interest only mortgage

Why Is It Difficult to Qualify for an Interest Only Mortgage?

If you are looking for a less expensive mortgage payment, one way is to strip it all the way down to just interest. That is what the interest only mortgage is. This type of mortgage requires you to only pay on the interest on the loan, which is simply the cost of the money you borrowed. You are not paying back the principal. These types of loans are harder to get and not as common as before the housing crash of a decade ago. Below is more information about no interest loans and how to get one.

Find Out Why So Many Borrowers Are Choosing the Interest Only Mortgage Option in 2018

Interest only home loans are usually set up as an adjustable rate mortgage and usually has a term up to 10 years. After this point, you are required to make amortized payments that include interest rate charges and principal. The other options are to pay off the loan in full or to refinance.

For instance, say you get an interest only mortgage for $500,000 with a 5% rate for five years. The interest only payment is $2083. After five years, the rate is adjustable on an annual basis, but it is still an interest only loan. Now let’s say the rate goes up to 6%. The interest only payment will be $2500.

If the rate continues to rise, and by the end of year 10 you must make interest and principal payments, you could eventually be paying 7% interest and have a payment of $3,876.

At the conclusion of the interest only term, the above example is 10 years, you may be able to refinance your loan balance into a new loan if a better interest rate is out there. But the problem with this is it is impossible to predict what rates will be with any certainty in several years. Even trying to guess what they will be in several months is difficult.

Qualifying for an Interest Only Mortgage

The reason that interest only loans are more unusual today is they are more difficult to qualify for. You typically need a higher down payment, a lower debt to income ratio and a good credit score. It would be rare that you could get an interest only loan with a FICO score under 700. You will certainly have to show the lender that you have solid financial assets and the ability to pay the loan.

Who Gets Interest Only Mortgages?

It depends, but many Interest Only Loans are for people who will probably not stay in the home for a long time. Most of these home owners are thinking of staying in the home for five or 10 years. The best borrowers for interest only loans have a lot of cash in the bank and a strong financial position. The fact that their loan is not reducing the principal is not a risk for them.

Some of the common types of interest only mortgage borrowers are those with:

  • A lot of monthly cash flow
  • A rising income
  • A lot of cash in the bank
  • Income that varies each month

Interest only mortgages can be a good choice for people who have the financial discipline to make a principal payment periodically. This can also work for the worker who is in a job that pays annual bonuses each year that can be used to pay down the loan principal every year.

Another type of person who might use an interest only loan is a couple getting close to retirement who could use an interest only loan to purchase a second home. They might sell their first home when they retire, move to their second home and then pay off the loan in full.

But keep in mind that interest only mortgages are not usually a good choice for the first time or conventional long-term buyer. Getting these loans is harder than it used to be because the loans are not purchased by Fannie and Freddie, so they are much harder to qualify for. Lenders must hold them on their own books or sell them to private investors.

An interest only loan can be a good fit for a higher income borrower with assets, but it is probably not appropriate for the first-time home buyer and is quite difficult to qualify for anyway.

 

 

 

rates are up

Interest Rates, Suicide and Pharmaceuticals Are All Up. What do they have in common?

In 2018, the housing market has continued to show strong signs of recovery, more than 10 years after the crash that devastated millions of families across the country. But as the US economy has been getting stronger, it means that the days of cheap gas, interest rates for houses at 3.5% and double-digit investment returns are probably behind us.

While this is good news in some ways, higher interest rates, home prices, higher consumer loan rates and gas prices can actually lead to higher economic stress for some Americans, and even suicide in the worst cases. The sale of pharmaceuticals has also risen, and more people are taking anti-anxiety and anti-depression drugs in the US than ever before. This is an indicator potentially that economic stresses from higher rates and prices are starting to cause Americans to feel more stress than in the past few years.

In recent months, the Federal Reserve has raised its benchmark interest rates several times. This means higher interest rates for auto loans, credit cards and mortgages. The 30-year fixed rate mortgage rate has gone up to a four year high with the latest rate at the 4.6% level. This is still very low, but it does mean that borrowers cannot afford to borrow as much as they once did. After man years of low inflation, Americans around the country are paying more for just about everything.

In fact, mortgage interest rates for 30-year loans have risen for 15 of the first 21 weeks in 2018, which is the biggest share since Freddie Mac started to track the data in the early 1970s. The relatively healthy economy and the potential of higher inflation and higher prices is increasing the yield on the 10-year Treasury bond to more than 3%, which always has a negative effect on interest rates for mortgages eventually.

