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First the bad news.  According to the latest data from the Mortgage Bankers Association (MBA), the current average 30-year fixed mortgage rates are 2.5% to 3% higher than a year ago.  Current 30-year mortgage rates range from 5% to 6% for most borrowers (depending on the borrower’s credit score and the type of transaction).

What most people don’t realize is that current mortgage interest rates are still low compared to mortgage interest rates in the 1970’s, 1980’s, 1990’s and 2000 through 2007.  During these periods mortgage interest rates reached as high was 18% and were generally above 6%.

FUTURE MORTGAGE INTEREST RATE ENVIRONMENT

Due to inflation, the Federal Reserve has been tightening since January 2022 by reducing its asset holdings and by increasing the interest rate that it controls, the Federal Funds Rate.  The Federal Funds Rate does not directly impact mortgage interest rates (more on this later), however the change in the policy of the Federal Reserve in January 2022 does impact mortgage interest rates indirectly because a change in Federal Reserve policy impacts all types of interest rates.

As we begin August 2022, the outlook for mortgage interest rates remains uncertain.   However, there is a growing belief that sometime in the second half of 2022 or in early 2023 mortgage interest rates will decline.  During the final two weeks of July mortgage interest rates have moderated and have declined slightly and more importantly volatility in mortgage interest rates has decreased.  There is optimism that mortgage interest rates may have peaked due to the belief that the U.S. economy either has already entered a recession or will enter a recession in the second half of 2022.

If the employment picture begins to deteriorate it is likely that the Federal Reserve will be forced to modify/change policy in order to avoid a long-lasting recession.  A potential change in policy will lead to a change in future interest rate expectations for all types of interest rates and will lead to lower mortgage interest rates.

Stay tuned!

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BACKGROUND ON MORTGAGE INTEREST RATES

Who sets mortgage rates? Why do rates change? How often do rates change?  These are some of the questions that are often asked.  Like a lot of things in life, many people believe one thing when in fact something totally different is true.

When it comes to mortgage interest rates the public believes that the Federal Reserve, Congress, the Government, banks or some other entity or person sets mortgage interest rates.  While the actions of each of the parties mentioned can influence mortgage interest rates, none of these parties or entities “sets” mortgage interest rates.

The real answer is that mortgage interest rates, and the corresponding fees or points charged for various rates, are set by the prices of Mortgage Backed Securities (MBS).  MBS are pools, or groups, of mortgages packaged into securities for sale in the secondary market. These MBS are traded in a manner very similar to stocks and are sold to investors.  What investors pay a pool of MBS is what sets interest rates.  In other words, investors who invest in mortgages set mortgage interest rates

Wholesale and correspondent lenders purchase loans from brokers and banks that originate mortgages for homeowners, with the intent to resell those loans by packaging them into MBS and then selling to investors into the secondary market. The going price in the secondary market for mortgages at various interest rates influences the rates and prices a broker or bank will offer to the public.  The value of the mortgages and the price of MBS is constantly changing which is directly the reason mortgage interest rates offered to the public change daily.

The two factors that impact mortgage interest rates the most, and what investors are willing to pay for MBS pools, are economic growth and inflation. The faster the economy is growing, the more demand there will be for capital, leading to a higher cost for borrowing money. That is why good news about the economy is often good for stocks but is bad for mortgage interest rates.  In addition, growing economic activity adds to demand for all types of resources which leads to inflation. Inflation erodes the value of a dollar, so a lender will demand more dollars back later to compensate for the lost purchasing power.

Since mortgage rates are often fixed for the life of the loan, inflation over the years can seriously diminish an investment’s inflation adjusted return. At the time an investor purchases a MBS, the rate of inflation will be over the life of the loan must be predicted.  As a result, the investor will demand that the yield on the investment exceed the expected rate of inflation by enough to earn a reasonable return. Predicting what inflation will be for years in the future can be very difficult and being wrong can be very costly. This is why MBS prices are highly sensitive to anything that changes investors expectation of future inflation.

Any news which provides information about the current level and expected level of economic growth or inflation will influence prices.  Economic reports and data that measure the strength of the economy and the amount of inflation are released on a weekly basis. Some data and reports have more significance than others.

This is a brief explanation to answer the question of who sets mortgage interest rates, and outlines some of the factors that that cause mortgage interest rates to change on a daily basis.

Trigger Leads are something that seems to be more prevalent and worrisome over the last few years.

So, what is a mortgage trigger lead? When you fill out a loan application, you are also giving the lender permission to pull your credit. When a lender pulls credit, it is pulled using certain “codes” that they must use to show they have permissible purpose to pull credit. These codes trigger the national Credit Reporting Agencies (Experian, Trans Union, Equifax) that a consumer is shopping for a mortgage, new or refinance.  The credit bureaus take the consumer’s information and turn these into trigger leads that are then sold to other lenders. It is important for you to know that your information is not being sold by us when pulling your credit, or our company. Nor is your information being sold by the third-party credit reporting agency we are using to pull the credit. Your information is actually being sold by the three major credit bureaus – Experian, Trans Union, and Equifax.

After your credit is pulled, you may start receiving dozens of phone calls, emails or physical mail from other lenders wanting your business. Is this legal? Unfortunately, yes. According to the CEO of the National Foundation for Credit Counseling (NFCC) “Under the FCRA, as long as the company that is buying the trigger leads meets certain legal requirements, it is legal in all 50 states.”  The Federal Trade Commission (FTC) has been a proponent of selling trigger leads in that they felt it can provide the consumer with more options when they are looking to buy or refinance a home. For most consumers though, ending up on a trigger list can be something of a nightmare.

Trigger leads are normally sold in bulk lots and when a broker signs up to receive trigger leads, they can request them with certain parameters. They can request certain age groups, specific credit scores, certain neighborhoods, current mortgage payments…the list goes on and on.

There are steps you can take to prevent some of this activity.   Go online or call to opt-out of your information being sold. We cannot opt-out for you.

To opt-out of having your information sold by the credit bureaus, do one of the following:

Divorces are anything but simple, and complicating the process are decisions about what to do with the marital home and its existing mortgage.

It’s important to remember that divorce isn’t a release from debt. Just because you are no longer married to someone, doesn’t absolve you from your mutual debts. Preparing for divorce financially, especially if you have assets, typically requires an accounting of assets and debts, a decision on how to split them equitably and an execution of legal documents to divide financial and real estate assets.

Your commitment to marriage may have ended, but your commitment to your mortgage has not. So BEFORE you make decisions about your home or mortgage during a divorce, make sure you have the right people around you, including a good divorce attorney, a financial planner and a mortgage broker.

Divorce Mortgage Guidance – What is it and Who needs it?

Divorce Mortgage Guidance is a free service provided by Spectra Mortgage that helps divorcing homeowners make informed decisions about secured house debt and resolve real estate gaps in their divorce case and marital balance sheet.  As a trained and designated RCS-D (Real Estate Collaboration Specialist-Divorce) specialist, we work with family lawyers, mediators, financial professionals, and divorcing homeowners to help preserve home ownership eligibility and help protects credit scores for each divorcing spouse.

Divorce has been known to damage credit scores and we want to protect you from that. Even if you don’t have a marital home with your spouse now, Divorce Mortgage Guidance is still important to you, as above all, saving your credit score before, during, and after the divorce is critical to ensure you can move forward with obtaining new credit and insurance once the dust has settled.

Divorce Mortgage Guidance really takes a consumer protection approach and is most valuable during the discovery phase, which is before mediation and the collaborative practice phases enter the picture. Our goal is to help you structure the property settlement agreement to make an informed decision and secure future financing success.  We assist you with being a document wrangler and review mortgage underwriting and guidelines to help avoid any mistakes on the property settlement agreement that would preclude you from getting funding for a new loan.

Divorce may feel like the end of the world, but there is life and financial peace after the storm passes.  Let Spectra Mortgage help you navigate thru the eye of the storm and help keep your financial standing strong.

Divorce Can Be Messy – Make Sure Your Financial Standing Isn’t.

 

Coming up with a down payment for a home can seem overwhelming, especially to a first-time home buyer.  However, for veterans, service members, and their families there is a program designed to help them overcome this hurdle.  With a VA loan, you can put no money down and mortgage insurance is not required.

Other mortgage programs such as FHA and conventional require primary mortgage insurance if you put less than 20% down on a home.  There are other fees you need to be sure you are aware of and understand.

VA loans are not just for buying a home either.  It is possible to refinance to do renovations, pay for home improvements, or do debt consolidation.

What is a VA loan?

A VA loan is backed by the US Department of Veterans Affairs.  VA loans are not issued by the federal government.  It is a guarantee that the VA will pay the lender up to 25% of the loan amount if the loan should go into default.

It is possible in most cases to finance 100% of the home and finance the closing costs as part of the loan.

Who Qualifies?

The main requirement is to get a Certificate of Eligibility (COE) from the Department of Veterans Affairs.  Qualifying spouses of service members may also be eligible to receive a certificate of eligibility.  A Certificate of Eligibility is a document from the Department of Veterans Affairs that confirms your eligibility for the VA program.  The document details your VA loan entitlement and if you are required to pay a VA funding fee.  The following link will walk you through to get a Certificate of Eligibility: https://www.va.gov/housing-assistance/home-loans/how-to-request-coe/

Lenders will have their own credit requirements, so it is always good to check with the lender for any additional qualifying requirements.  It is always a good idea to get pre-approved so you know what you can qualify for and be sure the new obligation will fit into your budget.

What are the different types of VA Loans?

When deciding what type of loan is right for you, it is important to understand how each program works and how they match up with your situation.  We offer free consultations and would appreciate the opportunity to go over your options to see what is best for your situation.

The simple answer is that the Federal Reserve Bank (the “FED”) continues to modify and adjust its policy.

The reason for the change in FED policy was that the inflation that began in 2021, which originally was ignored and downplayed by the FED, has exploded in 2022.  The causes of current inflation include but are not limited to economic data in the US, massive government spending in 2020 and 2021, the ongoing pandemic that affected the price of other goods due to supply chain disruption, the increase in energy cost as a result of policy changes and made worse by the war in Ukraine that has affected the price of all commodities (oil, gas, copper, industrial materials, etc.…).  Controlling Inflation is one of the two primary policy goals of the FED and to this point its policies have failed to control inflation.

The expectation by the financial markets is for inflation to continue to grow which caused interest rates to rise in anticipation of future FED actions, including their state objective to increase the FED Funds Rate and to substantially reduce the purchases of Mortgage-Backed Securities.  It is noteworthy to note that during the first quarter of 2022, the FED has confirmed that the market is right to be afraid of its change in policy.

This sums up the big problem for mortgage interest rates so far in 2022 and the reason for the unprecedented increase in mortgage rates at the fastest pace, in a similar time frame, since 1994.

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For the week ending March 31, 2022, the average 30-year fixed mortgage interest rate, published by Freddie Mac, rose to 4.67% nationwide.  This rate was approximately 3% on January 1, 2022.  This is the highest level for interest rates since December 2018 and the sharpest increase in mortgage interest rates in such a short timeframe since 1994.

