Category: Interest Rates (Page 1 of 21)

Why Pausing Your Home Search Might Not Be a Good Idea

August 29, 2023 / Tom Bonetto

For those who have been shopping for a home recently, you’ve likely confronted more than a few challenges along the way.

High mortgage interest rates and rising home prices cut into affordability, pushing many would-be buyers to the sidelines. Secondly, a lack of housing inventory is only making matters worse.

woman with credit card pondering while buying online with laptop

Due to these conditions, some buyers have decided to pause their home purchasing plans on hold, at least temporarily. But is that such a good idea?

You can find out more from E rik Martin’s article at The Mortgage Reports here…

Temporarily stopping your home buying search might seem like a reasonable decision in certain situations, such as a volatile real estate market or personal financial uncertainty.

However, there are several compelling reasons why hitting the pause button on your home buying journey might not be the best move.

Ever-Changing Market

The real estate market is dynamic and ever-changing. Pausing your search could mean missing out on potential opportunities.

Market conditions can shift quickly, and a property that fits your criteria perfectly may become available during your hiatus.

In today’s market, for example, home prices are continuing to rise due to lower supply and higher demand. So, if buyers choose to wait, it’s a guarantee that they will pay more for a home in the future.

By staying active in your search, you can capitalize on favorable market conditions and secure a property that aligns with your needs and preferences.

Long-Term Hold

Moreover, real estate is a long-term investment that tends to appreciate over time. This is especially true if borrowers are looking to keep the property for an extended period of time, versus flipping it quickly.

By delaying a purchase, would-be buyers could potentially miss out on the appreciation of property values in their desired area.

This could limit their ability to build equity and wealth through homeownership. Over the years, the property they had their eye on might become out of reach due to escalating prices.

Interest Rates

Yes, interest rates are at much higher levels than they were 2+ years ago, but most experts agree that waiting for rates to come down before making a purchase is a risky strategy. Timing the market is always a very difficult task.

When rates do drop, many believe that there will be renewed interest and added demand in the real estate market…which means prices will rise at a faster pace than today.

By waiting, you might end up paying more for the same property when interest rates inevitably drop. Remember, borrowers can always refinance when rates go down, so ‘Marry the House but Date the Rate’!

In Conclusion

While pausing your home buying search might seem like a cautious approach, it comes with potential drawbacks that could impact your financial well-being and future prospects.

The real estate market’s volatility, fluctuating interest rates, and the potential appreciation of property values all underscore the importance of staying active in your pursuit of homeownership.

By maintaining a proactive stance, you position yourself to make informed decisions that align with your goals and aspirations.

Please reach out to me for more so we can strategize about the right options for you!

Why Are Mortgage Lenders Requiring Upfront Points Today?

August 21, 2023 / Tom Bonetto

There’s been a recent change in the mortgage marketplace, as lenders are now requiring borrowers to pay upfront discount points when obtaining a home loan.

This is much different than in years past, when borrowers could easily qualify for a home loan with no points – and in some cases even receive a lender credit.

To find out more about discount points, please refer to this article…

Why Is This the Case?

Today’s situation has everything to do with volatility in the mortgage market over the last few years.

In essence, it’s very difficult for lenders to determine the value of a mortgage consummated today, because it’s unclear where mortgage rates go next. Lenders need to make sure that they don’t lose money on each loan they originate.

So, to guard against this unknown, nearly all lenders are charging discount points to ensure at least some profits are being captured upfront.

Why Do Mortgage Lenders Charge Points?

Mortgage lenders charge points to collect profit upfront as opposed to over time via regular monthly interest payments.

Instead of waiting to collect interest each month once the loan is closed, they can collect some money upfront.

Lenders use upfront points to manage their risk. By requiring borrowers to pay discount points, lenders can ensure a more predictable profit over the life of the loan.

This can be particularly important when interest rates are expected to rise, as it helps lenders secure a steady income regardless of market fluctuations.