The ¾ of a point increase in mortgage interest rates so far in 2018 have boosted the cost of a $200,000 mortgage about $85 per month. The higher costs can definitely lead to more stress for home buyers and home owners, and it is possible that the higher costs are causing sales to decline. Existing home sales fell last month by 2.5% to an annual rate of 5.46 million and were 1.5% below the level of 2017 at the same time. From January through April 2018, home sales have dropped 1% from the same time a year ago.

Some economists have blamed low housing supplies more than the rates, but there is no doubt that the higher prices and rates are causing more people economic stress even though the economy is better overall. There was a four-month supply of existing, built homes on the market as of April 2018. This is the time that it would take to sell the supply of homes at the current pace. The standard, more balanced amount of homes is actually a six-month supply.

Economists add that higher interest rates are probably discouraging some people from selling their current homes and buying bigger ones. The thinking is that if you have an interest rate at under 4%, why would you want to sell your home and get a new interest rate that is approaching 5%? In these cases, these home owners may decide to stay in their current home and do renovations instead.

Some experts do insist that mortgage rates have definitely caused home sales in the US to slow as more buyers are feeling stress from the higher costs of borrowing money, as well as the higher prices. According to an index of mortgage applications, there are 3.5% more than a year ago, but it is down 6% on a seasonally adjusted scale since the peak in December 2017. Mortgage applications always reflect the demand from home buyers and current rates and are not obstacles that might prevent some home buyers from buying a home, such as a low level of home supply and hot competition from other buyers. One expert noted that for every ½ point increase in mortgage rates, mortgage applications drop by 8%.

While it is good that the economy is doing better in terms of unemployment and growth, the higher interest rates can lead to more stress on consumers with higher borrowing costs, which can lead to more pharmaceutical use, and incidents of suicide in the worst cases.

 

 

References: https://www.usatoday.com/story/money/2018/05/24/mortgage-interest-rates-2018-7-year-high-home-sales/641263002/

Inflation Goes Up, Mortgage Rates Have to Go Up, so What’s Next for US Real Estate Market?

Generally positive economic news in March and April 2018 have led to a stronger US economy and a stronger labor market. This is causing higher mortgage interest rates. With that comes the risk of inflation. When there is a higher chance of inflation, the Federal Reserve usually raises rates faster.

The jobs report in March 2018 showed good growth with non-farm payroll employment increasing by more than 300,000. The labor market strength was very broad, as almost all industries saw increases in jobs from the month before. The stronger job market put more pressure on compensation, with wages going up 2.5% from the year before.

The Fed also noted earlier this year that it expected annual inflation to move higher but to stabilize in the area of 2%. The Federal Reserve has forecast 3 rate increases for this year, which is the same number as last year. But if wages continue to rise, this could increase inflation. Faster inflation will probably cause the Fed to increase rate increases.

So, if inflation continues to rise and the Fed raises rates more, what does this all mean for the housing market? Rising inflation will increase long term bond yields to pay investors for the higher amount of inflation. For instance, the yield on the 10-year US Treasury already increased .6% since the beginning of the year and just went over the psychologically important benchmark of 3%.

This affects the mortgage and housing markets because mortgage rates follow the pattern of long term bond yields. And rates have been on the rise. Recent rates for 30-year conventional mortgages that are fixed have been nearly 4.6%. This is up more than .5% from the start of the year. Rates have generally gone up every week this year, with a few breathers every month or so. Higher mortgage rates give buyers less buying power. This can be a problem especially as home prices have been climbing substantially, with home prices overall in the US 6% higher than 2017, according to recent data.

But, how much the rising interest rates and inflation will affect the housing and mortgage markets is debatable. After all, the root cause of higher inflation and home loan rates is increasing growth of wages. Average household income based upon Census data shows is as high as it has ever been. But even though mortgage rates are higher, they still are very low historically. Keep in mind that in the 40 years before the Great Recession in 2008, mortgage rates were never below 5%.

For 2018, exactly how much inflation and mortgage rates affect the real estate market come down to just how much household incomes rise, and how high rates climb.

Understanding More About Inflation and Home Prices

One of the key ways to understand how inflation affects housing prices is to think about all of the materials that go into building a home. There are a lot of commodities that go into building a house: wood, copper, glass, plastic, steel, etc. These are all very basic commodities that must be used to construct most houses in the country. When the prices of these materials rise with inflation, it costs the builder more to build the home. They will either make less profit or increase the price. In most cases, they will increase prices. Higher cost of commodities are usually passed onto the consumer.

Another effect of increasing inflation is, as we noted earlier, is increasing interest rates as the Federal Reserve raises them to reduce inflation. So, it becomes more expensive for consumers to borrow money. Fewer people are able to get loans and fewer homes may be built. But higher wages and economic growth can counter some of this.