BACKGROUND ON FED POLICY

Fed policy involves setting the key overnight lending rate in the US (the Fed Funds Rate) as well as deciding when to buy and sell large amounts of various types of bonds.

The types of bonds purchased by the FED include US Treasuries and Mortgage-Backed-Securities (MBS).  The MBS market directly influences mortgage rates.  As a result, the Fed policy for purchasing MBS bonds has a direct and significant impact on mortgage rates.  If the Fed gives the market a reason to expect smaller MBS purchases, mortgage rates will rise.

Starting in November 2021, the Fed began reducing the size of its bond purchases that began at the start of the pandemic. This was bound to happen at some point, but November was a bit earlier than financial market experts had expected. As a result, MBS suffered, and mortgage interest rates began to rise.  30-year mortgage rates were as low as 2.5% in the fall of 2021, prior to this announcement.

In December 2021, the Fed announced it would decrease MBS purchases at a faster pace than previously announced in November.  At the beginning of January 2022 mortgage interest rates had risen to just above 3% following the December announcement.

On January 5th, 2022, the minutes from the December’s Fed meeting were published.  The minutes are closely reviewed because they often reveal additional details that didn’t make it into the official policy statement released immediately following the meeting (generally three weeks earlier).  When the minutes were released, it was learned that the Fed was discussing decreasing the purchase of MBS bonds at a faster pace than previously announced.  More concerning was that the FED had also been discussing a faster pace of rate hikes for the Fed Funds Rate.  While the Fed Funds Rate does not directly govern mortgage rates, if the market suddenly expects more/faster increases of the Fed Funds Rates, all types of interest rates will increase at a faster pace, including mortgage rates.

Following the January 5 meeting there was an immediate shift in rate hike expectations.  With the Fed Funds Rate in the 0.25-0.50 bracket at the beginning of November 2021, it will require EIGHT rate hikes in the standard 0.25% amount to hit the current 2022 year-end target of 2.5% to 2.75%.  There are only 6 Fed meetings remaining!  So at least 2 of those meetings will require a 0.50% hike.  It has been more than 20 years since the FED has increased the FED Funds Rate 0.50% following a meeting.

This rapid repricing of expectations is the cause of volatility in interest rates right now.   The decrease in MBS purchases by the FED is also a large factor in the increase in mortgage interest rates in 2022.

LOOKING AHEAD

There is hope on the horizon.  The higher rates go and the faster they get there, the sooner we will see a stable and predictable interest rate environment return.  This can happen even as the Fed continues to hike rates because the mortgage and Treasury markets anticipate interest rate changes based on future expectations and move in advance of the FED announcing any actions.  When the future plays out as expected, rates generally do not continue to increase and often will decline.

Any additional surprises will depend on incoming data and events–especially inflation related data and geopolitical events that greatly affect the outlook for growth or inflation.

Home Possible Mortgage by Freddie Mac

The primary goal is to make home ownership more affordable for eligible borrowers.  This program helps to remove some of the barriers to home ownership and is geared towards individuals and families with lower income who are looking to purchase a primary residence.

For many, one of the main obstacles to home ownership is the misguided belief that a down payment of 20% or more is required to purchase a home.  The Home Possible Program from Freddie Mac requires a down payment of only 3% of the purchase price.  Many potential homeowners believe that they need to have a down payment equal to 20% of the purchase price.  This simply is not true.

Other benefits of the Home Possible Mortgage by Freddie Mac are:

Contact us to learn more about this program and how it can help people become

REVERSE YOUR THINKING

Everything about mortgages is better when it comes to Reverse Mortgages.

More and more people are contacting us about reverse mortgages to find out how they work and why they are beneficial whether they currently have a mortgage or do not have a mortgage.  More and more people are deciding to obtain a reverse mortgage for various reasons.

We talk to a lot of homeowners and their financial advisors, and it is obvious that there continues to be a lot of misinformation and misunderstanding about Reverse mortgages by many people.  Often the reluctance to get educated and learn about reverse mortgage is based on information and beliefs that are simply not true.  The fact that many people have these perceptions and beliefs is unfortunate because they are missing out on the opportunity to improve the financial stability and protect their housing security for both themselves and their spouses.

Here are a few of the things we hear.

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We encourage people to call us and find out why more and more people are utilizing reverse mortgages as part of the financial plan and retirement plan.  Get the real answers.  We don’t sell, we provide information.  If you are interested in finding out more about the benefits give us a call at 303-468-1985

 

 

MORTGAGE RATES HIGHEST IN 9 MONTHS

2022 is not off to a great start for mortgage interest rates.  During the week between Christmas and New Year, rates moved to their highest levels in about 9 months.  Then to start the first week of the new year, mortgage interest rates have moved up again.  Generally, 30-year mortgage rates currently range from 3.2% to 3.3% with no points.  In the short term, it is possible that mortgage interest rates may come down some, but the overall expectation for 2022 is for mortgage interest rates to move higher.

How Are Mortgage Rates Determined

Contrary to what many believe, the Federal Reserve and banks do not directly determine mortgage interest rates.  However, the policies of the Federal Reserve can and do impact the market and market perceptions.  The current policies of the Federal Reserve that are impacting rates are two-fold:

  1. The Federal Reserve has begun to reduce the number of mortgage-backed securities that they purchase on a monthly basis. This is seen as bearish for mortgage rates and is primarily the reason mortgage rates moved higher in the 4th quarter of 2021; and
  2. In the event Inflation continues to increase as we move into 2022, the Federal Reserve will be forced to adjust their policy to fight inflation. Historically, inflation has led to higher interest rates across the board.

