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Financing Strategy, Recession, and Mortgage Rates – May 2022 Edition

white paymaster ribbon writer adding machine placed on tabletop

Many experts are warning of a potential recession later this year, which has many questioning if it’s a good time to purchase a home…and worrying about mortgage interest rates, in particular.

We know that inflation is at 40-year highs – and as a result, mortgage rates are up over 2% in the last 4 months.

This is one of the most rapid increases in mortgage rates we’ve seen in recent memory.

With all of this in play, what’s the outlook for the future of mortgage rates and housing – and what’s the best strategy to navigate these rough waters?

Let’s take a look at a what’s happening today and also consider a little history of Federal Reserve rate hikes and recession.

Believe it or not, we might be in for an upcoming perfect storm – and in a good way for borrowers.

Inflation

Mortgage rates are primarily driven by inflation, which erodes the buying power of the fixed return that a mortgage holder receives.  When inflation rises, lenders demand a higher interest rate to offset the more rapid erosion of their buying power.

When the Federal Reserve increases the federal funds rate, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will indeed decline.  History proves this during rate hike cycles for the past 50 years.

Here’s a quick look at what’s happened historically when the Federal Reserve raises the federal funds rate:

Notice how rates actually DECREASE after inflation starts to slow. 

Most experts hope that the Federal Reserve is aggressive at tackling inflation, as they are really late to the game.  Better late than never, I guess!

By the way, don’t be fooled if you see inflation numbers come in lower over the next few months.  Many in the media have talked about “peak inflation” as right around the corner.  I don’t buy it. 

Federal Reserve Chairman Jerome Powell

Peak inflation will be in September/October of this year.  Just watch.

Also, it does look like some of the supply chain issues that have plagued us (and has contributed to inflation), might be worked out by this fall.  Or at least, we can hope for that!

Recession

The first quarter US Gross Domestic Product (GDP) reading came in at -1.4%.  That means the US economy actually shrunk by nearly a percent and a half.  Not good news, to be sure.

The definition of a recession is back-to-back negative GDP quarters.  So, if the April-June numbers are negative, we will officially be in a recession.  And this seems likely. If not now, it will be soon.

The Fed has stated that they will be moving the federal funds rate higher in the coming months – possibly even 3 percentage points this year.

The thick grey bars in the chart below demonstrate recessionary periods…and they correspond very closely to the Federal Reserve interest rate hikes.

Secondly, when you take a look at the combination of high inflation and low unemployment, a recession always follows:

Finally, another great barometer of a coming recession has to do with the difference in yield between the 10-year treasury bond and the 2-year treasury bond.

Investopedia: An inverted yield curve describes the unusual drop of yields on longer-term debt below yields on short-term debt of the same credit quality. Sometimes referred to as a negative yield curve, the inverted curve has proven in the past to be a relatively reliable lead indicator of a recession.

As you can see by the chart below, we are nearing that point now where we have an inverted yield curve.

So, when you take a look at negative GDP growth, the combination of inflation/high-employment, and the inverted yield curve, it is most likely that we will see recession very soon.

Mortgage Rates

As stated earlier, mortgage rates generally FALL during recessionary periods.

This might seem counter-intuitive, but history bears this out.  Take a look at the chart below:

Notice that mortgage rates actually fall during recessionary periods.  You can see the recessions are pictured in the dark blue verticals, and mortgage rates are highlighted inside of them.

Also, one of the few areas that seem relatively immune from recession is the housing market.  Historically, one of the safest bets during recession is real estate.

The chart below shows how housing stays quite resilient during and through recessions:

Looking back at eight of the nine recessions since 1960, home prices significantly increased or at least remained stable each time during and after the recession.  One of the reasons this occurs is because interest rates significantly fall during recessionary periods.

So, things look to be lining up for lower rates ahead!

Potential for Perfect Financing Storm

Essentially, all of these factors listed above combine for LOWER rates later this year into 2023. 

lightning and gray clouds

So, what’s a buyer or home owner to do now?

Of course, things can change, but it sure is looking like a recession is on the horizon, which will undoubtedly bring lower mortgage rates.