If more people are unable to afford higher rates and higher prices (if these effects are outweighing rising household wages), more people may start to move into rental properties. This is not good for single family home sales, but it can sure help landlords!  Some landlords may even decide to buy or build more multifamily homes.

One interesting fact of home ownership is that owning protects you against inflation in large part. For most Americans, their biggest expense is their mortgage. But most people have fixed rate mortgages, so no matter what is going on in the real estate and financial markets, you have the same fixed mortgage at the same rate. You are now paying off your mortgage with dollars that are not as valuable as when you took out the loan. While owning a home does not always make you wealthy, it sure can protect you against inflation.

We will need to watch for the rest of the year to see if rising inflation will cause rates to have to go higher. The Fed may decide to do so. If so, it is debatable whether the real estate market in the US will cool. It could in some areas where wage growth is not keeping up with inflation, but not in hot real estate markets.

 

References: https://inflationdata.com/articles/2017/10/25/ways-inflation-affects-real-estate-market/

 

G7 Meeting and Trade Wars Can Affect the Interest Rates Globally How?

The G7 met earlier in June 2018, as it began to weigh the EU response to the new US tariffs on EU, Canadian and Mexican aluminum and steel imports, which were at 25% and 10%, while overturning exemptions that Trump granted last March.

The EU during the G7 meeting responded with a promise to impose tariffs of its own against more than $3 billion in US products, including whiskey and playing cards among other things. However, this threat ignored a warning that he would retaliate further with any tariffs on American goods entering other countries. This is thought by many G7 countries that he would put tariffs on automobiles entering the US.

This type of tit for tat on the global economic front can have an effect on every country in the world that engages in trade of any kind. In turn, the tougher economic situation can cause interest rates to rise, which can affect housing markets in the United States.

As many experts in the financial markets argue, in the end, it is the consumer that ultimately bears the final burden of tariffs. It also is the final consumer that may need to switch from one product to a cheaper product. Further, if the trade wars cause interest rates to rise, it is possible that it could cause an increase in interest rates that could make homes unaffordable for some Americans in 2018.

One professor of international business at Warwick Business School in the UK noted recently that it is often importing agents who make the final decisions on what products will get a tariff and which will not. So, if Californian wine increases in price by 20%, people will not then buy it, so it will not be imported. This can cause different products to show up on grocery store shelves.

The director of trade at KPMG recently noted that all consumers in the US will suffer if trade wars and tariffs continue to escalate after the G7 meeting. David Slater said there are not any winners in the long term in a trade war. It usually will have a negative effect on jobs, the global economy and the US housing market. Competition decreases, prices of commodities increase, and investment and innovation are reduced. He noted that a major concern of a trade war is that it usually will increase borrower costs. While loans are not subject to tariffs overseas, the higher costs of goods we buy from tariffs will increase inflation beyond the target the government has for the US economy. In such a case, the Federal Reserve might not have a choice but to increase interest rates, and that has a negative effect on people who are trying to get mortgages.

Already in the US, we see mortgage interest rates substantially higher than just a year ago. The typical rate for a 30-year, conventional fixed rate mortgage is almost 4.8% as of June 2018, which is 1% higher than just last year.

At this time, the number of industries that have been affected by US tariffs is small, but after a heated G7 summit, it is possible there could be more protectionism on the way.

This continues to be a volatile situation in the summer of 2018, and people who are buying a home should be aware of the possible fallout. If rates continue to go up, all consumers should try to pay down consumer loans and mortgages as much as they can. Also, experts advise to not take on any new debt until the situation becomes clearer.

 

References:  https://www.independent.co.uk/money/spend-save/trade-war-personal-finances-how-affect-savings-us-trump-g7-a8398541.html

What Do Rising Mortgage Rates Mean to the Housing Market in California?

Home prices in Southern California rose 7% from a year ago in April to hit an all-time high. This is a big increase in a time when increasing interest rates are making it more difficult to afford a home in the US, but especially in more expensive areas in California.

Mortgage interest rates on a 30-year, conventional, fixed mortgage is approximately 4.55%, and generally on the rise. Meanwhile, southern California’s median sale price for new and resale homes and condominium was up $520,000, which was an increase of $1,000 from the last high set in March. According to one real estate agent in Los Angeles even though rates are rising and making borrowing money more expensive, the market is still hot and not showing a sign of ending.

But agents here say buyers also are asking the same question. They wonder if price appreciation will start to slow as people find it more difficult in California to find an affordable home. But it is not likely home values will plunge any time soon unless the economy gets worse fast.