Mortgages are similar to bonds and there are many types of bonds in the bond market.  Movement in the bond market generally translates to movement in mortgage rates.

Additionally, lenders make additional adjustments to rates based on factors like credit scores, down-payment amounts and other risk factors. Those adjustments rarely change, so day-to-day movement in an individual rate quote is almost always determined solely by bond market movement.

Going Forward

Most analysts expect interest rates to be higher in 2022 than they were in 2021.  Many forecast mortgage rates between 3.5% and 4% although the timing of these increases is unknown.  What is known is that rates bottomed out around 2.625% for a 30-year fixed rate in early 2021 and ended 2021 with 30-year mortgage rates .5% higher at approximately 3.125%.

INVESTMENT OPPORTUNITIES

A non-QM loan, or a non-qualified mortgage, is a type of mortgage that allows a borrower to qualify for a mortgage based on alternative methods, instead of traditional income verification required for Conventional Mortgages or other types of government guaranteed mortgages such as FHA and VA. These mortgages offer more flexible qualification requirements and open up real estate opportunities to a broader group of individuals.

One of the most popular newer programs is geared toward investors. Qualification is based on the rental income that a property will generate and is not based on the employment of the borrowers. This program offers the following:

·         Up to $3 million loan amounts
·         First time investors allowed
·         For borrowers who are experienced real estate investors looking to purchase investments properties or Airbnb/VRBO rentals
·         Income used to qualify based on cash-flows from property owned
·         Unlimited financed properties allowed
·         No tax returns or tax transcripts required
·         No debt ratio calculation required
·         30-year fixed rate and 30-year interest only fixed rate terms available
·         5/6, 7/6, 10/6 ARMS with interest only options

Another popular program is geared to self-employed borrowers who may not have been in business for the required two years or those where the tax returns do not accurately reflect the business income of the borrower. This program allows self-employed individuals to use 12 or 24 months’ personal or business bank statements to support their income in qualifying for a mortgage. Key Features and Benefits:

In the general the programs are geared toward borrowers who would prefer not to do a conventional mortgage or those who cannot meet the traditional qualification or documentation requirements. The type of borrower who might benefit from a non-QM loan include the following:

 

For more information on these programs or other mortgage programs we may be able to offer call Wayne, Kim, or Elizabeth at 303-468-1985.

REVERSE YOUR THINKING

Everything about mortgages is better when it comes to Reverse Mortgages.

You may have heard that a reverse mortgage has hidden risks. The fact is a traditional mortgage may not be your safest choice once you approach retirement age.  Here’s why. Homeowners with a traditional mortgage have their wealth tied to their home’s equity. And you can’t easily take advantage of this equity. For instance, you may face sudden medical bills, home repairs, or an emergency.

With a traditional mortgage you can’t access your equity and eliminate monthly mortgage payments. With a reverse mortgage, you can.

Advantages of a Reverse Mortgage

Security

A reverse mortgage offers a level of security for the owner(s) that simply cannot be obtained with a traditional mortgage in two areas.  The ability to remain in the home indefinitely without the requirement to make a mortgage payment.  The ability of a spouse to keep and maintain the residence following the death of a spouse.

Appreciation

Retain ownership and control of home and benefit from future appreciation of the property.

Ownership

The ability to transfer ownership as part of an estate plan and the ability to sell the property whenever desired.

Line of Credit

A reverse mortgage can also provide access to a line of credit that grows every year, is easily accessible, cannot be frozen, and allows for but does not require payments.  The proceeds of the line of credit are not taxable and can be used for any purpose.

Financial Planning Opportunities

For those with low mortgage balances or those without a mortgage, there are significant benefits that reverse mortgages can provide.  A reverse mortgage can help manage sequence of return risk that is a major issue in retirement planning.  Simply stated, sequence of return risk is the risk that an individual will run out of money faster than expected due to market conditions.

Additionally, a reverse mortgage allows for financial efficiency.  What is meant by financial efficiency is the ability of an individual to manage all assets in a unified manner with the ability to choose which asset can be used to best meet a financial obligation or need.  For example, rather than selling an investment or taking money out of a retirement account to meet a need and thereby lose the earnings from the investment, it can be more efficient to use a reverse mortgage and leave the other funds invested.  This can be accomplished without having to take on a large payment which is required if a traditional mortgage is used for the same purpose.

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There are many more benefits that are associated with reverse mortgages.  If you are interested in finding out more about the benefits give us a call at 303-468-1985

 

 

If you’ve ever wondered about the benefits of owning a home, you’re not the only one. Home buyers in Colorado are experiencing the benefits of home ownership firsthand by buying new places, driving median home prices to record highs in August. According to the Colorado Association of Realtors, single-family home sales in Colorado set new records, rising 15% from June and 21% from July 2019. And statewide, the median home price jumped 4.5% in one month, to $443,925.

In addition, home buyers are looking for ways to finance their new homes. Metro Denver experienced the highest level of mortgage originations since the fall of 2005, according to ATTOM Data Solutions. With historically low interest rates even during a pandemic, mortgage originations were up 40.3% from Q1 and 65% from Q2 of 2019.

So why are so many Coloradans choosing to buy homes? From financial gains to greater privacy, there are a number of benefits that make home ownership more appealing than renting. Check out the seven benefits below. 

