2015: Buy Now, Before the Fed’s Patience Ends

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Realtor.com|January 30, 2015| Jonathan Smoke

By now you’ve probably heard that 2015 is expected to be a pretty good year for real estate. It’s a prediction that we chief economists are all fairly aligned on.

But what I can’t emphasize enough is why I’m so confident this is a defining year for the housing industry.

It comes down to three simple factors:

  1. Home sales will increase.
  2. Prices will increase.
  3. Mortgage rates will increase.

When combined, those three indicators point to an extremely strong real estate market. And potential home buyers should move fast if they want to spend less.

Buy before it’s too late

Buyers should act now––delayed purchases will only result in higher monthly mortgage payments as prices and rates rise. In fact, our forecast data show affordability may decline as much as 10% over the course of the year.

Plus, we won’t get another head fake on mortgage rates like we did in 2014. The economy is much stronger now, and the Federal Reserve continues to communicate loudly to the financial markets that it will raise the target for the federal funds rate this year.

Right now, the Fed is using the word “patient” to describe its approach to picking the time to raise the target rate.

However, when the Fed “loses patience,” rates will go up at least 20 to 40 basis points in anticipation of the target rate officially going up.

The last time the word “patient” disappeared from the Fed’s language, it raised the target two months later. And when “patient” disappeared from the Fed’s language, mortgage rates went up in anticipation of the official move.

So, buyers beware: The clock on these low mortgage rates may be ticking.

Job growth, global economy will boost housing

From a macro level, the economy and the housing market are in far better shape now than a year ago. We are creating jobs at a pace now that we haven’t seen in 15 years.

Friday’s initial report on fourth-quarter GDP came in at 2.6% growth. Underneath the number was mounting evidence that consumer spending is indeed strong and wage growth is finally accelerating.

Low prices at U.S. gas pumps have turbocharged consumer confidence and are enabling households to spend more and save more for big purchases—say, buying a home.

Besides global factors that bode well for buyers, the U.S. housing market is also in much healthier shape. Foreclosure inventories have fallen to nearly normal levels everywhere except for a few slow markets. As a result, distressed sales are no longer weighing on the market.

We’re back to a normal and upward trajectory for housing prices, and there’s little risk of prices declining because inventories are very low. I’m actually more worried about listings and new home construction not keeping up with the demand.

Market is primed for first-time buyers, sellers

I’ve said it before and I’ll say it again: 2015 is the year of the millennial when it comes to real estate. Millennials are at a critical demographic tipping point where their sheer numbers will naturally drive demand for more home sales. Most first-time buyers move into their first home when they’re between the ages of 25 to 34.

Sellers should also be encouraged—especially if they’re sitting in affordable homes waiting for a long-overdue upgrade. With recent clarification of mortgage standards, new low-down-payment programs, and lower FHA insurance premiums, access to credit should improve. That means those folks who’ve been sitting on equity in entry-level homes can finally upgrade to bigger homes and retirement homes.

What are the downsides?

There are some risks to keep in mind.

Supply must keep pace with demand, otherwise affordability declines more rapidly and would-be buyers can’t find the home of their dreams.

The U.S. economy could hiccup from global weakness.

Consumers could take the money they’re saving on gas and buy lottery tickets instead.

The probability of those risks completely reversing the recovery is slight, but it is strong enough to limit the potential. On the flip side, if the economy ends up growing more than expected and first-time buyers come roaring back, we could end up in an even stronger market. Here’s to a robust and strong 2015!

Jonathan Smoke is chief economist at realtor.com®.

Before You Refinance, Look Into Loan Modification

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Realtor.com| Craig Donofrio| Link

For months now, we’ve been telling you to take advantage of lower interest rates by refinancing. But you know what? There’s another option to consider as well: loan modification. Wait, isn’t loan modification what distressed homeowners used to get through the post-2008 housing crisis? Well, yes, but it’s more than that. Here’s the lowdown, and whether it’s the right choice for you.