One of the problems in southern California is job growth continues to be strong and not enough homes are being built. This is creating a mismatch between demand and supply. So, even with mortgage rates much higher than a year ago, it seems that many buyers in this part of the country continue to want to buy.

Home sales did fall 1.5% last April though compared with a year ago. This could be because the number of homes that were offered for sale fell in recent months, compared to the same month last year. The drop-in sales also may indicate that some buyers are having difficulty affording the homes that are listed on the market.

Another reason there may not be a major downturn in prices here is because lending standards are tougher than a decade ago, which was in part what crashed the economy.

A lender in Los Angeles said that the real estate market here is not at a breaking point yet. There is no ticking time bomb like the last time when there were too many home owners with stated income. In the mid-2000s, it was possible to get a mortgage with little documented evidence that you had the income to support the loan.

To get a better idea of what is happening to prices in southern California, look at this data from April 2018:

• Los Angeles County: Median increased 7.3% to $590,000
• Orange County: 5.9% to $715,000
• Riverside County: 6.1% to $375,000
• San Bernardino County: 10% to $330,000
• Ventura County: 4.4% to $585,000
• San Diego County: 8.6% to $570,000

Home mortgage rates have been rising in 2018 largely because investors think inflation is going to rise. Last week, the typical interest rate for a 30-year mortgage rose to 4.61%. At that rate, the typical home in this area at a value of $520,000 would have a $2,781 mortgage payment for buyers who can put down 20%. In January, the median home price was $507,000, and rates at the start of the month were only 3.95%, which would have made a monthly payment of $2,554 when putting down 20%.

Rates across the country were in the low threes to low fours for many years. But the very low cost of borrowing, plus steady job growth and a lack of home building caused the rise in home prices that are being felt in California.

Theoretically, higher mortgage rates can cut buyer demand and slow the climb of prices. But the evidence of this happening in the real world is still rather murky. Some agents in southern California say the increase in mortgage rates could cause would be home buyers to make a smaller bid for a home or to stop their home search. But others say clients are doing the exact opposite: Stretching even further because they think the rates are going to be climbing higher next year.

The bottom line is that the mortgage rates have not yet had a major dampening effect on the housing market in places such as southern California. But if they keep rising into the 5% range next year, this could change.

References: http://www.latimes.com/business/la-fi-home-prices-20180523-story.html 

Mortgage Insurance Rates Going Up with Interest Rates.  What Does this Mean to First Time Homeowners?

Higher mortgage interest rates and mortgage insurance rates are making it harder for first time home buyers to get a mortgage in 2018. While the US economy is doing well, the higher rates make it more challenging for buyers with no equity in a previous property to be able to afford a home.

In popular metro areas such as Denver, buyers are hurrying to close a deal before the rates get much higher, which stand at approximately 4.7% as of May 2018. While these rates are low in historical terms, they are at least a point higher than last year.

In Dallas some buyers are moving further out to find homes they can afford, as prices in this area are going up as much as 10% per year. In Los Angeles, there is a massive home shortage and most homes that go up for sale receive several offers.

The problem with higher interest rates is that just a .5% higher rate can increase your monthly payment and add tens of thousands of dollars of interest payments over the life of a 30-year mortgage. In 2018, home prices are rising faster than incomes in much of the country and the higher rates can be more than enough to shut many first-time buyers out of the market. Plus, higher mortgage insurance costs are occurring as the hot housing market is allowing insurers to raise their rates as well. Mortgage insurance rates being higher also affects first time home buyers. If you put down less than 20% on your home, you must pay for mortgage insurance unless you have a VA mortgage. Most first-time home buyers have difficulty coming up with a 20% down payment, so higher mortgage insurance rates affect them especially.

First time home buyers can expect that a combination of low inventory, higher prices, higher mortgage rates and higher mortgage insurance rates will make it harder to buy a home in 2018. Some economists think the economic indicators mean US home sales this year will remain flat even though the economy is strong as a whole. For example, a buyer in Colorado highlighted by USA Today this month said that he put in 11 offers on homes and lost out every time to other buyers who offered more money. Rising rates made it harder for him to afford a home.

He said that the rates continued to climb, and the more it happens, the smaller home you have to buy. The man eventually settled on a new $370,000 townhome with an interest rate at 4.7% but he cannot lock his rate until later in May, so it is possible that he could have to pay more. Some industry experts think we could see 5% rates before the end of 2018. This could really put a damper on the housing market for first time buyers.

