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Category: Mortgage (Page 2 of 32)

March Mortgage Rate Update – COVID-19 Edition

Mortgage rates went from ridiculously low to “still not-so-bad” in just over a week.  I can’t say that I recall ever seeing mortgage backed securities and mortgage rates having such gigantic swings in 6 days.

A flood of demand for refinancing combined with volatile credit markets last week caused mortgage rates to actually spike on Tuesday and Wednesday. By Thursday, buyers for mortgage debt had largely stopped making bids.

Borrowers who were looking at a 3.25% or a lower rate on a 30-year mortgage the prior week were quoted 4% on Tuesday and then above 4.25% on Wednesday.

When U.S. mortgage rates spiked last week, the entire market clogged up on Thursday and bidding on mortgage loans essentially stopped.

Secondarily, the Federal Reserve cut the federal funds to near zero on Sunday, adding to their earlier rate cut of a half a percent last week.

The Fed has also stated it will purchase $700 billion in bonds and mortgage backed securities on Sunday. Last week’s Fed injection was to allow banks to have the appropriate levels of cash reserves.

This new one is to bolster markets ahead of potential coming weaknesses.

Nearly all of this was in direct reaction to the COVID-19 (Coronavirus) threat and fears of an economic calamity that could be brought on by the virus.

Stock trading was halted for 15 minutes a few times last week due to a 7% drop in the market.

Treasuries tumbled to levels never seen before and the stock market dropped to a point where the Dow officially entered the bear market, ending the 11-year run in bull market territory.

Given all this, mortgage rates should have seen a serious decline last week. Instead, they’ve climbed nearly 0.75% in the last couple of days.

Why the disconnect?  There are 3 main reasons for this anomaly:

Capacity

Mortgage applications soared 55% last week from the previous week and demand for refinances rose to an almost 11-year high, as borrowers responded to the historically low rates.

Because of this volume, multiple investors actually stopped taking applications due to capacity concerns.  Many mortgage lenders would no longer accept locks less than 60 days for refinances. Their systems are stressed and they do not have the capacity to originate, process, and underwrite such an extremely high influx of loans. 

Essentially, mortgage lenders are trying to put 10 gallons of water in a 2 gallon jug.

So, investors are raising rates to combat the surge in an attempt to slow things down a bit.

Out With The Old and In With The New

The surge in refinances has increased prepay speeds for securities backed by recent mortgages.  This is essentially shortening the term of the investment and reducing the expected return of previous mortgages by the investor and servicer.

With this increased flood of refis, many previously funded and serviced loans are actually money losers now.

These losses for investors and servicers will see their revenue streams from their mortgage servicing rights dry up.  Most mortgage servicers see a break-even of 3 years for each transaction – and most mortgages are kept on an average for 7, so there’s generally a tidy profit for the average loan. 

A vast majority of the loans being refinanced are less than 3 years old – many are less than 18 months old, as a matter of fact..

So, investors are adding in some padded profits to cover those losses…and they do they by increasing mortgage rates they charge to borrowers.

Margin Calls

Because of the intense stock market drop this week, many investors were forced to sell their most easily liquidated assets to cover stock losses.

Many of those assets were mortgage backed securities that had appreciated and were easily available to be sold.

In the short term, that made mortgage backed securities more expensive, forcing rates higher in the short term.

Fed Rate Cut and Mortgage rates

Also, many erroneously believe that Federal Reserve rate cut directly correlates to mortgage interest rates moving downward.  As you can see by the piece I’ve written here, the Fed does not control mortgage rates.  As a matter of fact, there have countless times where the mortgage rates moved higher the day fed cut the federal funds rate.

Note that the federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis.  This is not what drives mortgage rates – it does influence them, but does not “set” them.

Treasury Yields and Mortgage Rates

The 30-year fixed mortgage rate and 10-year treasury yield generally move together because investors who want a steady and safe return compare interest rates of all fixed-income products.

You can find out more on that here…

This week, that relationship seemed to disappear, as the 10-year treasury plummeted and mortgage backed securities increased, due mainly to the 3 factors listed previously.

What Does The Future Hold?

It’s important to understand that mortgage rates are still extremely attractive relative to historical norms.

Until things normalize a bit, we can continue to expect volatility in the marketplace, although yesterday’s Fed actions could move the market in the short term.

If you haven’t locked and started already with a refinance, then I recommend that you get ready to do so, as timing could be everything. Once the investors clear out some backlog and more economic data comes out (especially concerning COVID-19 ), mortgage backed securities will most likely get a boost and mortgage rates should ease back down once again.

My advice is to stay patient and be ready to move when the numbers work for you.

Secondly, inflation (the arch enemy of interest rates) is low, and the latest measures show that pressures are actually easing…again, good news for interest rates in the long term.

What Can You Do Now?

I recommend that you reach out to your mortgage lender right away and put a plan in place for a future drop in rates.  It would be my pleasure to give you some scenarios that might help you in your decisions making to know when/if you should make a move. Don’t hesitate to reach out to me for more!

March Home Appreciation and Interest Rate Update

Good news for home owners and buyers alike – home appreciation remains strong.