Mortgage investors generally make money from the interest charged on the loans they provide. However, many of the mortgages originated today might be refinanced quickly, all but eliminating their projected revenue stream.

By requiring up-front points, the lender is compensated for the reduced interest income they would have received over the life of the loan.

How Will These New Mortgages Perform for Lenders and Investors?

Because mortgage rates have more than doubled in a short period of time, there’s a great deal of uncertainty regarding recently-originated home loans.

The big concerns for lenders and mortgage investors is a situation where rates improve enough for many of these borrowers to refinance.

Will those borrowers who obtained mortgages in 2022 and 2023 keep them for the long haul, or will they quickly refinance them if/when mortgage rates improve?

Per The Truth About Mortgage’s article, “a recent stat from Black Knight found that at least 10% of 2022 mortgages would become refinance candidates if the 30-year fixed fell to 4.75%”. And many believe that number is low…

So, if these homeowners refinance, their loans no longer earn profitable interest for the investors. In normal times, lenders can sell their loans to investors at a premium, and use the proceeds to cover their commissions and your closing costs (via lender credits).

Currently, however, this is proving difficult because the value of these loans is essentially unknown. Hence, the profit is being taken upfront in the form of discount points.

In Conclusion

Today’s current mortgage rate environment is much more volatile than in years past. This has made it difficult for investors to determine the value of their underlying loans.

This is why many borrowers are seeing multiple mortgage points attached to today’s mortgage rates.

For example, if you’re planning to stay in your home or hold that investment property for a long time and have the upfront funds available, paying points could be a financially sound decision.

On the other hand, if you’re planning to move or refinance in the near future, paying extra upfront points might not provide as much benefit. It’s important to always compare the total costs and potential savings over the life of the loan before making a decision.

Do reach out to me to discuss the options of paying points…and how much!

Understanding Today’s Mortgage Rates

July 19, 2023 / Tom Bonetto

Mortgage rates are a critical aspect of the housing market, directly influencing the affordability and accessibility of homeownership for millions of people.

Today’s rates are influenced by a variety of factors, including the overall state of the economy, the bond market, inflation, and the Federal Reserve’s monetary policies.

I’m asked consistently about what the future looks like for interest rates. Unfortunately, there’s no easy way to answer that question because mortgage rates are difficult to predict, as there are many factors involved.

However, there is a good historic indicator of what might happen with mortgage rates, and that’s the relationship between the 30-Year Mortgage Rate and the 10-Year Treasury Yield.

Many believe that the Federal Reserve set mortgage rates – and that’s not the case. Traditionally, the movement of the 10-year treasury bond is a great measure for mortgage rates.

You can find out a bit more here from Keeping Current Matters…

The Historical Spread

Here’s a graph showing those two metrics since Freddie Mac started keeping track of average mortgage rates in 1972:

As the graph above demonstrates, the average spread between the two over the last 50 years was 1.72 percentage points.

More importantly, when looking at the trend line, readers can see when the Treasury Yield trends up, mortgage rates almost always react in the same direction. And, when the yield drops, mortgage rates tend to follow.

Finally, the gap between the two has remained about 1.72 percentage points for quite some time.

Today’s Spread

However, what’s important to notice now is that the spread is widening much more than normal. See the graph below:

The reason? It’s has much to do with the uncertainties in the financial markets today. Inflation, the recent banking foreclosures, and lack of confidence the Federal Reserve are all influencing mortgage rates and widening this spread. Investors essentially need to factor in more risk into their pricing.

Inflation is truly the critical factor affecting today’s mortgage rates. Inflation erodes the purchasing power of money over time, reducing the value of future loan repayments to lenders. To protect their investments, lenders tend to raise mortgage rates in response to higher inflation.

Therefore, understanding inflation trends can help borrowers anticipate potential changes in mortgage rates and decide when to lock in their rates for the best deal.

Moving Forward

It is also really important to understand this spread and its deviation from historical norms. What most conclude is that there’s room for mortgage rates to improve moving forward.

And, here are what a few experts think, as long as inflation abates.

