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Archive for June, 2010

FHA Set to Raise Monthly Mortgage Insurance Premiums For New Buyers Friday, June 25th, 2010
 
The FHA has just been given the green light by congress to increase the cost of the monthly mortgage insurance on all FHA loans for new buyers. Right now, depending on your LTV (loan to value), the FHA monthly mortgage insurance Premium (MIP) is either .50% or .55% of the base loan amount, under this new law the cap has been raised to 1.5%. 
 
The House of Representatives approved by a 406-4 vote the Federal Housing Administration Act, a law designed to shore up the finances of the agency which now guarantees nearly one-third of the nation’s mortgages. The new law gives FHA the authority it had requested to raise the ceiling on the annual premiums it charges borrowers for its guarantee. 
 

FHA’s 2 step process to shore up finances

 
 
Earlier this year the FHA announced its intention to raise its premiums in a two-step process that was part of a larger program to put itself back on a firm financial footing. This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing.
 
The first step was raising the up-front premiums due from the borrower at loan closing, this became effective April 9, 2010 when upfront premiums went from 1.75 percent to 2.25 percent. However, the FHA was not able to raise the monthly mortgage insurance (MIP) without the permission of Congress as it was already at the authorized ceiling.  Now under the law passed the agency will be allowed to increase its annual premium to 1.50 percent of the unpaid balance of the loan. 

 
What can new buyers expect?
 
However FHA Commissioner David Stevens has come out and said the agency does not plan on raising rates to the maximum limit when this bill becomes law. Instead, the agency wants to raise the fee for new borrowers from 0.55 to 0.9 percent, Stevens said. The increase would help the FHA raise capital as well as make its fee structure more consistent with that of the private mortgage insurers, which have been crowded out as FHA’s market share has exploded (see chart below).
 
 

 
Comparing current vs new mortgage insurance payments 
 
Lets take a look at how this increase in monthly MIP will effect overall mortgage payments and affordability for new buyers. Lets look at FHA Monthly Mortgage Insurance Premiums (with less than 5% down).
 
Current premium                  -  .55% monthly

Expected increased premium  -  .90% monthly 

Maximum increased premium   - 1.55% monthly  

On a $400k loan for example, the monthly insurance amount with the current premium (.55%) is $183 a month. On the new “Expected” increased premium of .90%, this same buyer will pay $300 a month for mortgage insurance, which is an increase of $117 a month. $117 a month is a lot of money for some people and will make that $400k home purchase more expensive and possibly out of range now for many new buyers. This will also increase debt to income ratios, as this will be an additional debt of $117 to plug into a buyers debts. 

Lets hope they do not enforce the limit up to the cap of 1.5%, as this will increase payments by $317 a month on a $400k loan. This will not be a wise move by the FHA as this will decrease the price even more for what a buyer can afford. But as we have seen many times in the recent past, the people in congress do not make the wisest decisions most of the time…I will say no more on this subject.

 
Will FHA change their debt to income rules soon too?
 

Another important point to make is that the FHA have not lowered their debt to income ratios down to 50% yet. Fannie Mae and Freddie Mac have capped their debt to income ratios at 45% and allow 50% for strong borrowers. I will be very surprised if the FHA does not do this sometime soon, so that the whole lending industry has a cap of 50% debt to income ratios for all loans. If and when they do this, this will also limit the qualified pool of buyers who can buy at certain prices now.  

A good idea would be to explain this future increase in mortgage insurance premiums to any buyers who are still unsure about buying now. Show them the difference in payments with the current mortgage insurance and with the new future increased mortgage premium, an increase of $117 a month just might be enough to get some buyers off the fence to buy now.

 

 
Most of CA First Time Credit Claimed 
 

I just read an article this morning CA Tax Credit that says California ’s Franchise Tax Board is warning consumers that nearly 80% of the state’s $100 million first-time buyer credit has been claimed. As of June 15, the agency has received more than 15,000 applications from consumers. However, since many are duplicates or invalid, FTB will accept at least 28,000 applications to ensure the entire $100 million allocation is spent. It will announce a cut-off date for the program on its website, giving at least 24 hours notice for applicants to fax in their documentation.
 

However, submission before the deadline does not guarantee consumers being approved for the credit. FTB will stop allocating credits once the $100 million is exhausted. A separate program, the $100 million tax credit for the purchase of a newly constructed home, is still operational. Consumers need to enter into contract before Jan. 1, 2011 and complete the purchase before Aug. 1, 2011. This is another great reason to create urgency with buyers who may have thought this tax credit would be around for a while. 

 

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Compare the Savings on a 20 Year Loan vs a 30 Year Loan! Thursday, June 10th, 2010
There has never been a better time than now, for new buyers and existing homeowners to take a reduced term mortgage that will set them up to be mortgage free for an earlier retirement. Because of plummeting mortgage rates the 20 year fixed loan is now at 4.375% and the 15 year fixed is available around 3.99%.  Today’s record low interest rate environment is presenting just that opportunity.  
 
Look at options to a 30 year loan
 
I would say because of the really low rates recently, almost 40% of my clients have been taking reduced term mortgages in the past couple of months. The 20 fixed loan has been the loan of choice, as it has an affordable payment payment for a lot more clients with rates being so low. The 15 year fixed payment is usually just a little too high for all first time buyers. The idea of being mortgage free in 20 years and saving more than a $100k in mortgage payments and interest compared to a 30 year loan, is now becoming very appealing to a lot of buyers, as it opens up a whole new door of opportunities for retiring earlier. 
 
Educating homeowners with more options 
 
I believe that now more than ever, we must be ready to take the time to truly teach people what is happening in the market and why it is happening. Then, and only then, can they truly make the right decisions for themselves and their families. Its important to show buyers and homeowners why record low rates are presenting the opportunity of a lifetime to get a shorter term loan that will enable them to save more money and help them achieve their retirement goals a lot earlier. 
 
Compare the Savings on a 20 Year Loan vs a 30 Year Loan!
Here is a great example that compares the total savings on a 20 year fixed loan versus a 30 year fixed loan. For this particular example, let’s take a $400k 30 year fixed loan at 4.875% and a 20 year fixed loan at 4.375%. The difference in payment is only $387 a month more for the 20 year fixed loan. I know this will be too much for some people, but it will also be affordable to a lot of people too.
 
 
 
Now lets compare the total mortgage savings on the 20 year fixed versus the 30 year fixed loan, as you can see below the 20 year loan will save $161,175 in mortgage payments and interest over the 30 year loan. (See Net Savings)
 
Now lets see what the balance of each loan will be after 10 and 20 years. As you can see after 10 years, the 20 year fixed loan has already paid down an extra $81,147 in principle. Now let’s look at the balances after 20 years…on the 20 year fixed the balance is $0, whereas the loan balance after 20 years on the 30 year fixed is still $200,732.
 
 
So the two huge benefits here are #1 the borrower will payoff his home 10 years early and get to retire earlier, #2 the borrower will save over $161k in mortgage payments and interest.
 
Chat to family and friends about a 20 year loan?
 
A recent Wall St Journal article noted that 50% of US households have an interest rate over 5.75% on a 30 year fixed loan. Have a chat with your friends and family and ask them if they have a rate this high, or if they would be interested in looking at a reduced term 20 year fixed loan and becoming mortgage free for an earlier retirement? 
 
You can let them know that if they qualify, they would be able to refinance into a 20 year fixed loan at 4.375% or a 15 year fixed as low as 3.99%. I would be happy to help out any friends or family you have and present the figures to them as shown above, so they can make an informed decision about their future goals. As these record low rates really present an opportunity of a lifetime for many homeowners and buyers who can now look to achieve retirement goals a lot earlier.
 
An update on mortgage rates 
 
Mortgage rates are still edging downwards as investor cash continues to pour into the US bond market from around the world. Mortgage bonds actually had their new “price record” (highest yields on record) on Monday the 7th of June when the Fannie Mae 4.5% coupon priced out at 103.00 (see trading chart below). What does this mean to consumers? It means that if these yields stay around this high 103.00 range for the next few weeks or so, and this becomes a solid new trading range, lenders might be offering 4.5% 30 year fixed rates across the board very soon. What a fantastic opportunity this would be for new buyers and current homeowners who can refinance. 
 
 
BUT also do not discount rates spiking up either as we are in a very volatile market right now. It is the Euro crisis that is driving everything lower including the US stock markets..Remember when stocks go down, this causes bonds to up and mortgage rates rates in turn go down. But if the Euro crisis starts to dissipate fast and the “flight to safety” of investor money to the US markets alleviates, then we will see rates rise fast.
 
Personally I don’t see rates moving too much higher than they currently are for a few months or maybe even longer, as the member countries in the Euro zone are only starting to acknowledge and realize that severe austerity measures need to be initiated immediately in most countries. This will be a long drawn out and painful process for many countries, as evidenced by the recent riots in Greece and current union strikes in Spain. So in summary, while the Euro zone continues to have problems, this will keep money flowing to the US bond and treasury markets, thus keeping US mortgage rates low and the US stock markets lower too. But when you hear that the Euro zone is starting to get its house in order, watch this as a key factor for rates to rise and US stocks to improve again.  
 
If you have any questions about any of the information above, please do not hesitate to contact me directly at 858-200-9602. I look forward to chatting soon.
 
 
 

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