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Adjustable Rate Mortgage Terms

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Many new home buyers are focused more on the affordability of their monthly payments today without enough focus on the future payments they may have to pay if their loan adjusts to a possibly higher rate sooner than expected. Sometimes borrowers will take a shorter term, adjustable rate term when a longer term adjustable rate loan might be more appropriate and vice versa. There is a risk that if a homeowner gets into a shorter term adjustable mortgage that is not appropriate for them, they may not be able to afford their home if their mortgage rate adjusts upward too quickly.

As a result, it is important that new home buyers run some numbers before they choose their mortgage term. We can help you calculate payments at different interest rates and help estimate worst case scenarios upon adjustment (in the case of an adjustable rate mortgage), to help prevent a scenario where a loan that is affordable in the beginning, will not be unaffordable when the loan enters into its adjustment period. If we find that an adjustable rate mortgage term is not suitable for your finances or comfort level, then we can explore options for a longer term adjustable mortgage that will better fit your needs.

The Benefits of a Longer Term Adjustable Rate Mortgage

  • A longer term adjustable rate mortgage guarantees that home buyers will be able to afford their home over a longer period of time without their rate adjusting.
  • A 10 year adjustable mortgage, for example, allows home buyers to pay down more of the principal since the first few years of a mortgage primarily pays the interest.
  • By the time the longer term adjustable mortgage comes up for renewal, the total amount will be lower. This means it will be more affordable even if interest rates are higher as there will be a lower balance owed.

Home buyers that believe they will be able to afford their mortgage regardless of an increased interest rate can simply pick the mortgage term that most appeals to them. A little bit of preparation before choosing a loan term is critical in maintaining financial stability in the future and preventing challenges in the future.

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Mortgage Outlook: Week of August 8, 2011

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Last week marked new yearly 2011 lows for mortgage rates as a debt ceiling agreement was reached early in the week. These low rates were sustained through out the week with a small uptick on Friday when the Non-Farm payrolls came in stronger than expected.

Fast forward to today and the markets are being rocked by the S&P downgrade of U.S. credit worthiness. As a result, the Dow closed down 634.76 points or -5.55%‎, wow. This should bad for mortgage rates, causing them to rise, but there is significant concern and uncertainty in the markets about the US and World Economic outlook, which have helped rates maintain their current low levels.

What Will Happen With Rates This Week?

Volatility is the theme of the week, which means it’s hard to tell. Factor in the Fed meeting tomorrow and we’ve got yet another wildcard that could negatively or positively affect rates.

The bottom line is that rates are at record low levels and when rates move up, they will do so quickly and without warning. If you are looking to lock in a low rate, now is the time to do so, to hold off for lower rates is simply gambling. If there has ever been a sensible time to lock in a low rate and savings, this is it.

Economic Calendar for Week of August 8, 2011

  • Tuesday – FOMC Meeting
  • Wednesday – Wholesale Inventories
  • Thursday – Initial Claims
  • Friday – Retail Sales, Michigan Sentiment

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Mortgage Rates Set New Lows for 2011

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Mortgage rates set new lows for 2011 yesterday, fresh off a week that saw more negative economic data released and the biggest Dow plunge since 2008, with a total loss of 512.76 points. The loss was fueled by ongoing concerns in the markets about US debt, ongoing weak economic data, the possibility of a second recession and the possibility of a downgrade for US debt and ongoing debt crisis in Europe.

Today rates rose slightly on better than expected employment numbers. The U.S. economy added about 117,000 new jobs in July, coming in higher than the 46,000 jobs added in June. The street had expectations of 75,000 new jobs this month. The unemployment rate also showed a slight sign of improvement moving down to 9.1 percent, from 9.2 percent.

Getting Technical: Frank Nothaft, vice president and chief economist, Freddie Mac Speaks

“Treasury bond yields fell markedly after signs the economy was weaker than what markets had previously thought allowing fixed mortgage rates to follow this week with the 15-year fixed and 5-year ARM setting new historical lows. The economy grew 1.3 percent in the second quarter, which was below the market consensus forecast, and first quarter growth was cut to less than a quarter of what was originally reported. In fact, the first half of this year was the worst six-month period since the economic recovery began in June 2009. Moreover, consumer spending fell 0.2 percent in June, representing the first decline since September 2009.

