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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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Mortgage Rate Outlook for Week of July 18, 2011

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Mortgage rates continued lower last week fueled by concerns regarding employment and statements made in the June Federal Open Market Committee (FOMC) minutes regarding market weakness. The consensus among the majority of the recently released market data and the FOMC minutes is that the overall recovery is still a work in progress and the levels of GDP growth needed to fuel a healthy economy are still a ways off. This is good news for mortgage bad news for the economy as a whole.

Economic Calendar for Week of July 18, 2011

  • Monday – NAHB Housing Market Index
  • Tuesday – Housing Starts
  • Wednesday – Existing Home Sales
  • Thursday – Initial Claims, Philadelphia Fed, Leading Indicators

Mortgage rates have been been held down for weeks as bad economic data has driven bond prices up creating a unique and very likely last chance for home owners and buyers to take advantage of extremely low rates. The concern is that once this window closes and rates begin their inevitable move up, there will be no going back, which means that once the opportunity is gone, it’s gone for good. We can help you understand if you are in or getting into the best mortgage for your needs, please contact us for a free consultation.

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Economic Worries Translate Into Low Consumer Confidence and Low Mortgage Rates

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The University of Michigan’s / Thomson Reuters widely-watched consumer confidence index shows consumer confidence moving lower driven by lack of confidence in government economic policies and increasing pessimism over unemployment, home prices and falling income. The index fell  7.7 points to 63.8, its biggest decline since March with the index falling to 76.3 from 82.0, the lowest reading since November of 2009.

One issue at the forefront of eroding consumer confidence is the impending budget deal debacle which will decide the fate of whether or not the US debt ceiling can be increased, allowing the United States to continue funding its monthly obligations.

Adding to consumer anxiety is credit rating agency Standard & Poor’s statements this week that there is a 50 per cent chance it will downgrade the U.S. government’s credit rating within three months because of the congressional infighting over approving an increase in the debt ceiling. The rating agency has placed the United States on a credit watch, not good news for the economy or consumers.

FED Chairman Ben S. Bernanke in Semiannual Monetary Policy Report to the Congress:

Much of the slowdown in aggregate demand this year has been centered in the household sector, and the ability and willingness of consumers to spend will be an important determinant of the pace of the recovery in coming quarters. Real disposable personal income over the first five months of 2011 was boosted by the reduction in payroll taxes, but those gains were largely offset by higher prices for gasoline and other commodities. Households report that they have little confidence in the durability of the recovery and about their own income prospects. Moreover, the ongoing weakness in home values is holding down household wealth and weighing on consumer sentiment. On the positive side, household debt burdens are declining, delinquency rates on credit card and auto loans are down significantly, and the number of homeowners missing a mortgage payment for the first time is decreasing. The anticipated pickups in economic activity and job creation, together with the expected easing of price pressures, should bolster real household income, confidence, and spending in the medium run.

The silver lining for mortgage rates is that bad economic news results in lower or depressed mortgage rates. We can help you decide if you in the best mortgage for your needs or if a lower rate is available. Please contact us today for your free existing or future mortgage consultation.

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Federal Reserve Minutes Indicate Higher Mortgage Rates Coming

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The Federal Reserve released notes from the June 21-22 Federal Open Market Committee (FOMC) meeting on Tuesday, shedding light on the FOMC’s current observations of the market and how it will be adjusting its activities moving forward. This release of minutes is one of eight releases the Fed meets, following each of the eight Fed meetings that take place each year.

The minutes didn’t drop any bombshells that have had any significant immediate impact on mortgage rates, but did provide useful insight on how the Fed will be adjusting its activities, which will affect how mortgage rates move in the future. The market and mortgage rates as a whole were largely unmoved release of the minutes.

The Fed overview on the current state of the market shows that recovery has been slower than expected and that housing prices remain depressed, both factors holding back the overall recovery of the economy.

From the June 2011 FOMC Minutes:

Activity in the housing market remained depressed, as both weak demand and the sizable inventory of foreclosed or distressed properties continued to hold back new construction. Starts and permits of new single-family homes were essentially unchanged in April and May, and they stayed near the very low levels seen since the middle of last year. Sales of new and existing homes remained at subdued levels in recent months, while measures of home prices fell further.

Since the Fed sets monetary policy and participates in other activities such as buying Treasury debt, their activities can significantly impact the mortgage rates and the economy as a whole. As the Fed has implemented various policies to help push the economy out of recession, maintaining these policies for an extended period of time can do more damage than good. The June minutes provided some insight into how the Fed will unwind or exit some of these policies moving forward.

Fed Exit Strategy Principles

  1. The Fed will raise the Fed Funds Rate (the rate at which banks lend each other money overnight)
  2. The Fed will stop buying Treasury Debt (they are currently reinvesting the proceeds on existing obligations)
  3. The Fed will sell its holdings in mortgage-backed securities

Since rates are currently at very low levels, there is a lot more room for rates to go up then go down. That means that now is a great time to inquire about whether your existing mortgage is the best fit for you or to learn about your options if you are considering purchasing a home.




Recurring Closing Costs: Costs of Buying and Maintaining Your Home

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When you purchase a home for the first time, there are some expenses to keep in mind that you may not be aware of that you are responsible for when you close on your home.  Closing costs typically total 3% to 6% of the purchase price of a home. The recurring closing costs outlined below are not only applicable when you close but have to be paid on an ongoing basis after you take possession of your new home.

Recurring Closing Costs

These are the costs that you may have to pay out at closing, but that you’ll also be responsible for on an ongoing basis as a home owner.

  • Property Tax – This will be paid at closing if the seller has pre-paid any of the property taxes for the period after you take possession of the home. If your mortgage lender requires that you put your property taxes in escrow, one or two month’s payments may also be required at closing.
  • Mortgage Insurance – If you’ve taken out a high ratio mortgage (with less than 20% down) you may be required to have it insured. You may need to pay the full premium upfront or just the taxes. The same applies if you choose to take creditor protection to help you with your mortgage in case of illness or death.
  • Home Owner’s Insurance – To protect you against fire or flood, at the time of closing you will be required to prove that you have insurance in place. Some lenders will require that you pre-pay premiums for the whole year.

If you have any questions about recurring closing costs or any other mortgage related questions, we can help! Please contact us for a free mortgage consultation.

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