The Federal Housing Finance Agency announced new baseline conforming loan limits for Fannie Mae and Freddie Mac in 2021: $548,250.
This is a 7.5% increase from the 2020 limit of $510,400 and marks the fifth consecutive year of increases from the FHFA.
This is important because now buyers and borrowers can purchase a higher priced home and still stay within conforming loan guidelines. That means easier qualifications at higher price points.
In 2016, the FHFA increased the Fannie and Freddie conforming loan limits for the first time in 10 years. Since then, the baseline loan limit has gone up by $131,250.
These new limits apply to conventional, conforming loans (those sold to or backed by Fannie Mae and Freddie Mac), for both refinances and purchases. Any loan amounts above these limits would be considered “jumbo” loans and fall outside of conventional guidelines.
Do I have to wait until 2021 to take advantage of a higher conforming loan amount?
Actually, no. The change actually applies to the date that Fannie and Freddie sign off on the new loan (either via “delivery” or “securitization”).
Essentially, any loan originated today would most likely close in 2021 and fall under the new loan limits.
Per Mr. Green: “If you’re a home buyer with a good deal of cash saved up in the bank, for example, but you have relatively low annual income, making the biggest down payment possible can be sensible. This is because, with a large down payment, your loan size shrinks, reducing the size of your monthly payment.”
Or, perhaps your situation is reversed.
“Maybe you may have a good household income but very little saved in the bank. In this instance, it may be best to use a low- or no-down-payment loan, while planning to cancel your mortgage insurance at some point in the future.”
Dan continues: “One thing is true for everyone, though — you shouldn’t think it’s “conservative” to make a large down payment on a home. Similarly, you shouldn’t think it’s “risky” to make a small down payment. The opposite is actually true.”
“About the riskiest thing you can do when you’re buying a new home is to make the largest down payment you can. It’s conservative to borrow more, and we’ll talk about it below.”
For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:
Remember, though, that these requirements are just the minimum. As a mortgage borrower, it’s your right to put down as much on a home as you like and, in some cases, it can make sense to put down more.
Larger Down Payments Actually Increase Risk
Green continues: “As a homeowner, it’s likely that your home will be the largest balance sheet asset. Your home may be worth more than all of your other investments combined, even.
In this way, your home is both a shelter and an investment and should be treated as such. And, once we view our home as an investment, it can guide the decisions we make about our money.
The riskiest decision we can make when purchasing a new home?
Making too big of a down payment.”
The Higher The Down Payment, The Lower Your Rate of Return
The first reason why conservative investors should monitor their down payment size is that the down payment will limit your home’s return on investment.
Consider a home which appreciates at the national average of near 5 percent.
Today, your home is worth $400,000. In a year, it’s worth $420,000. Regardless of your down payment, the home is worth twenty-thousand dollars more.
That down payment affected your rate of return.
With 20% down on the home — $80,000 –your rate of return is 25%
With 3% down on the home — $12,000 — your rate of return is 167%
That’s a huge difference. Please do reach out to me for more information so we can figure out the best down payment strategy for you!
The Federal Reserve board announced last week that they think the federal funds rate will remain at close to zero through at least 2023.
That’s pretty bizarre…and they must have some sort of an amazing crystal ball that we don’t know about. I don’t know of any Federal Reserve Board that has given 2+ years of guidance in one day. Evidently they’ve turned into economic soothsayers.
As a reminder, the federal funds rate that is set by the Fed and mortgage rates (not set by the Fed) are two totally completely different instruments.
The Federal Funds Rate
The federal funds rate is the target interest rate set by the Federal Reserve Open Market Committee at which commercial banks borrow and lend their excess reserves to each other overnight. It really has limited impact on the mortgage market.
I’d invite you to read this article that I’ve written that outlines what really drives mortgage interest rates: https://lendingcoach.net/mortgage-rates-the-fed/ (hint…it isn’t the Federal Reserve).
Mortgage Interest Rates
This graph shows the deviation of the 30-year mortgage versus the federal funds rate – and you can see there’s quite a dramatic difference.
Inflation Worries
Secondly, the fact that the Federal Reserve stated that they are OK with inflation levels over their original 2% target will not help the bond market or mortgage backed securities (the true drivers of mortgage interest rates).
