Expensive mortgages on the horizon

Owning a home takes work. Soon, it will cost more too. In response to a crippling financial crisis, sweeping changes were established in the mortgage industry to not only stabilize the crippled financial sector of the housing market, but to also to temporarily provide access to credit in an all but frozen credit market. Now that the temporary stop gaps are coming to an end, will private investors make home mortgages more expensive or will Congress bow to housing trade groups to extend current interventions?

Since the increase of FHA mortgage down payments to 3.5% a few years ago, there has been talk of increasing it further to 5%. The move comes at a time when mortgage assistance programs are winding down and reliance on FHA mortgages to refinance underwater home owners is diminishing. Concerns over FHA reserves prompted higher annual FHA mortgage insurance premiums and, of course, also elicited calls to increase FHA mortgage down payments to 5%.

Of course, while some look for a solid FHA mortgage down payment increase, some look to future decreases. H.R. 1977: FHA Reform Act of 2011 (introduced May 24th which has been currently referred to committee) creates the position of “Deputy Assistant Secretary of FHA for Risk Management and Regulatory Affairs,” whose job would be, among other things, to review down payment requirements.

Besides the push for increased FHA down payments, the FHA maximum loan amount is set to decrease in October of this year. Temporarily increased to $729,750, FHA loan limits will revert to those set by the Housing and Economic Recovery Act of 2008 (HERA). Unless Congress acts on maintaining the current FHA loan limits, HUD states that 669 of the 3,334 counties or county equivalents that are eligible for FHA insured mortgages will be affected. In “high cost” areas, such as Montgomery County, the maximum FHA loan limit will be reduced to $625,500 (“Potential Changes to FHA Single-Family Loan Limits…A Market Analysis Brief; hud.gov).

In addition to changes in FHA mortgages, conforming loans (mortgages that conform to Fannie Mae and Freddie Mac guidelines) will also change. October 2011 is also when the maximum conforming loan limits will revert to those established by HERA, as stated in a May 26th release from the Federal Housing Finance Agency (FHFA is the oversight agency for Fannie Mae, Freddie Mac, and Federal Home Loan Banks). Although the new loan limit will not differ from the current amount in a majority of regions, FHFA estimates that 250 counties or county equivalents will be affected. The maximum conforming loan limit for “high cost” areas, such as Montgomery County, will also be reduced to $625,500.

Although the current FHA and conforming loan limits were temporary, housing trade associations have warned about possible effects of reverting to lower mortgage limits on an unstable real estate market. Both the National Association of Realtors and National Association of Home Builders have commented on the imminent changes and have called on Congress to make the temporary changes permanent.http://www.blogger.com/img/blank.gif

Recent government interventions in the housing market may have been necessary but they were intended to be temporary. Continued intervention may continue to allow “lower cost” mortgages for some home buyers, but some have warned against maintaining the temporary stop gaps because it hinders private investors from entering the housing market as well as the possibility of artificially inflating housing prices.

by Dan Krell

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

How your interest rate effects you

Last week, I was in Starbucks talking about interest rates and the current real estate market. It was not unusual that I was in Starbucks nor conducting business there, as it seems that Starbucks, these days, maybe second to the golf course in the culmination of business. This day, I happened to be talking with Ken Cusick. Ken and I were discussing the vulnerability of those homeowners who purchased their home with adjustable mortgages, primarily interest only mortgages and their mortgage rates. Ken had a lot to say about this topic. Ken is the principal of Cusick Financial, LLC, a financial consulting firm located in Olney, MD specializing in residential and commercial financing.

Ken and I agreed that many homeowners have a great mortgage rate because of the historically low interest rates we have had recently. I expressed my concern about the many homeowners who have bought their home with an interest only or variable rate mortgage to either allow them to buy more home than they normally could afford, or to keep payments down. After all, the interest rates for these mortgages usually started between three to four percent. This cut the mortgage payment by at least a few hundred dollars a month, if not more.

Ken had a few things to say in response, as well as a few words of advice. First, Ken asserted that because the interest only and variable rate mortgages are tied to short term indices, they usually tend to be a better deal than 30-year mortgages (which are tied to long term bonds and indices). Depending on the type of index the mortgage is tied to, the interest rate can change annually or even as frequently as monthly. He stated that the unusually low interest rate environment we have had in the past five years has made housing more affordable, which paradoxically led to the significant increase in home prices we have experienced.

Second, Ken stated that those homeowners who have a fixed rate mortgage would always be able to afford their home as long as their income never decreases and they never need to sell their home. Even if there is a correction in the real estate market to lower home prices, these homeowners are in good shape.

Third, homeowners who have interest only or variable rate mortgages are subject to the volatility of the market as rates rise and fall, and are at significant risk. As interest rates rise, their monthly mortgage payments rise. Additionally, as interest rates rise, the cost of housing rises and housing demand decreases. This creates difficulty for those who were betting on interest rates to stay low because the affordability of the mortgage becomes an increasing burden on those who may not be able to afford higher payments. Add that to the possibility of their home being devalued increases the burden of loss.

Ken’s advice was simple. If the homeowner could not afford the mortgage payment with an increase of of interest by two to three percentage points, then they should refinance into a fixed rate mortgage. He admits the payment will be higher, but the comfort that the payment will not change should be peace of mind in an uncertain future.

If, however, the mortgage rate does not adjust in three to five years and the homeowner intends to sell in within that time period, Ken says to hang in there. The logic is that the only risk the homeowner takes is the possibility of the home depreciating in value. If the mortgage balance is 70% to 80% of the current home value, then the risk is much less.

To many, Ken’s advice would seem a bit too conservative. I, however, believe that this advice to be the consensus of good financial planning.

by Dan Krell © 2005

This column is not intended to provide nor should it be relied upon for legal and financial advice.