Congratulations on taking the exciting step towards homeownership. Securing a mortgage is a key part of the process, and avoiding these common mistakes can ensure you get the best possible deal and steer clear of costly pitfalls.

Mistake 1: Neglecting your credit

Lenders heavily rely on your credit score to determine your interest rate. The higher your score, the lower your rate will be. Obtain a copy of your free credit report summary at least six months before applying for a mortgage. This allows ample time to identify and address any errors or areas for improvement. Dispute inaccuracies and take steps to boost your score, such as paying down debts or becoming an authorized user on a trusted friend or family member’s credit card with a good history.

Mistake 2: Changing jobs just before you apply for a mortgage

A steady income and consistent employment history demonstrate reliability to lenders. If you’ve recently changed jobs frequently, consider staying at your current position until your mortgage is finalized. This strengthens your application and increases your chances of securing a favorable interest rate.

Mistake 3: Settling for the first mortgage offer you get

The mortgage market is competitive, and interest rates and loan terms can vary significantly between lenders. Don’t accept the first offer you receive! Obtain quotes from multiple banks, credit unions, and online lenders to get the best deal. Comparing options can potentially save you thousands of dollars over the life of your loan.

Mistake 4: Not saving a down payment

A larger down payment reduces the amount you need to borrow and lowers your monthly payment. While a 20% down payment is traditionally recommended, government-backed programs are available for qualified borrowers with a lower down payment. Explore your options with a mortgage lender to determine the best approach for your financial situation. For example, FHA loans allow a minimum down payment of 3.5%. The Federal Housing Administration (FHA) explains its loan programs in detail, including eligibility requirements.

Mistake 5: Failing to lock in your interest rate

Interest rates fluctuate, so locking in your rate protects you from potential increases during the loan application process. Most lenders offer lock periods of 30-45 days. Ensure you can close on the house within that timeframe to avoid being subject to a higher rate or incurring fees for extending the lock. The Consumer Financial Protection Bureau (CFPB) offers a comprehensive guide on the entire mortgage process, including information on locking in your interest rate.

By being proactive and informed, you can navigate the mortgage process with confidence and secure the perfect loan for your dream home.

If you enjoyed 5 mortgage mistakes to avoid you may like,

• Mortgage rejections in 2024 and what to do about them
• How to get a mortgage with a 500 credit score
• How to build credit

Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.

The post 5 mortgage mistakes to avoid appeared first on Credit Sesame.

1. Overdraft fee charges rise for the first time since 2021
2. Rising Treasury bond yields dampen asset prices
3. Panama Canal traffic snarl threatens supply chain
4. Small businesses continue to believe the U.S. is in a recession
5. Regulator sues short-term lender for churning loans
6. Home purchase mortgage applications lowest since 1995
7. Existing home sales fell in July 2023
8. Mortgage rates continue to rise

1. Overdraft fee charges rise for the first time since 2021

The total dollar amount of overdraft fees charged rose in the second quarter of 2023. It was the first such rise since the final quarter of 2021. Overdraft fee charges have generally fallen in recent years, mainly due to regulatory pressure to reduce or eliminate such charges. Despite the general decline in overdraft charges, they still add up to a large amount. In the second quarter of 2023, overdraft fee charges industry-wide totaled $1.43 billion. Besides the direct cost of overdraft fees, consumers should be aware of other negative consequences of overdrafting their bank accounts. These include possible late payments and forced closure of an account. See article at SPGlobal.com.

2. Rising Treasury bond yields dampen asset prices

The yield on 10-year U.S. Treasury bonds rose to a 15-year high of 4.366 this week. Rising bond yields reflect falling bond prices, but they also tend to have a negative impact on other assets. The higher bond yields go, the more they draw money away from riskier assets like stocks. Bond yields are reacting to concerns about the lingering threat of inflation. While the inflation rate has dropped sharply over the past year, a persistently strong economy and rising energy prices have raised concerns that it may flare up again. Also, downgrades of the U.S. government’s credit rating may have damaged the appeal of Treasury securities, causing yields to rise. See article at Reuters.com.

3. Panama Canal traffic snarl threatens supply chain

Just as global supply chains returned to normal after COVID, weather conditions are creating severe delays for the crucial Panama Canal shipping corridor. Due to drought conditions, traffic through the canal has been delayed by as much as three weeks. Those conditions lower the level of the water in the canal. This means ships have to carry less cargo to pass through. Concerns are that these extreme conditions may become more common due to global climate change. The resulting shipping bottleneck could cause shortages and inflation pressures. See article at Reuters.com.

4. Small business owners continue to believe the U.S. is in a recession

A slight majority of small business owners say they believe the country is in a recession. This is according to a survey by the National Federation of Independent Business. A similar survey in April also found that most small business owners thought a recession had already started. These business owners seem to base their assessment on a general impression of the economy rather than what they see firsthand. More than two-thirds of survey respondents reported that the state of their own business was either “excellent” or “good.” 80% said their local economy was at least “okay.” See article at Yahoo.com.