Right now, the national median home price is $225,500, which is 3.8 times the median income of $59,000. In cheaper parts of the country in the Midwest, it is easier for first time buyers to get into homes. In Pittsburgh, a median priced home is only $125,000 which is only 2.2 times the median income of the area of $56,000. But in Los Angeles and Seattle, the median price of homes is as high as $600,000, which is eight or nine times the median income of $66,000. This is putting first time buyers completely out of the market.

If you are a first-time home buyer and are worried about being priced out of the market with higher rates, mortgage insurance rates and higher prices, here are some tips:

  • Ask your lender about first time home buyer programs. Some lenders work with state agencies to provide first time home buyers with rate discounts, help with down payments and educational resources. You may be able to find a grant to help you with your down payment, for example.
  • Look for lenders that offer government backed loans. Government backed mortgages are good choices for many first-time buyers. They offer low rates and low-down payments. FHA home loans are great for first time buyers with 3.5% down payments and rates that are below market.
  • Make sure you very carefully shop mortgage interest rates. You may be enticed by a super low interest rate in an advertisement. But this number often does not include all the closing costs and fees and could be for only the best credit borrowers. You are better off looking at APRs which have all costs figured into the number.

The reality is that it may be harder to find a home to buy in some areas of the country right now for the first-time home buyer. It really comes down to what part of the country you are in. But there are often options available to help you to get into a home loan you can afford so you can enjoy the American Dream.

 

References: https://www.usatoday.com/story/money/personalfinance/real-estate/2018/04/18/mortgages-homeownership-get-tougher-rates-rise/527530002/

What Do the Midterm Elections Have to Do with Mortgage Rates?

After a momentary pause in May, mortgage interest rates are back on the rise. According to data released in mid-May 2018, the average mortgage interest rate for the 30-year fixed rate mortgage was 4.62%. A year ago, home mortgage rates were only 4%. The 30-year fixed mortgage rate has not been this high since 2011.

The 15-year fixed mortgage is now 4.08%; it was only 3.27% a year ago. The five-year adjustable rate mortgage is 3.82% and was only 3.13% a year ago.

Why Are Mortgage Rates on the Rise?

Mortgage industry insiders say a strong economy, low unemployment, higher oil prices and comments from Fed officials are contributing to higher rates. Markets are expecting there to be three interest rate hikes this year, but it is possible there could be a fourth Fed rate hike before 2019.

After a big sell off in the bond markets after strong economic data was released, the yield on the 10-year Treasury went above 3% for its highest rate in seven years. Because how long-term bonds move is the best indicator of what mortgage rates are going to do, home loan rates went up. As yields rise, so do interest rates.

According to Bankrate.com, more than 50% of experts think mortgage rates will continue to rise for the rest of May. Generally, the price paid for a better economic environment is higher inflation and higher interest rates. That is why mortgage rates are the highest they have been in seven years.

Many experts think rates will continue the slow rise higher this year, going into fall and the midterm elections. Generally, if the Republicans hold Congress, it is possible that rates will continue to rise as markets will expect stronger economic activity. If Democrats take at least the House, it is possible rates could fall.

Regardless of who takes Congress, there is little doubt that higher rates are leading to more skepticism among potential buyers. Mortgage applications fell again last week with the market composite index falling 2.7% from the week before. The home refinance application rate fell 4%.

Experts say the combination of higher mortgage interest rates and higher prices is making it harder for people to apply for mortgages. In many cases, volatility in interest rates is good for the housing market, because it pushes people to buy before they go higher. But as there have been frustrations with high demand and low inventory, there could continue to be a drop-in mortgage applications.

As rates get closer to 5%, the markets could start to see what is called rate lock. This is when people stay in their homes with low rate mortgages than trade into a bigger or better home with a higher rate. For example, if you refinanced in 2017, you may have been able to get a rate below 4% for a 30-year mortgage. Those rates are long gone. If you were to buy another home today, you could go from a 3.5% mortgage to 4.5% or higher. That adds hundreds of dollars per month to your mortgage payment.

Experts say a one percent increase in mortgage rates can cause a drop in home sales of 7%. At this time, price increases on homes have not shown much sign in dropping, but as rates get closer to 5%, it is possible that this will start to happen.

It will be interesting to see what happens to mortgage rates around the Congressional election. As noted earlier, we could see higher rates if the GOP holds Congress. But it would not be surprising to see volatility in late October and early November before the election. There is a lot of uncertainty at such a time, and markets do not like uncertainty. But once the election is over, rates will probably continue to move higher as the economy continues on a strong trajectory.

 

References: https://www.washingtonpost.com/news/where-we-live/wp/2018/05/17/mortgage-rates-reach-levels-not-seen-in-seven-years/?utm_term=.0ec8eccaa9e2