Ever wonder what the effect of increasing mortgage interest rates are on your ability to purchase a home of choice? The key words here are “home of choice”
We all know that higher rates mean higher monthly payments. But it is not the higher payment that causes most of the pain when rates increase.
When a family or individual considers buying a home of choice the overwhelming majority focus on the characteristics of the home they perceive to be the right choice. This focus develops into expectations that can be as strong as all of the other factors involved in purchasing a home combined. So how does the increase in rates impact these expectations?
1. For every 1/8% change in rates monthly payments will increase by about 1.5%.
2. Lenders consider an applicant’s ability to pay based on monthly payments otherwise known as “housing costs”.
3. Each 1.5% increase in monthly payment reduces the housing price that buyers can afford by an amount that is in direct portion.
If you take the current outlook for interest rates in 2010 and bet on the increases to be around 1% the price of a house you may qualify for is reduced by about 12%.
For example: If your target home price (based on monthly outlay) is $300,000 at an interest rate of 5%. A rate of 6% will reduce that target home price to $268,500. The challenge now becomes finding the home that meets the expectation set at the $300,000 level for a price of $268,500.
In a declining market such as we have been experiencing for some time now time is on your side. However, pricing is beginning to stabilize and will eventually begin to rise again (in many of our areas this is already happening). When prices are stable or increasing the effect of higher rates is even more significant.
The message is simple. If you are ready to purchase, do it as quickly as you can and take advantage of the lower prices, lower rates and tax credit programs.
Thursday, November 26, 2009
Mortgage Rates Seen Below 6% Through 2010
Even as mortgage rates remain near record lows, the Mortgage Bankers Association believes that the looming expiration of a key Federal Reserve program may increase home loan costs next year. Still, the MBA expects rates to remain extremely attractive throughout 2010, helping to juice home sales and insert a floor underneath real estate values. Here are five things you need to know about the MBA's 2010 economic outlook:
1. Opposing forces: The MBA expects subdued inflation and high unemployment to put downward pressure on 30-year fixed mortgage rates next year. However, "there is a lot of uncertainty regarding rates immediately following the termination of the Federal Reserve's purchase of mortgage-backed securities," Jay Brinkmann, MBA's chief economist and senior vice president for research and economics, said in a statement accompanying the economic outlook's release. "No doubt the Fed will do its best to minimize adverse effects, but the elimination of these purchases will put upward pressure on all long-term rates as well as the spread between mortgage rates and Treasuries."
2. Fed programs and rates: The Federal Reserve got into the business of driving down mortgage rates in November of 2008 as it scrambled to stabilize the free-falling housing market. To that end, it announced plans to buy up debt and mortgage-backed securities from Fannie Mae and Freddie Mac. In March of this year, it expanded the program to include the purchase of long-term treasury bonds and additional Fannie and Freddie assets. This asset purchase program is a key reason why rates have remained so attractive for nearly a year. Guy Cecala, publisher of Inside Mortgage Finance, says the program has brought rates roughly a full percentage point lower than they would be otherwise. Thirty-year fixed mortgage rates averaged 6.6 percent in mid-October 2008 but dropped below 5 percent by the first week of April 2009, according to HSH.com. (Rates for 30-year, fixed-rate mortgages averaged just over 5 percent last week.)
3. Getting out: But as the housing market shows signs of stabilization, the Fed is looking to unwind some of this support. Its treasury-bond purchase program, for example, is expected to conclude by the end of the month. However, in the absence of a private market for mortgage-backed securities, the Fed moved in late September to extend its program for buying up these assets. Without committing additional funds to the initiative, the Fed said it will continue buying up debt and mortgage-backed securities from Fannie and Freddie through the first quarter of 2010. (The program had been scheduled to expire at the end of the year.) By remaining in the market, the Fed can help ensure that rates remain in an attractive range for a longer period of time. And rather than risk sharply higher mortgage rates, the Fed may extend the program again, depending on how the economy and housing markets perform in the coming months. "I don't think [the Fed asset purchase program] is going to end until it is not needed anymore," Cecala says. "If the housing market is clearly in the toilet still and [the Fed believes] that there is no private market around to support it, they will extend it as long as necessary."
4. Less than 6 percent: While acknowledging that the expiration of this program is likely to push rates higher, the MBA expects rates to remain in an attractive range in 2010. Fixed mortgage rates will average around 5 percent in the final quarter of this year and rise to 5.6 percent by the end of 2010, the MBA predicts. Keith Gumbinger of HSH.com says that while the MBA's forecast isn't unreasonable, he expects rates to be modestly higher than the trade group predicts. "I would suggest that we are probably looking at a top end that probably ends up being closer to 6 percent than 5.6," Gumbinger says.
