How Interest Rate Increases Effect Purchasing Power

Its not so much the price, as the Payment

The data and graph below illustrate the enormous net effect to the consumer of mortgage lending rates. In the first series, a fixed loan amount of $300,000 is graphed into an increasing rate from 4.25% to 6.00%. The payment rises from $1,476 per month to $1,799 per month. The second graph shows a fixed payment of $1,475 per month and graphs the declining loan amount to the rising interest rate. A $1,475 monthly payment services (p&i) a $246,062 mortgage at 6.0%.

This analysis points out that it is important for the consumer to understand the rate trend at any given time. It is reasonable to expect interest rates to continue to rise until the current trend either ceases or reverses.

An informed buyer should secure a purchase contract and lock in a rate that has a "float-down" mechanism to allow for a potential rate decrease, while protecting against any further increase.

CLICK ON GRAPH/DATA FOR EXPANDED VIEW

Wells Fargo Hosts 4th Annual Cine-Meeting Event
Brian Buffini Headlines: Building Business in 2011


How to Serve More HomebuyersWho are the post-recession homebuyers of 2011, and how do they view homeownership, money and responsibility? Have the events of the past five years dampened the American dream? Or is a “New Normal” emerging on which to base our business strategies?

Learn what market research and trend analysis tells us we can expect going forward. This year’s dynamic program will help you understand:

1. The attitudes and behaviors of buyers in today’s home purchase market
2. How to work together as legislative change continues to impact the real estate and mortgage lending industries
3. How to go beyond surviving — and thrive in any market
Massachusetts Venues: Burlington, Swansea, Framingham. Follow link and select state.3 choices will display. https://www.wfhmconsumerevents.com/aspx/Events/SelectEventbyGroup.aspx

Interest Rates on the Rise
The 30 Year Fixed Rate continues its steady rise through the month of January and now sits at roughly 1 percent higher than the "bottom" rate of last summer. The Fannie Mae 3o Year Fixed is now at approximately 5.25%. Depending on credit and equity, adjustments will apply. As seen in the FNMA graph of the Fannie Mae Coupon the rate has steadily increased since November, 2010 - having risen a full point since then. (http://www.bloomberg.com/apps/quote?ticker=MTGEFNCL:IND). Most economists had predicted a slower increase over the course of 2011, but market forces have pushed rates up faster than expected. Capital markets have shown large increases, including the US stock market and precious metals. This has forced bond markets to charge lower prices in competition for the same dollars. Lower bond prices equate to a higher interest rate yield to investors.
Locking in mortgage rates asap is advisable. Especially if a "float down" option is offered by the lender, such as Wells Fargo. A float down option offers an "insurance" to the borrower in the event that rates take an unexpected reduction. In this way, the consumer / borrower gets the protection from rising rates, while maintaining the peace of mind that a "float-down" offers.

30 Year Fixed vs. 5 Year Hybrid ARM

With fixed rates plunging to record lows, the vast majority of borrowers are choosing the 30 or 15 year fixed rate mortgage. However, in some circumstances, a 5 year ARM, or Hybrid mortgage is a wiser choice. Particularly with FHA loans, the 5 year product is very attractive. The difference between a 30 year fixed rate and a 5 year hybrid ARM, is that the rate on the ARM product starts out at a reduced rate for the first 5 years. Then it can rise as much as 1% per year in the subsequent years. The maximum rise over the entire loan is 5%.

The current FHA 30 year fixed rate mortgage is 4.75%. The 5 year ARM is at 3.25%. So, using a $100,000 loan amount for example, the payment deferential is as follows:

$100,000 at 3.25% = $435.21 per month
$100,000 at 4.75% = $521.62 per month

Net difference of $86.41 per $100,000 financed per month

The 5 year ARM can go up after 5 years. So, using worst case estimates, the payment can rise to $491.94 in year 6, $552.21 in year 7, $615.72 in year 8, $682.18 in year 9, and $751.27 in year 10. It is not until the 10th year that the sum of the ARM payments meets the sum of the fixed rate payments.

