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Understanding Mortgages


Couple holding a house

Interest rate are climbing, but how high will they go?

The answer is a bit foggy, as is their effect on conventional mortgage rates. However, should they head higher, newly released information suggests that many would-be buyers say they wouldn't let this get in the way of entering the market.

On March 21, the Federal Reserve - as expected - raised the benchmark funds rate to 1.75 percent, following several quarter-percent increases in 2017 and a few more in previous years. This most recent hike puts short-term interest rates at their highest level in a decade.

When key interest rates rise or fall, they cause a ripple effect that impacts savings, credit card fees and mortgage rates. Indeed, tracing back to when the Fed first started raising interest rates in earnest, mortgage rates have followed suit, although at a more moderate pace. For instance, according to data from Freddie Mac, 30-year fixed-rate mortgages used to average below 4 percent. Now they average around 4.5 percent.

Additional rate hikes may be in store

Economists seem to agree that the central bank isn't done. According to The Washington Post, some predict as many as two or three more rate hikes before 2018 concludes. But even if this comes to pass and mortgage interest levels run higher in response, most Americans wouldn't let it deter them from buying a house.

That's according to a poll conducted by SurveyMonkey, which found that, of the 4,000 individuals who participated, just 6 percent said they'd change their mind about buying a house if mortgage rates surpassed 5 percent.

Recent evidence seems to suggest as much. Home sales continue to spring up like roses. In February, purchases for all housing types rose 3 percent compared to January, according to the National Association of Realtors. This translated to a seasonally adjusted total of 5.5 million properties bought across the U.S. in February.

This gives credence to the general consensus among real estate agents who say their clients aren't altogether bothered by rates on the rise. In fact, financial advisor Peter Boockvar believes it's having the opposite effect.

"Higher rates are actually spurring buyers to step up and lock in with a purchase and a funding rate before they head even higher," Boockvar told CNBC. He added that weekly mortgage application data, maintained by the Mortgage Bankers Association, is further evidence of this. In early March, purchase loans were - and likely continue to be - the most popular mortgage type.

5 percent is the norm for interest rates

Historical context may also be playing a role in how prospective buyers are seemingly unperturbed by rates elevating. After all, the historical norm for short-term interest rates is 5 percent, and 30-year FRMs once averaged in the double-digits during the 1970s.

Real estate experts are none too bothered either, but admittedly they would rather see inventory levels do the climbing.

"To fully satisfy demand, most markets right now need a substantial increase in new listings," National Association of Realtors chief economist Lawrence Yun told CNBC.

With the economy on firmer footing and consumer sentiment at 17-year highs, that just might happen. But much like the direction of interest rates, only time will tell.

Understanding Mortgages

Down payment on a house might be a lot less than you think it is

A down payment on a house might be a lot less than you think it is

Have you ever heard the expression that "what you don't know can't hurt you?" While this may be true some of the time, it isn't exactly accurate when it comes to buying a house or applying for a mortgage. That's because many people, it turns out, have preconceived notions about how much they need to spend on a down payment, believing it costs more than it actually does.

Nearly 45 percent of baby boomers think that a 20 percent down payment is required in order to be eligible to buy, according to a 2016 poll conducted by the National Association of Realtors. Many first-time buyers are also of this mindset: 37 percent of respondents 35 years of age or under thought the same thing.

What is the average down payment on a house?
This 20 percent down payment myth has been circulating for a while, but it's time to put an end to it. For several years, the average median down payment for U.S. homebuyers has hovered around 5 percent of the purchase price, according to NAR research.

This may also provide greater clarity as to why prospective buyers at the state level can't help but have some misgivings about entering the market. A 2017 survey conducted by the Michigan State Housing Development Authority found that the cost of a down payment was the chief concern for 55 percent of individuals living in the state and aspiring to buy a house for the first time.

Lawrence Yun, chief economist at the NAR, said this is a thinking process of millennials as a whole and could explain why homeownership among people age 35 and under is less robust than it's been.

"It's possible some of the hesitation about buying right now among young adults is from them not realizing there are mortgage financing options available that do not require a 20 percent down payment, which would be north of $100,000 in some expensive areas in the country," Yun explained.