Well, waiting to purchase a home and “timing the market” is one option…but it’s almost always a bad idea. 

Why?  Because no one knows exactly when rates will hit rock bottom – and home prices will continue to accelerate.

More importantly, buyers will miss out on the gains of owning a home. Homes increased in value over 15% last year in the west…and things aren’t getting any cheaper.  More on trying to time the market here…

Today’s housing market is extraordinarily strong, as there is record low inventory:

On the other side, there are more new households than ever – and these are competing for fewer homes:

Strong demand and tight supply should continue to be supportive of home price increases, so prices are not coming down.

Again, what’s a potential buyer to do? Fortunately, there’s a great solution here.

Purchase Strategy

I recommend making your purchase now – and NOT paying extra discount points to lower your interest rate.  As a matter of fact, you could use “negative” points to help offset any closing costs.

Instead of paying discount points to access lower mortgage rates, borrowers can receive credits from their lender and use those monies to pay for closing costs and fees associated with the home loan.

More on that strategy here…

Yes, the interest rate might be slightly higher, but you will want to refinance this mortgage when rates drop later this year or next year!  This will also limit your out-of-pocket fees for the initial transaction.

Refinance Strategy

selective focus photo of stacked coins

If you are considering refinancing, now might be a good time to do a “cash-out” refinance and take advantage of all of the equity that’s been built over the last 5 years and pay down debt.

Rebates can be good for refinances, too, as loan’s complete closing costs can be “waived”. This allows the homeowner to maximize the amount of money received from the refinance transaction.

Then, refinance in early 2023 when rates come down.  That means you can have the cash now, and a more-than-likely lower rate later.

In Conclusion

Although things look a little grim currently, the future is actually looking bright for mortgage rates later this year and into next year.

Would you like to find out more?  Contact me to discuss your current situation and how you might be able to take advantage of today’s market.  It would be my pleasure to help you!

Real Estate/Mortgage Market Webinar – Featuring Industry Expert Barry Habib

The Lending Coach and Finance of America Mortgage are proud to present a special virtual event featuring mortgage and housing expert Barry Habib on Wednesday, April 6th. He will be discussing where the housing market’s heading in 2022.

In case you are unfamiliar, Barry Habib is a real estate and mortgage industry executive, bestselling author, and founder and CEO of MBS Highway. Barry is also a well known media resource and TV commentator on the mortgage and real estate markets.

He has recently been named America’s top real estate forecaster by Zillow and Pulsenomics®.

Join us to learn all about housing rates, recession, and how to be best prepared to serve your borrowers this year!

Wednesday – April 6, 2022 at 10:00 a.m. PDT:

As a professional in the real estate industry, you know that interest rate fluctuation and real estate pricing can be a challenge to predict.

Stay ahead of your competition and find resources to help you become a trusted advisor to buyers and borrowers in your community in this rapidly changing environment.

Barry will discuss his predictions for the housing market going forward in 2022 and the benefits of utilizing this system to show clients and referral partners the power of homeownership.

Do register today!!

Mortgage Rate Update – March 2022

white android tablet turned on displaying a graph

Mortgage interest rates just keep moving higher.  They have risen nearly 1.5% points since January 3rd… and it seems like almost every day rates move up again.

pattern luck usa business

The outlook for lower rates isn’t great right now, thanks mostly to the Federal Reserve’s handling of the money supply and out-of-control inflation.

How will the Fed’s recently announced quarter point hike to the Fed Funds Rate affect mortgage interest rates?  The answer may surprise you.

The Federal Reserve

The Fed Funds Rate is not the same as a mortgage rate because it can change from one day to another, while mortgage rates can be in effect for 30 years. More on that here….

Mortgage rates are primarily driven by inflation, which erodes the buying power of the fixed return that a mortgage holder receives.  When inflation rises, lenders demand a higher interest rate to offset the more rapid erosion of their buying power.

You probably know that inflation has been rising significantly of late, and as a result, so have mortgage rates.  Inflation is pushing 9%, the highest level we’ve seen in over 40 years.  This has moved mortgage rates into the mid 4% range this week.