5. Regulator sues short-term lender for churning loans

The Consumer Financial Protection Bureau (CFPB) has sued Heights Finance Holding Company, formerly Southern Management Corporation, for predatory lending practices. The CFPB alleges that Southern and its affiliates used deceptive techniques to lock customers into short-term, high-cost loans. They approved loans they knew the customers could not pay off and repeatedly induced them to refinance. Even though the company’s loan terms are usually just a few months, they managed to lure 10,000 customers into a continuous cycle of renewed loans. The company operates in 250 locations across six states. See announcement at ConsumerFinance.gov.

6. Home purchase mortgage applications lowest since 1995

According to the Mortgage Bankers Association, last week, the number of applications for home purchase mortgages dropped to its lowest level since April 1995. The slowdown in home-buying activity came amid a spike in Treasury bond rates that pushed mortgage rates above 7%. Adjusted for seasonal differences, applications for home purchase mortgages were down by 5% from the previous week and 30% lower than a year earlier. See news release at MBA.org.

7. Existing home sales fell in July 2023

Completed sales of existing homes slipped by 2.2% in July and are off by 16.6% from a year ago. Sales grew in the West but declined in the other three major regions of the U.S. market. Over the past year, the supply of unsold inventory relative to the sales pace has increased even though fewer houses are available for sale. There are now 14.6% fewer houses on the market than a year ago. And yet, this represents 3.3 months of supply at the current sales pace, up from 3.2 months in July of 2022. See news release at NAR.realtor.

8. Mortgage rates continue to rise

30-year mortgage rates rose for a fifth straight week to reach 7.23%. That’s their highest since the beginning of June 2001. 15-year mortgage rates have also increased for five weeks in a row. Continuing strength in the economy and lingering concerns about inflation were cited as reasons for the recent climb in mortgage rates. See rate details at FreddieMac.com.

Weekly News Headlines from Credit Sesame

• Last week’s news roundup August 19, 2023
• Next week’s news roundup September 2, 2023

The post News roundup August 26, 2023 appeared first on Credit Sesame.

According to a recent report by the Federal Reserve Bank of New York, total mortgage debt in the United States increased by $1 trillion dollars over the past year, to reach a record level of $11.67 trillion. A hot market has led to many new mortgages, and high home prices have boosted the size of those mortgages.

Lately, the dynamics have shown signs of changing. Home prices may falter after a long rally, just as rising mortgage rates make housing harder to afford. Still-high home prices and rising mortgage rates remain a barrier for new home-buyers, but the change could hint at the beginning of a new opportunity to buy a home more affordably.

The long rally in home prices

To understand what home buyers are up against, a good place to start is by looking at home prices over the past decade. The chart shows the S&P CoreLogic Case-Shiller U.S. National Home Price Index (a proxy for how prices have changed) for just over ten years.

The index shows an uninterrupted streak of 124 consecutive months of rising home prices from from March of 2012 through June of 2022. Home prices rose monthly for ten years without a single step back. The housing market celebrated the tenth anniversary of the start of that streak, with the largest monthly gain of all in March of 2022.

In total, home prices gained 124% during that winning streak. Of course, that’s not great news for current home buyers who are coming into the market at higher prices following that streak.

Mortgage rates hurt affordability

It’s not just higher prices that today’s home buyers are up against. 30-year fixed mortgage rates have more than doubled this year. According to data from mortgage finance company Freddie Mac, they now stand at their highest level since early 2002.

Such a steep rise in mortgage rates may cause a severe change in home-buying plans. Credit Sesame calculated the impact the change in 30-year mortgage rates so far this year would have on the monthly payment for a $300,000 loan.

A $1,282.68 monthly principal and interest payment at the start of this year is a $2,012.05 payment for someone buying now.

That kind of change drastically affects the price of the home you can afford, or even if you can afford a home at all.

The impact of higher interest rates can be seen in recent mortgage origination trends. According to the New York Fed, for two years mortgage originations ran at historically high levels. However, in the third quarter of 2022, they slowed to a pre-pandemic pace.

During the home price rally, buyers bought at steadily higher prices. However, most of that rally occurred during a time of unusually low mortgage rates.

When you layer this year’s sharply higher mortgage rates on top of those elevated home prices, fewer people are able to afford to buy. Recent data shows this is starting to have an impact on housing demand.

Home prices seem to be turning first

If home prices and mortgage rates make housing unaffordable, something’s got to give. If demand keeps falling, either mortgage rates or home prices must drop.

There’s reason to believe that housing prices that fall first. In fact, the start of that trend can be seen at the very end of the home price chart shown earlier in this article. For the first time in over ten years, home prices declined in each of the two most recent months of data.

While that’s noteworthy after such a long, interrupted run of rising prices, two months is not enough to be considered a trend. However, there are other reasons to expect home prices to fall before mortgage rates do.

Interest rates are heavily influenced by inflation. In order for the principal and interest payments they get back on their loans to be worth more than when they lend the money, lenders generally have to charge interest rates that are higher than the rate of inflation.

There can be temporary exceptions to this, if lenders believe a surge in inflation will be short-lived. However, mortgage rates have been below the inflation rate for over a year and a half now. Many of the loans made during that time have locked lenders into rates well below today’s rate of inflation.

Mortgage rates are still below the current inflation rate, though the gap has reduced in recent months. However, after spending such a long time playing catch-up, lenders are likely to be hesitant to start significantly lowering rates until inflation has slowed down much more than it has so far.

Thus, high mortgage rates may continue to cool off the housing market. That’s why home prices are starting to fall before mortgage rates.

