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For any buyers still sitting on the fence thinking about buying a home, they should consider the following three reasons why they should get into contract before April. Simply put, loans are going to get a lot more expensive.
1. The Feds announced they are not renewing their rate reduction program after March 30th.
2. Buyers need to be in contract before April 30th to take advantage of the $8k tax credit.
3. FHA is increasing their upfront MIP fee from 1.75% to 2.25% on April 17th.
1. The Feds announce March 30th as the end of their rate reduction program
The Feds have come out and announced they will not be extending their mortgage rate reduction program. The Feds have been buying mortgage backed securities (MBS) for the past 13 months and this has artificially lowered rates down to all time record lows. As the chart below indicates, they have been buying less and less mortgage backed securities (MBS) each month. By buying less MBS each month they are trying to slowly wean the markets off this support.
The Feds now have less than 10% of the $1.25 Trillion in funds they allocated for this mortgage rate reduction program program until March 30th.
I think it is fair to say that mortgage rates will automatically rise once government support goes away. How high will they go? Well no one really knows. But the Freddie Mac deputy chief economist announced recently that “interest rates are bound to rise to 6% in 2010 because private buyers will demand a higher rate of return on the securities than the Fed did”. Mark Zandi the chief economist at Moody’s also just announced “if you told me by the end of 2010 a 30 year rate was at 6%? that sounds about right”. I think it is imperative that all potential buyers understand the dynamics of this program and how it will affect interest rates for home loans.
2. Be in contract before April 30th for $8k tax credit
There are still some buyers out there that don’t realize you have to be in contract before April 30th to take advantage of the $8k credit. It is true you have until June 30th to close the transaction. The IRS have also come out and announced recently that they are going to be extremely strict with these deadlines, so it is important that all buyers understand the significance of these dates. Also according to a recent poll among mortgage bankers, they think there is less than a 5% chance that the government will extend this tax credit.
I think the government needs to stop their spending and the markets need to find their feet again without artificial help. The proverbial band aid needs to be ripped off and the markets need to heal naturally. I know there will probably be some pain for the markets once the Fed and the Government pull out of these programs. But, as in the past, the markets will learn to create a new normal and business will continue on.
3. FHA increases MIP funding fee to 2.25%
The FHA just announced last week that they are increasing their Upfront Mortgage Insurance Premium (UPMIP) from 1.75% to 2.25%. This is effective for FHA loans for which the case number is assigned on or after April 5, 2010. So for example on a $350k loan, this will be an increase in cost of $1750 to the buyer.
This means that a buyer has to be in contract before April 5th so you are able to pull this FHA case #. I think it is important to note that currently HUD is also requesting that Congress increase the annual premium, which is the monthly mortgage insurance that all homeowners pay on FHA loans.(this will probably happen sometime later this year).
Example of how much extra a loan will cost after April
Here is a cost comparison of a FHA loan closing today versus what a loan could potentially cost after April 30th.
Loan A: Today’s FHA loan costs
- $300k purchase price
- 3.5% down payment $10,500
- $289,500 loan amount
- Upfront MIP fee $5066
- 5% interest rate
- $1554 Principle and interest payment
Loan B: After April 30th FHA loan costs
- $300k purchase price
- 3.5% down payment $10,500
- $289,500 loan amount
- Upfront MIP fee $6513 ( increase of .5%)
- 6% interest rate (increase of 1%)
- $1735 P&I payment (increase of $181 monthly)
Total savings on Loan A
- $8k tax credit
- $1447 less in FHA MIP fee
- $181 monthly payment savings = $65,160 over 30 years
- Total savings= $74,607
The total savings on loan A amounts to $74,607, this is a lot of money to a first time buyer and is enough to put future children through college. Of course if rates do not go as high as 6%, then these costs will not be as high. But there is a good chance they will.
Create urgency with all buyers
I think it is very important that all buyers understand that waiting to make their decision to buy could be very costly. I know some buyers out there are still waiting for values to drop, but let’s say that even if the price on Loan B dropped down 5% from $300k to $285k..the total savings on Loan A would still surpass the savings from the price reduction of 5% on Loan B.
If you need any additional information on any of these topics, or you need help getting your buyers approved, please do not hesitate to ask. I would also be happy to work up these figures above on a "total cost analysis worksheet" for any of your buyers, so they can understand and see these numbers for themselves. Perhaps seeing figures like these may help some of them make the decison to move forward a little faster. As they say the numbers never lie. I look forward to chatting soon.
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