5. Sales and prices: The MBA predicts the unemployment rate will peak at 10.2 percent in the second quarter of next year. Nevertheless, the trade group expects to see an increase in home buying activity next year, with exiting-home sales up 11 percent from 2009 levels and new-home sales increasing 21 percent. In addition, "[national] average home price declines should abate by early 2010, but will vary by state and home value," the MBA said in its press release. "The demand will be highest for entry-level homes."
1. Opposing forces: The MBA expects subdued inflation and high unemployment to put downward pressure on 30-year fixed mortgage rates next year. However, "there is a lot of uncertainty regarding rates immediately following the termination of the Federal Reserve's purchase of mortgage-backed securities," Jay Brinkmann, MBA's chief economist and senior vice president for research and economics, said in a statement accompanying the economic outlook's release. "No doubt the Fed will do its best to minimize adverse effects, but the elimination of these purchases will put upward pressure on all long-term rates as well as the spread between mortgage rates and Treasuries."
2. Fed programs and rates: The Federal Reserve got into the business of driving down mortgage rates in November of 2008 as it scrambled to stabilize the free-falling housing market. To that end, it announced plans to buy up debt and mortgage-backed securities from Fannie Mae and Freddie Mac. In March of this year, it expanded the program to include the purchase of long-term treasury bonds and additional Fannie and Freddie assets. This asset purchase program is a key reason why rates have remained so attractive for nearly a year. Guy Cecala, publisher of Inside Mortgage Finance, says the program has brought rates roughly a full percentage point lower than they would be otherwise. Thirty-year fixed mortgage rates averaged 6.6 percent in mid-October 2008 but dropped below 5 percent by the first week of April 2009, according to HSH.com. (Rates for 30-year, fixed-rate mortgages averaged just over 5 percent last week.)
3. Getting out: But as the housing market shows signs of stabilization, the Fed is looking to unwind some of this support. Its treasury-bond purchase program, for example, is expected to conclude by the end of the month. However, in the absence of a private market for mortgage-backed securities, the Fed moved in late September to extend its program for buying up these assets. Without committing additional funds to the initiative, the Fed said it will continue buying up debt and mortgage-backed securities from Fannie and Freddie through the first quarter of 2010. (The program had been scheduled to expire at the end of the year.) By remaining in the market, the Fed can help ensure that rates remain in an attractive range for a longer period of time. And rather than risk sharply higher mortgage rates, the Fed may extend the program again, depending on how the economy and housing markets perform in the coming months. "I don't think [the Fed asset purchase program] is going to end until it is not needed anymore," Cecala says. "If the housing market is clearly in the toilet still and [the Fed believes] that there is no private market around to support it, they will extend it as long as necessary."
4. Less than 6 percent: While acknowledging that the expiration of this program is likely to push rates higher, the MBA expects rates to remain in an attractive range in 2010. Fixed mortgage rates will average around 5 percent in the final quarter of this year and rise to 5.6 percent by the end of 2010, the MBA predicts. Keith Gumbinger of HSH.com says that while the MBA's forecast isn't unreasonable, he expects rates to be modestly higher than the trade group predicts. "I would suggest that we are probably looking at a top end that probably ends up being closer to 6 percent than 5.6," Gumbinger says.
5. Sales and prices: The MBA predicts the unemployment rate will peak at 10.2 percent in the second quarter of next year. Nevertheless, the trade group expects to see an increase in home buying activity next year, with exiting-home sales up 11 percent from 2009 levels and new-home sales increasing 21 percent. In addition, "[national] average home price declines should abate by early 2010, but will vary by state and home value," the MBA said in its press release. "The demand will be highest for entry-level homes."
Monday, November 9, 2009
FREQUENTLY ASKED QUESTIONS ABOUT THE NEW TAX CREDIT PROGRAM
For existing homeowners must the new house be more expensive than the current house?
No. As long as all of the other requirements for eligibility are met you will be eligible for the credit (up to $6,500)
I am an existing home owner. On October 25, 2009 I signed a contract to purchase a home. I have lived in my current home for more than 5 consecutive years. I also qualify on the income limits. I will settle on my new home on November 20, 2009. Will I qualify for the tax credit?
Yes. The new rules go into effect on November 6, 2009.
I am a first time buyer. I was not eligible under the income limits of the old program when I entered into a contract on my new home on October 20, 2009. I would be eligible under the new limits for income. Will I be eligible for the tax credit when I go to settlement on my new home in December 2009?
Yes. The rules will be measured on the day of purchase which is the settlement date.
I am an eligible existing homeowner. I have a fair amount of equity in my current home. I have found a new home with a non-negotiable price of $825,000. Will I be eligible for any of the $6,500 tax credit?
No. The $800,000 limit on price is firm. Any purchase of a home over that amount is not eligible.
I owned my home for 10 years but sold it two years ago and have been renting ever since. If I purchase a new qualifiying home and my income is under the limit will I be able to recieve any of the tax credit?
Yes. You lived in your former home for at 5 of the past 8 years. That will qualify you as long as the other requirments are met.
I am an eligible first time buyer. I entered into a contract to purchase a home on November 1, 2009. Do I still have to go to closing by November 30, 2009?
No. The extension has been passed into law and the new deadlines are in effect at this time.
I recently settled on a home in October. I was not eigible for the tax credit based on my income being higher than the limits in effect at that time. With the new law I would be eligible based on the new income limits. Can I go back and claim the credit at this time?
No. The requirements are measured as of the day of settlement which was in October. At that time your income was measured. If you were over the stated limits at that time you are not eligible for the tax credit.
No. As long as all of the other requirements for eligibility are met you will be eligible for the credit (up to $6,500)
I am an existing home owner. On October 25, 2009 I signed a contract to purchase a home. I have lived in my current home for more than 5 consecutive years. I also qualify on the income limits. I will settle on my new home on November 20, 2009. Will I qualify for the tax credit?
Yes. The new rules go into effect on November 6, 2009.
I am a first time buyer. I was not eligible under the income limits of the old program when I entered into a contract on my new home on October 20, 2009. I would be eligible under the new limits for income. Will I be eligible for the tax credit when I go to settlement on my new home in December 2009?
Yes. The rules will be measured on the day of purchase which is the settlement date.
I am an eligible existing homeowner. I have a fair amount of equity in my current home. I have found a new home with a non-negotiable price of $825,000. Will I be eligible for any of the $6,500 tax credit?
No. The $800,000 limit on price is firm. Any purchase of a home over that amount is not eligible.
I owned my home for 10 years but sold it two years ago and have been renting ever since. If I purchase a new qualifiying home and my income is under the limit will I be able to recieve any of the tax credit?
Yes. You lived in your former home for at 5 of the past 8 years. That will qualify you as long as the other requirments are met.
I am an eligible first time buyer. I entered into a contract to purchase a home on November 1, 2009. Do I still have to go to closing by November 30, 2009?
No. The extension has been passed into law and the new deadlines are in effect at this time.
I recently settled on a home in October. I was not eigible for the tax credit based on my income being higher than the limits in effect at that time. With the new law I would be eligible based on the new income limits. Can I go back and claim the credit at this time?
No. The requirements are measured as of the day of settlement which was in October. At that time your income was measured. If you were over the stated limits at that time you are not eligible for the tax credit.
Friday, November 6, 2009
NEW TAX CREDIT EXTENSION INFORMATION
Congress has extended and expanded the homebuyer tax credit. New rules become effective November 6, 2009.
NOVEMBER 6, 2009 - APRIL 30 2010
Amount of credit Up to $8,000
(first time buyer) $4,000 married filing
separately)
Definition of May not have had interest in a
Eligibility principal residence for the past
3 years prior to purhcase
Current Homeowner Up to $6,500
Amount of Credit (3,250 married filing
separately)
Effective date November 6, 2009
Definition of Used as principal residence for at
Eligibility - least 5 consecutive years out
Current Homeowner out of previous 8 years
Expiration of Credit May 1, 2010
Contract Date Rule Must close by 6/30/2010
Income Limits $125,000 single
Effective November 6, 2009 $225,000 married
Additional $20,000 phase
out
Cost of Home Limits $800,000
Effective November 6, 2010
Purchase by Dependant Not eligible for credit
Anti-Fraud Rule Must attach HUD1 to tax
return
NOVEMBER 6, 2009 - APRIL 30 2010
Amount of credit Up to $8,000
(first time buyer) $4,000 married filing
separately)
Definition of May not have had interest in a
Eligibility principal residence for the past
3 years prior to purhcase
Current Homeowner Up to $6,500
Amount of Credit (3,250 married filing
separately)
Effective date November 6, 2009
Definition of Used as principal residence for at
Eligibility - least 5 consecutive years out
Current Homeowner out of previous 8 years
Expiration of Credit May 1, 2010
Contract Date Rule Must close by 6/30/2010
Income Limits $125,000 single
Effective November 6, 2009 $225,000 married
Additional $20,000 phase
out
Cost of Home Limits $800,000
Effective November 6, 2010
Purchase by Dependant Not eligible for credit
Anti-Fraud Rule Must attach HUD1 to tax
return
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