A quick overview of market action today as well as my thoughts on 2 important topics that are all the buzz right now with the $8000 tax credit about to expire and advertised rates versus realistic rates with extended lock periods due to HVCC and HERA.
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A short video to recap the $8000 home buyer tax credit due to expire Nov 30th. The 5 key points in my video will cover; #1 The deadline and what this means. #2 The IRS' broad definition of what a first time home buyer and who does and doesn't qualify for the credit. #3 Understanding that it truly is a credit and not a deduction or loan that needs to be repaid back. #4 How the credit can or cannot be used in reference to closing costs and down payment. #5 How to amend your 2008 taxes to receive the $8000 credit weeks after closing versus waiting until next Spring to file and the forms needed to receive the credit and amendment.
Reporting on the 3-day decline in mortgage bond pricing causing a jump in rates from last week. Watch the video for the reasons for the jump but it simply comes down to anytime there is positive news for the economy, bonds will suffer. With good pending home sales, lower number of jobs being lost and positive economic news if other global economies, mortgage bonds have been taking a lashing.
It has been a brutal day for mortgage bonds and treasuries, but a great day for stocks with the DOW looking to close above 9000, the NASDAQ nearing 2000 and the S & P close to 1000 as well.
After pricing a few deals for clients this afternoon and where mortgage rates landed after a nice rally today I feel that considering an adjustable rate mortgage for a moderate range period like 5 to 7 years is making a lot of sense again. If you look at a 5-yr ARM rate at 3.75% (APR 3.97%), the gap is quite impressive between a 30-yr and 5-yr again and definitely worth considering if you feel you will only have the mortgage for 5 or 6 years.
Remember, conforming ARM's are not the evil child of lending that the media has led us to believe in recent months. The sub-prime ARM's that are no longer available were the ones that had huge margins at the adjustment period and pre-payment penalties. For example, on a conforming 5-yr ARM, at the end of the 5th year, the new interest rate for the next 12 months (year 6) is determined by adding the margin (2.25%) with the index, which the 12-month LIBOR is commonly used.
Today, for my clients that have their 5 and 3 year ARM's adjusting next month, we simply have to add 2.25% and the current LIBOR which is at 1.456% for a new rate of 3.71% for the next 12 months. Not the shock and awe most people think or assume. Obviously when the Feds start raising the Fed Funds Rate again then the LIBOR will start climbing but I am talking real time numbers as an example.
So as long as an adjustable rate mortgage is properly managed by your mortgage planner, there should be no surprises before the adjustment period would happen. Understanding how the ARM works takes away all the mystery and surprises of this type of financing and the people that understand them enjoy the thousands saved over time. On a $300,000 mortgage, a difference in 1.25% rate over 5 years is $18,750, not a small number to shrug at.
If you look at a 5-yr Interest Only ARM on an investment property with 25% down, the rate was only 4.625% today (APR 4.814%). If you were to buy an investment property for $220,000 with a loan amount of $165k, (75% loan to value) their monthly interest payment is only $635! Add in taxes and insurance you are probably looking at a total payment of $875, which seems like an easy cash flow situation on day 1 of renting! I think it is safe to say we will see some appreciation in the next 5 years to negate the interest only payment if you are concerned about trapping a principal payment into your rental.
If you cringe at thought of having a 5-yr ARM because it is too short of a period, ask yourself this question, how many mortgages have you had before and what was the length of time you held each mortgage. More often than not when I have people tell me they will keep their mortgage forever, a quick check of their credit report begs to differ as I see a new mortgage every 4 or 5 years because of their use of equity management, investment opportunities, remodels, college funding, a new home, job transfer, etc. You get the idea.
I don't think we should all run out and get an adjustable rate mortgage but I certainly feel they have there place in the financing world if managed properly and you are quite certain you will be keeping your current home more than 2 years and less than 5 (refinance) or simply you are going to take advantage of the great rates and low home prices to be able to sell in 5 years or so when the market is growing and inflation has grown, looking to turn a profit.
I didn't touch on them but if a 5-year makes you nervous there are 7 and 10-yr ARM's as well. There is no sense in paying a higher premium (rate) to get a long term fixed mortgage for 30-years if you aren't going to use the benefit.
What turned in to being probably the most anticipated Fed meeting adjournment with its policy statement following shortly thereafter, turned out to be a big flop. Mortgage backed securities were literally flat at 0 the last I looked and the DOW was down 23 after traders digested the information.
Two of the big statements in the policy note was that “The pace of economic contraction is slowing and conditions in financial markets have generally improved in recent months.” This typically would have caused stock to rally and bonds to sell of causing mortgage rates to worsen but the next paragraph goes on to explain that “inflation is to remain subdued for some time.” Had there not been the preceding statement, this would have caused mortgage bonds to rally and stocks to falter, so they pretty much canceled each other out.
Wow, I didn't see this one coming! I was shocked to realize that after attending more training on these Refi Programs, I had my transaction coordinator run an investment property through Fannie Mae's "DU" on the new DU Refinance program only to get an approval with an appraisal waiver AND NO HITS TO THE RATE! I had to pull the guidelines from a few lenders that are currently offering the program to make certain this was not a mistake and all of them state that second homes and investment properties qualify both in the Fannie and Freddie programs as long as they are coming from either Fannie or Freddie and going back to Fannie and Freddie.
This is HUGE! This means for all of you that own investment properties, most likely your rate has been much higher than normal conforming rates of the past, you can now get the same low rate as you would on your primary residence, WOW!
Talk about making your properties cash flow. And if you are a realtor wondering how this effects your current purchase and listing business, I see a big connection! If your clients that own investment properties have been leery about buying more in this market, if they know they can refinance their other properties into a MUCH lower rate, this would free them up most likely emotionally and economically to pull the trigger on buying another investment property.
So most mornings I have my little "Hour of Power" ritual usually around 530 AM where I do things like my deep breathing, prayer, jump on the "Rebounder" review my "attitude of gratitude list", time in the Word, daily affirmations, read a chapter in my current book and finally and probably the least impactful, review my "word of the day".
Well this morning it was Ogle, and here I am thinking, well that is boring, I know what that means and the definition given was "to look at appreciatively or lustfully." Not a shock, knew that one.
Then...my little epiphany! I always thought Google was such a dumb name and wonder who came up with that one, kind of like EBay or Facebook, I guess they needed to name it something, why not Google.
But my little word of the day made me realize that I am not as bright as I think I am sometimes for me to just now realize years later, Google I am assuming was meant to encourage you to GO OGLE, duh! lol
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