“On a positive note, there were indications that the housing market is firming. Real residential fixed investments added growth to the economy in the second quarter after subtracting from growth over the first three months of the year. The CoreLogic® National House Price Index rose for the third straight month in June (not seasonally adjusted) and was the first three-month gain since June 2010. Finally, pending existing home sales rose for a second consecutive month in June and was up nearly 20 percent from June 2010 when the housing tax credits expired.”

Time and time again, rates have moved downward on a flood of negative economic data over the past month(s). While this has provided a record breaking window for locking low mortgage rates, the market will see mortgage rates move higher as the pendulum begins to swing the other way. The question is not if, but when, mortgage rates will increase. Not locking in low rates now is taking a gamble, we can help you lock in savings that will not be around for long.

Home Closing Basics

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Everyone’s home search is different. Some buyers fall in love with the first home they see, and others have wish lists that are harder to satisfy. Buyers typically make their decisions based on location, size, finishes and features, and of course price. What most buyers don’t realize is that the process doesn’t end when you choose your dream home and put in an offer.

The Offer Process

In many ways the offer process is straightforward. You determine a price you’d be willing to pay, add any conditions or requests you’d like the seller to consider, and then allow your agent and possibly a lawyer to review it before it’s submitted. If you’re submitting an offer without having secured financing, there are other actions you need to take, including showing proof of income.

Once your offer is accepted by the seller, there are only a couple of reasons why you’ll be allowed to back out of the deal. Some purchases are contingent on financing, while some are contingent on the results of a home inspection. If neither party backs out, however, you go to closing.

What is Closing?

Closing is the name given to the time when your home purchase becomes final. In order to close your mortgage needs to be approved, and you must officially turn in your down payment and checks for closing costs. Sometimes you’ll be able to sign the final contract early, but often that step has to wait until closing day. Your closing day is the day you receive your keys and your house is officially in your name. That’s the day when your home search is truly over.

Need Help With Your Home Purchase?

We can help you pre-qualify for a mortgage and help you understand what mortgage rate you would qualify for. More importantly, we can help you establish how much home you can afford. Since rates are near or below 2011 lows, now is the time to lock in extremely low rates before they are gone, which is not a question of if, but when.

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Mortgage Outlook for Week of August 1, 2011

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Mortgage rates were suppressed last week by jittery markets focused on the ongoing debt ceiling debate. While there is a talk of a debt ceiling resolution this morning, there are still concerns about the details of implementing such a solution and whether or not the damage has already been done to world confidence in the United States’ credit worthiness.

Even if a debt ceiling resolution is in place, there is rampant speculation that the United States AAA credit rating is in jeopardy. There is even greater speculation about the aftermath that would occur, should the United States have its credit rating downgraded.

Manufacturing Sector Report Disappoints

The ISM Manufacturing index fell to 50.9 in July, down 4.4 points from June in data released by the Institute for Supply Management. The index fell to 50.9 in July, down 4.4 points from June, marking the sector’s slowest growth since July 2009. Analysts want to see a reading above 50 as that is the level where the manufacturing sector is considered to be growing. While the index has been above that level for two years straight, a reading of only 50.9 shows that growth is very flow, which disappointed analysts.

“The U.S. ISM manufacturing report for July is a shocker and strongly suggests that the disappointing performance of the economy in the first half of the year was not just temporary,” Paul Dales, senior U.S. economist with Capital Economics, said in a research note.

How Are Mortgage Rates Affected?

Continuing negative economic data as we have seen over the past months paints a picture of an economy that is struggling. This means that investors are more likely to flee stocks and push their money towards safer vehicles like bonds, which which can translate into lower mortgage rates. The data is bad, but for current or prospective home owners, it has extended a window of extremely low mortgage rates. Since rates are not expected to stay at these low rates, now may be the opportunity you have been looking for to lock in a new low rate for your existing or future mortgage.

Economic Calendar for Week of August 1, 2011

  • Monday – Construction Spending
  • Tuesday – Personal Income & Outlays Report
  • Wednesday – Factory Orders, ADP Employment Report
  • Thursday – Initial Jobless Claims, ISM Non-Manufacturing Index
  • Friday – Unemployment Rate, Consumer Credit

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Poor GDP and Consumer Sentiment Data Translates Into Low Mortgage Rates

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U.S. Treasuries prices rose this morning (good for lower mortgage rates) as news the U.S. economy grew at an even slower pace in the first half of the year than was previously estimated, raised yet more fears the economy was at a real risk for recession. Gross domestic product, a measure of all goods and services produced within the United States, shows that output increased at a 1.3 percent annual pace in the second quarter. According to Commerce Department data, the economy advanced just 0.4 percent in the first three months of the year, which is significantly lower than the previously reported 1.9 percent gain.

