Monday, February 23, 2015

How do the higher mortgage rates in 2015 affect homebuyers?

Have you seen the articles about mortgage interest rates being on the rise in 2015?

Wow! Sounds daunting, right? Don’t get too nervous. Overall, interest rates are near record lows considering rates over the past 50 years. The Federal Reserve has not made any changes to the prime rate since 2008. The prime rate is the interest rate at which banks borrow money from the Federal Reserve. So, why the change in mortgage interest rates lately?

Well, there are a few other factors that affect mortgage rates. The stock market affects interest rates; usually there’s an inverse affect. When the stock market is going up, less people are buying bonds (the 10 year bond affects 30 year fixed interest rates), so that propels the interest rates to go up. This is what’s happened over the past week. However, with the introduction of quantitative easing, the inverse relationship is not always the case (just to make economics extra confusing). Also, the mortgage-backed securities prices affect 30-year fixed interest rates, as well.

What does this mean in real numbers?

Here’s an example for you. Let’s assume you are buying a home with a sales price of $300,000. Just to use round numbers, let’s assume you are putting down 20%. (Please email me directly at for questions and loan program options.) Okay, so if you are putting down 20% of $300,000, your down payment would be $60,000, leaving you with a loan amount of $240,000. With a $240,000 loan amount, if the interest rate is 3.75%, your principal and interest payment would be $1,111.48.

With a $240,000 loan, if the interest rate is 4.25%, your principal and interest payment would be $1,180.66. That’s a difference of $69.18. Most of this is tax deductable interest, so although it’s seems like it’ll cost you the amount of a Starbucks every other day, it’s a bit less when you factor in the tax savings. (Be sure to consult your CPA for the tax advantages of home ownership.) However, if you’re considering buying a new home and $70 a month is your breaking point, the difference of $69.18 becomes a whole different conversation.

So are the current “higher rates” really all that high?

Let’s look at this historically, when interest rates where 8% (they’ve been as high as 18%!), if you had a $240,000 loan amount, your principal and interest payment would be $1,761.03. That’s $580.37 more than your principal and interest payment of $1,80.66 with the current “high” rate of 4.25%.

So, overall, interest rates are still at all-time lows. The most important thing you can do is to make sure you are getting the best loan for you and the home you want. No sense in rushing and buying something you aren’t thrilled with just to get a “good deal.” Do your due diligence and get pre-approved so that you’re ready to move forward when you find your dream home.

***Please keep in mind this is only an example for illustration purposes.  These interest rates may not be available and/or you may not qualify for this loan type.

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Monday, February 16, 2015

What is the best mortgage option for first-time homebuyers?

There are a variety of loan programs that require little or no down payment. These are great for first-time homebuyers that may not have equity from their current residence to roll into a new home. There’s lots of chatter about the conventional financing for first-time homebuyers that is now available. For those that qualify, the conventional first-time homebuyer loan only requires a 3% down payment. In contrast, FHA loans require a down payment of 3.5%, and also require an up-front funding fee.

Conventional and FHA Loans Both Require Mortgage Insurance, But…

Both the conventional first-time homebuyer loan and the FHA loan require mortgage insurance (MI), which is paid monthly and is part of the monthly mortgage payment. For the conventional first-time homebuyer loan, MI is required if the buyer puts down anything less than 20% of the purchase price. So, if the buyer is approved for and elects the 3% down payment for the conventional loan, MI is required. But, the mortgage insurance requirement drops once the borrower has 20% equity in the home; if you don’t keep track of your payments and equity, the MI is automatically dropped once you have 22% equity in the home. With FHA loans, MI is required no matter how large or small of a down payment is put down; and mortgage insurance is required for the life of the loan. President Obama recently reduced the monthly mortgage insurance factor for FHA loans. The FHA reduction in the monthly mortgage insurance factor reduces the monthly payment for the required FHA mortgage insurance, therefore the total monthly mortgage payment (as compared to the total monthly payment with a higher MI premium).

Apparently more than half of the Millennials age 18-34 plan to buy a house in the next one to five years. Will President Obama’s reduction in FHA mortgage insurance or the lower down payment with conventional first-time homebuyer loans lure these Millenial first-time homebuyers?

What will Millennials do?

Buying a home for the first time-- that’s an exciting prospect to consider… if you qualify for conventional financing, you can put as little as 3% down and buy a house. For example, using a $300,000 sales price, you would only need a down payment of $9,000, plus closing costs. Being a first-time homebuyer offers a big advantage in affordability since conventional financing requires a minimum 5% down payment if you are not a first-time homebuyer. A 5% down payment alone would be $15,000 on a $300,000 sales price, then you would also need cash for the closing costs.

How Many Times Can You Be a First-Time Homebuyer?

What is a first-time homebuyer? Perhaps not quite what you would think. To qualify for first-time homebuyer status, you must not have owned a home in the past 3 years. So, if you bought and sold a house 5 years ago, you qualify for first-time homebuyer status and may qualify for first-time homebuyer programs.

What Are the Advantages and Disadvantages of Small Down Payment Loan Programs?

What about the pros and cons of putting such a small amount of money down on your dream home? The big advantage is that you can buy a house with very little money out-of-pocket. This enables you to start building equity in your home even if you have little set aside or prefer to keep your savings intact when purchasing your first home. Buying a home with a small down payment also allows you a tax write-off for your mortgage insurance (please consult a tax professional). A small down payment can help first-time homebuyers afford their piece of the American Dream.

Hmmmm, the only potential con I see is if the market turns, the buyer could be upside down in their mortgage. If you consider that when listing a house for sale the real estate agents’ commission is usually 6% (3% to the buyer’s agent and 3% to the seller’s agent), that means the seller nets 94% of the purchase price before any other closing costs. If the sellers only have 97% equity in the home, they may have to bring money to the closing table to sell their home. That’s a scary prospect! So, if first-time homebuyers are not sure about their financial future, career, or aren’t in love with their community, a loan with a small down payment may not be a good choice for them.

There are also two other loan programs that can be used by first-time homebuyers-- USDA and VA loans. USDA and VA are also government programs, like FHA, and have up-front funding fees. However, USDA & VA loans have $0 down payment requirements for those that qualify. For more info on any of these loan programs, just email me at

When you are considering purchasing a home, be sure to consider your 3-5 year goals and where you want to be living. If you feel comfortable about where you are buying, your career, and your financial future, then a low down payment is an excellent opportunity to get into the home of your dreams!

***Please keep in mind this is only an example for illustration purposes.  These interest rates may not be available and/or you may not qualify for this loan type.

To get on our waiting list for my new book, How To Get Approved for the Best Mortgage Without Sticking a Fork in Your Eye, go to our website
For video mortgage tips, subscribe to our YouTube Channel: