Tuesday, October 27, 2015

Why pricier mortgages shouldn't spook housing

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History shows that if mortgage rates rise, it does not necessarily mean house prices will drop. Higher rates typically coincide with strong economies, which means jobs - and thus greater buying power for home buyers. This photo shows a home for sale in Dana Point earlier this year. CINDY YAMANAKA, , CINDY YAMANAKA, STAFF PHOTOGRAPHER

As home selling once again takes its seasonal pause, an eerie pall haunts the real estate community: The specter of higher mortgage rates.
I’m not sure it’s worth the worry.
I tossed into my trusty spreadsheet a 25-year history of mortgage rate movements from the St. Louis Fed, local job growth from the Employment Development Department, and Orange County home price and sales volume data from CoreLogic.
What I found in the interaction between economic forces and homebuying habits is that pricier mortgages often coincide with eras of higher home prices. Since 1990, when mortgage rates have increased over a one-year period, Orange County’s median selling prices have risen by an average 8.7 percent in the same timeframe. And the following year, home prices advanced, on average, by 3.9 percent.
Certainly, that’s not the conventional wisdom. But even in the worst case scenarios – the 25 months with the largest one-year rate hikes – housing fared well: Prices averaged 11.1 percent gains that year and 2.3 percent in the 12 months that followed.
Yes, rising rates scare off some shoppers and chill home buying activity – but not in a big way.
Since 1990, when rates are up in a one-year period, Orange County home sales volume falls 2.2 percent on average in those 12 months, then declines 5 percent the following year. Sluggish, but by no means a crash.
And in the worst-case rate hikes, sales slowed modestly on average: down 5.4 percent during the year in question and another 3.9 percent over the next 12 months. Not a reason for panic.
So how can the nightmarish scenario for real estate pros – rising interest rates – actually be relatively benign, and perhaps even good news, statistically speaking?
Remember the three key words of real estate: Jobs! Jobs! Jobs! Interest rates commonly rise when the economy is hot – like today’s business climate, in which jobs are growing at a 3 percent annual pace.
Since 1990, mortgage rates have increased in one-year periods when local jobs are growing at a 2.1 percent average annual rate – twice the historical norm. Rising rates do increase house payments, however, so a house hunter needs plenty of confidence in the job market to make a leap into home buying mode.
Look what job growth means for housing. Since 1990, in any year when Orange County bosses are in hiring mode – that is, they generate year-over-year job growth – home prices have averaged 8.3 percent gains and similar size increases the following year. Sales activity is basically flat in the same two years – pretty remarkable stability amid a significant jump in pricing.
Then look at boom times. In the 25 months with the largest year-over-year job gains since 1990, Orange County’s average price gain is roughly equal to what was seen in all of those hiring years. But that faster-paced job growth means an average jump of 15.2 percent in homebuying activity the first year and 6.8 percent in the 12 months that follow.
Yes, these results are a bit counter-intuitive. And to be fair, history isn’t a perfect guide to the future. For example, home prices rose only 70 percent of the time in a year when mortgage rates moved higher – so industry fears of potential trouble aren’t totally unjustified.
Still, what should really be spooking the local housing market late in 2015? Any risk of a significant slowdown in Orange County’s biggest-since-the-’90s hiring spree.

Sunday, October 18, 2015

Average rate on 30-year mortgage rises to 3.82%

WASHINGTON — Average long-term U.S. mortgage rates rose slightly this week yet remained below 4% for a 12th straight week.
Mortgage financing giant Freddie Mac said Thursday the average rate on a 30-year fixed-rate mortgage increased to 3.82% from 3.76% a week earlier. The rate on 15-year fixed-rate mortgages rose to 3.03% from 2.99%.
Despite the increase, rates remained well below last year's levels, providing an inducement for potential homebuyers.
A year ago, the average 30-year mortgage rate was 3.97%, while the rate for 15-year loans was 3.18%.
In recent days, two influential members of the Federal Reserve's policymaking body spoke in favor of postponing an increase in its key short-term interest rate. The Fed has been expected to raise the benchmark rate later this year for the first time in nearly 10 years.
To calculate average mortgage rates, Freddie Mac surveys lenders across the country at the beginning of each week. The average doesn't include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1% of the loan amount.
The average fee for a 30-year mortgage held steady from last week at 0.6 point. The fee for a 15-year loan also remained at 0.6 point.
The average rate on five-year adjustable-rate mortgages was unchanged at 2.88%; the fee remained at 0.4 point. The average rate on one-year ARMs declined to 2.54% from 2.55%; the fee was steady at 0.2 point.

Sunday, October 4, 2015

7 ways you can cash in on historically low mortgage rates

ways you can cash in on historically low mortgage rates

How rising interest rates cut borrowing power

This example assumes a borrower has annual household income of $80,000 and puts one-third of it into a house payment.
• At 3.5 percent you can borrow $494,383
• At 4 percent you can borrow $465,004
• At 4.5 percent you can borrow $438,142
• At 5 percent you can borrow $413,545
• At 5.5 percent you can borrow $390,990
• At 6 percent you can borrow $370,277
Source: The Register


Everybody is trying to guess what rising interest rates will mean for the housing market, but not enough people are focusing on what they can do about it before it happens.
Yes, we’ve been warned before that a rate hike is coming, and it still has not happened. But this time it feels like a reasonable certainty that we’ve seen the lowest mortgage rates in this cycle – and it was record cheap money.
No matter the timing of any serious rate increases in the future, today’s mortgage rates are what anybody before this century would have called an absolute steal. Fixed 30-year mortgages run in the 4 percent ballpark today. That’s up about a half-point from 2012’s absolute lows, but it’s still a bargain vs. the average rate of 5.5 percent since 2000 and the 10 percent average seen in the last 30 years of the 20th century.
And the opportunity is not simply in low rates.
I’m not sure many people know that lenders are far more generous today with both loan terms and approval standards than they were immediately following the Great Recession that wrecked their mortgage portfolios.
There are good reasons behind bankers’ renewed optimism: Home values have firmed, as have the paychecks that allow homeowners to pay back their loans.
Certainly, many households are satisfied with their housing and mortgage situations. But let me suggest some ideas to consider as 2015 winds down, because I have a hunch that years from now many folks will look back to today and say, “Gosh, I wish I could have borrowed more at those great rates.”
Have you checked rates lately? Do you even remember what rate you’ve got?
Forget all the hassles of borrowing a few years back, right after the recession ended. Lenders today have almost made the experience pleasant. I said almost!
And there are deals. Despite all the talk about rising interest rates, mortgage rates have quietly slipped back to around 4 percent as questions emerge about the economy’s durability and the Federal Reserve delays hiking rates.
Perhaps home values are up significantly in your neighborhood. Maybe there’s been a major improvement in your employment picture, paycheck or credit score. Be aware that the mortgage rate you could get these days might surprise you.
And if you think you’re living in a home where you will be for a long time, is this the time to pay extra points or loan fees to get an even cheaper rate with a refi and save even more money?
Adjustable-rate mortgages became the scourge of the real estate business after the housing debacle, because too many aggressive borrowers, with the help of too many aggressive lenders, used these deals to buy or keep housing they couldn’t afford.
The resulting pushback from bankers and borrowers alike reduced the popularity of adjustable loans. Variable-rate deals funded 1 in 9 of all Orange County home purchases in the past seven years, after being used by half of all homebuyers in the previous seven years, according to CoreLogic statistics.
I suggest that homeowners with adjustable rate mortgages consider switching to a fixed rate.
Yes, the most popular adjustable rate mortgages do offer extended periods of locked-in starter rates, from five to 10 years. That’s plenty of delay before any future payment shock.
But why risk it ? It’s a good bet that today’s low interest rates on fixed rate loans are not much higher than what many borrowers are paying on their adjustable loans now.
So wouldn’t you feel foolish some years down the road if you hadn’t locked in today’s rates if your adjustable repriced higher? That’s one reason I refinanced this year.
Many homeowners used the cheap money environment to pick up mortgages of shorter duration than the traditional 30 years to get even lower interest rates.
There’s only one problem with these shorter-maturity deals: Monthly payments are high, and much of the money is used to pay down principal, so tax deductions for mortgage expenses are reduced.
It’s not a small amount. The monthly payment on a 3 percent, $400,000 15-year mortgage is $2,762. That same-size loan, at today’s 4 percent rate for 30 years, costs $1,910 a month. That’s an immediate $852 advantage to going long.
Yes, a longer-term mortgage does have higher long-run interest cost. However, think how that improved household cash flow can be used in various ways to pay down other debts, invest in other goals – education or retirement – or keep a financial cushion for emergency purposes. (Yes, there will be another downturn.)
P.S.: If you’ll simply blow the fresh savings on luxury or frivolous goods, skip this idea.
First-time shopper? Moving up? Downsizing?
If you believe today’s mortgage rates are the last shot at a once-in-a-generation deal, it may be time to think about making that purchase.
Guessing which direction home prices will go is never a feasible way to time a home purchase. For every person who swears they saw the previous housing bust coming, how many saw the bottom and buying opportunity of 2012, too?
I know some homebuying holdouts are convinced that home prices are too high and will only go lower. I won’t debate the outlook, I’ll just ask: How long do you think it would take for serious discounts to appear?
Cheap interest rates could be history by the time any significant price drop materializes. That could mean a higher monthly payment, despite getting a deal on the selling price.
Ponder this: If mortgage rates jump a full percentage point in the next year, home prices will have to fall by at least 10 percent to offset the impact on monthly house payments.
I know a lot of homeowners and financial consultants think taking equity out of the home is generally a bad idea.
Let me argue otherwise.
Assuming that you’re the type of financially savvy homeowner who won’t spend every last penny in your bank account, here is a sad truth about personal finances: No banker will lend when you really need money (say, if you’re out of work).
Today, assuming you’re gainfully employed with a solid credit history, lender generosity includes doing cash-out deals again.
I’ll assume you’d use the proceeds of a cash-out loan for a noble cause: paying off other debts, investing in other long-term needs or creating a hefty rainy day fund.
And for those approaching retirement with plenty of home equity, please just ask yourself where emergency funds will come from when the paychecks stop. Sadly, it’s easier to access home equity when employed, than not – unless you sell your home.
If you just want the mental comfort of using your home as a financial backstop in a tough situation, getting a home equity line of credit today is an option.
Many lenders are offering these loans at little or no cost, with only a modest annual maintenance fee. You won’t incur any sizable extra house payments unless you access the line.
One downside is that these loans have a shorter lifespan than traditional mortgages – often just 10 years to use it and another 10 to pay it back.
And if you obtained a credit line a few years ago, it may be worth looking into getting a new one. Terms have improved. Or you can simply extend the life of your existing credit line.
Let’s say you’re really bullish on real estate: Today’s cheap money can make a property investment pencil out profitably.
With a few significant caveats:
One, bankers still are cautious about loans for nonowner-occupied housing. So be prepared to bring a significant down payment to the deal and solid household financials – and be ready to answer plenty of questions.
Two, cheap money helped push up home values. That makes many investment deals not as profitable as hoped. Be realistic about any investment potential.
Three, be prepared for bidding battles. Numerous investors are making all-cash bids for investment-type properties.
Nobody said this would be easy.