  1. A good long-term investment: In most cases, when you buy a home, the asset you’re purchasing will appreciate in value over time. This can be a smart way to create a solid financial foundation and position the cash you’ve invested to grow.
  2. Tax benefits: With home ownership, you get favorable tax treatment in the shape of deductions. In most cases, you can deduct your home mortgage interest, as well as the money you pay in property taxes each year, and some closing costs when buying a home.
  3. Building equity: The equity in your home is the difference between what you sell it for and what you owe. The equity grows as you pay down the mortgage. When there is significant equity in your home, that equity can act as a financial cushion against unexpected events. If you face a financial challenge, you may be able to access your home’s equity with a home equity loan or line of credit.
  4. Consistent monthly payments: A home’s mortgage payment is the fixed cost of the principal and interest until the loan is paid off. A homeowner can plan a monthly budget around this payment and doesn’t have to worry about the payment increasing, which is a more common concern for renters.
  5. Stability: Owning a home often creates a sense of permanence for homeowners. If you buy a home and have a family, a home can serve as a stable haven for both children and adults. And being a homeowner in a neighborhood often leads to new friendships and a sense of community.
  6. The perfect retreat: When you want to get away from the world, a home is the ideal place to lie low. While your house is a good place to social distance, you can also make being home bound more interesting. If you feel a new fire pit would be the perfect addition to the patio, you can add it because every inch of the house, yard, garage and patio are yours!
  7. Convenient, remote home office: While many companies expect their employees to return to offices when the pandemic has passed, a growing number of technology companies are planning for “work from home” to be the new normal. According to Adam Ozimek, chief economist of Upwork, as much as a fifth of the workforce may continue to work remotely after the crisis. As CEOs recognize the financial benefit of a smaller corporate footprint, WFH employees will place greater value on their homes as the location of their home workplace.

In today’s world, the stability and financial benefits of home ownership shouldn’t be overlooked. To learn more about how you can get started purchasing a home, contact the Spectra Mortgage team through social media, email or phone at 303-468-1985.

For many, the equity that exists in a home or other real estate investments are their largest assets.  Depending on the location of the property and the period owned, equity can often be in the hundreds of thousands of dollars.

We believe this asset should be monitored and managed just like someone manages their 401k account or any other investment held.  However, it is often not managed effectively.

What do we mean by management?

Lastly, we provide a tool to all our clients that allow them to monitor their home values and provides insight into the changing value in their neighborhood.  It also provides information on current interest rates and has many other features.  If you are interested in having access to this service, just contact us and we will sign you up or you can sign up directly at https://hmbt.co/acJ8Ja.

Manage and protect your home equity.

Increasingly adult children are helping their parents with housing needs because they want to or are forced to.  There are many emotional, family, and lifestyle aspects to these issues.  However, in most cases the number one issue to be dealt with is financial.  The questions that come up are numerous:

  1. Should the house be sold, and parents rent?
  2. Can the house be sold, and parents buy more suitable housing?
  3. If parents’ income is insufficient or the parents are on a fixed income, how can the purchase of a new home, or necessary improvements to an existing home, be financed to allow the parent to remain in the home if the required funds are not readily available?
  4. Can parents afford monthly mortgage payments on their own?
  5. Is a Reverse mortgage appropriate?
  6. What will happen to the house when the parents no longer can or want to live there?

The list above is not all-inclusive but highlights many of the issues and questions that arise.

We are going to specifically talk about item number three above, and a unique program offered by both Fannie Mae and Freddie Mac that can allow an adult child to assist their parents, make a good investment and provide peace of mind.

The program allows for an adult child to purchase a home or refinance a home (and possibly get cash out) for their parents, who will live in the house, and have the transaction be treated as a primary residence even though the adult child will not live in the house.  The benefits are numerous:

  1. A lot of times the parents cannot qualify for a mortgage because they are retired, or their income is otherwise insufficient.
  2. As a primary residence the down payment required is much less than what is required on a house that is not occupied by the borrower. 5% down payment for a primary residence versus 20% down payment for an investment property.
  3. The interest rates will be lower as a primary residence.
  4. There are significant advantages if buying a condo for a house to be considered a primary residence versus an investment property.

Under this program the parents may be on the loan and the title to the property, but they are not required to be.  Not being on the loan or the title can provide significant estate planning benefits and save time and money later.  At that same time, the opportunity for the adult child to make a sound investment while also assisting their parents is very compelling.

Also, it is noteworthy that the same program is available for a parent who wants to purchase or refinance a home that will be occupied by a physically handicapped or disabled child.

For more information on this great program please contact us.

In these uncertain times, it is unlikely that most of us will not be affected in some way whether it be by the pandemic itself or the potential financial crisis that follows.

Freddie Mac and Fannie Mae are offering a package of relief options for borrowers having trouble making their mortgage payments because of the financial disruptions caused by the COVID-19 virus. Some of the provisions include:

These measures are effective immediately and apply to borrowers who are unable to make their mortgage payments due to a decline in income resulting from the impact of COVID-19, regardless of whether they have contracted the virus. Borrowers are eligible for forbearance regardless of whether the property is owner-occupied, a second home, or an investment property.

Freddie Mac and Fannie Mae are also looking to expanding relief available through well-known forbearance programs, allowing most affected borrowers to get assistance as expeditiously as possible. Borrowers who may be experiencing financial challenges due to COVID-19 are strongly encouraged to contact their mortgage servicer (the company where they send their monthly mortgage payments) as this is the best resource available. Another excellent resource is for borrowers through Fannie Mae is https://www.knowyouroptions.com/relief.

Last Sunday the Federal Reserve announced they were cutting “Rates” to zero. Unfortunately, often borrowers assume that means mortgage interest rates will also go down. Many lenders have had borrowers calling saying that they heard “Rates” are at zero. This is unfortunate and causes lots of confusion for borrowers. The media reporting adds to the confusion.