Putting yourself in a position to benefit

Even if home prices continue to slide, this doesn’t make conditions easy for home buyers. High mortgage rates may continue to make monthly loan payments steep. But if home prices continue to fall before mortgage rates do, there are three things you can do to benefit:

1. Save for a larger down payment. A larger down payment means you borrow less and may qualify for a lower interest rate.
2. Work on your credit. While you are saving, why not build your credit score? This could also help you qualify for a lower mortgage rate when the time comes.
3. Keep a close eye on your local market. Follow trends in your target neighborhoods closely, so you can be early to spot when prices become affordable. Some local markets and especially individual properties may react to changing conditions sooner than others.

You may also be interested in:

• Guide to Buying a House and Getting a Mortgage
• Why ARMs Can Be Good for First-Time Homebuyers
• When Will Things Get Better for Home Buyers?

Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post What’s Going Down: Home Prices or Mortgage Rates? appeared first on Credit Sesame.

Tax benefits, equity building, freedom and stability are a few of the reasons to own a home listed by the National Association of Realtors. You can live in the same spot for as long as you want without worrying if the landlord is going to raise the rent. Your monthly mortgage payment is predictable if you get a fixed-rate mortgage, as many homebuyers do.

An adjustable-rate mortgage (ARM), however, can make buying a home cheaper and may be a good option for first-time homebuyers.

What is an adjustable-rate mortgage?

A fixed-rate home loan has an interest rate that never changes for the duration of the loan, usually 15 or 30 years. An adjustable-rate mortgage is a home loan that has a fixed interest rate that’s low for a set time, then can change once or twice a year.

ARMs have a fixed rate for a five, seven or 10-year introductory period. Typically, the rates are around one percentage point lower than for a fixed-rate mortgage. After the intro period, the ARM rate can change every six months or once a year, depending on the conditions of the loan. The changing interest rate is tied to an index, such as the 1-year Treasury Security, or the London Interbank Offered Rate (LIBOR.)

For a 5/1 ARM, the 5 indicates a five-year introductory period where the interest rate stays the same. The 1 indicates how often the rate can change for the life of the loan. In this case, it means once a year. A 5/6 ARM is fixed for 5 years and may then adjust every six months. ARMs have caps on how much interest can be adjusted in any period and over the lifetime of the loan.

As with fixed-rate mortgages, borrowers may be able to end an adjustable-rate mortgage by paying off the loan, refinancing, or selling their home.

Difference in 5-year payments for fixed versus ARM

The obvious appeal of an ARM is that usually they have lower interest rates than fixed-rate mortgages during the introductory period. A lower interest rate can save you thousands of dollars in five years. For example, a $240,000 loan shows that over five years payments for a fixed-rate loan total $96,600. whereas payments on an ARM total $85,980, a difference of $10,620 (or $2,124 per year or $177 per month).

The interest rates used are for the week ending October 27, 2022 reported by Freddie Mac in its Primary Mortgage Market Survey.

How low are ARM interest rates??

The last week in October 2022 is the first time in 20 years that the 30-year fixed-rate mortgage broke 7%. As interest rates on fixed-rate mortgages have increased, so have ARMs.

Even as rates more than doubled this year, ARMs have stayed around a percentage point below fixed mortgage rates. Since 2000, ARM rates have consistently been lower than fixed rates on average, according to the Mortgage Bankers Association. 

Not surprisingly, ARMs are gaining market share again as fixed-rate mortgages hit 20-year highs. ARMs account for 10% of mortgages in 2022, up from 5% in 2015.

Five-year ARMs usually have the lowest interest rates and monthly payments during the initial rate period. Ten-year ARMs have higher rates in exchange for longer protection from interest rate changes.

Why first-time homebuyers might consider ARMs

Many people think their first home is where they’ll live forever. According to Home LLC 43% of home buyers assume they’ll stay in their homes for at least 16 years. In fact, more than 60% of people under age 38 stay in their homes for under eight years.

The reasons for moving are numerous, including a new job, a growing family that needs more space, moving closer to loved ones, and selling a home that appreciates in value so owners can upgrade to a new home. Whatever the reason, new homebuyers may benefit from adjustable-rate mortgages that give more financial possibilities. Lower rates on an ARM may mean:

• Less pressure on cashflow
• The principal can be paid down faster
• Money may be added to retirement savings
• Being able to increase the loan amount and buy a larger house

How risky are ARMs?

The downside of an ARM is that after the introductory period, the interest rate can be adjusted, perhaps higher than a fixed-rate mortgage. However, there are limits to how much interest rates can rise for ARMs. Buyers should always check the lender-specific terms and conditions, but most ARMs have three types of rate caps that protect consumers:

1. Initial adjustment cap. At the end of the fixed-rate period, the first time the rate adjusts it can only be 2% or 5% higher than the initial rate, according to the Consumer Financial Protection Bureau. No matter how high interest rates have risen, the initial adjustment cannot exceed this cap.
2. Subsequent adjustment cap. After the initial adjustment, the rate can only increase by a certain amount each year. The most common cap is two percentage points higher than the previous rate, the CFPB says.
3. Lifetime adjustment cap. Over the life of the mortgage a cap is set on the total increase over the life of the loan. This is often up to 5% higher than the initial rate, though some lenders may have a higher cap.