They stated that they would allow inflation to run moderately above 2% “for some time” – and many in our industry are worried that once inflation gets rolling (and it has been moving up, even in today’s COVID economy) it will be impossible to stop.
Mortgage rates will be affected by inflation because inflation erodes the buying power of the fixed return that a mortgage holder receives. And interestingly, the best way to combat inflation is by raising the Fed Funds Rate.
If inflation begins to rise, and there are already some signs of this, Mortgage Rates will start to climb in response. All this can absolutely still occur while the Fed Funds Rate is at zero.
Today’s Opportunity
With all of that said, the current mortgage rate environment presents an incredible opportunity that should be taken advantage of for either a purchase or refinance. Contact me so I can help you benefit before things change too dramatically!
Making an offer over the asking price on a house often makes buyers wince.
But let’s face it, paying above list price is just a reality in certain circumstances—at least if you really have any hopes of getting that house!
Is it a good idea? Well, this article from Realtor.com outlines a few reasons why it might be. It’s a good read and I highly recommend it.
Reasons to Offer Over Asking
In many parts of the country we are in what would be considered a “sellers market”, so buyers must adapt. A good rule of thumb: ‘If houses are selling in your neighborhood in less than 10 days, it’s a strong seller’s market’.
Here are a few other reasons you may want to bid more than list price:
You love the home and want to make sure you get it
You know there’s a bidding war or lots of competition for the property
The house is undervalued (comparable sales can help you judge this)
There are cash bids on the table
How To Decide
With that said, does it really make financial sense to pay more for a home than the asking price?
The answer is…it depends – and you should do the math to make sure.
My friends at The MBS Highway have put together a tool that helps buyers decide if making an offer over the asking price is a good financial decision.
Their “Buy Over Ask” tool takes into account a myriad of factors – from the asking price itself to expected appreciation – even to a break-even point that shows the exact month you should expect your return.
In the example above, by offering $7,500 over the seller’s asking price, a buyer’s break-even point is only one month away…and they can expect appreciation of nearly $100K over the next 5 years. In this case, it looks like paying a bit over asking would be a good idea, indeed.
Find Out If Offering Over Asking Is Right For You
It would be my pleasure to help any potential buyer find out if bidding over list is a good idea.
Reach out to me and I can easily put together a summary just like the one above for you to help determine if making an offer over the asking price is something you should consider!
Mortgage rates are at all-time lows. Many homeowner’s are taking advantage and locking in for the long term. But what about investors, are they doing the same?
Refinancing rental properties can unlock a good deal of wealth-building opportunities for investors, including the ability to lower interest rates and monthly payments, improve loan terms, and earn additional cash flow.
Interestingly, many investors have not taken advantage of today’s market.
For one reason or another, there are a number of investors that don’t even realize the opportunity that’s in front of them.
Should I Refinance My Rental Property?
In most cases, investors should consider a refinance to:
Much has changed in a relatively short period of time regarding rates and valuations…and they are almost all in favor of the investor.
As mentioned earlier, interest rates are historically low…and they look a lot better than they did even this time last year, let alone a few years ago.
5.75% versus 4.5% example
If you purchased an investment property in October of last year, for example, many borrowers took on mortgages with an interest rate in the high 5% range.
Today, if that investor were to refinance their $250,000 loan from 5.75% to 4.5% for example, they would save nearly $200 per month.
There might be some discount points involved depending on the scenario, but they can be financed into the loan amount, so the only out-of-pocket cost would be that of an appraisal.
Assumptions: $250K loan, 70% loan-to-value and 760+ credit score
In Conclusion
When you own an investment property, the goal is to earn a solid rate of return…and refinancing that property can increase your short-term cash flow and help you build longer-term wealth.
Do reach out to me for more, as it would be my pleasure to help you look at different options and programs that might help you in today’s market.
Thomas Eugene Bonetto
Mortgage Loan Originator
NMLS: 1431961
About The Coach
Tom Bonetto has been helping his customers and players achieve their best for nearly 30 years. His goal is to provide both a superior customer experience and tremendous value for both his business associates and his players alike.
The views expressed are my own and do not necessarily reflect those of Starlight Mortgage.