Let’s start here. The Federal Reserve controls the Federal Funds Rate. This is the rate that applies to overnight loans (1 day) between the largest financial institutions in the U.S. The Federal Reserve does not dictate mortgage interest rates and their rate setting does not directly affect any mortgage rates except for home equity lines of credit.

At times, the Federal Funds rate and mortgage rates move in the same general direction and at times (like now) they do not. However, they are fundamentally different types of loans since one is for one day and the other is most often for 30 years. Lenders and investors have different priorities for a one-day loan versus a 30-year mortgage.

HOW ARE MORTGAGE RATES DETERMINED?

There is a market where mortgages are traded daily. The participants are institutional investors and financial professionals. It is called the Mortgage Backed Securities market and what is traded are mortgage bonds. This market is like the stock market and there are thousands of trades a day that involve mortgage bonds.

The prices of mortgage bonds are determined by the buyers and sellers. When buyers have better investment alternatives, they will demand lower prices in order to invest in mortgage bonds, which results in the investor receiving a higher interest rate for their investment. When the investor receives a higher rate to purchase mortgage bonds, that means mortgage interest rates to the consumer will go up. Conversely, when investors are looking for less risky and more predictable assets the demand for mortgage bonds will increase and the price/interest rate offered will go down since there are many buyers and mortgage bonds are in high demand. When the investor receives a lower rate to purchase mortgage bonds, that means mortgage interest rates to the borrower decrease.

Because mortgage bonds trade on a daily basis, mortgage interest rates can and do change on a daily basis (sometimes many times a day). By contrast, (except in emergencies) the Federal Reserve meets 8 times a year and may or may not adjust the Federal Funds rate.

Additionally, mortgage interest rates can be influenced by the broader bond market. The 1-year, 10-year and 30-year Treasury bonds often move in the same direction. However, what is generally true is not always true since the treasury bond market tends to be more stable in times of stress. Additionally, there are other factors that also influence the mortgage bond market that could cause mortgage interest rates to be disconnected from the treasury bond market.

WHERE ARE WE NOW

By some accounts the last two weeks have been the most volatile in the history of the mortgage bond market. Seven or eight days ago, 30-year mortgage rates for the most credit-worthy borrowers were in the low 3% range. The past week closed with the lowest rates being offered at close to 4%. Don’t believe the advertisements on the internet and on the radio. The mortgage bond market has been very fluid and has been very volatile, so getting accurate pricing is not possible when rates are changing 5 or 6 times a day. The internet and radio ads cannot keep up.

Unlike 2008, which was the last time the mortgage markets were this chaotic, the reasons for the volatility have nothing to do with the banking or mortgage industries. First, the reaction to the Coronavirus has created an unprecedented situation and general uncertainty for the economy, at least in the short term. When there is uncertainty, investors want liquidity (cash), which means they sell their assets. In the past two weeks, investors have been selling all asset classes, which includes stocks, treasuries, corporate bonds, and mortgage bonds. The selling of these assets results in mortgage bond prices going down, which increases the mortgage interest rate to consumers.

The other factor weighing on the mortgage bond market is the fact that prior to the current situation, a large volume of mortgage bonds was issued in the first 2 months of 2020 due to the volume of refinancing that has taken place as interest rates declined. There simply are not enough buyers for all the new mortgage debt generated in the past two months. The problem is now amplified by investors wanting to hold cash. This depresses the price of mortgage bonds and causes mortgage interest rates to the consumer to rise.

To summarize, mortgage interest rates are not currently at zero and will never be at zero since no investor would ever invest in a mortgage bond with an interest rate of zero.

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While mortgage interest rates have increased over the past 7 or 8 days, there is strong belief when things calm down, that mortgage interest rates will back closer to where they had been. There is no way to know if they will get as low or what the time frame for that is.

I am advising my clients that if they are looking to refinance at a certain rate and we are above that rate then we should get prepared and have everything ready to go so that when rates fall to their desired level that we can be opportunistic and lock right away. Often when rates fall, they may only stay low for a few hours or a few days.

Increasingly adult children are helping their parents with housing needs because they want to or are forced to.  There are many emotional, family, and lifestyle aspects to these issues.  However, in most cases the number one issue to be dealt with is financial.  The questions that come up are numerous:

  1. Should the house be sold, and parents rent?
  2. Can the house be sold, and parents buy more suitable housing?
  3. If parents’ income is insufficient or the parents are on a fixed income, how can the purchase of a new home or necessary improvements to an existing home be financed to allow the parent to remain in the home if the required funds are not readily available?
  4. Can parents afford monthly mortgage payments on their own?
  5. Is a Reverse mortgage appropriate?
  6. What will happen to the house when the parents no longer can or want to live there?

The list above is not all-inclusive but highlights many of the issues and questions that arise.

We are going to specifically talk about item three above, and a unique program offered by both Fannie Mae and Freddie Mac that can allow an adult child to assist their parents, make a good investment and provide peace of mind.

The program allows for an adult child to purchase a home or refinance a home (and possibly get cash out) for their parents, who will live in the house, and have the transaction be treated as a primary residence even though the adult child will not live in the house.  The benefits are numerous:

  1. A lot of times the parents cannot qualify for a mortgage because they are retired, or their income is otherwise insufficient;
  2. As a primary residence the down payment required is much less than what is required on a house that is not occupied by the borrower. 5% down payment for a primary residence versus 20% down payment for an investment property;
  3. The interest rates will be lower as a primary residence;
  4. There are significant advantages if buying a condo for a house to be considered a primary residence versus an investment property.

Under this program the parents may be on the loan and the title to the property, but they are not required to be.  Not being on the loan or the title can provide significant estate planning benefits and save time and money later.  At that same time the opportunity for the adult child to make a sound investment while also assisting their parents is very compelling.