From Forbes magazine:

“Though housing market watchers expect mortgage rates to remain elevated amid ongoing economic uncertainty and the Federal Reserve’s rate-hiking war on inflation, they believe rates peaked last fall and will decline—to some degree—later this year, barring any unforeseen surprises.”

Secondly, as Odeta Kushi, Deputy Chief Economist at First American, explains:

“It’s reasonable to assume that the spread and, therefore, mortgage rates will retreat in the second half of the year if the Fed takes its foot off the monetary tightening pedal . . . However, it’s unlikely that the spread will return to its historical average of 170 basis points, as some risks are here to stay.”

In Conclusion

Understanding today’s mortgage rates is vital for anyone considering homeownership or refinancing.

Mortgage rates are influenced by a complex interplay of economic factors, inflation, Federal Reserve policies, and housing demand. Being aware of these influences empowers borrowers to make informed decisions about their mortgage options, ultimately impacting their financial well-being and the overall real estate market.

Do reach out to me for more information, as it would by my pleasure to help you navigate these interesting times!

The Benefits of Borrowing from a 401(k) for a Down Payment

June 27, 2023 / Tom Bonetto

One legitimate option for those looking to make a home purchase is to borrow from a 401(k) retirement account to cover some or all of the down payment.

As we all know, purchasing a home is a significant milestone in many people’s lives and it often requires a substantial down payment, which can be a barrier for aspiring homeowners.

An often-used solution is to borrow from a 401(k) retirement account and utilize those funds for the down payment.

While there are risks involved, there are multiple reasons why borrowing from your 401(k) can be a good idea.

Accessibility and Convenience

Borrowing from one’s 401(k) for a down payment provides a readily accessible source of funds.

Since it’s your own retirement savings, borrowers won’t have to go through extensive approval processes or meet stringent credit requirements as you might with traditional financing options.

This convenience can expedite the home-buying process, enabling you to seize opportunities in a competitive housing market.

Lower Interest Rates

When borrowing from your 401(k), you typically pay yourself back with interest.

While interest rates vary, they are often lower than those associated with traditional loans, such as HELOCS or personal loans.

By utilizing 401(k) funds, you may be able to save money on interest payments over the long term, making it a cost-effective option for financing your down payment.

No Need for Private Mortgage Insurance (PMI)

One advantage of borrowing from your 401(k) is that it eliminates the need for private mortgage insurance (PMI).

PMI is typically required for homebuyers who put down less than 20% of the purchase price. By utilizing your 401(k) funds, you can increase your down payment and potentially avoid the additional cost of PMI. And that can save you a significant amount of money over the life of your mortgage.

Repayment Flexibility

Borrowing from your 401(k) provides you with repayment flexibility.

While it’s crucial to adhere to the repayment terms to avoid penalties, you have the opportunity to repay the loan on your terms.

This flexibility can be especially beneficial if you encounter financial hardships or unexpected expenses in the future, as you can adjust your repayment schedule accordingly.

Building Home Equity

By utilizing your 401(k) funds for a down payment, you can expedite your entry into the real estate market and begin building equity in your home sooner.

Home equity is an asset that can grow over time, potentially providing you with a source of financial stability or the ability to leverage it for future investments or other financial goals.

Conclusion

While borrowing from your 401(k) for a down payment on a home is a decision that should be carefully considered, it can offer several advantages.

The accessibility, lower interest rates, potential elimination of PMI, repayment flexibility, and the opportunity to build home equity are compelling reasons to explore this option.

With proper planning and responsible management, borrowing from your 401(k) can be a beneficial strategy to turn your dream of home ownership into a reality.

Nevertheless, it is crucial to weigh the risks involved and consult with financial advisors to make an informed decision that aligns with your long-term financial goals.

I also advise that you contact your financial planner to see if this might be a good option for you.

Contact me to discuss your current situation and how you might be able to take advantage of your 401(k) and purchasing a home. It would be my pleasure to help you!

