Are You Ready? 5 Tips to Prepare for Mortgage Approval

Buying your first home is an adventure that can be as scary as it is exciting. In the end, it’s a destination well worth the journey. Buying a house, especially compared to renting, isn’t just a permanent home for your family. It’s a long-term investment in one of the most stable economic markets in the world.

Congratulations on starting this adventure.

Here are a few things you can do to get ready for mortgage approval: 

Estimate How Much House You Can Afford

There are multiple online calculators available to help you pinpoint exactly how much you can afford to pay per month in mortgage, but as a general rule, aim for no more than 2.5 times your gross annual income. If you make $58,000 a year (the average household income in America), a $145,000 home should feel very comfortable, financially speaking. How much that comes out to per month in mortgage payments, however, depends on a few different factors.

Know Your Credit Score

In general terms, the higher your credit score, the better the interest rate you’ll get, but not always. The housing market, the Fed, and the overall strength (or weakness) of the economy also contribute to interest rates. Just know that it’s not entirely personal, and unless you can make a bigger down payment, your interest rate isn’t going to be easily malleable.

For a $145,000 home with a 20% down payment, your monthly payment will be about $550 per month in principle and interest at a 4% interest rate. As a reference point, your payment increases to $620 a month at 5% interest. Note that this doesn’t include tax.

Maximize Your Down Payment

A higher down payment results in a lower mortgage payment. Period. For a $145,000 home, a 3% down payment will cost you about $755 a month in principle and interest, including PMI (see below). A $30,000 down payment cuts your total loan so much that you can expect to pay $150 less, about $620 per month. When you get into the $200,00 or $300,000 house range, the difference between a 5% down payment and a 20% down payment is the difference between a Ford Focus and a Cadillac CT6. 

Knowing your comfort level is important. It’s easy to forget that a mortgage is just a loan. You’re borrowing money. Being realistic about your employment status, future earnings, and borrowing limits is key to smart home ownership.

Saving for as large a down payment as possible is not just a matter of lowering your monthly payment. It can also be the difference between buying a house with 3% equity compared to 30% equity. Just because you can afford a $190,000 home with $10,000 down doesn’t mean that’s the right financial decision, especially when a $150,000 house with a $30,000 down payment may be the safer choice.

Weigh the Pros & Cons of PMI

If you don’t put down at least 20% of the home value, expect to pay PMI, or “Private Mortgage Insurance.” This is literally an insurance policy for lenders loaning money to someone with limited savings. Those who cannot put down at least 20% are seen as higher risk, so PMI is used to protect lenders against the threat of loan default.

PMI ranges from 0.3% to 1.2% of the total amount of the loan. Assuming a minimum 3% down payment, expect to pay an extra $420 per year ($35 per month) to $1,600 ($140) in PMI on a $145,000 house.

The downside of PMI is that it’s non-refundable. If you can avoid paying it–if you can afford a 20% down payment–do. The extra hundred dollars a month can be invested in far better ways, offering far better rates of return.

The benefit of PMI is that many people wouldn’t be able to get into a house without it. If a 1% tax makes the difference between renting–literally paying for your landlord’s mortgage–and paying down your own mortgage, there’s no reason to hesitate. In the two to five years it takes to pay down your mortgage to an 80% loan-to-value ratio (the equivalent of 20% in equity), the 4% average return on the housing market has no comparison to paying rent for five years with no assets and no equity. 

Don’t Forget Taxes

Taxes and fees vary by state, city, and ZIP code. Ask your realtor for a realistic analysis of projected taxes for the area you’re looking to buy.

How much you can afford to pay in mortgage per month depends on your annual income, down payment, credit score, and the cost of the house you want to buy. Use Zillow’s mortgage calculator for a general idea of what size house you can comfortably afford, or contact us today to see how we can help get you into a house that’s right for your family, your future, and your budget.


Current & Future Interest Rates Trends October 18′

Now that the traditional spring/summer buying and selling season is over, let’s take a look at how interest rates have been trending—and what may be in store in the coming months.

Generally, the interest rates on a 30-year fixed-rate mortgage and on a 15-year fixed-rate mortgage have been stable throughout the spring and summer real estate season. In the chart below from Freddie Mac’s Primary Mortgage Market Survey, the interest rates have fluctuated only 0.12 percentage points on the 30-year fixed-rate and only 0.14 percentage points on the 15-year fixed-rate from April through August.

This stability in the rates is something we’ve seen the last two years during the same April-August timeframe, with a variance of 0.17 percentage points in the 30-year fixed and 0.14 percentage points in the 15-year fixed in 2017 and 0.17 in the 30-year fixed and 0.12 in the 15-year fixed in 2016.

 

Month 30-Year Fixed 15-Year Fixed
April 4.47% 3.93%
May 4.59% 4.07%
June 4.57% 4.04%
July 4.53% 4.01%
August 4.55% 4.02%

 

The weekly figures for the last six weeks also show fairly steady rates. Since August 16, the 30-year fixed has varied only 0.14 percentage points and the 15-year fixed has varied only 0.14 percentage points.

 

Weekly 30-Year Fixed 15-Year Fixed
August 16 4.53% 4.01%
August 23 4.51% 3.98%
August 30 4.52% 3.97%
September 6 4.54% 3.99%
September 13 4.60% 4.06%
September 20 4.65% 4.11%

 

 

The steady interest rates are a result of a variety of factors that have been applying pressure—both upwards and downwards—on the rates. The balanced economy, strong corporate earnings and worries over rising inflation have applied upward pressure while slowing home sales, concerns about the global economy, and other international “drama”—such as the recent currency problem in Turkey—have applied downward pressure on the rates.

Going forward, two opposing factors that may influence interest rates in the near future are the Federal Reserve’s pronouncement that we’ll see one or two more hikes to the key short-term interest rate this year and the possible economic ramifications of the current tension surrounding tariffs and trade.

As always, to get the best information on interest rate trends, talk to your mortgage professional. ∆

 

© Left Field Media


Are Mortgage Rates Influenced by the Presidential Election?

Thinking of buying a home?

If you’re thinking of buying a home, it’s prudent to know if current events have any impact on the direction of mortgage rates. After all, the direction of mortgage rates means you can buy more house for the same money if they go down, or less if they go up.

Does the outcome of the presidential election have any influence on mortgage rates? Up? Down? Remaining the same?

Mortgage Rates Are Determined by the Federal Reserve

Mortgage rates are determined by the Federal Reserve, which meets about eight times a year and looks at economic data. If the economy looks strong, they may decide to raise rates. If it looks weak, rates are sometimes lowered to stimulate the economy.

The governance of the Federal Reserve, which determines the direction of interest rates, was designed in part to remove it from partisan politics. Although the president of the United States nominates the chair of the Federal Open Market Committee (FOMC), they serve for four-year terms and cannot be replaced. In other words, the inauguration of a new president does not coincide with the ability to name a new Fed chair, although that will happen down the road, when the term is up.

The governors of the Fed serve 14-year terms, and also cannot be removed. That means, for example, that the overall governance of the Fed cannot be removed because an incoming president doesn’t like their monetary policies.

Federal Reserve

It’s the Economy, Not the President

The ultimate determinant of interest rate direction and thus mortgage rate direction is the economy, not who sits as president.

Rates currently are at historically low levels, making this a good time to buy a house.

A recent survey of economists showed a consensus that the economic picture would be strong in November 2016, with low unemployment and good consumer confidence.

However, the consensus on the direction of interest rates has changed several times this year, with an unexpectedly weak job report and the British vote to leave the European Union affecting plans to hike.

The best bet is to stay tuned to the economic news.