Many millennials admit they haven't saved enough
However, there are those situations where millennials really aren't saving enough for the down payment portion of a real estate transaction. According to survey data from Apartment List, two-thirds of 18- to 34-year-olds have down payment savings of less than $1,000. Perhaps if more people spread the word about down payments, they will encourage more people to save in order to achieve a dream that is much more attainable than they once thought.

Although 5 percent is the typical down payment for first-time borrowers, conventional mortgages allow for 3 percent. And if you're currently serving in the military, are an eligible veteran or surviving spouse of a service member, the down payment could be waived altogether, as no down payment options are available to qualifying borrowers through the Department of Veterans Affairs. There are also zero down payment options available to qualifying borrowers and homes through the USDA Rural Development program.

Although not being required to pay 20 percent of a home's worth surely comes as good news for would-be buyers, in many cases it may still be a good strategy to put more toward the down payment in order to reduce your monthly mortgage expenses. These are the kinds of decisions that are good to examine with a loan officer.

For more help on the financing program that makes the most sense for you, talk to an RMS loan officer today.

Understanding Mortgages

What's causing the rise in mortgage ratesIf you're considering applying for a mortgage and have taken a peek at interest rates, you've probably noticed something that's hard to miss: Rates are rising.

If you go back to as recently as 2016, a 30-year fixed-rate mortgage averaged in the 3.5 percent range through most of the year, according to archived data maintained by Freddie Mac. And in years prior, 30-year FRMs occasionally reached even lower levels.

Today, the tide has turned a bit. As of mid-February, 30-year FRMs have increased every week in 2018, now averaging 4.22 percent, based on the most recent Primary Mortgage Market Survey from Freddie Mac.

The reversal raises a simple question: Why? The answer, admittedly, isn't quite as clear cut.

Economic stimulation

Like the residential marketplace itself, the forces behind mortgage shifts are numerous and variegated, and the relative influence of each variable can change. One of the chief effects is the economy. In bad times, when gross domestic product is low or unemployment is high, mortgage interest rates tend to be more affordable in an effort to stimulate borrowing and investment on the part of businesses and individuals who have the means to buy. This is part of the reason why in the aftermath of the recession, fixed-term mortgage loans for the most part stayed in the 4 percent range, reaching 5 percent only on a handful of occasions in 2010.

When the economy strengthens, like it did in 2017 and continues to do thus far in 2018, mortgage rates frequently rise, in part to prevent the economy from burning too hot.

Actions by Federal Reserve

The Federal Reserve is the central banking authority in the U.S., charged with implementing monetary policy for the country. One of its main functions is determining short-term interest rates. The Fed doesn't unilaterally establish where interest rates will be, but participates in actions, like lending, that move them along.

Generally speaking, when the Fed raises the benchmark on interest rates, mortgage rates follow suit. While this isn't always the case, the actions by the central bank do have an influence. In February, the federal interest rate stood between 1.25 percent and 1.50 percent. Economists polled by the Wall Street Journal predict the Fed will adjust rates higher three or four times in 2018, noting the number could change.

Developments on the world stage

There's no denying that the U.S. has the largest economy in the world. California alone has a GDP that's on par with some of the world's leading countries.

But what’s going on in the U.S. doesn't occur in a vacuum. Because of the American free market economic system, what happens at the global level has an impact at home. Influences may include, but aren't limited to, political developments, employment availability, the cost of living and even fuel prices. Furthermore, much like the U.S. when the economy performs well, mortgage rates also rise when the global economy is robust. As noted by the Wall Street Journal, numerous countries had a stellar 2017, evidenced by new records among several major stock indexes, like Japan's Nikkei and Germany's DAX.

Everyone wants an affordable mortgage with the lowest rates possible. And even though their interest rates are higher, would-be buyers recognize they're still low. In fact, just 6 percent of buyers said they'd put off applying for a mortgage if rates surpassed 5 percent, according to a poll commissioned by Redfin. And even though rates are higher, borrowers are keeping up with their payments, as serious delinquencies (overdue by 90 days or more) fell in 48 of 50 states in November, based on the most recent statistics available from CoreLogic.

The mortgage approval process is a highly personal one and can be complicated if you're new to it. At Residential Mortgage Services, we guide our clients from beginning to end so they know exactly what to expect. High-quality, friendly service at RMS isn't just our specialty - it's our priority.

