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Rob Chrisman's Corner: Get Approved - Down Payment Strategy Often More Important than Rate

One of the smartest, and easiest, ways to make life easier is obtaining a solid mortgage approval before shopping for a home. Low housing inventory in many markets means that clients are competing with multiple offers. Having a mortgage approval before starting the hunt for a home allows the client to make a stronger offer when they find a home. And this places a client in a much better negotiating position, and it could possibly save the deal.

The cost of selling a house (roughly 8%) must be considered. When an owner sells their house in the future, they will most likely need to sell the house for at least 8% - 10% more than what they paid for it just to break even and cover the real estate commissions and transfer taxes on the sale. If a house goes up in value by the long-term average of 3% per year, the new owner would likely break even in 2-3 years.

JMAC’s experienced brokers remind clients to consider the costs of improvements, utilities, and maintenance. Has the client considered the costs of improvements, utilities and ongoing maintenance expenses? Clients are told to have their home properly inspected before the closing. Investigate the cost of utilities, and make sure to budget for them, and to budget 1%-2% of the home's value for annual maintenance expenses.

Choosing the wrong down payment strategy is something our brokers work to avoid. A study was recently conducted by the Federal Reserve showing that a home buyer's down payment strategy is eight times more impactful on housing affordability than the mortgage interest rate. 

And our brokers tell clients that the right mortgage professional can help them consider things that they may otherwise overlook during the home buying process. Their client’s mortgage is most likely going to be their single largest debt and their home is most likely going to be their single largest investment. That’s why it's important to work with a qualified mortgage professional.

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.