Also, it is noteworthy that the same program is available for a parent who wants to purchase or refinance a home that will be occupied by a physically handicapped or disabled child.

This program is available to anyone who meets the qualification criteria.  If further information is desired, please contact us.

 

Since the beginning of the year, 30-year mortgage interest rates fell from around 5% to 4.5%.

Now, over the past 4 weeks, 30-year mortgage rates have fallen to 4%, and for some, into the high 3% range for those with the best credit and lower loan-to-values. 20-year rates are approximately the same as 30-year rates and 15-year rates are even lower.

Mortgage interest rates are at their lowest levels since late 2017.

The interest rate environment is very favorable for anyone looking to purchase or refinance in the second half of 2019. For anyone that has a current interest rate of 5.25% or higher, it may be advantageous to evaluate refinancing in order to lower the monthly payment.  The magnitude of the benefit will largely be dependent on the loan-to-value ratio and credit scores.

For those looking to reduce the current payment and save money, I would recommend monitoring mortgage rates over the next 30 to 60 days since it is anticipated that they could move lower.

Another strategy that can be attractive for some is to consider refinancing into a shorter-term mortgage. There are 10, 15, 20-year or custom mortgage term loans available.  We can provide an analysis that shows the payments, the interest savings achieved and a comparison of the mortgage paydown compared to the current mortgage.

Lastly, with the rapid price appreciation in Colorado, many people who have considered getting an equity loan may have been reluctant to refinance their current first mortgage if it has a low interest rate. In some cases, it may be more beneficial to do a line of credit.  We can help run the numbers to see whether it is better to leave an existing mortgage in place and obtain a Line of Credit or refinance the entire mortgage.  This analysis compares the new rate versus the rate on the old mortgage plus the rate of the Line of Credit (i.e. the blended interest rate).

If you have any questions or if you want us to provide an analysis, please contact either Wayne or Kim.

Making Smart Savings Choices

In today’s unsettled economy, many people are looking for ways to stretch their money—but sometimes this includes altering insurance coverage to dangerously low levels or eliminating coverage entirely. If you’re thinking about changing your coverage to save money, consider these key issues below:

Some decisions to avoid

It is just as important to understand what not to do as you look for cost savings. Here are some scenarios you should avoid:

It may be unwise to carry only the minimum state-required amount of uninsured/underinsured motorist coverage on auto policies, or to cancel it entirely if it is not required in your state: According to the Insurance Research Council (IRC)*, the correlation between the percentage of uninsured motorists and the unemployment rate is high — when the economy is struggling, more people go without insurance. You want to make sure you’re protected in this instance.

Saving money is important, but so is making sure that what you’ve got is protected. If you’re looking for ways to save, or want to review your coverages, call Corda or Robert Jellum at 720-962-8700 for more information.  They can help make sure you’ve got the right protection at a price you can afford.

*Insurance Research Council, January 21, 2018

For many homeowners, their home equity represents their single largest asset and the biggest component of their total net worth. However, home equity is also the asset that people pay the least amount of attention to when it comes to financial planning. There are many ways that the efficient management of home equity can enhance wealth and support many financial planning goals.

A mortgage/line of credit, or lack thereof, is most often the tool used to manage home equity and achieve various financial and lifestyle objectives that people have at different times in their life.

Background

If you have owned a home in Colorado for more than 5 years, Congratulations! You have most likely made a lot of money.

From March 1991 through September 2018, housing prices in Colorado have increased 366.03%. In the past 5 years housing prices in Colorado have increased 58.76%.  In the Denver metro area, the appreciation has even been higher.

During this time frame, Colorado has experienced the second highest level of housing appreciation second only to the District of Columbia. The top 5 states for appreciation since 1991 are as follows:

  1. District of Columbia        440.95%
  2. Colorado                            366.03%
  3. Oregon                               331.65%
  4. Utah                                    326.57%
  5. Montana                            306.57%

The national average for all 50 states during this time is 161% and every state had appreciation. For emphasis, there were no states where values declined over this period.(Source: Federal Housing Finance Agency (FHFA), Home Price Index (HPI), November 27, 2018)

Planning Opportunities

There are many financial planning opportunities for a homeowner to use their equity to improve their overall financial position and increase their wealth long term. These alternatives and options are tied to factors that are unique to each individual and their current goals and objectives. Following is a brief nonexclusive list of strategies and techniques, along with the respective benefit for each, that can be implemented to manage home equity in the context of the broader objective of financial planning:

The list above is not exhaustive, and there are many other strategies that may be effective depending on specific circumstances. The main point is that there are many ways to manage home equity in a manner that facilitates more effective financial planning.

If you are interested in discussing managing your home equity or discussing any of the strategies outlined above, give me a call.

Since the financial and real estate crisis of 2007-2009, the data shows that fewer people own houses than before, often by choice, and that people are buying their first house at an older age again often by choice.

There are many reasons for this, but one factor that is written about and discussed from time to time is the premise that renting is cheaper than owning a house. While this can be true in the short term for certain markets such as Denver, CO., the data is indisputable that people who own homes are wealthier than renters.

The Numbers Are Eye-Opening

According to the most recent Survey of Consumer Finance which was completed in 2016 by the Federal Reserve Board (the report is completed every three years) here are the findings on wealth:

  1. In 2016, the median net worth of homeowners in the U.S. was $231,400 (a 15% increase from the last survey in 2013).
  2. The median net worth of renters in the U.S. was $5,200 (a 5% decrease from the last survey in 2013).
  3. The median net worth of a homeowner in the U.S. is 45 times greater than the median net worth of a renter in the U.S.

