Tandem Mortgage can help you through the mortgage process.

 I am now with Tandem Mortgage in Northridge, CA.

If you are looking to purchase a home or refinance an existing mortgage please contact me at one of the links below-

craigd@tandemhomeloans.com

www.tandemmortgage.com

Craig Daniger

818-326-1915

You may also start your loan application at https://tandem12.startmyapplication.com/smaweb/index.jsp

 Current Market Rates

courtesy of First Tuesday

The average 30-year fixed rate mortgage (FRM) rate rose to 4.00% during the week ending December 2, 2016. The 15-year FRM rate also increased to 3.17%. Though FRM rates have been a downward trend over the past two years, rates are now on the rise following the recent presidential election.

Much like the “taper tantrum” in 2013 when the Federal Reserve (the Fed) announced it was ending the addition of money to the banking system, the economy is now seeing a “Trump jump” due to post-election investor activity — a trend that will likely result in a slow decline in rates going into the 2017-2018 recessionary period.

Prior to the rate jump, FRM rates remained relatively low due to bond market activity and near-zero short-term borrowing rates set by the the Fed. The Fed raised the short-term rate by 0.25% on December 17, 2015 after seven years at essentially zero. However, the raise had little effect on FRM rates.

The reason: mortgage rates are tied to the bond market and move in tandem with the 10-year Treasury Note (T-Note) rate. Until now, investors have been placing large sums in bonds and on deposit with the Fed for safekeeping while investment opportunities are scarce. These excess funds have kept FRM rates low and steady, preventing further decreases needed to spur mortgage originations and, subsequently, increase home sales volume.

The present “Trump jump” has caused bond market investors to pull back investment funds in the 10-year T-Note. Decreased investment indicates the rate on the 10-year T-Note will now rise over the next several months, FRM rates following in tandem.

As of December 1, 2016, the 10-year T-Note rate is at 2.48%, up from the prior week and the highest it has reached since 2014.

Lenders use the 10-year T-Note to determine a homebuyer’s mortgage rate. The difference between the note rate and the 10-year T-Note rate represents the lender’s risk premium. The premium accounts for potential losses due to mortgage defaults on less than 20% down payment transactions, covered by private mortgage insurance (PMI).

The current spread between the 10-year T-Note and 30-year FRM rate increased to 1.5%, level with the historical difference of 1.5%. However, the long-term trend shows the spread between the two rates has remained elevated throughout 2016, and will likely continue to remain high, indicating higher mortgage rates for homebuyers and refinancers, as well as higher lender profits. These overpriced mortgages – along with the deceleration in home sales volume since October 2015 due to excessive home pricing – are contributing to the reduction in purchase-assist originations and, as a result, the current slowdown in residential construction.

As of November 2016, the average rate on adjustable rate mortgages (ARMs) also rose significantly to 3.29%, above its low point of 2.49% experienced in May 2013. ARM use has gradually risen due to home prices rising faster than the rate of pay, causing buyers to take on more risk to extend their purchasing power. The Fed’s short-term interest rate hike at the end of 2015 caused ARM rates to rise proportionately – around 0.25% – and they will continue to rise with FRM rates.

Expect mortgage rates to now experience upward pressure from related economic factors, such as:

• a drop in tax revenue due to tax rate reductions and a slowing economy;
• increased spending on government programs (like infrastructure) that raise demand for capital and attract bond market money;
• inflationary expectations by the bond market and the Fed due to the flow of investment funds to government programs; and
• higher interest rates and payments on consumer debt for cars and housing.

This is the definitive book concerning the Mortgage Meltdown of 2008. A must read for anyone with a mortgage!

Low down payment mortgage comparison

(Courtesy of First Tuesday)

Homebuyers with down payments of less than 20% of the purchase price are limited to:

• Federal Housing Administration (FHA)-insured mortgages with the additional cost of mortgage insurance premium (MIP);
• conventional financing with the additional cost of private mortgage insurance (PMI); and
• if they are a qualified veteran, a U.S. Department of Veterans Affairs (VA)-guaranteed mortgage.

Of these three options, the VA-guaranteed mortgage is by far the best deal since zero down payment is required and no mortgage insurance is charged — though a less significant VA funding fee is required.

 (Mortgage insurance is required for smaller down payments since homeowners with low down payments have less skin in the game. Thus, they are more likely to default on their mortgage than someone with more money invested.)

However, if your low down payment homebuyer is not a veteran, they are stuck paying extra costs. Are they better off waiting to scrape together the 20% down payment? Or is there a situation when buying sooner, with the extra expense of mortgage insurance, is worth it?

To discover the best way to spend one’s money — in this case, whether the homebuyer is better off delaying their home purchase until they have a 20% down payment — is to consider the alternatives. If a homebuyer purchases a home today with a small down payment, what is the ultimate difference in savings, and how will they spend or invest the money they may have otherwise put towards the potential full down payment?

For example, imagine a future homebuyer who needs to save $80,000 to buy the home they want with a full down payment, listed for $400,000. However, in 2016 they only have $15,000 saved toward their home purchase, enough for a small 3.5% down payment.

If they choose an FHA-insured mortgage, they will pay:

• $6,755 in upfront MIP; and
• an additional $273 each month in MIP.

MIP payments on mortgages with LTVs higher than 90% are required as long as the homeowner has a mortgage balance, even after the balance has dipped below the 80% loan-to-value (LTV) ratio. (If the LTV is less than or equal to 90%, the MIP payments are removed 11 years after origination.)

If they choose to save up for a 5% down payment on a conventional mortgage, they will pay:

• no upfront premium; and
• an additional $282 each month in PMI. [View current MIP and PMI rates here]

PMI payments are required until the mortgage balance declines to 80%.

Over the life of the mortgage, this can equal:

• over $100,000 paid for FHA’s mortgage insurance; or
• roughly $20,000 in PMI if the home appreciates at a modest rate of about 3% a year.

However, most homebuyers sell before their mortgage term is up. In this example, the homebuyer plans to move in about five years. Thus, the homebuyer can continue to rent until they can save up for a 20% or $80,000 down payment. They have $15,000 saved and they need $65,000 more.

Of more immediate concern to the homebuyer, the inclusion of mortgage insurance to the monthly payment reduces the homebuyer’s purchasing power. Therefore, they qualify for a smaller purchase amount, as money that may have gone toward paying principal or even mortgage interest goes toward paying for mortgage insurance.

Or, if the homebuyer chooses to buy with a low down payment, over these five years the homebuyer will spend a total of:

• $23,200 additional in upfront and annual MIP; or
• $16,900 additional in PMI.

Compared to the $65,000 they will need to save to qualify with a full down payment, the difference is $40,000+ over five years. That’s $40,000 more if they buy now that they can use to invest in the stock market, mutual funds or retirement. Further, home prices will likely continue to rise over the next several years, thus they may not be able to qualify for the same house in five years. Their home’s equity — and their investment — will also increase during this time.

All of these factors point toward buying today, even with the added cost of mortgage insurance.

Also of concern, interest rates are expected to steadily increase over the coming years. Therefore, it will become more expensive to take out a mortgage. In fact, the Federal Reserve projects their target short-term rate, which heavily influences mortgage interest rates, to increase by three or more percentage points by the end of 2018. While the exact amount of increase to mortgage rates is unknown, the increase will undoubtedly be significant enough to negatively impact buyer purchasing power in the coming years.

Each homebuyer situation is different, and your homebuyer may find it wiser to wait until they gain a full down payment — especially if they’re very close to reaching 20%.

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