Cap rates should be compared when looking at ARMs, even if you think you’ll move or refinance before the adjustable period starts.

The CFPB also recommends that applicants ask lenders to calculate the highest payment they’ll ever have to pay on the loan they’re considering. This information should be in the Truth-in-Lending disclosure after applying for a loan.

If you enjoyed Why ARMs Can Be Good for First-Time Homebuyers you may also enjoy:

• Debt Putting a Bigger Squeeze on Household Budgets
• When Will Things Get Better for Home Buyers?
• Guide to Buying a House and Getting a Mortgage

Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Why ARMs Can Be Good for First-Time Homebuyers appeared first on Credit Sesame.

The stakes for maintaining good credit are higher than ever. In October 2022, recent news provides multiple examples of how important good credit is in today’s economy, and how consumers’ credit is under attack.

Concerned Lenders are Tightening Credit Standards

According to the Mortgage Bankers Association, lending standards on mortgages have tightened for seven straight months. This makes mortgage approval harder to obtain than at any time since March 2013.

Lenders tighten approval standards when they are concerned about economic conditions. Rising consumer debt levels raise the possibility that more households are overextended. The threat of a recession further heightens the risk that more households may start to default on their loans.

With high inflation, people have been leaning more and more on credit. However, tightening lending standards mean it’s tougher to get credit unless you have a strong credit history.

Interest rates continue to soar

Credit is harder to get these days and comes at a high price.

According to mortgage finance company Freddie Mac, 30-year fixed mortgage rates more than doubled this year. The Federal Reserve’s Consumer Credit report shows that the average rate charged on credit card balances rose by over 2% since the first quarter. Personal and auto loan rates are up, too.

With inflation still raging and more Fed rate increases expected, the cost of credit may increase further. This creates a tough choice for consumers: they may feel the need to borrow more to make up for inflation, but that borrowing just adds to their rising expenses.

Maintaining good credit helps address these problems

Building and maintaining good credit can help consumers deal with both tighter credit standards and rising interest rates.

When lenders become more cautious because of economic concerns, they cut back on higher-risk loans and concentrate on lower-risk ones. Applicants with good credit are more likely to apply for a loan successfully.

Good credit also helps counter rising interest rates. Most lenders and credit card companies offer different rates depending on the risk profile of the customer. Customers who present a higher risk to the lender receive higher interest rate offers.

Credit card rates can vary by about 10% depending on your credit score. Mortgage rates can vary by a point or two – which can add up to tens of thousands of dollars worth of interest over the term of a 30-year mortgage.

A good credit score means you are more likely to be offered lower rates. If you improve your credit score, you might even see your credit card rate drop.

Consumers face multiple assaults on their credit

Although good credit can help you overcome tighter lending standards and higher interest rates, the problem of maintaining good credit remains. In the current economic environment, credit scores are under attack from multiple directions.

Inflation is driving borrowing higher

Prices have risen so fast that many consumers find themselves caught short. Suddenly, a paycheck doesn’t cover expenses as it used to.

It’s natural to turn to credit to fill the gap. This has created a growing debt problem.

Federal Reserve figures show non-mortgage consumer debt is up by 12.9% over the past two years. A sudden rise in borrowing can hurt credit scores in two ways:

• First, as people add to their debt balances, their monthly payments rise. As those payments get higher, more households start to miss some of those payments. Payment history is the biggest factor in credit scores, so missed payments are very damaging to credit.
• Second, higher credit balances mean people are often using a larger portion of their credit limits. Credit utilization, which is the percentage of your available credit that you use, is also a factor in credit score. More borrowing pushes credit utilization up, which is likely to drag credit scores down.

This can become a destructive cycle. As people rely more and more on credit, that reliance damages their credit scores.

A recession could tip millions of households over the edge

The threat of a recession has loomed over the economy for several months. If that threat becomes a reality, it could become a credit crisis for people who live on the edge financially.

Recessions over the past 50 years have triggered an average increase of 4.1% in the unemployment rate. Projected onto today’s labor force, that would translate to a loss of nearly 6.7 million jobs.

Americans have various resources to see them through a period of unemployment, such as savings, unemployment benefits and other household income. However, for households that rely on borrowing to make ends meet, there is little margin of safety. Even a partial decline in income could make it impossible to pay the bills.

Fraud makes maintaining good credit difficult for victims

It’s challenging enough that consumers have to worry about how their own financial behavior affects their credit. What makes it even tougher is that criminal activity also threatens that credit.

Credit card details from over a million consumers were recently released on the dark web – an internet for predominantly illegal activity.

This is the latest example of how technology is used to blow up the scale of financial fraud. This increases the necessity for vigilance. If consumers’ financial information is stolen and used fraudulently, it can damage victims’ credit and lose them money.

The solution is to take great care of your financial logins and assume the worst. Any text, email or call receive could be from someone trying to steal information. Be watchful and catch any fraudulent activity before too much damage is done. Consumers should review each transaction on their credit card and bank statements. They should watch for abrupt changes in their credit scores and check their credit reports regularly. Signing up for credit monitoring can help you keep your credit under continual surveillance.

Credit is a vital survival tool in today’s economy. Unfortunately, credit is also under multiple threats. That means customers need to take steps to defend their credit.

