal Reserve; and, the always-important jobs report due Friday.
Since April, mortgage rates have been on a downward trajectory and that may continue this week. Or, it may not. If you own a home and haven’t talked to your loan officer about a refinance, now is as good a time as any — rates are at historic lows and could rebound at any time.
Last June, mortgage rates rose 1.125% in 10 days. Under the right circumstances, it could happen again.
Home Affordability Rankings For 225 Metropolitan Statistical Areas
Home Affordability Rankings For 225 Metropolitan Statistical Areas
Home Affordability - Top and Bottom 5 markets 2010 Q2
With home prices holding firm and mortgage rates still dropping, home affordability is reaching new heights.
According to the quarterly Home Opportunity Index as published by the National Association of Home Builders, more than 72 percent of all new and existing homes sold between April-June 2010 were affordable to families earning the national median income.
It’s a slightly higher reading as compared to last quarter, and the second highest reading in the survey’s history.
As with all aspects of real estate, however, home affordability varies by locale.
For example, 97.2% of homes sold in Syracuse were affordable for families making the area’s median income, earning the New York city its first “Most Affordable Major City” designation. Indianapolis was the first quarter winner.
On the opposite end of the spectrum, the “Least Affordable Major City” title went to the New York-White Plains, NY-Wayne, NJ area for the 9th consecutive quarter. Just 19.9% of homes are affordable to families earning the local median income, down 1 percent from last quarter.
The rankings for all 225 metro areas are viewable on the NAHB website but regardless of where you live, buying a home is as affordable as it’s ever been in history. Furthermore, because home values are in recovery and mortgage rates may rise, the market is ripe for those in the market to buy a home.
All things equal, buying a home may never be this inexpensive again. If you were planning to purchase later this year, you may want to move up your time frame.
Home Affordability - Top and Bottom 5 markets 2010 Q2
With home prices holding firm and mortgage rates still dropping, home affordability is reaching new heights.
According to the quarterly Home Opportunity Index as published by the National Association of Home Builders, more than 72 percent of all new and existing homes sold between April-June 2010 were affordable to families earning the national median income.
It’s a slightly higher reading as compared to last quarter, and the second highest reading in the survey’s history.
As with all aspects of real estate, however, home affordability varies by locale.
For example, 97.2% of homes sold in Syracuse were affordable for families making the area’s median income, earning the New York city its first “Most Affordable Major City” designation. Indianapolis was the first quarter winner.
On the opposite end of the spectrum, the “Least Affordable Major City” title went to the New York-White Plains, NY-Wayne, NJ area for the 9th consecutive quarter. Just 19.9% of homes are affordable to families earning the local median income, down 1 percent from last quarter.
The rankings for all 225 metro areas are viewable on the NAHB website but regardless of where you live, buying a home is as affordable as it’s ever been in history. Furthermore, because home values are in recovery and mortgage rates may rise, the market is ripe for those in the market to buy a home.
All things equal, buying a home may never be this inexpensive again. If you were planning to purchase later this year, you may want to move up your time frame.
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