Essentially, The Federal Reserve has bungled their management of inflation and now have to make severe changes to offset the damage.  This brings market instability and increased mortgage rates.

When the Fed hikes rates, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will decline.  History proves this during rate hike cycles for the past 50 years.  Unfortunately, this isn’t an overnight fix.

Federal Reserve Chairman Jerome Powell

However, the Fed may also reduce its holdings of Mortgage Bonds, which can cause some interest rate volatility.  And if inflation continue to surge, the Fed might not be able to do much to help.  The situation isn’t great at this moment.

30-year fixed mortgage rates

The average 30-year fixed-refinance rate is 4.53 percent, up 20 basis points over the last week. A month ago, the average rate on a 30-year fixed refinance was lower, at 4.17 percent.

At the current average rate, you’ll pay $503.13 per month in principal and interest for every $100,000 you borrow. That’s $7.08 higher compared with last week.

Mortgage Rates and Treasury Yields – a great barometer

Fixed mortgage rates and Treasury yields tend to move together because fixed-income investors compare the returns they can get on government and mortgage-backed securities. 

Investors compare yields on long-term Treasuries to mortgage-backed securities and corporate bonds. All bond yields (including mortgage backed securities) are affected by Treasury yields, because they compete for the same type of investor.

Mortgages, in turn, offer a higher return for more risk. Investors purchase securities backed by the value of the home loans—so-called mortgage-backed securities. When Treasury yields rise, investors in mortgage-backed securities demand higher rates. They want compensation for the greater risk. 

You can dig deeper by reading Kimberly Amadeo’s article here…

You can see the rise in the 10-year treasury yield here…and mortgage rates have been following a nearly identical course over the last 3 months.

What Really Causes Rates to Rise and Fall?

Mortgage rates are determined by a complex interaction of economic factors, such as the level and direction of the bond market, including 10-year Treasury yields; the Federal Reserve’s current monetary policy, especially as it relates to funding government-backed mortgages; and competition between lenders and across loan types.

Because fluctuations can be caused by any number of these at once, it’s generally difficult to attribute the change to any one factor.  Although in our current situation, inflation (and the Fed’s mismanagement of it) is the number one cause.  When this is coupled with the large increase in government spending, you see a double dose of fear in the markets.

roll of american dollar banknotes tightened with band

In today’s case, the Federal Reserve has been buying billions of dollars of bonds in response to the pandemic’s economic pressures, and continues to do so. This bond-buying policy (and not the more publicized federal funds rate) is a major influencer on mortgage rates.

On March 16, the Fed announced that it expects to begin reducing its balance sheet in May, meaning it will start reducing the overall amount of bonds it owns. This will be on top of its existing move to reduce new bond purchases by an increment every month, the so-called taper, which began in November.

You can find out more here from Investopedia….

Most experts agree that this “taper” will also move treasury yields and mortgage rates higher.

Moving Forward

There may come a point when mortgage rates drop back down and borrowers can enjoy some of the remarkably low rates they were available from mid-2020 through late 2021.

And throughout 2022, we could have periods when rates dip to some degree.

But for the most part, borrowers may need to come to terms with the fact that the days of record-low borrowing are behind us.

With that said, it’s important to put today’s rates into perspective. Compared to the rates we saw from mid-2020 through the end of 2021, the rates above look high. But historically speaking, locking in a 30-year mortgage anywhere in the 4% range is not a bad deal at all.

Would you like to find out more?  Contact me to discuss your current situation and how you might be able to take advantage of today’s market.  It would be my pleasure to help you!

The Upfront Costs of Buying a Home: What Borrowers Can Expect

It’s important that borrowers understand the upfront costs of buying a home and the fees (known as “closing costs”) that go along with the purchase. In some cases, many home buyers only consider the down payment when they are saving for a house and are surprised by the additional upfront costs.

person with keys for real estate

The actual amounts needed for both the down payment and closing costs can vary by a wide margin. It’s important that would-be buyers meet with their mortgage professional first to get an idea of what they might be.

If buyers understand their options and choose their mortgage wisely, they can minimize upfront costs when buying a home.