You may also be interested in:

• You Can Counter Economic Threats by Working on Your Credit Score
• Ways to Build Credit and Create Good Credit Habits

Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Maintaining Good Credit has Become a High Stakes Game appeared first on Credit Sesame.

Good timing can make a big difference in life. This is certainly true of buying a home and getting a mortgage loan. While many matters in this process are out of our control, carefully determining when to shop for a mortgage, apply for financing, and close on a loan may reap benefits.

Learn what the experts have to say about the ideal timing when you decide to buy a house and apply for a mortgage.

Why timing can be important when financing a home

Mortgage interest rates have increased in the first half of 2022. That makes some prospective home buyers wish they would have pulled the trigger earlier. But the truth is that it’s impossible to predict mortgage rates and where they will land in the future. Trying to perfectly time the rate market can lead to frustration and disappointment.

Still, with proper advanced planning, you may be able to position yourself into a better mortgage loan deal and apply for a mortgage at the best time.

“The timing of your mortgage application will help you manage a couple of competing factors,” explains Martin Orefice, CEO of Rent To Own Labs. “First, especially in the current market, interest rates are going up all the time. With this in mind, applying earlier than anticipated is usually a better idea.”

Additionally, it’s wise to get pre-approved for a mortgage loan well before you start making offers on homes.

“The time of the month when you shop for loans and apply for financing can also have an impact,” he adds.

Also, if you expect mortgage interest rates to rise soon (current trends and the Federal Reserve’s plans to raise interest rates as the year progresses suggest that this is a foregone conclusion), it makes sense to time your home buying and financing plans carefully with the goal of acting sooner versus later. Wait too long and you may end up paying a higher interest rate and a higher home sale price.

The best time to begin shopping for a mortgage loan

Herndon Davis, a mortgage loan officer/broker in Fort Lauderdale, Florida, believes the best time to start shopping for a mortgage loan is four months before you begin home hunting.

“That’s because you must devote one solid month of research and due diligence figuring out which lender to choose – whether it’s a bank, credit union, or mortgage company,” he says.

This four-month timeline enables you ample time to save up for the down payment, closing costs, and cash reserves needed after you move in.

“Some lenders require a strict six months of cash reserves,” Davis notes.

After month #1, you’ll need the remaining three months to demonstrate financial responsibility and prudence.

“To prove your creditworthiness, your lender will want to see pristine bank statements with no outrageous cash deposits or withdrawals that cannot be easily explained away, he adds.

Starting plenty early can also give you time to work on improving your credit, if needed, notes Eric Jeanette, owner of Dream Home Financing in freehold, New Jersey.

“Once you are confident that you can qualify for mortgage financing, you can begin rate shopping,” Jeanette suggests.

The best time to apply for a mortgage

It’s wise to start the mortgage application process at the beginning of the month, the pros concur.

“The end of the month is always chaotic, with last-minute closings and rejected files getting last-minute approvals. You don’t want to get caught up in that rushed monthly madness,” cautions Davis. “I recommend applying for a mortgage loan between the third and fifth of the month if possible, making sure you provide all the necessary documents. Also, give yourself breathing room to get pre-approved by the 10th to 15th of the month – before the end-of-the-month rush.”

Consider that the start of the month is when lenders are most hungry for new business, Orefice points out. You’ll likely find that loan officers and processors are more eager to return your phone calls and carefully review loan options and terms with you earlier in the month versus later.

“However, the time of the month when you apply for a mortgage should have no impact on the deal, terms, or rate you are ultimately offered from a lender,” explains Jeanette.

In other words, the main benefit here is that you’ll get more personalized attention from lenders if you start the application process earlier in the month.

The best time to close on a mortgage loan

Want to save on closing costs? It can be best to close on your mortgage at the end of the month.

“Closing costs will often include a prorated charge for homeowners insurance, property taxes, and interest based on how many days are left in the month. So closing on or close to the last day of the month will keep these fees down,” Orefice continues.

Jeanette seconds those sentiments.

“If you close on the first day of the month, for example, you will owe about 30 days of interest. But if you close on the last day of the month, you will owe only one day of interest,” he says. “Therefore, the timing of when you close could have a significant impact on how much you will owe at the closing table.”

Adjustable-rate mortgages: Another way to time the market

In this era of higher interest rates, you might want to consider an adjustable-rate mortgage (ARM). This type of home loan usually starts with a lower rate than a fixed-rate mortgage; a few years later, the rate can change. ARMs are generally 30-year loans that span two specific phases: a fixed-rate period in which the interest rate stays the same (often lasting five, seven, or 10 years), and a second phase in which the interest rate can increase or decrease depending on market trends.

“You can pursue an ARM and then time it to refinance your loan or sell your home before the adjustable phase kicks in,” advises Davis.

You may also be interested in Guide to Buying a House and Getting a Mortgage.

The post Timing is Everything: When is the Right Time to Apply for a Mortgage? appeared first on Credit Sesame.

In real estate, people often talk about either a “buyer’s market” or a “seller’s market.” Higher mortgage rates lead to neither. They are an economic force that hurts both buyers and sellers.

Credit Sesame took a look at the recent trend in mortgage rates, and how it’s affecting the housing market.