Mortgage rates eased slightly lower this morning on the GDP data. Negative data is bad for the economy as a whole, but good for mortgage rates, which move lower when investors move into the safety of bonds.

‘Economic growth … was much weaker than the government had previously estimated and this opens the door for potentially another round of quantitative easing from the Federal Reserve,” said Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis. “Therefore, the bond market responded positively to the weak GDP number while the dollar weakened.”



Debt Ceiling Fears Linger

Also continuing to weigh on the markets is the uncertainty around a resolution to the debt ceiling debate in Congress. The continued uncertainty has helped suppress mortgage rates, keeping them at extremely low levels.

Consumer Sentiment Index Reaches Lowest Level Since 2009

All of the negative economic data is not only being felt by consumers but showing in consume sentiment numbers released today. The Thomson Reuters / University of Michigan’s index of consumer sentiment came in at 63.7, down from 71.5 in June, the lowest reading since March 2009.

While the economic outlook and data of late is not great, this means that now is an outstanding time to make sure you are saving as much money with your mortgage as possible. Since mortgage rates will not stay are their current low levels for long, now is the time to ask us how we can help you lower your existing rate or get the lowest rate on your new home purchase loan.

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Increasing Your Home’s Value With the Right Contractor

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With the current state of the real estate market, remodeling or completing renovations on your home is a great way to begin putting value back into your property. However, it is a big investment and when you are hiring a contractor to complete the work, you need to be certain that they are reputable and that they will get the job done right.

There are unlicensed contractors operating that may not have the same standards as those that are licensed, and they may try to cut corners on the job in ways that will cost you money and cost you the structure of your home.

To avoid contractor problems like the ones above (and more), there are a number of things that you can do.

How to Choose the Right Contractor

  • Check Qualifications – Don’t be afraid to ask contractors to show you proof that they are licensed and registered as required in your jurisdiction. If you want a testament to someone’s skills, consider selecting someone referred to you by someone whose opinion you trust.
  • Don’t Choose Based on Money Alone – The person with the lowest bid may seem appealing, but it is important to recognize that with cost comes value. You do not necessarily need to choose a contractor that quotes the higher price either; just be skeptical of those that seem too good to be true.
  • Ensure They Get Your Vision – When you communicate your needs to the contractor, make sure that before they start the job, they are able to communicate their understanding.
  • Do Your Research – Not only should you do your research with regards to each contractor you interview, know what the job you want done requires. If you know in advance what part of the project will require permits, for example, you can be skeptical about a contractor that says the job can be done without them.

Whether you are planning to remodel your home in preparation to sell, to increase the value of your home, or for your own enjoyment, finding the right contractor is essential.

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Mortgage Outlook for Week of July 25, 2011

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Mortgage rates worsened this morning, led in part by “positive” data from the the National Association of Home Builders/Wells Fargo sentiment index. The index climbed to 15 this month from 13 in June, which was higher than forecast. While the index is still at very low levels, positive surprises such as this one carry more weight in the bond markets than they might normally, given the slew of negative data that has been released in the past weeks.

From Bloomberg’s Coverage:

“It’s still at a very low level,” Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York, said about the homebuilders’ measure. “In order to see a brighter future for housing, we need to see a stronger economy.”

Builders are facing a backlog of discounted, distressed properties that remain in the foreclosure pipeline and are hesitant to start new projects. Rising unemployment and depressed home values may keep housing one of the weakest parts of the recovery.

Economic Calendar for Week of July 25, 2011

  • Tuesday – Consumer Confidence, New Home Sales
  • Wednesday – Durable Orders, Fed’s Beige Book
  • Thursday – Initial Claims, Pending Home Sales
  • Friday – Michigan Sentiment

Moving forward, mortgage rates will be highly reactive to news relating to Congress’s debt ceiling dialogue and debate. Since the debt ceiling is expected to be reached in early August and the outcome of the debates can have a significant affect on markets worldwide, the next week will be critical in assuring anxious markets or driving them into a deeper state of agitation. Rates can and will react at a moments notice when positive or negative news comes out regarding a debt ceiling agreement or lack thereof. Holding off on locking in the current low levels that rates are at is a gamble as rates may move significantly higher depending on how the debt ceiling talks go. We can help you decide if locking in a low rate is the best move for your existing mortgage or a new purchase you might be contemplating.