Interest have moved to historic lows due to multiple factors, including the virus scare.

The Federal Reserve has cut it’s funds rate by .50 basis points in an attempt to “provide a meaningful boost to the economy”, per Chairman Jerome Powell.

With these things in mind, make sure you have a solid game plan to navigate the market right now. Think about inventory, equity in your home, second homes, and investment properties as strategies to build wealth.

It’s also a good time to take a look at refinancing any properties you own, as rates have dropped significantly over the last 2 years.

The housing reporting benchmark, CoreLogic, reported that home prices rose 0.1% in January and 4.0% year over year.

The year-over-year reading remained stable from last month’s report. CoreLogic forecasts that home prices will appreciate by 5.4% in the year going forward, which slightly higher pace. from the 5.2% forecasted in the previous report.

This is great news for would be buyers, as they can expect a great return on their investment!

Do reach out to me to find out more, as it would be my pleasure to help you determine the right strategy for today’s environment.

Second Homes and Investment Properties – A Mortgage Primer

I work with a wide variety of clients, from first time buyers to seasoned investors…and many in between.  However, some of the most frequent questions I receive deal with second home mortgages versus investment property financing.

Interestingly, there are specific rules and regulations for both, and I’d like to outline a number of major differences between them.

In general, whether you’re buying a vacation home or an investment property, you’ll pay slightly higher mortgage rates and have to meet stricter guidelines to qualify.

I’m linking to an article from Peter Miller at The Mortgage Reports – and you can see his entire piece here…

Interest Rate Differences

Mortgage rates are generally higher for second homes and investment properties than for the home you consider your primary residence.

In general, investment property interest rates are about 0.625% to 1% higher than market rates for primary homes.

For a second home or vacation home, they’re only slightly higher (generally .125% to .25% higher) than the rate you’d qualify for on a primary residence.

Of course, investment property and second home mortgage rates depend on similar factors as those for your primary home. Each borrower’s situation will vary based on income, credit score, assets, and down payment percentage, just to name a few elements.

Why Are Second Home and Investment Interest Rates Different?

Per Miller, “The home you live in (your “primary residence”) is seen as the least risky form of real estate. It’s likely to be the one bill homeowners will pay if times get tough. A vacation home or investment property, on the other hand, is riskier. Borrowers are a lot more likely to forego those payments when money is short.

Because of the higher risk second homes pose, they come with stricter rules about financing.”

Second Home Mortgage Regulations

There are a few key things a buyer needs to know about mortgage requirements if they are considering a second or vacation home.  First of all, one you will essentially live in for part of the year, but not full time.

Lenders expect a vacation or second home to be used by you, your family, and friends for at least part of the year. However, you’re generally allowed to rent the house out when you’re not using it.

If you plan to rent the property when you are not there, you cannot use expected income from that property to help income qualify for the loan.

Down Payment of 10% or More

Most lenders will want at least 10 percent down for a vacation home. If your application isn’t as strong (say you have a lower credit score or smaller cash reserves), you may have to put 20 percent or more down.

Also, gift funds are generally allowed for a portion of the down payment, but at least 5% of it must come from the borrower’s own funds if bringing in less than a 20 percent down payment

Credit Score

The purchase of a second home or vacation home requires higher credit scores, typically in the 640 or higher range. Lenders will look for less debt and more affordability, think of tighter debt-to-income ratios. Strong reserves (extra funds after closing) are a big help.

Investment Property Mortgage Regulations

If you are planning on purchasing an investment property there are specific rules that apply.

If you’re financing a home as an investment property, and you plan to rent it out full-time, you are not personally required to live in the building for any amount of time.

Down Payment of 15% to 25%

Down payment requirements for an investment property range from 15 percent for a one-unit property to 25 percent for a two- to four-unit property. You may also be required to make a bigger down payment depending on your application and the type of loan.

No gift funds are allowed for investment property purchases, so most lenders will require down payment funds “seasoned” for at least 60 days in the borrower’s personal account.

Using Expected Rental Income to Help Qualify

The good news about utilizing an investment property loan is that the borrower can use expected rents as income to help in qualification.

Here are some of the guidelines:

  • If the property is leased, then copies of the current signed lease agreements may be required.
  • If the property is not currently leased, then the lender may use “market rent” information provided by the appraiser.
  • When there is no rental income for the subject property on the borrowers tax returns, the rental income will be reduced to 75% of the gross rental income provided on the lease.

You can find more on this subject here…

Credit Score

Lenders generally require borrowers to have a credit score above 640 for an investment property loan. With that said, rates can run very high for low credit scores.

The Bottom Line

When you apply for a mortgage, you are required declare how you intend to use the property. Lenders take such declarations seriously because they don’t want to finance riskier investment properties with residential financing.

Make sure to find a lender who truly understands the differences and requirements between second homes and investment properties.  I’d be more than happy to share other resources I have on the subject, so don’t hesitate to reach out to me with your questions!

Homes Are MORE Affordable Today – Not Less

You might be seeing in the press or hearing from others that owning a home today is less affordable than it has been in the past.  Sure, home prices have increased over the last five years and current inventory is tight.