OK, what’s the difference? 

If you refinance your home, you’re replacing your old mortgage with a new one, whether to take advantage of lower interest rates or to reduce your monthly payment. This can be done by your current lender or a new one. You can choose a loan that’s similar to what you currently have—or something completely different. As always, your creditworthiness, equity, and loan type play a role in determining your rate.

When you get a loan modification, on the other hand, you’re tweaking your existing loan from your current lender.

Again, this used to be an option just for people struggling to make their payments—lenders figured that some money is better than no money. But even if you’re not falling behind, you might be able to get a modification in your favor—even reducing interest rates.

That’s right, your lender might—might—be able to give you a lower rate for a one-time flat fee.

That sounds like a deal almost too good to be true. Why would a bank lose thousands and thousands of potential dollars in interest for a relatively small fee? Tom Pasqualini of Hudson United in the hamlet of New City, NY, says it’s a client-retention tactic—it prevents you from refinancing through another bank. It’s also “the lowest-cost solution for a rate/payment change for a consumer loan they are servicing,” he says.

The availability of this service is subjective to each lender, says Pasqualini. “Conservatively, [it’s] 50-50 if they offer the service.” With so many private lenders all over the country, you’ll just have to ask yours.

How much it’ll cost you

According to Carlos Jaime, owner of CTC Brokers & Associates in Corona, CA, one-time fees can range from $1,200 to $2,500. Some modifications don’t cost a thing.

But there won’t be any hidden fees, which is good. “When you elect to modify a loan, there can be no changes other than the rate of interest associated with the loan,” says Pasqualini.

If you refinance, remember, you’re getting a whole new loan—at whatever rate and monthly payment you agree to. If you have a no-cost refi and the closing costs aren’t paid by the lender, then the closing costs are rolled into the loan or are “bought out” by your accepting a higher interest rate.

There’s one thing that loan modification can’t do, but refinancing can: write someone in or out of a mortgage. So if you’ve gotten married or divorced, and want to add or remove a name from the loan, you’ll want to refinance, not modify.

Use caution and run the numbers

Be careful what kind of modification you choose. Unlike a good refinance, certain types of loan modification can trap you in surmounting debt.

Here’s how it works. Let’s say you get your lender to agree to an interest-only loan repayment period of five years, which reduces your monthly payment by $500, with the remaining balance tacked on to the loan. You’ll be paying $30,000 less over five years—but you won’t have saved that sum, you’ll still owe it. That $30,000 will be calculated into the loan, ultimately increasing your monthly payments by more than you paid before the modification. If you ask your lender for an extension and get one, you could be setting yourself up for trouble down the line.

In fact, a recent study found certain modification programs, such as the Countrywide program, actually induced strategic defaults, so make sure you fully understand any modification before agreeing to it.

Elysia Stobbe, branch manager of NFM Lending in Jacksonville, FL, says modifications can also come with teaser rates, just like mortgages.

“It can be a 2% teaser for the first year, then adding 1% each year for a few years, and then staying fixed in the 5% range,” says Stobbe.

Ask your lender

If you want to find out your loan modification options, you first want to identify who owns your loan (not the servicer). You can see if it’s Freddie Mac or Fannie Mae by using their websites. Fannie Mae and Freddie Mac both offer the government’s Home Affordable Refinance Program and the Home Affordable Modification Program. Both of these programs have broader income and credit requirements and may lessen your monthly payment and rates, if you’re eligible. Contact your lender for their requirements.

Even if your lender can’t offer you HARP or HAMP, it may have another option to help you out.

Making the choice

Choosing between a modification and a refinance can be tricky. Jaime says the first stop should be to see if you’re eligible for HARP for a refinance because of the program’s relaxed income requirements. If your lender doesn’t offer it, you’re ineligible, or you’re too underwater for a traditional refinance, it’s time to look into modifications. Consider the following:

  • How long will you live in the home? If you’re not planning on staying for the long term, it might be smarter to sell the house, if possible.
  • If you’re too far behind or too underwater, going into a foreclosure or short sale might be the better option. “If you’re delaying the inevitable and it’s unlikely you’re never going to reach that [equitable] value again, or take you forever to pay it back, you may be better off to cut the ties,” says Jaime.
  • How much does the refinancing cost, and how long will it take to break even?