A Sharp Rise in Mortgage Rates

30-year mortgage rates have risen by 2 full percentage points just since the start of 2022, according to mortgage finance company Freddie Mac. 15-year mortgage and adjustable rate mortgage (ARM) rates are also up sharply so far this year.

The interest rate increases trend has accelerated over the past couple months. 30-year rates have risen for seven consecutive weeks, for a total increase of 1.35% during that period.

This leaves 30-year mortgage rates at 5.11%, their highest level in over a decade.

Impact of Interest Rate Increases on Buying a Home

The market has seen mortgage rates this high – and much higher – before, but what’s truly disruptive to the plans of home buyers in 2022 is how quickly rates have risen.

Consider the experience of a typical home buyer who started looking for a home just before that recent seven-week stretch of mortgage rate increases began.

According to the Federal Reserve Bank of St. Louis, the average sale price of a home in the U.S. is currently $477,900. In early March, when 30-year rates were at 3.76%, with a 10% down payment you could have bought a house at that price with a monthly principal and interest payment of $1,994.35.

Just seven weeks later, with 30-year mortgage rates now up to 5.11%, that same monthly payment with a 10% down payment would only buy you a house worth $408,000. In summary,

• $1,994.25 per month purchased a $477,900 home in early March 2022
• $1,994.25 per month purchases a $408,000 home in late April 2022

In other words, if you had started your home search in early March by using a mortgage calculator to figure out what you could afford, just seven weeks later you’d have to lower your target price by nearly $80,000 to maintain the same monthly payment.

Alternatively, to afford that same average-priced home of $477,900, with a 10% down payment and a 5.11% 30-year mortgage, you’d now be facing a monthly principal and interest payment of $2,337.92.

That would represent a 17.2% increase in your planned monthly payment in just seven weeks – a massive rate of inflation for what would probably be your largest monthly expense.

Interest Rate Increases Create Lose-Lose Situation

It’s easy to see how fast-rising mortgage rates are disruptive to the plans of home buyers. Not only is the cost of buying a house rising, but mortgage rates are changing so quickly it would be difficult to shop for a house. When your target price becomes a moving target, it’s tough to know which properties you should be looking at.

While higher interest rates clearly hurt buyers they can also be bad for sellers as well.

As mortgage interest costs rise, less of what buyers pay goes towards the price of the home because more of each payment is taken up by interest. This puts downward pressure on prices and discourages home buying demand.

A survey by the Mortgage Bankers Association found that for the week ending April 15, 2022, purchase mortgage demand was down 3% in just a week, and down 14% over the past year.

In short, it’s getting tougher both to buy and to sell a home. Even home owners who aren’t looking to sell aren’t immune to the impact of rising interest rates.

Higher rates limit refinancing opportunities. The Mortgage Bankers Association found that the volume of refinance mortgages had fallen off even more sharply than that of purchase mortgages.

Refinancing mortgage volume dropped 8% in the latest week, and was off 68% over the past year.

Should Consumers Consider ARMs?

At their peril.

One other interesting tidbit from that Mortgage Bankers Association survey: as a percentage of overall mortgage volume, ARMs (adjustable rate mortgages) reached their highest level since 2019.

On the surface, the renewed interest in ARMs is easy to understand for two reasons. First, ARM rates are lower than either 30-year or 15-year fixed mortgage rates. Second, they haven’t risen as sharply this year as fixed rates.

However, the short-term benefit of an adjustable rate loan may turn out not to be worth the long-term cost if mortgage rates continue to rise.

ARMs offer a low initial rate, but then are adjusted up to market levels. If mortgage rates have continued to rise, people with ARMs may regret not having locked in a fixed rate.

Not only could they see their mortgage payments rise, but home owners with ARMs have to deal with the uncertainty of having those payments vary over time. This can make it very difficult to set a reliable household budget and make long-term financial plans.

Renting Is No Bargain Either

With all the perils that interest rate increases present to home buyers, you might think that the safest thing to do is continue to rent for the time being.

However, that’s also getting more expensive.

As part of its annual Survey of Consumer Expectations, the Federal Reserve Bank of New York conducts a housing survey that measures expectations for the year ahead.

This survey found that households expect rents to increase by 11.5% over the year ahead. A year earlier, the average expected rent increase was just 6.6% so consumers expect the pace of rent hikes to accelerate.

Since housing is a necessary expense, higher rents and mortgage rates may be hard for many consumers to avoid. The best defense is to keep other forms of debt low, so higher interest rates don’t eat any further into your budget than necessary.

Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Interest Rate Increases Mean Less Home for Your Money appeared first on Credit Sesame.

A new survey conducted on behalf of the National Endowment for Financial Education by Harris Poll also found Americans think homeownership is less important. In 2011, 17 percent said homeownership was their most-important financial goal, compared to just 13 percent in the latest findings. According to the poll, the most important goal now is having enough money for retirement.[cta button=”text for button” image=”http://override-default-image-url” link=”http://override-default-link/”]Get your free monthly credit score—no credit card required![/cta]

But I think homeownership and paying off a mortgage is a missing link to achieving that retirement goal.  At least, that’s the way I’ve used it. I can think of no other way of building wealth so easily, if you do it the right way.