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Lawmakers Introduce Bill to Extend Higher Conforming Loan Limits

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As part of the economic stimulus package in 2008, temporary loan limits were enacted to help homeowners in high-cost areas that were unable to get loans for more than $417,000 under the standard conforming loan limits regardless of their payment history, credit and income. Homeowners in areas such San Francisco, New York and Los Angeles routinely faced higher priced homes, which meant they were required to bring in substantially larger down payments when purchasing their home.

Representatives John Campbell, a California Republican, and Gary Ackerman, a New York Democrat, introduced a bi-partisan bill, H.R. 2508, the Conforming Loan Limits Extension Act, that would extend the 2008 loan levels for Fannie Mae, Freddie Mac and the Federal Housing Administration for an additional two years. Without this bill, the higher loan limits are scheduled to expire on September 30,2011.


For loans originated on or before September 30, 2011, the “temporary” high-cost area loan limits will apply and will be the same as the 2010 high-cost area loan limits, up to a maximum of $729,750 for a 1-unit property in the continental U.S. Loans originated on or after October 1, 2011, will use the “permanent” high-cost area loan limits established by FHFA under a formula of 115% of the 2010 median home price, up to a maximum of $625,500 for a 1-unit property in the continental U.S.

These temporary conforming loan limits are set to expire on September 30, 2011 if the bill extension is not passed. Upon expiration, these high-cost areas will be subject to standard conforming borrowing loan limits as shown below.

Standard Maximum Conforming Loan Limits for 2011
Units Contiguous States Alaska, Guam, Hawaii, and the U.S. Virgin Islands
1 $417,000 $625,500
2 $533,850 $800,775
3 $645,300 $967,950
4 $801,950 $1,202,925

If you live in a high-cost area, remember that regardless of where rates are, you may have trouble getting the loan size you need. Be sure to speak with us regarding your options as far in advance of the expiration as possible as H.R. 2508 has only been proposed, it has not passed and may not pass. We can help you understand the options you have so that you can make an informed decision before these higher loan amounts are no longer available.

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Applying for a Mortgage: How Much Can You Afford?

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Whether you’re applying for a mortgage for the first time or are looking at purchasing a new home and will be increasing your mortgage amount, it’s essential to understand how much you can afford. You may think that any number that fits within your monthly budget is comfortable and sustainable, but your mortgage lender may say otherwise. In order to determine what you can truly afford, there are some guidelines that mortgage lenders insist you abide by and they can ensure that you don’t get in over your head with your home purchase.

How Mortgage Debt Ratios Determine Affordability

You might think that if you make $4,000 per month that $2,000 per month to carry your mortgage is quite affordable but it’s not quite as simple as that to a mortgage lender. What they look at is a few essential debt ratios that ensure you’re taking on a mortgage well within your means with consideration to your other debts and expenses.

Gross Debt Service Ratio (GDS)

The gross debt service ratio looks specifically at the affordability of your housing costs, and it requires that they are not higher than a fixed percentage of your household income, which can vary by program and lender.

The way the GDS is determined is by calculating the monthly mortgage amount + property taxes + condo fees, and then that sum is divided by monthly income. In the case of the $4,000 income and the $2,000 mortgage payment, with this equation, that is not an amount that a mortgage lender would provide a borrower as the ratio is far too high without even considering the other housing costs.

Total Debt Service Ratio (TDS)

Your total debt service ratio is also considered to ensure that you get a mortgage amount that is easily affordable. The same calculation for the TDS applies, but with this debt ratio, all debt obligations are considered whether it’s a car loan, student loan or minimum credit card payments for outstanding balances as well as your housing expenses. This debt ratio can be no higher than 40%-42% on some programs, but this number can vary by program and lender.

Ensuring Your Mortgage is Always Affordable

While it may seem as though the mortgage amount that you’re approved for based on the debt ratios is much lower than what you believe fits into your budget, this is a realistic amount for a number of reasons:

  • As a general rule, having your total debt expenses total no more than 40% ensures you have enough cashflow for savings, investments, household repairs, day-to-day living expenses and more.
  • When you take on a fixed rate mortgage for 2 or more years, there’s potential that in that time period your situation or income could change. With a GDS of 32% or under, it’s more realistic to expect that if that happens, it’s more likely you’ll be able to continue to pay your bills.
  • You never want to become house poor or you’ll begin to resent your investment. When you don’t over-spend on your home, you’ll still have opportunity to live your life.
  • When you first buy your home, you may have fewer expenses than you would if your life changes. For example, when you make your purchase you may only be a couple and if later you have children, your variable expenses may change greatly.

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