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The interest rate you pay on your home mortgage has a direct impact on your monthly payment. The higher the rate the greater the payment will be. That is why it is important to look at where rates are headed when deciding to buy now or wait until next year.
Below is a chart created using Freddie Mac’s July 2015 U.S. Economic & Housing Marketing Outlook. As you can see interest rates are projected to increase steadily over the course of the next 12 months.
How Will This Impact Your Mortgage Payment?
Depending on the amount of the loan that you secure, a half of a percent (.5%) increase in interest rate can increase your monthly mortgage payment significantly.
Dr. Frank Nothaft, the SVP & Chief Economist for CoreLogic, had this to say in their latest MarketPulse:
“If you are thinking of buying a home and have the financial means to do so, this could be a good time to take a look at the neighborhoods you are interested in. We expect home prices in our national index to be up about 4.3% in the next 12 months, and mortgage rates are also likely to increase over the next year.”
If both the predictions of home price and interest rate increases become reality, families would wind up paying considerably more for their next home.
Even a small increase in interest rate can impact your family’s wealth. Meet with a local real estate professional to evaluate your ability to purchase your dream home.
Planning on buying a home next year? Be warned: A mortgage may be harder to get, at least in the early months of the year.
“You’ve heard all the stories about how difficult it is to get a mortgage and all the documentation required — there’s going to be a lot more of the same,” said Ron Haynie, senior vice president of the Independent and Community Bankers Association.
A slew of new mortgage regulations will take effect between Jan. 10 and Jan. 20 next year. The most noteworthy of these for borrowers is the ability-to-repay rule and the qualified mortgage, or QM, rule, which together establish new standards and practices for mortgages that lenders must follow.
While not every loan has to be a QM loan, lenders have a good reason to make them that way: QM loans, when done right, shields lenders from legal liability if loans sour, said Bob Davis, vice president of the American Bankers Association.
Although many mortgages today already meet the new QM standards, about 20 percent don’t, Davis estimates. Those could no longer be available next year as lenders get skittish about making non-qualified loans.
QM loans prohibit a number of mortgages that were generally bad for consumers, including “balloon,” interest-only and negatively amortizing loans. The new rule also limits the “points” — the fees or prepaid interest on a mortgage — to just 3 percent of the loan’s value. They also set qualifications that borrowers must meet, and that’s where the mounds of paperwork comes in.
Lenders will be looking at a borrower’s income and assets, current employment, the would-be monthly mortgage payment with interest, any other additional mortgage payment such as a second lien, the monthly payment of other mortgage-related obligations such as property taxes and homeowner’s insurance, current debt, monthly debt-to-income ratio and credit history.
The rules also set a standard debt-to-income ratio of 43 percent that all borrowers must meet. That means that your current monthly debt payments — credit cards, auto loans, student loans — and your monthly mortgage payments cannot exceed 43 percent of your monthly gross income.
“By putting that line in the sand of 43 percent, there will be people who are probably very good credit risks, but because they’re over that 43 percent threshold they won’t get a loan,” Haynie said. “That’s going to be tough for some folks.”
The upshot: Low- and middle-income borrowers, self-employed people whose income varies and anyone weighed down by debt may find it more difficult to get a mortgage.
What if you don’t qualify?
There is, however, a silver lining for those who don’t qualify for a QM loan. Fannie Mae and Freddie Mac will still accept non-QM loans, so as long as lenders craft loans they can sell to the housing finance agencies. That means borrowers who doesn’t meet all the QM standards can still get a loan.
“There will also be some lenders that will make loans that will not be considered QM, but initially they’re going to be extremely cautious,” Haynie said. “It’s an unknown risk until that ability-to-repay action from the borrower hits the courts, and that won’t happen any time soon.”
Lenders will have to see how court cases play out when a borrower that defaulted claims in court that the lender did not follow QM and issued a bad mortgage.
“Since there is substantial new liability if they get it wrong, the way banks will protect themselves — all lenders, really — is they will be a little more conservative in their underwriting,” Davis said.
Lenders are likely to exercise the greatest caution in the first six months after the rules take effect, as firms grapple with new computer systems and train staff to company with the regulations, Davis said.
Not everyone in the real estate industry expects the news rules to restrain lending. Stan Humphries, chief economist at Zillow, thinks the QM rules will have no effect on the real estate market.
“As [interest] rates rise, lenders are going to loosen standards in order to attract customers,” he said, adding that the dip in refinancing in recent months means lenders need to find new customers to fill the void.