However, that narrative is completely wrong, when you look at the data. Now is the most affordable buying a home has been in the last 30 years.

I’m linking to an article from Caety James at Keeping Current Matters that outlines some of the reasons.  You can find the article in its entirety here…

Low Mortgage Rates a Key Driver

James writes: “Homes, in most cases, are purchased with a mortgage. The current mortgage rate is a major component of the affordability equation. Mortgage rates have fallen by over a full percentage point since December 2018. Another major piece of the affordability equation is a buyer’s income. The median family income has risen by approximately 3% over the last year.”

Just take a look a the National Association of Realtors “Housing Affordability Index” – it shows that home affordability is better today than nearly any point over the last 30 years!

Potential buyers really should take the time to find out why now is the time to make that purchase.

Payment as Percentage of Income

The report on the index also calculates the mortgage payment on a median priced home as a percentage of the median national income. Historically, that percentage is just above 21%. Here are the percentages since June of 2018:

Again, we can see that affordability is much better today than the historical average and has been getting better over the last year and a half.

Bottom Line

Whether you’re thinking about buying your first home or contemplating a vacation home or investment property, don’t let the false narrative about affordability prevent you from moving forward.

From an affordability standpoint, this is truly one of the best times to buy in the last 30 years.  Please do reach out to me to find out more and how I can help!

Shop for a Mortgage Without Hurting Your Credit Score

Make sure to do a little planning before you start looking for a mortgage.  With a some work, you can keep your score in top shape relatively easily as you shop for the right mortgage lender.

“Metaphorically, not letting your lender check your credit is like not letting a doctor check your blood pressure. Sure, you can get a diagnosis when your appointment’s over — it just might not be the right one.” – Gina Pogol, The Mortgage Reports

When you start looking for the right mortgage provider, shop carefully because your credit score might suffer if you don’t take care. Each time you apply for a home loan, a mortgage lender will make a credit inquiry to review your credit history. These inquiries are reported to the three major credit-reporting agencies: Equifax, Experian and TransUnion.

I’m linking to a great article by Gina Pogol of The Mortgage Reports that discusses credit inquires and how it impacts a borrower’s score – you can view the entire article here…

If there’s one thing to take away, from Pogol’s article…”do make sure to share your social security number with your lender so they can give you accurate mortgage rate quotes instead of just best guesses or ‘ballpark rates’.”

Mortgage vs Credit Card Inquiries

A hard inquiry generally means you’re searching for additional credit. “Statistically, you’re more likely to have debt problems and default on financial obligations when you increase your available credit. This is especially true if you’re maxed out or carrying credit card balances and looking for more”, says Pogol.

She continues, “Understanding this, it makes sense that your credit scores drop when you go applying for new credit cards or charge cards. Fortunately, credit bureaus have learned that mortgage shopping behavior does not carry the same risks and they no longer treat a slew of mortgage inquiries the same way.”

They key point here is that multiple mortgage companies can check your credit report within a limited period of time – and all of those inquiries will be treated as a single inquiry. That time period depends on the FICO system the lender uses. It can range from 14 to 45 days.

What FICO Says

This is what MyFICO says about its algorithms and how it treats rate shopping inquiries:

FICO® Scores are more predictive when they treat loans that commonly involve rate-shopping, such as mortgage, auto, and student loans, in a different way. For these types of loans, FICO Scores ignore inquiries made in the 30 days prior to scoring. 

So, if you find a loan within 30 days, the inquiries won’t affect your scores while you’re rate shopping. In addition, FICO Scores look on your credit report for rate-shopping inquiries older than 30 days. If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry. 

For FICO Scores calculated from older versions of the scoring formula, this shopping period is any 14-day span. For FICO Scores calculated from the newest versions of the scoring formula, this shopping period is any 45-day span. 

Mortgage rate shopping / credit score Q&A with Gina Pogol

Do mortgage pre-approvals affect credit score?

Yes, but only slightly. Credit bureaus penalize you a small amount for shopping for credit. That’s a precaution in case you are trying to solve financial problems with credit. But requesting a mortgage pre-approval without applying for other types of credit simultaneously will have little to no effect on your score.

Will shopping around for a mortgage hurt my score?

You have 14 days to get as many pre-approvals and rate quotes as you’d like — they all count as one inquiry if you are applying for the same type of credit.

How many points does your credit score go down for an inquiry?

About 5 points, but that could be lower or higher depending on your credit history. If you haven’t applied for much credit lately, a mortgage inquiry will probably have a minimal effect on your score.

How much does a mortgage affect credit score?

Having a mortgage and making all payments on time actually improves your credit score. It’s a big loan and a big responsibility. Managing it well proves you are a worthy of other types of credit.

What’s the mortgage credit pull window?

You have 14 days to shop for a mortgage once you’ve had your credit pulled. Within 14 days, all mortgage inquiries count as one.

The Final Take-Away

A mortgage credit inquiry does have a small effect on your score, but it’s still worth shopping around to find the right lender. Borrowers can save both money and headaches by doing some work to find the lender that you trust the most.

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