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Rob Chrisman's Corner - The Fed's Impact on Mortgage Rates

Last week the Federal Reserve raised short term rates, leading JMAC’s brokers to ask, “Are mortgage rates going up? I have clients thinking about buying a house. Are mortgage rates going to march steadily higher?”

It is hard to say, but our veteran brokers know mortgage rates don’t usually rise in tandem with the Fed’s increases. Sometimes they even move in the opposite direction. Long-term mortgages tend to track the rate on the 10-year Treasury, which, in turn, is influenced by a variety of factors like supply and demand.

Some economists believe that 30-year mortgage rates will creep higher. Inflation is nearing the Fed’s 2 percent target. The global economy is improving, which means that fewer international investors are buying Treasuries as a safe haven. And with two more Fed rate hikes expected later this year, the rate on the 10-year note could rise over time — and so, by extension, would mortgage rates.

JMAC’s brokers know that it isn’t only mortgage rates that are impacted by Fed moves. For users of credit cards, home equity lines of credit and other variable-interest debt, rates will eventually rise by roughly the same amount as the Fed hike. That’s because those rates are based in part on banks’ prime rate, which moves in tandem with the Fed. The Fed’s rate hikes won’t necessarily raise auto loan rates: they tend to be more sensitive to competition which can slow the rate of increases.

On the positive side, our broker’s clients will eventually earn more on their certificates of deposit (CDs) and money market accounts? And those with stock holdings, Wall Street hasn’t been spooked by the prospect of Fed rate hikes. Stock indexes rose sharply after the Fed’s announcement.

The rate hikes are intended to withdraw the stimulus provided by ultra-low borrowing costs, which remained in place for seven years beginning in December 2008, when the Fed cut its short-term rate to near zero. The Fed acted during the Great Recession to spur borrowing, spending and investing. And President Trump is trying to speed up growth which could pit the White House against the Fed in coming years. Trump has promised to lift growth to as high as 4 percent annually, more than twice the current pace. He also pledges to create 25 million jobs over a decade. Yet the Fed already considers the current unemployment rate — at 4.7 percent — to be at a healthy level.

Any significant declines from there could spur inflation, per the Fed’s thinking, and require faster rate increases. More rate hikes, in turn, could thwart Trump’s plans — something he is unlikely to accept passively.

Rob Chrisman's Corner: Every Borrower Has Options

JMAC’s brokers know that the most popular choice for home financing is the 30-year fixed-rate mortgage. In fact, more than 8 out of 10 homebuyers choose this option. Many people never even consider the 15-year variety -- even when they should.

Our brokers will tell clients that when JMAC qualifies you for a mortgage, the main factor that determines how much you can borrow is your debt-to-income ratio, or DTI. Most lenders use two DTI numbers, known as the front-end and back-end ratios. The front-end ratio refers to your new mortgage payment relative to your monthly debt obligations, and many banks want this to be under 28%. In other words, multiply your pre-tax income by 0.28, and this is the monthly payment you can handle, based on the front-end ratio.

On the other hand, the back-end ratio includes all your monthly debts. This ratio generally needs to be 36% or less, but it's not uncommon for lenders to stretch this limit to 45% for otherwise well-qualified borrowers. Your maximum mortgage amount is limited by the lower of the two calculated payments.

JMAC’s brokers have found that the biggest misunderstanding when it comes to 15-year mortgages is many people assume that because a 15-year mortgage is half the duration of a 30-year, borrowers will simply end up paying half as much interest. This is not necessarily true. It is viable that a 15-year mortgage payment may be just 45% more, even though it will pay off the loan twice as fast.

Our brokers will suggest a 15-year mortgage may be a good choice if a borrower can answer yes to any of these. Can a borrower can afford a higher payment, relative to the amount of "house" they need? Is your job stable, and are you confident in your long-term ability to make higher payments? Are you close to retirement age and don't want to retire with mortgage debt?

Valid reasons to focus on a 30-year mortgage could include if your job is relatively unstable. If you become unemployed, the lower payments of a 30-year mortgage could be easier to handle. Or if you don't have any emergency savings. Lower mortgage payments could allow you to build up your reserves. And if you want to save more aggressively for retirement instead of putting more of your income toward housing.

JMAC’s AEs are more than happy to work with our key broker clients in helping borrowers determine the best program for them.

Rob Chrisman's Corner: FHA Borrowers Get Good News

Any borrower who will be obtaining FHA financing for their home were happy to learn that they will soon receive a break on their monthly mortgage payments. The Federal Housing Administration, the government insurer of low down-payment home loans, is reducing the annual mortgage insurance premium by 25 basis points, which it says will save FHA borrowers an average $500 this year – many of whom use JMAC’s brokers for home loans.

Money is money, and $500 certainly will help the average FHA borrower. HUD, who oversees the FHA, and the FHA pointed out that the reduction in insurance premium was due to the improved financial condition of the FHA’s insurance fund. The FHA's insurance fund was a major player in the housing bailout, offering borrowers the only low down-payment option available. JMAC’s broker’s borrowers can put as little as 3.5 percent down on a home with a mortgage backed by the FHA. HUD officials said the reduction is likely to lower the cost of housing for approximately 1 million households who are expected to purchase a home or refinance their mortgages using FHA-insured financing in the coming year.

Our brokers also know that in the last year the FHA has seen competition from Fannie Mae and Freddie Mac which rolled out low down payment programs. Although their volumes have not been high, the programs still represent an alternative – also, at this point, financed by taxpayers. In 2008, at the height of the crisis, nearly one-quarter of new loans were backed by the FHA. That is now down to about 1 in 6. The housing bailout, however, put the FHA in the red for several years, but strict underwriting and numerous premium hikes totaling 150 basis points, pulled it out.

The FHA spread the word that its insurance fund has gained $44 billion in value since 2012, and its capital ratio has been above the required 2 percent level for two years. The “why” may be lost on the clients of JMAC’s brokers, overshadowed by the “how much will it help me?” discussion. Which is fine, especially when it helps our broker’s borrowers financing a new home.

Rob Chrisman's Corner: Rates have gone up. Now what?

JMAC’s experienced brokers know that rates have gone up because the U.S. economy is doing well. And while few welcome higher interest rates, they should not be a considerable deterrent to someone who really wants to buy a home.

Rates under 5% have been the norm for a decade, and have a way to go for rates to be even close to the historical average. Rising home prices, fueled by strong demand and tight inventory, have pinched buyers in recent years. Lower interest rates helped temper that rise, but as they move higher, borrowing becomes costlier and can reduce a buyer's budget.

Many expect home prices to continue to rise in 2017, but at a slower pace – which could very well let income increases catch up somewhat. In many areas, the supply is still low compared to demand and that will keep pressure on prices and rents. The rate increases could be felt more by house hunters in the country's more expensive markets.

Our brokers also know that rates are expected to continue to gradually increase throughout 2017 – at least short-term rates. A higher Federal Funds rate makes it more expensive for banks to borrow money, which can lead to higher rates on credit cards and home loans. But despite potentially higher Fed Fund rates in 2017, mortgage rates may not rise alarmingly.

As rates move higher, we could see the return of more home loan products, such as adjustable rate mortgages. JMAC has a solid inventory of flexible, non-agency jumbo products, for example. Non-traditional mortgage products could start to creep back into the market as consumers search for more affordable options.