Humphries also pointed out that most mortgages today are backed by Fannie or Freddie. However, even though the two are exempt from the rules, the Federal Housing Finance Agency directed the pair to limit their purchases to qualified mortgages, though they will still accept loans that exceed the 43 percent debt-to-income ratio.
The rules also do not dictate standard acceptable credit scores or loan-to-value ratios, so there is still wiggle room for lenders to loosen their standards next year.
Rising interest rates might slow the refinance boom, but the trend is far from finished.
When interest rates hit record-setting lows in 2012, the mortgage industry experienced the peak of a refinance boom lasting for three years. But with rates on the rise in 2013, has the boom gone bust?
Not yet, according to mortgage industry experts.
“It’s been stalled, slowed down,” says Aaron Vantrojen, state president of the Arizona Association of Mortgage Professionals. “With that being said, there are a ton of people who have haven’t refinanced for whatever reason and still can.”
Freddie Mac, the government-backed home loan agency, noted in its “2013 First Quarter Refinance Report” that refinances made up approximately 70 to 75 percent of single-family home loan originations in 2012. By the end of 2014, Freddie Mac projects the percentage of refinances will drop to about 50 percent of all loan originations.
But Frank Percival, board president of the Washington Association of Mortgage Professionals, says lingering effects of the refinance boom are still in play for borrowers looking to take out a new home loan.
“It’s not over yet,” Percival says. “It’s more of a bang than a boom. When there’s an increasing rate market, it causes some folks debating about refinancing to put the brakes on, and others take a wait-and-see approach.”
Are you on the fence about refinancing your home? If so, keep reading to find out why the refinance boom isn’t over for everyone.
Reason #1: Interest Rates Are Still Relatively Low
Sure, there’s been a lot of news about rates sky-rocketing, but guess what? They’re still near historical lows.
In fact, in its “Weekly Primary Mortgage Market Survey,” Freddie Mac says the average rate for a 30-year fixed-rate mortgage (FRM) was 4.4 percent for the week of August 15, 2013. That’s nearly the identical interest rate for the same time in 2011, when the refinance boom was in high gear.
“In the last 30 years, it’s only been in the last four that we have seen rates below 5 percent,” Percival says. “It’s definitely something people should take advantage of again. If trends follow suit, it might not be another 25 or 30 years before we see rates this low.”
Percival suggests that if you are a homeowner with a 30-year fixed-rate mortgage over 5 percent, it might be worth it to investigate whether a refinance in the current market could save you money.
Homeowners may also want to check whether getting an adjustable-rate mortgage (ARM) could save them money, suggests Percival. That’s because initial ARM interest rates are significantly lower than the rates for a FRM. For example, the interest rate for a 5/1-year ARM – according to Freddie Mac’s weekly report – was 3.23 percent for the week of August 15 (more than 1 percent lower than the 30-year FRM rate we mentioned earlier).
A refinance to this type of ARM would mean a borrower would have a 3.23 percent interest rate for five years before it would change, either up or down, depending on the market.
“If you’re not planning on keeping your loan for 30 years, maybe getting a five-year note with an ARM makes sense,” Percival says. “The potential savings or lowering a mortgage payment are huge, tremendous.”
Reason #2: Property Values Are Increasing
Rising property values, according to experts, could have a positive effect on extending the refinance boom.
“More equity means you have better pricing for a refinance,” Percival says.
Equity, as defined by the U.S. Department of Housing and Urban Development’s glossary, is “an owner’s financial interest in a property, calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.” And because property values are on the rise, homeowners are starting to find themselves in better positions to refinance.
“A lot depends on the area where you live,” Percival says, “but property values are higher than before the bubble burst.”
How much have home prices improved? Clear Capital, a provider of data solutions for the real estate industry, released results of its “Home Data Index Market Report” on August 6, 2013, and reported that national home prices increased by 9.3 percent over the last year.
“If your home value is improving, it helps create a bidding war,” Percival says. “Your neighbors will get higher-than-asking-price for their homes, and anyone who wants to refinance will go from being below market value to above market value.”
Reason #3: Government Refinance Programs Are Still Available – For Now
President Obama gave a speech on August 6, 2013, in Phoenix, where he proposed for the first time to “wind down” Fannie Mae and Freddie Mac in an effort to overhaul the two mortgage-finance companies.
Does that mean the refinance boom is over for people who might consider using government programs to refinance? The answer, according to Percival, is that Fannie Mae and Freddie Mac are currently viable options for homeowners interested in refinancing. But, their future is uncertain, so homeowners should take advantage of these programs now – when they’re still available.