Back when I was a young adult, the dream of owning a home and qualifying for a mortgage was like the gateway to adulthood. After having my first child, buying a home was the obvious next step. Here’s the timeline of how we built wealth and good credit through homeownership and having a mortgage:

1995:  A wonderful couple saved $900 of our $1,200 monthly rent for the 3-bedroom, 2-bathroom house for that whole year (called, a lease-with-option-to-buy deal), resulting in the $10,800 down payment we needed to qualify for the mortgage on the $135,000 home.

2000: We sold when that rose in value to $185,000, resulting in enough cash to put 20 percent down on another house, which allowed us to forgo private mortgage insurance (a waste of money, in my opinion). Instead of buying up in price and house, we bought a total fixer-upper for $140,000 and spent five years renovating it, doing most of the work ourselves, buying materials with our income.

2006: At the height of the housing bubble, we sold again for $325,000 and used the cash for a 50 percent down payment on our current home bought for $200,000. The rest of the cash from that sale went into emergency savings and retirement savings. Every year, we use the mortgage interest to reduce our taxes and the good payment history to boost our credit score.

2013:  Our current house has dropped in value, like everyone else’s, but we can afford the mortgage payment on one income and we plan to live there until it appreciates –or forever if not, while paying down the mortgage and building more equity over the long term.

Since homeownership worked for me, I called up Certified Financial Planner, Michael Garry, author of Independent Financial Planning: Your Guide to Finding and Choosing the Right Financial Planner to find out why more people don’t see owning a home as a wealth and credit-building tool. He explained that younger generations shying away from mortgages may be struggling with employment, loaded with student loan debt or poor credit. Older generations may have been financially affected by the recent Great Recession and made many mortgage and homeownership mistakes that have wrecked their finances and credit score.  “When homeownership is approached correctly, it is definitely a wealth-building tool,” says Garry. “Once the mortgage is paid off, you can live in the home rent-free if you don’t sell it. Or you can sell for enough money to downsize to a smaller home for cash with leftover to invest in retirement or use for income or for long-term or assisted living care.”

Want to invest in homeownership the right way?

Don’t buy too much house:  Stick to the advised 28 percent of your gross monthly income (or much less) for housing expenses including the mortgage payment, real estate taxes and homeowners insurance. Don’t just go up to the limit or above that limit while forgoing your monthly budget and what you can safely afford.

Don’t ignore reality: Realtors and mortgage brokers all make more money by selling you a larger home with a larger mortgage. And that’s how unwary homeowners got in trouble during the housing bubble. If it sounds too good to be true, it is.

Don’t forgo the emergency fund for the down payment:  Make sure you have some emergency fund cash left over so your mortgage and your credit score is not in jeopardy by unexpected expenses or unemployment.

Don’t gamble on future rates:  Stick to a fixed rate for your mortgage and only refinance to lock in to a new lower fixed rate and possibly a shorter loan term to save even more on interest.

Don’t use the equity in your home: It’s not meant to be a loan. Equity is the wealth-building part of the mortgage equation and it gets spent a lot faster on a gourmet kitchen, or worse, a fancier car, than it takes to build back up over many years.

Don’t be short-sighted:  Treat your mortgage like a long-term investment and stay in the home at least five years (or as long as possible) before selling to let your equity build and cyclical market forces turn around to your favor.

More on Buying a Home:

• Steps to Prepping Your Credit for Buying a Home
• When it Comes to Mortgages, All of Your Credit Scores Matter
• How to Improve Your Credit Score Enough to Qualify for Rock-Bottom Mortgage Rates
• Timing Is Everything: When Is the Right Time to Apply for a Mortgage?
• Top Three Reasons You May Have Been Denied That Mortgage

The post Are You Missing Out on the Wealth-Building Powers of a Mortgage? appeared first on Credit Sesame.

1. Underwriting

Mortgage underwriting is the process lenders use to analyze their risk is extending a loan to you, the borrower. During this process, expect to work with your loan officer to supply lots of paperwork about your income, assets, liabilities, and more. The lender will also check your credit report card, so it’s a good idea for you to check your credit a few months before you apply for a mortgage to give yourself time to clear up any issues. These documents will help determine whether you qualify for a mortgage and at what interest rate.

[cta button=”text for button” image=”http://override-default-image-url” link=”http://override-default-link/”]Check Your Free Credit Score — No Credit Card Required![/cta]

2. Principal and interest

Principal refers to the amount that you borrow from your mortgage lender, while interest refers to the cost of borrowing that money. For instance, if you borrowed $100,000 over 30 years at 5 percent interest, you’d pay back the $100,000 of principal, plus about $90,000 in interest, over the course of the loan period for a total of over $190,000. Typically your mortgage payments go towards fees and interest before your payments are applied to principal. In some cases, though, your lender may allow you to make extra principal payments without incurring early pay-off fees.

3. Amortization period

The amortization period of your mortgage refers to the length of the loan. Thirty-year mortgages are common in the United States, although some homeowners choose a fifteen-year loan so they can pay off the mortgage more quickly and save on interest. Using an amortization schedule calculator, you can see how much of your mortgage payment goes to principal vs. interest and also see how increasing your payments would speed up completion of the loan.

4. Equity

Home equity is the difference between the property’s fair market value and your outstanding loan balance. As you pay towards principal or your home rises in value, your equity increases. But if you take out a home equity line of credit or your home decreases in value, you lose equity. Many mortgage experts recommend a down payment of at least 20 percent to avoid an “underwater mortgage” where you owe more than the property’s market value, often because you started with low equity and the property’s value declined.