I’m linking to an article by Erik Marin at The Mortgage Reports  – and he does a great job of going through what borrowers can expect in terms of closing costs.  I highly recommend that you read the entire article here…

What are the upfront costs of buying a home?

There are several costs that borrowers must pay prior to the closing of a real estate transaction. Collectively, these are called “cash to close.”

Upfront home buying costs include:

  •     Earnest money – 1% of purchase price or more (paid first but goes toward your down payment)
  •     Down payment – This figure can be anywhere from 0% to 20% plus
  •     Closing costs – 2–4% of home loan amount
  •     Prepaid property taxes and home insurance – 6–12 months’ worth

It’s crucial that borrowers have a good idea of the upfront costs associated with buying a home so they can set their expectations realistically and have enough cash on hand to complete the transaction.

woman with credit card pondering while buying online with laptop

Earnest Money

This is also called a ‘good faith deposit’.  Earnest money is a wire transfer or personal check paid to the seller and held by the escrow company shortly after your offer is accepted. This money tells the seller that you’re serious about purchasing the property.

Provided the deal goes through, your earnest money will be applied to your down payment at closing.

You can find out more about earnest money here…

Down Payment

Buyers must also make a down payment that counts toward the home purchase price.  This payment is made at the close of escrow.

The amount of the down payment varies by loan type.  VA and USDA loans can be done with $0 down payment.

man in blue crew neck long sleeve shirt holding wooden home decoration

FHA loans can be done with as little as 3.5%.

Conventional loans vary from 3% down to 20%+.

If you’re not sure how much down payment you need, talk to your mortgage lender about which types of mortgage loans you qualify for and how much cash is required for each one.

You can find out more regarding down payment options here…

Closing Costs

Your down payment is only one of the parts due at the close of escrow, as closing costs must also be considered. These cover all the fees required to set up your mortgage loan, including the lender’s fees, appraisal, inspection, and other third–party service fees.

Borrower’s can estimate paying 2–4% of your loan amount in closing costs.

A few of the major ones include:

  • Mortgage application, origination, and underwriting fees
  • Home inspection
  • Home appraisal
  • Discount points
  • Mobile notary fees
  • Title search and insurance
  • Recording fees
carton boxes and stacked books on table

Soon after you apply for your home loan, the lender will give you a document known as a Loan Estimate. This standardized, three-page document gives you a lot of important information about your new loan.

Page 1 includes your loan amount, mortgage rate, and estimated monthly payments, as well as an estimate of your total closing costs. Page 2 provides an itemized breakdown of the various costs associated with your loan.

You can find out more regarding the specifics on closing costs here…

Prepaid Taxes and Insurance

Prepaid taxes and insurance are usually lumped into closing costs. But it’s helpful to explain them separately so borrowers can better understand these costs and classify them as unique expenses.

At closing, borrowers are required to pay for a year’s worth of homeowners insurance coverage.  Lenders will not lend on uninsured property, hence this requirement.

Prepaid taxes are also collected at the time of closing and are estimated from the date of closing to the next tax due date.

Note that you may not have to pay these costs upfront if you put at least 20% down and decide not to open an escrow account for your taxes and insurance.

Getting Started

Interestingly, all home buyers pay essentially the same set of upfront fees…although the actual cost is quite different from one buyer to the next!

The total upfront home buying costs depend on your loan type, location, mortgage lender, mortgage rate, and a number of other factors.

For this reason, reach out to me before you start looking for a home.  I will be able to go through how much you can expect for your down payment and closing costs. It would be my pleasure to help you!

Mortgage Rate Update – February 2022

a gift with red ribbon in between red balloons with percentage symbols on a white background

It’s been a wild ride for mortgage rates so far in 2022. 

Since January 3rd, rates are up nearly a full percentage point.

The most recent reading of 7.5% inflation, coupled with the Federal Reserve’s statements of rate hikes and balance sheet reduction have really impacted the bond markets, including mortgage-backed securities and mortgage rates in general.

When you couple that with the Federal Housing Finance Agency increasing it’s mandatory fees for financed 2nd home transactions and extremely tight housing inventory here in the west, it’s a bit of tough sledding out there right now for would-be borrowers.