Hybrid ARMs are not for everyone, but for a home buyer that expects to sell or refinance within 5 to 10 years, this is a financing option worth considering.

I would be happy to run your custom scenario so determine the best solution to your financing needs.

Below is a graph illustrating the payments:

AVOID EXPENSIVE PMI WITH A "COMBO-LOAN"

This popular program is now back, on a limited basis. Known as 80-10-10 financing, this was a very popular way to structure financing to avoid expensive mortgage insurance. The program was virtually eliminated due to the declining real estate values nationwide. But, now with a stabilizing homes market, I am able to offer this program for purchase and refinance customers in Middlesex and Worcester Counties of Massachusetts.

Simply put, the program sets the First Mortgage at 80% of the property value. The Second Mortgage is then set at up to a total of 90% of property value. Under this arrangement, there is no PMI needed on the first mortgage - saving the borrower hundreds of dollars per month and thousands per year!

A complete pre-approval for financing should be obtained to determine eligibility, rates, and costs associated with this great program. I will provide a side-by-side analysis of this program versus a conventional 90% financing option.

LOWER QUALIFYING CREDIT FOR FHA LOANS

Wells Fargo has announced a MAJOR REDUCTION in minimum credit score for FHA loans. The new minimum credit score to qualify for FHA financing has been lowered to "500". This represents a significant easing of credit floor standards by Wells Fargo. This is not an industry wide change, this is unique to Wells Fargo Home Mortgage. In order to qualify for financing in the newly created lower tier, a maximum of 90% financing is allowed. The following is the new credit (score) guideline:

• Loan score lower than 500 = not allowed
• Loan score 500 to 579 allowed with maximum 90% LTV and the additional requirements listed below
• Loan score 580 - 599 allowed with maximum 95% LTV and the additional requirements listed below
• Loan score 600 and higher allowed with maximum 96.5% LTV

Additional requirements: All of the following requirements apply for transactions with loan scores less than 600:

• Maximum rations of 31/43
• 2 months reserves PITI
• Gift funds not to be used for 5% or 10% down programs
• Down payment assistance programs not allowed for 5% or 10% down programs.

It is IMPORTANT TO NOTE that, unlike Fannie Mae financing, interest rate adjustments/penalties are not applied on a graduating score basis. As a result, a borrower that formerly was assuming a 10% down purchase transaction, Fannie Mae conforming, will have a significant rate advantage with FHA. And, lower score application are ineligible with Fannie Mae, while now eligible down to a 500 score, with the same LOW RATE.

A complete pre-approval is highly recommended to determine eligibility and final rate.

New Program for Bank Owned Properties: HOMEPATH

Fannie Mae, along with Wells Fargo, has created a new loan program designed to assist in the purchase of Foreclosed Properties, or Bank Owned Properties, or REO's. This program, called HomePath, was developed to simplify and expedite the sale of the mounting inventory of these properties. This program will have special appeal to First Time Homebuyers and Investors, as the following key features apply to HOMPATH eligible properties:
97% Financing for Owner Occupies Single Family Residences
90% Financing for Investment Properties
NO Mortgage Insurance Premium
NO Appraisal Necessary
Until now, REOs have been difficult to finance because of appraisal deficiencies. Although the purchase price may have been a "bargain" price, lenders would not lend on properties needing work. Now, with the NO APPRAISAL feature, a "fixer-upper" can be financed through HomePath. Investors may be interested in this program as 90% financing is available. And NO PMI applies to all HomePath loans.
It is important for buyers to understand that proper caution should be taken in evaluating the value of the property. A property inspection is advised so that the buyer is fully aware of any deficiencies that may have otherwise been noted in an appraisal.
A complete list of HomePath Eligible properties in Greater Boston, Massachusetts, or any selected area is available through Wells Fargo Home Mortgage, or by following the link, www.homepath.com.
Loan approval is subject to Wells Fargo underwriting. Contact me for a complete explanation of rules and guidelines.