But if you can just lower your rate for a one-time fee, you’re in the clear. It’s cheaper than a refinance, and if you’re moving in the next few years, just calculate your break-even point.

For example, let’s say a modification on your $250,000 30-year fixed-rate mortgage lowers your interest rate by 1%, dropping your rate to 5%. That would save you $157 a month—$2,512 total—and you would break even in 16 months. If you were going to move before then, it’s not worth it.

Now let’s say you want to refinance using the same example. But since closing costs are involved, it’ll take you $5,000 to reduce your interest rate. You’ll still save $157 a month, but it’ll take 32 months to break even. But if you want to write someone out of the mortgage or change the loan type, this could be your only option.

Bottom line? Ask your lender. Call and see if it can reduce your rates and about what modifications or refinancing options it can offer you.

Get to Know the 3 Types of Mortgage Lenders

Zillow Blog| December 16, 2014| Linkshutterstock_119600434

Shopping for a mortgage can feel overwhelming. It’s intrusive because lenders require every detail of your personal and financial life to do their job. It’s complex because rate quotes and associated fees (also known as points) can be presented many different ways, plus rates change daily based on economic conditions. And it’s confusing because there are different kinds of lenders who all have a pitch as to why their model is the best.

If you know how to choose the right lender, you’ll feel more comfortable providing your profile and more confident when analyzing their rate quotes. Here’s a guide to the three main sources for consumer mortgages. Armed with this knowledge, you’ll know how to navigate the available information, and ask the right questions when you’re mortgage shopping.

Retail banks

These companies range from the biggest name-brand institutions down to smaller local banks and credit unions. They underwrite, approve and close loans for consumers, then either keep the loans on their own balance sheets or sell the loans to investment firms, Fannie Mae or Freddie Mac, who bundle the loans into mortgage bonds, aka mortgage backed securities (MBS).

Retail banks usually retain servicing rights, which means you would get your monthly mortgage statement directly from that bank, and the loan agent that handled your loan would remain your primary point of contact for all future inquires.

Advantages: Retail banks are usually a big brand or well-known local brand. These organizations can often be more flexible on loan approvals because they have the option to keep loans on their books, as opposed to selling the loans, which means more stringent underwriting. They also offer non-mortgage financial services like checking, savings, credit cards and financial planning, and they usually offer lower mortgage rates if you use them for additional services like a checking account.

Mortgage banks

Like retail banks, these companies underwrite, approve and close loans for consumers. They then sell the underlying loans to retail banks, investment firms, Fannie Mae or Freddie Mac, who bundle the loans into MBS.

Larger mortgage banks may keep servicing rights, so you’d get your monthly statement from the mortgage bank and retain your loan agent as primary contact for future inquiries. Smaller mortgage banks sell servicing rights along with the loans, which means you’d be contacting the new bank servicer for future inquiries.

Advantages: Your loan agent uses the many investors they sell to as a one-stop rate shopping process for you, and because they have their own underwriters, they still control the whole process from start to finish and can move very quickly.

Mortgage brokers

These companies obtain loans for consumers through retail banks or mortgage banks. The loan is funded and usually also serviced by the retail or mortgage bank that the broker takes your loan to.

This model was quite popular in the two decades leading up to the 2008 crash as big banks and mortgage banks outsourced the cost of sales forces to broker firms. But new regulations have caused banks to want to control sales forces more tightly, so brokers are less prominent than they used to be.

Advantages: Mortgage brokers can rate shop for you across many banks, and lend on tough borrower or property profiles because of their ability to shop the profiles across many banks. Because regulators have made brokering a tough business post-crisis, the last standing brokers are usually highly experienced veterans.