5. Conforming mortgage loan

Most mortgage loans conform to Fannie Mae and Freddie Mac guidelines around the size of the loan, the borrower’s debt-to-income ratio, and documentation requirements. This is what’s called a conforming loan. If you need to borrow more than the conforming loan amount ($417,000 for single-family homes in many places across the United States), then you’d likely apply for a jumbo loan, which has different criteria and accounts for a much smaller segment of the market.

6. Title insurance

The last thing you want is to close on a home and later discover that another party has a claim to the title. Or that a fence was built on what’s actually a neighbor’s property. Your real estate lawyer should check for a clear title before closing, but your mortgage lender may still require you to buy title insurance to protect them against potential losses in case of title issues that pop up later. Some homeowners also buy owner’s title insurance to protect themselves.

More on Buying a Home:

How to Improve Your Credit Score Enough to Qualify for Rock-Bottom Mortgage Rates

4 Rules for Buying a Home (and How Far You Can Bend Them)

7 Steps to Prepping Your Credit for Buying a Home

Do You Have to Put 20% Down on a New Home?

Young, Single and Buying a Home? What You Need to Know

The post 6 Mortgage Terms Every New Home Buyer Should Know appeared first on Credit Sesame.

If you’re thinking of buying a home, you probably feel lucky to be shopping in the best buyers’ market we’ve had in years, if not decades. Interest rates are still near historic lows, home prices are back to 2002 levels, which means for many homes are more affordable than they’d been in nearly a decade.

One thing most buyers tend to overlook, however, is what comes at the very end of the buying process: closing costs. And according to Bankrate.com’s just-released annual closing cost survey, closing costs are on the rise, up an average 8.8% compared with 2010. Nothing to sneeze at? Think again: that’s on top of the massive 36.6% increase reported in 2010. Since 2009, origination and third-party fees on a $200,000 home purchase have gone up nearly 50%, from an average $2,739 to $4,070.

Granted, those numbers aren’t perfect, since the survey is based on good faith estimates (GFEs) rather than fees from actual closed loans. But they do suggest that the cost of recent financial regulation in the mortgage industry is borne primarily by consumers.  The truly frightening part: some of the most significant regulatory reform provisions are yet to come.

Is the cure worse than the disease?

It takes a lot of manpower to assure financial regulators that consumers are getting a “fair” deal and that lending institutions are not driving themselves off a cliff.  Since 2008, a steady flow of regulation has affected almost every aspect of the mortgage process, from initial disclosures to appraisals.  With each new requirement, lenders have had to staff up in order to ensure compliance. As you might expect, these added costs are ultimately passed on to consumers.

But, you’d argue, don’t consumers benefit from financial reform? It’s true that some new requirements, such as the new GFE and loan officer compensation rules, do make mortgage fees more accurate and transparent for consumers. But, as the closing cost survey suggests, that added accuracy and transparency has not led to lower costs on average. It’s easier to make the case that the new regulations have hurt the average consumer. As anyone who has applied for a mortgage recently can tell you, getting approved for a mortgage is now more difficult — and when you do, the process takes longer and costs more.

And it isn’t over yet: the controversial QRM rule

One of the most wide-ranging reforms, that of the securitization of mortgages, is still yet to be implemented. Regulators are tackling this one with the controversial QRM (Qualified Residential Mortgage) rule.  This rule aims to redefine a good QRM loan versus a risky non-QRM loan for purposes of securitization in the secondary market.  The definition of QRM versus non-QRM will be based on typical underwriting criteria such as: the amount of equity in the property, debt to income ratios, credit scores and rate adjustment features of the loan itself.

The proposed rule requires lenders to maintain a 5% stake in any non-QRM loan that they originate and sell into the secondary market.  The intention of this rule, for lenders to have some “skin in the game,” is a good one, but the reality is that only the largest financial institutions would have the capital necessary to originate non-QRM loans. In all likelihood, those with less than perfect mortgage profiles will pay more — potentially a lot more — after this rule is put in place. The provisions of this reform are currently undergoing a period of public comment and are slated to become effective sometime mid-2012.

So what’s a consumer to do?

If you’re looking to buy or considering a refinance, now just might be the right time to jump off the fence.  It certainly doesn’t look like it is going to get any cheaper to get a mortgage down the road.

If you do decide to act, here are a few tips to help you protect yourself from the rising cost of financial reform:

1. Know where you stand

Mortgage rates are tied to your credit score.  Inaccuracies on your credit history can cost you dearly. Find out your score and make sure your history is accurate.

2. Consider a fixed rate loan

The impact of QRM rules could make it more expensive and difficult to refinance down the road. Seriously consider a loan that is fixed for its duration.

3. Shop around for the best deal

It has always made sense to shop around for a mortgage and financial reform has done nothing to reduce the pricing disparity found between lenders.

4. Shop the smaller mortgage bankers

As a result of the shake-out in the mortgage industry, the big banks have grown market share through consolidation.  The more aggressive mortgage bankers, however, often offer the best deals as they try to steal deals away from the big banks.

The post Why Mortgage Closing Costs Are Rising and How You Can Protect Yourself appeared first on Credit Sesame.