Inflation, Inflation, inflation means the Fed Has to Raise Rates.  – What can you do to afford a house in rising interest rate environment?

Mortgage rates and the 10-year Treasury yield have been going higher in 2018 because of inflation, higher wage growth, strong economic signs and strong earnings for corporations.

The Fed has been raising interest rates with four forecast for 2018, with the possibility of a fifth on the way too. Many people who are in the real estate and mortgage markets are advising you to buy a home now before rates and prices rise further, and inflation causes home prices to go up too.

But another way to look at it is like this: Higher rates make homes less affordable for many people. If homes are not as affordable, that could hurt demand, which can cause prices to drop. This is a different way to look at buying homes in a rising interest rate and inflating market.

There is no question that the housing market has recovered from the last downturn and we will see inflation. Since 2009, the stock market is up more than 200%, and the housing market is seeing an average of 7% price growth across the county. Unemployment is near 4% in 2018.

rate hikeThat is why the Federal Reserve has been raising rates. It wants to keep inflation down while keeping unemployment as close to full employment as it can. The Federal Reserve accomplishes this through monetary policy – mostly by raising and lowering interest rates, printing greenbacks and purchasing bonds. Overall the Fed has done a good job since the 2008 crash, but inflation was inevitable when the markets recovered.

If you are thinking about buying a home and worry about inflation raising prices, don’t worry too much. Most of the inflation we are talking about in this country is in the 1-3% annual clip. It is when we see inflation of 5-10% that people start to have serious problems affording homes, gas, groceries, and savings and investments lose purchasing power.

The Federal Reserve has been raising rates and causing mortgage interest rates to rise to keep inflation from going crazy. The Fed knows it needs to get ahead of inflation because by the time it is here, it is too late for the Fed to do anything effective because there is a delay in the effectiveness of a new monetary policy. Higher interest rates slow down the desire to borrow money and that reduces the production pace, investing and job growth. The rate of inflation eventually will drop.

Some experts say what the Fed would like to do if it could would be to have 2% inflation and 5% unemployment forever. That is the general goal.

As rates are rising, and inflation is higher than it was in a down economy, it is important to remember that higher interest rates and inflation are signs of a strong economy. A strong economy is the most important factor to determine the price you pay for a home. If the unemployment rate in your area is dropping and people’s wages are rising, this means home prices will continue to go up even if rates are going up. If people feel relatively flush with cash in a strong economy, they generally weather higher interest rates and inflation.

The bottom line is that inflation and higher interest rates are here. If you want to buy a home soon, hopefully you have been getting more work and rising wages like a lot of people. These factors will make it easier to buy a home. If your wages have not risen as much as you like, there is a possibility of picking up more work. The economy is strong and it is possible to get another part time job or to pick up more hours.



Fake News, What about Fake Economy?  Job numbers are good but payrolls stagnant.  How many real quality jobs created under TrumpEnomics?

Are you thinking about buying a home? Then you are probably curious to know how the American economy is doing. Generally, under President Trump, Americans think the economy is doing well. How much of that is reality and how much of it is perception is open to question.

A CBS poll from May 2018 found that two out of three Americans believe the economy is in good condition. Most of them also believe Trump’s policies are at least partially responsible. Naturally, more Republicans rate the economy as doing well than Democrats.

That survey has generally tracked Trump support and opposition levels over the first two years of his presidency. These days, more Americans are feeling positive about the economy; the ranks of the strongest Trump backers have gone up 22% from 18% in January. Many of these Trump supporters had had more of a wait and see attitude about Trump.

However, some question how rosy the economy really is; Trump is a good salesman, and it could be that some of what is going on is hype. Consider the following points:

  • Some economists say the economy has not changed much since the end of the Obama administration, in terms of measured economic growth. GDP continues to grow but at a relatively modest rate of 2.3%. That is what it grew at in Obama’s second term, too.
  • Unemployment is doing, but hiring has not been as robust as some believe. Since Trump took over, payrolls have expanded by 186,000 jobs per month. Over Obama’s second term, it averaged 216,000. Also, the unemployment rate was falling under the latter half of the Obama presidency.
  • Wage growth has been disappointing under Trump, but it was under Obama, too. Adjusted for inflation, earnings each hour grew very little over the last year – just .4% in March compared to the year before. Obama did see a few periods of real wage growth above 2%, but his record was not good either. Some companies announced plans after the Trump tax cut to use the money saved to increase worker pay. But many of the companies probably were going to do it anyway and used the big PR announcement to curry favor with Trump.
  • Federal deficits as part of the whole economy did grow under Obama in the first term. This was largely because there was a major financial crisis. Tax revenues shrank. Federal spending went up thanks to unemployment benefits being used and stimulus efforts. As the economy got better, deficits did shrink but they did not disappear. Under Trump, the deficits have exploded again; this is due to spending increases and tax cuts.
  • It should be noted that we have not seen the full impact of the Trump tax cuts yet. But experts contend that their effects will probably be short term and not that significant. Consumers have not really noticed their increased paychecks yet. Also, people who get the most benefit are the wealthy who are not as likely to spend their windfall.