So, what programs should homeowners look into?
If your home loan is owned or guaranteed through either Fannie Mae or Freddie Mac, you might be eligible for a refinance from the Home Affordable Refinance Program (HARP). According to Freddie Mac’s website, the program is “designed for homeowners who have not been able to refinance due to a decline in the value of their home.”
“These programs are crucial,” Percival says. “They might be the only refinance opportunity for some people in places where the property values have not yet increased enough (to improve their equity).”
In April of 2013, the Federal Housing Finance Agency (FHFA) announced it had directed Fannie Mae and Freddie Mac to extend HARP by two years, to December 31, 2015.
The Bottom Line
Percival suggests homeowners take a proactive approach when they start thinking about refinancing. He says it makes sense to consult with your mortgage professional on regular basis – once every three to six months or so – to see whether refinancing could help save you money.
“I think people are starting to realize the rates are still pretty good, and we’re starting to see clients come back,” Percival says. “It’s not a boom anymore, but a bang – a good bang that could turn back into a boom.”
Want to own your home faster? Learn what these homeowners did to pay off their mortgage in just six years.
Paying off your mortgage in just six years seems impossible, doesn’t it? It’s definitely not easy, but one Texas couple was able to do it.
And the biggest benefit of doing so is perhaps the savings, says Adiany Barboza, a licensed real estate broker with Abbey Road Realty, LLC in Orlando, Florida.
Barboza says that many consumers don’t realize the true cost of a mortgage. Depending on your interest rate and the amount you took a mortgage out for, you could end up paying more than double the amount of your mortgage in just interest over time, she says.
“That alone should be enough motivation to pay the mortgage earlier,” Barboza explains.
And that was enough motivation for Crystal Stemberger and her husband, Len, who paid off their mortgage in only six years.
How did they do it?
Stemberger says finding a low-priced, $114,000 foreclosed home in April 2007 was key to their success. The low initial price of their home, which was a 1,750 square feet, two-story property near Houston, Texas, allowed them to put 20 percent down, and get a 15-year mortgage at 5.375 percent for a $91,200 loan, she explains. That meant their monthly payment was just $740 a month. At that time, Stemberger worked in an office and earned $32,500 a year. Her husband, a public school science teacher, earned a salary of $42,500.
But the couple was driven to pay off their mortgage early, and they took every action necessary to do so.
To start, “We started the process by overpaying from day one,” explains Stemberger. Even though their mortgage payment was $740 per month, they paid $900 total from their very first payment, with the extra $160 going towards the principal.
Another key to the couple’s success was that they weren’t afraid to refinance.
In March 2011, less than four years after getting the original mortgage, Stemberger and her husband refinanced their remaining loan amount of $66,000 to another 15-year mortgage.
“Chase offered us a no-cost refinance to a 4.5 percent interest rate,” she says. This allowed them to save money by getting a lower interest rate, without having to pay closing costs for the new loan. Refinancing also allowed them to lower their monthly mortgage payment to $505.
But because the couple was determined to pay off their mortgage quickly, they decided to continue paying $900 a month, an extra $395 more than necessary. They were able to do this because of her husband’s new job as a school librarian, and the success of an online business that Stemberger launched. In 2012 for example, their gross income totaled $120,000 for the year.
Another thing that helped the couple pay off their mortgage faster was renting out a spare bedroom for $500 a month. They used this strategy on and off for a total of two and half years.
And while this might not be an option for everybody, Stemberger says it “helped us pay off our principal even faster.”
They also made larger payments towards the principal whenever they had enough money saved up.
And it was all worth it when they finally paid off their home just a few months ago in April 2013.
“We ended up paying off our [entire] mortgage in about six years on the dot,” she explains. “That was an amazingly happy day.”
If your mortgage is underwater, find out how to save it from drowning.
Scuba divers and other submariners might be thrilled by the thought of being underwater. But homeowners? Not really.
Just ask Jim Martin, a senior loan originator with the Metro Advisor Group – a mortgage company based in Pittsburgh, Penn. Martin says homeowners who are “underwater” owe more money on their mortgage than their house is worth. This situation – also known as being “upside down” or having “negative equity” – can cause homeowners to panic about their financial well-being, he says.
But, here’s some good news for those homeowners: The housing market is on the rebound. In fact, rising home prices led to 850,000 residential properties returning to a state of positive equity during the first quarter of 2013, according to a June 2013 study by CoreLogic, an organization that provides comprehensive data for the real estate market.
