Housing, Mortgages, and Interest Rates – Oh my!



By:  Mark Stinson | CPA, CFP®, MBA – Director of Planning

America’s residential sector was once the preserve of “mom-and-pop” investors or local developers. The role of hedge funds became apparent only when those who bet massively against the housing market—”The Big Short,” as it was later termed—made billions while their rivals floundered. By gambling that subprime mortgages, extended to borrowers with no plausible means of repaying them, would poison the financial system, John Paulson personally pocketed $3 billion after his hedge fund skyrocketed. – The Economist Magazine

The Housing Crisis of 2007 was truly a “shock to the system.” The housing market is still recovering from this crisis that caused the mortgage market to tighten. It is just now starting to open up.

Leading up to the crisis, homeowners were borrowing up to 100% of their home value. After the crisis, lenders strictly returned to the traditional approach of lending up to 80% of the value of the home (through mortgages and second mortgages). Recently, new mortgage programs have begun to appear.

BWFA has a corporate alliance with Equity United, a mortgage company located in Rockville, MD. Eric Suissa is the Branch Manager, and we asked him to give us his thoughts on the housing market, mortgage programs, and interest rates:

HOUSING

In some local areas there has been a major inventory shortage and many are having trouble finding a home. Multiple offers on the same listing have become commonplace, which has started to push home prices higher. In addition, lower interest rates have led to a sellers’ market.

On the other hand, some home buyers are still having trouble qualifying for a mortgage or raising cash for a down payment. Recently, new programs have been introduced to help home buyers.

MORTGAGES

Traditional Home buyer – The 80/10/10 program disappeared after the housing crisis, but has recently made a comeback. This program allows the buyer to put 10% down and receive the benefit of a lower rate on the first mortgage (80% of home value) and add a second mortgage (10%) at a higher rate.

First Time Homebuyers – Clients often ask about housing options for their children and grandchildren. Here are some examples of mortgage programs for first-time home buyers.

Federal Housing Authority (FHA) – The FHA has the most flexible programs for first time homebuyers. The advantages of the FHA program are:

  • Qualification with credit scores as low as 560
  • Mortgage interest rates below conventional rates
  • Down payments as low as 3.5%of home market value
  • Flexibility that allows closing costs to be included in the mortgage amount (above and beyond the 3.5% down), though at somewhat higher interest rates

The disadvantage of FHA loans is they have very high monthly mortgage insurance premiums.

Co-Borrower Programs – These programs can be used by a parent to help a child qualify for a mortgage. The FHA has long had a co-borrower program that requires as little as 5% down. As noted above, though, FHA mortgage insurance is very expensive. Now other programs are offering co-borrower programs with no mortgage insurance, but at a slightly higher interest rate.

Interest Rates – Eric noted that, for the most part, interest rates have been holding steady without any major increases in the past 12 months. Although jobless claims continue to decline, it appears that the true jobless rate along with the underemployed is still very high. In addition, the Federal Reserve’s tapering program is moving along as planned with no surprises. These two factors seem to be having a calming effect on the bond market, which is keeping mortgage interest rates relatively untouched. Unless we have some very bad news, Eric speculates that interest rates are likely to start climbing by summer’s end.

If you have questions or plan to buy, sell, or refinance a home, Mark Stinson mstinson@bwfa.com or 410-461-3900 can help you determine how it will fit into your Financial Plan.