To put this in perspective, mortgage rates are now where they were in May of 2019.

Let’s take a look at the reasons…

Inflation and Mortgage Rates

Inflation in the United States picked up its pace once again, accelerating to an annual 7.5 percent in January, the highest rate in 40 years and above analysts’ expectations, according to data released by the Bureau of Labor Statistics (BLS).

January’s acceleration in the Consumer Price Index (CPI), which reflects inflation from the perspective of end consumers, marks the eighth straight month of prices rising faster than 5 percent year-over-year and a faster pace than December’s 7.0 percent pace.

Per Tom Ozimek of the Epoch Times: “Not only is January’s annual pace of CPI inflation the highest since February 1982, when it hit 7.6 percent, it is also far above the Federal Reserve’s target of 2 percent as reflected in a separate but related inflation gauge, pressuring policymakers to tighten loose monetary settings to knock some of the wind out of surging prices.”

When inflation rises, the value of mortgage-backed bonds decreases. This causes these bonds to become a less attractive investment. So, interest rates must rise to keep investors buying. Higher rates on mortgage bonds translate to higher consumer mortgage rates…and that’s what we are seeing today.

The Federal Reserve

Federal Reserve Chairman Jerome Powell

Markets are in a state of increased nervousness as the Federal Reserve is changing its focus to a much tighter stance.  Fed leaders have failed in their assessment that the inflation we are seeing is “transitory”…and are now in panic mode.

The Fed has also announced an end to quantitative easing—the central bank’s program of buying Treasury securities—and has signaled a rapid pivot to quantitative tightening (QT), the sale of Treasury securities from the Fed’s bloated portfolio.

Brian McCarthy of the Epoch Times states, “Markets are right to be unsettled by the Fed’s shift in interest rate policy, which has been effected with all the deftness of a dozing driver yanking the steering wheel, as he awakens to the expanding headlights of an 18-wheeler bearing down on him on a dark country road.”

Essentially, The Federal Reserve has bungled their management of inflation and now have to make severe changes to offset the damage.  This brings market instability and increased mortgage rates.

2nd Homes and Mortgage Rates

Mortgage interest rates and fee structures are increasing for second home financing, thanks to the Federal Housing Finance Agency (FHFA).

The FHFA has announced targeted escalations to Fannie Mae and Freddie Mac’s upfront fees for second home loans.

FHFA Acting Director Sandra Thompson

In a statement, FHFA Acting Director Sandra Thompson said the fee increases are to provide better access to mortgages for first-time and low-income borrowers, as well as strengthen Fannie Mae’s and Freddie Mac’s balance sheets.

For mortgages on 2nd homes, they will now look nearly identical to investment properties in terms of rates and fees.

Essentially, this appears to be the FHFA’s attempt at revenue redistribution.  They will be charging more for 2nd home financing in order to facilitate increased participation in first-time and low-income borrower programs.

You can find out more on this here…

The New Normal

Mortgage rates hit their highest level since before the pandemic began this week. Rates are up over .75% since the beginning of January and up over 1% since their all-time lows last year.

“The normalization of the economy continues as mortgage rates jumped to the highest level since the emergence of the pandemic,” Sam Khater, Freddie Mac’s chief economist, said in the report. “Rate increases are expected to continue due to a strong labor market and high inflation, which likely will have an adverse impact on home buyer demand.”

Essentially, the rates that were seen last year (2.75% for a 30-year fixed mortgage) just aren’t available today…and borrowers need to be willing to accept that fact.

Some Perspective

With that said, today’s mortgage rates are still extremely low relative to historical norms.

Take a look at this chart, showing average mortgage rates since 1972 (courtesy The Mortgage Reports):

Rates in the 3% to 5% range are very, very low compared to those in recent history.

This means that although rates might not be in the 2% range (as they were at times last year), today’s mortgage rates are clearly are advantageous to borrowers.

Would you like to find out more?  Contact me to discuss your current situation and how you might be able to take advantage of today’s market.  It would be my pleasure to help you!

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