While this is great news, there are still plenty of homeowners who aren’t out of the water yet. CoreLogic’s analysis also showed that 9.7 million – or 19.8 percent of all residential properties with a mortgage were still underwater.
Thankfully, mortgage professionals say there are a number of potential solutions – like government-backed refinance programs – available to homeowners seeking to rid themselves of negative equity. Here are some options to consider should you have an underwater mortgage.
Option #1: Refinance through HARP
If your mortgage is owned by Fannie Mae or Freddie Mac, the second incarnation of the Home Affordable Refinance Program (HARP) could widen your possibilities of qualifying for a refinance.
Here’s how: HARP 2.0 has eliminated the maximum loan-to-value (LTV) ratio for HARP loans, reports the Federal Housing Finance Agency (FHFA). This means that homeowners who were previously denied from the program because their home’s value was too low (relative to how much they owed on their mortgage) could now qualify.
And along with making it easier for homeowners to be eligible, HARP has also been extended until December 31, 2015. Originally, it was supposed to end in December 2013.
“More than two million homeowners have refinanced through HARP, proving it a useful tool for reducing risk,” said FHFA acting director, Edward J. DeMarco, in a press release announcing the deadline extension. “We are extending the program so more underwater borrowers can benefit from lower interest rates.”
Option #2: Consider an FHA Streamline Refinance
If you don’t qualify for HARP, you still have options – one of which is the Federal Housing Authority’s (FHA) “Streamline Refinance” program, which has looser qualifications than HARP.
In fact, with an FHA Streamline Refinance, employment verification, income verification, and credit score verification are all not required, according to the U.S. Department of Housing and Urban Development (HUD).
So, what exactly is required for a Streamline Refinance? According to HUD, these are basic requirements:
- The mortgage must be FHA insured
- The mortgage must not delinquent
- The refinance results in a lower monthly principal and interest payments or the conversion of an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM).
- No cash may be taken out on mortgages refinanced through a Streamline Refinance
Option #3: Get the Veterans Affairs’ Interest Rate Reduction Refinance Loan
Members of the armed forces might be trained to deal with adversity on land, at sea, and in the air, but being underwater as homeowners is an entirely different ballgame.
Luckily, the U.S. Department of Veterans Affairs’ Interest Rate Reduction Refinance Loan (IRRRL) is a viable option that assists veterans who are underwater on their mortgage.
“It’s a very strong program, but you have to be a veteran currently in a VA (home loan),” Martin says.
If you fit both of those criteria, according to the VA’s website, the IRRRL program is designed to lower interest rates by refinancing existing VA home loans. The possible end result for the homeowner is paying a more affordable house note.
“By obtaining a lower interest rate, your monthly mortgage payment should decrease,” writes the VA’s website.
The biggest advantages of the IRRRL is that it doesn’t require a home appraisal or credit underwriting, according to Martin. If your home has negative equity, this facet of the program could prove invaluable for homeowners who qualify.
Rising mortgage rates aren’t deterring a majority of homebuyers in the marketplace. According to an analysis by Goldman Sachs Group, more than half the homes sold last year and so far this year have been all-cash transactions.
According to the analysis, published in The Wall Street Journal, an estimated 20 percent of homes sold before the housing market collapse were all-cash sales. But over the past seven years, that share of sales has been increasing.
Many of the buyers are investors taking advantage of the still-low home prices with the goal of unloading the property quickly as the market improves. “Given the low interest rate environment that has many investors sitting on cash that is literally earning next to nothing, the prospect of parlaying that cash to scoop up real estate at bargain prices — while avoiding the mortgage process — is pretty attractive,” says Greg McBride, senior financial analyst at Bankrate.
McBride adds that over time, as credit standards loosen up, buyers with an appetite for investment properties and vacation homes will begin financing again.
Borrowers are borrowing less, too
Currently, buyers who obtain a mortgage are financing less of the sale price of the home than they did before the housing crash. The report by Goldman Sachs estimates that for every $1 of a home’s sale price, 44 cents is financed, compared with 67 cents of every $1 before the crash.
Buyers who finance can still take advantage of the mortgage tax deduction, but McBride says whether Congress will eventually eliminate or reduce the deduction is a “wild card” in assessing the future mortgage market. “The mortgage tax deduction further reduces the net borrowing cost, making a mortgage an attractive alternative to liquidating other assets,” he says. “But should the mortgage tax deduction be limited or go away entirely, this will alter the appeal of mortgage financing for buyers that can otherwise pay cash.”