Understanding Mortgages

Millennials as Home BuyersMillennials belong to the largest generation in the U.S. at 83 million strong, according to the most recent Census Bureau data, and they're also highly diverse. Indeed, almost 45 percent are a part of a minority group. Given this, their attitudes don't always align. After all, they come from a host of different backgrounds and encompass several age groups (18 to 35 years of age).

But one area where millennials are in relative lockstep is homeownership. Many are experiencing the same obstacles to achieving the American dream, new polling data suggests.

The homeownership rate climbed in 2017, reaching 64.2 percent in the fourth quarter, according to the Census Bureau. Up from 63.7 percent in Q4 of 2016, homeownership is currently at its highest point since Q4 2014. It also ticked higher from 63.9 percent in the third quarter. 

And believe it or not, it was none other than millennials who pushed homeownership forward. As reported by The Wall Street Journal, the percentage of buyers 35 years of age and under in 2017's closing quarter reached 36 percent, up 1.3 percent from the fourth quarter of the preceding year.

Supply shortfall causing frustrations

But millennials have been met with a few bumps in the road, influenced largely by supply constraints. According to data from, numerous first-time homebuyers in the previous 12 months had limited options to select from, with inventory down almost 9 percent compared to the previous year. This caused asking prices to reach levels often beyond their financial means.

Joe Kirchner, senior economist, indicated builders can't move fast enough to shore up the number of property listings, but they still need to be mindful of buyers' budgets.

"Builders will need to focus more on homes geared for moderate incomes, partner with the government on initiatives to transform distressed urban neighborhoods and overcome labor shortages through a combination of workforce development training and pressure to ease artificial restrictions on the supply of labor," Kirchner said.

For 70 consecutive months, asking prices have risen on a year-over-year basis. In December, the median for an existing home was $246,800, according to the National Association of Realtors. Inventory levels also fell in December from the same period 12 months ago, down 11.4 percent to just 1.4 million up for sale. That's the lowest amount on record.

If you're new to the homebuying process or are interested in applying for a mortgage, Residential Mortgage Services can help you get started. We originate mortgage loans throughout the Midwest, South and Northeast, and our loan officers are ready to provide you with the options that best fit your needs and budget.

Understanding Mortgages

Why all the personal questionsOn every mortgage loan application there is a section of questions that can feel a bit uncomfortable to ask and answer. Most people expect to answer questions about how much money they make, how much they have tucked away in a bank account and what their credit card debt looks like. It’s a financial transaction, after all. Financial questions ought to be in there. But race? Ethnicity? Which gender I identify with… what does that have to do with a mortgage approval?

And the answer is: Nothing at all.

Questions about race, gender, age, ethnicity, etc. have nothing to do with the mortgage approval process. Even though the questions are asked and answered right there in the same paperwork as your car payment and income, nothing in that section is used as a factor in evaluating whether you are a good candidate for a mortgage loan.

Why are they there at all? To protect you.

You see, in our country’s efforts to protect citizens from unfair biases in the lending world, it became apparent that we couldn’t fix what we couldn’t see. We needed to be able to track the lending opportunities offered within communities in order to catch unfair practices and do something about it. In 1975 the Home Mortgage Disclosure Act (HMDA) was passed, giving the public and financial regulators information to make sure financial institutions were providing access to residential mortgage loans in their communities. This was expanded to include questions that could help identify discriminatory lending patterns. After the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was passed in 2010, new questions were added to help spot troublesome trends. In January 2018 even more additional questions became a requirement.

What should I do when I come across these questions?

It’s up to you how you choose to respond, and your choice won’t make any difference on whether your mortgage loan is approved. Maybe you take the view that the more accurately these questions are answered, the better the statistics will be, and you’re doing your part to help mortgage lending be as fair as possible. Or perhaps you’re uncomfortable identifying yourself in those terms and would rather not give an answer. This is an option that you’re welcome to choose. Either way is fine. If you do choose to answer, though, please answer honestly.

Here’s a fact that not many people know, going into a mortgage application meeting: If you meet with your Loan Officer in person and decline to answer the HMDA questions, your Loan Officer is required to make a best guess and answer the questions for you.

If you have questions or feel uncomfortable about the HMDA questions, talk to your Loan Officer about your concerns. They’ll be able to talk to you and explain your options.

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