While there may not be a direct cause and effect relationship that entirely explains the disparity (there are undoubtedly other factors), the Survey of Consumer Finance makes clear that there is without a doubt a strong correlation between home ownership and wealth.

It is estimated by the U.S. Census Bureau that that there were approximately 118.3 million households in 2016. This data also showed that 63.4% of the households owned their home and 36.6% rented. (Source: Pew Research analysis of Census Bureau Housing Data, report published July 19, 2017 based on 2016 data).

  1. While approximately 65% of the households headed by someone under 35 rented; Almost 35% owned;
  2. More telling is the fact that 41% of the households headed by someone between the ages of 35 to 44 rented; and
  3. Approximately 20% of the households headed by someone between 45 and 60 rented.Often people try to explain the disparity in net worth between renters and homeowners by stating that only young people rent and older people own homes. Again, while a factor, this reason does not account for the large disparity in net worth given the high numbers of renters across all age groups and the relatively strong homeownership number for those under 35.  

What Accounts for the Disparity?

  1. Simply put, homeownership is a form of ‘forced savings’. Every time you pay your mortgage you are contributing to your net worth. Every time you pay your rent, you are contributing to your landlord’s net worth.
  2. Homeowners are the beneficiaries of 100% of their home’s appreciation. In Colorado, homes have appreciated 366% since 1991, which is the second highest number for any state in country during that period. Renters experience no appreciation.
  3. The monthly cost of having a mortgage is fixed (i.e. it does not rise), which supports financial stability. A renter is subject to annual rent increases that have averaged between 5% to 10% in the Metro Denver area over the last 10 years. From 2010 through 2017, rents have increased 48% in the Metro Denver area. With wages rising at a much slower pace, renters lose purchasing power every year and are in a worse financial position every year.
  4. To the extent that rent payments may be less than a mortgage payment in the early years, most renters do not invest the difference and they spend it on other items, so the opportunity for investment returns on any savings is lost.
  5. Homeowners receive preferential tax treatment under the Internal Revenue Code with many of the costs of homeownership being deductible. None of the costs of renting are deductible.
  6. The ability to convert equity into cash in order to meet other financial objectives. No such option exists for renters.

Conclusion

We often hear people wonder out loud if “now is a good time to buy” or “if there is a real estate bubble that is ready to pop.” The simple reality is that over time home values have appreciated substantially, especially in Colorado. This is anticipated to continue with Colorado’s population projected to continue to increase due to the strong economy and a desirable lifestyle for many. Given the lack of building and the desire of most people to live close to centers of employment, prices will continue to go up simply due to supply and demand.

Until there is a recession or economic slowdown that impacts the local economy in a meaningful way, Colorado will not experience a decline in prices and will likely continue to experience appreciation although not likely at the levels seen since 1991. But who would have thought my first house that was purchased in 1992 for $88,000 would today be worth between $400,000 and $425,000?

Nationwide, the housing prices have increase 161% since 1991. In Colorado housing prices have increased 366%, which is second only in the country to District of Columbia. (Source: Federal Housing Finance Agency (FHFA), House Price Index, November 27, 2018). Since the recession of 2008 and 2009, the net worth of homeowners has continued to increase, while the net worth of renters has declined during the same time period.While it is clear not everyone can or should buy a home and there are situations where it does make financial sense to rent for some, period. However, for those whose financial situation and current goals support taking on the financial obligation of homeownership, it is well worth it.

A Non-QM mortgage is a Non-Qualified Mortgage loan. A conventional mortgage, FHA, or VA loan are all considered qualified mortgage loans. In 2014, the Consumer Finance Protection Bureau (CFPB) adopted new rules that defined qualified mortgages (QM). This gave mortgage lenders protection on loans that met standards set by the federal government. This reduced the risk with fewer mortgages ending up being delinquent or in foreclosure. Also, the CFPB began the Ability to Repay minimum standards. After the new CFPB rules were adopted, loans that did not stick to QM standards were found to be non-QM loans.

A loan that is non-QM is not necessarily a higher risk loan. It just means that loan does not follow the QM definition. Generally, non-QM loans are designed today to offset some of the risks of the past.

The following are good examples of non-QM loans today:

Why Non-QM Loans and Non-Traditional Mortgages Are Coming Back

Non-QM loans are becoming easier to get as the fiscal crisis recedes in the rear-view mirror. They are a good financial tool because they help people who cannot otherwise qualify for a conventional, FHA, or VA loan to get a mortgage. These programs allow for alternate documentation for income, allow for lower credit scores, and can be more forgiving of negative credit events. Because these loans carry more risk, they tend to have higher interest rates. You will see rates range 1% to 4% above conventional interest rates depending on specific circumstances. But for some, this will not be a hinderance because it allows them to accomplish their goals.

For more information on the mortgage options that are currently available, contact us and we can work with you to evaluate all your options and identify the mortgage that fits your situation.

Fixed rate mortgages have been coming down in recent weeks, but more borrowers are starting to look to adjustable rate mortgages. ARMs posted the highest number of originations in December since Ellie Mae began tracking them in 2011, according to the National Association of Realtors.

With Adjustable Rate Mortgages, the interest rate is locked for a set period, such as five or seven years, and then will change based on market conditions. ARMs can provide consumers with some additional flexibility when purchasing a home because the rates and payments are lower early in the term of the loan.  ARMs also allow borrowers to take advantage of falling interest rates without having to refinance.    This can also be a more affordable way for borrowers to purchase a home who do not plan on living in the home for 20 to 30 years, which most people do not.  The dream for homeownership is still alive and well and is still a possibility for borrowers in many types of situations.