Debunking the Myth: You Don’t Need a 20% Down Payment for a Mortgage

May 30, 2023 / Tom Bonetto

The idea of needing a 20% down payment for a mortgage has long been fixed in the minds of prospective homebuyers. However, this traditional belief doesn’t hold true in today’s dynamic housing market.

With evolving loan options and changing financial landscapes, it’s important to debunk the myth and explore the advantages of bringing in a small down payment when securing a home loan for a primary residence.

Accessibility and Affordability

Requiring a 20% down payment can be a big hurdle to homeownership for many. For first-time buyers or those with limited savings, this amount may be prohibitively high.

Fortunately, many mortgage programs exist that allow for lower down payments, such as Federal Housing Administration (FHA) loans, which require as little as 3.5% down.

VA loans for those in our military and our veterans can require no down payments whatsoever!

These options make home ownership far more accessible and affordable for a broader range of would-be buyers. This provides new opportunities for individuals to enter the market and build equity.

For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:

FHA Loan: 3.5% down payment minimum
VA Loan: No down payment required
HomeReady/Home Possible Conventional Loan (with PMI): 3%
Conventional Loan (with PMI): 5%
Conventional Loan (without PMI): 20% minimum
USDA Loan: No Down Payment required

PMI is “private mortgage insurance”…and you can find out more about that here…

You can also find out more on the specifics of multiple mortgage types here…

By allowing lower down payments, lenders offer more financial flexibility to aspiring homeowners. This means that you can become a homeowner sooner and start building equity in your own home right away!

Opportunity for Building Wealth

Rather than waiting until they accumulate a large down payment, individuals can enter the housing market sooner by utilizing mortgage programs with lower down payment requirements.

white paymaster ribbon writer adding machine placed on tabletop

This early entry enables homeowners to benefit from potential property appreciation, which can be a valuable source of wealth building over time.

By leveraging their down payment funds to secure a mortgage and invest in a property, individuals can start building equity and potentially generate significant returns in the long run.

Would-be borrowers can also utilize gifts from relatives for their down payment and closing costs. Find out more on that here…

Flexibility and Financial Freedom

Earmarking a significant portion of savings towards a down payment may leave homebuyers financially strained, limiting their flexibility and ability to handle unexpected expenses or invest in other areas.

Opting for a lower down payment allows buyers to retain more cash on hand, providing a financial safety net and allowing for future investments or potential home improvements.

This increased flexibility enhances financial freedom and offers peace of mind in managing homeownership-related expenses.

In Conclusion

The belief that a 20% down payment is necessary for obtaining a mortgage is no longer an absolute truth.

While a larger down payment can offer certain advantages, such as lower monthly payments, it is essential to recognize the benefits of alternative mortgage programs with lower down payment requirements.

These options promote accessibility, affordability, and the opportunity for investment and wealth building. By understanding the evolving landscape of mortgage financing, prospective homebuyers can make informed decisions that align with their financial goals and aspirations.

So please do reach out to me for more, as it would be my pleasure to help you structure your loan and down payment options.

Category: Interest Rates (Page 1 of 21)

Why Pausing Your Home Search Might Not Be a Good Idea

Ever-Changing Market

Long-Term Hold

Interest Rates

In Conclusion

Why Are Mortgage Lenders Requiring Upfront Points Today?

Why Is This the Case?

Why Do Mortgage Lenders Charge Points?

How Will These New Mortgages Perform for Lenders and Investors?

In Conclusion

Understanding Today’s Mortgage Rates

The Historical Spread

Today’s Spread

Moving Forward

In Conclusion

The Benefits of Borrowing from a 401(k) for a Down Payment

Accessibility and Convenience

Lower Interest Rates

No Need for Private Mortgage Insurance (PMI)

Repayment Flexibility

Building Home Equity

Conclusion

Debunking the Myth: You Don’t Need a 20% Down Payment for a Mortgage

Accessibility and Affordability

Opportunity for Building Wealth

Flexibility and Financial Freedom

In Conclusion

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