In the end, experts generally agree that presidents get too much blame and credit for good and bad economies. Trump is very good at promoting economic numbers that put him in a good light, and it is true that the economy is much stronger than a decade ago. But a lot of that is just because of the economic recovery that has been occurring under two presidents for a decade. It also is important to remember that Trump is known as a pro-business person, and some of the good ratings of the economy under him could just be because people think a businessman would have to be good for the economy.

If you are thinking about buying a home now, it really comes down to your personal financial situation. Keep in mind that rates are generally on the rise, and home prices have increased by 6% on average since last year in the US. It seems we are generally in a rising interest rate environment in 2018, with it unlikely that rates will fall below 4% again anytime soon.



remove pmi

Easy Steps to Make Your Monthly PMI Payment Disappear

Did you buy a home with less than a 20% down payment? Then you probably are familiar with private mortgage insurance, or PMI (if you have an FHA loan, you know it by mortgage insurance premium or MIP). Mortgage insurance is usually required on loans with less than a 20% down payment.

It is necessary because lenders will not take on the risk of lending that much money with a low-down payment unless they are assured they will be reimbursed if you default. Mortgage insurance reimburses the lender if you stop making your mortgage payments. PMI is an annoying extra cost each month on top of your mortgage, and it is great to get rid of it if you can.

Below are ways to eliminate PMI or MIP that you can try.

PMI Removal Steps

To get rid of your monthly PMI payment, you are required to have at least 20% equity in your home with a conventional mortgage backed by Fannie Mae or Freddie Mac. You can write a letter to the mortgage lender when you have reached 20% equity and ask them to remove your mortgage insurance. This may be possible when you have paid down your mortgage balance to 80% of the original appraised value of the home.

Also, in these times of rising property values in 2018, it is possible that appreciation could cause you to reach 20% equity faster than just through paying your mortgage on time. You may want to order a new appraisal on the property if you think that your home value has gone up significantly. You can get an idea by looking at the sold prices in the past year for similar homes in your neighborhood. Also, if your property tax assessment went up substantially in the past year or two, you may have reached 20% equity faster than you thought.

When you write a letter to your conventional mortgage lender, you will need to ask them to remove the PMI payment because you believe you have reached 20% equity. You will need to provide proof that the home value supports your request, such as with a recent appraisal report. Or, you can refer to your original amortization schedule to show that you have paid down the mortgage so that you have 20% equity.

The mortgage lender generally will drop the PMI requirement when you reach 20% equity and make a written request. But do not assume they will do so automatically! Some lenders will drag their feet and hope you continue to make PMI payments after you reach 20% equity. However, recent federal law changes do require conventional lenders to drop your PMI requirement when your loan balance has reached 78%. To get the payment dropped, you will need to have made your mortgage payments on time for at least the past year.

MIP Removal Steps

Unfortunately, if you have an FHA lien that was underwritten after early June 2013, your mortgage insurance requirement is for the life of the loan, UNLESS you made at least a 10% down payment. In this case, you can have your mortgage insurance cancelled after 11 years. This is a recent change to FHA rules that was enacted because the emergency fund for FHA to tap in case of mortgage defaults had gotten below the legislatively mandated minimum amount, so the MIP requirement was made permanent for most borrowers.

If you think it sounds unfair to be paying mortgage insurance when you have 50% equity, we agree with you. Who is going to default on a mortgage when they have possibly hundreds of thousands of dollars of equity in their home? Virtually no one.

So, if you have an FHA mortgage and have above 20% equity, it is highly recommended that you refinance your FHA loan and move into a conventional loan. But you need to have a good enough credit score to do so. Plus, if you have an FHA loan that was approved in 2016 or 2017 for example, you are probably enjoying a much lower interest rate than you can get in 2018 or beyond. You will need to run the numbers to determine if you can save more money by cancelling PMI and moving into a possibly higher interest rate with a refinance into a conventional loan.

Whether you have a conventional or FHA-insured loan, you can speed up your ability to cancel mortgage insurance by prepaying on your loan; even an extra $50 per month will mean a serious drop in your balance over the years. Also, consider remodeling, which can add substantial value to your home. Then ask your lender to recalculate your loan to value to see if you have gotten to the magic 20% equity mark.